The International Comparative Legal Guide to: 2012 Securitisation

Published by Global Legal Group, in association with: The International Comparative Legal Guide to: Securitisation 2012

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Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & atkinsW practices in Saudi Arabia in association with the Law Office of Mohammed A. Al-Sheikh. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. © Copyright 2012 Latham & Watkins. All Rights Reserved. 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 EDITORIAL

Welcome to the fifth edition of The International Comparative Legal Guide to: Securitisation. This guide provides the international practitioner and in-house counsel with a comprehensive worldwide legal analysis of the laws and regulations of securitisation. It is divided into two main sections: Five general chapters. These are designed to provide readers with a comprehensive overview of key securitisation issues, particularly from the perspective of a multi-jurisdictional transaction. Country question and answer chapters. These provide a broad overview of common issues in securitisation laws and regulations in 34 jurisdictions. All chapters are written by leading securitisation lawyers and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor, Mark Nicolaides of Latham & Watkins LLP, for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.co.uk

Alan Falach LL.M. Managing Editor [email protected] Chapter 1 Documenting Receivables

Financings in Leveraged Dan Maze Finance and High-Yield Transactions

Latham & Watkins LLP Rupert Hall

Introduction following the delivery of goods or the rendering of services by a company to its customers. As long as a receivable is legally Including a receivables securitisation tranche when financing (and enforceable and not subject to set-off, and satisfies certain other refinancing) highly leveraged businesses that generate trade eligibility criteria specific to each transaction, the company to receivables has become popular for several reasons. First, and which the receivable is owing can raise financing against it. foremost, securitisation financings can generally be obtained at One popular form of receivables financing, asset-based lending lower, and in some cases much lower, overall cost to the corporate (ABL), is structured as a loan to a company secured by the group. Second, securitisation financings can be incurred by the receivables. ABL transactions, although popular, have the target operating companies directly, and do not need to be “pushed drawback of exposing ABL lenders to all of the risks of the down” from the acquisition vehicle (as is sometimes the case with borrowing company’s business – risks which may lead to the leveraged financings), thus providing immediate working capital company’s insolvency and (at least) delays in repayment of the for the group. Third, securitisation financings generally do not ABL lenders. impose as extensive a package of operational restrictions on the group compared with leveraged finance documentation or even An alternative form of receivables financing, discussed below, is a incurrence covenants found in high-yield bond and senior secured “securitisation” of the receivables. A securitisation involves the note indentures. Finally, many companies engaged in securitisation outright sale of receivables by a company to a special purpose transactions claim that it helps them improve the efficiency of their “vehicle” (SPV), usually a company but also possibly a partnership underlying business by focussing management attention on the or other legal entity, which exists for no other business than to actual performance of customer relationships (e.g., invoice payment acquire the receivables. The purchase price of receivables will speed and volume of post-sale adjustments). In this chapter, the generally equal the face amount of the receivables minus (in most term “high-yield” refers to both traditional unsecured high-yield cases, but depending on the tax laws of the relevant selling bonds as well as senior secured notes that are an increasingly company’s jurisdiction) a small discount to cover expected losses important part of the capital structure. on the purchased receivables and financing and other costs of the SPV. The purchase price will typically be paid in two parts: a non- In leveraged finance facility agreements and bond indentures, refundable cash component paid at the time of purchase with affirmative and negative covenants restrict the operations of the financing provided to the SPV by senior lenders or commercial Borrower / bond issuer, and all or certain of its significant (i.e. paper investors; and a deferred component payable out of “restricted”) subsidiaries, in a complex and wide-ranging manner. collections on the receivables. In some jurisdictions, the deferred We set out below the manner in which such covenants would need component may need to be paid up front (e.g., to accomplish a “true to be modified in order for a Borrower / Issuer to be able to enter sale” under local law), in which case the SPV must incur into a receivables securitisation without needing to obtain specific subordinated financing, usually from a member of the selling lender or bondholder consent (often a costly and a challenging company’s group, to pay that portion of the purchase price up front. process). Although this chapter describes one set of modifications, The SPV will grant security over the receivables it acquires and all there are of course various means of achieving the same objectives of its other assets to secure repayment of the financing incurred by and the transaction documentation must be analysed carefully in it to fund receivables purchases. each case to determine what exactly is required. This chapter also discusses some of the key negotiating issues involved in negotiating The SPV will be structured to have no activities and no liabilities and documenting such covenant modifications. other than what is incidental to owning and distributing the proceeds of collections of the receivables. The SPV will have no Once appropriate covenant carve-outs permitting a trade employees or offices of its own; instead, the SPV will outsource all receivables securitisation have been agreed, the securitisation itself of its activities to third parties pursuant to contracts in which the can then be structured and documented. Each of the country third parties agree not to make claims against the SPV. While the chapters in the latter part of this guide provides a summary of the SPV purchaser will often be established as an “orphan company”, issues involved in executing a securitisation in that country. with the shares in the company held in a charitable trust, rather than by a member of the target group, in certain jurisdictions and Typical Transaction Structure depending on the particular deal structure, it may be necessary to establish an initial purchaser of receivables that is incorporated as a Trade receivables are non-interest bearing corporate obligations member of the group (which may then on-sell the receivables to an typically payable 60 to 90 days following invoicing. They arise “orphan” SPV).

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Collection of the receivables will generally be handled by the “Qualified Receivables Financing” means any Receivables selling company or its parent pursuant to an outsourcing contract Financing of a Receivables Subsidiary that meets the until agreed trigger events occur, at which point a third party following conditions: servicer can be activated. By these and other contractual (a) an Officer or the Board of Directors of the Issuer shall provisions, the SPV is rendered “bankruptcy remote” and investors have determined in good faith that such Qualified in the securitisation are as a result less likely to suffer the risks of Receivables Financing (including financing terms, the insolvency of the Borrower of the securitisation debt. covenants, termination events and other provisions) is in the aggregate economically fair and reasonable to From collections, the SPV will pay various commitment fees, the Issuer and the Receivables Subsidiary; administration fees and interest to its third party suppliers and (b) all sales of accounts receivable and related assets to finance providers. All payments are made pursuant to payment the Receivables Subsidiary are made at fair market priority “waterfalls” that govern which parties are paid first, which value (being the value that would be paid by a willing next, and which last. Typically, there is one waterfall for buyer to an unaffiliated willing seller in a transaction distributions made prior to enforcement and one for distributions not involving distress of either party, as determined in made after enforcement commences. good faith by the responsible accounting or financial The structure of a typical trade receivables securitisation transaction office of the Issuer); and looks like the following: (c) the financing terms, covenants, termination events and other provisions thereof shall be on market terms (as determined in good faith by the Issuer) and may include Standard Securitisation Undertakings. The grant of a security interest in any accounts receivable of the Issuer or any of its Restricted Subsidiaries (other than a Receivables Subsidiary) to secure Indebtedness under a Credit Facility or Indebtedness in respect of the Notes shall not be deemed a Qualified Receivables Financing. “Receivable” means a right to receive payment arising from a sale or lease of goods or services by a Person pursuant to an arrangement with another Person pursuant to which such other Person is obligated to pay for goods or services under terms that permit the purchase of such goods and services on credit, as determined on the basis of applicable generally accepted accounting principles. “Receivables Assets” means any assets that are or will be the Documentation Provisions subject of a Qualified Receivables Financing. “Receivables Fees” means distributions or payments made In light of the foregoing, we describe below the documentation directly or by means of discounts with respect to any provisions necessary to permit a trade receivables securitisation. In participation interest issued or sold in connection with, and summary, the relevant documentation will need to include several other fees paid to a Person that is not a Restricted Subsidiary framework definitions describing the general terms of the in connection with, any Receivables Financing. anticipated securitisation transaction and several carve-outs from “Receivables Financing” means any transaction or series of the restrictive covenants to which the relevant Borrower / Issuer transactions that may be entered into by the Issuer or any of would otherwise be subject. We address each in turn below. its Subsidiaries pursuant to which the Issuer or any of its Subsidiaries may sell, convey or otherwise transfer to (a) a Receivables Subsidiary (in the case of a transfer by the Descriptive Definitions Issuer or any of its Subsidiaries), or (b) any other Person (in the case of a transfer by a Receivables Subsidiary), or may The following descriptive definitions will need to be added to the grant a security interest in, any accounts receivable (whether relevant transaction documents to describe what is permitted and now existing or arising in the future) of the Issuer or any of thus to provide reference points for the covenant carve-outs which its Subsidiaries, and any assets related thereto, including all follow. The definitions below are tailored for a high-yield indenture collateral securing such accounts receivable, all contracts (in part by referring to an “Issuer”), but they can easily be modified and all guarantees or other obligations in respect of such for a senior facility agreement if desired. accounts receivable, proceeds of such accounts receivable and other assets which are customarily transferred or in The definitions below contain various limitations designed to strike respect of which security interest are customarily granted in a balance between the interests of the owners of the Borrower / connection with asset securitisation transactions involving Issuer, on the one hand, who desire to secure the receivables accounts receivable and any Hedging Obligations entered financing on the best possible terms, and the interests of the senior into by the Issuer or any such Subsidiary in connection with lenders / bondholders, on the other hand, who do not want the terms such accounts receivable. of the securitisation financing to disrupt the Borrower’s ability to “Receivables Repurchase Obligation” means any obligation repay their (usually much larger) leveraged loans or bonds in of a seller of receivables in a Qualified Receivables accordance with their terms. The definitions below are of course Financing to repurchase receivables arising as a result of a negotiable, and the exact scope of the definitions and related breach of a representation, warranty or covenant or provisions will depend on the circumstances of the particular otherwise, including as a result of a receivable or portion transaction and the needs of the particular group. In particular, thereof becoming subject to any asserted defense, dispute, off-set or counterclaim of any kind as a result of any action where a business is contemplating alternate structures to a trade taken by, any failure to take action by or any other event receivables securitisation, such as a factoring transaction, certain relating to the seller. slight modifications may be necessary to one or more of the “Receivables Subsidiary” means a SPV Subsidiary or a definitions and related provisions described below.

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wholly-owned Subsidiary of the Issuer which is designated already incorporated into the descriptive definitions above (see by the Board of Directors of the Issuer as a Receivables “Key Issues” below). However, if required, these may include: Subsidiary: minimum credit ratings (for underlying debt or the securities (a) no portion of the Indebtedness or any other issued pursuant to the securitisation); obligations (contingent or otherwise) of which (i) is conditions as to who may arrange the securitisation; guaranteed by the Issuer or any other Restricted Subsidiary of the Issuer (excluding guarantees of notification obligations in respect of the main commercial obligations (other than the principal of, and interest terms; on, Indebtedness) pursuant to Standard Securitisation requirement to ensure representations, warranties, Undertakings), (ii) is subject to terms that are undertakings and events of defaults / early amortisation substantially equivalent in effect to a guarantee of any events are no more onerous than the senior financing; and/or losses on securitised or sold receivables by the Issuer other economic terms. or any other Restricted Subsidiary of the Issuer, (iii) is recourse to or obligates the Issuer or any other Restricted Subsidiary of the Issuer in any way other Covenant Carve-outs than pursuant to Standard Securitisation Undertakings, or (iv) subjects any property or asset of In a typical senior facility agreement or high-yield indenture, the the Issuer or any other Restricted Subsidiary of the securitisation transaction must be carved out of several covenants, Issuer, directly or indirectly, contingently or described in further detail below. In summary, carve-outs will need otherwise, to the satisfaction thereof, other than to be created for the following restrictive covenants: pursuant to Standard Securitisation Undertakings; Asset sales / disposals. (b) with which neither the Issuer nor any other Restricted Subsidiary of the Issuer has any contract, agreement, Indebtedness. arrangement or understanding other than on terms Liens / negative pledge. which the Issuer reasonably believes to be no less Restricted payments. favourable to the Issuer or such Restricted Subsidiary than those that might be obtained at the time from Limitations on certain payments by Restricted Subsidiaries. Persons that are not Affiliates of the Issuer; and Affiliate transactions / arm’s length terms. (c) to which neither the Issuer nor any other Restricted Financial covenants (in the case of facility debt only). Subsidiary of the Issuer has any obligation to Limitation on Asset Sales / Disposals maintain or preserve such entity’s financial condition or cause such entity to achieve certain levels of Typically in a leveraged facility agreement, the relevant Borrower operating results. may not, and may not permit any of its subsidiaries to, sell, lease, transfer or otherwise dispose of assets (other than up to a certain Any such designation by the Board of Directors of the Issuer shall be evidenced to the Trustee by filing with the Trustee a permitted value), except in the ordinary of course of trading or copy of the resolution of the Board of Directors of the Issuer subject to certain other limited exceptions. Similarly, in a typical giving effect to such designation and an Officer’s Certificate high-yield indenture, the Issuer may not, and may not permit any of certifying that such designation complied with the foregoing its Restricted Subsidiaries to make any direct or indirect sale, lease conditions. (other than an operating lease entered into in the ordinary course of “SPV Subsidiary” means any Person formed for the business), transfer, issuance or other disposition, of shares of capital purposes of engaging in a Qualified Receivables Financing stock of a subsidiary (other than directors’ qualifying shares), with the Issuer in which the Issuer or any Subsidiary of the property or other assets (referred to collectively as an “Asset Issuer makes an Investment and to which the Issuer or any Disposition”), unless the proceeds of such disposition are applied in Subsidiary of the Issuer transfers accounts receivable and accordance with the indenture (which will regulate how much of the related assets) which engages in no activities other than in net disposal proceeds must be offered to purchase, prepay or connection with the financing of accounts receivable of the redeem the high-yield bonds). Issuer and its Subsidiaries, all proceeds thereof and all rights (contractual or other), collateral and other assets However, in connection with a Qualified Receivables Transaction relating thereto, and any business or activities incidental or the relevant Borrower and its Restricted Subsidiaries will clearly be related to such business; selling Receivables to the Receivables Subsidiary and those sales “Standard Securitisation Undertakings” means will be caught by such a restriction. Thus, the relevant representations, warranties, covenants, indemnities and documentation should contain an explicit carve-out, typically in the guarantees of performance entered into by the Issuer or any case of a high-yield indenture from the definition of “Asset Subsidiary of the Issuer which the Issuer has determined in Disposition”, along the following lines: good faith to be customary in a Receivables Financing, (___) sales or dispositions of receivables in connection including those relating to the servicing of the assets of a with any Qualified Receivables Financing; Receivables Subsidiary, it being understood that any Receivables Repurchase Obligation shall be deemed to be a A similar carve-out can be included in the restrictive covenant Standard Securitisation Undertaking. relating to disposals in a loan facility agreement, or in the definition of “Permitted Disposal” or “Permitted Transaction”, where applicable. Qualified Receivables Financing Criteria Limitation on Indebtedness In addition to the descriptive definitions above, the documentation Typically, in a leveraged facility agreement the relevant Borrower may also set out certain criteria which the Qualified Receivables group is greatly restricted in its ability to incur third party financial Financing would have to meet in order to be permitted. These indebtedness other than in the ordinary course of its trade (again criteria will often be transaction specific or relate to certain often subject to a permitted debt basket and certain other limited commercial terms, in which case they may not be needed in exceptions). In a high-yield indenture, the Issuer and its Restricted addition to the requirements for market or customary provisions Subsidiaries are typically restricted from incurring Indebtedness

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other than “ratio debt” (e.g. when the fixed charge or leverage ratio replace existing receivables. A simple way to incorporate this into of the group is at or below a specified level), subject to limited the loan documentation would be to carve out ongoing proceeds exceptions. In a high-yield indenture, the term “Indebtedness” from the proceeds which are required to be prepaid: typically covers a wide variety of obligations, including (without “Excluded Qualified Receivables Financing Proceeds” limitation) with respect to any entity: (1) principal of indebtedness means any proceeds of a Qualified Receivables Financing to for borrowed money; (2) principal of obligations evidenced by the extent such proceeds arise in relation to receivables bonds, debentures, notes or other similar instruments; (3) all which replace maturing receivables under that or another reimbursement obligations in respect of letters of credit, bankers’ Qualified Receivables Financing; acceptances or other similar instruments; (4) the principal “Qualified Receivables Financing Proceeds” means the component of all obligations to pay the deferred and unpaid proceeds of any Qualified Receivables Financing received by purchase price of property (except trade payables), which purchase any member of the Group except for Excluded Qualified price is due more than one year after the date of placing such Receivables Financing Proceeds and after deducting: property in service or taking final delivery and title thereto; (5) (a) fees, costs and expenses in relation to such Qualified capitalised lease obligations; (6) the principal component of all Receivables Financing which are incurred by any obligations, or liquidation preference, with respect to any Preferred member of the Group to persons who are not members of the Group; and Stock; (7) the principal component of all indebtedness of third parties secured by a Lien on any asset of such entity, whether or not (b) any Tax incurred or required to be paid by any such indebtedness is assumed by such entity; (8) guarantees by such member of the Group in connection with such Qualified Receivables Financing (as reasonably entity of the principal component of indebtedness of third parties; determined by the relevant member of the Group, on (9) net obligations under currency hedges and interest rate hedges. the basis of existing rates and taking into account of However, a Receivables Subsidiary in connection with a Qualified available credit, deduction or allowance) or the Receivables Transaction will incur various payment obligations that transfer thereof intra-Group, will be caught by such a restriction, particularly if the financing is to the extent they exceed, in aggregate for the Group, (___) raised in the form of a secured loan made to the Receivables in any financial year. Subsidiary. Thus, if a Borrower / Issuer desires to retain the ability Limitation on Liens / Negative Pledge to continue to obtain funding under a receivables securitisation even Typically, in a leveraged facility agreement, a Borrower may not, if the leverage of the group is too high to permit the incurrence of and may not permit any of its subsidiaries to, create or permit to third party financings (or if the permitted debt basket is subsist any security interest over any of its assets, other than as insufficient), the relevant documentation should contain an explicit arising by operation of law or in the ordinary course of trade (again carve-out from the indebtedness restrictive covenant along the often subject to a permitted security basket and certain other limited following lines: exceptions). Similarly, in a typical high-yield indenture, an Issuer (___) indebtedness incurred by a Receivables Subsidiary may not, and may not permit any of its Restricted Subsidiaries to, in a Qualified Receivables Financing; incur or suffer to exist, directly or indirectly, any mortgage, pledge, It is of course also possible to exclude the securitisation transaction security interest, encumbrance, lien or charge of any kind from the definition of “Indebtedness” directly and there is nothing (including any conditional sale or other title retention agreement or wrong with having both carve-outs in the documents: lease in the nature thereof) upon any of its property or assets, The term “Indebtedness” shall not include . . . (___) whenever acquired, or any interest therein or any income or profits obligations and contingent obligations under or in respect of therefrom (referred to collectively as “Liens”), unless such Liens Qualified Receivables Financings. also secure the high-yield debt (either on a senior or equal basis, However, it should be noted that an exclusion from “Indebtedness” depending on the nature of the other secured debt). As with may have an impact on other provisions such as cross defaults or leveraged loan facilities, typically, there is a carve-out for financial covenants so it should therefore be considered carefully in “Permitted Liens” that provide certain limited exceptions. the different contexts in which it would apply (see also “Financial However, a Receivables Subsidiary in connection with a Qualified Covenants” below). Receivables Transaction will grant or incur various Liens in favour Subject to the same considerations, a similar carve-out can be of the providers of the securitisation financing that will be caught included in the restrictive covenant relating to the incurrence of by the restriction, particularly if the financing is raised in the form Financial Indebtedness in a loan facility agreement, or in the of a secured loan made to the Receivables Subsidiary. Thus, the definition of “Permitted Financial Indebtedness” or “Permitted relevant documentation should contain an explicit carve-out from Transaction”, where applicable. the Lien restriction, along the lines of one or more paragraphs added Mandatory Prepayment of Other Debt from the Proceeds of to the definition of “Permitted Lien”: Securitisations (___) Liens on Receivables Assets Incurred in connection with a Qualified Receivables Financing; The carve-outs from disposals covenants and “Indebtedness” described above may be subject to a cap, above which any such amounts are (___) Liens securing Indebtedness or other obligations of a Receivables Subsidiary; either prohibited absolutely or subject to mandatory prepayment of other debt. Whether, and to what extent, the proceeds of securitisations A similar carve-out can be included in the negative pledge in a loan should be used to prepay other debt can often be heavily negotiated, facility agreement, or in the definition of “Permitted Security” or particularly in the leveraged loan market. The business may wish to “Permitted Transaction”, where applicable. use such proceeds for general working capital purposes while lenders Limitation on Restricted Payments would be concerned at the additional indebtedness incurred by a Typically, in a leveraged facility agreement, the Borrower and its Borrower group which may already be highly leveraged. subsidiaries may not make payments and distributions out of the If some form of mandatory prepayment is agreed, this will often be restricted group to the equity holders or in respect of subordinated limited to the initial proceeds of the securitisation so that the shareholder debt. Similarly, in a typical high-yield indenture, an Borrower is not required to keep prepaying as new receivables Issuer may not, and may not permit any of its restricted subsidiaries

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to, make various payments to its equity holders, including any financial adviser in connection with each such transaction is an dividends or distributions on or in respect of capital stock, or additional burden that the business will want to avoid, and the purchases, redemptions, retirements or other acquisitions for value indenture will therefore need to contain an explicit carve-out from of any capital stock, or principal payments on, or purchases, the restriction on affiliate transactions, along the following lines: repurchases, redemptions, defeasances or other acquisitions or (___) any transaction between or among the Issuer and retirements for value of, prior to scheduled maturity, scheduled any Restricted Subsidiary (or entity that becomes a repayments or scheduled sinking fund payments, any subordinated Restricted Subsidiary as a result of such transaction), or indebtedness (as such term may be defined). between or among Restricted Subsidiaries or any Receivables Subsidiary, effected as part of a Qualified However, a Receivables Subsidiary in connection with a Qualified Receivables Financing; Receivables Financing will need to pay various fees that may be caught by this restriction. Thus, the relevant documentation should A similar carve-out can be included in the restrictive covenant contain an explicit carve-out from the restricted payment restrictive relating to arm’s length transactions in a loan facility agreement, or covenant, along the following lines: in the definition of “Permitted Transaction”, where applicable. (___) payment of any Receivables Fees and purchases of Financial Covenants Receivables Assets pursuant to a Receivables Repurchase In addition to the carve-outs described above, the parties will also Obligation in connection with a Qualified Receivables need to consider carefully whether the activities of the Borrower Financing; and its subsidiaries in connection with Qualified Receivables A similar carve-out can be included in the restrictive covenants Financings may impact the testing of financial covenants. Although relating to dividends and restricted payments in a loan facility high-yield indentures will typically not contain maintenance agreement, or in the definition of “Permitted Distribution” or covenants in the same way, the testing of financial ratios is still “Permitted Transaction”, where applicable. important for the purposes of determining whether a particular Limitation on Restrictions on Distributions from Restricted action may be taken by an Issuer or a restricted subsidiary under the Subsidiaries high-yield indenture at a particular time, or indeed to determine whether a subsidiary must be designated as a Restricted In some documentation, a Borrower / Issuer may not permit any of Subsidiaries in the first place. its restricted subsidiaries to create or otherwise cause or permit to exist or to become effective any consensual encumbrance or In a high-yield indenture, important carve-outs can be consensual restriction on the ability of any restricted subsidiary to accomplished by excluding the effects of the securitisation make various restricted payments, make loans, and otherwise make financing from two key definitions: transfers of assets or property to such Borrower / Issuer. “Consolidated EBITDA” for any period means, without However, a Receivables Subsidiary in connection with a Qualified duplication, the Consolidated Net Income for such period, plus the following to the extent deducted in calculating such Receivables Financing will have restrictions placed on its ability to Consolidated Net Income (1) Consolidated Interest Expense distribute cash to parties in the form of payment priority and Receivables Fees; (___) . . . “waterfalls” that will usually be caught by such a restriction. Thus, “Consolidated Interest Expense” means, for any period (in the relevant document should contain an explicit carve-out from the each case, determined on the basis of UK GAAP), the limitation on restrictions on distributions, etc., along the following consolidated net interest income/expense of the Issuer and its lines: Restricted Subsidiaries, whether paid or accrued, plus or (___) restrictions effected in connection with a Qualified including (without duplication) . . .. Notwithstanding any of Receivables Financing that, in the good faith determination the foregoing, Consolidated Interest Expense shall not of an Officer or the Board of Directors of the Issuer, are include (i) . . . (____) any commissions, discounts, yield and necessary or advisable to effect such Qualified Receivables other fees and charges related to a Qualified Receivables Financing; Financing. Limitation on Affiliate Transactions / Arm’s Length Terms The treatment of financial covenant definitions in a leveraged Typically, in a leveraged facility agreement, the Borrower and its facility agreement is potentially more complex, and care should be subsidiaries will not be allowed to enter into transactions other than taken to ensure that the treatment of receivables securitisations in on an arm’s length basis. Similarly, in a typical high-yield the various related definitions is consistent with the base case model indenture, an Issuer may not, and may not permit any of its used to set the financial covenant levels and with the applicable restricted subsidiaries to, enter into or conduct any transaction or accounting treatments. Examples of definitions which should series of related transactions (including the purchase, sale, lease or incorporate receivables securitisations might include, in the case of exchange of any property or the rendering of any service) with any leveraged loan facility agreements, the definitions of “Borrowings”, affiliate unless such transaction is on arm’s length terms. “Finance Charges” and “Debt Service”. Depending on the value of such transaction, an Issuer may be required to get a “fairness opinion” from an independent financial Key Issues adviser or similar evidencing that the terms are not materially less favourable to the Issuer (or to the relevant restricted subsidiary) as Should an early amortisation of the securitisation facility constitute would be achieved on an arm’s length transaction with a third party. a cross-acceleration or cross-default to the leveraged finance A Receivables Subsidiary in connection with a Qualified facility or high-yield bonds? Receivables Transaction will need to engage in multiple affiliate Leveraged finance facility agreements and high-yield bond transactions because it will purchase Receivables from other indentures typically contain a clause providing that the leveraged members of the Group on an on-going basis and a variety of loans or bonds, as applicable, can be declared to be repayable contractual obligations will arise in connection with such immediately should an event of default occur, with respect to some purchases. While the terms of such financing may be structured to third party debt, or should such third party debt become payable qualify as a true sale, and be on arm’s length terms, the potential before its scheduled maturity. A receivables securitisation requirement to obtain a “fairness opinion” from an independent financing can be structured so that there is no debt, and therefore no

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events of default or acceleration can occur. Instead, Receivables Should “ineligible” receivables be sold? Financings enter into so-called early amortisation pursuant to which This issue functions commercially in much the same manner as the the receivables collections that would normally have been paid to advance rate issue discussed immediately above. As summarised at the Borrower’s group to acquire new receivables is paid instead to the beginning of this chapter, Receivables Funding providers only the provider of the Receivables Financing. advance funds against receivables that satisfy certain specified The commercial risk to lenders and bondholders should an early eligibility standards. That requirement, however, does not mean amortisation event occur is that the cut-off of funds cause a sudden that the “ineligible” receivables are any less likely to be paid or that and severe liquidity crisis at the Borrower’s group. Thus, subject to they have actual payment rates that are any less sound compared a materiality threshold below which the parties agree that the with eligible receivables. However, the advance rate against an sudden loss of liquidity is not material, cross-default and cross- ineligible receivable is 0% and, as a result, including them in the acceleration triggers in leveraged finance facilities and high-yield pool of sold receivables will reduce the effective overall advance bond indentures should be tripped if an early amortisation event rate against the pool, with the adverse impact for lenders and occurs under a Receivables Financing facility. bondholders described above. Accordingly, if ineligible receivables How might the non-renewal of the securitisation programme affect constitute any meaningful percentage of a group’s total receivables, the leveraged loans and the high-yield bonds? it makes sense to require that ineligible receivables be excluded from the receivables financing. For historical reasons, most securitisation facilities must be renewed every year by the receivables funding providers. The Should proceeds raised under the securitisation facility be used to leveraged loans and high-yield bonds, on the other hand, have far repay debt? longer maturities. The non-renewal of a securitisation facility prior The required and permitted use of proceeds of a securitisation to the maturity of the leveraged loans and high-yield bonds can financing is always a key point of negotiation. The outcome of cause a liquidity crisis at the Borrower’s group in the same manner those negotiations will depend upon many diverse factors, as any early amortisation event, and should be picked up in the including whether the group’s liquidity needs are met by one of the leveraged finance and high-yield documentation in a comparable leveraged loan facilities and whether the Borrower’s group can bear manner. the higher overall debt burden should no debt repayment be Should there be any limits to the size of the securitisation facility? required. If so, how should those limits be defined? Should the lenders/bondholders regulate the specific terms of the By its nature, a securitisation financing removes the most liquid securitisation? assets of a Borrower group –the short term cash payments owing to Sponsors prefer that the receivables financing carve-outs permits the group from its customers – from the reach of the leveraged any programme which a responsible officer of the Borrower lenders and high-yield bondholders. Moreover, the amount of new determines in good faith are “on market terms” which are “in the Receivables Financing raised will never equal the full face value of aggregate economically fair and reasonable” to the Borrower / the receivables sold, because the receivables financing providers Issuer and the group. This approach is, in general, the correct one. will advance funds on the basis of some “advance rate” or subject As indicated above, however, certain issues are sufficiently to certain “reserves” which result in the new funding equalling 75% important for the parties to agree upon in advance. Beyond these to 80% of the full face value of the receivables at best. On the other and possibly a handful of additional issues, neither lenders nor hand, a Receivables Financing delivers to the Borrower group, the bondholders should have the right specifically to approve the lenders and bondholders alike the benefits of lower-cost funding documentation of the receivables financing facility. and liquidity. Where the balance between these two competing factors should be struck is for negotiation among the parties, but some balance in the form of a limit to the overall size of the Conclusion receivables facility seems appropriate. In summary, with very little modification to the standard leveraged Should a limit be agreed, the residual question is how that limit loan or high-yield documentation, a trade receivables securitisation should be defined. There are two main options. The limit can be financing can easily be added as part of a leveraged buy-out defined by reference to the total outstanding value at any point in financing or refinancing, thereby providing financing directly to the time of receivables sold, or it can be defined by reference to the relevant corporate group on comparatively favourable terms. total Receivables Financing raised. The disadvantage of the latter approach is that it rewards Receivables Financings with poor advance rates. If a Receivables Financing has an advance rate of 80%, £500 million face value of receivables is needed to raise £400 million of financing. On the other hand, if a receivables financing has an advance rate of only 50%, £800 million face value of receivables is needed to raise the same £400 million of financing. In the latter example, the leverage lenders and high-yield bondholders lose more receivables for little or no additional cost or liquidity benefit.

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Dan Maze Rupert Hall

Latham & Watkins LLP Latham & Watkins LLP 99 Bishopsgate 99 Bishopsgate London EC2M 3XF London EC2M 3XF United Kingdom United Kingdom

Tel: +44 20 7710 1000 Tel: +44 20 7710 1000 Fax: +44 20 7374 4460 Fax: +44 20 7374 4460 Email: [email protected] Email: [email protected] URL: www.lw.com URL: www.lw.com

Dan Maze is a Finance partner in the London office of Latham & Rupert Hall is an associate in the London office of Latham & Watkins. He has a wide range of experience in leveraged finance Watkins and is a member of the finance department. Rupert transactions, investment-grade acquisition facilities, restructurings specialises in banking and leveraged finance, with a particular and workouts and emerging markets financings. focus on cross-border acquisitions.

Latham & Watkins LLP is a global law firm with approximately 2,000 attorneys in 31 offices, including Abu Dhabi, Barcelona, Beijing, Boston, Brussels, Chicago, Doha, Dubai, Frankfurt, Hamburg, Hong Kong, Houston, London, Los Angeles, Madrid, Milan, Moscow, Munich, New Jersey, New York, Orange County, Paris, Riyadh, Rome, San Diego, San Francisco, Shanghai, Silicon Valley, Singapore, Tokyo and Washington, D.C. For more information on Latham & Watkins, please visit the Website at www.lw.com.

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The Evolution of a Global Asset Class: The Securitisation of Trade Receivables - Past, Present and Future

Rabobank International Mark D. O’Keefe

Introduction investment grade, unrated and non-investment grade corporations alike. The range of types of companies that have accessed this Perhaps no other securitiseable asset class is more fitting to be the financing tool is broad and diverse ranging from consumer products subject of an introductory chapter to The International Comparative companies to utilities to telecoms to commodity trading entities. Legal Guide to: Securitisation than trade receivables, also known as Given the broad based utilisation of the product and an ever accounts receivable. The reason being that no other asset class truly increasing familiarity with its applications and benefits, there is, has the real potential (or actual track record) to be combined into a and should be, no stigma associated with monetising receivables in singular, multijurisdictional or global financing with broad-based such a financing. In addition to reducing a company’s overall appeal to issuers, lenders and investors. This asset class, when viewed weighted average cost of capital and other benefits which will be through the prism of such a transaction, crystallises most of the cross- delineated herein, these facilities interlock with other liability border concepts that are addressed throughout this guide ranging from elements of a company’s capital structure from revolving credit assignability to conflicts of law and the taking of security. facilities to term debt to bonds. These transactions only typically The securitisation of short-term receivables has withstood the test require appropriate carve-outs or asset disposition language to be of time as an important financing tool, notwithstanding the credit executed. However, more thorough intercreditor agreements may crisis which began in 2007 and continues to manifest itself. be required with leveraged finance/sponsor companies and Arguably, this form of finance is more relevant today than at any companies utilising the product as a tool for restructuring or for other time in its roughly twenty-year history. The product is ideal exiting a bankruptcy. to serve the working capital needs of an ever expanding global It should be noted that it is quite difficult to pinpoint the exact size economy. Corporates are in need of simple, transparent, and of this market, the number of transactions outstanding, et al. since flexible structures to finance their short-term working capital needs. data for the market are largely private. Many of these transactions Banks and asset-backed commercial paper (ABCP) conduit were historically, and continue to be funded, in ABCP conduits (for sponsors are in need of solvency (interchangeable with capital) which some high level market data is available from the rating efficient products (given the increased solvency requirements of agencies). However, in recent years due to regulatory and Basel III). Moreover, there are signs that investors are looking for accounting changes notably for US banks, and the inability of some transparent and time-tested products with relatively short-tenors. sponsors to fund themselves efficiently or at all in the ABCP The product offers a solid performance track record in the bank- markets due to greater investor scrutiny, many conduits have exited sponsored conduit market and, to a more limited extent, in the term the market or deliberately contracted their ABCP outstandings. In market. The performance is due to the significant loss protection these situations, client business that used to be funded in the and other structural features required to receive shadow or explicit conduits often migrated to banks’ balance sheets where there ratings ranging from ‘A’ (typically the minimum required in the continues to be significant activity (though not easily traceable) in bank conduit market) to ‘AAA’ (typically the required rating for addition to ongoing funding in ABCP conduits. At the end of 2011, term transactions). based on data extracted from rating agency reports, trade Corporates are expanding into new markets where the regional and receivables transactions outstanding in multi-seller ABCP conduits global transfer of wealth is giving rise to new demand for their approximated USD 50 billion (see Endnote 1); however, as noted products. This trend, coupled with a general trend toward rising for the reasons above, the number is almost certainly to be commodity prices, is putting pressure on working capital financing significantly understated. needs. As new customers in new markets become more Furthermore, even as stated, the relative importance is not fully sophisticated and relevant in the global revenue chain, they are also appreciated as nominal facility sizes actually finance multiple times demanding and securing more flexible terms from their suppliers, that amount in economic activity given the revolving nature of the which in turn increases the cash conversion time cycle for portfolios. Therefore, assuming an average portfolio turnover of corporates. Securitisation can help to address these issues by four times per year (equating to roughly 90 days’ sales outstanding shortening the cash conversion cycle for end users while at the same (DSO)), USD 50 billion worth of financing actually encapsulates time allowing the end user to be more user friendly to its USD 200 billion of economic activity. creditworthy customers. Factoring and receivables discounting The reasons that this product is able to be relatively global in scale facilities are also other options and will be discussed further. and application is due to user friendly evolution of legal, regulatory In short, these transactions finance the growth and normal (at least historically), currency and tax regimes in North America, functioning of the real economy and the working capital needs of Europe and a gathering of countries within South America, Asia and

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Africa. However, for the product to reach its potential and to days in commitment tenor, no regulatory capital was mandated to accommodate the demand needs when currently stagnant economies be held under the guidelines of Basel I. Accessing the growing return to more robust rates of growth and to finance the demand in ABCP market allowed sponsoring banks to access alternate funding developing markets, more evolution will be needed in such regimes, for their core client business. The three preceding considerations especially in South America and Asia. Also, increasing or increased allowed banks to offer their customers secured, non-recourse credit political stability and transparency in ways of doing business in some facilities at substantially reduced margins (typically at a steep countries in Eastern Europe, South America and Asia will spark discount to the bank debt margin) which caused the product to gain further willingness of corporates, lenders, investors and credit insurers in appeal within the US market. to take steps to fill gaps between supply and demand, thereby Banks were also able to show increased return on assets since increasing overall economic activity. revenue was recognised, but assets, associated with the financings Additionally, certain regulatory issues currently under review in the were not on balance sheets. Increased return on solvency from US and in Europe will need to evolve in a more securitization friendly client relationships was also a result and made it possible for banks manner. to participate in less attractive revolving credit facilities from a When the world does return to a more healthy rate of growth, and as return on solvency perspective and still hurdle overall client markets begin to develop more in terms of their creditworthiness relationship return targets. Another important consideration is that profiles, the current construct of the overall receivables financing banks were and are often willing to hold considerably larger market (ABCP conduits, banks, and existing term investors, as well as exposures to securitisation facilities versus bilateral or credit other players including factors and providers of receivable discounting facilities given that the exposure is solvency efficient, viewed as facilities) may not be adequate for the demand given current trends of exposure to the overall portfolio of obligors on a high grade deleveraging and retrenchment. New variations of the product, structured basis, and with minimal clean risk to the issuer. These including forms of risk participations and new investors will need to assets are also viewed as the most liquid, except for cash, on be mined. But this should and will be a worthwhile effort and one that corporate’s balance sheet. Such risk is not typically counted in full industry participants should advocate given the historical performance against existing exposure lines to clients, or, to the extent it is of this form of asset finance. counted, is viewed as a higher grade exposure. As the product evolved and took hold in the US, US, Canadian, Japanese, Australian and European banks began to offer the product A Brief History of the Trade Receivable to their clients in Europe and elsewhere depending on investor Securitisation Product appetite and the rollout of securitisation regimes across the globe. Yet the market was more slow to develop on the eastern side of the Trade receivable securitisation began to flourish in the 1990’s in the Atlantic due to a few factors. United States as the overall securitisation market for asset classes in addition to that for residential mortgages took hold and expanded. First, there was not enough of a clear cut cost advantage to execute Many corporates, initially formerly investment grade credits (a.k.a. a securitisation when set-up costs and time to market were factored fallen angels) and other middle market companies, flocked to this into the equation. While corporates could benefit from the lower new financing technology as banks offered these financings to their credit margin, set up costs and the process affecting the time to corporate customers via ABCP conduits. The economically market could be incrementally burdensome enough to cause efficient form of financing helped to level the competitive playing treasurers and CFO’s to opt for syndicated or bilateral facilities field for corporates across the credit profile spectra. Non- which were in abundant and cheap supply. More often than not, investment grade or unrated corporates were now able to finance a corporates would have to contribute assets from several part of their capital structure with cost efficient debt that looked to jurisdictions to achieve economies of scale. Different legal, tax and the quality of a diversified pool of assets that were often structured regulatory requirements in different markets all impacted the to a higher credit profile than that of their senior secured or bottom line. Moreover, MIS systems were not as efficient as they unsecured debt. are today at extracting and tracking both the initial and ongoing data required to execute and report on an ongoing basis for these deals. Money market funds and other short-term investors looking for low risk, short-term assets in which to invest cash holdings provided an Secondly, factoring facilities and receivables discounting facilities efficient outlet for ABCP. were in abundant supply and could be quickly and cheaply set up. This area is discussed in more detail later herein. In addition to non-investment grade or unrated issuers, investment grade issuers utilised (and continue to utilise) the product as a With the advent of the credit crisis in 2007-2008, there was an source of alternate, backstop liquidity to hedge against losing increase in credit spreads for corporate lending in European and access to the corporate commercial paper markets should they lose other markets. This increase in credit spreads coincided with a (or had lost) their requisite short-term ratings (typically A-1/P-1 retrenching of many banks to local markets to focus on core clients ratings levels, given the lack of depth in the A-2/P-2 market). Other and local heroes (trending toward a type of economic nationalism). rationale for standby facilities include(d) having a committed These trends helped to foster more consideration by corporate source of liquidity to take advantage of acquisition opportunities. treasurers for securitisation as a viable alternative, despite some of Having a large quantum of debt that can be accessed with a few the features noted earlier. The current Eurozone crisis and the effect days’ notice is highly attractive and is reliant on the company’s that it has had on European banks and factoring entities from a asset performance versus investor appetite at the time. ‘business as usual’ perspective in terms of range of products offered and their associated pricing has caused more people to give From a regulatory capital perspective and overall return basis, these securitisation a second look. trades historically were highly attractive. Since multi-seller conduits were not typically owned by the sponsoring banks, the In a research study entitled, “The Growth of Receivables-Based assets corresponding to the securitised debt of the transaction did Finance”, published in 2010, Demica noted, based on a survey of over not show up on the bank’s balance sheets (a feature which gradually 1,500 corporates across Germany, France and the United Kingdom, changed over time). As the liquidity commitments from the bank 37% of the firms surveyed had used receivables financing in the past backstopping the transaction were structured to be less than 364 year, and another 40% were considering some form of asset finance,

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including securitisation. (See Endnote 2.) It is interesting to note that These facilities can be structured to achieve off balance this survey was completed prior to the recent full manifestation of the sheet treatment/derecognition under US GAAP, IFRS, credit crisis in the Eurozone and does not cover southern European and local accounting regimes or local GAAP: corporates. One would suppose that such issues are even more at the forefront of treasurers’ objectives at this time. While typically more in demand by corporates reporting under IFRS than for corporates reporting under US GAAP, off balance sheet structures are achievable under these structures and can Benefits and Reasons for Corporates to include third parties such as credit insurers and first loss providers Securitise in order to meet the threshold requirements.

Many of the benefits and rationale for utilising securitisation today are the same as when the product was initially launched, albeit on a While more complex and costly to setup than factoring more global scale, including: facilities, securitisation facilities can be more flexible and enduring:

The product provides for access to alternative and lower Securitisation facilities are set up to finance a portfolio of assets. cost funding: These facilities are often committed (versus offering basis or until further notice facilities), and since the replacement of Basel I by Historically, these transactions have commonly been financed in the Basel II and III, sponsoring banks are indifferent as to the tenor of ABCP market through bank sponsoring conduits, although a limited the commitment from a solvency perspective. Price however will number of transactions for corporates have been successful in be steeper in exchange for a longer commitment. accessing the term markets. Both of these markets allow for issuing Conversely, most factoring or receivables discounting facilities are corporates to access different funding than the traditional bank debt, for designated obligors who may rely on credit insurance and may high yield, bond and private placement markets. With ABCP be uncommitted in terms of purchasing commitment by the lender. funding, the debt trades on the name of the conduit versus the name of the corporate. While these non-securitisation facilities have been utilitarian and continue to be so, more and more treasurers are looking for Since these transaction are bankruptcy remote, typically limited certainty in funding. Also the growing, supplier finance market recourse to the issuer for items that are dilutive to receivables could adversely affect this market’s ability to grow. More and more balances or for breaches in representations and warranties, and frequently, corporates whose names are single name candidates for since the underlying collateral is packaged into an instrument that is receivables discounting are prohibiting the sale or assignment of of a higher credit profile than that of the issuer, the overall debt their receivables in order to limit the use of their name in the overall package results in a lower cost of credit. debt markets to secure financing. Also, to the extent funded in an ABCP conduit, issuing companies Securitisation facilities must contend with this non-assignability can take advantage of a conduit sponsoring bank’s funding costs in issue as well, but the product actually works best for diversified the marketplace to the extent that the basis for the transaction is done portfolios in excess of 200 obligors (although it can work with far on a cost of funds basis. Although, it should be noted that this factor fewer), where a statistical analysis based on low exposure to obligor has seen more volatility of late on a macro basis given the Eurozone concentrations is used versus single name credit evaluations. crisis, which has honed in on the European banking system and Smaller and midsize corporates are less likely to prohibit the limited certain banks’ access to competitive funding levels. assignment of their receivables than larger corporate names. Despite longer time requirements and higher set-up costs than other The product can provide for operational efficiencies, receivables purchasing or financing facilities, securitisation centralisation of treasury functions and uniform leverage facilities are highly versatile in that they are able to adapt to growth and pricing: and changes in a company’s business profile and are able to efficiently accommodate seasonal fluctuations in receivables Recently, there has been a nascent, but observable trend in some balances. These facilities can be used to fund organic and inorganic markets for treasurers to seek out consolidation of bilateral growth and used as backstop facilities. facilities, including factoring and smaller securitisation facilities, into larger, syndicated securitisation programmes. This Finally, after going through portfolio analysis and the set up consolidation, much like a syndicated loan, centralises the touch requirements necessary to track the performance of a trade receivable point of the company with one agent bank, thereby reducing transaction, most issuers find that they get a new perspective on their invested hours needed to maintain working capital financing. asset portfolio and their customer performance, trends, and While other lines are made redundant, the fact that the securitisation requirements. This new way of looking at debtor portfolios can lead facilities are able to be syndicated allows for ever important sharing to better performance due to early warning measures for potentially of the cross-sell wallet with core house banks. problem credits but can also serve as an indicator for changing business needs which can lead to better inventory management, Since the collateral pool of assets are cross-collateralised, issuers can resource allocation and business planning for corporates. achieve uniformity of leverage and pricing. Overall leverage and price may not be as efficient as if the company were securitising in just one developed and highly liquid market, such as the US; however; it will Term vs. Conduit or Balance Sheet Execution be more efficient than when compared to bilateral facilities in emerging markets or a market experiencing a period of stress due to the portfolio Private or public term securitisations for this asset class have been effects and cross collateralisation of the assets. In any event, more limited than ABCP conduit executions for a variety of benchmarks for investors and lenders to meet vis-à-vis corporates reasons. Also, some pending regulations unless altered from their contemplating such trades will be existing costs of debt financing. current status could adversely affect these transactions going forward. Following are some contrasts between conduit and term transactions.

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Required Higher Ratings monitoring functions and overall frequent contact with customers, deal with the real time issues facing their customers. These issues In order to clear the market at efficient levels, these transactions can range from overall performance trends in key markets, to have historically been executed at an explicit AAA-ratings level corporate customers’ desires for extended payment terms, to (although some subordinated tranches have also been funded). increased funding needs in emerging markets. The product serves While the end result is attractive from a funding and cost of credit as a portal for increased customer intimacy between lenders and level, the higher ratings level threshold renders less operating borrowers and can facilitate first mover advantage. flexibility from an issuer’s perspective. Alternatively, while in abundant supply prior to 2007-2008, it was easier from a Where Do We Go From Here? corporate’s perspective to opt for a lower ratings level, (typically single A to AA shadow rating level) with an ABCP conduit Clearly, the opportunities and rationale for expansion of this transaction and trade a few basis points away in cost of credit but product, in its current or altered form, are many, but there are get more flexibility with a bank sponsor or syndicate of bank (hopefully surmountable) hurdles to it reaching its full potential sponsors. Perhaps that advantage is not as salient today. globally. Further evolution in currency, legal and regulatory regimes that is Less Flexibility to Accommodate Business Changes and favourable to securitisation in markets such as China, Brazil and Amendments India, both onshore and offshore, is one such hurdle. Basel III’s increased solvency requirements will at least slow the Amendments to existing conduit deals to reflect changes in the rate of growth of banks’ balance sheets. While banks may opt to business of a company require negotiations with bank sponsor(s) increase solvency efficient products in their offerings, ultimately, within the syndicate group. Amendments to term transactions can the capacity of banks’ balance sheets is limited. be costly and time consuming, and, depending on the complexity, can meet with varying degrees of success, due to the larger group of Accounting changes in the US have forced some ABCP conduits to investors involved, who may not be as willing to take risks that exit the market due to loss of benefit from funding in the conduits relationship banks are. versus funding on balance; however, banks still seem to want to offer this product to clients. Certain regulations, namely the “Volcker Rule” of the Dodd Frank Inability to Accommodate Borrow Up/Pay down Features Act, at the very least, may require restructuring of conduits in order to comply with regulations if not changed from their current draft Conduit facilities are highly efficient in terms of matching assets format. and liabilities and changes in receivables balances due to seasonality or reduced borrowing needs. In a term transaction, For the week of March 19, 2012, Asset Backed Alert reported by issuers must maintain a core level of debt that can be supplemented referencing data compiled by Moody’s that the 20 largest ABCP by a variable funding note (often provided by a conduit facility) or Administrators issuance as of yearend 2011 was down 8% (from lose it due to operational constraints with term investors. 384 billion to $353 billion) “where regulatory pressure and less favorable accounting rules have already combined with broader financial-market weakness to drag down issuance.” (See Endnote Bank Benefits for Offering Securitisation to 3.) During the same week, the Financial Times reported that new Clients securitisation vehicles were being prepared in an effort to “try to resolve the credit crunch in the commodity industry” that has arisen For banks today, whether these deals are funded on balance or via from an overall rise in commodity prices at the same time banks are sponsored ABCP conduits, most of the same features that existed at pulling back (see Endnote 4). the time that the product came into play still exist today. While While the article does not disclose the detail of the structures, it is regulatory solvency requirements are more risk based under Basel not unreasonable to assume that such structures may bear II and III versus commitment tenor based under Basel I, similarities to previous facilities which several commodity trading securitisations are still typically more solvency efficient than other houses have established over the years. debt products. This feature alone should preserve the attractiveness of the product. To the extent that banks are able to fund their Notwithstanding the fact that there is still capacity in the established conduits via ABCP investors, banks are serving their core clients markets for trade receivables transactions and other forms of while alleviating pressures on their treasury departments, although receivables finance, all of these trends point to the potential need for they must comply with more stringent liquidity guidelines. new investors and other market participants (credit insurers (new and existing), trustees, back-up servicers, etc. – for investor In the end, securitisation is a highly desirable form of cross-sell to comfort) in term structures or new variations of the existing clients that increases overall relationship returns. This feature is product, either on a standalone basis or in conjunction with bank more important in the era of solvency constraints and rising conduit or balance sheet facilities. liquidity costs. These costs can render other forms of debt negative from a return perspective. This imbalance will persist until credit For the right issuers with solid credit profiles and the ability to spreads find a balance with the new realities for banks. deploy a core mass of solid performing receivables (with detailed history) on a consistent basis, such trades should be imminently Regardless this product also has limits for bank balance sheets in doable in the term markets, as well as on a continued basis in this era of deleveraging, and new structures (or add-ons to existing existing markets. structures) will need to be mined. It is time for the overall market to look more closely at trade While the preceding reasons to sponsor securitisation activities are receivables securitisation, or evolutions of the product, once again likely evident to those somewhat familiar with the product, there through the prism of a debt capital markets product that can have are other ancillary benefits that come with having a securitisation even more appeal from a variety of perspectives. with core clients. Securitisation departments, through their

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Endnotes Mark D. O’Keefe 1. Moody’s Investors Service, ‘Special Report: ABCP Market Rabobank International at a Glance: ABCP Multiseller Market Snapshot’, Pg 12, 13 Thames Court, 1 Queenhithe London EC4V 3RL January 2012, http://www.moodys.com/. Data in report as of United Kingdom 30 September, 2011. Trade receivable securitisation information (estimated size) is extrapolated based on the Tel: +44 20 7809 3461 figures, determined according to the amount of ABCP Fax: +44 20 7809 3549 outstanding, of the then largest multiseller and hybrid ABCP Email: Mark.O’[email protected] programmes (which together make up the largest part of the URL: www.rabobank.com total ABCP market). Mark D. O’Keefe, Managing Director and member of Rabobank 2. Demica, “The Growth of Receivables-Based Finance”, June International’s Capital Markets Management team is responsible 2010, pp 2 & 7. for securitisation activities in Europe, the Middle East, Africa and 3. “Pullbacks Continue for Asset-Backed CP Administrators”, the Asia Pacific Region. Mr. O’Keefe has over 20 years of Asset-Backed Alert, March 23, 2012, pp 4-5. professional experience, with 18 years in securitisation with roles in structuring and origination, credit portfolio management, and 4. Blas, Javier “Bid to unlock commodities liquidity crunch”, workout. He has experience in a number of consumer and Financial Times, March 20, 2012. corporate asset classes including trade receivables, middle market CLO’s, whole business and future flows. His other professional experience includes management consulting. Note Predecessor institutions where Mr. O’Keefe has worked include Deutsche Bank Securities, CIBC World Markets, MBIA Insurance The author would like to thank his colleagues for their comments on Corporation, and Andersen Consulting. Mr. O’Keefe holds an A.B. in International Relations with honours from Brown this article and would like to note further that the views and University and a Master of International Affairs from Columbia opinions expressed therein are his and not necessarily those of the University focusing on International Banking and Finance and Rabobank Group or its affiliates. Emerging Markets. He was elected to the Board of Directors of the European Securitization Forum, now part of AFME, in 2009.

The Rabobank Group is the collective name by which Rabobank and its subsidiaries operate nationally and internationally. The group provides a wide range of banking and other financial products and services in the fields of payments, savings, home mortgages, insurance, asset management, leasing and real estate. With the Netherlands as its home base, the group is increasingly spreading around the world. Rabobank International is the Rabobank Group's international banking division that concentrates on international wholesale and retail banking activities. The related focus is on food & agri customers that are served from branch offices worldwide. Rabobank International is dedicated to attaining the position as the leading food & agri bank worldwide. This mission fits in seamlessly with Rabobank's co-operative origins as the financier of choice for the Dutch agricultural sector and with the expertise the bank has developed in this specialised area. Rabobank International's activities are divided into the regions Europe (excluding the Netherlands), the Netherlands, North and South America, Australia and New Zealand, and Asia. We offer our clients the full range of corporate and investment banking services embracing global capital markets and treasury, international M&A, structured finance and asset securitisation.

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New Structural Features for Collateralised Loan Craig Stein Obligations

Schulte Roth & Zabel LLP Paul N. Watterson, Jr.

Introduction mezzanine notes, and surrendered mezzanine notes to the note registrar (which was the bank that acted as trustee for the CLO 2011 saw a revival of offerings of collateralised loan obligations noteholders) for cancellation, with no payment made to the noteholder (“CLOs”), one of the structured credit products that proved resilient for the cancelled notes. As a result of the cancellation of the notes and during the credit crisis. CLOs primarily invest in loans to non- the corresponding reduction in the debt owed by the issuer, the CLO investment grade commercial and industrial enterprises and, unlike came back into compliance with the overcollateralisation tests, and collateralised debt obligations (“CDOs”) which invested in cashflows that would otherwise have been diverted to redeem the mortgage-backed securities, CLOs suffered few events of default senior notes became available for distribution to the subordinated and still fewer liquidations that resulted in losses to investors. [See notes and the remaining mezzanine notes. These actions angered Endnote 1.] Although the ratings of many CLO notes were senior note investors. In one case KKR Financial reached an downgraded during the credit crisis, the rating agencies raised the agreement with the senior noteholders, whereby the senior ratings of CLO notes in 2011 because of the improved credit quality noteholders agreed not to challenge the surrender of CLO notes by a of the underlying loan portfolios and changes in the ratings KKR affiliate for cancellation in exchange for KKR agreeing to methodology for CLOs. Notwithstanding this favourable track refrain from taking a similar action in other CLOs that it managed. In record, managers and investors identified deficiencies in the another CDO, the note registrar declined to cancel the mezzanine indentures of CLOs issued before 2009. Changes in regulations and notes, resulting in litigation before the Delaware Chancery Court, tax law also required adaptations in CLO indentures. As a result, which in 2010 upheld the right of the mezzanine noteholder to tender structural changes have been made in the governing documents for its notes for cancellation. [See Endnote 2.] CLOs issued in 2011 and early 2012. In response to the controversy caused by these attempts to bring Some of these structural changes are fundamental. Thus far, CLOs into compliance with overcollateralisation tests through indentures for new CLOs require that the CLO invest primarily in mezzanine note cancellations, the indentures for new CLOs often senior secured loans to borrowers in the United States and use a deprive noteholders of the right to voluntarily surrender a note for “cash flow” model; CLOs which invest primarily in loans to cancellation. If the indenture preserves this right, it typically European borrowers or which use a “market value” model have not provides that if a noteholder surrenders its notes for cancellation returned. Post-debt crisis CLOs are not permitted to invest in many (unless the notes are redeemed or repurchased pursuant to the types of assets, such as structured finance securities and credit priority of payments), the cancelled notes will be treated as default swaps, in which the prior generation of CLOs could invest outstanding for purposes of the overcollateralisation tests until all because these assets are now widely perceived by investors as notes senior to the cancelled notes have been redeemed. posing a greater risk. As a result of the involuntary bankruptcy of a CDO in 2011, CLO indentures have strengthened the provisions intended to prevent a CLO noteholder from successfully forcing the Amend and Extends CLO issuer into a bankruptcy proceeding. Changes in regulations The leveraged loan market has experienced a boom in amend and also have affected CLO documentation; for example, the new Rule extend solutions to the problem of how to refinance the large 17g-5 of the U.S. Securities and Exchange Commission, by amount of leveraged loans coming due in the next few years requiring that any information given to a rating agency be made (sometimes referred to as the “refinancing cliff”). In a classic contemporaneously available to other rating agencies, has changed amend and extend transaction, the credit agreement is amended to both the process under which CLOs obtain ratings and the provide better economic terms for the lenders in exchange for governing documents. Other structural changes to CLO governing extending the maturity of the loan. CLO noteholders have documents that are discussed below responded to specific, questioned whether the manager of a CLO is authorised to agree to unanticipated risks that were identified during the credit crisis. these extensions. First, if the reinvestment period for a CLO has ended, may the CLO nevertheless agree to an amend and extend? Note Cancellations Second, may the CLO agree to the extension of the loan’s maturity if it will cause the CLO to fail its weighted average life test? Third, Many CLOs failed overcollateralisation tests during the credit crisis, should the manager decline to participate in the amend and extend resulting in the diversion of cash that would have been distributed to transaction if the amended loan would not meet the CLO’s the most junior class of subordinated notes (and, in some cases, eligibility requirements for investment in a new loan? mezzanine notes) to redeem senior notes. In several CLOs, an affiliate Many CLO indentures do not provide the manager with clear of the manager owned both the CLO subordinated notes and

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guidance on these three questions, and managers have adopted RAC for the proposed action, or that the rating agency no longer varying policies regarding amend and extend transactions. Many views itself as a “Rating Agency” for a specific CLO. In addition, managers of CLOs believe that they are authorised to approve these indentures now specifically identify when RAC is required from transactions as amendments to loans in the portfolio, even if the one rating agency but not from another rating agency. In some CLO’s indenture would not permit the CLO to purchase the transactions, the controlling class has obtained additional amended loan. Some managers have taken the view that an amend protections (such as objection rights) when, as a result of this and extend may cause a loan’s maturity to extend beyond the legal change in the definition of RAC, the traditional form of RAC letter final maturity of the CLO or cause the CLO to fail its weighted is not required to be obtained for an important action by the CLO. average life test, while other managers take the opposite position. As a result of the recent wave of amend and extend transactions, Discount Obligations specific provisions regarding the parameters for amend and extend transactions are often included in new CLO indentures. For As loan prices fell during the recession, managers of CLOs found it example, new CLO indentures may prohibit the CLO from difficult to trade out of deteriorating loans and into higher quality approving an amend or extend which extends the maturity of the loans because their indentures required deep discount loans to be loan beyond a specified date (such as the maturity of the CLO’s carried at their purchase price, rather than par, when calculating the notes) or would cause the CLO to fail its weighted average life test. CLO’s overcollateralisation tests. A “deep discount” loan was often defined in CLO indentures as (i) loans purchased below 80% of par, Reinvestment After the Reinvestment Period regardless of their ratings, or (ii) loans purchased below 85% of par if rated below B3. These restrictions were intended to prevent the This issue came to the forefront in Black Diamond CLO 2005-1. In manager from manipulating the par value of the CLO’s portfolio that CLO, the manager made commitments during the reinvestment and thereby improving its overcollateralisation ratios at the expense period to purchase loans, with the settlement of the purchases to of the underlying credit quality of the portfolio (so-called “par occur after the reinvestment period ended. Senior noteholders building”). objected to the trades being settled with funds received by the CLO These restrictions had unanticipated consequences during the credit after the reinvestment period had ended and insisted that the CLO crisis, when even loans to high quality companies traded well below instead use these funds to pay the noteholders. The trustee in the par. A CLO that sold a risky loan and used the proceeds to buy a transaction brought an interpleader action in the United States loan to a more creditworthy borrower at the same price could suffer District Court in order to resolve the dispute among the parties as to a decline in its overcollateralisation ratio, even though the credit the distribution of these funds. Based on an analysis of the relevant quality of the portfolio improved. This occurred because the CLO indenture provisions, the court ruled that these funds were not had carried the more risky loan that it sold at par but was required available for reinvestment and should be distributed to the to carry the new, less risky loan at its purchase price for purposes of noteholders. [See Endnote 3.] the overcollateralisation tests. CLOs tried to amend their The Black Diamond decision has been misunderstood as standing indentures to permit these deep discount “substitutions” to be made for the proposition that a CLO may only reinvest funds received without suffering a decline in the overcollateralisation ratio. These before the reinvestment period ends. But many CLO indentures changes to indentures required a CLO to obtain RAC from rating authorise the CLO to apply funds received after the reinvestment agencies. As a result, the rating agencies established new criteria period both to settle investment commitments made during the for investments in discount obligations, and these criteria now reinvestment period and, subject to more strict criteria, investment appear in the indentures for many new CLOs. New CLO indentures commitments made after the reinvestment period has ended. The often permit the CLO to purchase a loan at a deep discount but still indenture for any new CLO should specify with precision what treat it as a par obligation for purposes of the overcollateralisation funds received after the reinvestment period ends may be reinvested tests if a number of conditions are met (including that the loan was and the additional reinvestment criteria, if any, that are applicable to purchased with the sale proceeds of a loan that was not itself a deep such reinvestment. discount obligation).

Rating Agency Condition or Rating Agency Exchange Offers Confirmation (“RAC”) An exchange offer is an offer by a company to its noteholders to Since 2008, rating agencies have been more reluctant (and slower) exchange a new security for its outstanding notes. Many CLOs, to give a letter (a RAC letter) confirming that an action by the CLO, particularly during the financial crisis when borrowers were under such as a supplemental indenture or replacement of the manager, distress, owned loans for which the borrowers made exchange will not result in a downgrade or withdrawal of the rating on the offers. Although some CLO indentures broadly authorised the notes. This has prevented many CLOs from taking actions manager to accept exchange offers, many did not explicitly permit recommended by managers in circumstances in which the indenture the manager to accept such exchange offers or did not specify requires RAC as a condition to the CLO taking the action. whether other requirements in the indenture (such as the eligibility criteria for investments in new loans) were applicable. New CLO The definition of RAC in many new CLO indentures has been indentures often provide express authority for a manager to consent adapted to reflect these practical limitations on when and how each to an exchange offer without obtaining noteholder consent even if rating agency will give RAC. Some indentures no longer require the newly issued security does not comply with the requisite that RAC come in the form of a letter from a rating agency eligibility criteria. Some indentures impose limitations on the addressed to the CLO; instead, RAC can now come in the form of manager’s discretion to accept an exchange offer if an event of a press release or announcement by the rating agency, or a statement default has occurred under the CLO indenture or if the new security by the rating agency to the CLO, manager or trustee that RAC is not is scheduled to mature after the CLO notes mature. required, or that the rating agency’s practice is no longer to provide

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Subordination Provisions even litigation ensued. Some indentures for new CLOs provide that, if the manager discovers that a loan was purchased in violation Some pre-credit-crisis CLO indentures contained apparent of the eligibility criteria, the manager has no obligation to sell the inconsistencies among the post-default liquidation provisions, the loan, whereas other indentures specify the requirements under subordination provisions and the priority of payment provisions. In which the manager may sell the asset. If the indenture specifies that CDOs, these inconsistencies resulted in a number of lawsuits and the asset must be sold, it often permits the manager to sell it to any interpleader actions by trustees as different classes of noteholders party (including the manager, one of its affiliates or a fund or fought over how cash should be distributed following an event of account that is managed by the manager or one of its affiliates) that default. New CLO indentures are resolving these issues in a will purchase the loan at a price equal to the CLO’s purchase price. number of ways. One approach is to provide for a separate priority On a related point, some indentures now authorise the manager to of payments that applies to all distributions after the occurrence of dispose of an “illiquid” asset which is not cashflowing and which an event of default or after acceleration of the maturity of the notes cannot be sold in the market. These provisions may authorise the following an event of default (subject to the event of default being manager to offer the asset to noteholders of the most senior class cured or waived or the acceleration being rescinded) or after (and thereafter to other classes in order of seniority) and, if there are liquidation of the portfolio commences. Other indentures retain a no takers in any class of noteholders, to take ownership of the asset single priority of payments but state expressly that distributions to itself or to transfer it to a charity or an “abandoned property subordinated classes of notes under this priority of payments are account”. This provision becomes important at the maturity of the subject to the subordination provisions. CLO notes, because unsalable assets have made it difficult to terminate indentures after the other assets in the portfolio have been sold. Distributions After Liquidation Commences

There have been a number of disputes (primarily in CDOs) about Section 457A whether funds should continue to be distributed to noteholders under the regular priority of payments on a scheduled payment date Section 457A of the U.S. Internal Revenue Code of 1986, as that occurs after liquidation of the portfolio commences (following amended (the “Code”), generally requires U.S. taxpayers to include an event of default under the indenture) but before the liquidation in income any compensation that is deferred under a nonqualified has been completed. One approach in new CLO indentures to avoid deferred compensation plan, unless the income is subject to a such disputes is to make clear in the indenture that once a “substantial risk of forfeiture”. Compensation is generally liquidation commences, no distributions will be made on a considered subject to a substantial risk of forfeiture only if the scheduled payment date until the trustee determines that proceeds recipient’s rights to such compensation are conditioned upon the of liquidation should be distributed pursuant to the post-default future performance of substantial services. CLO managers are remedial provisions of the indenture. Another approach is to permit generally paid fees pursuant to the priority of payments in the distributions to be made on a scheduled payment date but to make indenture which specifies the priority in which cash from the those distributions under a separate priority of payments applicable underlying portfolio is distributed to investors and to service to distributions after an event of default under the CLO indenture. providers. Because many CLO managers charge “subordinate fees” and “incentive fees” which are paid only if cash is available at the bottom of the waterfall, and the payment of such fees is often not Sales After an Event of Default subject to a “substantial risk of forfeiture” within the meaning of There is a perceived inconsistency between the right typically given Section 457A, there is real risk that the amount of such fees would to the most senior class(es) of notes (the “Controlling Class”) to not be determinable and paid at the time required by Section 457A. direct the trustee to sell loans in the CLO’s portfolio after an event As a result, U.S. CLO managers would be subject to an additional of default has occurred under the CLO’s indenture and the right of 20% tax and interest penalty charge when such amounts are finally the manager to make sales of certain types of loans. This perceived determined and included in the U.S. CLO manager’s income. U.S. inconsistency led to a number of disputes in CDO and CLO CLO managers need to structure new CLOs in order to ensure either transactions during the credit crisis, and some trustees have that Section 457A would not apply or that the compensation declined to permit the manager to make any sales of loans if an arrangement operates in compliance with Section 457A. event of default has occurred. New CLO indentures may expressly permit certain sales (for example, sales of credit risk or defaulted FATCA loans, equity securities, margin securities or assets subject to withholding tax) to be made by the manager after an event of The so-called “FATCA” provisions of the U.S. Hiring Incentives to default has occurred under the CLO indenture, but the manager may Restore Employment Act (the “HIRE Act”), which was signed into lose this power if the Controlling Class of notes directs the trustee law on March 18, 2010, generally require every foreign financial to liquidate the portfolio. institution (“FFI”), including a CLO organised outside the U.S., to enter into an information sharing agreement with the U.S. Treasury Department (generally by June 2013) and to comply with specific Sales of Nonconforming Assets and Unsalable documentation and reporting requirements with respect to its U.S. Assets investors. A CLO that is not in compliance with FATCA will generally be subject to a 30% withholding tax on any “withholdable Issues have arisen where a CLO purchases a loan and subsequently payment”, which is broadly defined to mean any payment of the manager or the trustee determines that the loan did not comply income (including interest) from sources within the U.S. and gross with the eligibility criteria in the indenture at the time of purchase. sale proceeds from the sale of property that can produce either Is the manager permitted or required to sell the asset? At what interest or dividends from U.S. sources. Substantially all of a price? Does the manager need to comply with the normal sale CLO’s income and potentially all cash receipts and proceeds of restrictions in the indenture? Does the manager have any obligation loans to U.S. obligors may become subject to FATCA withholding to purchase the loan from the CLO? In a few cases disputes and ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 15 © Published and reproduced with kind permission by Global Legal Group Ltd, London Schulte Roth & Zabel LLP New Structural Features for Collateralised Loan Obligations

beginning in 2014 (for income) and 2015 (for proceeds) if the CLO Additional Equity Contributions fails to enter into the required information sharing agreement. Indentures for new CLOs give the managers additional authority to Many indentures for new CLOs authorise the CLO to accept enable the CLO to comply with these requirements or to redeem its contributions in cash and in-kind from the holders of the CLO’s securities if it cannot. As the requirements of FATCA are clarified, equity securities (often consisting of subordinated notes) and also CLO managers will need to develop compliance systems and adopt authorise such equityholders to waive their right to receive a approaches to enable their CLOs to comply with the FATCA regime distribution from the CLO. The CLO is authorised to use these funds and minimise the risk of withholding. for a broad variety of purposes which are described in the indenture. Typically, the equityholders may specify the purpose for which the funds will be used, which may include: (i) distribution as interest Tax Subsidiaries proceeds or as principal proceeds; (ii) repurchase of CLO notes for cancellation; (iii) exercise by the CLO of warrants or options; and (iv) Many CLO indentures did not permit the CLO to establish holding a contributed asset as part of the CLO’s portfolio. subsidiaries, which created difficulties when a CLO acquired securities in distressed exchanges during the recent recession, because some of these securities exposed the CLO to U.S. net Conclusion income taxation. As a result, the indentures for new CLOs authorise the CLO to establish wholly owned subsidiaries to acquire Many positive structural features have been introduced into the securities of this type, such as U.S. real property holding company governing documents of CLOs issued in 2011 and 2012. More equity and equity in “pass through” entities that operate U.S. changes can be expected. For example, CLOs rarely conform to the businesses. The indentures also specify detailed requirements for risk retention requirements in Article 122a of the European Union the organisation and operation of these subsidiaries. Capital Requirements Directive, but, as the classes of European Community investors that are covered by these requirements expand, the desire to market the CLO’s securities to those investors Refinancing will require changes to accommodate these requirements. In the next few years CLOs also will need to adapt to the risk retention CLO transactions have an optional redemption feature whereby requirements mandated by the Dodd-Frank Act. [See Endnote 4.] after a specified non-call period, holders of a majority of the equity class of securities may direct the redemption in whole of the CLO’s notes through a liquidation of its portfolio. The main requirement Endnotes to effectuate such a redemption is that the proceeds of liquidation of the portfolio be sufficient to repay the notes at par plus accrued 1 Moody’s Investors Service reported that only six of the more interest. New CLO transactions also provide that, after the than 600 arbitrage CLOs experienced events of default specified non-call period, holders of a majority of the equity class during the credit crisis, of which three were cured, and that none of these events of default resulted in losses for investors of securities may direct the refinancing of any or all of the classes in notes rated at least “A”. of the CLO’s notes in order to achieve a lower cost of funds for the CLO. The indenture includes safeguards to protect the interests of 2 Concord Real Estate CDO 2006-1, Ltd et al. v. Bank of America, N.A. (2010). the holders of notes that are not refinanced. In addition, indentures for some new CLOs include a note re-pricing mechanism whereby 3 U.S. Bank National Association v. Black Diamond CLO 2005-1 Adviser, L.L.C. et al. (2011). a majority of the equity, after the specified non-call period, may direct the CLO to re-price (by reducing the spread over LIBOR) any 4 Subtitle D of Title IX of the Dodd-Frank Act. class or classes of notes, without the consent of the holders. Prior to the re-pricing of the notes, noteholders are given the option to Acknowledgment retain the notes at the revised pricing level, and any holders not electing to retain the notes are required to be paid par plus accrued The authors would like to acknowledge the assistance in the interest and surrender their notes. Such re-pricing only takes effect preparation of this chapter of their colleague, Dominique P. if all holders of the repriced notes consent to the re-pricing or if an Gallego, a partner in the tax department at Schulte Roth & Zabel intermediary is able to sell all of the notes of the non-consenting LLP. holders.

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Craig Stein Paul N. Watterson, Jr.

Schulte Roth & Zabel LLP Schulte Roth & Zabel LLP 919 Third Avenue 919 Third Avenue New York, NY 10022 New York, NY 10022 USA USA

Tel: +1 212 756 2390 Tel: +1 212 756 2563 Fax: +1 212 593 5955 Fax: +1 212 593 5955 Email: [email protected] Email: [email protected] URL: www.srz.com URL: www.srz.com

Craig Stein is a partner and co-head of the structured products & Paul N. Watterson, Jr. is a partner and co-head of the structured derivatives group at Schulte Roth & Zabel LLP (SRZ). His products & derivatives group at Schulte Roth & Zabel LLP (SRZ). practice focuses on structured finance and asset-backed He concentrates on structured product and derivative transactions, swaps and other derivative products, including transactions, formation and representation of credit funds and credit- and fund-linked derivatives, prime brokerage and capital markets regulation, and is counsel to many participants in customer trading agreements. He represents issuers, the securitisation, credit and derivatives markets. He represents underwriters, collateral managers and portfolio purchasers in underwriters, issuers and managers in structured financings, public and private structured financings, including collateralised including CLOs, and is involved in structured finance transactions loan obligations. Mr. Stein has been recognised by leading peer- that use credit derivatives, including regulatory capital review publications as a leader in the industry and he speaks and transactions and repackagings. He advises funds and other writes widely on advanced financial products. He earned his alternative investment vehicles on their transactions in undergraduate degree, cum laude, from Colgate University and derivatives, loans, asset-backed securities and CDOs. Mr. his J.D., cum laude, from the University of Pennsylvania Law Watterson has also been active in the creation of derivative School. He is a member of the ISDA Credit Derivatives Market products that reference hedge funds. He is a regular speaker at Practice Committee, American Bar Association and New York major industry events and is widely published and recognised by State Bar Association. peer-reviewed publications. He earned his A.B., cum laude, from Princeton University, and his J.D., magna cum laude, from Harvard Law School.

Schulte Roth & Zabel LLP (www.srz.com) is a full-service law firm with offices in New York, Washington DC and London. We represent placement agents, issuers, dealers, investors and investment managers in offerings of a variety of investment products, including private investment funds, asset-backed securities (ABS) and structured products. Our firm also structures derivatives products, including unleveraged and leveraged derivatives referencing bonds, loans, investment funds, commodities, equity securities, interest rates and currencies, and advises clients on forwards, repurchase agreements, securities lending agreements, prime brokerage agreements and master netting agreements. The firm’s tax, ERISA, investment management, regulatory and bankruptcy lawyers have experience with these products and lend their expertise to every transaction.

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Risk Retention and Tom Parachini Disclosure Rules – A Comparison SNR Denton Erik Klingenberg

Introduction Credit Risk Retention

Predictably, a flood of financial reform regulation has followed in European Union/CRD2 United States: Dodd-Frank/Regulation RR

the wake of the financial crisis. Significant parts of the new Scope regulations focus on securitisations. Given the global interconnectedness of the financial markets, securitisation Requires that “credit institution investors” Requires the “sponsor” to retain the required invest or assume exposure to credit risk in economic risk. Sponsor and originator may regulations adopted in one jurisdiction will have significant securitisations only where (i) the originator or agree to allocate part of the required implications in many others, and while regulators speak of the need sponsor has expressly disclosed that it will economic risk to the originator. “Sponsor” is maintain a material net economic interest of defined as a person who organises and to ensure international coordination, the political and economic at least 5%, and (ii) such investor has a initiates an asset-backed securities transaction imperatives have thus far led to the adoption of separate regimes in thorough understanding of all structural by selling or transferring assets, either features of the transaction that materially directly or indirectly, including through an two of the major markets for securitisation issuers and investors: the impact the performance of the investment. A affiliate, to the issuer. “Originator” is a person United States and the European Union. This chapter compares “credit institution” is defined in Article 4(1) who creates a financial asset that of the CRD as “an undertaking the business collateralises ABS and sells such asset recent changes to the regulatory regimes currently applicable to the of which is to receive deposits or other (directly or indirectly) to a securitiser. securitisation industry in Europe and the United States. repayable funds from the public and to grant Requires a coalition of regulators (including credits for its own account”. the Office of the Comptroller of the Currency, In the United States, the Dodd-Frank Wall Street Reform and Failure to comply with the risk retention the Board of Governors of the Federal requirements will result in penalty risk Reserve System, the FDIC (together, “Federal Consumer Protection Act, Pub. L. No. 111 (“Dodd-Frank”) was weighting being applied to the investment of Banking Agencies”) and the SEC, and, in the signed into law on July 21, 2010, and encompasses a vast array of the “credit institution investor”. case of exposures to residential mortgages, the Department of Housing and Urban regulatory initiatives, including many aimed at the securitisation Development and the Federal Housing Finance Authority), to jointly issue risk industry. Proposed regulations implementing Section 15G of the retention regulations. Proposed regulations Securities Exchange Act of 1934 set forth proposed inter-agency (“Regulation RR”) were issued on March 29, 2011. risk retention rules for asset-backed securities (“ABS”) Broad regulatory discretion is provided under transactions. In Europe, the European Council and Parliament the Act, including as to scope and exemptions. enacted a series of amendments to the Capital Requirements Penalties for failure to comply with risk Directive (“CRD”) that Member States had to implement by retention requirements are not specified in Dodd-Frank or Regulation RR. However, January 1, 2011. In particular, Article 122a of Directive each regulator would be able to exercise any 2009/111/EC (“CRD2”) sets out a number of securitisation specific generally applicable enforcement powers. requirements. While both Dodd-Frank and CRD2 are in their Securities Affected infancy, and additional regulations and interpretational guidance

will provide additional specifics with regard to each, this article Applicable to “securitisations” defined as “a Applicable to all “asset-backed securities” provides a general overview and comparison of two fundamental transaction or scheme, whereby the credit risk (“ABS”) defined as “a fixed income security associated with an exposure or pool of collateralised by any type of self-liquidating aspects of the new regulations: risk retention and disclosure. exposures is tranched, having the following assets that allows the holder of the security to characteristics: (i) payments in the transaction receive payments that depend primarily on The chart below compares the relevant provisions of Dodd-Frank or scheme are dependent upon the cash flow from the asset”. (taking into account proposed and existing regulations) and CRD2 performance of the exposure or pool of Includes transactions required to be registered exposures; and (ii) the subordination of under the Securities Act of 1933 (public) and with respect to risk retention and disclosure, followed by a tranches determines the distribution of losses transactions exempt from registration discussion highlighting some of main differences. during the ongoing life of the transaction or (private). scheme”. Applies to both public and private In September 2011, the Committee of European Banking securitisation transactions. Supervisors (“CEBS”), now the European Banking Authority (“EBA”), published further guidance on the implementation of Article 122a in response to technical and interpretative questions raised by market participants and competent authorities.

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Credit Risk Retention Credit Risk Retention

European Union/CRD2 United States: Dodd-Frank/Regulation RR European Union/CRD2 United States: Dodd-Frank/Regulation RR

Who Is Required To Hold Interests Form of Retained Interest (Cont.)

Requires material net economic interest to be Requires sponsor to retain an economic Horizontal Slice -- retention of the first loss Seller’s Interest -- for sponsors of revolving retained by the original lender, the originator interest. The regulations permit the sponsor tranche and, if necessary to total 5%, other asset master trusts backed by receivables or the sponsor of the securitisation. “Original to allocate the risk retention requirement tranches having the same or a more severe under revolving accounts (e.g., credit cards), Lender” is not defined; however, it has been between the sponsor and an originator, which risk profile than those transferred or sold to retention of a seller’s interest in not less than interpreted by the Committee of European means the risk retention obligations required investors and not maturing any earlier than 5% of the unpaid principal balance of all the Banking Supervisors (CEBS, which since the of the sponsor will be reduced by the risk those transferred or sold to investors, so that assets held by the issuer, which is defined as beginning of 2011 transformed into the retention obligations required of the the retention equals in total no less than 5% an ABS interest (i) in all assets held by the European Banking Authority (EBA)) to mean originator. Allocation to the originator is only of the nominal value of the securitised issuer that do not collateralise any other ABS the original creditor in respect of an permitted when risk is retained in vertical or exposures. issued by the issuer, (ii) that is pari passu underlying exposure at the time of the horizontal form and the originator contributed In a footnote to its guidance, CEBS indicated with all other ABS interests prior to an early creation of such exposure. “Originator” is at least 20% of underlying assets (allocation that although Article 122a precludes amortisation event, and (iii) that adjusts for defined as (i) an entity directly or indirectly may not exceed percentage contributed by combinations of the options set forth above, fluctuations in the outstanding principal involved in the original agreement which originator). as part of its post-implementation review they balance of the securitised assets. created the obligations giving rise to the may assess the benefits of allowing such Representative Sample -- retention of a exposure being securitised, or (ii) an entity combinations, and, stated that “given that if randomly selected representative sample of which purchases a third party’s exposures all retention options are feasible in the assets equivalent, in all material respects, to onto its balance sheet and then securitises alignment of interests, any combination of the securitised assets, with an unpaid them. such options could potentially be equally principal balance equal to at least 5% of the “Sponsor” is defined as the credit institution feasible”. unpaid principal balance of the securitised that establishes and manages a securitisation Among other things, this would appear to assets. Representative assets must be serviced scheme. Where there is no entity that open the door to an L-shaped option in the by same servicer under the same standards as satisfies the definition of sponsor, the future. The EBA has indicated that they the securitised assets. retention must be by either the originator or intend to follow up this point with the Premium Reserve -- In addition to “base” the original lender, and, where there is no Commission and to provide advice to the risk, the sponsor is required to fund a entity that meets the definition of originator Commission. “premium capture cash reserve account” in an or sponsor, the retention must be by the amount equal to the difference (if positive) original lender. between (i) the gross proceeds received from There “shall be no multiple applications of the sale of the ABS (net of closing costs) (or the retention requirement”, which generally 100%, for certain types of base retention means for each individual securitisation it is outside the issuing entity), and (ii) 95% of par necessary for only one of the originator, value of all ABS issued (adjusts for base sponsor or original lender to the requirement retention). For purposes of (i) above, gross and that not each party must in all cases proceeds are deemed increased by the value individually satisfy the requirement. of any ABS interest retained by the sponsor However, where there are multiple underlying that (a) sponsor does not intend to hold to originators or original lenders, each originator maturity, or (b) is an interest-only class that is or original lender may be required to hold the senior to the most subordinate class. Funds required minimum where such retained in account must be applied to pay any amount is not held by the sponsor or where shortfalls on the ABS before allocation to any the original lenders or originators are not part ABS interests, including retained interests. of the same group for regulatory capital purposes, i.e. generally one originator cannot Duration of Retained Interest retain risk for other originators. For resecuritisations, the requirement will not look through to each underlying securitisation Throughout term of the securitisation. The Throughout the term of the securitisation. but rather only apply to the top layer form of retention cannot change over the life of resecuritisation. the transaction, other than under exceptional circumstances and, provided that such change Required Risk Retention is explicable and has good reason, and provided that such change is disclosed in a transparent manner to investors. 5%, subject to certain exemptions as set forth 5% “base”, subject to certain exemptions as The retention of the net economic interest is below. set forth below, plus “premium capture cash measured at the origination and shall be reserve account”. maintained on an ongoing basis. Maintaining the initial net economic interest implies Form of Retained Interest maintaining the applied measure and thus the form of retention. The change of form of There are four ways in which a material net Proposed regulations permit “base” risk to be retention may be allowed only under economic interest can be retained: retained in any of five ways (with separate exceptional circumstances. This is in order to Vertical Slice -- retention of no less than 5% exceptions for asset-backed commercial paper avoid opportunistic behaviour by originator, of the nominal value (refers to the gross (“ABCP”) and commercial mortgage-backed sponsor or original lender and to make the exposure value (i.e. gross of impairments and securities (“CMBS”) discussed below): disclosure to investors easier. Furthermore value adjustments, not net of these) and not a Vertical Slice -- retention of at least 5% of the form of retention may have helped notional exposure, which would therefore each class of ABS interests issued, i.e., 5% of determine an investor’s decision to invest in a exclude interest-only tranches) of each of the each class (including interest-only and non- specific in securitisation transaction. tranches sold or transferred to the investors. certificated classes). Pool Exposure -- retention of an originator’s Horizontal Slice -- retention of an “eligible Exemptions interest in no less than 5% of the nominal horizontal residual interest” equal to at least value of the securitised exposures, provided 5% of the par value of all ABS interests Government Guarantee -- the securitised ABCP -- The sponsor of an “eligible ABCP the securitisation is one of revolving issued, which must be (i) allocated all losses exposures are claims on, or are guaranteed by conduit” supported by 100% liquidity from exposures or a revolving securitisation of on securitised assets until par value of class is central governments or central banks, by regulated institutions may satisfy its base non-revolving exposures. The CEBS reduced to zero, and (ii) subordinate in right regional governments, local authorities and retention obligation if each originator-seller guidance states that “where the nominal value to payment of principal and interest. May public sector entities of EEA Member States, that transfers assets to the conduit retains the of exposures in a securitisation may increase receive its proportionate share (as reduced by by multilateral development banks or by required eligible horizontal residual interest in or decrease over time, the retained net realised losses) of scheduled principal institutions to which a 50% risk weight or its intermediate SPV. The sponsor is economic interest would typically be payments actually received; may not receive less is assigned under the CRD. responsible for ensuring risk retention expected to increase should the nominal value unscheduled principal payments until all Transparent Index -- transactions based on a requirements met by originator-sellers. of exposures increase, but could conversely other classes paid in full. May hold clear transparent and accessible index, where CMBS -- The sponsor of an eligible CMBS decrease proportionately should the nominal horizontal cash reserve account in lieu of the underlying reference entities are identical transaction (at least 95% commercial real value of exposures decrease”. residual interest. to those that make up an index of entities that estate loans) may satisfy its base retention Representative Sample -- retention of L-Shaped Slice -- retention of (i) not less than is widely traded or are other tradable obligation if a third party purchaser (“b-piece randomly selected exposures, equivalent to no 2.5% of each class of ABS issued, and (ii) an securities other than securitisation positions. buyer”) meets the retention obligations, less than 5% of the nominal value of the eligible horizontal residual interest not less Other Exemptions -- syndicated loans, subject to six conditions: (i) b-piece buyer securitised exposures, provided that: (i) such than 2.564% of the par value of all ABS purchased receivables (i.e. factoring) or credit retains an eligible horizontal residual interest exposures would otherwise have been issued (excluding vertical retention). default swaps where, in each case, if not used (same form and amount as required for securitised; and (ii) the number of potentially to package and/or hedge a securitisation. sponsor); (ii) b-piece buyer pays for its securitised exposures (i.e. the sum of those The CEBS guidance noted that a partial interest in cash without financing from any securitised and those retained) is no less than guarantee would not allow for an exemption party to securitisation; (iii) b-piece buyer 100. of cash flows benefitting from the guarantee performs credit review of each asset in pool and noted that for example, student loans before closing; (iv) b-piece buyer (and

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Credit Risk Retention Credit Risk Retention

European Union/CRD2 United States: Dodd-Frank/Regulation RR European Union/CRD2 United States: Dodd-Frank/Regulation RR Hedging of Retained Interests Exemptions (cont.) The material net economic interest must be The retained interest may not be transferred which are 97% guaranteed do not meet the affiliates) prohibited from having control maintained on an ongoing basis and must not (except to consolidated affiliates) and the requirement for exemption. rights, including acting as special servicer, be subject to any credit risk mitigation, short credit risk associated with the retained For a warehousing transaction, or transaction unless independent operating advisor positions or hedge, provided that the retained interest may not be hedged (directly or that has a ramp-up period before being appointed with right to consult with servicer interest may be available to be used by the indirectly). Interest rate and currency risk securitised, the applicability of CRD2 on major decisions, review and report on any original lender, originator or sponsor as may be hedged. Prohibits pledging retained depends on whether the transaction itself (and servicer affiliated with b-piece buyer and collateral for secured funding purposes, as interest unless full recourse to sponsor. If more specifically, the transactions during replace any such servicer if it concludes long as credit risk of the retained interest is pledged interest is transferred to lender, warehousing or ramp-up periods) would fall servicer failed to comply with standards and not transferred to a third party in such secured sponsor will be in violation of rule. under the definition of a securitisation. If the in best interest of all investors (unless funding arrangements. definition is not met, it would be out of the majority of each class vote to retain); (v) It is uncertain how the transfer of the retained scope. If the definition is met, then CRD2 sponsor provides certain information about b- interest in connection with a default under a would be applicable. piece buyer (including price paid for its secured funding arrangement will impact the The CEBS guidance further notes that when interests) to other investors; and (vi) b-piece capital treatment imposed by credit institution the tranching of credit risk is made on the buyer complies with hedging and transfer investors. liabilities issued by an originator or multiple restrictions otherwise applicable to sponsor. originators (including, for instance, covered GSEs -- Proposed regulations exempt Fannie Effective Date bonds), and such liabilities do not transfer the Mae and Freddie Mac (“Enterprises”) from credit risk of third parties, because the credit risk retention requirements so long as under The requirements of CRD2 apply to new As proposed, the regulations will be effective risk clearly remains with the originator (the the conservatorship or receivership of the securitisations issued on or after January 1, (i) with respect to residential mortgage loans, originator is the final debtor to the investor), federal government as the regulations deem 2011. The requirements will also apply to one year after final regulations are issued, and it is clear that economic interests are already the guaranty provided by the Enterprises as any securitisation issued prior to January 1, (ii) with respect to all other ABS, two years aligned and thus the requirement for retention satisfying any applicable risk retention 2011 if new underlying exposures are added after the final regulations are issued. may be deemed to be fulfilled automatically. requirement during the period proscribed. to such securitisation on or after January 1, However, when such liabilities are issued to Significant public opposition to this 2015. transfer the credit risk of third parties (e.g. exemption is expected. credit-linked notes) through securitisation, it Governmental Guarantee -- Risk retention Improved Disclosure/Transparency cannot be claimed that incentives are already does not apply to certain ABS insured or aligned and so the retention requirement must guaranteed by the United States or any European Union/CRD2 United States: Dodd-Frank/Regulation RR still be shown to be satisfied. agency thereof, any state or political The CEBS guidance similarly makes subdivision of a state and certain public Scope reference to retained securitisations (e.g. for instrumentalities of a state. purposes of a repo transaction); where an Qualified Residential Mortgages -- Risk originator credit institutions initially retains retention requirements will not apply to an Same as risk retention requirements described Applies to issuers of registered public ABS all of the notes issued under the securitisation ABS if all assets are qualified residential above (“credit institution investors”), and also offerings. for purposes of a repo transactions, but then mortgages. A “qualified residential applies to credit institution originators and In April, 2010, the SEC proposed rules that later sells one or more tranches of notes to mortgage” is a prime residential first-lien sponsors of securitisations. would significantly alter existing Regulation third party investors. mortgage meeting strict underwriting criteria AB, which governs registration, disclosure specified in the regulations, including 80% and reporting for ABS (“Revised Reg AB”). maximum LTV and 28%/36% front-end/back- Revised Reg AB proposed requiring end DTI. QRMs must contain a commitment disclosure and reporting for un-registered from creditor to borrower to engage in certain private transactions, however such rules have loss-mitigation efforts and restrictions on yet to be adopted by the SEC. The SEC has servicing. The sponsor is required to indicated that it may consider conditioning repurchase any loans that are later determined the use of the safe harbours from registration not to be QRMs. (including Rule 144A) for all structured Qualifying Commercial, CRE and Auto finance products on compliance with all Loans -- ABS backed entirely by qualifying disclosure and reporting requirements that commercial loans, commercial real estate would apply for a public offering. loans or auto loans would have a zero percent risk retention requirement. In order to Due Diligence -- Disclosure qualify, the applicable loans must meet conservative underwriting criteria set forth in Requires a credit institution to understand Requires an issuer of registered ABS to the regulations (such as a 60% max LTV for “the risk characteristics of the exposures review the assets underlying the ABS and CRE loans). The sponsor is required to underlying the securitisation position” when disclose the nature, findings and conclusions repurchase any loans that are later determined acting as an investor, while a credit institution of such review, including how the assets in not to have met the applicable underwriting acting as sponsor or originator is required to the pool deviate from the disclosed standards. make available “all materially relevant data underwriting standards. While the rules Resecuritisations -- Risk retention on the credit quality and performance of the imposed under Dodd-Frank only apply to requirements will not apply to any single individual underlying exposures, cash flows registered ABS, a securitiser or issuer of a class pass-through resecuritisation transaction and collateral supporting a securitisation private ABS transaction will be required to if the underlying ABS fully complies with the exposure, as well as such information as is meet additional disclosure requirements applicable risk retention rules. necessary to conduct comprehensive and well (including, at a minimum, compliance with Foreign-related Transactions -- Certain informed stress tests on the cash flows and the requirements of Regulation AB) if the foreign-related transactions will have the collateral values supporting the underlying securitiser is an insured depository institution benefit of a safe-harbour from the risk exposures”. attempting to meet the requirements of the retention requirements if the transaction is not Requires credit institutions to be able to FDIC Safe Harbour rule. required to be registered under the Securities demonstrate for each securitisation position The review must be designed and effected to Act, no more than 10% (by value) of the ABS that they have a comprehensive and thorough provide reasonable assurance that the are sold to US persons, neither the sponsor understanding of and have implemented disclosure regarding the pool assets is nor the issuer is incorporated in the US or is formal policies for analysing and recording accurate in all material respects. The an unincorporated branch of a non-US entity, their securitisation positions. minimum review standard adopted by the and no more than 25% of the underlying SEC will necessarily include a review of the assets are acquired by the sponsor, directly or credit and underwriting of the assets since indirectly, from a US-based affiliate or disclosure about these factors is required in branch. the prospectus, but also generally include all Regulatory Discretion -- The regulators may disclosure about the pooled assets that is provide for the total or partial exemption required under Regulation AB. from the risk retention for any securitisation Permits the issuer to engage a third party for (or category of securitisation). Any such purposes of performing the mandated review. exemption, exception or adjustment should be If the findings and conclusions of the review designed to ensure high quality underwriting are attributed to the third party, the third party standards, encourage appropriate risk must be named in the registration statement management practices, improve access to and consent to being named as an “expert” credit on reasonable terms for consumers and under the Securities Act, and thus will be businesses and otherwise promote the public subjected to “expert liability” under the interest and the protection of investors. Securities Act.

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their product -- Bear, Lehman, Wamu, IndyMac, Countrywide, etc. Improved Disclosure/Transparency Dodd-Frank also seeks to make securitisations “safer” investments, European Union/CRD2 United States: Dodd-Frank/Regulation RR generally, by providing incentives to underwrite “higher-quality” Due Diligence -- Disclosure (Cont.) loans (through exceptions to risk retention) and requiring greater disclosure to investors, particularly concerning compliance with Dodd-Frank also requires additional disclosures in connection with certain reps underwriting guidelines and breaches of representations and and warranties. Where the underlying warranties (both specifically related to the quality of the assets). securitisation documents contain a covenant to repurchase or replace assets in the event of While the “why” may be informative when predicting and a breach of a representation or warranty, new disclosure requirements applicable to all ABS interpreting regulations, what is most significant is “how” the (public and private transactions) require the regulations will effect new transactions. Given the global market- securitiser to disclose all fulfilled and unfulfilled requests for asset repurchases or place for financial assets, it is fairly certain that both CRD2 and replacements based upon alleged breaches of Dodd-Frank will have wide-ranging impact. Indeed, many of the representations and warranties. The disclosures must be set forth on Form ABS- most active originators and sponsors of securitisations in the US are 15G and require an initial report and quarterly branches and subsidiaries of European banks. Although some of reporting. these are based outside the EU, many will be subject to both CRD2 Effective Date and Dodd-Frank when engaging in securitisations of US assets. On the other hand, as a result of CRD2’s focus on certain European Same as Risk Retention. Applicable to any registered (or in the case of reps and warranties disclosures, unregistered) investors, US institutions that hope to sell ABS securities to EU offering of ABS commencing with an initial credit institutions will have to comply voluntarily with CRD2 bona fide offer after December 31, 2011. requirements (and although the CRD2 regulations cover only banks, it is expected that other types of institutions may be covered by similar legislation over time (for example in respect of alternative investment fund managers under the controversial Comparative Analysis of CRD2 and Dodd-Frank Alternative Investment Fund Managers Directive)). In addition, Risk Retention and Disclosure Rules Member States in Europe have the ability to implement more Investor Based Approach vs. Issuer Based Approach stringent requirements than the minimum retained risk amount established under CRD2. In 2010, the German parliament passed a Although fairly similar in terms of stated objective, the EU and US law which increases the minimum retention level referred to in the have, to date, taken materially different approaches. In the EU, the CRD from 5 per cent to 10 per cent for securitisations entered into new regulations focus in large part on credit institutions (i.e. entities after 31 December 2014. This created further differentiation in subject to European bank regulatory framework) that act as application of these requirements. investors in securitisations -- an “investor based approach”. In the US, Dodd-Frank is aimed at the originators and sponsors -- an The practical reality that certain parties and transactions may be “issuer based approach”. required to comply with both CRD2 and Dodd-Frank may prove less significant upon a further examination of the specific In Europe, governments were forced to support many large requirements of each. financial institutions that invested heavily in ABS, in many cases backed directly or indirectly by exposures to US real estate, Types of Securities Affected including through the infamous ABS CDOs. Because much of the Dodd-Frank defines “asset-backed securities” broadly (a fixed “problem” came from transactions outside their direct control, it income security collateralised by any type of self-liquidating assets was logical for EU regulators to place future responsibility on the that allows the holder of the security to receive payments that investors within their regulatory purview. There is also a strong depend primarily on cash flow from the asset), but gives regulators perception that many of these institutions did not understand what significant discretion to tailor the rules to different asset classes and they were buying -- neither the underlying assets nor the structures structures. Prior to the financial crisis, regulation of the of the securitisations themselves. Hence, the explicit requirements securitisation industry was focused primarily on the registration and that credit institutions not only obtain sufficient information about disclosure requirements for “public” transactions (namely their investments, but also demonstrate that they have a Regulation AB) and the securities laws applicable to securities “comprehensive understanding” of those investments. Finally, offerings generally, including Rule 144A applicable to private re- there is a widespread belief that the originators and sponsors of sales to qualified institutional buyers. All of these regulations securitisations did not have the same concerns about the quality of concentrated on the information given to investors, with large, the underlying assets as third-party investors. By requiring “skin in “sophisticated” investors assumed able to fend for themselves being the game”, the regulators hope for a better alignment of interests afforded less direct oversight protection. between issuers and investors. The revised definition of “asset-backed securities” under Dodd- In the United States, Dodd-Frank reflects an over-riding view that Frank could be applied to both public and private transactions, as originators and sponsors did not care about the credit-quality of well as those conducted by the government sponsored entities, such their product because they were pooling the loans in securitisations as Fannie Mae and Freddie Mac. While the due diligence and selling off the risk to investors that demanded minimal due disclosure rules recently adopted by the Securities Exchange diligence and relied heavily on credit ratings. This view asserts that Commission (“SEC”) only apply to public offerings, the if originators and issuers have a direct interest in their representation and warranty disclosure rules and the proposed risk securitisations, they will be more conservative in their underwriting retention rules apply to both public and private securitisations. therefore aligning the risk of loss with the investor. Consequently, The EU approach is, on the face of it, more limited in scope, and the US regulations focus on the originators and sponsors, and applies only where the “credit risk associated with an exposure or require them to retain a minimum percentage of their transactions. pool of exposures is tranched, having the following characteristics: Ironically, nearly every major US financial institution that failed (i) payments in the transaction or scheme are dependent upon the during the crisis was among the greatest “believers” (investors) in performance of the exposure or pool of exposures; and (ii) the

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subordination of tranches determines the distribution of losses commercial, rather than regulatory reasons, could be required to during the ongoing life of the transaction or scheme”. But while comply with the risk retention component of CRD2, despite not this may sound more limited, practically the application of CRD2 in being obliged to comply with any aspect of risk retention under the Europe generally applies quite broadly to many securitisation US regulations, for example, because of an asset-specific transactions. In addition, there are no specific exemptions for exemption. “sophisticated investors” or for private transactions under CRD2, On the other hand, the forms of risk retention proposed by the US perhaps a logical outcome given the perception of the regulators as regulators generally match up with the types permitted by CRD2. to the historic shortcomings of the institutions in question. Both permit vertical, horizontal, seller’s interest (although only for Method of Retained Interests/Exemptions revolving master trusts in the US) and random sample. The US CRD2 provides flexibility to the market by permitting risk to be regulations are far more detailed in their requirements; however, as retained by any one of several parties (the original lender, the proposed, any non-exempt, US compliant securitisation should originator or the sponsor), and in any one of four distinct forms. easily satisfy CRD2. Both require enhanced disclosure and it is Specifically, CRD2 allows the material net economic interest to be likely that market practices will ensure that most EU and US retained through retention of (i) a vertical slice, (ii) pool exposure, transactions will comply with both EU and US requirements. In its (iii) random selection, or (iv) a horizontal slice. However, the most recent publication, CEBS declined to provide more guidance requirements of CRD2, including a minimum of 5% retained, apply on the issue of loan level data disclosure, however since the to all asset classes, without specific exceptions or divergences for enactment of Article 122a, the asset purchase programmes initiated different asset classes. by the European Central Bank and Bank of England have arguably had a greater impact on this issue. The enhanced loan level data Contrasting this approach, Dodd-Frank instructs the regulators to disclosure requirements for eligibility to these central bank develop separate rules governing the securitisation of different asset programmes, such as the European Central Bank’s long-term classes. Following that direction, the proposed regulations create refinancing operations programme, have established detailed exemptions from risk retention requirements for several asset disclosure templates for RMBS, SME loans and CMBS, with other classes, including qualified residential mortgages, qualifying asset classes contemplated. commercial loans, qualifying CRE loans and qualifying auto loans. Loans in these categories that meet the strict underwriting criteria In a nod to the complexity and significant impact of these and other conditions for exemption may be securitised without any regulations, Dodd-Frank gives regulators until one (residential risk retention by the sponsor or other parties. For now, the mortgages) and two (all other classes) years after publication of the regulations also propose to exclude securitisations by Fannie Mae final rules to make the new regulations effective. All relevant parts and Freddie Mac from risk retention requirements, although there is of CRD2 took effect in Member States with respect to new substantial public resistance to this exemption due to the securitisations on January 1, 2011 and will apply to existing competitive advantage it would provide to the agencies. In securitisations after December 31, 2014 if new underlying addition, the proposed regulations create specific risk retention exposures are added or substituted after that date. alternatives for certain asset classes, such as ABCP and CMBS, In today’s capital markets, securities are sold on an international which permit parties other than the sponsor or originator to hold the basis. US issuers sell to European investors and vice versa. required risk retention. Without coordinated regulatory regimes, certain institutions will This exemption for certain assets and issuers creates the most almost certainly be at a competitive disadvantage. Indeed, EU obvious conflict between the EU and US regulations. Unless CRD2 credit institutions are required to comply with CRD2 for is modified before the US regulations become effective, EU transactions that they participate in today, while US regulations are financial institutions will either be precluded from investing in on track to phase in over a longer horizon. As the regulations in exempt US ABS or US sponsors will be compelled to comply with various jurisdictions take shape, it is likely that many transactions CRD2 despite the exemption available in the US (unlikely). Some will be structured to satisfy both EU and US requirements in order market participants in the U.S. have observed that U.S. issuers do to ensure maximum liquidity. However, where the differences are not in all cases seek to comply with the requirements of Article great, or the cost of compliance with both outweighs the benefits, 122a; whereas the general standard in Europe appears to be parties will continue to be at a disadvantage. Failure to effectively compliance with Article 122a. Note, however, that certain exempt coordinate the regulatory regimes, or establish some form of mutual US ABS may comply with CRD2 as such ABS falls within one of recognition, could result in limited marketability and liquidity for the limited exemptions allowed under CRD2, such as government certain securities, providing additional hurdles for an already fragile guarantees (i.e. Enterprise securitisations so long as under the securitisation market. In addition, there is a need for international conservatorship or receivership of the federal government). coordination beyond the US and EU to ensure a level playing field Moreover, EU banks will be at a competitive disadvantage when to avoid regulatory arbitrage that could have the affect of migrating sponsoring exempt US ABS because they will be required to certain products or investors to less well regulated environments. comply with CRD2 while their US counterparts will not. The Due Diligence/Disclosure CEBS guidance makes note that the application of the risk retention CRD2 imposes a requirement that “credit institution investors” requirement as to investing or assumption of securitisation exposure understand the risk characteristics of the exposures underlying the is whether or not significant risk transfer is met under CRD by an securitisation position. While CRD2 requires a “credit institution” originating credit institution, which may further complicate the acting as sponsor or originator to make available “all materially determination of which parts of the rule applies. A credit institution relevant data on the credit quality and performance of the individual should not disregard Article 122a of the economic risk of a purchase underlying exposures, cash flows and collateral supporting a is transferred to another non-regulated entity outside the securitisation exposure”, the obligation only applies to “credit consolidated group via a contract such as a credit default swap or institutions” albeit in their various roles of investor, originator, total return swap. This would be viewed as an avoidance sponsor, etc. Credit institutions acting as arrangers or underwriters mechanism. It would seem possible however, that a non-EU will need to take into account the due diligence and disclosure subsidiary of an EU credit institution as an originator or sponsor principles of CRD2 and are required to apply a sameness principle that is required to retain some exposure to a securitisation for in line with their own credit underwriting practices. While there is

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guidance addressing the practical difficulties in carrying this out, it Conclusion is relatively clear that it will take time as issuers, underwriters and investors determine for themselves the appropriate level of The perceived benefits of the risk retention and disclosure rules are disclosure required. generally mitigation of moral hazard in originator underwriting, Contrastingly, and following its general theme, Dodd-Frank places reduction of information asymmetries among originators and a more prescriptive burden on the sponsor of ABS transactions to sponsors on the one hand and investors on the other, and the review the assets underlying the securities and disclose the nature, increase in capital requirements for risks that were underestimated findings and conclusions of such review. There is no corresponding in the past. The perceived costs are generally the initial and requirement that an investor necessarily demonstrate a “thorough ongoing compliance costs, potential reduction in demand and understanding” of the transaction. Unlike the risk retention market liquidity for securitised products, and potentially reduced requirements that apply to all asset-backed securities, the initial availability of credit or higher costs for such credit for consumers regulations mandating a review of the pool assets as well as and businesses as the increased cost to banks are passed on to their disclosure of the results and findings of the review only apply to end user customers. asset-backed securities that are registered under US securities laws, As regulators around the world continue to develop the standards although it is expected that additional regulations to be adopted will that will apply to securitisations going forward, market participants mandate disclosure of the results and findings of any review of the will have to determine how the evolving requirements effect new assets for privately offered asset-backed securities as well. CRD2 transactions, both for themselves, as well as potential investors and has no similar safe-harbor for “private” transactions, which raises other participants. Parties may be compelled to comply with the question of how such securities will be structured and marketed regulations imposed by other jurisdictions to ensure liquidity for to European investors by US issuers, in particular if the European their transactions. The full extent and degree to which the divergent investor based rules are extended to a broader universe of regulations create competitive advantages and disadvantages institutional investors. On the other hand, given market standards depending on jurisdiction will not be know until the regulators are and “best practices”, we expect that most private securitisation done. transactions would provide a level of disclosure sufficient to allow an investor to meet CRD2 requirements.

Tom Parachini Erik Klingenberg

SNR Denton SNR Denton One Fleet Place 1221 Avenue of the Americas London EC4M 7WS New York, NY 10020-1089 United Kingdom USA

Tel: +44 20 7246 7029 Tel: +1 212 768 6843 Fax: +44 20 7246 7777 Fax: +1 212 768 6800 Email: [email protected] Email: [email protected] URL: www.snrdenton.com URL: www.snrdenton.com

Tom Parachini is a partner in the firm’s Banking and Finance Erik Klingenberg is a member of SNR Denton’s Capital Markets practice. Tom represents issuers, underwriters, placement practice specialising in all aspects of structured finance and agents and investors in asset-backed securitisation, structured securitisation, including the sale, financing and servicing of all finance and debt capital markets transactions. He has worked on types of financial assets. Erik represents issuers, underwriters transactions involving a wide variety of asset classes including and many other capital market participants in a wide variety of residential mortgages, consumer loans and trade receivables, domestic, offshore and cross-border transactions, including with an emphasis on retail auto loans, retail auto leases and CMBS, RMBS, ABS, CP conduits and master trusts. His practice dealer floorplan finance receivables. He has extensive focuses on complex, innovative structures involving assets experience with public and private offerings, domestic and cross- ranging from residential and commercial mortgage loans, B notes border offerings, term note and variable funding note offerings, and mezzanine loans to student loans, servicing advances and and existing asset and future flow transactions. other asset-backed securities.

SNR Denton is a client-focused international legal practice delivering quality and value. We serve clients in key business and financial centres from 60 locations in 43 countries, through offices, associate firms and special alliances across the US, UK, Europe, the Middle East, Russia and the CIS, Asia Pacific and Africa, making us a top 25 legal services provider by lawyers and professionals worldwide. Joining the complementary top tier practices of its founding firms -- Sonnenschein Nath & Rosenthal LLP and Denton Wilde Sapte LLP -- SNR Denton offers business, government and institutional clients premier service and a disciplined focus to meet evolving needs in eight key industry sectors: Energy, Transport and Infrastructure; Financial Institutions and Funds; Government; Health and Life Sciences; Insurance; Manufacturing; Real Estate, Retail and Hotels; and Technology, Media and Telecommunications.

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US Taxation of Non-US Investors in Securitisation Transactions

Ashurst LLP David Z. Nirenberg

A. Introduction on such a debt instrument is presentment of the instrument to the issuer (or its paying agent). Thus, the issuer would have no need or This chapter discusses, in plain business English, special US tax ability to track changes in ownership of the instrument. rules applicable to non-US investors in securitisation transactions. Accordingly, there would be no easy paper trail for the IRS to These rules include, among others, a 30 percent US withholding tax follow in identifying owners. on non-US investors and the ability of non-US investors to hold With a view to increasing taxpayer compliance, TEFRA amended securities in bearer form. For a more detailed discussion of the the Code to prohibit, with limited exceptions, the issuance or topics covered in this article, complete with citations to the relevant holding of debt obligations in the United States in bearer form. primary authorities, readers should see chapter 12 of James M. Specifically, the TEFRA rules require all registration-required Peaslee & David Z. Nirenberg, FEDERAL INCOME TAXATION OF obligations (as defined below) to be in registered form. (The SECURITIZATION TRANSACTIONS AND RELATED TOPICS (4th Ed., TEFRA registration requirements are tax related and distinct from Frank J. Fabozzi Associates 2011) from which this chapter is any need to register securities with the Securities and Exchange derived. More information about the book and free updates are Commission or state agencies under US securities laws.) available at www.securitizationtax.com. An obligation is in registered form for these purposes if (1) it is This chapter also discusses the effect on mortgage-backed securities registered as to both principal and interest with the issuer or its of the Foreign Investment in Real Property Tax Act of 1980 agent and can be transferred only by the surrender of the old (FIRPTA). The chapter finishes with a discussion of the Foreign obligation to the registrar for its reissuance, or the issuance of a new Account Tax Compliance Act (FATCA) rules enacted on March 18, obligation, to the transferee, (2) principal and interest may be 2010, which generally will apply to payments made after December transferred only through a book entry system maintained by the 31, 2012. This legislation requires foreign entities to monitor and issuer or its agent, or (3) it is registered as to both principal and report on accounts or ownership interests held directly or indirectly interest with the issuer or its agent and can be transferred only by specified US persons. Its purpose is to prevent US persons from through either of the methods described in (1) or (2). Bonds are avoiding tax by hiding income earned through foreign accounts and considered to be in registered form if they are required to be held entities. Noncompliance is penalised through a special additional through a book entry system maintained by a clearing organisation withholding tax. even if holders can obtain physical certificates in bearer form in Except where otherwise noted, it is assumed in this chapter that a extraordinary circumstances that are unlikely to occur (specifically, non-US investor has no connection with the United States other the clearing organisation going out of business without appointment than the holding of the asset-backed security under discussion, and of a successor). Under the Hiring Incentives to Restore specifically that the investor does not hold the security in Employment Act of 2010 (HIRE Act), an obligation issued after connection with a US trade or business conducted by the investor. March 18, 2012 also will be in registered form if it is held through In very general terms, income of a non-US investor that is a “dematerialised book entry system” or any other book entry effectively connected with a US trade or business is not subject to system specified by the Treasury. Any obligation that is not in the 30 percent withholding tax, but is instead subject to a net registered form is considered to be in bearer form. An obligation is income tax at the rates applicable to domestic taxpayers. A non-US considered to be in bearer form if it is currently in bearer form, or investor buying an asset-backed security need not fear that it will be if there is a right to convert it into bearer form at any time during deemed to be engaged in a US trade or business because of the remaining period that it is outstanding. activities of the issuer, except in those fairly rare cases in which the The issuance of a registration-required obligation in bearer form issuer is engaged in a US trade or business and the security is can result in severe sanctions to the issuer. The issuer of a treated as a partnership interest. registration-required obligation in bearer form is liable for an excise tax equal to the product of 1 percent of the principal amount of the B. TEFRA Registration Requirements obligation and the number of years (or portions thereof) from its issue date to its maturity date (section 4701) (see Endnote 1). Also, the issuer is not permitted to deduct interest paid on the obligation 1. Overview in computing taxable income or, with limited exceptions, earnings and profits. Finally, obligations issued in bearer form that do not A debt instrument in bearer form may be transferred by assignment comply with the Eurobond exception (described below) are not and delivery. Further, the only prerequisite to receiving payments eligible for the portfolio interest exemption from the 30 percent withholding tax on interest (described below). The sanctions 24 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ashurst LLP US Taxation of Non-US Investors in Securitisation Transactions

described in the two preceding sentences generally affect only US They are registration-required obligations and must be issued in issuers or issuers that are owned (in whole or in part) by US registered form unless the Eurobond exception applies. Although persons, but the excise tax is potentially applicable to all issuers. REMIC residual interests are probably not “obligations” for Any US taxpayer that holds a registration-required obligation in TEFRA purposes, under the REMIC rules, they cannot be issued in bearer form in violation of the TEFRA rules is also subject to bearer form without jeopardising the issuer’s status as a REMIC. certain tax penalties. In general, the holder of a registration- The treatment of pass-through certificates under the TEFRA rules is required obligation in bearer form is denied deductions for any loss more complex. Except where otherwise noted, it is assumed in this from the obligation, and any gain from the obligation that otherwise discussion that the issuing trust is classified for tax purposes as a would be capital gain is converted into ordinary income. The trust. For substantive tax purposes, pass-through certificates are not holder sanctions apply to an obligation only if the issuer was not recognised to be debt of the issuing trust; instead, they merely subject to the excise tax (described above), and thus are generally a evidence ownership of the trust assets. It would make little sense, concern only for debt obligations that were issued under the however, to exclude pass-through certificates from the reach of the Eurobond exception described below. TEFRA rules. They are generally liquid securities similar to traded A registration-required obligation is defined generally as any debt instruments. Further, applying a look-through approach would obligation other than one that: is issued by an individual; is not of a produce odd consequences. The pass-through certificates would type offered to the public; or has a maturity at issue of not more than not be subject to the registration requirement if the underlying trust one year. Thus, the TEFRA registration requirements do not apply assets were obligations of individuals or loans not of a type offered directly to home mortgages and other consumer receivables that are to the public. If the trust assets included any registration-required obligations of individuals. In fact, such obligations are almost obligations, it would not be possible to issue certificates in bearer never issued or held in registered form. Conventional commercial form under the Eurobond exception. loans and mortgages are generally not of a type offered to the public These unsettling results are avoided under regulations that and traditionally have been issued in bearer form. However, effectively treat pass-through certificates (as defined in the because interest on bearer securities not issued under the Eurobond regulations) as obligations of the issuing trust for TEFRA purposes. exception generally cannot be paid to a foreign holder free of US Thus, the nature of the underlying obligations is irrelevant in withholding tax (see below), many commercial loans and applying the TEFRA rules to such certificates. The certificates commercial mortgages are now issued in registered form. must be in registered form unless the Eurobond exception applies For purposes of applying the issuer sanctions only, an obligation is based on an offering of the certificates (as distinguished from the not registration-required if it is issued under the Eurobond obligations held by the trust) outside of the United States. exception, which allows bearer paper to be offered outside of the The regulations define a “pass-through certificate” as a “pass- United States to non-US investors. As discussed below, for through or participation certificate evidencing an interest in a pool obligations issued after March 18, 2012, the Eurobond exception of mortgage loans” (emphasis added) to which the grantor trust will continue to apply only for purposes of applying the issuer rules apply, or a “similar evidence of interest in a similar pooled excise tax. fund or pooled trust treated as a grantor trust”. Apart from an In general, an obligation qualifies for the Eurobond exception if (1) example of a trust holding 1,000 residential mortgages, the the obligation is “targeted” to non-US investors upon its original regulations offer no guidance on the meaning of the term “pool”. issuance, (2) the obligation provides for interest to be payable only outside the United States, and (3) for any period during which the C. Withholding Tax obligation is held other than in temporary global form, the obligation and each coupon contain a TEFRA legend. For an obligation to be targeted to non-US investors there must be, in the 1. Overview language of the statute, “arrangements reasonably designed to ensure” that the obligation “will be sold (or resold in connection In general, a non-US investor that receives fixed or determinable with the original issue) only to a person who is not a United States annual or periodical income (FDAP income) from US sources is person”. To satisfy this arrangements test, generally it is necessary subject to a 30 percent tax on the gross amount of such income, to meet detailed restrictions on offers, sales, and deliveries of unless either a statutory exemption applies or the tax is reduced or obligations during an initial “seasoning” period and to obtain eliminated under an income tax treaty between the United States certifications as to the non-US status of investors. and the investor’s country of residence. The tax is required to be The HIRE Act limited the scope of the Eurobond exception for collected and paid over to the Internal Revenue Service (the obligations issued after March 18, 2012, so that it will continue to Service) by any withholding agent in the chain of payment, but is apply only as an exception to the issuer excise tax. Thus, due whether or not it is collected by withholding. registration-required obligations issued after that date in bearer The two types of income that are likely to be earned by an investor form will be subject to the other issuer sanctions (including denial in asset-backed securities are interest and gain from the sale or of interest deductions) and will not be eligible for the portfolio exchange of the securities. Although interest is FDAP income, gain interest exemption. What this means in practical terms is that the from the sale or exchange of securities, including gain attributable Eurobond exemption will no longer be available with respect to to market discount and option premium, is not. Gain representing obligations issued after March 18, 2012, for issuers that are accrued original issue discount is treated as interest and thus is domestic taxpayers or owned by domestic taxpayers because FDAP income. Thus, the withholding tax discussion herein interest on bearer paper would not be deductible. concentrates on interest income. Certain other types of FDAP income that may be earned from asset-backed securities are 2. Asset-Backed Securities discussed below. In general, interest income is subject to the withholding tax if it is The TEFRA rules apply in a straightforward way to pay-through derived from US sources, unless either the exemption for portfolio bonds, pass-through debt certificates, and REMIC regular interests. interest (described below) applies, or the tax is reduced or

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eliminated under a treaty. In some cases, tax may be required to be entities) that make it clear that a taxpayer cannot avoid tax on withheld from payments of interest even if those payments are not income from non-economic residual interests by having the includible in full in the income of the payee. The investor, however, interests be held by a domestic partnership and allocating income would be entitled to a refund of any excess tax withheld. Special from them to foreign partners. rules apply to original issue discount, and to dividends paid by a mutual fund out of interest income. 2. Portfolio Interest Exemption The source of interest income depends on the status of the borrower. Interest is generally US source if the borrower is a resident of the Notwithstanding the general rules discussed above, interest is United States or is organised in the United States. Thus, interest on exempt from withholding tax if such interest qualifies as portfolio all of the following typically would be sourced in the United States: interest. With limited exceptions—most significantly, for payments a pass-through certificate issued by a grantor trust holding of interest to 10 percent corporate shareholders or partners, to obligations of US residents, and pay-through bonds and pass- related controlled foreign corporations, or to banks of interest under through debt certificates that are considered debt of a US resident. bank loans, and for certain payments of contingent interest— Pay-through bonds issued by an entity classified as a partnership interest on an obligation (including OID) is portfolio interest if (1) would be US source if the entity is engaged in a US trade or the obligation is in bearer form, and was issued on or before March business, and bonds of a US grantor trust or disregarded entity 18, 2012 in compliance with the Eurobond exception to the TEFRA would be sourced as if the debt were issued directly by the registration requirements described above, or (2) the obligation is in owner(s). registered form, and the withholding agent receives a statement A specific rule treats excess inclusion income earned on a REMIC from the beneficial owner or certain intermediaries giving the residual interest as domestic source income in all cases. Otherwise, owner’s name and address and certifying that the owner is not a US there is no explicit source rule for REMIC interests. It is highly person. In the case of an obligation issued prior to January 1, 2009 likely, however, that income from both regular and residual interests in “targeted registered” form, a more lenient certification procedure would be sourced in the United States if the issuing REMIC is applies if the obligation is held through an appropriate foreign organised and operated in the United States and the underlying financial institution. In such a case, the financial institution need mortgages are obligations of US borrowers. Apart from the source only certify that the beneficial owner of the obligation is not a US question, the withholding tax applies to REMIC regular interests in person, without disclosing the beneficial owner’s identity. The the same way that it applies to conventional debt obligations. targeted registered rules have been eliminated for securities issued Income on a REMIC residual interest representing a share of the on or after January 1, 2009, although they continue to apply to REMIC’s taxable income is treated as interest for withholding tax outstanding securities. purposes. No exemption from such tax or reduction in rate applies There are three basic approaches to applying the portfolio interest to the portion of the income from a residual interest that is an excess exemption to asset-backed securities, which reflect differences in inclusion. In the limited cases in which income from a REMIC the degree to which the securities are treated as stand-alone residual interest is considered to be derived from sources outside of securities or instead as interests in the underlying receivables. This the United States (now only of historical interest for excess distinction is important because, as noted above, consumer inclusion income), such income should not be subject to US receivables typically are not in registered form and are not issued withholding tax, even if it is an excess inclusion. The withholding under the Eurobond exception. Accordingly, interest on such tax generally is imposed on income from a residual interest when receivables received directly by investors would not be eligible for such income is paid or distributed (or when the interest is disposed the portfolio interest exemption. The same may be true for certain of). Such income may have to be taken into account earlier, under short-term debt obligations. regulations, if the residual interest does not have significant value. Pay-through bonds and REMIC regular interests are considered Thus far, this grant of authority has been used sparingly, only to debt instruments in their own right and thus can qualify for the require accelerated withholding for partnerships allocating income portfolio interest exemption based on their own characteristics from residual interests to foreign partners (these rules are described regardless of the date of origination or bearer or registered status of below). Outside of the partnership context, the REMIC regulations the underlying receivables. As is true with other debt, the portfolio prevent underwithholding by providing that a purported transfer of interest exemption would not apply if the lender was considered a a residual interest to a non-US investor is ignored for tax 10 percent shareholder of the borrower. In applying that limitation, purposes—with the hapless transferor retaining ownership of the careful consideration should be given to the possible application of interest for tax purposes—unless the residual interest is reasonably conduit principles if the issuer of receivables is related to the lender. expected to produce cash distributions sufficient to pay withholding At the other extreme, a full-look-through approach applies to any tax liabilities no later than the close of the calendar year following security that is considered a partnership interest (including interests the year in which the related income accrues. in most owner trusts and pass-through certificates issued by trusts For withholding tax purposes, the holder of an equity interest in a that have characteristics that prevent them from qualifying as domestic partnership or trust is treated essentially as if it owned trusts). Thus, the portfolio interest exemption is applied as if the directly the underlying receivables, and the partnership or trust acts partners owned directly the partnership assets. REMIC residual as a withholding agent. Thus, the 30 percent tax, to the extent it interests fall into the look-through camp, but are subject to the applies, is based on the gross amount of interest received by the overriding principle that any income that is an excess exclusion is partnership or trust. This rule poses a risk for an owner trust that not eligible for any exemption from withholding tax, including the applies interest it receives to pay debt service on pay-through bonds portfolio interest exemption. Interests in grantor trusts that do not without allowing for a withholding tax. Such a trust and its domestic hold “pools” of loans (see the following paragraph) are also subject equity owners have an interest in ensuring that any interest allocable to a look-through approach. to equity interests held by a non-US investor are exempt from The last category of securities is pass-through certificates withholding tax, either as portfolio interest or under a tax treaty. representing interests in grantor trusts holding pools of debt A special withholding regime applies to REMIC residual interests obligations. Although pass-through certificates are generally taxed held by domestic partnerships (and certain other pass-through

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on a look-through basis, as discussed above, a special rule treats withholding tax under either theory (options are discussed below). such certificates as separate obligations for purposes of applying the This statement would not apply, however, to a credit default swap TEFRA registration requirements. The same logic carries over to that relates to an identified debt instrument held by the protection the portfolio interest exemption, so interest received on such buyer if the arrangement were recast as a guarantee. In that case, certificates is considered to be received on the certificates rather periodic premium payments made to the protection seller would be than on the underlying receivables. However, the July 18, 1984 subject to the withholding tax rules governing guarantee fees, effective date of the portfolio interest exemption is applied based on which generally are less favourable to taxpayers. when the underlying trust assets were issued. b. Rents. Rental income from real property located in the United Portfolio interest does not include any interest that, with certain States is considered US source FDAP income. There is no exceptions, is contingent on the profits or cash flow of the debtor (or withholding tax exemption for such income comparable to the one a related person), the value of the debtor’s (or a related person’s) for portfolio interest. Thus, if a non-US investor holds pass-through property, or distributions on the debtor’s (or a related person’s) equity. certificates or other equity interests in an entity that is taxed for Thus, such interest will generally be subject to the 30 percent federal income tax purposes as either a trust or a partnership, and withholding tax unless the tax is eliminated or reduced under a treaty. the issuer acquires US real property in connection with a default or Of particular relevance to securitisations, the contingent interest anticipated default on a mortgage, the withholding tax generally exclusion does not apply to interest that is considered contingent would apply to the investor’s share of any rents received on the solely on account of (1) a contingency as to the timing of any interest property. Interesting allocation issues arise where pass-through or principal payment, (2) the debt being nonrecourse or limited certificates are divided into junior and senior classes. On the other recourse, or (3) the interest being determined by reference to interest hand, income earned on an instrument that is taxed as debt of the that itself is not contingent (or by reference to the principal amount of issuer, such as a pay-through bond or REMIC regular interest, debt that does not bear contingent interest). While asset-backed continues to be interest even if it is derived from rental income. securities may provide for payments that depend on cash flows of the Although uncertain, it appears that all income on a REMIC residual issuer, these exceptions cover the features of typical asset-backed interest would be treated as interest income for withholding tax securities that are likely to raise questions. Other exceptions are purposes regardless of the REMIC’s sources of income. available that are less likely to be relevant in securitisations. c. Option Income. Income from options (including gain of an option writer from the lapse of an option) is considered gain from 3. Swaps, Rents, Options, and Debt-Related Fees the sale or exchange of property. Accordingly, such income is not FDAP income and is not subject to the 30 percent withholding tax. a. NPC Income. Some asset-backed securities represent ownership d. Debt-Related Fees. A creditor may receive various income interests in a trust holding both (1) a debt instrument (including a amounts denominated as “fees” in connection with extending REMIC regular interest) or pass-through certificate, and (2) a credit. How withholding tax rules apply to fees received by a non- notional principal contract (NPC), such as an interest rate swap, cap US person depends on how they are characterised for tax purposes, or floor agreement. The trust may be classified for tax purposes as which should depend on their economic substance. For example, either a grantor trust or a partnership. The withholding tax fees may represent interest if paid as additional consideration for treatment of income from the debt instruments held by the trust is lending funds, or may instead be compensation for some ancillary discussed above and would not change because the securities are service provided to a borrower and represent income from personal held in combination with an NPC. services. Certain fees may be treated as gain from the sale or The income from payments received on the NPC generally would exchange of property. be FDAP income. Thus, the income would be subject to US Fees that are not gained from the sale or exchange of property withholding tax unless the tax is eliminated or reduced under a tax would be FDAP income and thus potentially would be subject to treaty, or the source of the income is outside of the United States. withholding tax if received from US sources. The applicable source (The portfolio interest exemption would not apply because swap rule will depend on the type of income involved. Income from income is not interest.) In fact, the withholding tax never applies to personal services is sourced where the services are performed. income from an NPC as such because such income is sourced based In recent years, the Service has issued guidance on a number of on the residence of the payee, not the residence of the payor. miscellaneous types of “fees” charged in connection with credit However, to the extent there is a significant non-periodic payment card accounts, which is helpful in providing a framework for under an NPC, the instrument is generally split for tax purposes into analysing fees. The guidance generally divides the fees between an on-market NPC and a deemed loan. If a non-US investor is the interest and services income depending on whether they are tied to lender, the withholding tax treatment of the deemed interest income funded amounts. For example, fees charged as penalties for making (specifically whether the portfolio interest exemption or some other late payments are interest and annual fees charged for issuing a relief applies) must be considered separately from the rules for credit card (whether or not the card is used) are services income. NPCs. There are special rules for dividend equivalent swap Commitment fees are amounts paid by a prospective lender for an payments that are not generally relevant to securitisations. agreement of a prospective lender to lend on agreed terms. There A non-US investor that owns an interest in an NPC through a are authorities treating such fees in the hands of domestic taxpayers grantor trust clearly would benefit from the NPC source rule based as payments for a property right akin to an option. If this on the investor’s residence, since the trust would be ignored. Due characterisation holds true for withholding tax purposes, income to a change in law in 1997, the result generally would be the same from commitment fees would not be FDAP income, although the for a non-US investor holding an NPC through a partnership, point is not clear. Even if commitment fees were considered FDAP provided the activities of the partnership are limited (as they income, they might be sourced outside of the United States on the typically are with asset-backed securities in which foreigners ground that they are more analogous to gain from the disposition of invest) to investing and trading in securities. a property right than to other types of income, or on the ground that A credit default swap generally would be considered either an NPC the commitment represents a use of the taxpayer’s capital which is or a put option and payments thereunder would not be subject to located outside of the United States.

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Fees received for consenting to the amendment or waiver of the income paid to non-US investors if it otherwise would apply. Taxes terms of a debt instrument would not be FDAP income if the that are withheld will not be refunded or credited by the Service amendment or waiver results in a deemed exchange of the debt unless the beneficial owner provides information to establish the instrument, so that the fee is properly considered part of the identity of any US owners, and other restrictions apply where the consideration received in an exchange of the unmodified beneficial owner is an FFI. instrument. Where that is not the case, the outcome depends on Unlike the conventional rules governing withholding tax on whether the fees are properly regarded as additional interest, a fee payments to non-US investors, the FATCA regime focuses on for services, or compensation for the relinquishment of a property payments to foreign entities (not individuals) and has as its goal right. The source of the income also needs to be considered. identifying ultimate US (not foreign) owners of the payments (both Fees may be paid to accept credit risk on obligations of a third party. individuals and closely held corporations) who may be hiding The withholding tax treatment of these fees is currently uncertain. behind foreign entities. Consistent with this goal, the rules do not generally require the reporting to the Service of income amounts but instead the identities of the US owners and the existence and D. FIRPTA size of accounts and gross payments. Further, although withholdable payments are limited to payments having, broadly FIRPTA subjects non-US investors to US tax on gains from sales of speaking, a US source, the required reporting is not. Thus, an FFI certain United States real property interests (including equity receiving US source payments may be compelled by the threat of interests in “United States real property holding corporations”) in withholding on those payments to report on unrelated foreign the same manner as if such gains were effectively connected with a source income earned by US persons. Congress clearly viewed the US trade or business. The FIRPTA rules do not apply to interests in withholding taxes as a club to compel compliance with reporting real property that are solely creditor interests. obligations, rather than a new revenue source (aside from the If, however, a non-US investor holds a mortgage-backed security revenue picked up through greater compliance with existing income taxable as an equity interest in a grantor trust or partnership and the tax obligations). Some institutions with limited US connections issuer acquires a real property interest in connection with a likely will respond to the new regime by excluding all US account mortgage default, the investor will generally be treated for purposes holders or holding no US assets. of FIRPTA as owning a non-creditor interest in such property. Any In a number of places, the legislation allows the Treasury to grant gain attributable to such property that is allocable to the investor exemptions and modify reporting requirements. Accordingly, the will be taxed under FIRPTA, either when the owning entity scope of the new rules will depend significantly on how they are disposes of the real property, or when the investor disposes of its implemented. The discussion below generally is based on the interest in the entity. A creditor acquiring real property collateral statute and does not separately identify the ways in which the rules generally would have a basis in the acquired real property equal to may be changed. Further, the description is not comprehensive. its fair market value at the time of acquisition, so that any gain The first item of implementation guidance issued is described would be limited to increases in the property’s value during the below. period it is held by the entity. The FATCA rules use a number of defined terms. This summary A REMIC regular interest should be treated as a creditor interest will begin by defining the most significant terms and then describe that is not subject to the FIRPTA tax without regard to any holdings the substantive rules for FFIs and NFFEs. of real property by the issuer. A withholdable payment is the kind of payment to which the new withholding tax applies. It is defined as US source FDAP income, E. FATCA Reporting and Withholding Tax and gross proceeds from the sale or other disposition of property of a type which can produce US source interest or dividends (including dividend equivalent payments under swaps). Thus, it 1. Overview and Definitions includes income amounts not normally subject to withholding tax such as gains on the sale of property and amounts representing a The FATCA regime, enacted in 2010 by the HIRE Act and generally return of capital. There is an exception for an item of income (not effective in 2013, imposes a 30 percent withholding tax on payments) effectively connected with a US trade or business. withholdable payments made to a foreign financial institution A passthru payment is a withholdable payment or other payment to (FFI), whether or not the FFI is the beneficial owner of the the extent attributable to a withholdable payment. Thus, a payment, unless the FFI enters into an agreement with the Service withholdable payment that is received by an FFI but owned by and that obligates it, among other things, to report to the Service paid to another person would be a passthru payment. Apparently, a information about United States accounts. FATCA also imposes a passthru payment also may be attributed to debt of an entity and to 30 percent withholding tax on withholdable payments made to all equity interests in an entity that is not taxed as a pass-through entity, other foreign entities (referred to as non-financial foreign entities although how this will be done is unclear. An FFI is required to (NFFEs)), provided an NFFE is the beneficial owner of the withhold on passthru payments in certain circumstances. payment, unless the withholding agent receives a certification as to the ownership of the NFFE by US persons. A withholding agent is the person required to withhold from withholdable payments and is broadly defined as any person, in The statutory provisions of FATCA provide that withholding taxes whatever capacity acting, having the control, receipt, custody, will apply to payments after December 31, 2012, except that disposal, or payment of any withholdable payment. The term is not withholding is not required for payments in respect of obligations limited to US persons. outstanding on the date two years after the date of enactment (the two-year anniversary is March 18, 2012). Guidance from the IRS, A foreign financial institution or FFI is the type of foreign entity discussed below, delays the start of withholding to payments after that must agree to report on its accounts or suffer withholding on all December 31, 2013 and extends the grandfathering to obligations withholdable payments it receives. An FFI is defined broadly as outstanding as of December 31, 2012. The new withholding tax is any entity that is not a United States person and (1) accepts deposits not intended to duplicate the regular 30 percent withholding tax on in the ordinary course of a banking or similar business, (2) as a

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substantial portion of its business, holds financial assets for the An expanded affiliated group is a group of corporations (domestic accounts of others, or (3) is engaged (or holding itself out as or foreign) connected through more than 50 percent ownership links engaged) primarily in the business of investing, reinvesting, or (by vote or value), and also includes other entities controlled by trading in securities as defined in section 475(c)(2) (which includes members of such a group. stocks, debt instruments, and interest rate, currency, or equity NPCs), partnership interests, or commodities, or any interest in any 2. Foreign Financial Institutions of the foregoing. Under the last part of the definition, an entity need not have customers or be a securities dealer to be an FFI. Holding A withholding agent making withholdable payments to an FFI securities for investment or trading is enough. Thus, virtually any (other than amounts beneficially owned by certain governmental foreign entity that holds mostly some combination of debt entities) must withhold a 30 percent tax unless the FFI meets the instruments, asset-backed securities, or derivatives therein will be requirements of section 1471(b) described below. Obviously, in an FFI. implementing the withholding regime, the Service will have to A non-financial foreign entity or NFFE is any foreign entity that is develop a mechanism that will allow withholding agents to not an FFI. determine if a payee is an FFI and if so if it is one that meets these A financial account with respect to any financial institution is a requirements. depository or custodial account, and also, somewhat surprisingly, If tax is withheld from a payment, and an FFI is the beneficial any equity or debt interest in the financial institution other than owner of the payment, then refunds or credits are allowed only to interests which are regularly traded on an established securities the extent the FFI is entitled to a reduced rate of withholding tax market. As discussed below, proposed regulations would exclude under a tax treaty with the United States. Offshore issuers located from the definition of financial account plain vanilla debt and in tax haven jurisdictions would not generally qualify. Of course, equity securities of banks, brokerage firms, and insurance even if a refund was potentially obtainable, beneficial owners of companies, even if not publicly traded. payments still would have a strong preference to avoid withholding A United States account is generally any financial account held by in the first instance. one or more specified United States persons or United States owned An FFI meets the requirements of section 1471(b) (so that it can foreign entities. There is a de minimis exception for depositary avoid withholding on payments it receives) if it either complies accounts not over $50,000 held by individuals. There is no with procedures to ensure that it does not maintain United States comparable statutory de minimis rule for financial accounts accounts, or agrees with the Service to do the following: represented by debt or equity interests or custody accounts. To obtain information (and comply with verification and due avoid duplicative reporting, a United States account does not diligence procedures) to determine if accounts are United include an account in an FFI if it is held by another FFI that has a States accounts; FATCA compliant agreement with the Service or if the holder report annually to the Service certain information described otherwise is subject to information reporting requirements that below with respect to United States accounts; would make FATCA reporting duplicative. This exception may be withhold a 30 percent tax from any passthru payment made very helpful to an offshore issuer in avoiding (or more accurately to another FFI that does not meet the requirements of section shifting to others) reporting burdens. 1471(b), or to a recalcitrant account holder; A recalcitrant account holder is any holder of a financial account in withhold a 30 percent tax from any passthru payment made an FFI which fails to comply with reasonable requests to provide to another FFI that elects to have the payor FFI withhold information needed for the FFI to determine if the account is a amounts the payee FFI otherwise would be required to United States account or to meet its FATCA reporting requirements withhold on payments it makes; if it is a United States account (including waiving any foreign law comply with requests for additional information with respect that would prevent the FFI from reporting the information). to any United States account maintained by the FFI; and A specified United States person is any United States person with where a foreign law would otherwise prevent the reporting of certain exceptions. The exceptions include, most significantly, information with respect to any United States account, corporations whose stock is regularly traded and their affiliates, attempt to obtain a waiver of the law or close the account. governmental and charitable entities, banks and common trust In the case of an FFI that is a qualified intermediary (QI), these funds, REITs and RICs. There is no general exception for requirements are in addition to those imposed under the QI corporations that do not have regularly traded stock, which is not agreement. Further, section 1471(b) requires an agreement by an surprising given the purpose of the statute. FFI with the Service, so that effectively, and absent some A United Stated owned foreign entity is any foreign entity with one accommodation by the government, a prior arrangement with the or more substantial United States owners. A substantial United Service would be required before an FFI could receive payments on States owner is a specified United States person that has a required assets producing US source income. In theory at least, the Service ownership interest. The required interest is generally a 10 percent can revoke an agreement for non-compliance, although if direct or indirect interest (by vote or value for a corporation and by experience with QI agreements is any guide, it may take real effort profits or capital for a partnership). However, for an entity that is for a significant institution to behave badly enough to trigger a an FFI because of its investment or trading activities, the 10 percent termination. floor drops to zero (or stated differently, all ownership interests are A key issue in implementing the information gathering and due considered to be substantial). For a grantor trust, all specified diligence requirements with respect to United States accounts will United States persons who are treated as owners under the grantor be the degree to which FFIs can rely on existing know-your- trust rules are considered substantial owners. Thus, a foreign trust customer, anti-money laundering and similar non-tax rules that primarily holds receivables for investment (and accordingly is requiring the identification of account holders. It may be quite an FFI) and issues pass-through certificates would be required to challenging to identify direct or indirect US owners of foreign treat all direct or indirect owners of any certificates that are entities, particularly at the thresholds required by the statute, and specified United States persons as substantial United States owners. the beneficial holders of non-traded debt or equity interests that do

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not produce US source income and have only non-US paying agents NFFEs need not report on holders of debt interests issued by and thus are not subject to current information reporting the NFFE, whether or not traded. requirements. The difficulties could be extreme for FFIs such as NFFE reporting relates to particular payments. There is no securitisation vehicles or investment funds that are not traditional requirement of annual reporting of account balances. financial institutions. An NFFE is not required to withhold on payments it makes The requirements of section 1471(b) are not met with respect to an (unless it is otherwise a withholding agent with respect to FFI unless they are also met by each FFI that is a member of its withholdable payments). expanded affiliated group. Thus, an FFI could go out of compliance There is no statutory exemption that would allow an NFFE to if more than half of its equity, by vote and value, were acquired by not report on US owners of equity interests that are held a corporate parent that is also an FFI but not one that complies with indirectly through financial institutions that are themselves subject to information reporting or FATCA reporting FATCA. That could be a significant practical issue for a obligations. securitisation vehicle having traded equity with a relatively small value. An FFI must agree to report the following information annually to 4. Implementation the Service with respect to each United States account: the name, address, and taxpayer identification number (TIN) of each account The IRS has issued three notices, Notice 2010-60, Notice 2011-34, owner which is a specified United States person and, in the case of and Notice 2011-53, addressing the implementation of the FATCA any account holder which is a United States owned foreign entity, regime. On February 8, 2012, just as this chapter was being the name, address, and TIN of each substantial United States owner submitted for publication, the US Department of Treasury released of such entity; the account number; the account balance or value; proposed regulations under FATCA expanding and somewhat and the gross receipts and gross withdrawals or payments related to modifying the guidance provided in the three notices. The first the account. three sections below discuss each of the three notices, as written, and the fourth subsection below highlights some of the major The required reporting on account balances, receipts and changes from the three prior IRS Notices made by the proposed withdrawals differs from conventional information reporting regulations. applicable to US payees of certain categories of income under sections 6041 (FDAP income paid by a business), 6042 (dividends), Notice 2010-60. Notice 2010-60 was the first step taken in 6045 (broker reporting of gross proceeds), and 6049 (interest), implementing the FATCA regime. Some of the principal issues which requires the reporting of income amounts and sales proceeds. addressed by the Notice include the following: An FFI may elect to report income amounts under these sections The notice contemplates narrow exceptions from the rather than account balances and deposits and withdrawals. definition of FFI for certain retirement plans, property and casualty insurance companies, holding companies, finance The exclusion from the definition of United States account of subsidiaries, start-up companies, companies in the process of accounts held by other FFIs with FATCA-compliant agreements reorganisation or liquidation, and foreign-targeted funds, and means that an FFI that cannot practically undertake investor-level providing a simplified regime for certain other categories of reporting obligations (for example, with respect to non-traded debt entities. or equity) could avoid them by requiring that debt or equity be held The notice indicates that the IRS is considering adopting through (1) an FFI that meets the requirements of section 1471(b) rules that minimise potential duplicative reporting in and does not elect to pass withholding obligations to its payor FFI, situations in which an account maintained by an FFI (such as or (2) a publicly held domestic institution (which would not be a shares that it issues) is held in custody through another FFI specified United States person). Also, if all of the debt or equity (such as a broker or clearinghouse) for the benefit of a were held through a single clearing organisation, either no reporting specified United States person. In such a case, only the FFI would be required or, if it were required, it would be fairly simple. that has the most direct relationship with the US accountholder would be required to report with respect to the account. The notice does not address accounts in an FFI 3. Non-Financial Foreign Entities maintained by US financial institutions. The notice provides substantial guidance regarding the scope Section 1472 requires a withholding agent to withhold a 30 percent of the due diligence and documentation requirements that tax from withholdable payments to a NFFE if the beneficial owner FFIs and US financial institutions will need to follow to of the payment is an NFFE (either the payee or another NFFE) that determine the characteristics of their accountholders. is not exempt from withholding, unless the withholding agent The notice indicates that foreign entities that are engaged in receives (1) a certification that the beneficial owner does not have the conduct of an active trade or business (other than a any substantial United States owners, or (2) the name, address, and financial business) generally will be exempt from the new TIN of each substantial United States owner of the beneficial FATCA withholding and reporting regime. owner. In addition, to avoid withholding, the withholding agent As noted above, there is a grandfather rule for “obligations” in must not know or have reason to know that information it receives existence on March 18, 2012. The notice clarifies that the term is incorrect and must report such information to the Service. “obligation” means any legal agreement that produces or could Amounts that are withheld from payments to a NFFE are potentially produce withholdable payments, other than equity interests, or refundable if required information is reported to the Service. agreements that lack a definitive expiration or term. The notice also The NFFEs that are exempt from withholding are corporations with provides that brokerage, custodial and similar agreements to hold regularly traded stock or members of an expanded affiliated group financial assets for the account of others are not eligible for the including such a corporation, corporations organised in a grandfather rule. The notice provides that an instrument will lose possession that are wholly owned by bona fide residents of the the grandfather protection if it undergoes a material modification possession, and certain governmental entities. after March 18, 2012. As discussed below, proposed regulations replace the March 18, 2012 grandfathering date with December 31, There are several key differences between the reporting required of 2012. NFFEs and FFIs:

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Notice 2011-34. Notice 2011-34 refines the steps that an FFI must Most significantly, the Notice acknowledges the potential practical go through to determine if an account owned by an individual is a obstacles faced by FFIs in complying with FATCA and states that U.S. account. The Notice requires more effort to identify existing the Service will issue regulations that will provide for withholding individual U.S. accounts where the account is a private banking on payments to FFIs to be phased in starting January 1, 2014. The account or has a balance of $500,000 or more. Other existing withholding obligations under FATCA were originally slated to individual accounts need not be reviewed except by searching apply to payments made on or after January 1, 2013. Instead, electronic records. Notice 2011-34 does not revise the diligence withholding under section 1471(a) and 1472(a) for U.S. source procedures applicable to new individual accounts or to accounts FDAP payments will begin on January 1, 2014, and withholding owned by entities. agents will not be required to withhold on other withholdable In other respects, the Notice shows a desire to give the rules a very payments (e.g., gross proceeds) until January 1, 2015. In addition, broad sweep. Most significantly, the proposed rules for passthru the withholding obligations of a participating FFI on passthru payments have the potential to extend FATCA reporting to virtually payments to recalcitrant holders, non-participating FFIs or FFIs that every FFI in the world without regard to the level of contact with elect to be withheld upon with respect to their recalcitrant holders the United States. will begin, at the earliest, on January 1, 2015. As discussed below, proposed regulations extend certain of the grandfathering dates. Specifically, a participating FFI (one that has an agreement with the IRS) is required to withhold on passthru payments to the extent they The Notice also clarifies that, for purposes of the rule are made to a recalcitrant account holder or to another FFI that is grandfathering obligations outstanding on March 18, 2012, the term not participating or deemed compliant. Under the Notice, a “obligation” means any legal agreement that produces or could payment made by an FFI that is not a withholdable payment (i.e., produce passthru payments (including withholdable payments). generally U.S.-source payments, plus gross proceeds from the This clarification addresses an ambiguity in the statute which could disposition of property that produces U.S.-source interest or have been interpreted to mean that payments made by an FFI on an dividend income) generally will be treated as a passthru payment obligation issued prior to March 18, 2012 were not exempt from based on the FFI’s passthru payment percentage, which is the withholding to the extent such FFI held non-grandfathered percentage of the assets of the FFI that are U.S. assets. U.S. assets obligations. The term “obligation”, however, does not include any are not only those that could produce U.S. source income but also instrument treated as equity, or any legal agreement that lacks a assets that could produce passthru payments from another FFI. definitive expiration or term. Thus the rule would have a cascading effect; the receipt of a The Notice states that the Service will begin accepting FFI passthru payment by an FFI would taint payments it makes (even applications through its electronic submissions process no later than commercial payments such as those under swaps or repos or January 1, 2013. An FFI must enter into an FFI agreement by June overnight deposits). The passthru payment percentage is calculated 30, 2013 to ensure that it will be identified as a participating FFI quarterly and is to be updated and published quarterly. For and to avoid being withheld upon in 2014. An FFI that enters into payments of amounts held in a custodial account, the passthru an agreement after June 30, 2013 but before January 1, 2014 will be payment percentage would be the one calculated for the entity a participating FFI (and, theoretically, should not be withheld issuing interests or instruments held in the account. Hopefully, the upon). However, as a practical matter, it may not be identified as pro-rata approach in its most extreme form is a trial balloon. such in time to prevent withholding against it beginning on January Something will have to give to make the system workable. 1, 2014. In order not to create a disincentive for an FFI to enter into As one nod to practical concerns, the Notice creates new rules an agreement prior to July 1, 2013, the effective date of an allowing certain FFIs with local operations, and certain local agreement entered into before July 1, 2013 will be July 1, 2013 and members of participating FFI groups, to be treated as deemed the effective date of an agreement entered into on or after July 1, compliant pursuant to certain streamlined procedures, provided 2013 will be the actual date the agreement is entered into. certain conditions are met. In terms of due diligence procedures, a participating FFI will be The new Notice also indicates that the IRS will implement the rule required to put in place account opening procedures described in requiring all FFIs that are part of an expanded affiliated group to be Notice 2010-60 to identify U.S. accounts for accounts opened on or compliant (or deemed compliant) in order for any member to be after the effective date of its agreement. For private banking accounts compliant. Also, QI agreements will require the QI to be compliant. opened prior to the effective date of an agreement with a value of at least $500,000 as of the effective date of the agreement, a participating The Notice indicates that certain collective investment vehicles and FFI will be required to complete the due diligence procedures other investment funds would be treated as deemed-compliant if (1) described in Notice 2011-34. For private banking accounts opened all holders of record of direct interests in the fund are participating prior to the effective date of the agreement with a value less than or deemed-compliant FFIs (or otherwise exempt), (2) the fund $500,000 as of the effective date of the agreement, a participating FFI prohibits the acquisition of fund interests by anyone not described will be required to complete certain private banking procedures for in (1), and (3) the fund certifies that it complies with obligations such accounts by the later of December 31, 2014, or the date that is imposed on FFIs to calculate and publish passthru payment one year after the effective date of its FFI agreement. For all other pre- percentages. As a practical matter, it is unclear if investment funds existing accounts, a participating FFI must complete the due diligence currently will be able to rely on this deemed-compliant rule because procedures described in Notice 2010-60, Notice 2011-34 and most funds likely do not impose the selling and transfer restrictions forthcoming regulations within two years of the effective date of its required under the rule. In addition, the exception does not yet agreement. It is not entirely clear how this two-year timetable accommodate some holdings of interests through DTC or other dovetails with the January 1, 2014 effective date for withholding on domestic financial intermediaries. U.S. source FDAP payments. The Notice states that the Service Notice 2011-53. Notice 2011-53 supplements Notice 2011-34 and expects to issue regulations to provide further guidance on private Notice 2010-60 and addresses certain implementation issues, banking procedures and the required review of account holder files. including the timing of completing due diligence and reporting The Notice also delineates the timelines for reporting to the Service obligations, effective dates of withholding, and certain other on U.S. accounts and provides for slightly more flexible reporting miscellaneous items. requirements for certain FFIs during 2014.

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The Notice indicates that the Service expects to issue draft versions passthru payments (foreign passthru payments) has been delayed of an FFI agreement and reporting forms in the summer of 2012. until at least January 1, 2017 from a previously proposed date of Further, an automatic extension to December 31, 2013 of qualified January 1, 2015. The effective withholding dates remain intermediary agreements, withholding foreign partnership unchanged for any portion of a passthru payment that constitutes agreements, and withholding foreign trust agreements of entities US source FDAP income or gross proceeds of obligations of a type qualifying as FFIs that would have expired on December 31, 2012 that could produce US source interest or US source dividends, gives such FFIs leeway to negotiate only an FFI agreement during which are January 1, 2014 and January 1, 2015, respectively. The 2013. Any such FFI that enters into an FFI agreement by December delayed effective date with respect to the foreign passthru payments 31, 2013 will be deemed to have renewed its qualified intermediary is intended to give Treasury more time to consider how withholding agreement, withholding foreign partnership agreement, or should be applied to such payments. Unless previously issued withholding foreign trust agreement, as applicable. guidance is abandoned, it seems FFIs that have entered into an FFI FATCA Agreement will be obligated to withhold on payments to Recalcitrant Holders and non-participating FFIs, even with respect Proposed FATCA Regulations and the Joint to payments that lack a direct nexus to the United States (e.g., a loan Statement to a non-US entity not engaged in a US trade or business from another such non-US entity, or a derivative on the British Pound entered into between two such non-US entities). Notwithstanding Introduction the delayed effective date for withholding on foreign passthru payments, FFIs will be required to report on payments to non- On February 8, 2012, just as this chapter was being submitted for participating FFIs for 2015 and 2016. publication, the US Department of Treasury (the Treasury) released Grandfathered obligations. The grandfathering date for proposed regulations under FATCA (the Proposed FATCA withholding has been extended from obligations outstanding on Regulations or the proposed regulations). This section highlights March 18, 2012 to those outstanding on January 1, 2013. (While a some of the major changes from the prior IRS Notices discussed grandfathered obligation is not subject to withholding, it is above. A more detailed description of the Proposed FATCA generally not exempt from reporting.) The Proposed FATCA Regulations will be available in the periodic updates of James M. Regulations adopt previously announced guidance and provide that Peaslee and David Z. Nirenberg, FEDERAL INCOME TAXATION OF an obligation will lose its grandfathered status if it is materially SECURITIZATION TRANSACTIONS AND RELATED TOPICS (Frank J. modified after December 31, 2012, which for debt instruments Fabozzi Associates. 2011), available at the website for book: means that they are treated as reissued under section 1001. In www.securitizationtax.com. addition, the Proposed FATCA Regulations clarify that grandfathered obligations include (i) revolving and other lines of Joint Statement credit provided that the applicable agreement fixes the material terms (including a stated maturity date) prior to December 31, 2012, In conjunction with the release of the Proposed FATCA and (ii) derivatives entered into prior to December 31, 2012 under Regulations, the United States also issued a joint statement with an ISDA Master Agreement and evidenced by a confirmation. France, Germany, Italy, Spain, and the United Kingdom, outlining Although the grandfathering examples in the Proposed FATCA a potential framework that would modify or eliminate the FATCA Regulations focus on the ISDA Master Agreement, it seems that reporting and withholding obligations of FFIs resident in such derivatives documented in some other manner would also be countries. Under a future framework, the United States and a eligible for grandfathering, provided all the other requirements are partner country (which could include countries other than the initial met. five) would enter into an agreement (a FATCA Partner Agreement) The Treasury has indicated that it is considering whether and in pursuant to which the partner country would gather account what circumstances equity in securitisation vehicles that invest information from its resident FFIs and transmit the information to solely in debt and similar instruments should also be grandfathered. the United States. In return, FFIs resident in a partner country Currently, no equity is eligible for grandfathering. The rationale for would not be required to enter into an agreement directly with the grandfathering equity in securitisation vehicles may be that the IRS (an FFI FATCA Agreement). In addition, FFIs resident in a terms of equity issued by such vehicles are substantially similar to partner country would not be required to terminate non-compliant those of debt issued by such vehicles and because the equity of a holders or withhold on payments to non-compliant holders or other securitisation vehicle, like the debt, is viewed as a “pass-through” FFIs organised in other countries that also have entered into FATCA of the underlying assets. Accordingly, in many cases, it may be Partner Agreements with the United States. inappropriate to treat such equity differently than its corresponding Although entering into a FATCA Partner Agreement may alleviate debt. some concerns over local privacy laws for FFIs resident in a partner No withholding on short-term obligations. The proposed country, such FFIs likely will still be required to adopt costly regulations provide that payments of interest or original issue information reporting procedures and systems in order to comply discount on debt obligations with a term of 183 days or less (such with the modified FATCA regime. In addition, a FATCA Partner as commercial paper) are exempt from any withholding (but not Agreement will impose reciprocal reporting obligations on US necessarily reporting). financial institutions to gather information on residents of the Delayed withholding date for withholdable payments on certain partner countries and report such information to the IRS for obligations. Withholding that would otherwise be required on transmission to those foreign countries. payments to FFIs will be delayed until January 1, 2015 (from January 1, 2014) if the payer does not know or have reason to know Proposed FATCA Regulations — Significant that the payee is in fact an FFI. Changes and Clarifications of Prior Guidance Changes to effective dates for compliance and reporting. The proposed regulations stagger the effective dates for FFIs to Passthru payments. Withholding on the non-US source portion of commence reporting on its account holders.

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FFIs report on basic non-financial information on its US Expanded affiliate rule. An FFI will be unable to enter into an FFI account holders starting in 2014 (with respect to 2013); FATCA Agreement if any of its FFI affiliates do not enter into its FFIs report income associated with their US account holders own FFI FATCA Agreement. Accordingly, FFIs will need to starting in 2016 (with respect to 2015); and determine whether the composition of its equity owners may cause FFIs commence more in depth reporting on their US account other FFIs that are not in compliance with FATCA to be treated as holders starting in 2017 (with respect to 2016). an affiliated FFI. Recognising that some jurisdictions have in place The Proposed FATCA Regulations also ease the procedures for laws that prohibit an FFI’s compliance with certain of FATCA’s identifying pre-existing US account holders. In general, FFIs can requirements, the proposed regulations provide a two-year rely on electronic document reviews for accounts up to $1 million transition, until January 1, 2016, for the full implementation of this and for accounts with a balance in excess of $1 million, a review of requirement. During this transitional period, an FFI affiliate in a existing paper documents is required only if the electronic search jurisdiction that prohibits the reporting or withholding required by fails to yield sufficient information. The concept of “private FATCA will not prevent other FFIs within the same expanded banking relationship” accounts has been abandoned and FFIs are no affiliated group from entering into an FFI FATCA Agreement, longer required to distinguish between those and other accounts. provided that the FFI in the restrictive jurisdiction agrees to perform Further, an FFI may not need to update their customer verification due diligence to identify its U.S. accounts, maintain certain records, procedures with respect to new accounts. Finally, FFIs that adhere and meet certain other requirements. This transition period will not to the diligence guidelines outlined in the proposed regulations and apply, however, to affiliate FFIs that are not prohibited by law from that comply with the withholding requirements of section 1471(b) complying with an FFI FATCA Agreement. and any other requirements in an FFI FATCA Agreement will be treated as in compliance with their withholding and reporting Use of US Withholding Agents as Blockers obligations and will not be held to a strict liability standard. Expanded scope of exempt FFIs. The proposed regulations also The Treasury and the IRS have indicated that they are aware of the increase the categories of FFIs that will not be required to enter into potential for using US withholding agents as blockers for foreign an FFI FATCA Agreement, although such FFIs, among other passthru payments made to non-participating FFIs (generally, FFIs stringent requirements, will need to have strict rules in place that that fail to enter into an FFI FATCA Agreement). The potential prohibit accounts held by U.S. persons or certain non-compliant arises because US withholding agents are required to withhold only FFIs. Such deemed compliant entities include certain regulated with respect to US FDAP income and gross proceeds of certain US investment funds, referred to in the proposed regulations as source obligations while a participating FFI (generally, an FFI that “qualified collective investment vehicles” and “restricted funds”). has entered into an FFI FATCA Agreement or is otherwise FATCA A significant requirement of qualified collective investment vehicle compliant) is generally required to withhold on all payments. In status is a requirement that each holder of debt interests in the fund light of the potential for abuse, Treasury and the IRS have in excess of $50,000 or any equity interest in the fund is, among announced that they are assessing various options to address this others, a participating FFI. issue, including expanding the scope of payments that US withholding agent must withhold on, or requiring FFIs to withhold A significant requirement of restricted fund status is a requirement on passthru payments made to US withholding agents acting as that interests in the fund are distributed only through, among others, intermediaries. participating FFIs, the distribution agreements prohibit sales of debt and equity interests to, among others, US persons and non- participating FFIs, and all marketing materials indicate that sales to, Endnote among others, US persons and non-participating FFIs is prohibited. No similar rule is available to non-regulated investment funds or Except as otherwise noted, all section references are to the US securitisation vehicles, even if their constituent documents contain Internal Revenue Code of 1986, and references to regulations are to similar transfer restrictions. the Treasury Regulations promulgated thereunder. This chapter is Limits definition of financial account. The proposed regulations current through February 15, 2012. For more updated information exclude from both withholding and reporting plain vanilla debt and on the topic, please see the updates to chapter 12 of James M. equity securities issued by banks, brokerage firms, and insurance Peaslee and David Z. Nirenberg, FEDERAL INCOME TAXATION OF companies, even if such interests are not regularly traded on an SECURITIZATION TRANSACTIONS AND RELATED TOPICS (Frank J. established securities market. This rule does not apply to other Fabozzi Associates. 2011), available free of charge at the website FFIs, including investment funds and securitisation vehicles. for the book: www.securitizationtax.com.

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David Z. Nirenberg

Ashurst LLP Times Square Tower, 7 Times Square New York, NY 10036 USA

Tel: +1 212 205 7007 Fax: +1 212 205 7020 Email: [email protected] URL: www.ashurst.com

David Z. Nirenberg is a partner in the international finance department in New York. He covers the tax aspects of securitisations, structured products and finance, derivative products and investment funds and has played a significant role in the structuring of a wide variety of innovative financial products in both domestic and cross-border markets. David has written and lectured extensively in the area of financial products. He is the co-author of FEDERAL INCOME TAXATION OF SECURITIZATION TRANSACTIONS AND RELATED TOPICS (4th Ed., Frank J. Fabozzi Associates 2011). More information about the book is available at www.securitizationtax.com. David is admitted to the Bar of New York. • Columbia Law School (JD). • Boston University (MBA). • Cornell University (BS).

Ashurst is a premier international law firm with 27 offices worldwide and over 1500 lawyers, including 380 partners, with core businesses in securitisations, finance, corporate and M&A. We advise the world’s leading companies, financial institutions and national governments on their most strategically important transactions. Ashurst recently combined its Asian practice with that of Blake Dawson, one of Australia’s leading law firms. As part of this merger, Blake Dawson rebranded as Ashurst in Australia and we are working together to offer our clients significantly enhanced international coverage of the highest quality. Ashurst’s Securitisation and Derivatives Group advises on a wide variety of securitisation transactions, structured products and financial instruments including CLOs/CDOs, credit, equity and other derivatives, distressed debt, municipal bonds, tender option bond programmes, liquidity facilities and credit enhancement, structured lending, syndicated and bilateral loan facilities, guarantees, letters of credit, funds, general US securities advice, tax issues, ERISA and US financial regulatory advice. In addition, Ashurst advises on a wide variety of lending transactions (including acquisition, senior syndicated, mezzanine, asset- based financings and repo financings), corporate finance transactions (involving both equity and debt) and general corporate and transactional matters (including mergers and acquisitions, corporate restructurings, venture capital and private equity investments, and matters involving investment fund structuring and formation).

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Argentina Damián F. Beccar Varela

Estudio Beccar Varela Roberto A. Fortunati

1 Receivables Contracts contracts may be conditioned to compliance with certain prior requirements.

1.1 Formalities. In order to create an enforceable debt obligation of the obligor to the seller, (a) is it necessary 2 Choice of Law – Receivables Contracts that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone sufficient; and (c) can a receivable “contract” be deemed 2.1 No Law Specified. If the seller and the obligor do not to exist as a result of the behaviour of the parties? specify a choice of law in their receivables contract, what are the main principles in Argentina that will determine In general it is not necessary that, for the sales of goods and services the governing law of the contract? to be enforceable, that they be instrumented under a specific form required by law. In Argentine law, the principle of freedom of The governing law will be determined in the first place by the forms governs. However, contracts above a certain value have to be applicable international treaty. If no international treaty is instrumented in writing. Additionally, certain goods exist whose applicable, the Argentine Civil Code will apply. In general terms, sale must be evidenced by certain formalities. Invoices can the main regulations are: (i) sections 1,209 and 1,210, which set constitute evidence of a contract. It is also possible to infer the forth that the contract will be governed by the laws of the place of existence of a contract based upon a historic relationship between performance of the (characteristic) obligation; and (ii) section 1,205 determined parties. For such purposes, invoices constitute one of that sets forth that the applicable laws will be those of the place of the relevant elements for determining the presence of a contractual execution of the contract. The rule varies if the receivable is in relationship. connection with the sale of (i) movable assets (personal property) with a permanent situation in Argentina and with no intent of transport abroad, and (ii) real estate, which in both cases shall be 1.2 Consumer Protections. Do Argentina’s laws (a) limit rates governed by Argentine law. of interest on consumer credit, loans or other kinds of receivables; (b) provide a statutory right to interest on late payments; (c) permit consumers to cancel receivables for 2.2 Base Case. If the seller and the obligor are both resident a specified period of time; or (d) provide other noteworthy in Argentina, and the transactions giving rise to the rights to consumers with respect to receivables owing by receivables and the payment of the receivables take them? place in Argentina, and the seller and the obligor choose the law of Argentina to govern the receivables contract, is Except for certain operations (e.g., credits deriving from the use of there any reason why a court in Argentina would not give credit cards), Argentine laws do not fix limits to the interest rates effect to their choice of law? agreed upon by the parties to a contract. Certain court rulings have admitted that grossly out of market interest rates were usurious, and No, there is not. reduced them ex-officio. Argentine legislation envisages the right of all creditors to claim indemnification due to late payment; in 2.3 Freedom to Choose Foreign Law of Non-Resident Seller particular, in the case of obligations to deliver sums of money, the or Obligor. If the seller is resident in Argentina but the indemnification owed by the defaulting debtor is the payment of obligor is not, or if the obligor is resident in Argentina but interest. the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables contract, will a court in Argentina give effect to the choice 1.3 Government Receivables. Where the receivables of foreign law? Are there any limitations to the contract has been entered into with the government or a recognition of foreign law (such as public policy or government agency, are there different requirements and mandatory principles of law) that would typically apply in laws that apply to the sale or collection of those commercial relationships such that between the seller and receivables? the obligor under the receivables contract?

In principle, the contracts utilised for such purposes will be those Under Argentine conflict of law rules, the seller and the obligor are existing under private law but formalities required by specific rules free to choose the law which will govern the receivable, provided of administrative law may exist. Likewise, the enforcement of there is a reasonable connection between the parties or the

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receivable contract and the law chosen. For instance, such rights of creditors should be taken into account, as well as connection may arise from the place in which obligations will be provisions related to reciprocity in case of bankruptcy (Argentine performed, the place in which the receivable contract is executed, bankruptcy law sets forth that foreign creditors shall only be the domicile of one or more of the parties, etc. There are limitations allowed to present themselves in the bankruptcy proceedings in to the recognition of foreign law based on Argentine international Argentina and file a claim for their outstanding credit (which credit public policy. This concept is applied to the case in a posteriori is payable abroad) before the Argentine judge if, likewise, the laws basis (i.e. it is not a fixed set of rules which the chosen law must of the country of said foreign creditor would allow an Argentine abide by, but certain core principles which the chosen law must not creditor to file a claim for his or her outstanding credit (payable in violate, and said violation or lack thereof is determined by a judge Argentina) in any bankruptcy proceedings in said foreign country). after analysing the case, the principles, and the solution granted by

Argentina the chosen law). It is important to point out there are not many case 3.3 Example 2: Assuming that the facts are the same as law precedents where a judge has ruled that certain laws are in Example 1, but either the obligor or the purchaser or both violation of Argentina’s international public policy, and there are are located outside Argentina, will a court in Argentina even fewer cases where said violation was determined due to the recognise that sale as being effective against the seller choice of law in a commercial contract. and other third parties (such as creditors or insolvency This notwithstanding, there is a tendency to acknowledge certain administrators of the seller), or must the requirements of principles which operate a priori and are thus inflexible rules which the obligor’s country or the purchaser’s country (or both) be taken into account? are applicable no matter what law the parties have chosen. Said rules are also known as “immediate application norms” due to the See the answer to question 3.2. aforementioned fact that they are applicable even if the parties have chosen a different law to govern the contract. However, these fixed rules only apply to certain specific cases (for example, corporations 3.4 Example 3: If (a) the seller is located in Argentina but the incorporated abroad which carry out their main business activities obligor is located in another country, (b) the receivable is in the country). governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law 2.4 CISG. Is the United Nations Convention on the of the obligor’s country to govern the receivables International Sale of Goods in effect in Argentina? purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in The United Nations Convention on Contracts for the International Sale Argentina recognise that sale as being effective against of Goods and the Protocol to Amend the Convention on the Limitation the seller and other third parties (such as creditors or Period in the International Sale of Goods, both signed in Vienna on insolvency administrators of the seller) without the need April 11, 1980, were ratified by Argentina on July 19, 1983 through to comply with Argentina’s own sale requirements? Law 22,765. These rules became effective on January 1, 1988. Under Argentine conflict of law rules, the seller, the obligor and the purchaser are free to choose the law which will govern their 3 Choice of Law – Receivables Purchase commercial relation provided there is a reasonable connection Agreement between the case and the law chosen. If the election is valid and the sale has been legally perfected under foreign laws, an Argentine court would recognise that sale as being effective provided that 3.1 Base Case. Does Argentina’s law generally require the principles of Argentine international public policy are not violated. sale of receivables to be governed by the same law as the law governing the receivables themselves? If so, does In case of bankruptcy, law provisions regarding rights of creditors that general rule apply irrespective of which law governs should be taken into account, as well as provisions related to the receivables (i.e., Argentina’s laws or foreign laws)? reciprocity in case of bankruptcy.

There is no specific rule, and therefore there is freedom to agree. 3.5 Example 4: If (a) the obligor is located in Argentina but the seller is located in another country, (b) the receivable 3.2 Example 1: If (a) the seller and the obligor are located in is governed by the law of the seller’s country, (c) the Argentina, (b) the receivable is governed by the law of seller and the purchaser choose the law of the seller’s Argentina, (c) the seller sells the receivable to a country to govern the receivables purchase agreement, purchaser located in a third country, (d) the seller and the and (d) the sale complies with the requirements of the purchaser choose the law of Argentina to govern the seller’s country, will a court in Argentina recognise that receivables purchase agreement, and (e) the sale sale as being effective against the obligor and other third complies with the requirements of Argentina, will a court parties (such as creditors or insolvency administrators of in Argentina recognise that sale as being effective against the obligor) without the need to comply with Argentina’s the seller, the obligor and other third parties (such as own sale requirements? creditors or insolvency administrators of the seller and the obligor)? If the applicable law was validly chosen, as mentioned in the previous answer (i.e. that there was a reasonable connection The domicile of the seller is one of the usual connections used by between the obligor and the seller, and between the seller and the the Argentine conflict of law rules, therefore, if the seller resides in purchaser to choose in their relations the laws of the seller), and Argentina, an Argentine court would probably consider that as a provided that Argentina’s international public policy was not reasonable connection giving effect to the choice of the law of the violated, an Argentine court will recognise that sale as being seller’s country for these kinds of commercial relations and that sale effective against the obligor. Bankruptcy law provisions regarding would be effective against the seller (subject to some formalities rights of creditors should be taken into account, as well as detailed in question 4.2). Bankruptcy law provisions regarding provisions related to reciprocity in case of bankruptcy.

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3.6 Example 5: If (a) the seller is located in Argentina “public act”, jurisprudence and scholars’ opinions have deemed that (irrespective of the obligor’s location), (b) the receivable is the participation of a public officer (i.e. public notary, courts) governed by the law of Argentina, (c) the seller sells the implies the existence of a public act. Depending on the quantity and receivable to a purchaser located in a third country, (d) size of the loans to be transferred, hiring notaries to serve notices to the seller and the purchaser choose the law of the each debtor has a tremendous impact on the cost and timing of any purchaser’s country to govern the receivables purchase transaction. Instead, to meet the “public act” requirement, the agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in securitisation industry in Argentina has been publishing notices in Argentina recognise that sale as being effective against the Federal official gazette. There is no court precedent that has the seller and other third parties (such as creditors or confirmed yet that publishing general notices complies –or not– insolvency administrators of the seller, any obligor located with such legal standard.

in Argentina and any third party creditor or insolvency A very important exception to the notice requirement has been Argentina administrator of any such obligor)? established through Law 24,441 of Trusts [trusts under Argentine law are different from the Anglo Saxon trusts], which establishes See question 3.4. that the sale of the receivable without notice of the assignment may still be enforceable vis-à-vis third parties when (i) the receivable 4 Asset Sales contract expressly exempts the seller from the notice requirement (customary in receivable contract forms in Argentina), (ii) the transfer is made to securitise a credit portfolio and collateralise the 4.1 Sale Methods Generally. In Argentina what are the issues of securities, and (iii) that the securities to be issued are customary methods for a seller to sell receivables to a registered with the Argentine Securities Commission (“CNV”). purchaser? What is the customary terminology – is it called a sale, transfer, assignment or something else? Among other transfer of assets that have to be recorded, and regardless whether the notice requirement is exempt or not, any The customary method will be an assignment contract, listing the transfer of a mortgage securing a loan has to be recorded with the sold receivables and the names and domiciles of the debtors real estate registry of the province where the relevant real estate is thereunder. When the receivable is under litigation, a sale of real located. This recording impacts on the cost and timing of any estate, a credit secured with real estate or originally documented in transaction structure. a public deed, the purchase agreement will need to be documented To avoid such a costly burden applicable to mortgage loans, Law in a public deed in order to be effective. For securitisation No. 24,441 has also admitted the issue of mortgage securities upon purposes, receivables are usually assigned to a trust (under the existence of a mortgage loan in the first degree of preference, Argentine law - fideicomiso), and the property of such receivables which expressly authorises such issuance in the act of agreeing on segregated from other property of the trustee. See the response to the loan and creating the mortgage on the property. The issuance of question 7.2. The customary terminology is “assignment”. the mortgage security shall be registered by the registry of real estate. The mortgage security represents the right of the seller under the mortgage loan. Once its creation has been recorded, it 4.2 Perfection Generally. What formalities are required generally for perfecting a sale of receivables? Are there can be transmitted without the need to give any notice to the debtor any additional or other formalities required for the sale of or recording the transfer with the real estate registry. Nowadays, receivables to be perfected against any subsequent good standard forms of mortgage loans suggested by the Central Bank faith purchasers for value of the same receivables from and used by banks include the creation of mortgage securities in the seller? order to facilitate sales and securitisations. Mortgage securities are usually book-entry securities. In this case, the The sale of receivables is legally effective between the purchaser designation of the entity in charge of the records of this kind of and seller upon the execution of the assignment agreement and with mortgage securities (where the public deed of the mortgage shall be the delivery of the receivable contracts to the purchaser or a deposited) shall be expressly registered within the corresponding custodian (for instance, the seller). However, as a general principle, registry of real property. The register of the mortgage securities shall for the sale of any receivable (except for the ones specified below be under the charge of clearing houses, banks or corporations organised in this questionnaire), the law requires prior written notice to the exclusively for such purposes. Transfer of these kinds of mortgage debtor of such assignment in order to produce legal effects towards securities shall be registered with such entity upon the filing of the the debtor and third parties. Upon such notice: (a) the seller ceases corresponding transfer instrument, and it shall produce legal effects to be the owner of the receivable, and he can no longer assign that with respect to the debtor and third parties without any need to give credit, receive payments from the debtor or take any action in notice of such transfer or registration to the registry of real property. connection with the collection of that credit; (b) the debtor shall be notified of his creditor’s identity; and (c) third parties shall know the assignor’s condition with regard to the assigned credit. 4.3 Perfection for Promissory Notes, etc. What additional or different requirements for sale and perfection apply to Regarding the formalities of the notice, in order for the sale to be sales of promissory notes, mortgage loans, consumer effective against the debtor (excluding third parties), the law does loans or marketable debt securities? not require a particular formality for the notice to the debtor of the assignment of the receivable, it being thus possible to give such The general regime described in question 4.2 above is applicable notice through a private letter, a telegram, through the notice of the also to the sale of consumer loans and of mortgage loans. With complaint against the debtor or even verbally. regard to the sale of Promissory Notes, the sale and perfection of However, for the transfer to be effective vis-à-vis third parties other such are effected by endorsement of the note. Lastly, with respect than the debtor, the law requires that the notice complies with to the marketable debt securities, it is only necessary to notify the certain formal conditions that provide authenticity to the fulfillment agent that holds the register of ownership of sold securities. of the notice requirement, that is to say, through a public act. By

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4.4 Obligor Notification or Consent. Must the seller or the 4.7 Identification. Must the sale document specifically identify purchaser notify obligors of the sale of receivables in each of the receivables to be sold? If so, what specific order for the sale to be effective against the obligors information is required (e.g., obligor name, invoice and/or creditors of the seller? Must the seller or the number, invoice date, payment date, etc.)? Do the purchaser obtain the obligors’ consent to the sale of receivables being sold have to share objective receivables in order for the sale to be an effective sale characteristics? Alternatively, if the seller sells all of its against the obligors? Does the answer to this question receivables to the purchaser, is this sufficient vary if (a) the receivables contract does not prohibit identification of receivables? assignment but does not expressly permit assignment; or (b) the receivables contract expressly prohibits Other than identifying the original amount and the debtor, there are assignment? Whether or not notice is required to perfect no statutory additional rules regarding the identification of sold

Argentina a sale, are there any benefits to giving notice – such as receivables. The more information, the higher the likelihood of cutting off obligor set-off rights and other obligor avoiding potential litigations. defences?

Please refer to the first two paragraphs of the answer given to 4.8 Respect for Intent of Parties; Economic Effects on Sale. question 4.2. As long as the receivables contract does not expressly If the parties denominate their transaction as a sale and prohibit assignment, it is not necessary for the seller or for the state their intent that it be a sale will this automatically be purchaser to obtain debtors’ consent to the sale of receivables. respected or will a court enquire into the economic Contrarily, if the contract prohibits (or in any other manner restricts) characteristics of the transaction? If the latter, what economic characteristics of a sale, if any, might prevent the assignment, debtors’ consent should be obtained. Notice the sale from being perfected? Among other things, to perfects the assignment vis-a-vis third parties. Other benefits of what extent may the seller retain (a) credit risk; (b) notice are: (a) the seller ceases to be the owner of the receivable, interest rate risk; and/or (c) control of collections of and he can no longer assign that credit, receive payments from the receivables without jeopardising perfection? debtor or take any action in connection with the collection of that credit; (b) the debtor shall be notified of his creditor’s identity; and None of the economic characteristics above will prevent perfection (c) third parties shall know the assignor’s condition with regard to of the sale. A provision by which an option is granted to the seller the assigned credit. to repurchase the receivables may, according to some court precedents and scholars’ opinions, prevent not only perfection, but 4.5 Notice Mechanics. If notice is to be delivered to obligors, may also affect the validity of the sale. whether at the time of sale or later, are there any requirements regarding the form the notice must take or 4.9 Continuous Sales of Receivables. Can the seller agree in how it must be delivered? Is there any time limit beyond an enforceable manner (at least prior to its insolvency) to which notice is ineffective – for example, can a notice of continuous sales of receivables (i.e., sales of receivables sale be delivered after the sale, and can notice be as and when they arise)? delivered after insolvency proceedings against the obligor have commenced? Does the notice apply only to specific receivables or can it apply to any and all (including future) Yes, he can. However, the agreement to make continuous sales will receivables? Are there any other limitations or not be enforceable in the event of insolvency of the seller. considerations? 4.10 Future Receivables. Can the seller commit in an The notice or acceptance to be delivered to the debtor does not need enforceable manner to sell receivables to the purchaser to fulfill any specific requirements; any means is considered that come into existence after the date of the receivables appropriate to notify. Please refer to the first two paragraphs of the purchase agreement (e.g., “future flow” securitisation)? If answer given to question 4.2. so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the 4.6 Restrictions on Assignment; Liability to Obligor. Are seller’s insolvency? restrictions in receivables contracts prohibiting sale or assignment generally enforceable in Argentina? Are Argentine law permits the sale of future receivables. Thus, the there exceptions to this rule (e.g., for contracts between seller can voluntary transmit between inter vivos future receivables commercial entities)? If Argentina recognises prohibitions on sale or assignment and the seller nevertheless sells without any specific form different from that required in question receivables to the purchaser, will either the seller or the 4.2. Argentine law governs the general principle of freedom of purchaser be liable to the obligor for breach of contract or forms, as stated in section 1.278 of the Argentine Civil Code. In on any other basis? connection with enforcement in the insolvency scenario of the seller, please see question 6.5 below. Last, Argentine law does not Undoubtedly. The seller would have to indemnify the debtor permit the sale of future mortgages or pledges or those that were not against any loss arising in connection with the sale of the created at the time of the sale. This restriction will not apply to the receivables, in case that, even though that act was expressly assignment of the agreement from which future credits will arise. forbidden in the contract, the seller sold them nevertheless.

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4.11 Related Security. Must any additional formalities be delivery of the movable asset securitised has occurred, even though fulfilled in order for the related security to be transferred it can be challenged by the creditors of the debtor. concurrently with the sale of receivables? If not all related security can be enforceably transferred, what methods are customarily adopted to provide the 5.4 Recognition. If the purchaser grants a security interest in purchaser the benefits of such related security? receivables governed by the laws of Argentina, and that security interest is valid and perfected under the laws of Unless prohibited under the security contract itself, pursuant to the purchaser’s country, will it be treated as valid and perfected in Argentina or must additional steps be taken Article 1458 of the Civil Code, the sale/assignment of a receivable in Argentina? (credit) automatically includes all related securities thus entitling the new creditor to enforce such securities. It is customary,

In principle it should be treated as valid and perfected in our Argentina however, to serve notice of the transfer to the third parties that country. Nevertheless, in the case of a security interest over granted such securities (e.g., the owner of the mortgaged land, a receivables payable in Argentina, an Argentine court could consider pledgor of personal property, et cetera). such receivables movable assets with a permanent situation in Argentina (please refer to the answer to question 2.1 above), and 5 Security Issues therefore construe the validity and efficacy of the said security interest in the light of Argentine law.

5.1 Back-up Security. Is it customary in Argentina to take a “back-up” security interest over the seller’s ownership 5.5 Additional Formalities. What additional or different interest in the receivables and the related security, in the requirements apply to security interests in or connected to event that the sale is deemed by a court not to have been insurance policies, promissory notes, mortgage loans, perfected? consumer loans or marketable debt securities?

Please note that in all transfers of rights for valuable consideration The requirements to be complied with depend on the type of there exists a legal and implied warranty for eviction (garantía de security interest created and the assets to which such security evicción), that is to say, Argentine law foresees that if a purchaser, interest applies. It is worth pointing out, however, in the case of a due to a cause prior to or contemporaneous with the acquisition, by pledge (a security interest frequently created under our law), that if virtue of a judgment is deprived totally or partially of the rights the same was to apply to certain negotiable securities originated in acquired or suffers any other loss with respect to its ownership, accordance with Argentine law and transmissible by means of enjoyment or possession rights, the purchaser has the right to be endorsement, the notification of the granting of the security interest indemnified by the seller. Otherwise, it is not customary in to the assigned debtor could be dispensed with. Argentina to take a “back-up” security interest over the seller’s In general, when granting a loan or financing any payment, the ownership interest in the receivables and the related security. lender will require the debtor to pay a life insurance linked to the loan covering the loan or credit balance. In case of a mortgage or 5.2 Seller Security. If so, what are the formalities for the pledge, an additional insurance covering the asset shall be taken seller granting a security interest in receivables and out. related security under the laws of Argentina, and for such Regarding insurance requirements, if the security interest was a security interest to be perfected? mortgage loan or a pledge granted by certain financial entities regulated by law (such as banks), the mentioned life insurance Please refer to the answer to question 5.1 above. linked to the loan is mandatory.

5.3 Purchaser Security. If the purchaser grants security over 5.6 Trusts. Does Argentina recognise trusts? If not, is there all of its assets (including purchased receivables) in a mechanism whereby collections received by the seller favour of the providers of its funding, what formalities in respect of sold receivables can be held or be deemed must the purchaser comply with in Argentina to grant and to be held separate and apart from the seller’s own perfect a security interest in purchased receivables assets until turned over to the purchaser? governed by the laws of Argentina and the related security? Yes it does (fideicomisos).

The requirements to be fulfilled depend on the type of security to be created and the type of assets over which such security is granted. 5.7 Bank Accounts. Does Argentina recognise escrow For example, in the case of the civil pledge, regulated by the accounts? Can security be taken over a bank account Argentine Civil Code, in order for it to be validly perfected it is located in Argentina? If so, what is the typical method? Would courts in Argentina recognise a foreign-law grant required that: (a) the debtor of the pledged credit be notified; (b) the of security (for example, an English law debenture) taken credit be evidenced by a written document; (c) the document in over a bank account located in Argentina? which the credit is evidenced be delivered to the creditor or to a third party; (d) the pledge agreement be perfected through a public Section 3207 of the Argentine Civil Code provides for a pledge “in deed or a private document with true date (fecha cierta); and (e) the the hands of a third party” as different from a pledge in the hands of pledge agreement indicates the amount of the secured obligation the creditor. The funds in a bank account may be used a security and individualises the asset granted in security. In the case of the under this statute and it also the typical method. This security commercial pledge, contemplated by the Argentine Commercial device is usually named as an “escrow” account. Code, the absence of perfection of the pledge through a written document cannot be validly claimed by the debtor when the

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6 Insolvency Laws celebrated during the “suspect period”, can be ruled ineffective by the bankruptcy court, if the third party that celebrated the act with the insolvent party had knowledge of the suspension of payments 6.1 Stay of Action. If, after a sale of receivables that is (cesación de pagos) of the debtor. It should also be mentioned that otherwise perfected, the seller becomes subject to an it is the third party that celebrated the act with the insolvent party insolvency proceeding, will Argentina’s insolvency laws automatically prohibit the purchaser from collecting, that must prove that such act did not prejudice the creditors. All that transferring or otherwise exercising ownership rights over has been explained is regard to bankruptcy liquidation but is not the purchased receivables (a “stay of action”)? Does the applicable to bankruptcy reorganisation or out-of-court composition insolvency official have the ability to stay collection and with creditors. Lastly, we should mention that in the Argentine enforcement actions until he determines that the sale is Civil Code the possibility of filing an action for fraud exists as

Argentina perfected? Would the answer be different if the envisaged with respect to all acts that may have caused or purchaser is deemed to only be a secured party rather aggravated the insolvency of the debtor. than the owner of the receivables?

The Argentine Bankruptcy Act contemplates three types of 6.4 Substantive Consolidation. Under what facts or insolvency proceedings: bankruptcy reorganisation (concurso circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with preventivo); out-of court composition with creditors (but with those of the seller or its affiliates in the insolvency limited court intervention after an agreement is reached) (acuerdo proceeding? preventivo extrajudicial); and bankruptcy liquidation (quiebra). If the sale has been perfected in conformity with the law and if there Under the Argentine Bankruptcy Act, where two or more has been a true sale, neither the opening of a bankruptcy individuals or legal entities comprise permanently an economic reorganisation of the seller, nor the application for out-of-court group, they can request jointly their bankruptcy reorganisation composition with creditors, nor the declaration of bankruptcy stating the facts upon which the existence of the economic group is liquidation of the seller could prevent, or give reasons for an official based. The request must include all the members of the group insolvency to prevent, the exercise of the rights of the purchaser without exception. The bankruptcy court may dismiss the request over the acquired receivables. if it should consider that the existence of the group is not evidenced. Within the context of bankruptcy reorganisation proceedings of an 6.2 Insolvency Official’s Powers. If there is no stay of action economic group, the appointed receiver must prepare, apart from under what circumstances, if any, does the insolvency specific reports, a statement of consolidated assets and liabilities of official have the power to prohibit the purchaser’s the insolvent group. The regulations governing bankruptcy exercise of rights (by means of injunction, stay order or reorganisation proceedings of an economic group are also applied other action)? to those that by means of any legal act may have guaranteed the obligations of an insolvent party and that may have applied for its If the sale has been performed in accordance with law and if there bankruptcy reorganisation proceedings to be filed together with that has been a true sale, the insolvency official could not prohibit the of its guaranteed party. On the other hand, in the case of bankruptcy purchaser’s exercise of rights. liquidation, the law envisages some cases of extension of the bankruptcy liquidation in which, if there exists confusion of assets 6.3 Suspect Period (Clawback). Under what facts or between the original insolvent party and those to whom the circumstances could the insolvency official rescind or declaration of bankruptcy has been extended, a sole mass of assets reverse transactions that took place during a “suspect” or is formed in respect of all the creditors of the related parties “preference” period before the commencement of the adjudged bankrupt. insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in Argentina for (a) transactions between unrelated parties and (b) 6.5 Effect of Proceedings on Future Receivables. What is the transactions between related parties? effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on Under bankruptcy liquidation proceedings, acts exist that could be sales of receivables that have not yet come into existence? directly ineffective by virtue of law or, in other cases, by virtue of a court resolution. The Argentine Bankruptcy Act contemplates a In general, we can say that if the price for the receivable was “suspect period” which takes place between the date on which the already paid, the purchaser will collect his claim in the same suspension of payments (cesación de pagos) began and the date of conditions as any other unsecured creditor. And if the price was not the bankruptcy adjudgment, even though, for purposes of this paid yet, performance of the contract will be conditioned to the matter, the date of suspension of payments (cesación de pagos) decision of the bankruptcy judge. cannot be backdated further than two years from the date of the bankruptcy liquidation adjudgment or of the bankruptcy reorganisation filing (provided that it has preceded the relevant 7 Special Rules bankruptcy liquidation). The Argentine Bankruptcy Act envisages that the following acts performed by the debtor within the “suspect period” are directly ineffective by virtue of law in respect of the 7.1 Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in Argentina creditors: (a) gratuitous acts; (b) anticipated payment of debts establishing a legal framework for securitisation whose expiration should have occurred on the date of the transactions? If so, what are the basics? bankruptcy liquidation adjudgment or later; and (c) the granting of a mortgage, pledge or any other preference, with respect to a non- There is no law that specifically provides for securitisation expired obligation that originally did not have such security transactions. The one that is probably more specific is Law No. interest. On the other hand, other acts prejudicial to creditors, 24,441. 40 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Estudio Beccar Varela Argentina

7.2 Securitisation Entities. Does Argentina 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 Argentina, 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 Yes, it does. It is Law No. 24,441, which governs the creation of regulation as a financial institution in Argentina? Does the answer to the preceding question change if the “financial” trusts, in other words, trusts that issue securities. purchaser does business with other sellers in Argentina?

Under Argentine law, the trust is not an entity, but is an estate Argentina separate from those of the trustee (purchaser) and the settler (seller). Foreign companies are authorised by the Argentine Companies Law Accordingly, assets of the trust shall be the target of any action by to perform “isolated” acts of commerce in Argentina. Acts of the trustee’s and seller’s creditors and their respective bankruptcies commerce on a “habitual” basis require the registration of the (except fraud). The trustee is in charge of operation and purchaser. The answer would depend on the circumstances of the management of the business of the trust. Only banks licensed in case and it would depend on the size and characteristics of the Argentina and entities authorised by the National Securities receivable portfolio acquired. However, in practice, due to tax and Commission may act as trustees. The trustee shall not be personally foreign exchange reasons, receivable portfolios are usually acquired liable to any obligation of the trust, which shall only be payable by a locally organised trust and, depending on whether or not funds with the assets of the trust, except when the trustee acted are offshore or inshore, foreign investors would not need to be negligently or with willful misconduct. The entities authorised by registered to do business in Argentina to purchase the securities the National Securities Commission are required to meet a relativity issued by the trust with consequent less foreign exchange low solvency requirement. restrictions.

7.3 Non-Recourse Clause. Will a court in Argentina 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) limiting the following their sale to the purchaser, including to appear recourse of parties to available funds? before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect Yes, it is highly probable that a court will hold such a contractual sold receivables? provision among the parties as valid. If the seller is an Argentine company, no special licence would be required. If it is a foreign company, it is probably convenient and, 7.4 Non-Petition Clause. Will a court in Argentina give effect to a contractual provision (even if the contract’s governing depending on the circumstances, in some cases mandatory that the law is the law of another country) prohibiting the parties foreign company becomes registered under either Section 118 or from: (a) taking legal action against the purchaser or 123 of the Business Associations Law (No. 10550 as amended). another person; or (b) commencing an insolvency proceeding against the purchaser or another person? 8.3 Data Protection. Does Argentina have laws restricting the use or dissemination of data about or provided by As long as the purchaser is a trust, a trustee would not be personally obligors? If so, do these laws apply only to consumer liable to any obligation of the trust, which shall only be payable obligors or also to enterprises? with the assets of the trust, except when the trustee acted negligently or with willful misconduct. Several rules protect the data provided by obligors, the most relevant being Law No. 25,326. It not only applies to consumer 7.5 Independent Director. Will a court in Argentina give effect obligors, but also to enterprises. to a contractual provision (even if the contract’s governing law is the law of another country) or a provision in a 8.4 Consumer Protection. If the obligors are consumers, will party’s organisational documents prohibiting the directors the purchaser (including a bank acting as purchaser) be from taking specified actions (including commencing an required to comply with any consumer protection law of insolvency proceeding) without the affirmative vote of an Argentina? Briefly, what is required? independent director?

Debtors of the sold receivables are considered consumers. Thus, It is likely that a court would consider the clause non-enforceable, the purchaser should have to comply with several consumer arguing that it is contrary to public policy, due to the fact that it protection rules, the most relevant one being Law No. 24,240. could be prejudicial to third parties’ rights. Among other relevant requirements, that law requires: (i) giving true, objective, detailed and sufficient information of the given services, and respect all terms and conditions as they have been published and agreed; and (ii) avoiding clauses that restrict rights of the consumer or enlarge the faculties of the other party. In case of doubt in the interpretation of a clause, that which is most favourable to the consumer will always prevail.

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8.5 Currency Restrictions. Does Argentina have laws 9.4 Value Added Taxes. Does Argentina impose value added restricting the exchange of Argentina’s currency for other tax, sales tax or other similar taxes on sales of goods or currencies or the making of payments in Argentina’s services, on sales of receivables or on fees for collection currency to persons outside the country? agent services?

Yes, there are several, especially when foreign investors invest in As a general rule, the sale of goods or services is levied by VAT securities issued by a trust organised in Argentina. There are with a 21% rate. The sale of certain goods or services may be restrictions to inflows, outflows and to the purchase and sale of levied with lower or higher rates depending on the specific goods or foreign currency notes in Argentina. Restrictions vary depending services. The fees for collection agent services are also taxed with on whether the person operating in the foreign exchange market is VAT at a 21% rate. a resident or a non-resident of Argentina.

Argentina In the case of sales of receivables, VAT is imposed at the rate of 21% on the spread between the value of the portfolio and actual 9 Taxation purchase price. However, sales to a trust organised under Argentine law (the vehicle used for securitisation deals and the purchase of distressed credit portfolios in Argentina) are exempt from VAT. 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser be subject to withholding taxes in Argentina? Does the 9.5 Purchaser Liability. If the seller is required to pay value answer depend on the nature of the receivables, whether added tax, stamp duty or other taxes upon the sale of they bear interest, their term to maturity, or where the receivables (or on the sale of goods or services that give seller or the purchaser is located? rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold The obligation to perform withholdings and applicable rates may receivables or collections? vary depending on the nature of the receivables and the location of the beneficiary of the payment. Unless the receivables are part of the assets sold in the transaction For instance, in case the recipient of the payment is a local resident qualifying as a Transfer of a Going Concern (Law No. 11,867), the and interest is being paid, debtors who are companies or individuals principle is that the tax authority would only claim against the party that borrowed money for their business, have to make income tax that is liable. If the transaction qualifies as a part of a Transfer of a withholdings on interest payments to the lenders. The withholding Going Concern, special procedures must be accomplished to rate may vary from 3% to 35%. In principle, receivables originated exempt the purchaser from the tax liabilities of the seller. in consumer loans are not subject to withholding. In the case of stamp tax, both parties are jointly and severally liable The purchaser of receivables may have to perform these for paying the tax. withholdings, substituting the debtor, upon payment to the seller. In the case of the payment of interest to non-residents, withholding 9.6 Doing Business. Assuming that the purchaser conducts rates may vary from 15.05% to 35% depending on the beneficiary no other business in Argentina, would the purchaser’s and its country of residence. In case a Double Taxation Treaty is purchase of the receivables, its appointment of the seller applicable, this rate may be lower. as its servicer and collection agent, or its enforcement of In addition, the sale of receivables may also be subject to income the receivables against the obligors, make it liable to tax tax withholdings. in Argentina?

No, not as long as the purchaser does not reside or have domicile in 9.2 Seller Tax Accounting. Does Argentina require that a Argentina and does not maintain a permanent establishment in specific accounting policy is adopted for tax purposes by Argentina. If you consider a sole transaction of the purchase of the seller or purchaser in the context of a securitisation? receivables, the appointment of a servicer and the enforcement, we do not think that a purchaser would become personally liable for No specific accounting policy must be adopted. taxes in Argentina. However, depending on the circumstances, the debtor or the collection agent would have to make high 9.3 Stamp Duty, etc. Does Argentina impose stamp duty or withholdings on interest payments due to the fact that the creditor is other documentary taxes on sales of receivables? domiciles abroad. For such reason, it would probably be more efficient to organise a local vehicle or a trust for the purchase. The receivable purchase contract may be subject to stamp tax in Argentina’s provinces and in the City of Buenos Aires (Argentina is a federal country). However, most jurisdictions exempt sellers and purchasers from stamp tax as long as the transfer was made for the purpose of a securitisation deal and the securities are registered with the CNV.

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Damián F. Beccar Varela Roberto A. Fortunati

Estudio Beccar Varela Estudio Beccar Varela Tucumán 1, piso 3 Tucumán 1, piso 3 1049AAA Buenos Aires 1049AAA Buenos Aires Argentina Argentina

Tel: +54 11 4379 6834 Tel: +54 11 4379 6834 Fax: +54 11 4379 6860 Fax: +54 11 4379 6860 Email: [email protected] Email: [email protected] URL: www.ebv.com.ar URL: www.ebv.com.ar

Damián F. Beccar Varela is a grandson of the founder of the Firm. Roberto A. Fortunati is a partner of the Firm. His professional Argentina He graduated as a lawyer in Argentina and was admitted to activity is mainly concentrated in banking, and corporate finance Buenos Aires bar association in 1967. In 1967/68, he practiced with a focus in the oil and gas and mining sectors. He has also as a foreign associate at the firm of Casey Lane & Mittendorff in been acting as consultant to The World Bank in insolvency New York, N.Y. In 1972, he was a foreign visiting assistant matters. Mr. Fortunati acted as leading local counsel for several professor at, and at the same time attended graduate courses at, major project financings, mainly related to mining, oil and gas, the University of Illinois at Champaign-Urbana, Illinois, U.S.A. A and utilities. He has been very active in the fields of out-of-court partner of the firm since 1971, in 1986 he was elected Senior debt restructurings (work-outs), privatisation of state-owned Partner of the Firm and continues to discharge such position. His companies, M&A and in the start-up of venture capital personal specialty practice areas include international business investments. He is member of the board of directors of several transactions and finance agreements and mergers and corporations, including his acting as independent director and a acquisitions. He was a head member of the team of lawyers member of auditing committees, and an arbitrator to the MAE (the during the years when his Firm was the Argentine counsel of the local OTC electronic market). He is a member of the Advisory international banking community in respect of the renegotiations Board of the School of Law of Torcuato Di Tella University, of the Argentine foreign debt and led the majority of the teams Buenos Aires, and teaches project financing in a postgraduate that dealt with corporate restructuring, mergers and acquisitions, course on Oil and Gas Law, at the School of Law of the University joint ventures, and complex financing agreements. He speaks, of Buenos Aires. Mr. Fortunati founded the Firm Fortunati & reads and writes Spanish, English, French and Italian. Asociados in early 2003, a firm which has recently merged with Estudio Beccar Varela. He acted as General Counsel of Citibank in Argentina, after being partner of Estudio Beccar Varela, in Buenos Aires. Mr. Fortunati started his professional career as in- house counsel of Amoco Argentina Oil Company. He graduated from the Law School of the University of Buenos Aires in 1979.

Estudio Beccar Varela is an Argentine law firm based in the city of Buenos Aires. For more than a century it has counselled and advised its clients in all aspects of corporate and financial law. It is frequently involved in many of the largest Argentine banking and corporate transactions and has demonstrated a sophisticated level of expertise in structure operations which match the international legal frame with the local legal environment. Many of the firm’s clients have been serviced by the firm for over 65 years, the oldest current client being Citibank, N.A., since 1914. The Firm’s practices include corporate law, banking law, capital markets, mergers and acquisitions, insurance law, natural resources law, litigation, labour, tax, customs, administrative, intellectual property law and trademarks and patents law, antitrust and consumer protection law. The Firm is one of the leaders in the securitisation practice in Argentina. For almost 15 years now since the securitisation practice has been common practice with the passing of Law No. 24,441 (Trust Act), the Firm has been advising arrangers, sellers, issuers, trustees, rating agencies and even foreign sovereigns.

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Australia Paul Jenkins

Ashurst Jamie Ng

1 Receivables Contracts interest only being charged whilst the default continues. Once a judgment is obtained, interest at the applicable statutory rate would be recoverable on the judgment debt. 1.1 Formalities. In order to create an enforceable debt obligation of the obligor to the seller, (a) is it necessary (c) The Australian Securities and Investments Commission Act that the sales of goods or services are evidenced by a 2001 (Cth) (ASIC Act) applies to consumer loans, and can formal receivables contract; (b) are invoices alone render a consumer contract void, or certain terms within it sufficient; and (c) can a receivable “contract” be deemed void, where a credit provider has acted unfairly, to exist as a result of the behaviour of the parties? unconscionably or in a misleading way. Under the ASIC Act, a consumer can also challenge an “unfair” fee or charge as (a) There is no general requirement that the sale of goods or void, where the liability for the fee or charge is contingent on services be evidenced by a formal receivables contract (i.e., a the occurrence (or non-occurrence) of a particular event. written agreement signed by the parties). There are some However, this right does not permit a challenge to be made exceptions, notably contracts relating to land and certain to the interest and fees that are payable in any event and that regulated (consumer) credit contracts. These would be relevant were disclosed when the contract was entered into. to residential mortgage-backed securitisations in particular. Separately, under the NCCP and the NCC, obligors may be (b) Generally, invoices will be sufficient evidence of a contract, entitled to variations to their loan contract in circumstances provided that all the elements of a contract – offer, of hardship, or to postponement of enforcement, or to reopen acceptance, consideration, intention to create legal relations, a transaction which is unjust. certainty and capacity – are present. (d) The ASIC Act, NCCP and the NCC specifically provide (c) A receivable “contract” may be deemed to exist as a result of remedies for consumers (inclusive of penalties) in relation to the behaviour of the parties, provided that all the elements of excessive fees and unfair terms, and failure to comply with a contract set out in (b) above are present and no special rules key disclosure and conduct requirements. apply (such as those mentioned in (a) above). 1.3 Government Receivables. Where the receivables contract has been entered into with the government or a 1.2 Consumer Protections. Do Australia’s laws (a) limit rates government agency, are there different requirements and of interest on consumer credit, loans or other kinds of laws that apply to the sale or collection of those receivables; (b) provide a statutory right to interest on late receivables? 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 No, government agencies are generally subject to the same them? requirements and laws as other persons. However, the common law recognises that, in some circumstances, government agencies can (a) Interest rates on consumer loans are governed by the breach or repudiate an otherwise valid and enforceable contract National Consumer Credit Protection Act 2009 (Cth) without paying damages on the grounds of ‘executive necessity’. (NCCP) and the National Credit Code (NCC) that is a Many Commonwealth contracts contain termination for schedule to the NCCP. At the present time, this legislation convenience clauses that allow the Commonwealth (but not its does not provide an interest rate cap. counterparties) to terminate without penalty in the event of policy There is a proposal to introduce an interest rate cap at a changes, government exigencies and the like. Crown proceedings federal level from 1 July 2012 (48%), with a more limited legislation governs rights of action against the government. cap applicable to small amount credit contracts. The draft legislation to impose these new caps is currently going through a consultation process. Separately, certain States 2 Choice of Law – Receivables Contracts and Territories of Australia impose interest rate caps on all regulated consumer credit (i.e., New South Wales, Victoria, Queensland and the Australian Capital Territory). 2.1 No Law Specified. If the seller and the obligor do not (b) There is no statutory “right” to interest on late payments in specify a choice of law in their receivables contract, what Australia. However, contractually imposed “default interest” are the main principles in Australia that will determine the is common and permissible in Australia. Under the NCC, governing law of the contract? default interest with respect to consumer loans is subject to certain rules about pre-contractual disclosure, and default If no law is specified, an Australian court will approach the issue as

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a matter of contractual construction. The court will determine the general rule that requires the law governing the receivables sale governing law intended by the parties as implied by the terms of the agreement to be the same as the law governing the receivable. contract and the surrounding circumstances, in particular whether there is a choice of forum clause. However, if the governing law 3.2 Example 1: If (a) the seller and the obligor are located in cannot be determined as a matter of contractual construction, the Australia, (b) the receivable is governed by the law of court will determine which system of law has the closest connection Australia, (c) the seller sells the receivable to a purchaser with the contract by considering factors such as the nature and located in a third country, (d) the seller and the purchaser subject matter of the contract, the place of contracting, the place of choose the law of Australia to govern the receivables performance and the form of the contract. purchase agreement, and (e) the sale complies with the requirements of Australia, will a court in Australia

recognise that sale as being effective against the seller, Australia 2.2 Base Case. If the seller and the obligor are both resident the obligor and other third parties (such as creditors or in Australia, and the transactions giving rise to the insolvency administrators of the seller and the obligor)? receivables and the payment of the receivables take place in Australia, and the seller and the obligor choose Yes, subject to the discussion in section 2 above, an Australian court the law of Australia to govern the receivables contract, is there any reason why a court in Australia would not give would recognise that sale as being effective against the seller, the effect to their choice of law? obligor and third parties. However, a “deemed security interest” (and possibly other security interests) may be created upon such sale An Australian court would generally give effect to a choice of law pursuant to the Personal Property Securities Act 2009 (Cth) (PPSA) in to govern a document, or a submission to the jurisdiction of a court, respect of which a financing statement should be registered against the unless it would be contrary to public policy in the place in which the seller. A failure to comply with this registration requirement will not court is situated or any legislation overrides this position. An affect the effectiveness of such sale although such failure could, in Australian court will also not give effect to a choice of law to certain circumstances, result in a third party creditor of the seller or a govern a document if the choice is not made in good faith or if the subsequent purchaser of the relevant receivables to take priority over relevant laws are not connected with the commercial realities of the the earlier purchaser or the relevant security interest to be extinguished. transactions contemplated by the document. 3.3 Example 2: Assuming that the facts are the same as 2.3 Freedom to Choose Foreign Law of Non-Resident Seller Example 1, but either the obligor or the purchaser or both or Obligor. If the seller is resident in Australia but the are located outside Australia, will a court in Australia obligor is not, or if the obligor is resident in Australia but recognise that sale as being effective against the seller the seller is not, and the seller and the obligor choose the and other third parties (such as creditors or insolvency foreign law of the obligor/seller to govern their receivables administrators of the seller), or must the requirements of contract, will a court in Australia give effect to the choice the obligor’s country or the purchaser’s country (or both) of foreign law? Are there any limitations to the be taken into account? recognition of foreign law (such as public policy or mandatory principles of law) that would typically apply in Yes, subject to the discussion in section 2 above, an Australian court commercial relationships such that between the seller and would recognise that sale as being effective against the seller and third the obligor under the receivables contract? parties in Australia regardless of the legal requirements of the purchaser’s country but the legal requirements of the obligor’s country Subject to the limitations discussed in question 2.2 above, an may need to be taken into account to the extent there are any Australian court would give effect to the parties’ choice of foreign law. formalities or requirements relating to that sale. Also, a “deemed security interest” (and possibly other security interests) may be created upon such sale pursuant to the PPSA in respect of which a financing 2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in Australia? statement should be registered against the seller. A failure to comply with this registration requirement will not affect the effectiveness of such sale although such failure could, in certain circumstances, result Australia acceded to the United Nations Convention on Contracts in a third party creditor of the seller or a subsequent purchaser of the for the International Sale of Goods (CISG) on 1 April 1989. Each relevant receivables to take priority over the earlier purchaser or the State and Territory in Australia has passed legislation to implement relevant security interest to be extinguished. the CISG with the effect that the terms of the Convention will prevail over any provision of local law and have the force of law in each State and Territory. 3.4 Example 3: If (a) the seller is located in Australia but the obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, (c) the seller 3 Choice of Law – Receivables Purchase sells the receivable to a purchaser located in a third Agreement country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the 3.1 Base Case. Does Australia’s law generally require the requirements of the obligor’s country, will a court in sale of receivables to be governed by the same law as Australia recognise that sale as being effective against the law governing the receivables themselves? If so, does the seller and other third parties (such as creditors or that general rule apply irrespective of which law governs insolvency administrators of the seller) without the need the receivables (i.e., Australia’s laws or foreign laws)? to comply with Australia’s own sale requirements?

As discussed in section 2 above, the parties are free to choose the Yes, subject to the discussion in section 2 above and assuming that law governing the sale of receivables, and an Australian court an Australian court is an appropriate forum, an Australian court would would generally give effect to the parties’ choice. There is no recognise that sale as being effective against the seller and third parties

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without the need to comply with Australia’s own sale requirements. title and beneficial ownership pass to the assignee) or “equitable” However, a “deemed security interest” (and possibly other security (where only beneficial ownership passes to the assignee and legal interests) may be created upon such sale pursuant to the PPSA in title remains with the assignor). Equitable assignments are more respect of which a financing statement should be registered against the common as they may provide certain advantages, such as not seller. A failure to comply with this registration requirement will not requiring notice of assignment to the underlying obligor (i.e., affect the effectiveness of such sale although such failure could, in allowing the purchaser to remain undisclosed) and, in some certain circumstances, result in a third party creditor of the seller or a circumstances, may be more stamp duty efficient. This is dealt with subsequent purchaser of the relevant receivables to take priority over in more detail in question 4.2. the earlier purchaser or the relevant security interest to be extinguished. In Australia, the customary terminology is to class the transaction as a “sale” or as an “assignment”. Australia 3.5 Example 4: If (a) the obligor is located in Australia but the seller is located in another country, (b) the receivable 4.2 Perfection Generally. What formalities are required is governed by the law of the seller’s country, (c) the generally for perfecting a sale of receivables? Are there seller and the purchaser choose the law of the seller’s any additional or other formalities required for the sale of country to govern the receivables purchase agreement, receivables to be perfected against any subsequent good and (d) the sale complies with the requirements of the faith purchasers for value of the same receivables from seller’s country, will a court in Australia recognise that the seller? sale as being effective against the obligor and other third parties (such as creditors or insolvency administrators of the obligor) without the need to comply with Australia’s The property law legislation in each Australian State and Territory own sale requirements? establishes a statutory mechanism for the legal assignment of a receivable. If this mechanism is used, the transferee or any Yes, subject to the discussion in section 2 above, and assuming that subsequent good faith purchaser for value of the receivable an Australian court is an appropriate forum, an Australian court becomes the legal holder of the receivable, and is able to enforce would recognise that sale as being effective against the obligor and that receivable directly against the underlying obligor without third parties without the need to comply with Australia’s own sale involving the transferor. The rules for a legal assignment of a requirements. receivable vary slightly between jurisdictions. For the purposes of this discussion, however, the mechanism contains four key features: a) it must be an assignment of the entire receivable; 3.6 Example 5: If (a) the seller is located in Australia (irrespective of the obligor’s location), (b) the receivable is b) it must be in writing; governed by the law of Australia, (c) the seller sells the c) the receivable being assigned must be in existence at the time receivable to a purchaser located in a third country, (d) of assignment; and the seller and the purchaser choose the law of the d) written notice of the assignment needs to be given to the purchaser’s country to govern the receivables purchase obligor. agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in Under the PPSA, the assignment of receivables by a seller to a Australia recognise that sale as being effective against purchaser, where the relevant obligor is an Australian entity or the the seller and other third parties (such as creditors or receivables are located in Australia, creates a “deemed security insolvency administrators of the seller, any obligor located interest” (and possibly other security interests) for the purposes of in Australia and any third party creditor or insolvency the PPSA in respect of which a financing statement must be administrator of any such obligor)? registered against the seller. A failure to comply with this registration requirement will not affect the effectiveness of such Yes, subject to the discussion in section 2 above and assuming that an sale although such failure could, in certain circumstances, result in Australian court is an appropriate forum, an Australian court would a third party creditor of the seller or a subsequent purchaser of the recognise that sale as being effective against the seller and third parties. relevant receivables to take priority over the earlier purchaser or the However, a “deemed security interest” (and possibly other security relevant security interest to be extinguished. interests) may be created upon such sale pursuant to the PPSA in respect of which a financing statement should be registered against the 4.3 Perfection for Promissory Notes, etc. What additional or seller. A failure to comply with this registration requirement will not different requirements for sale and perfection apply to affect the effectiveness of such sale although such failure could, in sales of promissory notes, mortgage loans, consumer certain circumstances, result in a third party creditor of the seller or a loans or marketable debt securities? subsequent purchaser of the relevant receivables to take priority over the earlier purchaser or the relevant security interest to be extinguished. The same requirements for sale and perfection will apply as Also, if the obligor is located in Australia, Australian law requirements discussed in question 4.2. as to perfection of such sale would need to be complied with. In addition, any securities that are sold on through the electronic clearing house system, Austraclear, will be subject to Austraclear’s 4 Asset Sales rules in relation to dealing with securities. Mortgages over land, and transfers of mortgages, must be registered 4.1 Sale Methods Generally. In Australia what are the with the relevant State or Territory registry under the Torrens customary methods for a seller to sell receivables to a system. The PPSA introduced rules for perfecting security interests purchaser? What is the customary terminology – is it in promissory notes, other receivables and marketable debt called a sale, transfer, assignment or something else? securities.

In Australia, a sale of receivables is customarily undertaken by way of an assignment. Assignments may be “legal” (where both legal

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4.4 Obligor Notification or Consent. Must the seller or the ineffective the relevant sale of receivables as that sale will still be purchaser notify obligors of the sale of receivables in valid in equity under Australian law. However, the purchaser will order for the sale to be effective against the obligors not be entitled to the benefits of providing notice as described in and/or creditors of the seller? Must the seller or the question 4.4 above and may lose priority to a third party creditor of purchaser obtain the obligors’ consent to the sale of the seller or a subsequent purchaser who provides notice to the receivables in order for the sale to be an effective sale relevant obligors before the earlier purchaser. against the obligors? Does the answer to this question vary if (a) the receivables contract does not prohibit Also, see our discussion in question 4.2 above in relation to the assignment but does not expressly permit assignment; or consequences of a failure to register a financing statement in respect (b) the receivables contract expressly prohibits of the “deemed security interest” (and possibly other security assignment? Whether or not notice is required to perfect interests) created pursuant to the PPSA upon the assignment of a sale, are there any benefits to giving notice – such as receivables by a seller to a purchaser where the relevant obligor is Australia cutting off obligor set-off rights and other obligor an Australian entity or the receivables are located in Australia. defences?

Notification is not necessary for an equitable sale of receivables but 4.6 Restrictions on Assignment; Liability to Obligor. Are notification is necessary for a legal sale of receivables for the sale restrictions in receivables contracts prohibiting sale or to be effective against the obligors and the seller. For securitisation assignment generally enforceable in Australia? Are there exceptions to this rule (e.g., for contracts between transactions, perfection of an equitable sale of receivables into a commercial entities)? If Australia recognises prohibitions legal sale usually occurs after the insolvency of the seller or of the on sale or assignment and the seller nevertheless sells obligor. In the case of the seller, this is usually covered in the receivables to the purchaser, will either the seller or the transaction documents as a “title perfection event” allowing purchaser be liable to the obligor for breach of contract or notification to be made, together with a grant of a power of attorney on any other basis? by the seller in order to facilitate this. In an insolvent administration context, there may be some limitations on exercising See our answer to question 4.4 above. rights under the seller power of attorney.

The benefit of providing notice to obligors in respect of receivables 4.7 Identification. Must the sale document specifically identify that are sold by a seller to a purchaser is that under Australian each of the receivables to be sold? If so, what specific legislation, the provision of such notice is effective to transfer legal information is required (e.g., obligor name, invoice title to those receivables to the purchaser. This minimises the risk number, invoice date, payment date, etc.)? Do the that the obligors can set-off amounts owed to them by the seller and receivables being sold have to share objective minimises the risk that the obligors can discharge their obligations characteristics? Alternatively, if the seller sells all of its under those receivables by paying the seller rather than the receivables to the purchaser, is this sufficient purchaser of those receivables. identification of receivables? Under the PPSA, the sale of receivables by a seller to a purchaser The documentation in relation to the sale of receivables should identify where the relevant obligor is an Australian entity or the receivables the receivables to be sold, in order to satisfy the legal requirements of are located in Australia creates a “deemed security interest” (and contractual certainty. It is common to identify the receivables by possibly other security interests) for the purposes of the PPSA setting out certain key information, such as the party names and invoice which must be registered against the seller to perfect that security numbers. Receivables may also be defined by reference to certain interest (as opposed to the perfection of the sale itself). eligibility criteria set out in the receivables sale contract. Also, under the PPSA prohibitions or restrictions in the receivables Provided that there is sufficient identification of the receivables being contract will not prevent a sale of the relevant receivables by a sold under the receivables sale contract, it is not necessary that the seller to a purchaser; however, the rights of the purchaser are receivables share objective characteristics, although it is rare in a subject to the terms of the receivables contract and other equity, securitisation context that the receivables being sold would not share defence or claim, and the seller may be liable in damages to the such characteristics. If a seller sells all its receivables to the purchaser, obligor for breaching those prohibitions or restrictions. there still must be sufficient identification of what those receivables are to satisfy the legal requirements of contractual certainty. 4.5 Notice Mechanics. If notice is to be delivered to obligors, Under the PPSA and in the context of a typical securitisation whether at the time of sale or later, are there any transaction, parties are generally free to negotiate the terms of their requirements regarding the form the notice must take or sale agreement without the need to satisfy prescriptive form how it must be delivered? Is there any time limit beyond which notice is ineffective – for example, can a notice of requirements. Such sale agreement would be a "security sale be delivered after the sale, and can notice be agreement" under the PPSA given that a "deemed security interest" delivered after insolvency proceedings against the obligor and possibly other security interests would be created upon the have commenced? Does the notice apply only to specific relevant sale for the purposes of the PPSA. However, in order for receivables or can it apply to any and all (including future) a security interest to be enforceable against third parties in the receivables? Are there any other limitations or context of a typical securitisation transaction, the security considerations? agreement providing for that security interest must cover the relevant receivables (which would be “collateral” under the PPSA). There are no specific requirements regarding the form the notice must Under the PPSA, a security agreement that covers collateral is one take or how it must be delivered but that notice must be express, legible which is evidenced by writing signed or adopted or accepted by the and contain sufficient detail identifying the relevant receivable. The grantor by an act, or omission, that reasonably appears to be done notice should apply only to specific receivables and not future with the intention of adopting or accepting the writing and that the receivables. writing must contain a description of the particular collateral or a There are no specific requirements as to the time by which notice statement that a security interest is taken in all of the grantor’s must be given. A failure to provide such notice does not render ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 47 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ashurst Australia

present and after acquired property. 4.10 Future Receivables. Can the seller commit in an There are varying views in the market in relation to the use of enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables “Clayton's contracts” in the context of sales in equity under which purchase agreement (e.g., “future flow” securitisation)? If a written offer to sell receivables is made by a seller to a purchaser so, how must the sale of future receivables be structured and which is accepted by the payment of the relevant purchase price to be valid and enforceable? Is there a distinction by the purchaser (i.e., by conduct of the purchaser). The between future receivables that arise prior to or after the authors’view is that the typical documents used for a Clayton’s seller’s insolvency? contract, together with the acceptance by the relevant secured party by way of payment and adoption of post-transfer terms (such as Yes, but the sale must be structured as an equitable assignment for servicing the accounts and remitting collections to the purchaser), the sale to be valid and enforceable. Please see question 6.5 as to Australia should ordinarily comply with the PPSA in this regard, even though the possible issues that may arise in relation to future receivables the transfer itself may not be evidenced in writing. that arise after the seller’s insolvency.

4.8 Respect for Intent of Parties; Economic Effects on Sale. 4.11 Related Security. Must any additional formalities be If the parties denominate their transaction as a sale and fulfilled in order for the related security to be transferred state their intent that it be a sale will this automatically be concurrently with the sale of receivables? If not all respected or will a court enquire into the economic related security can be enforceably transferred, what characteristics of the transaction? If the latter, what methods are customarily adopted to provide the economic characteristics of a sale, if any, might prevent purchaser the benefits of such related security? the sale from being perfected? Among other things, to what extent may the seller retain (a) credit risk; (b) The transfer of a land mortgage would require the assignee to be interest rate risk; and/or (c) control of collections of registered with the relevant land titles office as the new mortgagee. An receivables without jeopardising perfection? assignee may require the assignor to provide it with a power of attorney in order to facilitate this if it has been agreed that a full legal transfer Characteristics of sales which have been regarded as true sales will not take place unless specified “title perfection events” occur. include: The rules for the assignment of other types of securities, such as a) clear and unambiguous sale language and the terms of the receivables sale contract must be consistent with that charges, are substantially the same as those applicable to the language; and assignment of receivables. However, certain filings and registrations are required under the PPSA. b) the transaction must not have been contrived to give the appearance of certain rights and obligations which are different to those which the parties originally intended. 5 Security Issues A sale may still be regarded as a true sale where: a) the seller is appointed as the servicer of the receivables; 5.1 Back-up Security. Is it customary in Australia to take a b) receivables may be sold at a discount to face value or part of “back-up” security interest over the seller’s ownership the purchase price is deferred; and interest in the receivables and the related security, in the c) the seller may indemnify the purchaser for breach of event that the sale is deemed by a court not to have been warranties relating to the receivables. perfected? Under the PPSA, the sale of receivables by a seller to a purchaser where the relevant obligor is an Australian entity or the receivables It is not customary in Australia that a “back-up” security interest is are located in Australia creates a “deemed security interest” (and obtained over the seller’s ownership interest in receivables and the possibly other security interests) for the purposes of the PPSA in related security. However, it may be sought on a case-by-case basis. respect of which a financing statement must be registered against the seller to perfect that security interest. A failure to comply with 5.2 Seller Security. If so, what are the formalities for the this registration requirement could, in certain circumstances, result seller granting a security interest in receivables and in a third party creditor of the seller or a subsequent purchaser of the related security under the laws of Australia, and for such relevant receivables to take priority over the earlier purchaser or the security interest to be perfected? relevant security interest to be extinguished. Also, the sale of receivables may also create an “in substance” security Steps to perfect the security interest will need to be taken under the interest under the PPSA, for example where the purchaser has PPSA as the PPSA governs the attachment, priority, enforcement recourse to the seller if the relevant obligor does not pay the relevant against third parties and perfection of such security interest. receivable when required, as this kind of arrangement is akin in commercial effect to a secured loan. This security interest would also 5.3 Purchaser Security. If the purchaser grants security over be subject to the registration requirement discussed above. all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities must the purchaser comply with in Australia to grant and 4.9 Continuous Sales of Receivables. Can the seller agree in perfect a security interest in purchased receivables an enforceable manner (at least prior to its insolvency) to governed by the laws of Australia and the related continuous sales of receivables (i.e., sales of receivables security? as and when they arise)? The PPSA governs the granting of security interests by companies. Yes, but the sale must be structured as an equitable assignment. Under the PPSA, a security interest granted over, among other things, receivables, must be registered within 20 business days. Under the PPSA, failure to perfect a security interest granted over

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receivables may mean that the financier may lose its priority or perfected by way of registration. Also, if the secured party is an have its interest extinguished. Unperfected security interests may authorised deposit-taking institution (ADI) and it has been granted also be void upon the administration or liquidation of the purchaser. a security interest in a bank account held with it, that security In addition to the registration requirements, the security interest interest will be automatically perfected by control. may also be liable for mortgage stamp duty in New South Wales Australian courts do recognise a foreign-law grant of security taken and such duty must be paid within three months after the date of over a bank account located in Australia. Parties are free to choose the first signing the document creating that security interest. However, law to govern the security agreement and Australian courts will apply we note that, as at the time of writing, from 1 July 2012, stamp duty the chosen law, provided that the choice is made at the time of entry will no longer be payable on transfers of non-land business assets, into the contract and subject to certain qualifications, such as where New South Wales located unquoted shares and units and mortgages the operation of the choice of law would be contrary to public policy. affecting New South Wales property. However, Australian law will be relevant to perfecting that interest to Australia Further perfection steps may be necessary if security interests are the extent the property is located in Australia. A secured party in taken over the proceeds of the relevant secured receivables. respect of a bank account in Australia will need to take steps to perfect its interest, as discussed above in question 5.3.

5.4 Recognition. If the purchaser grants a security interest in receivables governed by the laws of Australia, and that 6 Insolvency Laws security interest is valid and perfected under the laws of the purchaser’s country, will it be treated as valid and 6.1 Stay of Action. If, after a sale of receivables that is perfected in Australia or must additional steps be taken in otherwise perfected, the seller becomes subject to an Australia? insolvency proceeding, will Australia’s insolvency laws automatically prohibit the purchaser from collecting, Additional steps must be taken in Australia. For instance, under the transferring or otherwise exercising ownership rights over PPSA, the secured party will need to register a financing statement the purchased receivables (a “stay of action”)? Does the in respect of its security interest over the receivables of the insolvency official have the ability to stay collection and purchaser that are governed by the laws of Australia. The fact that enforcement actions until he determines that the sale is the security interest may have been perfected under the laws of the perfected? Would the answer be different if the purchaser’s jurisdiction will not change this. purchaser is deemed to only be a secured party rather than the owner of the receivables?

5.5 Additional Formalities. What additional or different If the purchaser has perfected its security interest created in respect requirements apply to security interests in or connected to of its purchase of the relevant receivables under the PPSA, the insurance policies, promissory notes, mortgage loans, purchaser should be able to enforce its rights against other persons, consumer loans or marketable debt securities? subject to another secured party asserting a higher priority to the receivables, or a transferee taking the receivables free of the The PPSA introduced rules for certain types of property, including: purchaser’s “security interest”. a) Promissory notes – under the PPSA, a security interest under promissory notes may also be perfected by possession. If there has been a true sale by way of a legal assignment of the receivables, the insolvency of the seller should not limit the purchaser’s b) Marketable debt securities – under the PPSA, marketable debt securities constitute investment instruments and may be rights over the receivables. If there has been a true sale by way of an perfected by possession or control (i.e., where the issuer of equitable assignment only, there is some risk that the purchaser could the marketable debt securities registers the secured provider be prohibited from pursuing collection and enforcement actions whilst as the registered owner of the instrument). the seller is subject to a voluntary administration. This is because, The PPSA does not, however, apply to insurance policies generally, the voluntary administrator is the only person permitted to themselves although it does apply to a transfer of a right to an deal with the property of the company, which includes legal and insurance payment or other payment as indemnity or compensation equitable property of the company. However, this is unlikely to for loss of, or damage to collateral (or proceeds of collateral). prevent the purchaser giving a notice of assignment to the obligors and then collecting from the obligors themselves. If there is no true sale, such that the transfer of receivables actually 5.6 Trusts. Does Australia recognise trusts? If not, is there a secures the payment or performance of an obligation, then the mechanism whereby collections received by the seller in following also applies: respect of sold receivables can be held or be deemed to be held separate and apart from the seller’s own assets a) if the interest of the purchaser does not secure a fresh until turned over to the purchaser? advance of funds, and the interest is less than six months prior to the liquidation of the seller, the purchaser’s interest Trusts are recognised in Australia. Collections trusts are commonly could be set aside by a liquidator appointed to the seller; used in Australia in relation to receivables. b) if the interest of the purchaser is not perfected under the PPSA, or if the interest is perfected by registration only, and the registration is not before voluntary administration or liquidation 5.7 Bank Accounts. Does Australia recognise escrow and within 20 business days of the security agreement or 6 accounts? Can security be taken over a bank account months prior to the liquidation or voluntary administration of located in Australia? If so, what is the typical method? the seller, the purchaser’s interest will vest in the seller upon the Would courts in Australia recognise a foreign-law grant of voluntary administration or liquidation of the seller; and security (for example, an English law debenture) taken c) even if the interest is registered as required by the over a bank account located in Australia? Corporations Act, or perfected under the PPSA, the purchaser may be prohibited from pursuing collection and Escrow accounts are recognised in Australia. Under the PPSA, a enforcement actions whilst the seller is subject to a voluntary security interest may be taken over a bank account in Australia and administration.

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6.2 Insolvency Official’s Powers. If there is no stay of action unsecured claim against the seller in respect of any loss it suffers in under what circumstances, if any, does the insolvency relation to the failure to complete. official have the power to prohibit the purchaser’s If a true sale of future receivables has occurred, and the purchase exercise of rights (by means of injunction, stay order or other action)? price for the receivables has been paid by the purchaser prior to the initiation of insolvency proceedings, subject to the discussion in questions 6.1 and 6.3, the seller’s insolvency will not of itself affect Subject to the circumstances discussed in questions 6.1 and 6.3, an the purchaser’s rights as purchaser of the receivable. insolvency official cannot prohibit the purchaser’s exercise of rights in connection with an effective sale of the receivables. 7 Special Rules

Australia 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or 7.1 Securitisation Law. Is there a special securitisation law reverse transactions that took place during a “suspect” or (and/or special provisions in other laws) in Australia “preference” period before the commencement of the establishing a legal framework for securitisation insolvency proceeding? What are the lengths of the transactions? If so, what are the basics? “suspect” or “preference” periods in Australia for (a) transactions between unrelated parties and (b) transactions between related parties? Australia does not have a specific body of securitisation law, although it is one of the oldest and most active securitisation markets in the world. Relevant laws include laws governing Under Division 2 of Part 5.7B of the Corporations Act, if a taxation, corporations, financial services licensing, competition and transaction takes place within a specified “suspect” or “preference” banking. Australia also has anti-money laundering legislation that period, a liquidator may be able to set aside the transaction if it is a makes it an offence to deal with the proceeds of crime or to finance “voidable transaction”. Voidable transactions include: unfair terrorism, and sets a minimum threshold for customer identification preferences; uncommercial transactions; unfair loans to the or “know your customer” laws. Further, the NCCP and National company; and unreasonable director related transactions. Credit Code are in place to protect the rights of consumers who take A liquidator is able to set aside an uncommercial transaction if it is out credit for non-business purposes and related parties. entered into, or an act was done for the purpose of giving effect to The Australian Prudential Regulatory Authority has the power under it, during the two years ending on the relation-back day, which is section 11AF the Banking Act 1959 (Cth) to establish prudential the day that the relevant liquidation is deemed to have commenced. standards for ADIs. If an ADI acts as a sponsor to, sells its assets to, or A liquidator is able to set aside an unfair preference if the transaction provides a facility to a securitisation special purpose entity (SPE), the was entered into, or an act was done for the purpose of giving effect provisions of Australian Prudential Standard 120 apply. to it, during the six months ending on the relation-back day or after All entities involved in securitisation programmes also need to be that day but on or before the day when the winding up began. aware of their obligations to comply with the Privacy Act 1988 (Cth) If the transaction involved a related entity, the relevant period is (Privacy Act), which regulates, for example, how organisations extended to four years ending on the relation-back day. collect, use and disclose personal information. If the transaction is an unreasonable director-related transaction, the The PPSA also creates a legal framework that will need to be complied transaction will be voidable if it was entered into, or an act was with in the context of the sale of receivables to a SPE, the granting of done for the purposes of giving effect to the transaction, during the a security interest by the SPE to a security trustee and security interests four years ending on the relation-back day or after that day but on that may arise in respect of the receivables themselves. or before the day when the winding up began.

7.2 Securitisation Entities. Does Australia have laws 6.4 Substantive Consolidation. Under what facts or specifically providing for establishment of special purpose circumstances, if any, could the insolvency official entities for securitisation? If so, what does the law consolidate the assets and liabilities of the purchaser with provide as to: (a) requirements for establishment and those of the seller or its affiliates in the insolvency management of such an entity; (b) legal attributes and proceeding? benefits of the entity; and (c) any specific requirements as to the status of directors or shareholders? There is no general right under Australian law for an insolvency official to consolidate the assets and liabilities of the purchaser with There are no laws in Australia specifically providing for the those of the seller or its affiliates in an insolvency proceeding. establishment of a SPE for securitisation. In practice, the requirements for SPEs are typically driven by rating 6.5 Effect of Proceedings on Future Receivables. What is the agencies and government regulators. Special purpose trusts are the effect of the initiation of insolvency proceedings on (a) most common form of SPE, but companies are sometimes used also. sales of receivables that have not yet occurred or (b) on sales of receivables that have not yet come into existence? 7.3 Non-Recourse Clause. Will a court in Australia give effect to a contractual provision (even if the contract’s governing law is the law of another country) limiting the Sales of receivables cannot occur without the consent of the recourse of parties to available funds? insolvency official or the relevant Australian court after commencement of insolvency proceedings that have led to the A limited-recourse clause, or a clause which contractually limits the appointment of an insolvency official to the seller. liability of the SPE to specified assets, will generally be enforceable If a contract for the sale has been entered into, but the purchaser has in Australia if the contract in which it appears is enforceable. not paid the purchase price (or otherwise has not acquired an Enforceability of the contract will be guided by the principles of interest in the receivables), the purchaser will be left with an contract law, subject to certain legislation prohibiting the exclusion

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of liability, such as the Competition and Consumer Act 2010 (Cth) securities are regulated by the NCCP, the purchaser may be required and the NCCP. to hold an Australian Credit Licence (ACL) or be appointed as a credit representative of an ACL holder and to comply with the provisions of the NCCP. There are licensing exemptions applicable 7.4 Non-Petition Clause. Will a court in Australia give effect to a contractual provision (even if the contract’s governing to debt collectors acting for an ACL holder and for certain law is the law of another country) prohibiting the parties participants in a securitisation or a fund raising arrangement. from: (a) taking legal action against the purchaser or another person; or (b) commencing an insolvency 8.2 Servicing. Does the seller require any licences, etc., in proceeding against the purchaser or another person? order to continue to enforce and collect receivables following their sale to the purchaser, including to appear A non-petition or no-action clause should generally be enforceable, before a court? Does a third party replacement servicer Australia subject to the exceptions mentioned in question 7.3 above and require any licences, etc., in order to enforce and collect general contractual principles. We are not, however, aware of sold receivables? whether or not a non-petition or no-action clause has been tested in an Australian court. If any of the obligors are consumers, the NCCP requires the seller to hold an Australian Credit Licence or be registered with ASIC as a Carried Over Instrument (COI) lender. The seller must retain its 7.5 Independent Director. Will a court in Australia give effect to a contractual provision (even if the contract’s governing ACL or COI registration if the seller wishes to remain the lender on law is the law of another country) or a provision in a record, and to enforce its rights or security against those consumers party’s organisational documents prohibiting the directors following the sale of its interest in the receivables to the purchaser. from taking specified actions (including commencing an In some circumstances, a third party replacement servicer may insolvency proceeding) without the affirmative vote of an require an ACL or to be appointed as a “credit representative” of the independent director? ACL holding seller. This will not be required where the servicer, the servicer’s activities and the relevant securitisation arrangement A director’s powers are generally regulated through a company’s all fall within the ambit of the NCCP’s “securitisation exemptions”. constitution and statute. Directors have a range of duties that they must discharge in order to avoid liability, for example, they must not act for an improper purpose, and must act with unfettered 8.3 Data Protection. Does Australia have laws restricting the discretion. As a general matter, there is no reason why Australian use or dissemination of data about or provided by obligors? If so, do these laws apply only to consumer courts would not give effect to certain contractual provisions obligors or also to enterprises? prohibiting directors from taking certain specified actions without the vote of an independent director. Australia does have laws restricting the use or dissemination of personal information or information that may be used to identify an 8 Regulatory Issues individual. These laws are primarily contained in the Privacy Act and the National Privacy Principles (NPP) that are a Schedule to that Act. These laws apply only to information relating to 8.1 Required Authorisations, etc. Assuming that the individuals rather than corporate entities. Australian privacy laws purchaser does no other business in Australia, will its purchase and ownership or its collection and enforcement bear some resemblance to their EU counterpart but are far less of receivables result in its being required to qualify to do onerous and prescriptive – with the exception of those laws relating business or to obtain any licence or its being subject to to consumer creditworthiness information. regulation as a financial institution in Australia? Does the Commercial credit reporting is lightly regulated in Australia and is answer to the preceding question change if the purchaser not subject to most of the substantive provisions of the Privacy Act. does business with other sellers in Australia? The NPP govern a private sector organisation’s collection, storage (including security), use (including offshore transfer), disclosure, As a general rule, doing business with one or more sellers in Australia and access rules applying to personal information collected about or purchasing and enforcing receivables in Australia will amount to individuals. carrying on a business in Australia within the terms of the Corporations Act, and consequently will result in a purchaser or collector needing to The common law duty of confidentiality (also known as a ‘banker’s become registered as a foreign corporation carrying on business in duty of confidentiality’) also applies to the use and disclosure of Australia with the Australian corporate regulator (ASIC). information provided by both corporate and individual obligors to a financier. Enforcing receivables in Australia and engaging in receivable collecting activities, on behalf of someone else, may also require the purchaser to be licensed under State or Territory receivable collecting 8.4 Consumer Protection. If the obligors are consumers, will laws. Whether a State or Territory licence will be required will the purchaser (including a bank acting as purchaser) be depend, in part, upon whether the relevant obligors live in a State or required to comply with any consumer protection law of Territory that has a receivable collecting licensing regime. Australia? Briefly, what is required? Separately, collecting receivables and enforcing securities may be If the obligors are consumers, a purchaser will be required to regulated by the NCCP, as these activities fall within the ambit of comply with the following laws: engaging in “credit activities” (which is broadly defined in that Act). That said, such activities will only be potentially regulated by a) The ASIC Act – At a high level, this legislation requires the purchaser to refrain from engaging in unconscionable, unfair the NCCP where the relevant obligors are consumers under or misleading or deceptive conduct in dealing with the obligor. regulated credit contracts. The NCCP does not govern the Separately, ASIC also monitors and enforces compliance with collection or enforcement of receivables owed by companies. the Debt Collecting Code of Conduct (inclusive of various If the purchaser’s activities in collecting receivables and enforcing State laws) which governs the way in which the purchaser may

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deal and communicate with obligors. (TOFA) apply. The TOFA rules currently apply to entities including b) The NCCP – As noted under questions 8.1 and 8.2, in some securitisation vehicles, authorised deposit taking institutions, or other circumstances a purchaser will be subject to the consumer financial sector entities with an aggregate turnover of more than $20 protection provisions in the NCCP. This includes the “linked million. However, Technical Discussion Paper TDP 2011/1 credit provider” provisions which can link the credit contract Securitisation and TOFA indicates the Australian Taxation Office’s to the fate of a “tied” supply contract. preliminary view that TOFA may not apply to receivables held by a securitisation vehicle. This view has not been finalised and, 8.5 Currency Restrictions. Does Australia have laws accordingly, the seller or purchaser will need to consider the potential restricting the exchange of Australia’s currency for other application of the TOFA rules in light of their particular circumstances. currencies or the making of payments in Australia’s If applicable, the TOFA rules generally ignore distinctions between Australia currency to persons outside the country? income and capital and require the recognition of gains and losses over the life of the financial arrangement. The seller or purchaser There are laws restricting the amount of physical currency that can be may elect to apply one of five methods to take account of a gain or taken out of Australia, but there are no laws preventing payments to an loss under the TOFA rules, and if no election is made either the overseas person being made in Australian currency, or on the amount default accrual method will apply (if the gain or loss is sufficiently of Australian currency that may be exchanged for another currency. certain) or the realisation method will apply (if the gain or loss is Australia does have laws aimed at preventing and controlling financial not sufficiently certain). transactions that may have a money laundering or terrorist financing If the TOFA rules do not apply, the seller or purchaser must risk, including some currency exchange transactions. These laws are determine its taxation liability on the basis of the tax rules for the primarily contained in the Anti-Money Laundering and Counter- derivation of income and incurring of expenses and not in Terrorism Financing Act 2006 (Cth) (AML/CTF Act). The accordance with Australian accounting principles. AML/CTF Act also requires international funds transfers (IFTIs) to be monitored and reported to the regulatory authority – AUSTRAC. IFTIs that are above a certain threshold or are deemed to be suspicious 9.3 Stamp Duty, etc. Does Australia impose stamp duty or must also be reported to AUSTRAC. other documentary taxes on sales of receivables?

Separately, persons who trade in foreign and Australian currencies Stamp duty is imposed separately in each State and Territory of in Australia or with Australian residents may require an Australian Australia on certain documents and transactions. There can be Financial Services Licence under the Corporations Act in certain significant differences between the legislation in each State and circumstances. Territory. Therefore, it is necessary to carefully consider the stamp duty position in each State and Territory in a securitisation transaction. 9 Taxation Stamp duty issues may arise in a securitisation transaction in relation to the sale of the receivables and related securities, the creation of the securitisation trust and the security trust, the issue / 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser redemption / transfer of units in the securitisation trust and the grant be subject to withholding taxes in Australia? Does the of security (such as a charge). answer depend on the nature of the receivables, whether However, if these transactions are structured in a particular manner, they bear interest, their term to maturity, or where the stamp duty is generally not payable in any State or Territory in seller or the purchaser is located? Australia because the transactions are either not dutiable in the relevant jurisdiction or an exemption applies. A number of An obligor may be required to withhold an amount on account of jurisdictions have specific securitisation exemptions. It is also tax from payments on receivables, depending upon the nature of the proposed that all relevant areas of duty potentially applicable to receivable and the location of the seller or purchaser. Interest or securitisation will be abolished over the next few years. royalties (that may include payments for the use of industrial or commercial equipment) may be subject to withholding tax if paid to a non-resident (unless derived through a permanent establishment 9.4 Value Added Taxes. Does Australia impose value added tax, sales tax or other similar taxes on sales of goods or in Australia) or to a resident where the interest or royalty is derived services, on sales of receivables or on fees for collection through a permanent establishment outside of Australia. agent services? The rate of withholding is 10% for interest and 30% for royalties, although the rate may be reduced by the operation of a double tax In Australia, a value added tax known as a Goods and Services Tax agreement. Exemptions for interest withholding tax may also be (GST) applies to taxable supplies of goods and services at the rate available under the applicable double tax agreement and for certain of 10%. Input taxed and GST-free supplies are not subject to GST. publicly issued debentures and debt interests. In a typical securitisation arrangement the sale of the receivables An obligor may be required to withhold an amount from a payment to and related securities, the issue of notes or units and the provision a resident seller or purchaser if the seller or purchaser does not provide of security will generally be input taxed supplies and will not be its Tax File Number or Australian Business Number to the obligor. subject to GST. In some circumstances, such as supplies to non- residents, these supplies may be GST-free. 9.2 Seller Tax Accounting. Does Australia require that a Fees for collections agent services and trustee services will generally specific accounting policy is adopted for tax purposes by be taxable supplies and will be subject to GST. The securitisation trust the seller or purchaser in the context of a securitisation? is generally not entitled to claim back the full amount of the GST on these services as input tax credits. This is because the securitisation There is no requirement for the seller or purchaser to adopt a specific trust is making input taxed supplies (issuing securities and acquiring accounting policy for tax purposes in the context of a securitisation receivables). However, special rules give the securitisation trust an unless the tax rules for the Taxation of Financial Arrangements entitlement to a reduced credit of the GST on certain services such as

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servicer and trustee services. The reduced credit is generally 75% of only be liable to pay tax on Australian sourced income. The the GST on the acquisition. However, for certain trustee services, this purchaser’s liability to tax in Australia will depend upon a number is proposed to be reduced to 55% from 1 July 2012. of factors including the nature of the receivables and the extent of the activities undertaken by the purchaser in Australia. Certain income of the purchaser may be subject to withholding tax in 9.5 Purchaser Liability. If the seller is required to pay value added tax, stamp duty or other taxes upon the sale of Australia including interest and royalties. receivables (or on the sale of goods or services that give If the purchaser is resident in a country that is subject to a double rise to the receivables) and the seller does not pay, then taxation agreement with Australia, the purchaser would generally will the taxing authority be able to make claims for the only be liable to tax in Australia to the extent that the income is unpaid tax against the purchaser or against the sold attributable to a permanent establishment in Australia as defined in receivables or collections? that double tax agreement. Australia Liability to stamp duty is not dependent on conducting business in The sale of receivables is generally not subject to stamp duty or GST. Australia but on entering into certain types of transactions. GST liability is dependent upon carrying on an enterprise and 9.6 Doing Business. Assuming that the purchaser conducts having a specified turnover over the GST registration threshold. no other business in Australia, would the purchaser’s Consideration for input taxed supplies is not counted in determining purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of this turnover. Therefore, the purchaser in these circumstances the receivables against the obligors, make it liable to tax would not be required to register for GST but could choose to in Australia? register for GST in order to claim GST input tax credits.

If the purchaser is a non resident for tax purposes, it will generally

Paul Jenkins Jamie Ng

Ashurst Ashurst Level 36, Grosvenor Place Level 26, 181 William Street 225 George Street Melbourne VIC 3000 Sydney NSW 2000 Australia Australia Tel: +61 3 9679 3753 Tel: +61 2 9258 6266 Fax: +61 3 9679 3111 Fax: +61 2 9258 6999 Email: [email protected] Email: [email protected] URL: www.ashurst.com URL: www.ashurst.com

Paul Jenkins is a banking and debt capital markets partner with a Jamie specialises in the areas of structured finance, securitisation broad based practice covering most forms of corporate financing and debt capital markets, derivatives and property finance. Jamie arrangements. He is known in particular for his expertise in the has extensive experience in the securitisation field (acting for a corporate finance, debt capital markets, securitisation, structured cross-section of issuers, funders, trustees and dealers such as finance and derivatives areas. Cuscal Limited, The Bank of Tokyo-Mitsubishi UFJ and Bank of Paul is recognised as a leading individual in global legal directories America Merrill Lynch) and in highly complex international including Chambers Asia Pacific, 2011, IFLR 1000, 2011, Asia structured finance transactions where he has acted for Société Pacific Legal 500, 2010/2011 and Euromoney’s Expert Guide to Générale, Dresdner Bank and others. Structured Finance & Securitisation Lawyers, 2009. He is one of Jamie is listed as a leading individual in the areas of Structured only three Australian lawyers recognised by Chambers Asia Pacific, Finance & Securitisation and Debt Capital Markets, IFLR1000, 2011 as being band 1 for debt capital markets. 2011. He is also listed as a leading individual in the area of According to Chambers Asia Pacific, 2011, Paul “earns Securitisation, Chambers Global, 2011, where he is highlighted consistent praise for his banking and finance expertise. Sources for “deep knowledge of structured finance and legislative say he is “commercial, accessible and knows the market”. developments”.

Ashurst is a global law firm with over 400 partners and 1600 lawyers in 24 offices across 4 continents. We have advised on some of the largest and most complex deals in UK and Australian corporate history. Our securitisation team is part of the firm’s finance practice and has worked on transactions involving a broad array of asset classes, including RMBS (including reverse mortgages), CMBS, credit cards and other consumer debt, equipment leases, cinemas, IP rights, real estate pre-sales contracts, pub receivables, trade receivables, auto loans, net-interest margin, infrastructure and off-take cashflows. Our team has a particular emphasis on exotic asset-backed securities, a speciality enhanced by the close integration of our securitisation practice with our project finance, asset finance, real estate finance and leveraged finance practices. We have extensive experience in all securitisation structures, including whole of business, future flow, secured loan, true sale and synthetic securitisations. Our securitisation partners also have significant experience advising in relation to repackaging programmes, complex securitisation restructurings, and whole loan portfolio acquisitions including portfolios of mortgages and unsecured consumer debt. We act for a range of securitisation participants, including issuers, originators, professional trustees, SPV managers, arrangers, dealers, funders and wrappers.

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Fellner Wratzfeld & Partners Markus Fellner

1 Receivables Contracts 1.3 Government Receivables. Where the receivables contract has been entered into with the government or a government agency, are there different requirements and 1.1 Formalities. In order to create an enforceable debt laws that apply to the sale or collection of those obligation of the obligor to the seller, (a) is it necessary receivables? that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone There is no special law regulating the sale or collection of sufficient; and (c) can a receivable “contract” be deemed receivables from governmental entities. Such entities, however, are to exist as a result of the behaviour of the parties? treated differently than private sector firms with regard to non- assignment clauses. Under the Austrian General Civil Code (which Austrian law does not require the fulfilment of any special includes governmental entities) (ABGB), non-assignment clauses formalities for receivable contracts. Such contracts can be entered in contracts between a public law corporate body or its subsidiaries into orally, in written form or even be implied based on the conduct on the one hand and an applicant for subsidies on the other are of the parties, whereby written contracts are to be recommended for enforceable, whereas such clauses in agreements between private reasons of proof. An invoice alone does not constitute a contract sector firms are not. but may evidence its existence. Behaviour of the parties can indicate intent of the parties to conclude a contract, but must indeed show a mutual intent to do so. 2 Choice of Law – Receivables Contracts

1.2 Consumer Protections. Do Austria’s laws (a) limit rates of 2.1 No Law Specified. If the seller and the obligor do not interest on consumer credit, loans or other kinds of specify a choice of law in their receivables contract, what receivables; (b) provide a statutory right to interest on late are the main principles in Austria that will determine the payments; (c) permit consumers to cancel receivables for governing law of the contract? a specified period of time; or (d) provide other noteworthy rights to consumers with respect to receivables owing by Regulation (EC) No 593/2008 of the European Parliament and of them? the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I Regulation), which entered into force in all EU There are no specific limit rates of interest on consumer credit, Member States, except for Denmark, on 17 December 2009, loans or other kinds of receivables stipulated by law. However, governs the choice of law in the European Union. It is based upon there is a general limit resulting from the prohibition against and replaces the Convention on the Law Applicable to Contractual contracts violating public policy. Under Austrian law, under which Obligations 1980. Chapter I Article 4 of the Rome I Regulation circumstances high interest rates violate public policy is a case-by regulates which law applies in case the parties to an agreement have case analysis. Austrian law provides for a right of the creditor to not agreed on the applicable law. Depending on the kind of claim interest on late payments. Unless agreed otherwise between contract, different connecting factors are decisive. If a contract is the parties, the applicable interest rate stipulated by law applies. not listed in clause 1 of Article 4, it is governed by the law of the The statutory interest rate generally is 4% p.a. for contracts and 8% country where the party required to effect the characteristic p.a. over the base rate in case of claims arising out of contracts performance of the contract has its habitual residence, unless it is between companies in business transactions. There are no special clear from all the circumstances of the case that the contract is legal entitlements allowing consumers to cancel receivables for a manifestly more closely connected with another country, in which specified period of time. The legal venue for claims against case the law of such country applies. If the applicable law cannot consumers is always the competent court of their residence. be determined according to the aforementioned principles, as a fall- Moreover, Austrian law has special consumer protection provisions back rule a contract is governed by the law of the country with concerning the permissible content of general terms and conditions, which it is most closely connected. If the parties to a receivable which are mandatory in nature. contract have not agreed which law applies, since receivable contracts are not listed in clause 1 of Article 4, the contract is governed by the national law according to the principles outlined above. In most cases this is the law of the obligor’s home country. If the obligor is a customer within the meaning of the Consumer Protection Act (Konsumentenschutzgesetz), the choice of the law of 54 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Fellner Wratzfeld & Partners Austria

a country that is not a European Economic Area Member State in 3.2 Example 1: If (a) the seller and the obligor are located in some respects only applies to the extent it is more advantageous to Austria, (b) the receivable is governed by the law of the customer than the law of the European Economic Area Member Austria, (c) the seller sells the receivable to a purchaser State which would have applied without this choice of law. The located in a third country, (d) the seller and the purchaser restrictions on the permissible content of general terms and choose the law of Austria to govern the receivables purchase agreement, and (e) the sale complies with the conditions apply to consumer contracts irrespective of the choice of requirements of Austria, will a court in Austria recognise law of the parties to such contract. that sale as being effective against the seller, the obligor and other third parties (such as creditors or insolvency 2.2 Base Case. If the seller and the obligor are both resident administrators of the seller and the obligor)?

in Austria, and the transactions giving rise to the Austria receivables and the payment of the receivables take A court in Austria will recognise the seller’s and the purchaser’s place in Austria, and the seller and the obligor choose the choice of the law of Austria irrespective of where the purchaser is law of Austria to govern the receivables contract, is there resident. any reason why a court in Austria would not give effect to their choice of law? 3.3 Example 2: Assuming that the facts are the same as No, there is no such reason. Example 1, but either the obligor or the purchaser or both are located outside Austria, will a court in Austria recognise that sale as being effective against the seller 2.3 Freedom to Choose Foreign Law of Non-Resident Seller and other third parties (such as creditors or insolvency or Obligor. If the seller is resident in Austria but the administrators of the seller), or must the requirements of obligor is not, or if the obligor is resident in Austria but the the obligor’s country or the purchaser’s country (or both) seller is not, and the seller and the obligor choose the be taken into account? foreign law of the obligor/seller to govern their receivables contract, will a court in Austria give effect to the choice of Since there are no formal requirements for the transfer of foreign law? Are there any limitations to the recognition receivables, an Austrian court will give effect to the parties’ choice of foreign law (such as public policy or mandatory of law. principles of law) that would typically apply in commercial relationships such that between the seller and the obligor under the receivables contract? 3.4 Example 3: If (a) the seller is located in Austria but the obligor is located in another country, (b) the receivable is In general, the parties to a receivable contract are free to choose the governed by the law of the obligor’s country, (c) the seller applicable law. This freedom is restricted in cases where all parties sells the receivable to a purchaser located in a third to the receivable contract are resident in Austria and Austria is the country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables place of performance. In such constellation the mandatory purchase agreement, and (e) the sale complies with the provisions of Austrian laws must be applied to a receivable requirements of the obligor’s country, will a court in contract. In addition, foreign law will not be recognised to the Austria recognise that sale as being effective against the extent it violates Austrian public policy. Furthermore, for contracts seller and other third parties (such as creditors or with Austrian consumers, see question 2.1. insolvency administrators of the seller) without the need to comply with Austria’s own sale requirements?

2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in Austria? An Austrian court will recognise such sale as being effective because under Austrian law there are no formal requirements for the Yes, it has been in force since 1 January 1989. transfer of receivables.

3.5 Example 4: If (a) the obligor is located in Austria but the 3 Choice of Law – Receivables Purchase seller is located in another country, (b) the receivable is Agreement governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country to govern the receivables purchase agreement, and (d) 3.1 Base Case. Does Austria’s law generally require the sale the sale complies with the requirements of the seller’s of receivables to be governed by the same law as the law country, will a court in Austria recognise that sale as governing the receivables themselves? If so, does that being effective against the obligor and other third parties general rule apply irrespective of which law governs the (such as creditors or insolvency administrators of the receivables (i.e., Austria’s laws or foreign laws)? obligor) without the need to comply with Austria’s own sale requirements? The receivable contract and the contract out of which the receivables arise can be governed by different laws, irrespective of An Austrian court will recognise such sale as being effective which law governs the receivables. The enforcement of receivables because, under Austrian law, there are no formal requirements for governed by Austrian law is subject to Austrian law. the transfer of receivables.

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3.6 Example 5: If (a) the seller is located in Austria There are no additional requirements for the assignment of such (irrespective of the obligor’s location), (b) the receivable is promissory notes, but they are usually delivered physically in the governed by the law of Austria, (c) the seller sells the course of the sale of the receivables. receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the Mortgage loans are a form of security frequently used in Austria. purchaser’s country to govern the receivables purchase Mortgages are accessory to the debt they secure and cannot be agreement, and (e) the sale complies with the transferred without it. Mortgages must be registered with the land requirements of the purchaser’s country, will a court in register to be legally valid. A mortgage can either be registered for Austria recognise that sale as being effective against the a maximum amount or for the actual amount of a debt. In order to seller and other third parties (such as creditors or be registered with the land register, a mortgage for a maximum insolvency administrators of the seller, any obligor located

Austria amount can only be transferred by notarised written agreement in Austria and any third party creditor or insolvency under acceptance of the obligor, which is why a receivable purchase administrator of any such obligor)? contract, pursuant to which such mortgage shall be transferred, must comply with these formal requirements. Agreements on the An Austrian court will recognise such sale as being effective transfer of other mortgages do not have to comply with these formal because under Austrian law there are no formal requirements for the requirements. transfer of receivables. Under the Consumer Credit Act (Verbraucherkreditgesetz), which implemented EU Directive 2008/48/EG into Austrian law, the 4 Asset Sales consumer has to be informed if the consumer credit agreement itself or claims of the creditor arising therefrom are transferred to a third party, unless the original creditor, with the consent of the assignee, 4.1 Sale Methods Generally. In Austria what are the continuously acts as creditor in relation to the consumer. Although customary methods for a seller to sell receivables to a purchaser? What is the customary terminology – is it this provision is mandatory, its violation does not lead to the called a sale, transfer, assignment or something else? invalidity of the assignment. The additional requirements for the sale and perfection of There are no special formalities for the sale of receivables. The sole marketable securities differ depending on the type of security. Each requirement is a mutual agreement between the seller and purchaser transfer of ownership of securities requires a corresponding on the sale of the respective receivables. For reasons of proof, this agreement between the seller and the purchaser. The transfer of agreement will normally be entered into in written form, which, bearer securities additionally requires either handing over of the however, is not mandatory under Austrian law. Furthermore, it is securities to the purchaser or, as the case may be, instruction to the not necessary, for the effectiveness of the sale of the receivables, to possessor to hold them in the future for the purchaser. Registered inform the obligor of the sale. The obligor, however, is entitled to securities are transferred by way of assignment of the rights they pay its debt to the seller and thereby discharge the debt until it has certify. Endorsed securities have to be endorsed by the purchaser received notification of the sale. The customary terminology is that and transferred to its possession. a seller sells receivables under a receivables purchase agreement to a purchaser, whereas in such agreements also the term assignment 4.4 Obligor Notification or Consent. Must the seller or the and corresponding terms are customary. purchaser notify obligors of the sale of receivables in order for the sale to be effective against the obligors 4.2 Perfection Generally. What formalities are required and/or creditors of the seller? Must the seller or the generally for perfecting a sale of receivables? Are there purchaser obtain the obligors’ consent to the sale of any additional or other formalities required for the sale of receivables in order for the sale to be an effective sale receivables to be perfected against any subsequent good against the obligors? Does the answer to this question faith purchasers for value of the same receivables from vary if (a) the receivables contract does not prohibit the seller? assignment but does not expressly permit assignment; or (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect As outlined in question 4.1, there are no specific formal a sale, are there any benefits to giving notice – such as requirements for the sale of receivables. A subsequent sale of cutting off obligor set-off rights and other obligor receivables already sold is impossible under Austrian law since they defences? have already been transferred to the first purchaser. For this reason, an acquisition in good faith generally is not possible although there Under Austrian law, generally sales of receivables need not be are exceptions for sham transactions, acceptance bills and cheques. notified to obligors nor be approved by them. To the contrary, sales Nevertheless, if the obligor has not been informed of the first valid of receivables between entrepreneurs concluded in the course of sale but only of the second invalid sale, it can pay to the second their business activities are valid even if the receivable contract purchaser with a debt discharging effect. In such case, the first between the seller and the obligor contains a non-assignment clause purchaser is entitled to a claim based on unjust enrichment against (for the exception concerning governmental entities, see question the second purchaser. 1.3 above). Breach of a non-assignment clause, however, will subject the assignor to possible damage claims of the obligor. Such 4.3 Perfection for Promissory Notes, etc. What additional or damage claims may not be set off against the assigned receivables different requirements for sale and perfection apply to and an assignee will not be liable only because it knew that a non- sales of promissory notes, mortgage loans, consumer assignment clause had been in place between the seller and the loans or marketable debt securities? obligor.

In Austria, promissory notes as certificates of debt are not securities and generally only document obligations arising out of a loan.

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4.5 Notice Mechanics. If notice is to be delivered to obligors, economical ownership or both the economical and the legal whether at the time of sale or later, are there any ownership are transferred to the purchaser. requirements regarding the form the notice must take or how it must be delivered? Is there any time limit beyond which notice is ineffective – for example, can a notice of 4.9 Continuous Sales of Receivables. Can the seller agree in sale be delivered after the sale, and can notice be an enforceable manner (at least prior to its insolvency) to delivered after insolvency proceedings against the obligor continuous sales of receivables (i.e., sales of receivables have commenced? Does the notice apply only to specific as and when they arise)? receivables or can it apply to any and all (including future) receivables? Are there any other limitations or Yes, a seller can sell future receivables (see question 4.7) if the considerations? receivables are capable of being identified. Austria

Under Austrian law, there is no need to give notice to obligors about 4.10 Future Receivables. Can the seller commit in an a sale of receivables (see question 4.4). enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables 4.6 Restrictions on Assignment; Liability to Obligor. Are purchase agreement (e.g., “future flow” securitisation)? If restrictions in receivables contracts prohibiting sale or so, how must the sale of future receivables be structured assignment generally enforceable in Austria? Are there to be valid and enforceable? Is there a distinction exceptions to this rule (e.g., for contracts between between future receivables that arise prior to or after the commercial entities)? If Austria recognises prohibitions seller’s insolvency? on sale or assignment and the seller nevertheless sells receivables to the purchaser, will either the seller or the A seller in principle can sell future receivables that are capable of purchaser be liable to the obligor for breach of contract or being identified (see question 4.9). With respect to an obligor’s on any other basis? insolvency, see question 6.5.

Restrictions on assignment and sale stipulated in receivable contracts between entrepreneurs and consumers are enforceable and 4.11 Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred effective even against third parties. Non-assignment clauses in concurrently with the sale of receivables? If not all contracts between entrepreneurs concluded in the course of their related security can be enforceably transferred, what business activities are not enforceable (see question 4.4). methods are customarily adopted to provide the The seller will be liable to the obligor for the breach of an purchaser the benefits of such related security? enforceable non-assignment clause and the obligor might withdraw from the contract or claim damages. A claim against the assignee is Depending on the type of security, additional formalities for their only possible in case of fraudulent conduct. transfer might be necessary (see question 4.3). To ensure that no security becomes invalid by divergence of ownership of a security from the claim secured by it, receivable purchase agreements 4.7 Identification. Must the sale document specifically identify usually provide for the assignor to hold the securities in trust for the each of the receivables to be sold? If so, what specific information is required (e.g., obligor name, invoice assignee until they can be legally effectively transferred to the number, invoice date, payment date, etc.)? Do the assignee. receivables being sold have to share objective characteristics? Alternatively, if the seller sells all of its receivables to the purchaser, is this sufficient 5 Security Issues identification of receivables? 5.1 Back-up Security. Is it customary in Austria to take a Under Austrian law, it is not necessary to specify the object of sale “back-up” security interest over the seller’s ownership in detail, but it must be at least definable. For the specification of a interest in the receivables and the related security, in the concrete object of sale of a receivable purchase agreement, it is, event that the sale is deemed by a court not to have been however, advisable to give further details to avoid disputes between perfected? the seller and purchaser. Receivables to be sold in one receivable purchase agreement can originate from different kinds of contracts. Taking a “back-up” security interest is not customary. The assignment of all existing and future receivables is possible if the receivables are capable of being identified. 5.2 Seller Security. If so, what are the formalities for the seller granting a security interest in receivables and 4.8 Respect for Intent of Parties; Economic Effects on Sale. related security under the laws of Austria, and for such If the parties denominate their transaction as a sale and security interest to be perfected? state their intent that it be a sale will this automatically be respected or will a court enquire into the economic See question 5.1. characteristics of the transaction? If the latter, what economic characteristics of a sale, if any, might prevent 5.3 Purchaser Security. If the purchaser grants security over the sale from being perfected? Among other things, to all of its assets (including purchased receivables) in what extent may the seller retain (a) credit risk; (b) favour of the providers of its funding, what formalities interest rate risk; and/or (c) control of collections of must the purchaser comply with in Austria to grant and receivables without jeopardising perfection? perfect a security interest in purchased receivables governed by the laws of Austria and the related security? None of these characteristics will hinder a sale’s perfection but the concrete form of the receivable contract defines whether only the The purchaser and seller have to enter into an assignment

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agreement on the granting of a security interest in receivables. To 6 Insolvency Laws give legal effect to the granting of a security interest, it has to be shown in a way that enables third parties to take notice. This is 6.1 Stay of Action. If, after a sale of receivables that is usually effected via annotation in the purchaser’s books, whereas otherwise perfected, the seller becomes subject to an the security interest has to be shown in the respective customer insolvency proceeding, will Austria’s insolvency laws account (Kundenkonto), as well as in the list of open invoices automatically prohibit the purchaser from collecting, (Offene-Posten-Liste). transferring or otherwise exercising ownership rights over As long as the concrete amount of future receivables is not known the purchased receivables (a “stay of action”)? Does the to the purchaser, the remark in its books can be of a general nature, insolvency official have the ability to stay collection and

Austria but it has to be individualised after the origination of a specific enforcement actions until he determines that the sale is perfected? Would the answer be different if the receivable. To ensure the correct entry in the seller’s books, the purchaser is deemed to only be a secured party rather purchaser should require inspection rights to avoid diverging than the owner of the receivables? annotations in the seller’s and the purchaser’s books. Failure to make correct entries results in the security interest not being There is no automatic stay under Austrian insolvency laws. perfected. Purchased receivables, for which the purchase price has been fully paid and which have already been fully recovered, cannot be 5.4 Recognition. If the purchaser grants a security interest in claimed back by an insolvency administrator. If the receivables receivables governed by the laws of Austria, and that have not been sold to the purchaser, but it has a security interest in security interest is valid and perfected under the laws of the receivables, the purchaser has a right of separate satisfaction in the purchaser’s country, will it be treated as valid and case of a seller’s insolvency. perfected in Austria or must additional steps be taken in Austria? 6.2 Insolvency Official’s Powers. If there is no stay of action Unlike contractual undertakings, a transfer in rem has to fulfil the under what circumstances, if any, does the insolvency formal requirements stipulated by Austrian law. The rules official have the power to prohibit the purchaser’s exercise of rights (by means of injunction, stay order or concerning the creation of a pledge, which is a right in rem, apply other action)? analogously to the granting of a security interest. If contracts are not mutually fulfilled on or before the date 5.5 Additional Formalities. What additional or different insolvency proceedings are started, the insolvency administrator requirements apply to security interests in or connected to can choose between performance or non-performance of the insurance policies, promissory notes, mortgage loans, contract. There are special rules for leases and employment consumer loans or marketable debt securities? contracts. Certain transactions can be declared void as regards the creditors See question 4.3. where a successful challenge is made by the administrator either by legal challenge or defence under the Insolvency Act. The grounds 5.6 Trusts. Does Austria recognise trusts? If not, is there a for voidability are: mechanism whereby collections received by the seller in Discriminatory intent (Benachteiligungsabsicht). This respect of sold receivables can be held or be deemed to applies if the debtor acted with the intent to create a be held separate and apart from the seller’s own assets disadvantage for its creditors and the other contracting party: until turned over to the purchaser? (i) either knew of this intent (up to ten years preceding the initiation of insolvency proceedings); or (ii) should have Yes, Austrian law recognises trusts. known of this intent (up to two years preceding the initiation of insolvency proceedings). 5.7 Bank Accounts. Does Austria recognise escrow Squandering of assets (Vermögensverschleuderung). A accounts? Can security be taken over a bank account transaction can be challenged if it is seen as squandering the located in Austria? If so, what is the typical method? company’s assets. The other party to the transaction must Would courts in Austria recognise a foreign-law grant of have known or should have known that this was the case (up security (for example, an English law debenture) taken to one year preceding the initiation of insolvency over a bank account located in Austria? proceedings). Gifts made by the company (Schenkung). Gifts made by the Escrow accounts in Austria or in a foreign country are recognised company can be challenged if made in the two years before under Austrian law. Security over an Austrian bank account can be the start of insolvency proceedings. taken and is a customary form of collateralisation for banks. Under Preferential treatment of creditors (Begünstigungsabsicht). the general terms and conditions of banks, the borrower grants the Acts that favour one creditor over another can be set aside if bank a lien on all its objects and rights which enter into the bank’s they occurred in the 60 days before insolvency or after the possession, which in particular includes the credit on the borrowers’ start of insolvency proceedings. bank account. An Austrian court would recognise a foreign grant of Post-insolvency transaction. Transactions taking place after security over an Austrian bank account only if the formalities insolvency can be declared void if the creditor knew or required by Austrian law are met. should have known about the insolvency (Kenntnis der Zahlungsunfähigkeit). Any disposition of a company’s property by the debtor made after bankruptcy proceedings have started is void in proceedings without a debtor in possession since in such cases only the administrator is authorised to represent the debtor. In reorganisation proceedings

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with a debtor in possession, the debtor is entitled to carry on 7.2 Securitisation Entities. Does Austria have laws ordinary business activities, but needs the approval of the specifically providing for establishment of special purpose reorganisation administrator for extraordinary business activities. entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and Any impermissible divestment of the debtor’s property must be management of such an entity; (b) legal attributes and repaid to the insolvency estate. In case this is impossible, damages benefits of the entity; and (c) any specific requirements as must be paid. to the status of directors or shareholders? If third parties have become incontestably entitled to property which is to be restituted, the person, during whose possession the No, special securitisation companies under Austrian law do not incontestable encumbrance of rights has taken place, must pay differ from other companies except for the restriction that their sole damages to the insolvency estate in case such person’s acquisition business objective must be the execution of securitisation Austria is contestable. In addition, the bona fide transferee of a gratuitous transactions. The company has to be structured in a way to allow conveyance must provide for a restitution of assets only to the the separation of its own obligations from those of the originator, extent such transferee is enriched thereby; provided, however, that the legal and beneficial owners of which must be able to pledge and where such transferee’s acquisition of ownership also would be sell the rights connected therewith without restriction. contestable in case of a non-gratuitous acquisition, the entirety of the assets that are the subject of the conveyance must be restituted. 7.3 Non-Recourse Clause. Will a court in Austria give effect to a contractual provision (even if the contract’s governing 6.3 Suspect Period (Clawback). Under what facts or law is the law of another country) limiting the recourse of circumstances could the insolvency official rescind or parties to available funds? reverse transactions that took place during a “suspect” or “preference” period before the commencement of the A non-recourse clause is effective unless agreed with a consumer. insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in Austria for (a) transactions between unrelated parties and (b) 7.4 Non-Petition Clause. Will a court in Austria give effect to transactions between related parties? a contractual provision (even if the contract’s governing law is the law of another country) prohibiting the parties from: (a) taking legal action against the purchaser or See question 6.2. another person; or (b) commencing an insolvency proceeding against the purchaser or another person? 6.4 Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official Except for cases of wilful misconduct or gross negligence, a clause consolidate the assets and liabilities of the purchaser with prohibiting parties from taking legal actions against the purchaser those of the seller or its affiliates in the insolvency or another person is legally effective. proceeding?

See question 6.2. 7.5 Independent Director. Will a court in Austria give effect to a contractual provision (even if the contract’s governing law is the law of another country) or a provision in a 6.5 Effect of Proceedings on Future Receivables. What is the party’s organisational documents prohibiting the directors effect of the initiation of insolvency proceedings on (a) from taking specified actions (including commencing an sales of receivables that have not yet occurred or (b) on insolvency proceeding) without the affirmative vote of an sales of receivables that have not yet come into independent director? existence? Such provision could only be effective between the parties but not Regarding future receivables, the purchaser has not fully performed in relation to third parties generally. A breach of a director’s the receivable purchase contract at the time of initiation of the contractual obligation not to commence an insolvency proceeding, insolvency proceedings. Since the services owed by the purchaser however, is justified by mandatory law and therefore does not under the receivable purchase contract are separable, the seller is an justify any claim for damages. unsecured creditor of the insolvency estate with respect to the receivables which arise after the initiation of insolvency proceedings. 8 Regulatory Issues

7 Special Rules 8.1 Required Authorisations, etc. Assuming that the purchaser does no other business in Austria, will its purchase and ownership or its collection and enforcement 7.1 Securitisation Law. Is there a special securitisation law of receivables result in its being required to qualify to do (and/or special provisions in other laws) in Austria business or to obtain any licence or its being subject to establishing a legal framework for securitisation regulation as a financial institution in Austria? Does the transactions? If so, what are the basics? answer to the preceding question change if the purchaser does business with other sellers in Austria? In Austria there is no special securitisation law, but there are rules for special securitisation companies (Verbriefungs- A purchaser which only collects, enforces and securitises spezialgesellschaften) which can be established solely for the receivables will be qualified as a special securitisation company purpose of securitisation. under Austrian law; such special securitisation companies cannot pursue banking activities, which would require a banking licence or other licences. If the purchaser on the other hand also provides other banking services, it would have to obtain a banking licence

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and to comply with the provisions concerning financial institutions. 8.5 Currency Restrictions. Does Austria have laws restricting The qualification as a special securitisation company solely the exchange of Austria’s currency for other currencies or depends on the purpose and organisation of a company but not on the making of payments in Austria’s currency to persons the number of its business partners. outside the country?

Generally, there no such rules under Austrian law, but the exchange 8.2 Servicing. Does the seller require any licences, etc., in into certain currencies can be restricted by resolutions of the United order to continue to enforce and collect receivables Nations or the European Union or by decree of the National Bank following their sale to the purchaser, including to appear of Austria (Österreichische Nationalbank). Moreover, the before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect exchange of currencies in certain circumstances must be notified to Austria sold receivables? the National Bank of Austria for statistical purposes.

The business of collecting third parties’ receivables requires a 9 Taxation business licence for the business of a debt collection agency. Debt collection agencies are not permitted to enforce third party claims before a court or to have claims assigned to them even if such 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser assignment is only undertaken for the purpose of collection of the be subject to withholding taxes in Austria? Does the claims. Collecting agencies are only allowed to collect third party answer depend on the nature of the receivables, whether claims arising from claims in tort if the claims are undisputed. The they bear interest, their term to maturity, or where the acquisition of receivables from the delivery of goods or provision seller or the purchaser is located? of services and the assumption of the risk of the collectability of such receivables and in connection therewith the collection of such Payments on receivables are generally not subject to withholding receivables is a banking business with the meaning of the Banking taxes in Austria. Act (Bankwesengesetz) for which a banking licence is required.

9.2 Seller Tax Accounting. Does Austria require that a 8.3 Data Protection. Does Austria have laws restricting the specific accounting policy is adopted for tax purposes by use or dissemination of data about or provided by the seller or purchaser in the context of a securitisation? obligors? If so, do these laws apply only to consumer obligors or also to enterprises? In Austria, there are no special accounting provisions concerning the securitisation of receivables. In Austria, the EU Data Protection Directive (95/46/EC) was implemented in the Data Protection Act 2000 (DSG), according to which the use of personal data of persons and companies is subject 9.3 Stamp Duty, etc. Does Austria impose stamp duty or to several restrictions aimed at the protection of such data. As a other documentary taxes on sales of receivables? general principle, the use of personal data is only permitted with the explicit consent of the concerned person. However, there is also a Austria imposes stamp duty in different amounts on various types weighing of interests of the transferor of data and of the person of written contracts. On assignment contracts, a stamp duty in the whose data is affected. This weighing usually allows for the amount of 0.8% of the consideration is imposed. Assignments transfer of data in the course of securitisation transactions. between financial institutions and special securitisation companies are exempt from stamp duty. In some other cases (but not all) stamp In addition, there is a stricter protection of data of bank customers duty may be able to be avoided by either concluding a contract in under bank secrecy provisions stipulated in the Banking Act. As the form of an offer and its implied acceptance or, where one of the with general data protection, banking secrecy can also be breached parties is a foreigner, by signing the document abroad and assuring if the transferor’s interest in disclosing data outweighs the banking that it is not brought into Austria. customer’s non-disclosure interest. Both the general data protection rules and banking secrecy apply to the purchase of bank loans by special securitisation companies. 9.4 Value Added Taxes. Does Austria impose value added tax, sales tax or other similar taxes on sales of goods or Because of the weighing of interests, the disclosure of data to the services, on sales of receivables or on fees for collection extent absolutely necessary is generally viewed as permitted for the agent services? purpose of securitisation. In Austria, value added tax is imposed on the sale of goods and 8.4 Consumer Protection. If the obligors are consumers, will provision of services in the amount of 20% of the consideration. In the purchaser (including a bank acting as purchaser) be case of a sale of receivables, the seller undertakes a tax-free required to comply with any consumer protection law of turnover with monetary claims. Subject to provision of services by Austria? Briefly, what is required? the purchaser to the seller, the purchaser has to pay value added tax, whereas the calculation basis is the difference between the purchase Under the Consumer Protection Act (Verbraucherschutzgesetz) price for the receivables and the economic value of the receivables. compliance with provisions of consumer protection is the sole This economic value is, in particular, in case of the sale of non- responsibility of the seller. Since the validity of a receivable performing loans lower than the book value. The European Court purchase contract may be affected by non-compliance with of Justice decided in its decision C-93/10 of 27 October 2011 that mandatory provisions of data protection, it is advisable for the the purchaser of receivables does not have to pay any value added purchaser to assure that these provisions are complied with, which tax in case he does not provide services to the seller since in such typically is part of the representations and warranties package given cases there is no taxable turnover. by the seller. If the purchaser is not situated in Austria, the obligation to pay the value added tax is shifted to the seller. 60 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Fellner Wratzfeld & Partners Austria

9.5 Purchaser Liability. If the seller is required to pay value added tax, stamp duty or other taxes upon the sale of Markus Fellner receivables (or on the sale of goods or services that give Fellner Wratzfeld & Partners rise to the receivables) and the seller does not pay, then Schottenring 12 will the taxing authority be able to make claims for the A-1010 Vienna unpaid tax against the purchaser or against the sold Austria receivables or collections? Tel: +43 1 537 700 Fax: +43 1 537 70 70 All parties to an agreement are liable for the payment of stamp duty, Email: [email protected] if any. For value added tax, see question 9.4. URL: www.fwp.at Austria Markus Fellner is a founding partner of Fellner Wratzfeld & 9.6 Doing Business. Assuming that the purchaser conducts Partners. He has extensive experience in high-profile banking no other business in Austria, would the purchaser’s and finance, M&A and real estate transactions, as well as purchase of the receivables, its appointment of the seller complex corporate restructurings and insolvencies. He regularly advises Austrian and international credit institutions on as its servicer and collection agent, or its enforcement of securitisations and refinancings. the receivables against the obligors, make it liable to tax Degrees: Doctor Iuris, University of Vienna Law School, 1994; in Austria? Magister Iuris, University of Vienna Law School, 1992; Mag rer soc oec (Studies of business administration), University of The purchase of receivables by a foreigner alone generally would Economics and Business Administration, 1989. not trigger any tax obligation of the purchaser except for stamp Professional Membership: Austrian Bar Association, International Bar Association. duty, if such arises. Publications: Markus Fellner is the author of numerous articles mainly on the subject areas of banking and finance, company law, restructuring and insolvency law, as well as real estate law. He also regularly speaks at symposiums and seminars.

Fellner Wratzfeld & Partners (fwp) is one of Austria’s leading business law firms, combining in-depth legal expertise with well- founded business know-how and a hands-on approach in cutting-edge transactions, often completed under extreme time pressure. The firm’s clients include banks and other financial institutions, privately and publicly owned companies and public sector authorities. The firm’s expertise covers the full spectrum of industry sectors. The firm is particularly active in representing clients in the following sectors: Banking and financing (including Securitisations); service providers; infrastructure; oil and gas, as well as industrial manufacturers. The firm is further unique in that it has a leading practice in both transactional as well as administrative law, which can be ideally combined for project work. Increasingly it has been called upon for forensic work relating to company malfeasance. The firm’s major fields of practice are M&A, Banking and Financing, Restructuring and Insolvency, Real Estate and Litigation/Arbitration. It also has a broad public law practice focusing in particular on public procurement, infrastructure projects (including environmental aspects) and construction law.

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Levy & Salomão Advogados Fernando de Azevedo Peraçoli

1 Receivables Contracts Consumers may cancel a contract within a period of seven days from its signature or reception of the good or service, whenever contracting products and services outside a shop (i.e. via the 1.1 Formalities. In order to create an enforceable debt internet or by telephone). Upon cancelation, receivables are obligation of the obligor to the seller, (a) is it necessary cancelled and any amount already paid by the consumer must be that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone promptly returned with the corresponding monetary adjustments. sufficient; and (c) can a receivable “contract” be deemed The Brazilian Consumer Code limits penalties for late payments to to exist as a result of the behaviour of the parties? a maximum of 2% for all consumer contracts.

According to Article 227 of the Brazilian Civil Code, any contract 1.3 Government Receivables. Where the receivables with a value greater than R$7,100.00 (approximately US$4,000.00) contract has been entered into with the government or a must be undertaken in writing. Nonetheless, even in contracts that government agency, are there different requirements and have a smaller value, it is advisable to have the relevant agreement laws that apply to the sale or collection of those evidenced in writing in order to facilitate its enforcement in a court receivables? of law. In general, invoices alone are not sufficient to create a debt The sale of receivables owned by the government or a government obligation. However, Brazilian law allows the provider of goods or agency is considered to be a sale of assets made by the government services to issue a so-called ‘duplicate’ of the invoice (‘duplicata’, or a government agency and as such is subject to Federal Law No. in Portuguese), which, together with (i) a receipt issued by the 8.666, dated 21 June 1993. This statute provides that government debtor to the effect that a good or service has been received, and (ii) sales must be undertaken through a public auction in accordance a protest issued in writing by a public notary stating that payment with the procedure described in the statute. has not been received in due time, form a debt instrument that can Furthermore, restrictions are imposed by law on the raising of debt be foreclosed in court and would in such circumstance constitute finance by the federal and state governments. For such purpose, the sufficient evidence of indebtedness. raising of finance is to be understood as any operation incurring A receivable contract can be deemed to exist as a result of historic payment liability on the government entities in question. Whereas relationships, according to Article 432 of the Brazilian Civil Code. in a normal receivables contract no liability for the assignor that is a government entity would arise, liability might arise via a clause in which the seller accepts liability for non-performance of the 1.2 Consumer Protections. Do Brazilian laws (a) limit rates of assigned credits. This clause should thus be avoided. interest on consumer credit, loans or other kinds of receivables; (b) provide a statutory right to interest on late The collection of receivables owned by the government or by a payments; (c) permit consumers to cancel receivables for government agency must be pursued by the relevant entity rather a specified period of time; or (d) provide other noteworthy than by the purchaser, via a special collection suit that is available rights to consumers with respect to receivables owing by only to the benefit of public entities. The purchaser may only them? collect the receivable directly against the obligor in case the sale has been formalised prior to the commencement of such collection. Articles 591 and 406 of the Brazilian Civil Code impose a limit on In case the receivable is owned by a private seller and the interest rates charged by non-financial institutions that is equivalent government or government agency is the obligor, then the to the rate charged by the government for non-payment of federal collection must be pursued in court and will be subject to the taxes. Regarding financial institutions, according to Article 4, IX of following specific rules, among others: (a) the claimant (either the Federal Law No. 4.595, dated 31 December 1964, the National seller or the purchaser) will not be granted the right to attach or Monetary Council, a body that regulates the Brazilian financial seize any obligor’s asset; (b) the final decision against the obligor system, has the power to limit interest rates. The National will not be immediately enforceable; and (c) the judge will issue an Monetary Council issued Resolution No. 1.064, dated 5 December order of payment, that will wait in line until all previous orders have 1985, allowing parties to freely contract interest rates when at least been complied with (this could take years). one of the parties is a financial institution. As a long roster of exceptions to the rules above may apply in Brazilian law does not provide a statutory right to interest on late relation to government-originated credits, case-by-case analysis is payments, unless there is a penalty clause in the agreement. strongly advised.

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2 Choice of Law – Receivables Contracts 3 Choice of Law – Receivables Purchase Agreement 2.1 No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what 3.1 Base Case. Does Brazilian law generally require the sale are the main principles in Brazil that will determine the of receivables to be governed by the same law as the law governing law of the contract? governing the receivables themselves? If so, does that general rule apply irrespective of which law governs the According to Article 9 of Decree-Law No. 4.657/42, an obligation receivables (i.e., Brazil’s laws or foreign laws)? is governed by the law of the place where the contract is executed. Brazil If the parties are not found in the same country at the moment the No. Brazilian law does not require the sale of receivables to be contract is formed, the contract is considered formed at the place governed by the same law as the law governing the receivables where the last signature was made towards its execution. themselves. A different rule applies to contracts formally made of an offer to be accepted via a separate copy of the same instrument by the other 3.2 Example 1: If (a) the seller and the obligor are located in party, in which case the law of the place of residence of the offeror Brazil, (b) the receivable is governed by the law of Brazil, prevails. Furthermore, there is jurisprudential authority to the effect (c) the seller sells the receivable to a purchaser located in that choice of law in violation of such provisions is not acceptable; a third country, (d) the seller and the purchaser choose this view has, however, not been upheld in recent cases and final the law of Brazil to govern the receivables purchase resolution on this rule is still pending. agreement, and (e) the sale complies with the requirements of Brazil, will a court in Brazil recognise that sale as being effective against the seller, the obligor and 2.2 Base Case. If the seller and the obligor are both resident other third parties (such as creditors or insolvency in Brazil, and the transactions giving rise to the administrators of the seller and the obligor)? receivables and the payment of the receivables take place in Brazil, and the seller and the obligor choose the Yes, Brazilian courts will recognise the effectiveness of the sale law of Brazil to govern the receivables contract, is there provided that: (i) the receivables purchase agreement is executed in any reason why a court in Brazil would not give effect to Brazil; or (ii) the agreement takes the form of a unilateral written their choice of law? offer made by the seller located in Brazil to be accepted via a separate copy of the same written instrument by the purchaser. No. Brazilian law would apply, in accordance with Article 9 of Decree-Law No. 4.657/42. 3.3 Example 2: Assuming that the facts are the same as Example 1, but either the obligor or the purchaser or both 2.3 Freedom to Choose Foreign Law of Non-Resident Seller are located outside Brazil, will a court in Brazil recognise or Obligor. If the seller is resident in Brazil but the obligor that sale as being effective against the seller and other is not, or if the obligor is resident in Brazil but the seller is third parties (such as creditors or insolvency not, and the seller and the obligor choose the foreign law administrators of the seller), or must the requirements of of the obligor/seller to govern their receivables contract, the obligor’s country or the purchaser’s country (or both) will a court in Brazil give effect to the choice of foreign be taken into account? law? Are there any limitations to the recognition of foreign law (such as public policy or mandatory principles Yes, the courts will. Note from our answer to question 3.2 above of law) that would typically apply in commercial relationships such that between the seller and the obligor that the obligor’s domicile is not relevant for the analysis. under the receivables contract? 3.4 Example 3: If (a) the seller is located in Brazil but the As noted in our answer to question 2.1 above, to the extent that the obligor is located in another country, (b) the receivable is choice of law does not violate Article 9 of Decree-Law No. governed by the law of the obligor’s country, (c) the seller 4.657/42, a judicial court in Brazil will give effect to the choice of sells the receivable to a purchaser located in a third a foreign law (arbitral tribunals in Brazil, as opposed to judicial country, (d) the seller and the purchaser choose the law courts, are likely to always give effect to said choice). of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the However, foreign laws, foreign judicial decisions and arbitral requirements of the obligor’s country, will a court in Brazil awards based on foreign laws (either rendered in Brazil or abroad) recognise that sale as being effective against the seller will not be enforceable in Brazil in case they violate the Brazilian and other third parties (such as creditors or insolvency national sovereignty, public policy or morality. administrators of the seller) without the need to comply with Brazil’s own sale requirements?

2.4 CISG. Is the United Nations Convention on the Yes, but only in case both the receivables and the receivables International Sale of Goods in effect in Brazil? purchase agreement are executed in the obligor’s country. As noted in our answer to question 2.1 above, to the extent that the choice of No. The United Nations Convention on the International Sale of law does not violate Article 9 of Decree-Law No. 4.657/42, a Goods is not in effect in Brazil. judicial court in Brazil will give effect to the choice of a foreign law (arbitral tribunals in Brazil, as opposed to judicial courts, are likely to always give effect to said choice). However, foreign laws, foreign judicial decisions and arbitral awards based on foreign laws (either rendered in Brazil or abroad)

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will not be enforceable in Brazil in case they violate the Brazilian 4.2 Perfection Generally. What formalities are required national sovereignty, public policy or morality. generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of receivables to be perfected against any subsequent good 3.5 Example 4: If (a) the obligor is located in Brazil but the faith purchasers for value of the same receivables from seller is located in another country, (b) the receivable is the seller? governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country In general, there are no formalities for a sale of receivables to govern the receivables purchase agreement, and (d) documented in writing to be valid between the relevant parties. the sale complies with the requirements of the seller’s However, for such sale to be valid and enforceable against the Brazil country, will a court in Brazil recognise that sale as being effective against the obligor and other third parties (such obligor, it is necessary to notify the obligor. Except if otherwise as creditors or insolvency administrators of the obligor) provided under the receivables contract, no approval or without the need to comply with Brazil’s own sale authorisation by the obligor is necessary to render the sale valid and requirements? enforceable. Furthermore, the sale of receivables will only be valid and Yes, Brazilian courts will recognise the foreign sale as long as the enforceable against third parties if registered at a Public Registry of receivables purchase agreement has not been executed in Brazil. Titles and Deeds in the city of domicile of both the purchaser and the seller, according to Articles 129 and 130 of Federal Law No. 3.6 Example 5: If (a) the seller is located in Brazil 6.015, dated 31 December 1973. (irrespective of the obligor’s location), (b) the receivable is governed by the law of Brazil, (c) the seller sells the receivable to a purchaser located in a third country, (d) 4.3 Perfection for Promissory Notes, etc. What additional or the seller and the purchaser choose the law of the different requirements for sale and perfection apply to purchaser’s country to govern the receivables purchase sales of promissory notes, mortgage loans, consumer agreement, and (e) the sale complies with the loans or marketable debt securities? requirements of the purchaser’s country, will a court in Brazil recognise that sale as being effective against the For promissory notes (and other negotiable credit instruments such seller and other third parties (such as creditors or as cheques and letters of exchange) transfer is made through insolvency administrators of the seller, any obligor located endorsement, no other formalities of the kind mentioned in our in Brazil and any third party creditor or insolvency answer to question 4.2 being required. For loans, which are administrator of any such obligor)? normally evidenced by a written agreement other than a negotiable instrument of credit, the formalities are those described in our Yes, provided that: (i) the receivables purchase agreement is answer to question 4.2 above. As for marketable debt securities, if executed in the purchaser’s country; or (ii) the agreement took the properly registered with the Brazilian securities authorities, they form of a unilateral written offer made by the purchaser to be can be freely sold in stock exchanges and/or over-the-counter accepted via a separate copy of the same written instrument by the markets. In the case such registration is lacking, it will be necessary seller. See also our answer to question 2.1 on the acceptability of to execute an indenture, which must be registered at the Registry of pure choice of law. Companies. As noted in our answer to question 2.1 above, to the extent that the choice of law does not violate Article 9 of Decree-Law No. 4.4 Obligor Notification or Consent. Must the seller or the 4.657/42, a judicial court in Brazil will give effect to the choice of purchaser notify obligors of the sale of receivables in a foreign law (arbitral tribunals in Brazil, as opposed to judicial order for the sale to be effective against the obligors courts, are likely to always give effect to said choice). However, and/or creditors of the seller? Must the seller or the foreign laws, foreign judicial decisions and arbitral awards based on purchaser obtain the obligors’ consent to the sale of foreign laws (either rendered in Brazil or abroad) will not be receivables in order for the sale to be an effective sale enforceable in Brazil in case they violate the Brazilian national against the obligors? Does the answer to this question sovereignty, public policy or morality. vary if (a) the receivables contract does not prohibit assignment but does not expressly permit assignment; or (b) the receivables contract expressly prohibits 4 Asset Sales assignment? Whether or not notice is required to perfect a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor 4.1 Sale Methods Generally. In Brazil what are the defences? customary methods for a seller to sell receivables to a purchaser? What is the customary terminology – is it Yes, they must. See our answer to question 4.2 above. called a sale, transfer, assignment or something else? In general, it is not necessary to obtain the obligor’s consent for the The most common method is to enter into an assignment of credit sale to be effective against him/her. This also holds true in case the rights agreement. Such agreement is normally notified to the receivables contract does not prohibit assignment but does not obligor and registered with a public notary. These procedures expressly permit assignment. However, if the receivables contract guarantee the effectiveness of the assignment agreement against the expressly prohibits assignment, the obligor’s prior approval will be obligor and third parties. The customary terminology is necessary. There are no additional benefits to giving notice. “assignment of credit rights”.

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4.5 Notice Mechanics. If notice is to be delivered to obligors, receivables should identify not only the receivables but also the whether at the time of sale or later, are there any relevant real estate. Different kinds of receivables can be sold requirements regarding the form the notice must take or under the same receivables contract. Receivables sold do not have how it must be delivered? Is there any time limit beyond to share objective characteristics. Simply stating that the seller sells which notice is ineffective – for example, can a notice of all of its receivables to the purchaser is not sufficient identification sale be delivered after the sale, and can notice be of the receivables. delivered after insolvency proceedings against the obligor have commenced? Does the notice apply only to specific receivables or can it apply to any and all (including future) 4.8 Respect for Intent of Parties; Economic Effects on Sale. receivables? Are there any other limitations or If the parties denominate their transaction as a sale and

considerations? state their intent that it be a sale will this automatically be Brazil respected or will a court enquire into the economic There are no legal requirements regarding the form the notice must characteristics of the transaction? If the latter, what take or how it must be delivered. What is important is to be able to economic characteristics of a sale, if any, might prevent demonstrate that the notice has been effectively delivered. the sale from being perfected? Among other things, to what extent may the seller retain (a) credit risk; (b) There is no time limit to give notice to obligors. A notice of sale interest rate risk; and/or (c) control of collections of can be delivered after the sale and after insolvency proceedings receivables without jeopardising perfection? against the obligor have commenced. Notwithstanding, the moment the notice is delivered, insolvency rules would apply in Brazilian law does not, as a rule, apply a substance-over-form case the obligor is in such situation. Please refer to our answers in approach in transaction analysis and as a result the parties are free section 6 below. to negotiate the terms of the sale without jeopardising perfection. The notice may apply to specific receivables and to any and all However, in case the economic characteristics of the transaction (including future) receivables to the extent that the receivables are completely deprive the sale of having any effect, the transaction identifiable. For example, it is possible to refer to future may be considered ‘simulated’ and thus void under Article 167 of receivables in the notice if a reference is made to the contract that the Brazilian Civil Code. The question is one of fact to be will originate such receivables. With respect to the identification of determined via a case-by-case analysis. the receivables, please refer to our answer to question 4.7 below.

4.9 Continuous Sales of Receivables. Can the seller agree in 4.6 Restrictions on Assignment; Liability to Obligor. Are an enforceable manner (at least prior to its insolvency) to restrictions in receivables contracts prohibiting sale or continuous sales of receivables (i.e., sales of receivables assignment generally enforceable in Brazil? Are there as and when they arise)? exceptions to this rule (e.g., for contracts between commercial entities)? If Brazil recognises prohibitions on Yes. This is common in Brazil. sale or assignment and the seller nevertheless sells receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for breach of contract or 4.10 Future Receivables. Can the seller commit in an on any other basis? enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables Yes, restrictions in receivables contracts prohibiting the sale or purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured assignment are enforceable in Brazil. There is no exception to this to be valid and enforceable? Is there a distinction rule for contracts between commercial entities, for example. between future receivables that arise prior to or after the The described sale will not be valid against the obligor and, seller’s insolvency? furthermore, the seller will be liable for breach of contract. Depending on the case, liability for damages can be sought in court The seller can commit to sell receivables that come into existence in addition to the contractual penalties provided for in the after the date of the receivables purchase agreement in an receivables contract. enforceable manner. In fact, this has been recognised by the Brazilian Securities Commission (CVM). The organ issued 4.7 Identification. Must the sale document specifically identify Instruction No. 444, dated 8 December 2006, providing for a new each of the receivables to be sold? If so, what specific type of ‘Fund of Investment in Credit Rights’ (‘fundos de information is required (e.g., obligor name, invoice investimento em direitos creditórios’, or ‘FIDC’), called the ‘non- number, invoice date, payment date, etc.)? Do the standardised’ FIDC, which may securitise receivables which will receivables being sold have to share objective come into existence after the date of the sale contract. With respect characteristics? Alternatively, if the seller sells all of its to the identification of future receivables in order to structure the receivables to the purchaser, is this sufficient sale in a valid and enforceable manner, please refer to our answer to identification of receivables? question 4.7 above. This analysis is altered after the insolvency of the seller is declared, The sale document must include information sufficient enough so since the administrator is vested with the power to terminate any that the receivables sold can be properly identified. There is no agreement in case continuing to perform such agreement is not statutory provision as to what type of information on each profitable for the bankrupt estate (according to Article 117 of the receivable is necessary, but the lawyers handling the transaction Brazilian Bankruptcy Law). As a result, discretionary room for a should be careful to make sure that the receivables are correctly decision regarding the continued validity of the assignment described and adequately individualised. Usually, it is common to agreement is granted in the case of bankruptcy. indicate the following: obligor’s name and taxpayer registration number; date of execution of the receivables agreement; and invoice number and payment date. The sale of real estate

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4.11 Related Security. Must any additional formalities be 5.4 Recognition. If the purchaser grants a security interest in fulfilled in order for the related security to be transferred receivables governed by the laws of Brazil, and that concurrently with the sale of receivables? If not all security interest is valid and perfected under the laws of related security can be enforceably transferred, what the purchaser’s country, will it be treated as valid and methods are customarily adopted to provide the perfected in Brazil or must additional steps be taken in purchaser the benefits of such related security? Brazil?

There is a general principle in Brazil which holds that accessories Not necessarily, as Article 8, paragraph 2 of Decree-Law No. follow the principal. This means that if a secured credit is assigned, 4.657/42 provides that the applicable law with regard to in rem the related security is also assigned. As a rule, if there is no collateral is the law of the place where the person in possession of Brazil prohibition to the sale of the receivables, there shall be no the asset is domiciled. This rule is more easily adaptable to material prohibition in transferring the related security. However, it is assets. As to receivables, given that they are rights, the most necessary to notify the guarantor so that he/she is aware of the sale sensible view is to consider that they are kept in the place where the of the receivables and that he/she is now liable towards the creditor benefited by the pledge is resident. As a result, the terms assignee. It may also be necessary to take specific measures to of the collateral should follow the law of the country of such document and register the assignment of the security depending on beneficiary, typically the seller of the receivables. If they do not, the nature of the security (e.g., if the collateral is a mortgage of a validity of the collateral might be impaired. real estate, assignment must be registered at the relevant real estate registry). 5.5 Additional Formalities. What additional or different requirements apply to security interests in or connected to 5 Security Issues insurance policies, promissory notes, mortgage loans, consumer loans or marketable debt securities?

5.1 Back-up Security. Is it customary in Brazil to take a No relevant change is introduced. “back-up” security interest over the seller’s ownership interest in the receivables and the related security, in the event that the sale is deemed by a court not to have been 5.6 Trusts. Does Brazil recognise trusts? If not, is there a perfected? mechanism whereby collections received by the seller in respect of sold receivables can be held or be deemed to This is not a regular feature in most transactions. It is, however, an be held separate and apart from the seller’s own assets until turned over to the purchaser? issue that can be negotiated between the parties. An alternative commonly used in Brazil as a means for the creation of back-up Brazil does not recognise trusts. However, pursuant to Article 627 security is the assignment by a seller to the purchaser of a greater et seq. of the Brazilian Civil Code, an agreement may be executed number of contracts than the final value to be securitised, so that the in order to obligate the seller to keep collections received as a excess will work as collateral. depositary, being responsible for the safeguarding and maintenance of such assets, for the benefit of the purchaser. 5.2 Seller Security. If so, what are the formalities for the seller granting a security interest in receivables and related security under the laws of Brazil, and for such 5.7 Bank Accounts. Does Brazil recognise escrow accounts? security interest to be perfected? Can security be taken over a bank account located in Brazil? If so, what is the typical method? Would courts in Brazil recognise a foreign-law grant of security (for Normally a written clause in the agreement assigning the credits example, an English law debenture) taken over a bank would be the ideal means. account located in Brazil?

5.3 Purchaser Security. If the purchaser grants security over Brazil recognises escrow accounts. Security can be taken over a all of its assets (including purchased receivables) in bank account located in Brazil. In the typical case, security over favour of the providers of its funding, what formalities bank accounts takes the form of a pledge over the credit rights must the purchaser comply with in Brazil to grant and derived from the bank account or of a transfer of fiduciary perfect a security interest in purchased receivables ownership of such rights. governed by the laws of Brazil and the related security? As mentioned in our answer to question 5.4 above, Article 8, In the typical case where the security takes the form of a pledge, paragraph 2 of Decree-Law No. 4.657/42 provides that the perfection would require a written agreement registered with a applicable law with regard to in rem collateral is the law of the place registry of titles and deeds of the place of residence of the pledgor where the person in possession of the asset is domiciled. As a and the pledgee, together with notification of the obligor of pledged result, the terms of the collateral should follow the law of Brazil. If receivables (Articles 1.452 and 1.453 of the Brazilian Civil Code). they do not, validity of the collateral might be impaired. Alternatively, the security might take the form of transfer of fiduciary ownership of the assets (including receivables purchased). The purchaser in this case recovers ownership upon payment of the debt. Here again, the lien is perfected through its registration with the registry of titles and deeds of the place of residence of the purchaser (Article 1.361, paragraph 1 of the Brazilian Civil Code). In case the purchaser’s assets include real estate, registration of the lien with the competent real estate registry is also required.

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6 Insolvency Laws 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or 6.1 Stay of Action. If, after a sale of receivables that is “preference” period before the commencement of the otherwise perfected, the seller becomes subject to an insolvency proceeding? What are the lengths of the insolvency proceeding, will Brazilian insolvency laws “suspect” or “preference” periods in Brazil for (a) automatically prohibit the purchaser from collecting, transactions between unrelated parties and (b) transferring or otherwise exercising ownership rights over transactions between related parties? the purchased receivables (a “stay of action”)? Does the insolvency official have the ability to stay collection and Please refer to our answer to question 6.1 above. enforcement actions until he determines that the sale is Brazil perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather 6.4 Substantive Consolidation. Under what facts or than the owner of the receivables? circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with No. Brazilian Bankruptcy Law does not provide for an automatic those of the seller or its affiliates in the insolvency stay. Notwithstanding, the insolvency official, any creditor or the proceeding? Public Prosecutor’s Office, may call the securitisation into question by filing a lawsuit seeking the revocation of the agreement or act According to the Brazilian Bankruptcy Law, consolidation is not (the so-called ‘revocation suit’). The plaintiff must prove that the allowed. Even if the seller sold the whole company or any of its aim of the contracting parties was to defraud creditors (i.e., he/she branches or going concerns, the buyer would not be subject to the must prove fraudulent collusion between the seller and the debtor effects of the insolvency decree; at most, the transaction might be regarding the original debt or between the seller and the purchaser declared ineffective in the cases mentioned in our answer to regarding the sale of the receivable), as well as that the bankrupt question 6.1 above. estate (i.e., formerly the seller) has suffered a loss or damage. The same effect of invalidity shall ensue in case an undervalued 6.5 Effect of Proceedings on Future Receivables. What is the sale of the receivables was made up to 2 years prior to insolvency effect of the initiation of insolvency proceedings on (a) being decreed, in this case independently from evidence of the sales of receivables that have not yet occurred or (b) on intention of the parties to defraud creditors. sales of receivables that have not yet come into existence? Brazilian Bankruptcy Law, however, protects bona fide investors in the case of credits subsequently securitised through the issue of With relation to (a), at the very moment insolvency is decreed, the bonds representing them, setting forth that the validity of the management of the company’s assets is granted to the insolvency transfer shall not be impaired in case this would damage their rights. official. The receivables may only be sold after judicial allowance. If the purchaser is deemed to be only a secured party rather than the With regard to (b), pursuant to Article 75 of the Brazilian owner of the receivables, then the purchaser will not be able to Bankruptcy Law, once insolvency is decreed, the company’s pursue the receivable against the original obligor or exercise any businesses cease and the seller is removed from his/her commercial ownership right over the purchased receivable. The receivable will activities. Therefore, there will be no future receivables. be part of the seller’s estate and collectable by the seller under the applicable insolvency proceeding rules; the purchaser may only In case a judicial reorganisation proceeding takes place instead of collect and enforce the rights it may hold against the seller and in an insolvency proceeding, the company’s activities will not cease. the context of the relevant insolvency proceeding. The sole In such hypothesis, the seller’s creditors are granted the power to exception is if the security created in favour of a purchaser is a deliberate on the transaction’s conditions for the receivables either contractual encumbrance called ‘alienação fiduciária em garantia’, in case (a) or (b). which is similar to a trust and transfer to a purchaser of fiduciary ownership of the receivables. 7 Special Rules

6.2 Insolvency Official’s Powers. If there is no stay of action 7.1 Securitisation Law. Is there a special securitisation law under what circumstances, if any, does the insolvency (and/or special provisions in other laws) in Brazil official have the power to prohibit the purchaser’s establishing a legal framework for securitisation exercise of rights (by means of injunction, stay order or transactions? If so, what are the basics? other action)? Yes, Brazil has laws and regulations specifically providing for As we explained in our answer to question 6.1, above, pursuant to securitisation transactions. the Brazilian Bankruptcy Law, the insolvency official is not vested with the power to stop the agreements executed by the seller from The Brazilian Securities Commission (CVM) issued Instruction No. having legal effects. The adequate means to prohibiting the 356, dated 17 December 2001, to regulate FIDCs, which are purchaser’s exercise of rights regarding a receivable that is receivables funds used as conduit entities for securitisation otherwise perfected is to file a revocation suit. purposes, and Instruction No. 444, dated 8 December 2006, to regulate a specific type of ‘non-standardised’ FIDC, which refer to receivables that bear a higher risk of payment for various reasons, including receivables which will come into existence after the date of the sale contract. Apart from FIDCs, Brazilian law provides for other types of securitisation structures. The securitisation of real estate receivables, for instance, can be undertaken through a ‘real estate

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credit securitisation company’ (‘companhia securitizadora de securities previously authorised by the CVM in relation to their own créditos imobiliários’), under Federal Law No. 9.514, dated 20 assets. November 1997, or under a ‘real estate securitisation fund’ (‘fundo de investimento imobiliário’, or ‘FII’), under CVM Instruction No. 7.3 Non-Recourse Clause. Will a court in Brazil give effect to 472, dated 31 October 2008. The securitisation of financial a contractual provision (even if the contract’s governing receivables can be undertaken through a ‘financial credit law is the law of another country) limiting the recourse of securitisation company’ (‘companhia securitizadora de créditos parties to available funds? financeiros’), under Resolution No. 2.686, dated 26 January 2000, from the Brazilian National Monetary Council. The securitisation Yes, a court in Brazil will give effect to a contractual provision

Brazil of agribusiness receivables can be undertaken through an limiting the recourse of parties to available funds. However, a court ‘agribusiness securitisation company’ (‘companhia securitizadora in Brazil may limit the reach of this type of contractual provision in de direitos creditórios do agronegócio’), which is regulated under the case of fraud perpetrated against creditors. Federal Law No. 11.076, dated 30 December 2004.

7.4 Non-Petition Clause. Will a court in Brazil give effect to a 7.2 Securitisation Entities. Does Brazil have laws specifically contractual provision (even if the contract’s governing law providing for establishment of special purpose entities for is the law of another country) prohibiting the parties from: securitisation? If so, what does the law provide as to: (a) (a) taking legal action against the purchaser or another requirements for establishment and management of such person; or (b) commencing an insolvency proceeding an entity; (b) legal attributes and benefits of the entity; against the purchaser or another person? and (c) any specific requirements as to the status of directors or shareholders? No. According to Article 5, XXXV of the Brazilian Constitution, no restriction or prohibition can limit one’s right to file any claim, Yes, Brazil has laws and regulations specifically providing for the petition or suit before any Brazilian court. This is a fundamental establishment of special purpose entities for securitisation purposes. (i.e., non-disposable) right constitutionally granted, therefore it will FIDCs and FIIs funds are investment vehicles that, in Brazil, are not certainly prevail against the non-petition clause, even if such clause considered as legal entities but ‘condominiums’ without legal is grandfathered by a foreign law governing the relevant agreement. personality that serve as conduits for securitisation purposes. The formation of such funds requires an administrator that must be, in 7.5 Independent Director. Will a court in Brazil give effect to the case of FIDCs, a commercial bank, a multiple bank, the Caixa a contractual provision (even if the contract’s governing Econômica Federal (a savings and loans institutions controlled by law is the law of another country) or a provision in a the Federal Government), an investment bank, a credit, financing party’s organisational documents prohibiting the directors and investment company (‘sociedade de crédito, financiamento e from taking specified actions (including commencing an investimento’, in Portuguese) or a securities broker-dealer company, insolvency proceeding) without the affirmative vote of an all necessarily domiciled in Brazil, and, in the case of FIIs, a independent director? commercial bank, a multiple bank, an investment bank, a real estate credit company (‘sociedade de crédito imobiliário’, in Portuguese), Yes, a Brazilian court might give effect to a contractual provision or savings and loans institutions controlled by the Government, a a provision in a party’s organisational documents prohibiting the securities broker-dealer company or a mortgage company directors from taking specified actions (including commencing an (‘companhia hipotecária’, in Portuguese), all necessarily domiciled insolvency proceeding) without the affirmative vote of an in Brazil. independent director. However, this would be moderated by the Agribusiness, real estate and financial receivables securitisation can Brazilian court’s tendency to apply a reliance doctrine pursuant to also be conducted by limited liability corporations whose purposes which innocent third parties are not obliged to have knowledge of are to purchase and securitise such receivables. Such entities shall and abide by restrictions as to representation in a company’s or be registered with the CVM if their shares or debt instruments are similar entity’s constitutive documents. The final outcome would to be publicly traded. As with any Brazilian corporation, they must depend on matters of fact and equitable considerations surrounding have management resident in Brazil. The most common debt the case. instrument issued by the real estate securitisation companies are the ‘certificates of real estate receivables’ (‘certificados de recebíveis 8 Regulatory Issues imobiliários’ or ‘CRIs’), and for agribusiness receivables are the ‘certificates of agribusiness receivables’ (‘certificados de recebíveis do agronegócio’ or ‘CRA’). In addition, it is worth mentioning that 8.1 Required Authorisations, etc. Assuming that the income paid under a CRI and a CRA to a natural person who purchaser does no other business in Brazil, will its subscribed or acquired such CRI or CRA is exempt from taxation. purchase and ownership or its collection and enforcement of receivables result in its being required to qualify to do There is no restriction on the status of the shareholders of these business or to obtain any licence or its being subject to corporations nor in relation to investors in FIIs. As to FIDCs, regulation as a financial institution in Brazil? Does the investments are open only to qualified investors. Article 109 of answer to the preceding question change if the purchaser CVM Instruction No. 409, dated 8 August 2004, provides that the does business with other sellers in Brazil? following persons and entities may be classified as qualified investors: (i) financial institutions; (ii) insurance companies; (iii) The purchaser of receivables is not required to qualify to do pension funds; (iv) natural persons or legal entities with financial business or to obtain any licence in Brazil. The answer is the same investments greater than R$300,000.00 (approximately in the case that the purchaser does business with other sellers in US$166,000.00) who declare in writing their condition of qualified Brazil. investor; (v) investment funds directed exclusively to qualified investors; and (vi) managers of portfolios and consultants in

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8.2 Servicing. Does the seller require any licences, etc., in accounts in Brazilian currency outside the country will render order to continue to enforce and collect receivables infeasible the latter operations described in this question 8.5. following their sale to the purchaser, including to appear before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect 9 Taxation sold receivables?

9.1 Withholding Taxes. Will any part of payments on The seller will be able to collect and enforce the receivables receivables by the obligors to the seller or the purchaser (including on behalf of the purchaser or any third party, such as a be subject to withholding taxes in Brazil? Does the replacement servicer) without any need of a licence or consent until answer depend on the nature of the receivables, whether Brazil the obligor is notified about the sale of the receivable. Should they bear interest, their term to maturity, or where the collection and enforcement be initiated after the notice is served seller or the purchaser is located? upon the obligor, written proof that the seller is empowered to act on behalf of the purchaser will be necessary. Payments on receivables can be subject to withholding taxes in In case there is pending litigation, once the obligor has been served Brazil, depending on the nature of the payments and the the initial summons for the collection and enforcement of the condition/residence of the purchaser and the seller. The most receivables, the replacement of the original claimant (either the common securitisation structure, however, which involves only seller, the purchaser or any third party such as a replacement companies domiciled in Brazil and real estate credits, is usually not servicer) by a new claimant will be subject to the obligor’s consent. subject to withholding taxes. Some rules regarding withholding taxes on payments under 8.3 Data Protection. Does Brazil have laws restricting the receivables are: (i) when the seller/purchaser is an individual and use or dissemination of data about or provided by the obligor is a Brazilian legal entity, payments are usually subject obligors? If so, do these laws apply only to consumer to withholding income tax (WHT) at rates of up to 27.5%; (ii) in obligors or also to enterprises? case the seller/purchaser is an entity located outside Brazil, payments made to them may be subject to WHT at rates of 15% or The use of consumer debtor information is restricted by Brazilian 25% (the latter rate being applicable if the beneficiary is located in banking laws and regulations to the extent that the purchaser is a tax haven jurisdiction); and (iii) in the case the obligor and seller professionally engaged in factoring or similar credit purchase are Brazilian companies and the receivables derive from activities, and by the general rules protecting intimacy and private professional services, there may be a tax withholding of up to life contained in Article 5, X of the Brazilian Constitution. Such 6.15%. Other withholding taxes may be applicable to specific rules are not normally construed as restricting the use of obligor situations. information, but only its unauthorised dissemination. Please note In view of the complexity of Brazilian withholding tax legislation, that, in general, it is lawful to send to credit protection agencies each transaction should be carefully analysed by a local tax expert. information on non-performing contracts or loans. The publication of information on non-compliant obligors, on the other hand, would 9.2 Seller Tax Accounting. Does Brazil require that a specific violate the rule. accounting policy is adopted for tax purposes by the The breadth of the mentioned rules would justify their application seller or purchaser in the context of a securitisation? not only to the benefit of consumer obligors, but also to enterprises. There are regulatory rules providing guidelines as to how a 8.4 Consumer Protection. If the obligors are consumers, will securitisation transaction should be treated for accounting purposes, the purchaser (including a bank acting as purchaser) be with potential tax repercussions as well. As a general guideline, required to comply with any consumer protection law of especially after the process of harmonisation of the Brazilian Brazil? Briefly, what is required? accounting rules with International Financial Reporting Standards (IFRS), the transaction’s economic essence is required to prevail Not in general, provided: (i) the purchaser acquired only the over its legal form for accounting purposes. In general, the seller receivables (as opposed to being assigned the receivables contract, registers the transaction as a sale of assets at a loss (discount), as a whole); and (ii) the receivables contract does not infringe any whereas the purchaser registers the purchase of the asset and the law. However, some specific rules to the protection of consumers respective gain is recognised along the term of the securitisation. may indeed apply to credit purchasers, the most conspicuous being the rule that prepayment is always possible at the initiative of the 9.3 Stamp Duty, etc. Does Brazil impose stamp duty or other debtor, against proportional reduction of interest. documentary taxes on sales of receivables?

8.5 Currency Restrictions. Does Brazil have laws restricting There are no documentary taxes on the sale of receivables. the exchange of Brazilian currency for other currencies or Notwithstanding, it may be necessary or convenient to register the making of payments in Brazilian currency to persons certain sales of receivables with public registries in Brazil so that outside the country? they are enforceable against third parties. Registration duties are imposed on such registrations. Currently, there are some restrictions in relation to payments made abroad, but they do not impede securitisation transactions. The Brazilian regulation of foreign currency exchange was redrafted in 9.4 Value Added Taxes. Does Brazil impose value added tax, sales tax or other similar taxes on sales of goods or 2005 and several restrictions that existed were repealed. As a result, services, on sales of receivables or on fees for collection there are presently no important restrictions on the exchange of agent services? Brazilian currency or on payments using Brazilian currency to foreigners. In practical terms, however, the unavailability of Sales of receivables are not subject to value added tax, sales tax or

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other similar taxes on sales of goods or services. 9.6 Doing Business. Assuming that the purchaser conducts Fees received from a Brazilian party by a renderer of collection no other business in Brazil, would the purchaser’s purchase of the receivables, its appointment of the seller services resident in Brazil shall be subject to a service tax (ISS), as its servicer and collection agent, or its enforcement of which is charged from the service renderer at a tax rate between 2% the receivables against the obligors, make it liable to tax and 5%, depending on the municipality where the services are in Brazil? rendered/performed. In certain cases the contracting party (purchaser) may be liable for withholding and collecting the ISS. Brazilian tax law provides that the maintenance of an agent or This service tax is not due on services exported to non-Brazilian representative in Brazil with powers to negotiate contracts and bind residents, as long as the services’ results are verified out of Brazil. their foreign principal can be characterised as a permanent Brazil In case the collection agent is an individual resident in Brazil, fees establishment, therefore subjecting the foreign entity’s income to received from the purchaser (if a Brazilian legal entity) would be Brazilian corporate taxation. In view of this, the maintenance of an subject to WHT at rates of up to 27.5%. The purchaser would be agent or representative in Brazil which purchases receivables liable for withholding and collecting this tax. contractually binding the foreign entity can trigger Brazilian In the case of collection services rendered to a Brazilian purchaser corporate taxation of the foreign entity’s income under the same by a non-Brazilian party, payments remitted abroad would be rules applicable to local entities (the actual tax burden may depend subject to (i) ISS at a rate between 2% and 5%, depending on the on particular circumstances). municipality where the purchaser is located, (ii) WHT at a rate of The engagement of seller to render collection services will only 25%, and (iii) social contributions on gross revenues (PIS and result in tax liabilities for the purchaser in Brazil in the situations COFINS) levied at a combined rate of 9.25%. Due to the form of described in our answer to question 9.4 above. calculating these taxes, the total effective tax burden can vary Apart from this, the ownership of the credits may trigger the between 41% to 58% approximately, depending on whether the taxation indicated in our answer to question 9.1 above. burdens of WHT and ISS are transferred to the Brazilian purchaser. Finally, if the purchaser issues securities or debt instruments to fund The purchaser would be liable for the collection of these taxes. the purchase of the receivables, payments made by the purchaser to investors under such instruments may also be subject to WHT, the 9.5 Purchaser Liability. If the seller is required to pay value rates of which usually depend on the nature and term of the added tax, stamp duty or other taxes upon the sale of instrument. As the paying source, the purchaser would be liable for receivables (or on the sale of goods or services that give withholding and collecting such tax. rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold receivables or collections?

No, tax authorities cannot charge the purchaser for any taxes that have not been paid by the seller. If, however, the seller had tax liabilities and was insolvent when the receivables were sold, the transaction could be invalidated by tax authorities as a fraud against creditors.

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Ana Cecília Giorgi Manente Fernando de Azevedo Peraçoli

Levy & Salomão Advogados Levy & Salomão Advogados Av. Brigadeiro Faria Lima, 2601 - 12th floor Av. Brigadeiro Faria Lima, 2601 - 12th floor 01452-924 – São Paulo – SP 01452-924 – São Paulo – SP Brazil Brazil

Tel: +55 11 3555 5115 Tel: +55 11 3555 5127 Fax: +55 11 3555 5048 Fax: +55 11 3555 5048 Email: [email protected] Email: [email protected] URL: www.levysalomao.com.br URL: www.levysalomao.com.br Brazil Ana Cecília Manente is a partner of Levy & Salomão Advogados. Fernando is a senior associate in Levy & Salomão’s Corporate & Her practice concentrates on managed funds, foreign investment, Securities group, where his practice concentrates on public and and M&A deals. Ana also has extensive experience with private offerings, finance and secured transactions. He has structured finance, lending and venture capital, as well as significant experience with fund formation and private equity securities and general corporate matters. Ana works regularly matters, project finance, bond issuances and M&A transactions. with both foreign and Brazilian private equity investors and hedge Fernando works regularly with both international and Brazilian funds on fund formation and administration and investment investment funds, corporations, as well as banks and other structuring, and she serves as principal Brazilian counsel to many financial service providers. Fernando has also represented large international corporations doing business in Brazil. Ana clients in administrative proceedings before Brazil’s Central Bank advises clients on entity formation, including for joint ventures and and Securities Commission (CVM). Fernando holds a Bachelor M&A; corporate governance and regulatory compliance; real of Laws degree from Universidade Mackenzie, a specialist estate transactions; as well as leveraged transactions and access degree in Tax Law from Pontifícia Universidade Católica de São to capital markets, such as IPOs and bond issuances. Ana holds Paulo, a specialist degree in Economics and Corporate Law from a Bachelor of Laws degree from the University of São Paulo and Fundação Getulio Vargas and a LL.M from Georgetown a specialist degree in International Finance from the Foundation University Law Center. Institute of Economic Research of the University of São Paulo – FIPE/USP.

Levy & Salomão Advogados is a full-service law firm founded in 1989 to serve the needs of both Brazilian and foreign corporate clients. Our offices are located in São Paulo, Rio de Janeiro and Brasília. The firm handles demanding and complex cases and clients are afforded direct personal attention of experienced and renowned partners. Our lawyers are known for their strong analytical skills, their creativity in devising legal solutions, and their team-based approach to serving clients. Levy & Salomão attorneys combine solid academic backgrounds with substantial experience not only in the practice of law, but also in finance, capital markets, international business and accounting, and in government. Many of our professionals have previously worked for foreign law firms in the US and in Europe, and several are licensed to practice in foreign jurisdictions. Our client base is comprised primarily of transnational corporations and Brazilian corporate groups that require legal counsel on diverse aspects of law.

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Torys LLP Jim Hong

1 Receivables Contracts that a higher rate of interest after default may be an unenforceable penalty. (b) There is generally no statutory right to interest on late 1.1 Formalities. In order to create an enforceable debt payments in the common law provinces. The ability to obligation of the obligor to the seller, (a) is it necessary charge interest must be supported by a contract. In Québec, that the sales of goods or services are evidenced by a there may, in certain circumstances, be a statutory right to formal receivables contract; (b) are invoices alone interest for late payments. sufficient; and (c) can a receivable “contract” be deemed to exist as a result of the behaviour of the parties? (c) All provinces provide a cooling off period for direct sales contracts (contracts that are negotiated other than at the (a) Certain consumer contracts or sales that are subject to the seller’s place of business). Certain provinces provide sale of goods legislation (sales involving personal property cooling off periods for various other types of consumer other than receivables and money) must be in writing in contracts as well. order to be enforceable. (d) There is a wide array of ‘cost of borrowing’ laws in Canada. (b) Invoices alone are sufficient to create a receivable, subject to The failure to comply with cost of borrowing disclosure may the need to comply with consumer protection legislation lead to an inability to enforce the resulting receivable. In where applicable. addition, class action laws have been liberalised in Canada in the past decade to make it easier for representative plaintiffs (c) A contract can be found to exist based on the behaviour of to assert claims on behalf of a class of affected consumers. the parties and a written contract is not necessary to create a receivable, but would be helpful from an evidentiary perspective in case of dispute. 1.3 Government Receivables. Where the receivables contract has been entered into with the government or a government agency, are there different requirements and 1.2 Consumer Protections. Do Canada’s laws (a) limit rates laws that apply to the sale or collection of those of interest on consumer credit, loans or other kinds of receivables? receivables; (b) provide a statutory right to interest on late payments; (c) permit consumers to cancel receivables for Generally, receivables due from either the federal or a provincial a specified period of time; or (d) provide other noteworthy rights to consumers with respect to receivables owing by government are not assignable unless certain procedural steps are them? taken under the Financial Administration Act (Canada) or analogous applicable provincial legislation. Certain tax rebates (a) The Criminal Code (Canada) makes it a criminal offence, may be assigned under the Tax Rebate Discounting Act (Canada) or subject to criminal sanctions, to charge interest at a rate analogous applicable provincial legislation. greater than 60% per annum. Interest is broadly defined to include fees and other amounts payable by the borrower to the lender and is determined on the basis of the actual 2 Choice of Law – Receivables Contracts annualised return realised by the lender, other than in cases of voluntary prepayments by the borrower. In commercial 2.1 No Law Specified. If the seller and the obligor do not cases, courts have generally reduced the fees and other specify a choice of law in their receivables contract, what returns in excess of 60% per annum to fall within the are the main principles in Canada that will determine the Criminal Code limits, rather than striking down all interest governing law of the contract? and fees altogether if there is a violation, where the commercial agreement so provides. Canadian courts would apply principles of private international law The Interest Act (Canada) prohibits charging an increased in determining the law of the contract. Factors to be considered rate of interest on arrears of principal or interest that is secured by a real property mortgage. include the domicile, residence, nationality or jurisdiction of incorporation of the parties, the place where the contract was Certain provinces also have consumer protection legislation concluded and the place where delivery of goods or services is to be that applies to lending transactions giving courts the ability to reduce the excessive cost of borrowing charges. Québec performed. legislation provides that, in such case, the underlying As a practical matter, foreign law must be proven by expert contract may be terminated or the borrowing costs voided. evidence in Canadian courts. Therefore, if an action on a contract There is also case law in common law provinces to the effect without an express choice of law is brought in a Canadian court, and

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the court assumes jurisdiction over the matter due to a sufficient 3 Choice of Law – Receivables Purchase connection with the matter, it is likely that the court would be Agreement willing to interpret the contract under the laws of the forum unless the issue was disputed and expert evidence of the foreign law was introduced. 3.1 Base Case. Does Canada’s law generally require the sale of receivables to be governed by the same law as the law governing the receivables themselves? If so, does 2.2 Base Case. If the seller and the obligor are both resident that general rule apply irrespective of which law governs in Canada, and the transactions giving rise to the the receivables (i.e., Canada’s laws or foreign laws)? receivables and the payment of the receivables take

place in Canada, and the seller and the obligor choose No. The parties to the receivables purchase agreement would be Canada the law of Canada to govern the receivables contract, is free to choose a different law than that governing the receivables there any reason why a court in Canada would not give themselves. See question 2.3. effect to their choice of law?

It should be noted that matters of contract law fall under provincial 3.2 Example 1: If (a) the seller and the obligor are located in jurisdiction. Therefore, on the basis that this question can be read Canada, (b) the receivable is governed by the law of as relating to a particular province of Canada, the answer is that the Canada, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser court would give effect to a choice of the law of that province, choose the law of Canada to govern the receivables subject to the qualifications listed under question 2.3. purchase agreement, and (e) the sale complies with the requirements of Canada, will a court in Canada recognise 2.3 Freedom to Choose Foreign Law of Non-Resident Seller that sale as being effective against the seller, the obligor or Obligor. If the seller is resident in Canada but the and other third parties (such as creditors or insolvency obligor is not, or if the obligor is resident in Canada but administrators of the seller and the obligor)? the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables On the basis that this question can be read as relating to a particular contract, will a court in Canada give effect to the choice of province of Canada (see question 2.2) and subject to compliance foreign law? Are there any limitations to the recognition with perfection requirements discussed under questions 4.2 and 4.4, of foreign law (such as public policy or mandatory a court in a province of Canada would recognise the effectiveness principles of law) that would typically apply in commercial of the sale. relationships such that between the seller and the obligor under the receivables contract? 3.3 Example 2: Assuming that the facts are the same as A court would recognise the choice of foreign law in an agreement Example 1, but either the obligor or the purchaser or both provided that the parties’ choice of foreign law was bona fide and are located outside Canada, will a court in Canada there was no reason for avoiding the choice on the grounds of recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency public policy. Notwithstanding the parties’ choice of law, a court: administrators of the seller), or must the requirements of (a) will not take judicial notice of the provisions of the foreign the obligor’s country or the purchaser’s country (or both) law but will apply such provisions only if they are pleaded be taken into account? and proven by expert testimony; (b) will apply the law of the forum that would be characterised The answer would be the same as for question 3.2, except that the as procedural; effectiveness of the assignment against the foreign obligor would be (c) will apply provisions of the law of the forum that have governed by the law of the jurisdiction where the obligor was overriding effect (for example, certain enforcement located, not as described in question 4.4. provisions of the Personal Property Security Act (PPSA) in the common law jurisdictions would take priority over inconsistent remedy provisions in a security agreement 3.4 Example 3: If (a) the seller is located in Canada but the governed by a foreign law) or, in Québec, that are applicable obligor is located in another country, (b) the receivable is by reason of their particular object; governed by the law of the obligor’s country, (c) the seller (d) will not apply any foreign law if such application would be sells the receivable to a purchaser located in a third characterised as a direct or indirect enforcement of a foreign country, (d) the seller and the purchaser choose the law revenue, expropriatory or penal law or if its application of the obligor’s country to govern the receivables would be contrary to public policy of the forum; and purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in (e) will not enforce the performance of any obligation that is Canada recognise that sale as being effective against the illegal under the laws of any jurisdiction in which the seller and other third parties (such as creditors or obligation is to be performed. insolvency administrators of the seller) without the need to comply with Canada’s own sale requirements? 2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in Canada? The sale would be recognised so long as the seller remains solvent, subject to the qualifications referred to in question 2.3. As a Yes, it is. practical matter, in securitisations involving a Canadian seller, a true sale legal opinion is usually required and Canadian counsel would not be able to opine on the enforceability or the effect of a receivables purchase agreement governed by a foreign law. Also, in a bankruptcy proceeding in a Canadian court affecting the seller, it is possible that the court might recharacterise a sale under a foreign

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law as constituting a secured loan under applicable Canadian law if the PPSA, an absolute transfer of receivables is deemed to be a the receivables purchase agreement would not also constitute a sale security interest. In order for the transferee to take priority in those under applicable Canadian law. receivables as against third parties (such as subsequent good faith purchasers for value), the deemed security interest must be perfected, usually by registering a financing statement in the PPSA 3.5 Example 4: If (a) the obligor is located in Canada but the seller is located in another country, (b) the receivable is registry in the province where the assignor is located for purposes governed by the law of the seller’s country, (c) the seller of the PPSA. and the purchaser choose the law of the seller’s country In Québec, an assignment of receivables could be perfected by to govern the receivables purchase agreement, and (d) registration only if the receivables transferred constitute a the sale complies with the requirements of the seller’s

Canada “universality of claims”. If the receivables do not constitute a country, will a court in Canada recognise that sale as universality of claims, the assignment may be perfected with being effective against the obligor and other third parties respect to Québec obligors only by means of actual notice of the (such as creditors or insolvency administrators of the assignment to such obligors. There is considerable uncertainty obligor) without the need to comply with Canada’s own sale requirements? about what constitutes a universality, but it is generally accepted that a sale of all receivables of a particular type generated by the A court would recognise the sale under the law of the seller’s seller between two specified dates would constitute a universality of country, but this would not obviate the need to comply with the claims. It should be noted that the creation of a universality in this requirements set out in question 4.4 for the sale to be effective way prevents the random selection of Québec receivables for against obligors in Canada. inclusion in a segregated pool of Canadian receivables; rather, the Québec receivables would normally be selected so as to constitute a universality of claims generated between two specified dates. 3.6 Example 5: If (a) the seller is located in Canada (irrespective of the obligor’s location), (b) the receivable is governed by the law of Canada, (c) the seller sells the 4.3 Perfection for Promissory Notes, etc. What additional or receivable to a purchaser located in a third country, (d) different requirements for sale and perfection apply to the seller and the purchaser choose the law of the sales of promissory notes, mortgage loans, consumer purchaser’s country to govern the receivables purchase loans or marketable debt securities? agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in A transfer of promissory notes is governed by the Bills of Exchange Canada recognise that sale as being effective against the Act (Canada) which deals with the rights of holders in due course of seller and other third parties (such as creditors or a bill, note or cheque. While perfection of an assignment of insolvency administrators of the seller, any obligor located promissory notes is still governed by applicable provincial PPSAs in Canada and any third party creditor or insolvency (that is, in order to perfect the assignment as against third parties, administrator of any such obligor)? either registration or possession is required), most PPSAs expressly provide that the rights of holders in due course are not affected by The answer here is the same as for question 3.4, with the added provincial PPSAs. As a practical matter, in order to ensure that the requirement to comply with the procedures set out in question 4.4 purchaser of a promissory note has priority over other claimants (to for the sale to be effective against obligors in Canada. ensure no one else can become a holder in due course), it will be necessary for the purchaser, or a custodian acting for the purchaser, 4 Asset Sales to take and maintain possession or control. Most provinces of Canada have enacted Securities Transfers Acts 4.1 Sale Methods Generally. In Canada what are the (STAs) that deal comprehensively with the transfer and holding of customary methods for a seller to sell receivables to a securities and interests in securities. This legislation is modelled purchaser? What is the customary terminology – is it after article 8 of the US Uniform Commercial Code. called a sale, transfer, assignment or something else? In each of the common law provinces, an assignment of interests in real property (such as mortgages) is perfected by registering the Typically, the sale would be effected pursuant to a receivables assignment in the applicable land titles or land registry office. purchase agreement. The terms of the receivables purchase Usually, sellers anticipating the sale of mortgages by securitisation agreement would depend upon whether the commercial will arrange for their mortgages to be originated in the name of a arrangement is a factoring (financing), a whole loan sale (where the licensed trust company as nominee, bare trustee and custodian for seller retains no residual interest in the receivables sold), or a the benefit of the beneficial owner in order to obviate the need to version typically used in a securitisation (where the seller is entitled reassign the mortgages for securitisation. When mortgages are not to a deferred purchase price reflecting a residual interest in the registered in the name of a custodian or nominee, registration of receivables). There is no significance to the choice of terminology assignments is typically not made at the closing of the securitisation among sale, transfer or assignment. transaction; instead, assignors will deliver a power of attorney in registrable form, which may be used by the transferee to register 4.2 Perfection Generally. What formalities are required mortgage assignments at a later date. Since these powers of generally for perfecting a sale of receivables? Are there attorney are coupled with an interest in the related mortgages, such any additional or other formalities required for the sale of powers of attorney would survive the bankruptcy of the grantor of receivables to be perfected against any subsequent good the power (the assignor). faith purchasers for value of the same receivables from In Québec, claims under a mortgage (a loan secured by an the seller? immovable hypothec) constitute personal (movable) property and perfection is obtained in the same manner as for other receivables: In each of the common law provinces (all provinces other than that is, by registration at the personal property security register (and Québec), perfection is governed by that province’s PPSA. Under not the land registry office) in the case of the universality of claims,

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or else by providing evidence of the assignment to the obligor. The notified of the assignment of their receivables at any time; however, assignment of the mortgage (hypothec) resulting from the if the seller files for protection under the Companies’ Creditors assignment of the claims should be registered at the land registry Arrangement Act (Canada) (CCAA) or the Bankruptcy and office, however, failure to comply with said requirement would not Insolvency Act (Canada) (BIA), a judicial stay of proceedings render the sale ineffective against a trustee in bankruptcy of seller. would likely prohibit the purchaser from notifying obligors of the There are no statutory provisions providing that an assignment of assignment of their receivables without first obtaining a court order consumer loans be treated differently than other loans. permitting such notice to be given.

4.4 Obligor Notification or Consent. Must the seller or the 4.6 Restrictions on Assignment; Liability to Obligor. Are

purchaser notify obligors of the sale of receivables in restrictions in receivables contracts prohibiting sale or Canada order for the sale to be effective against the obligors assignment generally enforceable in Canada? Are there and/or creditors of the seller? Must the seller or the exceptions to this rule (e.g., for contracts between purchaser obtain the obligors’ consent to the sale of commercial entities)? If Canada recognises prohibitions receivables in order for the sale to be an effective sale on sale or assignment and the seller nevertheless sells against the obligors? Does the answer to this question receivables to the purchaser, will either the seller or the vary if (a) the receivables contract does not prohibit purchaser be liable to the obligor for breach of contract or assignment but does not expressly permit assignment; or on any other basis? (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect An assignment of a non-assignable receivable (as opposed to an a sale, are there any benefits to giving notice – such as assignment of an undivided interest in the receivable) is binding as cutting off obligor set-off rights and other obligor between the seller and purchaser; however, the obligor thereunder defences? will be entitled to fully discharge its obligations by making a payment to the seller, and therefore such an assignment would still In order for an assignment of a receivable to be effective against the be subject to the seller’s insolvency risk. The obligor could obligor, the obligor must receive notice of the assignment. Until the maintain a cause of action against the purchaser for the tort of obligor receives notice, it may discharge its obligations by making inducing the breach of contract. payment to the seller and also retain the benefit of all defences that may be asserted against the seller. Therefore, even where there is no need to notify obligors in order for the assignment to be 4.7 Identification. Must the sale document specifically identify effective, the benefit of providing notification is to cut off the each of the receivables to be sold? If so, what specific benefit of defences that could arise in the future. information is required (e.g., obligor name, invoice number, invoice date, payment date, etc.)? Do the In order for an assignment to be effective against the seller and its receivables being sold have to share objective creditors, it is generally not necessary to notify obligors so long as characteristics? Alternatively, if the seller sells all of its the assignment is perfected by registration. The only exception is receivables to the purchaser, is this sufficient for obligors residing in Québec, where the assignment does not identification of receivables? constitute a universality (see question 4.2). A receivable that arises pursuant to a contract that does not It is not necessary for the sale document to identify each specific expressly prohibit assignment is an assignable receivable (except receivable; however, it must contain a description of the receivables where the obligor is the federal or a provincial government). A being sold sufficient to allow them to be identified as belonging to receivable from a government obligor is not assignable unless the class of receivables sold. This may be satisfied by a sale of all specified procedures are followed under the Financial of a seller’s receivables. Administration Act (Canada) or applicable analogous provincial If a sale is of less than all of the receivables of a particular type, then legislation. the existence of shared objective characteristics that would permit Contractual restrictions on the assignment of receivables are not identification of receivables as either being sold or not sold, would binding on third party assignees; hence an assignment of “non- affect the characterisation of such receivables as a universality in assignable” receivables may be perfected (subject to the rights of an Québec. See question 4.2. unnotified obligor discussed under question 4.6); however, an assignment of an undivided interest in a receivable (rather than the 4.8 Respect for Intent of Parties; Economic Effects on Sale. entire receivable) would remain subject to contractual restrictions. If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be respected or will a court enquire into the economic 4.5 Notice Mechanics. If notice is to be delivered to obligors, characteristics of the transaction? If the latter, what whether at the time of sale or later, are there any economic characteristics of a sale, if any, might prevent requirements regarding the form the notice must take or the sale from being perfected? Among other things, to how it must be delivered? Is there any time limit beyond what extent may the seller retain (a) credit risk; (b) which notice is ineffective – for example, can a notice of interest rate risk; and/or (c) control of collections of sale be delivered after the sale, and can notice be receivables without jeopardising perfection? delivered after insolvency proceedings against the obligor have commenced? Does the notice apply only to specific receivables or can it apply to any and all (including future) There is a risk of a court recharacterising a sale of receivables as a receivables? Are there any other limitations or secured loan. True sale legal opinions are typically delivered in considerations? Canadian securitisation transactions. The most important factor in determining whether there has been a true sale is the intention of the There are no mandated requirements regarding the form of notice or parties, as evidenced by the documents, communications and conduct delivery mechanism; however, the onus of proving delivery will of the parties. The most important indication of the intention that an rest upon the party asserting delivery was made. Obligors may be arrangement is a secured loan is the existence of a right of the seller to require that the receivables sold be reassigned to it. 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According to the only reported judicial decision in Canada that register an assignment of a security interest or other rights depends considered the issue of the recharacterisation of a sale in a on the type of security interest or other rights involved. securitisation context, the court listed the following factors, in addition to the intention of the parties, to be considered in determining whether a transaction constitutes a true sale: 5 Security Issues (a) the transfer of ownership risk and the level of recourse; (b) the ability to identify the assets sold; 5.1 Back-up Security. Is it customary in Canada to take a “back-up” security interest over the seller’s ownership (c) the ability to calculate the purchase price; interest in the receivables and the related security, in the (d) whether the return to the purchaser will be more than its event that the sale is deemed by a court not to have been Canada initial investment and a calculated yield on such investment; perfected? (e) the right of the seller to retain surplus collections; (f) a right of redemption by the seller; No. That may be interpreted as contrary to the intent of the parties (g) the responsibilities for collection of the receivables; and to treat the transaction as a sale. In any event, so long as the assignment is perfected as an assignment, if it is recharacterised by (h) the ability of the seller to extinguish the purchaser’s rights a court as a secured financing, the perfected assignment will also from sources other than the collection of the receivables. constitute perfection of the security interest in common law Of these factors, it is likely that the only one that is determinative provinces. of the issue by itself is the presence of a right of redemption. In Under Québec law, the likelihood of recharacterisation is low, as the determining whether there is a right of redemption, the court merely assignment of claims as security is no longer recognised. If the looked to whether there was a contractual right of the seller to transaction is recharacterised, the sale would likely not constitute a repurchase or redeem the purchased receivables and did not infer movable hypothec without delivery. that there was one on the basis of an economic analysis of the transaction. 5.2 Seller Security. If so, what are the formalities for the seller granting a security interest in receivables and 4.9 Continuous Sales of Receivables. Can the seller agree in related security under the laws of Canada, and for such an enforceable manner (at least prior to its insolvency) to security interest to be perfected? continuous sales of receivables (i.e., sales of receivables as and when they arise)? This is not applicable in common law provinces. Yes, they can. To the extent that Québec laws apply to the validity and perfection of such security, appropriate charging language and a charging amount in Canadian dollars would need to be included in the 4.10 Future Receivables. Can the seller commit in an documentation so as to constitute a hypothec. A registration of the enforceable manner to sell receivables to the purchaser hypothec would also be necessary. Additional formalities for the that come into existence after the date of the receivables purchase agreement (e.g., “future flow” securitisation)? If granting of the hypothec might have to be followed if the secured so, how must the sale of future receivables be structured obligations constitute titles of indebtedness such as notes. to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the 5.3 Purchaser Security. If the purchaser grants security over seller’s insolvency? all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities Yes. However, the sale only occurs when the receivables come into must the purchaser comply with in Canada to grant and existence. perfect a security interest in purchased receivables When receivables arise after the seller’s insolvency, the seller or its governed by the laws of Canada and the related security? Insolvency Official may treat the sale of future receivables as an executory contract and disclaim such contract. Also see question The purchaser would have to grant security by means of a written 6.5. agreement, which (subject to question 2.3) need not be governed by the laws of a Canadian province. A security interest in receivables would attach when: 4.11 Related Security. Must any additional formalities be (a) value is given by the lender; fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all (b) the debtor has rights in the receivables or the power to related security can be enforceably transferred, what transfer rights in the receivables to the lender; and methods are customarily adopted to provide the (c) the debtor has signed a security agreement that contains a purchaser the benefits of such related security? description of the receivables sufficient to enable them to be identified. Security interests securing the receivables transferred to the Where the purchaser funds the purchase of receivables by issuing purchaser are assigned together with the receivables. Under the notes, it would ordinarily enter into a trust indenture with an PPSA, the registration of an assignment of a security interest by the indenture trustee acting for the noteholders and other secured secured party is optional; such registration is not necessary in order creditors. The trust indenture would include the granting of a to maintain perfection of the original security interest. Since the security interest over the receivables. originator is also normally appointed as the servicer of the In each of the above two cases, perfection would be achieved by receivables, it is rare to effect these registrations at the time of a registration under the applicable PPSA in common law provinces. securitisation. However, if a replacement servicer is appointed, such registrations would be effected by or on behalf of the To the extent that Québec law applies, it would also be necessary purchaser at such time. Under the Québec Civil Code, the need to for the purchaser to enter into a hypothec.

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5.4 Recognition. If the purchaser grants a security interest in 6 Insolvency Laws receivables governed by the laws of Canada, and that security interest is valid and perfected under the laws of the purchaser’s country, will it be treated as valid and 6.1 Stay of Action. If, after a sale of receivables that is perfected in Canada or must additional steps be taken in otherwise perfected, the seller becomes subject to an Canada? insolvency proceeding, will Canada’s insolvency laws automatically prohibit the purchaser from collecting, It will be recognised. Where the purchaser is located (or domiciled transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? Does the under Québec law) outside Canada, no additional steps are required. insolvency official have the ability to stay collection and If the purchaser is located in a Canadian province, it would be

enforcement actions until he determines that the sale is Canada necessary to perfect the security interest by registration. If the perfected? Would the answer be different if the purchaser is domiciled in Québec, a hypothec will be required. purchaser is deemed to only be a secured party rather than the owner of the receivables? 5.5 Additional Formalities. What additional or different requirements apply to security interests in or connected to Under the restructuring provisions of the BIA, a stay of proceedings insurance policies, promissory notes, mortgage loans, is automatic for a period of 30 days and may be renewed by court consumer loans or marketable debt securities? order for further 30-day periods (up to a maximum period of six months). Under the CCAA, an application to restructure normally Refer to question 4.3. includes an application for a stay order of unlimited duration which is normally granted by the court.

5.6 Trusts. Does Canada recognise trusts? If not, is there a If there has been a true sale of receivables and the seller has been mechanism whereby collections received by the seller in replaced as servicer by a replacement servicer and all obligors have respect of sold receivables can be held or be deemed to been notified of the assignment prior to the filing under an be held separate and apart from the seller’s own assets insolvency proceeding, the stay would not affect the collection of until turned over to the purchaser? such receivables. However, the stay could prevent a replacement servicer from being appointed or obligors from being notified until These types of trusts are recognised in common law provinces, not a court determines that the transaction constituted a sale of Québec. However, a trust cannot “deem” collections to be held receivables, rather than a secured financing. separate and apart from the seller’s own assets if, in fact, they are If the sale was not a true sale and the purchaser is deemed to only commingled with the seller’s assets such that they may not be be a secured creditor, the stay of proceedings would prohibit the separately identified. purchaser from enforcing its rights as a secured creditor unless In Québec, a similar result would be achieved by appointing the leave is obtained from the court. seller as agent (mandatory) of the purchaser.

6.2 Insolvency Official’s Powers. If there is no stay of action 5.7 Bank Accounts. Does Canada recognise escrow under what circumstances, if any, does the insolvency accounts? Can security be taken over a bank account official have the power to prohibit the purchaser’s located in Canada? If so, what is the typical method? exercise of rights (by means of injunction, stay order or Would courts in Canada recognise a foreign-law grant of other action)? security (for example, an English law debenture) taken over a bank account located in Canada? Although a stay order under the CCAA is not automatic, it is almost always included as part of the application by the debtor company to Security can be granted over escrow accounts. The means for initiate restructuring proceedings under that Act. taking security depends upon the type of account. For simple bank accounts, perfection can be achieved by registration under the 6.3 Suspect Period (Clawback). Under what facts or applicable PPSA or by obtaining a hypothec over the claim circumstances could the insolvency official rescind or resulting from such bank account if the holder is domiciled in reverse transactions that took place during a “suspect” or Québec. For securities accounts, it is necessary to take control over “preference” period before the commencement of the these accounts under the applicable STA in those provinces that insolvency proceeding? What are the lengths of the have enacted STAs. “suspect” or “preference” periods in Canada for (a) Courts in Canada would recognise a foreign law grant of security transactions between unrelated parties and (b) subject to provincial private international law rules governing the transactions between related parties? validity of security interests; however, procedural aspects of enforcing security would be governed by the law of the province Numerous statutes may be relevant in connection with the where the account was located. insolvency of the seller (collectively, Insolvency Statutes), including the BIA, the CCAA, the Winding-up and Restructuring Act (Canada) and various provincial fraudulent preference and fraudulent conveyance statutes. Under the Insolvency Statutes, certain transactions by an originator may be overridden or set aside in certain circumstances, including the following: a transfer of property made with the intention of defeating or defrauding creditors or others of their claims against the seller; a transaction that is entered into by an insolvent seller (or a seller that knows that it is on the verge of insolvency):

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with the intent to defeat or prejudice its creditors; of substantive consolidation, a number of steps can be taken, with a creditor with the intent to give that creditor including the following: preference over the other creditors of the seller; or (a) the special purpose purchaser can be established as an with a creditor and that has the effect of giving that “orphan” trust legally under the control of an arm’s-length creditor a preference over other creditors of the seller; trustee, with no beneficiary having a right to terminate the trust; a gratuitous conveyance made within three months immediately preceding the commencement of a winding-up (b) if an intermediate special purpose entity that is wholly owned proceeding; by the seller (to which the receivables would be sold before being sold again to the purchaser) is used, it can be required a contract, whereby creditors are injured or delayed, made by to have an independent director who would be required to a seller who is unable to meet its engagements with a person Canada approve any fundamental change (such as amalgamation, who knows of that inability or who has probable cause for winding-up or sale of substantial assets of the intermediate believing that such inability exists; special purpose entity); and a conveyance for consideration, whereby creditors are (c) the intermediate special purpose entity or the special purpose injured or obstructed, made by a seller who is unable to meet purchaser should be operationally separate from the seller its engagements with a person ignorant of that inability and through the following means: before that inability has become public, but within 30 days before the commencement of a winding-up proceeding; and it can have its own bank accounts to pay its liabilities; a sale, deposit, pledge or transfer of any property by a seller it can have its own financial statements prepared; in contemplation of insolvency by way of security for its liabilities should not be guaranteed by the seller; payment to any creditor whereby that creditor obtains or will and obtain an unjust preference over other creditors. it should hold itself out to third parties as a separate The time periods noted above relate to third party dealings; such entity distinct from the seller. review periods are extended if the seller and purchaser are related parties. In addition, under the transfers at undervalue provisions of 6.5 Effect of Proceedings on Future Receivables. What is the the BIA and CCAA, a court may review a disposition of property effect of the initiation of insolvency proceedings on (a) for which the consideration received by the seller is conspicuously sales of receivables that have not yet occurred or (b) on less than the fair market value of the receivables sold by the seller sales of receivables that have not yet come into who becomes an insolvent person or bankrupt. existence? Bulk sales legislation applies in certain provinces if there is a sale of tangible assets (such as leased autos or equipment) out of the Both would be executory contracts that could be disclaimed by an ordinary course of business. Failure to comply with applicable bulk Insolvency Official. Also, during a stay of proceedings under the sales legislation could make the purchaser responsible for losses CCAA or BIA, it is possible that the purchaser’s right to enforce the suffered by the creditors of the originator (up to the value of the sale agreement will be stayed unless leave of the court is obtained transferred assets). to enforce its rights under the sale agreement.

6.4 Substantive Consolidation. Under what facts or 7 Special Rules circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with those of the seller or its affiliates in the insolvency 7.1 Securitisation Law. Is there a special securitisation law proceeding? (and/or special provisions in other laws) in Canada establishing a legal framework for securitisation transactions? If so, what are the basics? There are no express provisions for substantive consolidation under the Insolvency Statutes. Instead, the jurisdiction to order There is no such law in Canada. substantive consolidation rests under the general equitable jurisdiction of the court in insolvency proceedings. There are only a small number of Canadian court decisions with reasons for 7.2 Securitisation Entities. Does Canada have laws judgment dealing with substantive consolidation. Canadian courts specifically providing for establishment of special purpose have generally adopted the “balancing of prejudice” test from U.S. entities for securitisation? If so, what does the law court decisions, whereby the court asks whether the creditors of the provide as to: (a) requirements for establishment and insolvent person will suffer greater prejudice in the absence of management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as consolidation than the debtor (and any objecting creditors) will to the status of directors or shareholders? suffer from its imposition. Factors commonly referred to in determining the balancing of interests include the following: Canada has no law specifically providing for securitisation special difficulty in segregating assets; purpose entities. In Canada, the special purpose entity used to issue presence of consolidated financial statements; notes is typically a common law trust. profitability of consolidation at a single location;

commingling of assets and business functions; 7.3 Non-Recourse Clause. Will a court in Canada give effect unity of interests in ownerships; to a contractual provision (even if the contract’s governing existence of inter-corporate loan guarantees; and law is the law of another country) limiting the recourse of parties to available funds? transfer of assets without observance of corporate formalities. A properly drafted unambiguous non-recourse clause will be Since substantive consolidation is an equitable remedy, the risk that enforceable, even if it is governed by a foreign law. See question it could be applied cannot be eliminated; however, to reduce the risk 2.3.

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7.4 Non-Petition Clause. Will a court in Canada give effect to Provided that the purchaser is not carrying on business in Canada, a contractual provision (even if the contract’s governing no licensing would be required nor would the purchaser become law is the law of another country) prohibiting the parties subject to regulation as a financial institution. from: (a) taking legal action against the purchaser or another person; or (b) commencing an insolvency proceeding against the purchaser or another person? 8.2 Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables Such a clause is likely not enforceable as being contrary to public following their sale to the purchaser, including to appear policy. before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect sold receivables? Canada 7.5 Independent Director. Will a court in Canada give effect to a contractual provision (even if the contract’s governing The need for the seller to be licensed would depend upon the nature law is the law of another country) or a provision in a of the sale and the nature of the receivables. party’s organisational documents prohibiting the directors from taking specified actions (including commencing an Collection by a seller of receivables on behalf of a purchaser would insolvency proceeding) without the affirmative vote of an not require additional licensing so long as the obligors are not independent director? notified of the assignment. If obligors are notified of the assignment and the seller continues to collect receivables on behalf An action taken by a corporation without the approval of an of the purchaser, certain provinces have collection agency statutes independent director in contravention of a contractual restriction that could apply to require the seller to become licensed as a not to do so would nevertheless be a valid corporate act so long as collection agent. A third party replacement servicer could require a it was done within the constraints of the corporation’s constating licence under applicable collection agency statutes unless it was documents. The remedy of the contract counterparty would be an exempt from the application of such statutes (as are most financial action for breach of contract. institutions). A requirement in a corporation’s constating documents, including in The collection of certain types of receivables, such as mortgages, a unanimous shareholders’ agreement, to the effect that the may require special licensing under mortgage broker legislation of corporation could not institute certain actions without an certain provinces. independent director’s approval should be effective to preclude such action from being validly taken without such approval. 8.3 Data Protection. Does Canada have laws restricting the use or dissemination of data about or provided by obligors? If so, do these laws apply only to consumer 8 Regulatory Issues obligors or also to enterprises?

8.1 Required Authorisations, etc. Assuming that the Yes. The Personal Information Protection and Electronic purchaser does no other business in Canada, will its Documents Act (PIPEDA) is federal legislation that governs the purchase and ownership or its collection and enforcement collection, use and disclosure of personal information of of receivables result in its being required to qualify to do individuals. Certain provinces have also implemented privacy business or to obtain any licence or its being subject to legislation. PIPEDA and provincial privacy legislation apply only regulation as a financial institution in Canada? Does the to individuals, not to commercial enterprises. answer to the preceding question change if the purchaser does business with other sellers in Canada? 8.4 Consumer Protection. If the obligors are consumers, will Assuming that the purchaser is not a foreign bank, merely owing the purchaser (including a bank acting as purchaser) be receivables does not in and of itself require registration. Servicing required to comply with any consumer protection law of receivables through an agent similarly does not require registration. Canada? Briefly, what is required? However, if the activities amount to carrying on a business, registration under extra-provincial registration statutes would be Most consumer protection laws would apply at or near the time that required in order to maintain an action on any of the receivables. the receivable is originated. These include cost of borrowing The greater the number of sellers that a purchaser deals with from a disclosure laws, false advertising laws and certain laws regulating particular province, the higher the probability that the purchaser’s motor vehicle dealers. To the extent these laws were not observed activities would constitute carrying on a business. by the seller, this could provide the obligors with defences against the purchasers. To the extent that there are consumer protection In order to avoid becoming subject to regulation in Canada, it would laws that apply following origination, such as privacy laws, the be advisable for the purchaser to limit its connections to Canada by purchaser, including a bank, would be required to comply. In ensuring, as much as possible, that the following occur: Québec, the assignee of a consumer receivable will be jointly and (i) the decision to purchase the receivables is made outside severally liable with the assignor for the assignor’s obligations Canada; toward the consumer (subject to certain statutory monetary (ii) all negotiations relating to the purchase of the receivables are limitations). either conducted outside Canada or conducted by telephone communications during which all of the officers and employers of the purchaser participating in the 8.5 Currency Restrictions. Does Canada have laws communications are outside Canada; restricting the exchange of Canada’s currency for other (iii) the funding for the purchase of receivables occurs outside currencies or the making of payments in Canada’s Canada; and currency to persons outside the country? (iv) the purchaser executes and delivers its documentation relating to the purchase outside Canada. No, it does not.

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9 Taxation (although Québec has indicated that it will adopt the HST on January 1, 2013). These taxes apply to the transfer of certain tangible assets, such as leased automobiles and equipment. 9.1 Withholding Taxes. Will any part of payments on Servicing fees are also subject to GST or HST. Generally, no GST receivables by the obligors to the seller or the purchaser or HST is applicable to receivables that are sold on a fully serviced be subject to withholding taxes in Canada? Does the answer depend on the nature of the receivables, whether basis, whereby the servicing component is an ancillary part of the they bear interest, their term to maturity, or where the receivables purchase price and no separate servicing fee is charged. seller or the purchaser is located? Therefore, it is most common in Canada not to specify a separate servicing fee but instead to sell receivables on a fully serviced basis.

Canada Canada has now fully eliminated withholding tax on interest paid to However, if a replacement servicer is appointed, the replacement arm’s-length lenders, other than participating debt interest. servicing fees would be subject to GST or HST. The GST rate is Therefore, Canadian receivables, other than those that produce 5%. The HST rate depends upon the applicable province. In lease or royalty payments and dividends, sold to a non-Canadian Ontario it is 13% and in Québec there is a combined GST and PST purchaser, will generally not be subject to Canadian withholding rate of 13.92%. tax. However, due to concerns about a non-Canadian purchaser becoming subject to Canadian tax by virtue of carrying on business 9.5 Purchaser Liability. If the seller is required to pay value in Canada through the servicing of the Canadian receivables, it is added tax, stamp duty or other taxes upon the sale of more common for an intermediate Canadian special purpose entity receivables (or on the sale of goods or services that give to be established to purchase the Canadian receivables and for that rise to the receivables) and the seller does not pay, then special purpose entity to then issue an interest-bearing note to a will the taxing authority be able to make claims for the non-Canadian investor. unpaid tax against the purchaser or against the sold receivables or collections? Withholding tax of 25% is generally exigible on most cross-border lease, royalty and dividend payments, subject to reduction through If a seller has failed to remit GST, HST or PST, failed to remit bilateral tax treaties. certain employee source deductions and employee and employer portions of Unemployment Insurance and Canada Pension Plan 9.2 Seller Tax Accounting. Does Canada require that a payments or failed to remit withholding taxes on payments to non- specific accounting policy is adopted for tax purposes by residents, the applicable tax authority may recover such taxes from the seller or purchaser in the context of a securitisation? the assets (or any realisation thereon) from a person who merely has a security interest in the assets on a super-priority basis. Where a Canadian taxpayers must calculate their income for Canadian tax true sale has occurred, assets are purchased from a seller selling in purposes in accordance with Canadian generally accepted the ordinary course of business; tax liability of the seller does not accounting principles (although there are a number of specific attach to the purchased assets. policies that permit tax treatment to be different than accounting treatment). All Canadian public companies now adopt International Financial Reporting Standards for fiscal years commencing on or 9.6 Doing Business. Assuming that the purchaser conducts no other business in Canada, would the purchaser’s after January 1, 2011. Specified rules exist in the Income Tax Act purchase of the receivables, its appointment of the seller (Canada) for financial institutions (as defined) holding and as its servicer and collection agent, or its enforcement of disposing of “specified debt obligations” (as defined). the receivables against the obligors, make it liable to tax in Canada? 9.3 Stamp Duty, etc. Does Canada impose stamp duty or other documentary taxes on sales of receivables? The answer would depend upon the specific facts of each particular situation. It is possible that the appointment of the seller as servicer No, it does not. and collection agent or the enforcement of the receivables against the obligors could cause a non-Canadian purchaser to be considered to carry on business in Canada and to be liable to tax in Canada on 9.4 Value Added Taxes. Does Canada impose value added that basis. As discussed above, due to the concern with a non- tax, sales tax or other similar taxes on sales of goods or Canadian purchaser being considered to carry on business in services, on sales of receivables or on fees for collection agent services? Canada through the servicing of Canadian receivables, it is more common for an intermediate Canadian special purpose entity to be The federal government imposes a goods and services tax (GST) established to purchase the Canadian receivables and for that and some provinces impose a provincial sales tax (PST) that is special purpose entity to then issue an interest bearing note to a non- combined with GST into a blended harmonised sales tax (HST); Canadian investor. certain provinces, including Québec, maintain their own PST

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Michael K. Feldman Jim Hong

Torys LLP Torys LLP 79 Wellington Street West, Suite 3000 79 Wellington Street West, Suite 3000 Toronto, ON M5K 1N2 Toronto, ON M5K 1N2 Canada Canada

Tel: +1 416 865 7513 Tel: +1 416 865 7369 Fax: +1 416 865 7380 Fax: +1 416 865 7380 Email: [email protected] Email: [email protected] URL: www.torys.com URL: www.torys.com Canada Michael Feldman’s practice focuses on corporate and Jim Hong practices corporate, commercial and securities law, commercial law, with an emphasis on structured asset-backed with a focus on structured asset-backed financings, financing, securitisation, infrastructure finance, capital markets, securitisation, derivatives and public and private managed secured lending, aircraft financing and derivatives. products. Prior to joining Torys, Jim practiced in London, U.K. in Michael has worked on securitisation transactions involving the international securitisation group of a leading firm, where he several asset classes including auto loans and leases, dealer advised on debt refinancing, RMBS and CDO transactions. Since floorplan loans, residential and commercial mortgage, reverse then, Jim has worked on securitisation transactions involving a mortgages, trade receivables and rental vehicles. number of asset classes including, credit card receivables, auto Michael’s high-profile representations have led to his international loans and leases, dealer floorplan loans, residential and recognition for his expertise. He is listed as a leading commercial mortgages and home equity lines of credit. Jim has securitisation lawyer in various international publications, been recognised as a leading securitisation lawyer in a number of including Chambers & Partners’ Chambers Global, publications including Chambers & Partners’ Chambers Global Lexpert/American Lawyer Media’s Guide to the Leading 500 and Woodward White’s Best Lawyers in Canada. Lawyers in Canada, Woodward White’s Best Lawyers and Legal Media Group/Euromoney’s IFLR1000 Guide to the World’s Leading Financial Law Firms.

Torys is a highly respected international business law firm with offices in Toronto, New York and Calgary. The firm offers seamless cross-border services to clients on both sides of the U.S.-Canada border and globally. Members of Torys’ Structured Finance and Securitization Practice Group represent issuers and underwriters on public offerings of asset-backed securities, and are familiar with the regulatory requirements of asset-backed securities offerings in Canada. They act on private placements of term notes, and in the establishment of multi-seller and single-seller commercial paper securitisation conduits. It also advises liquidity lenders, credit enhancers and investors. Torys is a recognised leader and a frequently recommended firm in the area of securitisation law. The securitisation practitioners have worked with clients to develop a number of new securitisation structures and products. The group has also been involved in several merger and acquisition transactions involving the assumption of obligations under public and private securitisation programmes.

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FenXun Partners Xusheng Yang

1 Receivables Contracts There is no statutory right permitting consumers to cancel receivables for a specified period of time. Moreover, unless the receivable contract provides otherwise, the consumer may have 1.1 Formalities. In order to create an enforceable debt rights of set-off against the seller for obligations of the same type obligation of the obligor to the seller, (a) is it necessary and quality that are due and payable. In other words, the consumer that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone may be entitled to set-off the debt owed to the seller by it under the sufficient; and (c) can a receivable “contract” be deemed receivables against any debt owed to it by the seller, as applicable, to exist as a result of the behaviour of the parties? if both debts are due and payable (unless this is restricted in the receivable contract). Furthermore, when the consumer receives the Under the PRC Contract Law, promulgated by the National notice regarding the sale of the receivables pursuant to Article 80 of People’s Congress on March 15, 1999, the parties may conclude a the PRC Contract Law, unless the receivable contract provides contract in writing, orally or in another form. A receivable contract otherwise, the consumer is entitled to set-off the receivables can be inferred by the combination of some written evidence, such purchased by the purchaser against those payment obligations owed as the invoices and the communications between the parties, to the consumer by the seller that are due and payable before or at coupled with the conduct of the parties. the same time as the due date of the receivables.

1.2 Consumer Protections. Do China’s laws (a) limit rates of 1.3 Government Receivables. Where the receivables interest on consumer credit, loans or other kinds of contract has been entered into with the government or a receivables; (b) provide a statutory right to interest on late government agency, are there different requirements and payments; (c) permit consumers to cancel receivables for laws that apply to the sale or collection of those a specified period of time; or (d) provide other noteworthy receivables? rights to consumers with respect to receivables owing by them? There are no statutory requirements that apply to the sales or collection of government receivables. However, in practice, there The People’s Bank of China (“PBOC”) regulates the loan rate of may be some contractual restrictions regarding the sale of interest by commercial banks. Commercial banks are able to decide government receivables, as agreed by the parties. their loan rate of interest based on the benchmark loan rate of interest provided by the PBOC, subject to the adjustments by the PBOC from time to time, and their loan rates of interest cannot be 2 Choice of Law – Receivables Contracts lower than the minimum level provided by the PBOC. On the other hand, since October 2004, the PBOC has declined to set forth any 2.1 No Law Specified. If the seller and the obligor do not maximum loan rate of interest by commercial banks. It should be specify a choice of law in their receivables contract, what noted that entities, other than commercial banks and other CBRC- are the main principles in China that will determine the approved financial institutions, cannot extend a loan in the PRC. In governing law of the contract? the consumer banking context, the PRC Supreme Court on 2 July 1991 (Fa Min Fa [1991] No. 21) issued an opinion which stated that In the absence of any clear choice of law, a PRC court would for loans to natural persons, the rate of interest should not exceed determine the governing law based on the principle of “country four times the rate applied by banks generally for the same type of most closely connected” as stipulated under Article 5 of the loan. Provisions of the Supreme People’s Court on Several Issues regarding the Applicable Law in the hearing of Foreign-related Under PRC law, the rate of interest on the late payment of Civil or Commercial Contract Disputes (the “Provisions”). Under receivables shall not be “excessively higher” than the actual loss the typical securitisation scenario, the agreement generating the incurred by a non-defaulting party to the contract; otherwise, the receivable between the obligor and the seller, along with the parties may accordingly apply for an adjustment. Receivables Purchase Agreement (“RPA”) between the seller and Where there is no agreed rate of interest for late payments, PRC law purchaser, would fall out as follows: (i) the law of the domicile of does not provide a direct and automatically applicable rate for late the seller when entering into the contract shall apply; unless (ii) if payment. However, a non-defaulting party could claim negotiations and execution took place in the obligor/purchaser’s compensation due to late payment of receivables through courts or place of domicile or the contract provides that the seller must arbitration institutions. 82 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London FenXun Partners China

perform delivery obligations at the obligor/purchaser’s place of 3.2 Example 1: If (a) the seller and the obligor are located in domicile, the law of the domicile of the obligor/purchaser’s shall China, (b) the receivable is governed by the law of China, apply. (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of China to govern the receivables purchase 2.2 Base Case. If the seller and the obligor are both resident agreement, and (e) the sale complies with the in China, and the transactions giving rise to the requirements of China, will a court in China recognise that receivables and the payment of the receivables take sale as being effective against the seller, the obligor and place in China, and the seller and the obligor choose the other third parties (such as creditors or insolvency law of China to govern the receivables contract, is there administrators of the seller and the obligor)?

any reason why a court in China would not give effect to China their choice of law? Yes. The PRC parties are able to choose PRC law to govern the receivable sale as at least one of the parties to the contract is a PRC In this situation, it is very unlikely that the court will not uphold the entity. choice of law of the parties.

3.3 Example 2: Assuming that the facts are the same as 2.3 Freedom to Choose Foreign Law of Non-Resident Seller Example 1, but either the obligor or the purchaser or both or Obligor. If the seller is resident in China but the obligor are located outside China, will a court in China recognise is not, or if the obligor is resident in China but the seller is that sale as being effective against the seller and other not, and the seller and the obligor choose the foreign law third parties (such as creditors or insolvency of the obligor/seller to govern their receivables contract, administrators of the seller), or must the requirements of will a court in China give effect to the choice of foreign the obligor’s country or the purchaser’s country (or both) law? Are there any limitations to the recognition of be taken into account? foreign law (such as public policy or mandatory principles of law) that would typically apply in commercial Yes, it will. relationships such that between the seller and the obligor under the receivables contract? 3.4 Example 3: If (a) the seller is located in China but the A PRC court is empowered to recognise the choice of foreign law obligor is located in another country, (b) the receivable is if the foreign interest (sometimes referred to as “foreign element”) governed by the law of the obligor’s country, (c) the seller test is met: (i) one of the parties to the contract is a non-PRC entity; sells the receivable to a purchaser located in a third (ii) the conclusion or performance of the contract takes place country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables outside of the PRC; or (iii) the subject matter of the contract is purchase agreement, and (e) the sale complies with the located outside of the PRC. requirements of the obligor’s country, will a court in China A PRC court would not, however, give effect to the parties’ choice recognise that sale as being effective against the seller of non-PRC law to govern the contract if the court considered that: and other third parties (such as creditors or insolvency (i) such law was contrary to the public interest of the PRC; or (ii) administrators of the seller) without the need to comply the application of such non-PRC law would circumvent the with China’s own sale requirements? application of any PRC mandatory or prohibitive law. Yes, because the foreign element test mentioned in question 2.3 above would have been met by the fact that the debtor of the 2.4 CISG. Is the United Nations Convention on the receivables contract is located in a foreign country (i.e. the obligor’s International Sale of Goods in effect in China? country), unless the choice of such non-PRC law was contrary to the public interest of the PRC or circumvented the application of China acceded to the CISG in Dec. 1986. However, China made PRC mandatory or prohibitive law. two reservations for item (b) of term 1, Article 1 and Article 11, respectively. 3.5 Example 4: If (a) the obligor is located in China but the seller is located in another country, (b) the receivable is 3 Choice of Law – Receivables Purchase governed by the law of the seller’s country, (c) the seller Agreement and the purchaser choose the law of the seller’s country to govern the receivables purchase agreement, and (d) the sale complies with the requirements of the seller’s 3.1 Base Case. Does China’s law generally require the sale country, will a court in China recognise that sale as being of receivables to be governed by the same law as the law effective against the obligor and other third parties (such governing the receivables themselves? If so, does that as creditors or insolvency administrators of the obligor) general rule apply irrespective of which law governs the without the need to comply with China’s own sale receivables (i.e., China’s laws or foreign laws)? requirements?

No, it does not. Yes, it will.

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3.6 Example 5: If (a) the seller is located in China For the sales of mortgage loans, the mortgagee rights enjoyed by the (irrespective of the obligor’s location), (b) the receivable is seller may be transferred together with the secured debt only by re- governed by the law of China, (c) the seller sells the registration of the mortgage in favour of the new mortgagee, i.e. the receivable to a purchaser located in a third country, (d) purchaser. the seller and the purchaser choose the law of the purchaser’s country to govern the receivables purchase Any transfer of non-bearer corporate bonds shall be effected by the agreement, and (e) the sale complies with the bondholder’s endorsement, with the company recording the requirements of the purchaser’s country, will a court in transferee’s name and address on the corporate bond book. Any China recognise that sale as being effective against the transfer of bearer corporate bonds shall take effect when the seller and other third parties (such as creditors or bondholder physically delivers the bonds to the transferee.

China insolvency administrators of the seller, any obligor located There are no additional requirements for sale and perfection that in China and any third party creditor or insolvency apply to sales of consumer loans. administrator of any such obligor)?

Yes, unless such sale (i) was contrary to the public interest of the PRC, 4.4 Obligor Notification or Consent. Must the seller or the or (ii) would circumvent the application of any PRC mandatory or purchaser notify obligors of the sale of receivables in prohibitive law. For example, if a PRC seller enters bankruptcy, a PRC order for the sale to be effective against the obligors court could second-guess the effectiveness of such sale under foreign and/or creditors of the seller? Must the seller or the law if the automatic stay, executory contract or preferential transfer purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale provisions of PRC bankruptcy law were triggered by such sale. against the obligors? Does the answer to this question vary if (a) the receivables contract does not prohibit 4 Asset Sales assignment but does not expressly permit assignment; or (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect 4.1 Sale Methods Generally. In China what are the a sale, are there any benefits to giving notice – such as customary methods for a seller to sell receivables to a cutting off obligor set-off rights and other obligor purchaser? What is the customary terminology – is it defences? called a sale, transfer, assignment or something else? Under Article 80 of the PRC Contract Law, notice must be given to the Receivables are generally sold by way of an assignment under the obligor for the sale of receivables to be effective as against the obligor. PRC Contract Law. The PRC Contract Law stipulates that a creditor Prior to notice to the obligor, the purchaser is subject to various rights may assign its rights under a contract to a third party, subject to any of the obligor, such as the obligor’s ability to discharge its obligations transfer restrictions contained in the original contract or otherwise under the receivables by making payment to the seller and the obligor’s present in PRC law (and we note there are no transfer restrictions right of set-off against the seller. However, generally, the obligor’s under PRC law generally). Such assignment is effective against the consent is not necessary to the sale of receivables in order for the sale debtor once a notice of transfer has been given to the debtor. There is to become effective against the obligor, except where there is an no customary term of art with which to characterise the transaction. explicit contractual consent requirement or negative covenant.

4.2 Perfection Generally. What formalities are required 4.5 Notice Mechanics. If notice is to be delivered to obligors, generally for perfecting a sale of receivables? Are there whether at the time of sale or later, are there any any additional or other formalities required for the sale of requirements regarding the form the notice must take or receivables to be perfected against any subsequent good how it must be delivered? Is there any time limit beyond faith purchasers for value of the same receivables from which notice is ineffective – for example, can a notice of the seller? sale be delivered after the sale, and can notice be delivered after insolvency proceedings against the obligor There are no such perfection requirements under the PRC law, have commenced? Does the notice apply only to specific subject to: (i) the PRC Security Law and PRC Property Rights Law receivables or can it apply to any and all (including future) in relation to the security interest attached to the transferred receivables? Are there any other limitations or considerations? receivables, as discussed in questions 4.3 and 4.11; and (ii) the PRC Contract Law in relation to the notice requirement, as discussed in As discussed in question 4.4, in order for the sale of receivables to question 4.4. The sale of the receivables is not required to be be effective against the obligor, the notice must be given and registered with any PRC governmental authorities and, generally, delivered to the debtor. There are no such requirements regarding the transfer is deemed to be completed upon the execution of the the form of the notice, nor any time limit. Subject to our assets transfer agreement. It should be noted that the PBOC has discussions in question 4.10, the notice applies to all receivables. established a registration system for the pledge of account receivables, however it is still uncertain whether the outright sale of receivables can or should be registered in this system. 4.6 Restrictions on Assignment; Liability to Obligor. Are restrictions in receivables contracts prohibiting sale or assignment generally enforceable in China? Are there 4.3 Perfection for Promissory Notes, etc. What additional or exceptions to this rule (e.g., for contracts between different requirements for sale and perfection apply to commercial entities)? If China recognises prohibitions on sales of promissory notes, mortgage loans, consumer sale or assignment and the seller nevertheless sells loans or marketable debt securities? receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for breach of contract or For the sales of promissory notes, the general method of perfection on any other basis? against the obligor and any third parties is the endorsement by the seller and delivery of the promissory note to the purchaser. Yes, such restrictions in receivables contracts are generally

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enforceable in the PRC and no recognised exceptions apply. If the profits regardless of the profit and loss of such entity, then this part seller sells receivables to the purchaser in disregard of the of the contract shall be deemed as a loan agreement and, therefore, contractual prohibitions, the seller will be liable to the obligor for invalid. breach of contract and the obligor can claim for damages against the Based on this analysis, we believe a sale of receivables is very seller. likely to be re-characterised as a loan if the buyer does not participate in the ownership risks of the receivables. Ownership 4.7 Identification. Must the sale document specifically identify risks include damage to, and loss of, the subject matter of a sale each of the receivables to be sold? If so, what specific (Articles 142 to 148 of the PRC Contract Law) and the loss of information is required (e.g., obligor name, invoice return thereon (Article 163 of the PRC Contract Law). number, invoice date, payment date, etc.)? Do the As part of the “transfer of risk” test, the Contract Law also places a China receivables being sold have to share objective great weight on the delivery of the subject matter of a sale characteristics? Alternatively, if the seller sells all of its agreement as this is generally regarded as the objective point in receivables to the purchaser, is this sufficient identification of receivables? time for the transfer of risks of the subject matter. Article 133 of the PRC Contract Law provides that the ownership of a subject matter So long as the receivables to be sold are reasonably identified so as for a sale contract shall be transferred upon the delivery of the to obviate any reasonable possibility for mistake, ambiguity or object (which in the case of a sale of receivables would generally be confusion as to what is being sold, then that should be sufficient considered to be at the closing upon satisfaction of conditions identification. A statement that the seller sells all of its receivables precedent to such closing), except as otherwise stipulated by law or to the purchaser is unlikely to be deemed as sufficient identification agreed upon by the parties. of receivables. Voidable Contracts Although there is no legal requirement as to any specific If a sale cannot be found invalid under the PRC Contract Law, a information, certain characteristics would be reasonable to list (e.g., PRC court’s power is limited in striking it down unless one of the buyer name, invoice number, invoice date, payment date). parties to the contract petitions the court to do so under the voidable contract principles. Article 54 of the PRC Contract Law provides that either party has the right to request a people’s court or an 4.8 Respect for Intent of Parties; Economic Effects on Sale. arbitration institution to alter or rescind any of the following If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be contracts: (a) any contract which is made under substantial respected or will a court enquire into the economic misunderstanding; or (b) any contract made unfairly. Additionally, characteristics of the transaction? If the latter, what according to Article 74 of the PRC Contract Law, if an obligor economic characteristics of a sale, if any, might prevent renounces its due creditor’s rights or transfers gratis its property and the sale from being perfected? Among other things, to thus causes losses to the obligee, the obligee may apply to a what extent may the seller retain (a) credit risk; (b) people’s court to rescind the obligor’s action. interest rate risk; and/or (c) control of collections of In the bankruptcy situation of the purchaser or seller, please refer to receivables without jeopardising perfection? our discussion in questions 6.1 and 6.3 below. A PRC court will have no legal basis not to honour a sale unless there are issues concerning the validity of the contract between the 4.9 Continuous Sales of Receivables. Can the seller agree in purchaser and the seller or the contract is otherwise voidable. an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables Invalid Contract as and when they arise)? According to Article 44 and Article 52 of the PRC Contract Law, a contract established according to law becomes effective upon its Yes, the continuous sales of receivables by a seller (prior to its establishment and shall be null and void statutorily only under the insolvency) is allowed under the PRC law. following circumstances: (a) it is concluded through the use of fraud or coercion by one party to jeopardise the interests of the State; (b) malicious collusion is conducted to jeopardise the 4.10 Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser interests of the State, a collective or a third party; (c) an illegitimate that come into existence after the date of the receivables purpose is concealed under the guise of legitimate activities; (d) purchase agreement (e.g., “future flow” securitisation)? If damage to the public interest; or (e) violation of the compulsory so, how must the sale of future receivables be structured provisions of laws and administrative regulations. to be valid and enforceable? Is there a distinction In China, a non-financial institution is not allowed to make loans to between future receivables that arise prior to or after the another enterprise under relevant financial laws including the PRC seller’s insolvency? Commercial Banks Law. Under Article 11 of the PRC Commercial Banks Law, no unit or individual may engage in commercial There is no clear basis under current PRC law for the enforceability banking businesses without approval of the banking regulatory of a current transfer of future receivables, even in a non-bankruptcy authority under the State Council and, pursuant to its Article 3, situation. One possibility might be the present sale of all commercial banks may engage in the businesses of granting short- receivables now and in the future arising from presently-existing term, medium-term and long-term loans. contracts. That situation may still, however, be construed to mean an agreement to make an assignment or transfer in the future. Re-characterisation as a Result of Invalidity of Contract In a bankruptcy of a seller under the PRC Enterprise Bankruptcy The Supreme People’s Court, in a notice of 1990 to its lower courts, Law, the bankruptcy administrator would have the power to reject stated that if a party to a joint operation contract (1) invests in a or continue to perform any pre-petition executory contract (i.e. any jointly operated entity but does not participate in the management, agreement, made prior to the petition, to transfer an inchoate and share the liabilities of ownership, of such entity, and (2) will receivable crystallising in the future). periodically be repaid its principal and interest or receive fixed

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4.11 Related Security. Must any additional formalities be 5.3 Purchaser Security. If the purchaser grants security over fulfilled in order for the related security to be transferred all of its assets (including purchased receivables) in concurrently with the sale of receivables? If not all favour of the providers of its funding, what formalities related security can be enforceably transferred, what must the purchaser comply with in China to grant and methods are customarily adopted to provide the perfect a security interest in purchased receivables purchaser the benefits of such related security? governed by the laws of China and the related security?

According to the PRC Property Rights Law, the security interest See question 4.2. may not be transferred, or be used as credit support for the rights of third parties, separately from the underlying obligation except with

China 5.4 Recognition. If the purchaser grants a security interest in the consent of the obligor. receivables governed by the laws of China, and that There are two types of mortgages: (i) Security Law Article 42 security interest is valid and perfected under the laws of mortgages (covering, inter alia, specified properties including land the purchaser’s country, will it be treated as valid and use rights, urban real estate, buildings, forest trees, aircrafts, ships, perfected in China or must additional steps be taken in vehicles, equipment and other moveable properties) which are China? established upon execution of a written mortgage contract and registration of the same at registries designated for each type of Due to the complexity of choice of law issues discussed in section specified property; mortgagee rights under Security Law Article 42 2 above, the answer to this question depends on the facts of each mortgages may be transferred together with the secured debt only case. by re-registration of the mortgage in favour of the new mortgagee; and (ii) Security Law Article 43 mortgages (covering all other types 5.5 Additional Formalities. What additional or different of property) which may be established upon execution of a written requirements apply to security interests in or connected to mortgage contract but are not effective against third parties unless insurance policies, promissory notes, mortgage loans, registered. Security Law Article 43 mortgages may be voluntarily consumer loans or marketable debt securities? registered, and if so, then Security Law Article 43 mortgages are established upon registration; mortgagee rights under Security Law According to Article 224 of the PRC Property Rights Law, the Article 43 mortgages may be transferred together with the secured pledgor and the pledgee shall sign a written contract for the pledge debt by assignment; however, the transfer is not effective against of a bill of exchange, cheque, or promissory note and the pledge third parties unless the mortgage is re-registered in favour of the shall be effective upon the delivery of the bill of exchange, cheque, transferee. or promissory note to the pledgee. It should be noted that Article A third form of security is pledge. A pledge refers to the act of a 98 of the Judicial Interpretation of the Security Law provides that debtor or a third party in delivering possession of moveable where a pledge is created over a bill of exchange, cheque or property to a creditor as security for creditor’s rights. A pledge is promissory note but the relevant instrument is not endorsed on the established by execution of a written pledge contract and delivery reverse side with the word “pledge”, such a pledge is not effective of possession of the pledged object to the pledgee. The objects against an innocent third party. As such, both endorsement and subject to a pledge may be re-hypothecated by the pledgee for its delivery of the bill of exchange, cheque, and promissory note are own debt, but only with the consent of the original pledgor. Pledgee necessary to create and perfect a valid pledge over such rights may be transferred by assignment together with the secured instruments. debt; however, the transfer is not effective against third parties To create a pledge of bonds, the pledgor and the pledgee shall sign unless the pledged object is delivered into the possession of the a written contract for the pledge of bonds and the pledge shall be transferee. effective upon the delivery of bond certificates to the pledgee. Furthermore, Article 99 of the Judicial Interpretation of the Security Law provides that where a pledge is created on a corporate bond but 5 Security Issues the bond is not endorsed on the reverse side with the word “pledge”, the pledge is not effective against the company or an innocent third 5.1 Back-up Security. Is it customary in China to take a party. Where the bonds are registered in the securities depository “back-up” security interest over the seller’s ownership and clearing institution without physical certificate, the pledge of interest in the receivables and the related security, in the such bonds shall be effective when the securities depository and event that the sale is deemed by a court not to have been clearing institution registers such pledge. perfected? There are no definite provisions regarding the requirements for securing a pledge of insurance polices under the PRC law. No, it is not customary and is considered logically inconsistent with However, in judicial practice, courts are inclined to regard an a sale transaction, since a security interest can only secure a debt insurance policy as “receivables”, which is a clearly listed (not a sale). pledgeable right under Article 223.

5.2 Seller Security. If so, what are the formalities for the 5.6 Trusts. Does China recognise trusts? If not, is there a seller granting a security interest in receivables and mechanism whereby collections received by the seller in related security under the laws of China, and for such respect of sold receivables can be held or be deemed to security interest to be perfected? be held separate and apart from the seller’s own assets until turned over to the purchaser? This is not applicable in China. Trusts are recognised by the PRC Trust Law.

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5.7 Bank Accounts. Does China recognise escrow accounts? will not be subject to a stay of action, nor does the bankruptcy Can security be taken over a bank account located in administrator have the ability to stay collection and enforcement China? If so, what is the typical method? Would courts actions, subject to the clawback discussion in question 6.3. in China recognise a foreign-law grant of security (for However, the answers above would be different if the purchaser is example, an English law debenture) taken over a bank deemed to only be a secured party with respect to the receivables. account located in China? Under the PRC Enterprises Bankruptcy Law, a moratorium would Contractually created and operated escrow accounts are used and apply to all creditors (secured and unsecured) upon the filing and recognised in the PRC. acceptance by the PRC court of a petition of insolvency in respect of the seller. The moratorium would last until an order of There is no concept of the pledge of a bank account under the PRC insolvency and liquidation issued by the PRC court. During the China laws except the pledge of export rebate custodian accounts under the moratorium, the secured creditor would be stayed from enforcing Provisions of Pledged Loans in Export Rebate Custodian Accounts, its security. Upon liquidation of the seller’s estate, a secured issued by the Supreme People’s Court and promulgated on November creditor would have priority over all unsecured creditors over the 22, 2004, effective as of December 7, 2005. Although the pledge of a property secured. bank account is not applicable under the PRC laws, creditors may ask the debtor to pledge its account receivables as provided by Article 223 Where the seller is insolvent after it has executed and delivered the of the PRC Property Rights Law. Creditors can make commercial RPA with the purchaser but neither party has completed the arrangements in the loan agreement and/or the security agreement to performance of such contracts (as is the case with some but not all monitor the receivables account of the debtor. types of future flow securitisations), the bankruptcy administrator will have the right to determine whether to terminate or to continue China has not yet provided a registration procedure to generally to perform such contracts. If the bankruptcy administrator fails to perfect a security interest in the shifting contents of a bank account. notify the purchaser within 2 months of the acceptance of any Nevertheless, it is possible to establish a so-called “pledge of cash” in bankruptcy petition in respect of the seller, or fails to reply within a “special account” held at the creditor acting as a CBRC-licensed 30 days of receipt of a purchaser’s demand to make such a decision, bank, which is essentially the concept of perfection by possession. such contracts shall be deemed to be terminated. If the bankruptcy This method has the virtue of establishing a perfected security interest administrator determines to continue to perform such contracts, over a changing amount; as such, the pledgee is entitled to withdraw, then the purchaser shall perform such contracts, provided that the without further act of the debtor, such sums from the account as may purchaser has a right to require the bankruptcy administrator to be necessary to satisfy the due amount from time to time upon a provide a guarantee for such performance. The contracts would be default in payment by the debtor. deemed to be terminated if the bankruptcy administrator refuses to Alternatively, a creditor (again acting as a CBRC-licensed bank) may provide a guarantee. choose to characterise a transaction as a structured deposit, the terms of which require/entitle the bank to pay a variable interest and or principal amount to the depositor depending on the performance of an 6.2 Insolvency Official’s Powers. If there is no stay of action under what circumstances, if any, does the insolvency underlying derivative transaction. The original principal amount of official have the power to prohibit the purchaser’s the deposit thereby serves to “collateralise” the depositor’s obligation exercise of rights (by means of injunction, stay order or (if any), in relation to such derivative transaction, to pay an amount up other action)? to the amount of such principal. Should this deposit be recharacterised as a disguised secured derivative transaction, if such principal was This is not applicable in China. originally deposited into the special account, such transaction (as recharacterised) should withstand attack. 6.3 Suspect Period (Clawback). Under what facts or Theoretically, the court will recognise a foreign law grant of security circumstances could the insolvency official rescind or if the choice of law regarding the security agreement is upheld by the reverse transactions that took place during a “suspect” or court as discussed above in question 2.3, and the security interest is “preference” period before the commencement of the duly created under the foreign law. However, practically, the foreign insolvency proceeding? What are the lengths of the interest test may not be met over a bank account in China. As the “suspect” or “preference” periods in China for (a) money will be hard currency but there would be no foreign party transactions between unrelated parties and (b) (considering most branches of foreign banks have converted to transactions between related parties? subsidiaries), unless it was a foreign natural person. Article 16 of the PRC Enterprise Bankruptcy Law restricts any payments from the security provider to its creditors once the court 6 Insolvency Laws has accepted the bankruptcy petition. The bankruptcy administrator also has the right under Article 32 of the PRC Enterprise 6.1 Stay of Action. If, after a sale of receivables that is Bankruptcy Law to request the court to revoke any preferential otherwise perfected, the seller becomes subject to an payments made by the debtor within the six-month period prior to insolvency proceeding, will China’s insolvency laws the court’s acceptance of the bankruptcy petition, unless those automatically prohibit the purchaser from collecting, payments benefit the debtor’s assets. transferring or otherwise exercising ownership rights over Under Article 31 of the PRC Enterprise Bankruptcy Law, the the purchased receivables (a “stay of action”)? Does the bankruptcy administrator has the right to request the court to revoke insolvency official have the ability to stay collection and enforcement actions until he determines that the sale is any of the following acts relating to the security provider’s assets to perfected? Would the answer be different if the the extent occurring within one year prior to the court’s acceptance purchaser is deemed to only be a secured party rather of the bankruptcy petition: (1) transferring assets free of than the owner of the receivables? consideration; (2) trading at an obviously unreasonable price; (3) providing security for previously unsecured debts; (4) prepaying After a sale of receivables that is otherwise perfected, the purchaser debts not yet due; or (5) giving up rights as a creditor.

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The above suspect periods are the same for both the unrelated corporate assets securitisations. The CSRC, as the securities parties and related parties. industry regulator, regulates securities companies in their asset management business, including their corporate assets securitisation business. 6.4 Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official Moreover, parties to a CAMP securitisation define their respective consolidate the assets and liabilities of the purchaser with rights and obligations through contractual agreements pursuant to those of the seller or its affiliates in the insolvency the PRC Contract Law. proceeding?

7.2 Securitisation Entities. Does China have laws specifically China There is no substantive consolidation under PRC law. providing for establishment of special purpose entities for securitisation? If so, what does the law provide as to: (a) 6.5 Effect of Proceedings on Future Receivables. What is the requirements for establishment and management of such effect of the initiation of insolvency proceedings on (a) an entity; (b) legal attributes and benefits of the entity; sales of receivables that have not yet occurred or (b) on and (c) any specific requirements as to the status of sales of receivables that have not yet come into directors or shareholders? existence? Unlike the case for SPTs or CAMPs, there are no special rules to The receivables generated after the initiation of insolvency regulate (and promote) a securitisation deal using SPC as the proceedings will be deemed as the debtor’s bankruptcy estate, and special purpose vehicle consideration, which might also attract thus will be subject to the automatic stay, subject in turn to the right taxation as a separate legal person. Both the regulatory authorities of the bankruptcy administrator to determine whether to terminate and market participants have attempted to utilise the SPC in certain or to continue to perform such contracts. CMBS and REIT transactions. A special purpose trust (“SPT”) is utilised in a credit assets 7 Special Rules securitisation. A trust is not a separate legal entity under the PRC law. According to the PRC Trust Law, the originator, as settler, entrusts certain assets that the originator owns to the trustee and the 7.1 Securitisation Law. Is there a special securitisation law trustee will manage or dispose of such assets in the name of the (and/or special provisions in other laws) in China trustee and for the benefit of the ABS noteholders. establishing a legal framework for securitisation transactions? If so, what are the basics? A CAMP has no separate legal status from its originator. However, unlike the trust structure of the credit assets securitisation, parties to In China, there are two main methods of conducting a securitisation a CAMP securitisation define their respective rights and obligations transaction: credit assets securitisations using trusts as special through contractual agreements pursuant to PRC Contract Law, purpose vehicles (“SPV”) are regulated by the PBOC and the China especially the provisions related to the entrustment relationship. In Banking Regulatory Commission (the “CBRC”); and corporate an entrustment relationship, the entrusted assets will not be separate assets securitisations using customer assets management plans as from the other assets of the settler. In addition, the trustee is able to SPVs are regulated by the China Securities Regulatory Commission elect whether to act in its own name. (the “CSRC”). In a CAMP transaction, (i) the investors entrust funds to the Credit Assets Securitisation securities company to establish a CAMP, and (ii) the securities company, on behalf of the investors, will use the entrusted funds to The CBRC and the PBOC each regulate different aspects of the purchase certain assets, such as receivables in a certain period, from credit assets securitisation process. The CBRC is concerned with the originator. monitoring the business practices of banks and other financial institutions in securitisation transactions, whereas the PBOC regulates the issuance and trading of notes backed by the credit 7.3 Non-Recourse Clause. Will a court in China give effect to assets on the inter-bank bond market. a contractual provision (even if the contract’s governing law is the law of another country) limiting the recourse of As the trust structure is utilised, the PRC Trust Law is the parties to available funds? fundamental governing law for credit assets securitisation. Furthermore, on April 20, 2005, the PBOC and the CBRC jointly Generally yes, based on the general legal principle of freedom of issued the Administrative Measures for Pilot Credit Asset contract. Securitization Projects (the “Administrative Measures for CAS”) and on November 7, 2005, the CBRC promulgated the Administrative Measures for Supervision of Pilot Projects for 7.4 Non-Petition Clause. Will a court in China give effect to a Securitisation for Financial Institutions’ Credit Assets contractual provision (even if the contract’s governing law is the law of another country) prohibiting the parties from: (“Administrative Measure for Supervision”). These administrative (a) taking legal action against the purchaser or another regulations are the foundation for the legal framework governing person; or (b) commencing an insolvency proceeding China’s credit asset securitisation process. against the purchaser or another person? Corporate Assets Securitisation The Tentative Measures for the Client Assets Management Business There are no mandatory provisions under PRC law prohibiting or of Securities Companies (“Tentative Measures”), promulgated by restricting such kind of non-petition clause, neither any case law the CSRC on February 1, 2004, were not specifically designed to can be found in this regard. Although the view in the academic create a vehicle for securitisation. However, in practice, market community is that the right to sue cannot be waived, this does not participants find that CAMP is a suitable vehicle to carry out apply to mandatory arbitration clauses.

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7.5 Independent Director. Will a court in China give effect to business of collecting debts for other entities in the form of self-help a contractual provision (even if the contract’s governing remedies or litigation proceedings. The administration of industry and law is the law of another country) or a provision in a commerce (“AIC”) will not proceed with any registration application party’s organisational documents prohibiting the directors in relation to any company whose business scope includes debt- from taking specified actions (including commencing an collection. insolvency proceeding) without the affirmative vote of an independent director? The Notice in relation to Ban of Companies that are Engaged in Debt-collection and Strict Punishment of Illegal debt-collection The corporate-form SPV is seldom used in the PRC as discussed in activities, promulgated by the Commission of State Economy and question 7.2. Trade, the MPS and the SAIC on 15 June 2000, bans companies that

are engaged in the business of debt-collection. China

8 Regulatory Issues 8.3 Data Protection. Does China have laws restricting the use or dissemination of data about or provided by 8.1 Required Authorisations, etc. Assuming that the obligors? If so, do these laws apply only to consumer purchaser does no other business in China, will its obligors or also to enterprises? purchase and ownership or its collection and enforcement of receivables result in its being required to qualify to do The PRC Contract Law requires parties to a contract to act in good business or to obtain any licence or its being subject to faith and perform obligations such as maintaining confidentiality in regulation as a financial institution in China? Does the accordance with the nature and purpose of the contract and/or trade answer to the preceding question change if the purchaser usage. Parties to the contracts must comply with this general does business with other sellers in China? principle of confidentiality. Foreign enterprises are generally prohibited from engaging in The Interim Provisions on the Protection of Trade Secrets of “production and operational activities” in the PRC without Central Enterprises, promulgated by the State-owned Assets undertaking required registration with the appropriate PRC Supervision and Administration Commission on March 25, 2010 registration authorities. If the purchaser’s purchase of receivables classifies customer information as one of the trade secrets owned by requires it to engage in such “production and operational activities” the central state-owned enterprises. It also requires such enterprises in the PRC, then the registration requirements will apply and the to enter into a confidentiality agreement with the counterparty when purchaser should set up an approved subsidiary in the PRC. dealing with customer information and other trade secrets. Merely passively owning receivables and taking payment offshore Except as described above, there are no general legal restrictions on (without active contact with and interaction with the obligors), in the dissemination of obligor data. and of themselves, would not be considered “production and operational activity”. 8.4 Consumer Protection. If the obligors are consumers, will Notwithstanding the above, there may be a risk that the relevant the purchaser (including a bank acting as purchaser) be PRC government authorities may consider the frequent and periodic required to comply with any consumer protection law of purchase and/or factoring of PRC receivables with numerous PRC China? Briefly, what is required? sellers to be “engaging in production and operational activities” in the PRC. As stated in question 1.2, the PRC does have a Protection of Consumer Rights and Interests Law, which does not contain any specific provisions relating to consumer debt. 8.2 Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables following their sale to the purchaser, including to appear 8.5 Currency Restrictions. Does China have laws restricting before a court? Does a third party replacement servicer the exchange of China’s currency for other currencies or require any licences, etc., in order to enforce and collect the making of payments in China’s currency to persons sold receivables? outside the country?

We believe that the seller (who is also the originator) of receivables Yes. The PRC imposes strict controls on both the convertibility and can act as the servicer of the receivables if the services are performed transferability of the RMB under the PRC Foreign Exchange in the context of factoring or purchasing of receivables where the Control Law. purchaser appoints the seller to provide such services. In such cases, The State Administration of Foreign Exchange (“SAFE”) is the the seller may argue that the rules discussed below would not apply PRC agency in charge of administering foreign exchange controls because the seller is not established primarily for the purpose of and has promulgated numerous regulations in respect thereof. providing debt-collection in the PRC and such services are incidental to the factoring/sale of account receivables which it originates. 9 Taxation If the purchaser decides to establish or appoint a PRC company to service and collect receivables from within the territory of the PRC, it should be noted that there are statutory prohibitions on establishing a 9.1 Withholding Taxes. Will any part of payments on company that engages in the business of collecting debts for and on receivables by the obligors to the seller or the purchaser behalf of other entities. be subject to withholding taxes in China? Does the answer depend on the nature of the receivables, whether The Notice in relation to the Prohibition on Establishment of they bear interest, their term to maturity, or where the Companies that are Engaged in Debt-collection, promulgated by the seller or the purchaser is located? Ministry of Public Security (“MPS”) and the State Administration of Industry and Commerce (“SAIC”) on 28 November 1995, prohibits As long as the seller or the purchaser is domestically incorporated, no any entity or person from setting up a company that is engaged in the withholding tax will apply to any part of the payments on receivables.

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9.2 Seller Tax Accounting. Does China require that a specific Examples of intangible assets are land use rights, trademarks, accounting policy is adopted for tax purposes by the patents, copyrights, non-patented technology and goodwill. seller or purchaser in the context of a securitisation? Receivables are not classified as intangible assets under the business tax rules, and thus no business tax should be payable for The Ministry of Finance, as the regulatory authority for accounting selling receivables. practices in the PRC, issued the Accounting Standard for Enterprise and a series of implementation rules, which constitute the PRC generally-accepted accounting principles (“GAAP”). The PRC 9.5 Purchaser Liability. If the seller is required to pay value added tax, stamp duty or other taxes upon the sale of GAAP heavily relies on and adopts IAS and moreover, in line with receivables (or on the sale of goods or services that give IAS39, the Ministry of Finance published Accounting Provisions of China rise to the receivables) and the seller does not pay, then Credit Assets Securitization (Caikuai [2005] No. 5) regarding the will the taxing authority be able to make claims for the derecognition of financial assets in securitisation transactions. unpaid tax against the purchaser or against the sold According to the Circular of the Ministry of Finance and the State receivables or collections? Administration of Taxation on Relevant Taxation Policy Issues Relevant to the Securitization of Credit Assets, an originator that Pursuant to the PRC Tax Administration and Tax Collection Law, if realises income from the transfer of credit assets shall calculate and the seller owing tax transfers his property without consideration or pay enterprise income tax thereon. transfers his property to a bad faith buyer at an unreasonable price that causes a loss of tax revenue, the tax authorities may petition the people’s court to revoke the seller’s transfer. 9.3 Stamp Duty, etc. Does China impose stamp duty or other documentary taxes on sales of receivables? 9.6 Doing Business. Assuming that the purchaser conducts Stamp duty is a tax levied on certain taxable documents executed or no other business in China, would the purchaser’s used in the PRC. The agreement for sales of receivables does not purchase of the receivables, its appointment of the seller fall within the scope of taxable documents, and thus no stamp duty as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax should be payable for entering into such agreements. in China?

9.4 Value Added Taxes. Does China impose value added According to the PRC Enterprise Income Tax, income from PRC- tax, sales tax or other similar taxes on sales of goods or originated receivables obtained by non-residents from PRC payers services, on sales of receivables or on fees for collection shall be subject to tax withheld at source, with the payer as the agent services? withholding agent. For the reasons discussed in questions 9.3 and 9.4, stamp duty tax and business tax will not apply. Value added tax is imposed on the sales/imports of goods and the provision of processing, repairs and replacement services (VATable services) within the PRC territory. The rate for value added tax is generally 17%, with reduced rates provided for certain goods. Business tax is imposed on the provision of services other than VATable services, the assignment of intangible assets and the sale of immovable properties within the PRC territory. The rate for business tax ranges from 3% to 20%, with the 5% rate being the most common one for commercial services.

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Fred Chang Xusheng Yang

FenXun Partners FenXun Partners Suite 1008, China World Office 2 Suite 1008, China World Office 2 No.1 Jian Guo Men Wai Avenue No.1 Jian Guo Men Wai Avenue Beijing 10004 Beijing 10004 China China Tel: +8610 6505 4243 Tel: +8610 6505 4243 Fax: +8610 6505 9422 Fax: +8610 6505 9422 Email: [email protected] Email: [email protected] URL: www.fenxunlaw.com URL: www.fenxunlaw.com China Fred Chang is a founding partner of FenXun Partners and co- Xusheng Yang is a founding partner of FenXun Partners and co- head of the Financing, Banking and Financial Services practice head of the Financing, Banking and Financial Services practice group at FenXun Partners. He is a graduate of Harvard College group at FenXun Partners. Xusheng specialises in securitisation (AB 1982) and Columbia Law School (JD 1986), and has been (both MBS and CDO) and capital markets (representing issuers, qualified in New York since 1987. He has been representing selling shareholders, and underwriters in initial public offerings primarily financial institutions (banks, insurers, and fund and private placements in forms 144A and/or Regulation S managers in the mutual fund, hedge fund and PE industries) offerings). Before co-founding FenXun Partners, Xusheng was a since 1986 in their investment and financing transactions and partner with King & Wood Beijing office. Xusheng also practised also on regulatory matters. He has spent 14 years in private United States securities laws in New York and Hong Kong for practice on Wall Street (1986-1994) and in China (2004-present), over five years and worked as a staff attorney with the China as well as nine years working for Goldman Sachs (1994-1998) Securities Regulatory Commission from 1992 to 1995. Xusheng and as Asia general counsel for Deutsche Bank (1998-2002). He is a law school graduate of Jilin University. He has also received has also served as Chairman of the ISDA legal committee and LL.M. degrees from the University of British Columbia and New member of the ISDA steering committee for North Asia from 1995 York University. to 1998.

FenXun has approximately 40 lawyers, covering capital markets, PE, M&A, financing, and dispute resolution. FenXun Partners was established in Beijing in 2009 by PRC- and NY-law qualified veterans of legal practice in NY, Asia and China. Its founding was in response to both clients’ and its own partners’ sense that China had entered a new phase in its economic development, requiring substantially different technical legal skills than had previously been the case in China. This new phase, marked by increased connectivity to global markets, now involves Chinese clients anywhere in the world, and foreign clients in China, transacting using a common language for capital structure, market price discovery, and change in corporate policy through ownership and management change. FenXun has offices only in China (Beijing) and virtually all its lawyers are native Chinese, is incentivised to deliver the best of the Firm for each client with its lockstep compensation, and is exclusively dedicated to the interests of clients acting in China.

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TGC Corporate Lawyers Andrea Majerčíková

1 Receivables Contracts The law provides no other particular right to consumers, but general principles in regard to fair business practices and decent moral conduct are expected to be followed. Agreements which are 1.1 Formalities. In order to create an enforceable debt contrary to these principles would be deemed unenforceable. obligation of the obligor to the seller, (a) is it necessary that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone 1.3 Government Receivables. Where the receivables sufficient; and (c) can a receivable “contract” be deemed contract has been entered into with the government or a to exist as a result of the behaviour of the parties? government agency, are there different requirements and laws that apply to the sale or collection of those In the Czech Republic, the sale of goods or services is usually receivables? achieved by means of a contract which can be created upon the sale or upon the delivery of goods or services. According to both the There are no special rules that apply to government receivables. In Czech Civil and Commercial Codes, sale contracts do not Czech civil and commercial law, the state is considered a legal entity. necessarily have to be made in writing. As a consequence, no specific form of the receivables contract is required in order to prove the sale of goods or services; invoices or other relevant 2 Choice of Law – Receivables Contracts documents suffice. Moreover, receivable contracts may be made in an implied fashion, e.g. as a result of the behaviour of the parties. 2.1 No Law Specified. If the seller and the obligor do not It is, however, recommended to make a written contract in order to specify a choice of law in their receivables contract, what prove the existence of such receivables, with the aim of facilitating are the main principles in the Czech Republic that will litigation if any form of disagreement were to arise. determine the governing law of the contract?

The seller and the obligor are to determine which law governs their 1.2 Consumer Protections. Do Czech Republic’s laws (a) mutual relations if there is an international dimension to their limit rates of interest on consumer credit, loans or other relationship. The choice of law may also be implied. kinds of receivables; (b) provide a statutory right to interest on late payments; (c) permit consumers to cancel In the event that no governing law is specified, and that the receivables for a specified period of time; or (d) provide relationship has an international dimension, the mutual relations of other noteworthy rights to consumers with respect to the contracting parties are governed by the law which would receivables owing by them? constitute a reasonable foundation for the relationship. Generally, sale and purchase agreements are usually subject to the laws of the No statutory limit exists in regard to a capped interest rate on state where the sale originated, whether or not the contract was consumer credit. However, there are a number of mandatory created upon sale or delivery. regulations. Interest must be calculated in a fashion which is in accordance with both the law and with the contract dictating the 2.2 Base Case. If the seller and the obligor are both resident credit terms between both parties. in the Czech Republic, and the transactions giving rise to The law provides a statutory right allowing financial institutions to the receivables and the payment of the receivables take charge for late payment by means of higher interest rates. Provided place in the Czech Republic, and the seller and the that a binding contract was agreed upon between both parties, the obligor choose the law of the Czech Republic to govern revised interest rate for late payment should normally figure on it. the receivables contract, is there any reason why a court Otherwise, in the event that the interest rate was not previously in the Czech Republic would not give effect to their choice agreed on, civil law applies. In this case, the annual amount of late of law? payment interest (APR) is equal to the repo rate set by the Czech National Bank plus seven percent. Under Czech law, an international dimension must be present in the legal relationship in order for the parties to have the right to choose Consumers have the right to withdraw from the contract without a foreign governing law. Otherwise, Czech law is always providing justification and without running the risk of sanction in a applicable. As no international element is included in the above period of 14 days after first accepting it, provided that the contract described case, Czech law will apply and choice of law will be was concluded by means of distance communication. considered void due to its irrelevance.

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2.3 Freedom to Choose Foreign Law of Non-Resident Seller 3.3 Example 2: Assuming that the facts are the same as or Obligor. If the seller is resident in the Czech Republic Example 1, but either the obligor or the purchaser or both but the obligor is not, or if the obligor is resident in the are located outside the Czech Republic, will a court in the Czech Republic but the seller is not, and the seller and Czech Republic recognise that sale as being effective the obligor choose the foreign law of the obligor/seller to against the seller and other third parties (such as govern their receivables contract, will a court in the Czech creditors or insolvency administrators of the seller), or Republic give effect to the choice of foreign law? Are must the requirements of the obligor’s country or the there any limitations to the recognition of foreign law purchaser’s country (or both) be taken into account? (such as public policy or mandatory principles of law) that would typically apply in commercial relationships such Czech courts will apply the specific foreign law by which a that between the seller and the obligor under the purchase agreement is governed. Therefore, only the requirements receivables contract? of the foreign governing law must be met.

As set out in question 2.1 above, the contracting parties are entitled Cz ech Republic to determine the law governing their mutual relations, provided that 3.4 Example 3: If (a) the seller is located in the Czech an international element exists. The choice of a third law may also Republic but the obligor is located in another country, (b) be chosen provided that it is not chosen solely for the purpose of the receivable is governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser avoiding Czech law. The parties cannot evade the application of located in a third country, (d) the seller and the purchaser mandatory Czech law; Czech Republic’s public policy must be choose the law of the obligor’s country to govern the protected. Therefore, if a relevant area of the chosen law is contrary receivables purchase agreement, and (e) the sale to Czech’s public policy, its use will be limited and deemed illegal. complies with the requirements of the obligor’s country, will a court in the Czech Republic recognise that sale as being effective against the seller and other third parties 2.4 CISG. Is the United Nations Convention on the (such as creditors or insolvency administrators of the International Sale of Goods in effect in the Czech seller) without the need to comply with the Czech Republic? Republic’s own sale requirements?

Yes, the convention was ratified by the Czech Parliament and has Czech courts will apply the rules of the chosen law, provided that been in effect since 1 April 1991. the choice of law is valid and justified. However, limitations as set out above must be taken into account. 3 Choice of Law – Receivables Purchase Agreement 3.5 Example 4: If (a) the obligor is located in the Czech Republic but the seller is located in another country, (b) the receivable is governed by the law of the seller’s 3.1 Base Case. Does the Czech Republic law generally country, (c) the seller and the purchaser choose the law require the sale of receivables to be governed by the of the seller’s country to govern the receivables purchase same law as the law governing the receivables agreement, and (d) the sale complies with the themselves? If so, does that general rule apply requirements of the seller’s country, will a court in the irrespective of which law governs the receivables (i.e., the Czech Republic recognise that sale as being effective Czech Republic’s laws or foreign laws)? against the obligor and other third parties (such as creditors or insolvency administrators of the obligor) Czech law generally does not require the sale of receivables to be without the need to comply with the Czech Republic’s governed by the same law as the one governing the receivables own sale requirements? themselves, provided that there is an international element included in the receivables purchase contract. Such a choice of law will then Czech courts will apply the rules of the chosen law, provided that be allowed. the choice of law is valid and justified. However, limitations as set out above must be taken into account. 3.2 Example 1: If (a) the seller and the obligor are located in the Czech Republic, (b) the receivable is governed by the 3.6 Example 5: If (a) the seller is located in the Czech law of the Czech Republic, (c) the seller sells the Republic (irrespective of the obligor’s location), (b) the receivable to a purchaser located in a third country, (d) receivable is governed by the law of the Czech Republic, the seller and the purchaser choose the law of the Czech (c) the seller sells the receivable to a purchaser located in Republic to govern the receivables purchase agreement, a third country, (d) the seller and the purchaser choose and (e) the sale complies with the requirements of the the law of the purchaser’s country to govern the Czech Republic, will a court in the Czech Republic receivables purchase agreement, and (e) the sale recognise that sale as being effective against the seller, complies with the requirements of the purchaser’s the obligor and other third parties (such as creditors or country, will a court in the Czech Republic recognise that insolvency administrators of the seller and the obligor)? sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of In this case, the relationship between the seller and the obligor is the seller, any obligor located in the Czech Republic and governed by Czech law and therefore the protective requirements of any third party creditor or insolvency administrator of any Czech law must be met. The sale of receivables must be notified to such obligor)? the obligor; otherwise, the obligor would be entitled to pay the receivables to the seller. In addition to this, limitations as described Czech courts will apply the rules of the chosen law, provided that the in the question 2.3 above must be taken into account. choice of law is valid and justified. However, as referred to above, the obligor must be notified since the receivable is governed by Czech law. As set out above, other limitations must be taken into account.

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4 Asset Sales 4.4 Obligor Notification or Consent. Must the seller or the purchaser notify obligors of the sale of receivables in order for the sale to be effective against the obligors 4.1 Sale Methods Generally. In the Czech Republic what are and/or creditors of the seller? Must the seller or the the customary methods for a seller to sell receivables to a purchaser obtain the obligors’ consent to the sale of purchaser? What is the customary terminology – is it receivables in order for the sale to be an effective sale called a sale, transfer, assignment or something else? against the obligors? Does the answer to this question vary if (a) the receivables contract does not prohibit Czech law uses the term “assignment of receivables”. As a result, assignment but does not expressly permit assignment; or the seller (original creditor) is called the assignor, and the purchaser (b) the receivables contract expressly prohibits (new creditor) is called the assignee. An assignment of receivables assignment? Whether or not notice is required to perfect is not a sale per se, but merely a change in obligations (change of a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor Cz ech Republic creditor). defences? An assignment of receivables (i.e. sale of receivables) is performed by written agreement between the seller and the purchaser. While In this case, the consent of the obligor is not required. the consent of the obligor is not required, he has to be notified A sale of receivables is not allowed if any previous agreement without unnecessary delay in accordance with the principles of between the obligor and the seller forbids it. “fairness of assignment”. Furthermore, the sale must be notified to the obligor without unnecessary delay. The obligor may fulfil his obligation directly 4.2 Perfection Generally. What formalities are required towards the seller until the obligor is notified of the assignment or generally for perfecting a sale of receivables? Are there until the purchaser proves the assignment to the obligor. any additional or other formalities required for the sale of receivables to be perfected against any subsequent good Regarding the rights of the obligor, any receivables due to the seller, faith purchasers for value of the same receivables from which exist at the moment of notification, may be claimed for the the seller? benefit of the purchaser, provided that they were notified to the obligor without unnecessary delay. This also applies for receivables For an assignment of receivables, no additional formalities are which were not payable at the moment of notification. Moreover, required. if the seller enforces a sold receivable on his own behalf (but for the benefit of the purchaser), and the obligor wants to use set-off rights, only receivables due from the seller to the obligor may be used (not 4.3 Perfection for Promissory Notes, etc. What additional or different requirements for sale and perfection apply to those due from the purchaser). sales of promissory notes, mortgage loans, consumer loans or marketable debt securities? 4.5 Notice Mechanics. If notice is to be delivered to obligors, whether at the time of sale or later, are there any An assignment of promissory notes (order papers) is executed by requirements regarding the form the notice must take or means of endorsement. Other promissory notes are considered to how it must be delivered? Is there any time limit beyond be simple receivables and can be assigned by a written contract as which notice is ineffective – for example, can a notice of described in question 4.1 above. sale be delivered after the sale, and can notice be delivered after insolvency proceedings against the obligor Under Czech law, mortgage loans are accessory rights and therefore have commenced? Does the notice apply only to specific follow the destination of the secured receivable. However, notification receivables or can it apply to any and all (including future) of the assignment to the security provider, as well as an amendment to receivables? Are there any other limitations or the security taker in the Real Estate Cadastre, is recommended. considerations? With regard to consumer loans, no additional formalities are required. Although there are some exceptions. There is no specific form that the notice should take under Czech law. However, written notification is recommended. In case of marketable debt securities, the following rules apply: for book-entered debt securities, registration with the Central As previously mentioned, the notice must be delivered to the Depositary is required; and obligor without unnecessary delay after the sale of the receivable. debt securities in documentary form are assigned by means The receivable must also be clearly defined in the notification. (See of endorsement if they are debt securities to order or by questions 4.7, 4.9 and 4.10 below.) means of handover in case of bearer debt securities.

4.6 Restrictions on Assignment; Liability to Obligor. Are restrictions in receivables contracts prohibiting sale or assignment generally enforceable in the Czech Republic? Are there exceptions to this rule (e.g., for contracts between commercial entities)? If the Czech Republic recognises prohibitions on sale or assignment and the seller nevertheless sells receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for breach of contract or on any other basis?

The following types of receivables may not be assigned/sold: receivables which cease at the moment of death of the obligor; receivables whose content would be changed by the change

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of creditor (protection of obligor); and contract where the amounts are known or calculable at the moment receivables which cannot be affected by court execution, i.e. of assignment and may be assigned through one single contract. which are legally unenforceable (protection of purchaser). However, receivables which arise under a framework agreement In addition to this, receivables may not be sold if an agreement (e.g. a purchase framework contract) are not sufficiently determined between the obligor and the seller forbids it. and therefore such an assignment contract would be considered void. In such circumstances, it is usual to assign the receivables A contract attempting to assign any of the above listed receivables periodically as they arise. would be void. In such circumstances, the obligor’s situation remains unchanged. However, damages in liability may arise between relevant parties. 4.11 Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all 4.7 Identification. Must the sale document specifically identify related security can be enforceably transferred, what each of the receivables to be sold? If so, what specific methods are customarily adopted to provide the Cz ech Republic information is required (e.g., obligor name, invoice purchaser the benefits of such related security? number, invoice date, payment date, etc.)? Do the receivables being sold have to share objective Security under Czech law follows the destination of the secured characteristics? Alternatively, if the seller sells all of its receivable. As a result, security is transferred concurrently with the receivables to the purchaser, is this sufficient sale of receivable. However, notification to the security provider is identification of receivables? recommended. There is a legal requirement that the assigned receivable must be identifiable; generally, a receivable can be identified with precise 5 Security Issues reference to the legal facts on which it is based, e.g. the amount, maturity, and possibly on other facts. However, exact requirements of “sufficient determination” are not expressly specified in Czech 5.1 Back-up Security. Is it customary in the Czech Republic to take a “back-up” security interest over the seller’s law. ownership interest in the receivables and the related security, in the event that the sale is deemed by a court 4.8 Respect for Intent of Parties; Economic Effects on Sale. not to have been perfected? If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be In our experience, it is unusual to take back-up security over the respected or will a court enquire into the economic seller’s ownership interests. characteristics of the transaction? If the latter, what economic characteristics of a sale, if any, might prevent the sale from being perfected? Among other things, to 5.2 Seller Security. If so, what are the formalities for the what extent may the seller retain (a) credit risk; (b) seller granting a security interest in receivables and interest rate risk; and/or (c) control of collections of related security under the laws of the Czech Republic, receivables without jeopardising perfection? and for such security interest to be perfected?

Czech courts will not enquire into the economic characteristics of Under Czech law, a security interest is usually determined by a the transaction. Provided that all of the formal requirements of the written contract (“zástavní smlouva”) which must clearly specify sale are met, the contract will be considered valid. the security as well as the secured claim. Depending on the nature of the security, different requirements must be met in order to perfect the security interest. In the case of receivables, the security 4.9 Continuous Sales of Receivables. Can the seller agree in interest is perfected at the moment of conclusion of the contract. an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables as and when they arise)? 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in The continuous sale of receivables can be contentious under Czech favour of the providers of its funding, what formalities law, particularly if executed using a framework contract between must the purchaser comply with in the Czech Republic to the seller and the purchaser. However, future receivables must be grant and perfect a security interest in purchased identifiable. receivables governed by the laws of the Czech Republic and the related security?

4.10 Future Receivables. Can the seller commit in an As set out in question 5.2, a security interest may be granted by a enforceable manner to sell receivables to the purchaser written contract between a purchaser and a funding provider (i.e. that come into existence after the date of the receivables security taker). However, the secured claim must belong to the purchase agreement (e.g., “future flow” securitisation)? If security taker at the moment of creation of such security interest. so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction Should the security interest be created in the purchaser’s entire between future receivables that arise prior to or after the asset, the contract must take the form of a notary deed. Moreover, seller’s insolvency? registration of the security interest in the Register of Securities is necessary in order to perfect such security interest. Sale of future receivables is not expressly forbidden under Czech law. However, future receivables must still fulfil the legal requirement that a sold receivable must be identifiable. Generally, future receivables that arise are in accordance with one specific

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5.4 Recognition. If the purchaser grants a security interest in Financial security is, in principle, a security interest in receivables governed by the laws of the Czech Republic, financial collateral in favour of the security taker or a transfer and that security interest is valid and perfected under the of financial collateral to the security taker. A contract for laws of the purchaser’s country, will it be treated as valid financial security is not required to be in writing. However, and perfected in the Czech Republic or must additional financial security is created on the basis of registration of steps be taken in the Czech Republic? such security interest in the corresponding register of investment facilities or handover of financial collateral to the Generally, such a security interest would be treated as valid and security taker. perfected, unless it is contrary to the protection of public policy or As previously mentioned, security over a bank account governed by contrary to mandatory provisions of Czech law. If the receivable is foreign law should be recognised in the Czech Republic. However, governed by Czech law, rules under Czech law protecting the rights rights of the obligor must be preserved. Therefore, the obligor must of the original obligor shall apply (notification of the original be notified.

Cz ech Republic obligor). 6 Insolvency Laws 5.5 Additional Formalities. What additional or different requirements apply to security interests in or connected to insurance policies, promissory notes, mortgage loans, 6.1 Stay of Action. If, after a sale of receivables that is consumer loans or marketable debt securities? otherwise perfected, the seller becomes subject to an insolvency proceeding, will the Czech Republic The following additional requirements must be met in order to grant insolvency laws automatically prohibit the purchaser from collecting, transferring or otherwise exercising ownership such security interests: rights over the purchased receivables (a “stay of action”)? in the case of promissory notes, a security endorsement is Does the insolvency official have the ability to stay required; collection and enforcement actions until he determines in the case of mortgage loans and consumer loans, no special that the sale is perfected? Would the answer be different requirements are required; however, registration in the if the purchaser is deemed to only be a secured party Register of Securities is possible if mentioned in the rather than the owner of the receivables? corresponding contract; and in the case of marketable debt securities: If the purchaser is the owner of purchased receivables, there is no book-entered debt securities: registration with the automatic stay of action and the purchaser is able to collect, Central Depositary is required; and transfer, enforce or exercise any other rights over the receivables. debt securities in documentary form: a security As set out in question 6.2 below, insolvency proceedings may endorsement is required for debt securities to order, include any asset in the insolvency estate, while subsequent actions and handover to the security taker is required for in relation to the exclusion of assets not owned by the insolvent bearer debt securities. seller are also possible. However, litigation of such actions may take up to several years. 5.6 Trusts. Does the Czech Republic recognise trusts? If If the purchaser is not the owner of the receivables, but only a not, is there a mechanism whereby collections received secured party, the purchaser will be treated as a security taker in the by the seller in respect of sold receivables can be held or insolvency proceedings, i.e. the purchaser will be a secured creditor. be deemed to be held separate and apart from the During the insolvency procedure, secured creditors are paid through seller’s own assets until turned over to the purchaser? monetisation of the asset against which their receivable has been secured. As of March 2012, Czech law does not recognise trusts. However, the new Civil Code (planned to take effect as of January 1, 2014) contains material relevant to the regulation of trusts (“správa cizího 6.2 Insolvency Official’s Powers. If there is no stay of action majetku”). under what circumstances, if any, does the insolvency official have the power to prohibit the purchaser’s exercise of rights (by means of injunction, stay order or 5.7 Bank Accounts. Does the Czech Republic recognise other action)? escrow accounts? Can security be taken over a bank account located in the Czech Republic? If so, what is the An insolvency official, known as a bankruptcy administrator, lists typical method? Would courts in the Czech Republic assets to be added to the bankruptcy estate. After such listing, no recognise a foreign-law grant of security (for example, an person is entitled to deal with the listed assets. However, it is English law debenture) taken over a bank account located possible to exclude an asset from such list through legal action. in the Czech Republic?

Escrow accounts are recognised in the Czech Republic and most 6.3 Suspect Period (Clawback). Under what facts or Czech banks offer such accounts to clients. They are especially circumstances could the insolvency official rescind or used for payment of the purchase price for sales and for real estate reverse transactions that took place during a “suspect” or transactions. It is not forbidden to use such accounts for other types “preference” period before the commencement of the of payment. insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in the Czech Republic There are two possible ways to take security over a Czech bank for (a) transactions between unrelated parties and (b) account: transactions between related parties? Security interest over funds in a bank account is a specific type of security interest in receivables. Creation of such a The insolvency official can rescind or reverse transactions that took security interest must be notified to the relevant bank.

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place during a “suspect” or “preference” period, if such acts reduce 7.3 Non-Recourse Clause. Will a court in the Czech Republic the potential for satisfaction of creditors (e.g. supplies or other legal give effect to a contractual provision (even if the acts without adequate consideration) or if such transactions favour contract’s governing law is the law of another country) some creditors over others. The bankruptcy court can declare such limiting the recourse of parties to available funds? acts/transactions ineffective on the basis of an action by the insolvency official (a set aside action - “odpůrčí žaloba”). For mere assignment of a receivable, the seller is only liable for the enforcement of the receivable by the purchaser if he received For related persons, a set aside action can be filed in relation to acts consideration for the assignment and the liability was agreed. carried out in the three years before the start of the insolvency Otherwise, the purchaser is not entitled to claim payment from the procedure. Transactions between unrelated persons may be set seller. aside if they were made in the one year period before the start of the insolvency procedure. 7.4 Non-Petition Clause. Will a court in the Czech Republic

For acts intended to reduce the satisfaction of creditors, the suspect Cz ech Republic give effect to a contractual provision (even if the period lasts for five years. contract’s governing law is the law of another country) prohibiting the parties from: (a) taking legal action against 6.4 Substantive Consolidation. Under what facts or the purchaser or another person; or (b) commencing an circumstances, if any, could the insolvency official insolvency proceeding against the purchaser or another consolidate the assets and liabilities of the purchaser with person? those of the seller or its affiliates in the insolvency proceeding? Under Czech law, any agreement relating to the waiving of future rights is invalid. This applies not only to consumer relationships This is not possible under Czech law. but also in commercial relations among equally strong parties. Non-petition or similar clauses are therefore often difficult to rely on. 6.5 Effect of Proceedings on Future Receivables. What is the effect of the initiation of insolvency proceedings on (a) However, if such a clause is concluded in a contract governed by sales of receivables that have not yet occurred or (b) on foreign law, a Czech court may not necessarily view this as against sales of receivables that have not yet come into public policy, especially if agreed between equally strong parties. existence? Therefore, in such circumstances, a non-petition clause might be effective. On a strict reading of the Czech Insolvency Act, an insolvent person is obliged to refrain from dealing with any asset included in the insolvency estate, as well as assets that may belong to it, provided 7.5 Independent Director. Will a court in the Czech Republic give effect to a contractual provision (even if the that it may cause a substantial change in the composition, use or contract’s governing law is the law of another country) or destination of the asset or may cause significant reduction of the a provision in a party’s organisational documents asset. Legal acts by a debtor made under these restrictions will be prohibiting the directors from taking specified actions ineffective against creditors. However, the restriction does not (including commencing an insolvency proceeding) without apply to operations required to operate in the normal course of the affirmative vote of an independent director? business. The same approach as described in question 7.4 above applies. 7 Special Rules Moreover, under the Czech Commercial Code, directors have a duty of care towards a company. Such a provision may therefore be unenforceable if it is viewed as limiting such duty of care. 7.1 Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in the Czech Republic establishing a legal framework for securitisation 8 Regulatory Issues transactions? If so, what are the basics?

Under Czech law there is no specific securitisation law, nor special 8.1 Required Authorisations, etc. Assuming that the purchaser does no other business in the Czech Republic, provisions in other laws. will its purchase and ownership or its collection and enforcement of receivables result in its being required to 7.2 Securitisation Entities. Does the Czech Republic have qualify to do business or to obtain any licence or its being laws specifically providing for establishment of special subject to regulation as a financial institution in the Czech purpose entities for securitisation? If so, what does the Republic? Does the answer to the preceding question law provide as to: (a) requirements for establishment and change if the purchaser does business with other sellers management of such an entity; (b) legal attributes and in the Czech Republic? benefits of the entity; and (c) any specific requirements as to the status of directors or shareholders? The purchase and ownership of receivables does not require a business trading licence in the Czech Republic. On the other hand, The Czech Republic has no special legislation regarding the the collection and enforcement of purchased receivables may establishment and operation of special purpose entities for require a business trading licence in the Czech Republic if it is a securitisation. continuous activity carried out independently and in a company’s own name (with responsibility) in order to gain profit. The purchase and ownership of receivables, as well as the collection and enforcement of purchased receivables, do not require a financial institution licence.

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8.2 Servicing. Does the seller require any licences, etc., in for foreign currency. Similarly, payments to entities outside the order to continue to enforce and collect receivables Czech Republic are not restricted. However, some large-scale following their sale to the purchaser, including to appear payments must be notified with a view to preventing money before a court? Does a third party replacement servicer laundering. require any licences, etc., in order to enforce and collect sold receivables? 9 Taxation Czech law allows a seller to enforce a sold receivable at the request of the purchaser, in the seller’s name and on the purchaser’s 9.1 Withholding Taxes. Will any part of payments on account. On this basis the seller does not need any special licence receivables by the obligors to the seller or the purchaser in order to continue to enforce and collect receivables. Moreover, be subject to withholding taxes in the Czech Republic? the seller is able to appear before a court without having any Does the answer depend on the nature of the receivables,

Cz ech Republic specific permission to do so. whether they bear interest, their term to maturity, or The collection and enforcement of purchased receivables by a third where the seller or the purchaser is located? party replacement servicer is likely to be considered as a service provided by the servicer, particularly if carried out continuously, Payment by an obligor to the seller or to the purchaser will not be independently, and in the name of the servicer (with responsibility) subject to a withholding tax in the Czech Republic. However, if the in order to gain profit. A business trading licence is therefore likely recipient of the payment resides outside the Czech Republic (i.e. is to be required. a Czech tax non-resident), a payment of receivables acquired by way of assignment is considered to be income sourcing from the Czech Republic. Such income will therefore be subject to Czech 8.3 Data Protection. Does the Czech Republic have laws income tax and the recipient of the payment will be obliged to restricting the use or dissemination of data about or submit a Czech income tax return and pay tax according to Czech provided by obligors? If so, do these laws apply only to consumer obligors or also to enterprises? tax rules and regulations. In addition, if the recipient of the payment is not a tax resident of Czech data protection law relates only to individuals’ personal data. one of the EEA Member States and there is no double taxation In such circumstances, a special notification to the Personal Data treaty concluded between its resident state and the Czech Republic, Protection Office is required. Certain duties must also be fulfilled a deposit for tax liabilities equal to 1% of the amount of the in accordance with the Czech Act on Personal Data Protection. payment must be deducted from the payment. If the obligor is a legal entity, such data protection restrictions will not apply. 9.2 Seller Tax Accounting. Does the Czech Republic require We also note that “Bank secrecy” restricts banks from providing that a specific accounting policy is adopted for tax information about their customers without such customers’ consent, purposes by the seller or purchaser in the context of a securitisation? irrespective of whether the obligors are individuals or legal entities. However, this can prohibit banks from carrying out activities which No special accounting rules are applicable in the context of a are in their legitimate interest. Banks may therefore in certain securitisation. circumstances provide information on their customers in order to conclude a valid contract for assignment of receivables. 9.3 Stamp Duty, etc. Does the Czech Republic impose stamp duty or other documentary taxes on sales of 8.4 Consumer Protection. If the obligors are consumers, will receivables? the purchaser (including a bank acting as purchaser) be required to comply with any consumer protection law of the Czech Republic? Briefly, what is required? Czech tax law does not impose any stamp duty or any other documentary tax upon the sale of receivables. Consumer protection applies specifically to the purchase of consumer credit loans. Pursuant to the Czech Act on Consumer 9.4 Value Added Taxes. Does the Czech Republic impose Credit Loans (implementing the corresponding EU directive), the value added tax, sales tax or other similar taxes on sales consumer benefits from the following rights: of goods or services, on sales of receivables or on fees Right to pay the receivable back before the due date without for collection agent services? sanctions, where the costs related to the credit loan must be equitably reduced. Sales of goods or services are subject to VAT in the Czech Republic, Right to terminate a contract for a credit loan within 14 days provided that the origin of a taxable supply is located in Czech. of conclusion of such contract without providing a reason. However, some specific supplies are VAT exempt, e.g. supply of goods to another EU Member State, financial services, insurance In addition, the consumer is also entitled to use a number of services, sale and rent of plots, buildings, apartments and defences, including set-off, which are available to the consumer commercial premises, etc. against the seller prior to notification of the sale. The sale of a company’s own receivables is not subject to VAT in the Czech Republic. 8.5 Currency Restrictions. Does the Czech Republic have laws restricting the exchange of the Czech Republic The sale of receivables acquired by assignment (i.e. receivables currency for other currencies or the making of payments purchased from another entity) is considered to be a financial in the Czech Republic currency to persons outside the service under the Czech VAT Act. Such sale will therefore be country? subject to VAT, although it will also be tax exempt so no VAT will be payable. The Czech Republic does not restrict the exchange of Czech crowns

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Fees for collection agent services are subject to VAT in the Czech 9.6 Doing Business. Assuming that the purchaser conducts Republic, provided that the origin of the taxable supply is located in no other business in the Czech Republic; would the the Czech Republic. However, if the purchaser is not a resident of purchaser’s purchase of the receivables, its appointment the Czech Republic, the origin of the taxable supply will move to of the seller as its servicer and collection agent, or its the home country of the purchaser. In such circumstances, Czech enforcement of the receivables against the obligors, make it liable to tax in the Czech Republic ? VAT regulations will not apply.

As set out in question 9.1 above, if a purchaser is not a Czech tax 9.5 Purchaser Liability. If the seller is required to pay value resident, payment of receivables acquired by means of assignment added tax, stamp duty or other taxes upon the sale of will be considered income sourced in the Czech Republic. The receivables (or on the sale of goods or services that give purchaser will therefore be obliged to submit an income tax return rise to the receivables) and the seller does not pay, then in the Czech Republic and declare this income. Such income will will the taxing authority be able to make claims for the

be subject to Czech income tax (depending on the nature of the Cz ech Republic unpaid tax against the purchaser or against the sold receivables or collections? purchaser, the standard corporate income tax rate of 19% or the personal income tax rate will be applicable). If the purchaser is a taxable resident of the Czech Republic, the tax authority may be able to claim for unpaid taxes against the purchaser. However, this is only possible if the purchaser had, should have or could have known that taxes were not going to be paid at the moment of realisation of the sale. In addition, the purchaser is liable for unpaid tax if the actual price of the taxable supply is either without economic justification, obviously different from the usual market price, or if the payment was paid to a bank account held at a bank outside the Czech Republic.

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Jana Jesenská Andrea Majerčíková

TGC Corporate Lawyers TGC Corporate Lawyers Česká 17 Česká 17 602 00 Brno 602 00 Brno Czech Republic Czech Republic

Tel: +420 542 425 821 Tel: +420 542 425 821 Fax: +420 542 425 822 Fax: +420 542 425 822 Email: [email protected] Email: [email protected] URL: www.tgc.eu URL: www.tgc.eu

Jana, a Czech advocate, leads TGC's Czech finance practice. Andrea Majercikova is an articled clerk registered with the Czech She advises Czech and foreign companies on loan and credit Bar association. She joined the Czech office of TGC Corporate

Czech Republic facilities, taking and the perfection of security, foreign exchange Lawyers after her graduation from the Law Faculty of Charles and other finance matters. She acts for major multinationals and University in Prague. Andrea has practical experience in various entrepreneurs as well as local financial institutions. aspects of commercial and corporate law. She has advised major international as well as local clients on financial legislation including receivables in the Czech Republic.

TGC Corporate Lawyers is an international corporate law firm providing constructive and cost effective advice and assistance to clients in Poland, Czech Republic and Slovakia. We act for some of the world’s leading companies, offering a breadth of services including corporate, M&A, litigation, finance, real estate, oil & gas and tax advice that is combined with a deep understanding of industry sectors such as financial services, real estate, FMCG, pharmaceuticals, manufacturing and companies involved in international trade. Through our network of offices in Central Europe we are able to provide clients with expert, local knowledge throughout Poland (Warsaw, Wrocław, Łódź and Kraków), the Czech Republic (Prague and Brno) and Slovakia (Bratislava).

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Accura Advokatpartnerselskab Christian Sahlertz

1 Receivables Contracts (c) The Danish Consumer Credit Act entitles the consumers to discharge his payment obligations pursuant to any credit agreements he has entered into prematurely, either in full or 1.1 Formalities. In order to create an enforceable debt partially. In addition, any credit agreements not limited in obligation of the obligor to the seller, (a) is it necessary time may be cancelled by the consumers from time to time or that the sales of goods or services are evidenced by a with 1 month’s prior notice. formal receivables contract; (b) are invoices alone (d) The Danish Consumer Credit Act grants the consumers a sufficient; and (c) can a receivable “contract” be deemed right to a reduction of costs and expenses in case of to exist as a result of the behaviour of the parties? premature discharge. In addition, although not specifically aimed at consumers, the Danish Instrument of Debt Act (a) No formal requirements are necessary to create an contains provisions which, to some extent, entitle an obligor enforceable debt obligation (save for a written requirement in to exercise rights of set-off even after the receivable has been terms of consumer credit agreements, cheques or other transferred. special areas of law). An oral or written receivables contract will suffice; however, an oral contract will be difficult to prove. In case of enforcing a debt obligation directly through 1.3 Government Receivables. Where the receivables the bailiff’s court, without obtaining a judgment, the debt contract has been entered into with the government or a obligation must be an instrument of debt including a clause government agency, are there different requirements and of enforcement. It is not market practice for the buyer to laws that apply to the sale or collection of those issue an instrument of debt. receivables? (b) An invoice will be sufficient to create an enforceable debt obligation. Formal receivables contracts are not used in As stated in the answer to question 1.1(b), receivables contracts are Denmark. However, in case the obligor objects to the not as such used in Denmark. However, any receivable which invoice, it may raise doubts as to the existence of a contract evidences a debt of the government or a government agency can in between the parties. general be sold to any third party in the same manner as other (c) The behaviour between the parties may create a “contract” receivables. based on the principle of passivity, practice or customary procedures applicable in such areas of contract law. Furthermore, a historic relationship may create a contract to 2 Choice of Law – Receivables Contracts the extent that there is some form of recording of the debt and the circumstances which gave rise to the debt, and this can be substantiated, if contested by the obligor. 2.1 No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what are the main principles in Denmark that will determine the 1.2 Consumer Protections. Do Danish laws (a) limit rates of governing law of the contract? interest on consumer credit, loans or other kinds of receivables; (b) provide a statutory right to interest on late As the receivable would normally only be evidenced by an invoice, payments; (c) permit consumers to cancel receivables for the governing law of the invoice would be identical with the a specified period of time; or (d) provide other noteworthy governing law of the contract which gave rise to the invoice. rights to consumers with respect to receivables owing by them? The governing law of the contract giving rise to the invoice will be subject to the EC Convention on Law Applicable to Contractual (a) Apart from provisions on usury in the Danish penal code, there Obligations (Rome 1980), which has been ratified by, and is in are no laws which limit the interest rate that can be charged. force in, Denmark. Pursuant hereto, the applicable law, in the (b) The Danish Interest Rate Act provides creditors with a absence of choice, shall be the law of the country with which it is statutory right to demand default interest on any late most closely connected, however, subject to the qualification that payments. The default interest rate is the aggregate of (i) the the law does not contravene with (i) Danish public policy (ordre lending rate of the Danish National Bank (fixed every half public), (ii) international mandatory rules to which the contract has year), and (ii) a margin of 7% p.a. In case the credit interest a close connection or the international mandatory rules of Denmark rate exceeds the statutory default interest rate, the creditors irrespective of the law otherwise applicable to the contract, and (iii) are entitled to charge the credit interest rate as default mandatory consumer rules of the country in which the consumer interest. resides.

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The EC Regulation on the Law Applicable to Contractual governing the receivables themselves. Unless any substantial Obligations (Rome I) does not apply to Denmark; cf. the Protocol arguments in favour of the opposite, we recommend that the parties on the position of Denmark in the EU. choose the law that governs the receivables as the governing law of the receivables purchase agreement. In general, there are no obvious benefits from choosing a different law to govern the 2.2 Base Case. If the seller and the obligor are both resident in Denmark, and the transactions giving rise to the receivables purchase agreement than the one governing the receivables and the payment of the receivables take receivables. place in Denmark, and the seller and the obligor choose Furthermore, the parties are free to make a single choice of law for, the law of Denmark to govern the receivables contract, is or various choices of law for parts of, the receivables purchase there any reason why a court in Denmark would not give agreement – the latter referred to as dépecage, which is possible

Denmark effect to their choice of law? only as an exception in case the parties have not specified a choice of law. No, a choice of Danish law is valid and will be upheld by the Danish courts in accordance with the EC Convention on Law Applicable to Contractual Obligations (Rome 1980). 3.2 Example 1: If (a) the seller and the obligor are located in Denmark, (b) the receivable is governed by the law of Denmark, (c) the seller sells the receivable to a purchaser 2.3 Freedom to Choose Foreign Law of Non-Resident Seller located in a third country, (d) the seller and the purchaser or Obligor. If the seller is resident in Denmark but the choose the law of Denmark to govern the receivables obligor is not, or if the obligor is resident in Denmark but purchase agreement, and (e) the sale complies with the the seller is not, and the seller and the obligor choose the requirements of Denmark, will a court in Denmark foreign law of the obligor/seller to govern their receivables recognise that sale as being effective against the seller, contract, will a court in Denmark give effect to the choice the obligor and other third parties (such as creditors or of foreign law? Are there any limitations to the insolvency administrators of the seller and the obligor)? recognition of foreign law (such as public policy or mandatory principles of law) that would typically apply in Danish law distinguishes amongst the effectiveness of (i) the inter commercial relationships such that between the seller and partes agreement entered into between the seller and the obligor (or the obligor under the receivables contract? the seller and a purchaser), which is regulated by the EC Convention (Rome 1980) as stated above, and (ii) any third party Yes, generally, the seller and the obligor may, by way of inclusion of rights which remains unregulated. a choice of law clause in the contract, stipulate that foreign law shall govern their contractual relationship, and such choice of law is valid According to Danish international private law, any issue regarding and will be upheld by the Danish courts, subject to the qualification the perfection and hence the effectiveness of the sale against third that the foreign law does not contravene with (i) Danish public policy parties must be addressed with reference to the law of the country (ordre public), (ii) international mandatory rules to which the contract where the receivable is deemed to be located – referred to as the lex has a close connection or the international mandatory rules of rei sitae rule. Denmark irrespective of the law otherwise applicable to the contract, As regards receivables, it is unresolved in Danish law whether a (iii) mandatory consumer rules of the country in which the consumer receivable (such being non-negotiable) is located at the obligor’s or resides, and (iv) the mandatory laws of any country with which the the seller’s domicile as it does not relate to any physical location. contract has a significant connection. There is no decisive case law on the subject and the legal scholars Danish public policy is deemed to have little practical meaning as the seem to be divided on this question, however, the predominant case law relates to matters which are manifestly incompatible with position is the domicile of the obligor. As a precautionary measure, the public policy of Denmark and is to be applied as a precautionary we recommend that the seller (or the purchaser) complies with the measure in order to prevent an apparent preposterous result. perfection requirement in both countries in case they differ.

2.4 CISG. Is the United Nations Convention on the 3.3 Example 2: Assuming that the facts are the same as International Sale of Goods in effect in Denmark? Example 1, but either the obligor or the purchaser or both are located outside Denmark, will a court in Denmark recognise that sale as being effective against the seller CISG is in effect in Denmark, however, currently with the and other third parties (such as creditors or insolvency reservation that Part II regarding the formation of contracts is not in administrators of the seller), or must the requirements of effect. Although this reservation has recently been repealed by the the obligor’s country or the purchaser’s country (or both) Danish Parliament, the Danish Minister of Justice is yet to provide be taken into account? for the effective date, which will implement CISG in its entirety in Denmark. The perfection requirement may be affected in the event that a Danish court bases its decision upon the perfection requirement in the obligor’s country, but only the perfection requirement in the 3 Choice of Law – Receivables Purchase seller’s country (i.e. Denmark) has been complied with. As a Agreement precautionary measure, we recommend that the seller (or the purchaser) complies with the perfection requirement in both 3.1 Base Case. Does Danish law generally require the sale countries in case they differ. of receivables to be governed by the same law as the law As regards the location of the purchaser, this will not interfere with governing the receivables themselves? If so, does that the perfection requirement, as this will be a matter of the domicile general rule apply irrespective of which law governs the of either the obligor or the seller. receivables (i.e., Danish laws or foreign laws)?

No, the parties are free to choose a different law than the law

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3.4 Example 3: If (a) the seller is located in Denmark but the requirement in the purchaser’s country may have to be taken into obligor is located in another country, (b) the receivable is account if the negotiable receivable is in fact located there. governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law 4 Asset Sales of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in 4.1 Sale Methods Generally. In Denmark what are the Denmark recognise that sale as being effective against customary methods for a seller to sell receivables to a the seller and other third parties (such as creditors or purchaser? What is the customary terminology – is it insolvency administrators of the seller) without the need called a sale, transfer, assignment or something else?

to comply with Denmark’s own sale requirements? Denmark Generally, the seller and the purchaser will enter into a receivables The perfection requirement may be affected in the event that a purchase (or transfer) agreement governing the sale of the Danish court bases its decision upon the perfection requirement in receivables. An assignment agreement is usually referred to in the seller’s country (i.e. Denmark), but only the perfection terms of a secured loan. requirement in the obligor’s country has been complied with. As a precautionary measure we recommend that the seller (or the 4.2 Perfection Generally. What formalities are required purchaser) complies with the perfection requirement in both generally for perfecting a sale of receivables? Are there countries in case they differ. any additional or other formalities required for the sale of As regards the location of the purchaser, this will not interfere with receivables to be perfected against any subsequent good the perfection requirement as this will be a matter of the domicile faith purchasers for value of the same receivables from the seller? of either the obligor or the seller.

Notice to the obligor constitutes perfection in respect of sale of 3.5 Example 4: If (a) the obligor is located in Denmark but receivables; however, there are no specific requirements as to the the seller is located in another country, (b) the receivable form of notice and it may be served orally or in writing. is governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s In addition hereto, we also recommend that the seller is deprived of country to govern the receivables purchase agreement, the control over the receivable, as well as over the income deriving and (d) the sale complies with the requirements of the from the receivable. Although this is not as such a perfection seller’s country, will a court in Denmark recognise that requirement in relation to true sale, it is a useful precautionary sale as being effective against the obligor and other third measure, should the sale be re-characterised as a secured loan parties (such as creditors or insolvency administrators of which would not otherwise have been duly perfected. the obligor) without the need to comply with Denmark’s Once the perfection requirements are fulfilled, the sale will not only own sale requirements? be effective against the seller’s creditors, but also against any subsequent good faith purchasers. The perfection requirement may be affected in the event that a Danish court bases its decision upon the perfection requirement in the obligor’s country (i.e. Denmark), but only the perfection 4.3 Perfection for Promissory Notes, etc. What additional or requirement in the seller’s country has been complied with. As a different requirements for sale and perfection apply to precautionary measure, we recommend that the seller (or the sales of promissory notes, mortgage loans, consumer purchaser) complies with the perfection requirement in both loans or marketable debt securities? countries in case they differ. In respect of a sale of promissory notes or other negotiable documents, the sale is, strictly speaking, already perfected once the 3.6 Example 5: If (a) the seller is located in Denmark parties have entered into the transfer agreement (or once the notes (irrespective of the obligor’s location), (b) the receivable is etc. have been set aside for the purchaser); however, we recommend governed by the law of Denmark, (c) the seller sells the that the seller is also deprived of the control over the document receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the either by the purchaser taking it into his own custody or by placing purchaser’s country to govern the receivables purchase it in a third party’s custody. agreement, and (e) the sale complies with the In respect of mortgage on real property, the sale must be registered requirements of the purchaser’s country, will a court in with the Danish Land Registry in order to be perfected. This also Denmark recognise that sale as being effective against applies in terms of chattel mortgages or car loans as the sale of such the seller and other third parties (such as creditors or must be registered with the Danish Registry of Chattel Mortgages insolvency administrators of the seller, any obligor located or the Danish Registry of Motor Vehicles, respectively. in Denmark and any third party creditor or insolvency administrator of any such obligor)? Pursuant to the provisions of the Danish Consumer Credit Act, a consumer credit loan can only take the form of a non-negotiable The perfection requirement will not be satisfied as a Danish court document whereby the perfection requirement is notice to the would base its decision upon the perfection requirement in either obligor. the seller’s country (i.e. Denmark) or the obligor’s country, and not In Denmark, marketable debt securities will normally be the perfection requirement in the purchaser’s country. As a dematerialised, i.e. they will only exist in the form of an electronic precautionary measure, we recommend that the seller (or the registration with the Danish securities depository – the VP purchaser) complies with the perfection requirement in the seller’s Securities Services. A sale of such securities is perfected by way of and the obligor’s respective countries in case they differ. registration with the VP Securities Services. In case of the sale of a negotiable receivable, the perfection

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4.4 Obligor Notification or Consent. Must the seller or the however, it is not necessary to provide the obligor with any purchaser notify obligors of the sale of receivables in evidence of the transfer of the receivables. order for the sale to be effective against the obligors Notice may be given at any point in time, but not after the and/or creditors of the seller? Must the seller or the purchaser obtain the obligors’ consent to the sale of insolvency of the seller as the receivable will form part of its estate. receivables in order for the sale to be an effective sale In case of the obligor’s insolvency, the administrator of the estate against the obligors? Does the answer to this question may be notified – in practice, it would presumably only be in vary if (a) the receivables contract does not prohibit relation to filing a claim with the estate. assignment but does not expressly permit assignment; or (b) the receivables contract expressly prohibits 4.6 Restrictions on Assignment; Liability to Obligor. Are assignment? Whether or not notice is required to perfect restrictions in receivables contracts prohibiting sale or Denmark a sale, are there any benefits to giving notice – such as assignment generally enforceable in Denmark? Are there cutting off obligor set-off rights and other obligor exceptions to this rule (e.g., for contracts between defences? commercial entities)? If Denmark recognises prohibitions on sale or assignment and the seller nevertheless sells Yes, notice to the obligor is a perfection requirement and must be receivables to the purchaser, will either the seller or the served by the seller or the purchaser. purchaser be liable to the obligor for breach of contract or No consent is required from the obligor (unless otherwise on any other basis? specifically required for in the receivable). An acknowledgment, although not required, would minimise the procedural risk of Generally, clauses prohibiting sale or assignment are enforceable in evidencing the notification having reached the obligor. Denmark and must be adhered to by the parties. (a) No, receivables are freely assignable provided that no clause As of 1 October 2011, a special securitisation scheme is available of prohibition of assignment exists. for financial institutions in Denmark under the Danish Securities (b) If the contract prohibits assignment, a violation of such Act, pursuant to which the Danish National Bank may provide would be a breach of contract for which the breaching party funding to a financial institution against obtaining security interests is liable, and the assignment to a purchaser or assignee in certain assets of that financial institution (e.g. loans, overdraft should not be effective. facilities, and securities – not including accounts receivables) Following the obligor being notified of the transfer, the obligor is no subject to a haircut. Perfection is made by way of the financial longer entitled to pay any amount under the receivables to the seller institution forwarding a list of the secured assets to the Danish with releasing effect (provided that the notification states otherwise), National Bank, and thereby dispensing from the requirement of and the obligor may only set-off any (non-related) counterclaim notification. against the purchaser if (i) the counterclaim has been acquired prior to In terms of a breach of prohibitions on sale or assignment, the seller the obligor being notified of the transfer, and (ii) the counterclaim falls will be liable for breach of contract. Furthermore, the obligor will due prior to the receivable that is subject to the transfer. not be bound by such sale or assignment and the purchaser will The general principle is that the purchaser will not obtain a more normally not be liable for the breach as no contract exists between preferable legal position than that of the seller, whereby the obligor the purchaser and the obligor. may set-off any (related) counterclaim arising out of the transferred receivable by way of netting. The obligor and the purchaser may 4.7 Identification. Must the sale document specifically identify agree from time to time that such rights may be limited by a cut-off each of the receivables to be sold? If so, what specific clause; however, subject to the Danish Consumer Credit Act which information is required (e.g., obligor name, invoice prohibits such clauses in respect of consumers. number, invoice date, payment date, etc.)? Do the receivables being sold have to share objective characteristics? Alternatively, if the seller sells all of its 4.5 Notice Mechanics. If notice is to be delivered to obligors, receivables to the purchaser, is this sufficient whether at the time of sale or later, are there any identification of receivables? requirements regarding the form the notice must take or how it must be delivered? Is there any time limit beyond which notice is ineffective – for example, can a notice of The receivables purchase agreement has to individualise and sale be delivered after the sale, and can notice be identify the receivables sold in such detail that the purchaser is able delivered after insolvency proceedings against the obligor at any time to identify which receivables have been bought. No have commenced? Does the notice apply only to specific specific information requirements apply. receivables or can it apply to any and all (including future) receivables? Are there any other limitations or considerations? 4.8 Respect for Intent of Parties; Economic Effects on Sale. If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be No particular requirements apply to the form of notice or to the respected or will a court enquire into the economic effective service, as it may be served orally or in writing. Danish characteristics of the transaction? If the latter, what law operates on the basis of substance over form, however, the economic characteristics of a sale, if any, might prevent notice must be clearly defined and precise in order for the obligor the sale from being perfected? Among other things, to to become fully aware of the transfer. In addition, it may be what extent may the seller retain (a) credit risk; (b) required that foreign obligors are notified in their languages. interest rate risk; and/or (c) control of collections of receivables without jeopardising perfection? The notice must reach the obligor in order for perfection to be duly obtained, and that burden of proof lies with the one serving the notice. A formal sale of receivables could be re-characterised as a secured loan if the substance of the sale corresponds to that of a secured The notice will have to specify the receivables sold in such detail loan, as Danish law applies substance over form – thus, a Danish that the obligor is able to identify the receivables that are sold; court would not automatically give effect to the intent of the parties.

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In assessing this, one should take all aspects of the transfer into 4.11 Related Security. Must any additional formalities be account and not just rely on a few factors. It is evident that the fulfilled in order for the related security to be transferred economic effects of such transfer are key factors in making this concurrently with the sale of receivables? If not all determination. In this respect, the Danish courts will be likely related security can be enforceably transferred, what (although there is practically no case law to rely on) to re- methods are customarily adopted to provide the purchaser the benefits of such related security? characterise a sale as a secured loan if the risk and benefits in relation to the receivables in general remain with the seller. Generally, any related security could be transferred to the purchaser In the event of a sale of receivables in which (a) the vast majority together with the receivable, e.g. any insurance or guarantees for of the credit risk and to a lesser extent the interest risk remain with payment of the receivable. The perfection requirement would in the seller, and (b) where the purchaser is restricted from exercising such instances be notice to the relevant insurance company and Denmark full ownership rights over the receivables, e.g. the right to freely guarantor, etc. dispose of the receivables to a third party, is more likely to be re- characterised as a secured loan than a sale, which does not exhibit these characteristics. 5 Security Issues In relation to (c) the control of the collections of receivables, such will not per se have a direct bearing on the re-characterisation issue, 5.1 Back-up Security. Is it customary in Denmark to take a however, should the sale be re-characterised as a secured loan (i.e. “back-up” security interest over the seller’s ownership the characteristics described in item (a) and (b) above apply), then interest in the receivables and the related security, in the the perfection requirements, in terms of depriving the seller of the event that the sale is deemed by a court not to have been control over the receivables, as well as the income deriving from perfected? such, are not fulfilled. No, in Denmark, the main risk is not whether the sale has been As a precautionary measure, we recommend that the seller is perfected or not, but instead whether the relevant perfection deprived of the control over the receivables as well as the income requirements have been fulfilled should the sale be re-characterised as deriving from such, unless the collection is made under strict a secured loan. Therefore, most receivables transfer agreements in supervision by the purchaser. Denmark are structured in such a way that all perfection requirements are met, irrespective of whether the sale is re-characterised or not. 4.9 Continuous Sales of Receivables. Can the seller agree in an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables 5.2 Seller Security. If so, what are the formalities for the as and when they arise)? seller granting a security interest in receivables and related security under the laws of Denmark and for such security interest to be perfected? Yes, a seller can enter into an enforceable receivables transfer agreement in relation to the continuous sale of receivables. In order to create a security interest over the receivables and any related security, the parties would have to enter into a pledge 4.10 Future Receivables. Can the seller commit in an agreement in relation to these assets. The perfection requirement enforceable manner to sell receivables to the purchaser would be notice to the obligors along the same lines as in relation that come into existence after the date of the receivables to true sale. In addition, the seller must be deprived of the control purchase agreement (e.g., “future flow” securitisation)? If over the receivables as well as over any income depriving from so, how must the sale of future receivables be structured these receivables. to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the seller’s insolvency? 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in The seller can, to a certain extent, enter into a receivable transfer favour of the providers of its funding, what formalities agreement concerning future receivables provided that the must the purchaser comply with in Denmark to grant and contractual relationship between the seller and the obligor, which perfect a security interest in purchased receivables gives rise to these future receivables, can be described in extensive governed by the laws of Denmark and the related detail, i.e. an agreement for the sale of future receivables from a security? presently undefined group of obligors will not be enforceable. Thus, the problem is the perfection requirement in terms of As regards security interest over the purchased receivables and any notifying the obligors and depriving the seller of his control, which related security, the purchaser must comply with the requirements may qualify the enforceability of the transfer. set out in question 5.2 above. It remains unresolved if one single notification in respect of future Pursuant to the Danish Registration Act, no person may grant receivables is sufficient perfection and if such is enforceable. As a security interests over all of his present or future assets, whereby the precautionary measure, we recommend that the obligor is notified purchaser is unable to grant security interests over all of its assets. of the transaction of each individual receivable. As an exemption, the purchaser may grant a floating charge over certain of its assets (including receivables, intellectual property, If the transfers of the receivables, including the future receivables, etc.) by way of registering an all-monies mortgage in the Danish are duly perfected, such receivables will not form part of the seller’s Registry of Chattel Mortgages. Perfection is subject to a stamp duty insolvency estate, cf. question 6.5 below, and non-perfected of approx. EUR 200 and an additional 1.5% of the nominal amount transfers would form part of the seller’s insolvency estate. of the all-monies mortgage. In the event that the purchaser is to grant security over any specific assets, the perfection requirements may differ as different acts of perfection apply to the various types of assets.

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5.4 Recognition. If the purchaser grants a security interest in and is perfected by way of notification to the account bank and receivables governed by the laws of Denmark, and that depriving the pledgor control of the bank account. Thus, the security interest is valid and perfected under the laws of pledged bank account must be blocked and the pledgor’s access the purchaser’s country, will it be treated as valid and must be made subject to discretionary consent of the pledgee. perfected in Denmark or must additional steps be taken in Denmark? No, the Danish courts will not recognise a foreign-law grant of security over an asset located in Denmark, as any issue regarding Subject to the qualifications set out in question 2.3 above, the third party rights must be addressed in accordance with the lex rei security granted will be considered valid between the purchaser and sitae rule, which in this event will refer to Danish law, provided that the relevant third party. the perfection requirement of a bank account pledge in the foreign country is not similar to those in Denmark.

Denmark According to Danish international private law, any issue regarding third party rights must be addressed with reference to the law of the country where the receivable is deemed to be located – referred to 6 Insolvency Laws as the lex rei sitae rule. As stated in the answer to question 3.2, a receivable may be deemed to be situated either at the obligor’s or 6.1 Stay of Action. If, after a sale of receivables that is the purchaser’s domicile. otherwise perfected, the seller becomes subject to an The perfection requirement may be affected in the event that a insolvency proceeding, will Danish insolvency laws Danish court bases its decision upon the perfection requirement in automatically prohibit the purchaser from collecting, the obligor’s country (provided that the domicile of the obligor is in transferring or otherwise exercising ownership rights over fact Denmark), but only the perfection requirement in the the purchased receivables (a “stay of action”)? Does the purchaser’s country has been complied with. As a precautionary insolvency official have the ability to stay collection and measure, we recommend that the purchaser (or the person for whom enforcement actions until he determines that the sale is perfected? Would the answer be different if the the security interest is granted in favour of) complies with the purchaser is deemed to only be a secured party rather perfection requirement in both countries in case they differ. than the owner of the receivables?

5.5 Additional Formalities. What additional or different If a true sale of the receivables is upheld and has been duly requirements apply to security interests in or connected to perfected and is not subject to any reversibility, the receivables will insurance policies, promissory notes, mortgage loans, not form part thereof and the purchaser may continue to exercise consumer loans or marketable debt securities? any ownership rights without any involvement of the seller’s estate. If a security interest over the receivables has been duly perfected In order to create a valid and perfected security interest over a and is not subject to any reversibility, the purchaser is a secured promissory note or any other negotiable document, the parties have preferential creditor with preference to enforce the security interest to enter into a pledge agreement. In addition hereto, the pledgee directly without any involvement of the seller’s estate. will also have to deprive the pledgor of the control over the relevant document, either by taking it into his own custody or by transferring it to a third party. In relation to marketable debt securities, the 6.2 Insolvency Official’s Powers. If there is no stay of action perfection requirement is registration of the security interest in the under what circumstances, if any, does the insolvency VP Securities Centre. official have the power to prohibit the purchaser’s exercise of rights (by means of injunction, stay order or other action)? 5.6 Trusts. Does Denmark recognise trusts? If not, is there a mechanism whereby collections received by the seller in Under the precondition that (i) the sale is upheld as a true sale and respect of sold receivables can be held or be deemed to not subject to any reversibility, or (ii) the security interest is duly be held separate and apart from the seller’s own assets perfected and not subject to any reversibility, the insolvency official until turned over to the purchaser? will have no such powers.

A trust cannot be established under Danish law and the concept of trust is not generally recognised under Danish law, however, the 6.3 Suspect Period (Clawback). Under what facts or existence of a validly created trust under foreign law may be circumstances could the insolvency official rescind or recognised in Denmark as a matter of Danish conflict of law rules. reverse transactions that took place during a “suspect” or “preference” period before the commencement of the The concept of agency is recognised under Danish law, whereby a insolvency proceeding? What are the lengths of the single legal entity may be appointed to act as agent on behalf of “suspect” or “preference” periods in Denmark for (a) others and hold the receivables, collect the payments made or transactions between unrelated parties and (b) enforce any security granted. An agency contract (e.g. power-of- transactions between related parties? attorney) should define the agent’s authority. Generally, an otherwise duly perfected transaction could be reversed if the transfer is preferential towards one creditor or if it 5.7 Bank Accounts. Does Denmark recognise escrow accounts? Can security be taken over a bank account diminishes the pool of assets which would otherwise form part of located in Denmark? If so, what is the typical method? the bankruptcy estate. The reversibility may relate to (i) gifts, (ii) Would courts in Denmark recognise a foreign-law grant of payments, and (iii) security interest. security (for example, an English law debenture) taken (i) Any gift to the purchaser may be voided by the insolvency over a bank account located in Denmark? official if such is made 6 months prior to the adjudication of insolvency. In case a gift is received by a party related to the Yes, Denmark recognises escrow accounts. obligor, the preference period is extended to 1 year. Yes, security may be taken over a bank account located in Denmark (ii) Any payment made to the purchaser may be voided by the

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insolvency official if such is made 3 months prior to the 7.2 Securitisation Entities. Does Denmark have laws adjudication of insolvency provided that the payment is specifically providing for establishment of special purpose made (a) by abnormal means, (b) prior to the debt being due, entities for securitisation? If so, what does the law or (c) with the effect of decisively deteriorating the obligor’s provide as to: (a) requirements for establishment and ability to pay. If payment is made to a party related to the management of such an entity; (b) legal attributes and obligor, the preference period is extended to 2 years. benefits of the entity; and (c) any specific requirements as (iii) Any security granted to the purchaser for the security of to the status of directors or shareholders? existing debt may be voided by the insolvency official if such is issued 3 months prior to the adjudication of insolvency. In No, Denmark has not adopted any special legislation in respect of case a security is granted to a party related to the obligor, the such special purpose entities. However, any entities which (i) preference period is extended to 2 years. purchase any receivables or other assets from an originator, and (ii) Denmark Furthermore, a general clause exists in which the insolvency official fund their acquisitions by issuing bonds to the general public in may reverse transactions in a period which is – in principle – Denmark might become subject to the provisions of the Danish unlimited. Financial Business Act.

6.4 Substantive Consolidation. Under what facts or 7.3 Non-Recourse Clause. Will a court in Denmark give circumstances, if any, could the insolvency official effect to a contractual provision (even if the contract’s consolidate the assets and liabilities of the purchaser with governing law is the law of another country) limiting the those of the seller or its affiliates in the insolvency recourse of parties to available funds? proceeding? Yes, in general the Danish courts will give effect to such a In general, Danish corporate law distinguishes between the contractual provision, unless the courts deem it to be unreasonable. purchaser, the seller and its affiliates each as being separate legal entities, whose rights and liabilities must be addressed separately. 7.4 Non-Petition Clause. Will a court in Denmark give effect The Danish courts in some cases deviated from this in case the to a contractual provision (even if the contract’s governing economy and management of entities have been interconnected to law is the law of another country) prohibiting the parties such an extent that the boundaries of the legal entities become from: (a) taking legal action against the purchaser or blurred, or if the entities have tried to take advantage of the another person; or (b) commencing an insolvency corporate structure and its limited liability in order to favour certain proceeding against the purchaser or another person? creditors. Yes, in general the Danish courts will give effect to such a contractual provision, unless the courts deem it to be unreasonable. 6.5 Effect of Proceedings on Future Receivables. What is the effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on 7.5 Independent Director. Will a court in Denmark give effect sales of receivables that have not yet come into to a contractual provision (even if the contract’s governing existence? law is the law of another country) or a provision in a party’s organisational documents prohibiting the directors Upon the adjudication of insolvency, the insolvency official will be from taking specified actions (including commencing an put in charge of the obligor’s assets which form part of the insolvency proceeding) without the affirmative vote of an independent director? bankruptcy estate, including any receivable transfer agreement entered into by the obligor. If such agreement concerns the sale of No, as the directors of a Danish company are under a statutory duty future receivables and is valid, cf. question 4.10 above, and does not to safeguard the interests of the shareholders, as well as the interests constitute a preference, the insolvency official can either choose to of the company’s creditors, this duty cannot be limited by way of terminate the contract or to honour it. In respect of the latter option, agreement or otherwise and any attempt to act in accordance with the agreement will have a preceding position in the insolvency such an agreement could subject the directors of the company to proceedings but the number of future receivables will decline as the liability towards the shareholders and/or the creditors of the insolvency official is winding-up the business of the obligor which company. gives rise to the receivables.

7 Special Rules 8 Regulatory Issues

8.1 Required Authorisations, etc. Assuming that the 7.1 Securitisation Law. Is there a special securitisation law purchaser does no other business in Denmark, will its (and/or special provisions in other laws) in Denmark purchase and ownership or its collection and enforcement establishing a legal framework for securitisation of receivables result in its being required to qualify to do transactions? If so, what are the basics? business or to obtain any licence or its being subject to regulation as a financial institution in Denmark? Does the No, Denmark has not adopted any special securitisation legislation, answer to the preceding question change if the purchaser whereby it is conducted on the basis of general contract law. does business with other sellers in Denmark?

Generally, purchase, ownership or enforcement of Danish receivables, as well as the collection of these receivables, will not per se qualify as doing business in Denmark and will not require any licences or authorisations under the Danish Financial Business Act.

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8.2 Servicing. Does the seller require any licences, etc., in 9 Taxation order to continue to enforce and collect receivables following their sale to the purchaser, including to appear before a court? Does a third party replacement servicer 9.1 Withholding Taxes. Will any part of payments on require any licences, etc., in order to enforce and collect receivables by the obligors to the seller or the purchaser sold receivables? be subject to withholding taxes in Denmark? Does the answer depend on the nature of the receivables, whether If the seller enforces and collects the receivables following the they bear interest, their term to maturity, or where the seller or the purchaser is located? transfer to the purchaser, the seller will require a licence pursuant to the Danish Debt Collection Act, which will also be required in case Payments on receivables by obligors to either a purchaser or a seller

Denmark of any third party replacement servicer, however, this is not are not subject to withholding taxes, provided that neither the applicable to attorneys-at-law. A licence will not be required if the purchaser nor the seller has any permanent establishment in seller enforces and collects the receivables prior to the transfer to Denmark in regards to the sale of the receivables. the purchaser.

9.2 Seller Tax Accounting. Does Denmark require that a 8.3 Data Protection. Does Denmark have laws restricting the specific accounting policy is adopted for tax purposes by use or dissemination of data about or provided by the seller or purchaser in the context of a securitisation? obligors? If so, do these laws apply only to consumer obligors or also to enterprises? No specific accounting policy is required in the context of The Danish Data Protection Act applies to the processing and securitisation. Good accounting practice is a legal standard in dissemination of personal data relating to private individuals Denmark, which all accountants must follow. whether being consumers or not and to some extent to corporate entities (primarily in relation to the processing of credit information 9.3 Stamp Duty, etc. Does Denmark impose stamp duty or by credit agencies). other documentary taxes on sales of receivables? According to the provisions of the act, personal data may only be gathered for specifically stated purposes and must be processed in No, there is no stamp duty or documentary taxes on the sale of accordance with good data processing practice. receivables. As stated in question 5.3 above, a security interest over the receivables created as a floating charge will be subject to a In addition hereto, the processing of data, as well as the stamp duty. dissemination of data, will often require the consent of the relevant person, especially in cases where the data is transferred to third countries outside of the European Economic Area, which do not 9.4 Value Added Taxes. Does Denmark impose value added have an adequate level of data protection. tax, sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for collection agent services? 8.4 Consumer Protection. If the obligors are consumers, will the purchaser (including a bank acting as purchaser) be Value Added Tax (VAT) of 25% is as a starting point due on any required to comply with any consumer protection law of sold goods or services made in Denmark, where it is a taxable Denmark? Briefly, what is required? supply made by a taxable person in the course or furtherance of a business carried on by said person. Consumers are protected by the Danish Consumer Contract Act, and depending on the nature of a securitisation, the receivables may Sales of receivables are VAT exempt in Denmark. often be subject to the provisions of the Danish Consumer Contract Collection agent services are subject to VAT in Denmark. Act, which applies generally to consumer credit agreements. The VAT on the sold goods or services made in Denmark may only be act contains various provisions in respect of interest rate fixing, deducted by the seller of the goods or services if a loss is accrued calculation of costs and prepayment options, as well as a number of on the receivable. A purchaser of a receivable is not allowed to information requirements, which the purchaser will have to comply deduct VAT if a loss is accrued on the obligor, as the purchaser is with, cf. question 1.2 above. not subject to any gain realised on the receivable, cf. question 9.5 below. 8.5 Currency Restrictions. Does Denmark have laws restricting the exchange of Danish currency for other 9.5 Purchaser Liability. If the seller is required to pay value currencies or the making of payments in Danish currency added tax, stamp duty or other taxes upon the sale of to persons outside the country? receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then Apart from payments to persons in countries under embargos or will the taxing authority be able to make claims for the sanctions imposed by the United Nations and/or the European unpaid tax against the purchaser or against the sold Union, there are no restrictions to the exchange of the Danish receivables or collections? currency (DKK). The seller alone is responsible for the payment of VAT and excise duties. No claims for indirect taxes can be made against the purchaser of the liabilities.

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9.6 Doing Business. Assuming that the purchaser conducts no other business in Denmark, would the purchaser’s purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax in Denmark?

Under the precondition that the purchaser does not have any permanent establishment in Denmark, the mere ownership and collection of the receivables will not make the purchaser liable to Danish taxation. Denmark

Kim Toftgaard Christian Sahlertz

Accura Advokatpartnerselskab Accura Advokatpartnerselskab Tuborg Boulevard 1 Tuborg Boulevard 1 DK-2900 Hellerup DK-2900 Hellerup Denmark Denmark

Tel: +45 3945 2802 Tel: +45 3945 2840 Fax: +45 3945 2801 Fax: +45 3945 2801 Email: [email protected] Email: [email protected] URL: www.accura.dk URL: www.accura.dk

Languages: Scandinavian languages and English. Languages: Scandinavian languages and English. Kim Toftgaard graduated in Law from the University of Christian Sahlertz graduated in Business Administration and Copenhagen in 1994, and, in 1999, he obtained an LL.M. with Commercial Law from the Copenhagen Business School in 2010. distinction from Georgetown University, Washington, DC. Christian Sahlertz is an associate in Accura’s Banking and Furthermore, he holds an HD (Business Finance) from the Finance Group, and specialises in structured finance, acquisition Copenhagen Business School. He was admitted to the Danish finance and investment funds and has advised major Danish and Bar in 1997 and to practise law before the Danish High Courts in foreign banks and investment funds on their activities in Denmark 1998. and on a cross-border basis. Kim Toftgaard is a partner in Accura’s Banking and Finance Group. He specialises in acquisition finance and structured finance and has advised major Danish and foreign banks, listed corporate entities and private equity funds on the financing and structuring of bond issues and securitisation of various assets such as mortgages, securities, loan, receivables and leasing activities in Denmark and on a cross-border basis. Kim Toftgaard has been recognised in a number of international survey based directories within banking and structured finance.

Accura is one the leading Danish law firms within M&A, real estate, banking and financing, competition, employment, insolvency and tax. Accura’s Banking and Finance Group represents some of the most active foreign and domestic players in the Danish market for banking and financial services. Our practice is focused on acquisition finance, property finance, structured finance, securities, financial institutions and investment funds. Accura’s Banking and Finance Group provides regular advisory services to market-leading European companies in respect of the legal problems relating to securitisation under Danish law, and offer expertise in connection with the securitisation of mortgages, securities, receivables, credit card, leasing activities, etc.

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England & Wales Jacky Kelly

Weil, Gotshal & Manges Rupert Wall

1 Receivables Contracts the review. The UK Government is to announce its decision on the most appropriate regime for consumer credit regulation in the coming months. 1.1 Formalities. In order to create an enforceable debt obligation of the obligor to the seller, (a) is it necessary that the sales of goods or services are evidenced by a 1.3 Government Receivables. Where the receivables contract formal receivables contract; (b) are invoices alone has been entered into with the government or a sufficient; and (c) can a receivable “contract” be deemed government agency, are there different requirements and to exist as a result of the behaviour of the parties? laws that apply to the sale or collection of those receivables? With the exception of certain debts arising under regulated consumer credit arrangements, a debt need not be in writing to be Not specifically, although there may be enforcement issues as a enforceable against the obligor but must arise as a matter of contract result of the laws pertaining to sovereign immunity. or deed. Contracts may be written, oral or partly written and partly oral. An invoice (depending on its terms) may itself represent the contract between the parties or evidence a debt arising pursuant to 2 Choice of Law – Receivables Contracts such a contract. Where a contract is oral, evidence of the parties’ conduct is admissible for the purposes of ascertaining the terms of 2.1 No Law Specified. If the seller and the obligor do not the contract. A contract may be implied between parties based on a specify a choice of law in their receivables contract, what course of conduct or dealings where the obligations arising from the are the main principles in England & Wales that will alleged implied contract are sufficiently certain to be contractually determine the governing law of the contract? enforceable. For contracts entered into on or after 17 December 2009, the position is governed by Regulation (EC) 593/2008 of 17 June 2008 1.2 Consumer Protections. Do the laws of England & Wales (“Rome I”). For contracts entered into prior to that date, the (a) limit rates of interest on consumer credit, loans or relevant law is the Contracts (Applicable Law) Act 1990, which other kinds of receivables; (b) provide a statutory right to interest on late payments; (c) permit consumers to cancel enacted the Rome Convention on the law applicable to contractual receivables for a specified period of time; or (d) provide obligations (“Rome Convention”) in England and Wales. other noteworthy rights to consumers with respect to The Rome Convention states that, absent an express choice of law, receivables owing by them? the applicable law of a contract will be that of the country with which it has the closest connection. There is a presumption that this Consumer credit loans are regulated by the Consumer Credit Act will be the country where the party who is to effect the performance 1974 (“CCA 1974”), as amended by the Consumer Credit Act 2006 of the contract has his habitual residence (if an individual) or its (“CCA 2006”). There is no maximum interest rate set out by the central administration (if a corporate entity). However, if the legislation. It is unlikely that courts will find interest rates unfair contract is entered into in the course of that party’s trade or unless they are clearly excessive. profession, the country with the closest connection is the country in There is a statutory right to interest on late payments, but this does which the party’s principal place of business is situated. Where, not apply to consumer credit agreements. under the terms of the contract, the performance is to be effected through a place of business other than the principal place of Certain clauses of receivables contracts may be found to be unfair business, it is the country in which that other place of business is under the Unfair Terms in Consumer Contracts Regulations 1999 situated. Note that certain classes of contracts fall outside the scope (“UTCCR”) and consequently may be unenforceable against the of the Rome Convention. consumer. The Consumer Protection from Unfair Trading Regulations prohibit certain practices that are deemed unfair. Under Rome I, the position is largely the same, save that the presumption in favour of the law of the place where the party The Financial Services Act 2010 contains measures designed to effecting performance has his habitual residence is a fixed rule, improve the position of consumers. A United Kingdom (“UK”) which may be displaced if the contract falls into one of several Government review into consumer credit and personal insolvency defined classes (for which specific rules apply) or if the contract is has been undertaken and the response was published in November manifestly more closely connected with the law of a different 2011. There have not yet been any specific proposals arising out of country (in which case the law of that country is the applicable law)

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or if it is sufficiently certain from the terms or circumstances of the agreements) are free to agree that the contract be governed by the contract which law the parties chose to apply (in which case that law of any country, irrespective of the law governing the receivable. law will be the applicable law). However, whether a receivable has been validly sold and whether For those types of contract which fall outside the scope of the Rome such sale has been perfected will generally be a matter for the law Convention or Rome I, the applicable law will be decided by governing the receivable and not the law governing the receivables reference to English common law principles. Those principles seek purchase agreement. In addition, questions of enforcement against first to determine which law the parties intended to govern the the obligor of the receivables may also be governed by the law of contract. If no such intention can be established, the applicable law the jurisdiction in which the obligor is located. of the contract is that with which the contract has its closest and most real connection. In deciding this, the English courts will 3.2 Example 1: If (a) the seller and the obligor are located in consider which law the ordinary businessman would have intended England & Wales, (b) the receivable is governed by the to apply, rather than applying the principles set out in the Rome law of England & Wales, (c) the seller sells the receivable Convention or Rome I. to a purchaser located in a third country, (d) the seller and England & Wales the purchaser choose the law of England & Wales to govern the receivables purchase agreement, and (e) the 2.2 Base Case. If the seller and the obligor are both resident sale complies with the requirements of England & Wales, in England & Wales, and the transactions giving rise to will a court in England & Wales recognise that sale as the receivables and the payment of the receivables take being effective against the seller, the obligor and other place in England & Wales, and the seller and the obligor third parties (such as creditors or insolvency choose the law of England & Wales to govern the administrators of the seller and the obligor)? receivables contract, is there any reason why a court in England & Wales would not give effect to their choice of law? Yes, it will.

No, there is not. 3.3 Example 2: Assuming that the facts are the same as Example 1, but either the obligor or the purchaser or both are located outside England & Wales, will a court in 2.3 Freedom to Choose Foreign Law of Non-Resident Seller England & Wales recognise that sale as being effective or Obligor. If the seller is resident in England & Wales but against the seller and other third parties (such as the obligor is not, or if the obligor is resident in England & creditors or insolvency administrators of the seller), or Wales but the seller is not, and the seller and the obligor must the requirements of the obligor’s country or the choose the foreign law of the obligor/seller to govern their purchaser’s country (or both) be taken into account? receivables contract, will a court in England & Wales give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law (such as public See question 3.1 above. In addition, under both the Rome policy or mandatory principles of law) that would typically Convention and Rome I, there are certain limited circumstances apply in commercial relationships such that between the where certain legal provisions of countries other than the country seller and the obligor under the receivables contract? whose law was selected to govern the receivables purchase agreement may be (but not must be) taken into account such as Both the Rome Convention and Rome I stress the importance of the where performance of the contract (by virtue of the location of the parties’ freedom to choose the law of their contract (including a purchaser, the obligor, both or neither) is due in a place other than foreign law) and allow for modification of that choice only to the England and Wales, in which case the English courts have extent that the choice conflicts with overriding mandatory rules or discretion whether to apply certain mandatory provisions of the law public policy. For those types of contracts not within the scope of of the country where performance of the contract is due, in so far as the Rome Convention or Rome I, the common law is also highly non-application of those overriding provisions would render the supportive of the parties’ choice of a foreign law and will only performance of the contract unlawful in that country. modify such a choice in exceptional circumstances. 3.4 Example 3: If (a) the seller is located in England & Wales 2.4 CISG. Is the United Nations Convention on the but the obligor is located in another country, (b) the International Sale of Goods in effect in England & Wales? receivable is governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in No, it is not. a third country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the 3 Choice of Law – Receivables Purchase requirements of the obligor’s country, will a court in Agreement England & Wales recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller) 3.1 Base Case. Does the law of England & Wales generally without the need to comply with England & Wales’ own require the sale of receivables to be governed by the sale requirements? same law as the law governing the receivables themselves? If so, does that general rule apply As above, under the Rome Convention and Rome I, the validity of a irrespective of which law governs the receivables (i.e., the contract will be determined by reference to the law that governs the laws of England & Wales or foreign laws)? contract in substance under the Rome Convention or Rome I, and therefore the English courts would assess the validity of the contract As discussed above, whether under the Rome Convention, Rome I in accordance with the law chosen by the parties. or principles of common law, subject to certain limited exceptions, However, certain mandatory principles of England andWales would the parties to a contract (including receivables purchase not be capable of disapplication by choice of law and the courts

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would not apply the parties chosen law to the extent it conflicted required to be given to the obligor. The giving of such notice will with those. not in itself result in the assignment becoming a legal as opposed to equitable assignment, as certain other formalities are also required under s.136 of the Law of Property Act 1925 (“LPA”), namely the 3.5 Example 4: If (a) the obligor is located in England & Wales but the seller is located in another country, (b) the assignment has to be in writing under the hand of the assignor, the receivable is governed by the law of the seller’s country, assignment must be of the whole of the debt and the assignment (c) the seller and the purchaser choose the law of the must be absolute and not by way of charge. Where the sale of a seller’s country to govern the receivables purchase receivable falls short of these requirements, it will take effect as an agreement, and (d) the sale complies with the equitable assignment, in which instance any subsequent assignment requirements of the seller’s country, will a court in effected by the seller and notified to the obligor prior to the date on England & Wales recognise that sale as being effective which the original assignment is notified to the obligor, will take against the obligor and other third parties (such as priority. A novation of receivables (pursuant to which both rights creditors or insolvency administrators of the obligor)

England & Wales and obligations are transferred) requires the written consent of the without the need to comply with England & Wales’ own obligor, as well as the transferor and transferee. sale requirements?

See question 3.4 above. In addition, questions of enforcement against 4.3 Perfection for promissory notes, etc. What additional or the obligor of the receivables may also be governed by the law of the different requirements for sale and perfection apply to jurisdiction in which the obligor is located and as such the English sales of insurance policies, promissory notes, mortgage courts may apply English law in this regard. loans, consumer loans or marketable debt securities?

The transfer requirements for promissory notes (as well as other 3.6 Example 5: If (a) the seller is located in England & Wales negotiable instruments) are governed by the Bills of Exchange Act (irrespective of the obligor’s location), (b) the receivable is 1882, which provides that they are transferable by delivery (or governed by the law of England & Wales, (c) the seller delivery and endorsement). sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law Mortgage loans and their related mortgages may be transferred by of the purchaser’s country to govern the receivables assignment. With respect to a mortgage over real property, as well purchase agreement, and (e) the sale complies with the as the giving of notice, certain other formalities need to be complied requirements of the purchaser’s country, will a court in with in order to effect a legal assignment, for example, registration England & Wales recognise that sale as being effective of the transfer at HM Land Registry. Most residential mortgage against the seller and other third parties (such as backed securitisation transactions are structured as an equitable creditors or insolvency administrators of the seller, any assignment of mortgage loans and their related mortgages to avoid obligor located in England & Wales and any third party the burdensome task of giving notice to the mortgagors and creditor or insolvency administrator of any such obligor)? registering the transfer. However, until notice is given and the formalities satisfied, the rights of an assignee of a mortgage may be See questions 3.1, 3.3 and 3.4 above. adversely affected by dealings in the underlying property or the mortgage as described in question 4.4 below. 4 Asset Sales See questions 8.3 and 8.4 in relation to specific regulatory requirements in relation to consumer loans. 4.1 Sale Methods Generally. In England & Wales what are Transfers of marketable securities in bearer form will be achieved the customary methods for a seller to sell receivables to a by delivery or endorsement and, if in registered form, by purchaser? What is the customary terminology – is it registration of the transferee in the relevant register. Dematerialised called a sale, transfer, assignment or something else? marketable securities held in a clearing system represented by book-entries may be transferred by debiting the clearing system The most common method of selling receivables is by way of account of the relevant seller and crediting the clearing system assignment (either legal or equitable). Alternatives to assignment account of the purchaser (or, in each case, its custodian or include a trust of the receivables (coupled with a power of attorney), a intermediary). trust of the proceeds of the receivables, sub-participation (essentially The Financial Collateral Arrangements (No. 2) Regulations 2003 a limited recourse loan to the seller) and novation (a transfer of both (as amended, including pursuant to the Financial Markets and the rights and obligations under the contract). An outright sale of Insolvency (Settlement Finality and Financial Collateral receivables may be described as a “sale”, a “transfer” or an Arrangements) (Amendments) Regulations 2010 that came into “assignment” although the phrase “assignment” often indicates a force in England and Wales on 6 April 2011) (the “Financial transfer of the rights, but not the obligations, whilst “transfer” often Collateral Regulations”) are also relevant to the transfer of indicates a transfer of the rights and obligations by novation. The negotiable instruments to the extent that a “financial collateral phrase “security assignment” is often used to distinguish a transfer by arrangement” exists. way of security from an outright assignment. Specific statutory requirements may also apply for assignments of receivables such as intellectual property rights and certain policies 4.2 Perfection Generally. What formalities are required of insurance. generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of receivables to be perfected against any subsequent good faith purchasers for value of the same receivables from the seller?

To perfect an assignment of receivables, express notice in writing is

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4.4 Obligor Notification or Consent. Must the seller or the 4.6 Restrictions on Assignment; Liability to Obligor. Are purchaser notify obligors of the sale of receivables in restrictions in receivables contracts prohibiting sale or order for the sale to be effective against the obligors assignment generally enforceable in England & Wales? and/or creditors of the seller? Must the seller or the Are there exceptions to this rule (e.g., for contracts purchaser obtain the obligors’ consent to the sale of between commercial entities)? If England & Wales receivables in order for the sale to be an effective sale recognises prohibitions on sale or assignment and the against the obligors? Does the answer to this question seller nevertheless sells receivables to the purchaser, will vary if (a) the receivables contract does not prohibit either the seller or the purchaser be liable to the obligor assignment but does not expressly permit assignment; or for breach of contract or on any other basis? (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect Restrictions on assignment or transfers of receivables are generally a sale, are there any benefits to giving notice – such as enforceable. If a contract is silent on the question of assignment, cutting off obligor set-off rights and other obligor then such contract and the receivables arising thereunder will be defences? freely assignable. If an assignment is effected in breach of a England & Wales contractual prohibition on assignment, although ineffective as Assuming the receivable does not fall into a select category of between the obligor and the seller (to whom the obligor can still contractual rights which are incapable of assignment either as a look for performance of the contract), such assignment is effective matter of public policy or because the rights are of a personal as between the seller and purchaser. nature, in the absence of an express contractual prohibition on assignment, receivables may be assigned without the consent of the obligor. To the extent that a receivable is the subject of a 4.7 Identification. Must the sale document specifically identify contractual prohibition on assignment, other methods of transfer each of the receivables to be sold? If so, what specific may be available (see question 4.1 above) depending on the exact information is required (e.g., obligor name, invoice wording of the contract. number, invoice date, payment date, etc.)? Do the receivables being sold have to share objective The absence of notice has the following implications: (i) obligors characteristics? Alternatively, if the seller sells all of its may continue to discharge their debts by making payments to the receivables to the purchaser, is this sufficient seller (being the lender of record); (ii) obligors may set-off claims identification of receivables? against the seller arising prior to receipt by the obligors of the notice of assignment; (iii) a subsequent assignee of (or fixed chargeholder The sale document must describe the receivables (or provide for over) a receivable without notice of the prior assignment by the details of the receivables to be provided at the point of sale) with seller would take priority over the claims of the initial purchaser; sufficient specificity that the receivables can be identified and (iv) the seller may amend the agreement governing the terms of the distinguished from the rest of the seller’s estate. For confidentiality receivable without the purchaser’s consent; and (v) the purchaser reasons, it is atypical for obligors’ names to be included in the must agree with the seller if it wishes to sue the obligor in its own information provided to the seller. name (although this is largely a procedural and not a substantive impediment). 4.8 Respect for Intent of Parties; Economic Effects on Sale. If the parties denominate their transaction as a sale and 4.5 Notice Mechanics. If notice is to be delivered to obligors, state their intent that it be a sale will this automatically be whether at the time of sale or later, are there any respected or will a court enquire into the economic requirements regarding the form the notice must take or characteristics of the transaction? If the latter, what how it must be delivered? Is there any time limit beyond economic characteristics of a sale, if any, might prevent which notice is ineffective – for example, can a notice of the sale from being perfected? Among other things, to sale be delivered after the sale, and can notice be what extent may the seller retain (a) credit risk; (b) delivered after insolvency proceedings against the obligor interest rate risk; and/or (c) control of collections of have commenced? Does the notice apply only to specific receivables without jeopardising perfection? receivables or can it apply to any and all (including future) receivables? Are there any other limitations or A transaction expressed to be a sale will be recharacterised as a considerations? financing if it is found to be a “sham”, i.e. if the documents do not reflect the actual agreement between the parties. Notice must be in writing and given to the obligor (or his agent) and Further, irrespective of the label given to a transaction by the may not be conditional, although there is no particular form of parties, the court will look at its substance and examine whether it notice that is required. The notice need not give the date of the creates rights and obligations consistent with a sale. assignment, but a specified date must be accurate. The main requirement is that the notice is clear that the obligor should pay the Case law has established four key questions which must be assignee going forward. considered when concluding that a transaction is a sale rather than a secured financing: There is no specific time limit for the giving of notices set down in 1) Do the transaction documents accurately reflect the intention the LPA and notice can be given to obligors post insolvency of the of the parties and are the terms of the transaction documents seller (including pursuant to an irrevocable power of attorney consistent with a sale as opposed to a secured financing? granted by the seller). The giving of such notice should not be 2) Does the seller have the right to reacquire the receivables prohibited by English insolvency law although failure to give notice sold? will have the effects set out in question 4.4 above. 3) Does the purchaser have to account for any profit made on any disposition by it of the receivables? 4) Is the seller required to compensate the purchaser if it ultimately realises the acquired receivables for an amount less than the amount paid?

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The seller remaining the servicer/collection agent of the receivables 5 Security Issues post-sale, the seller entering into arm’s length interest rate hedging with the purchaser and/or the seller assuming some degree of credit 5.1 Back-up Security. Is it customary in England & Wales to risk by assuming a first loss position are not considered to be take a “back-up” security interest over the seller’s inconsistent with sale treatment. ownership interest in the receivables and the related If the sale is recharacterised as a secured financing, the assets “sold” security, in the event that the sale is deemed by a court will remain on the seller’s balance sheet and the loan will be shown not to have been perfected? as a liability of the seller. In addition, given the practice in England and Wales not to make “back-up” security filings, the security may It is not customary to create “back-up” security over a seller’s not have been registered and may be void in an insolvency of the ownership interest in receivables and related security when an seller for lack of registration. outright sale is intended, although a seller may create a trust over In addition to recharacterisation, sale transactions are also the receivables in favour of the purchaser to the extent that any England & Wales vulnerable under certain sections of the Insolvency Act 1986 such outright sale is either held to be void or is subsequently as s.239 (transactions at an undervalue) and s.240 (preferences). recharacterised.

4.9 Continuous Sales of Receivables. Can the seller agree in 5.2 Seller Security. If so, what are the formalities for the seller an enforceable manner (at least prior to its insolvency) to granting a security interest in receivables and related continuous sales of receivables (i.e. sales of receivables security under the laws of England & Wales, and for such as and when they arise)? security interest to be perfected?

An agreement pursuant to which a seller agrees to sell receivables See questions 5.1 and 5.3. on a continuous basis prior to the occurrence of certain specified events will take effect as between the seller and purchaser as an 5.3 Purchaser Security. If the purchaser grants security over agreement to assign. The receivables will be automatically all of its assets (including purchased receivables) in assigned to the purchaser as and when they come into existence. favour of the providers of its funding, what formalities See question 6.5 on the effect of an insolvency of the seller on an must the purchaser comply with in England & Wales to agreement to assign a receivable not yet in existence. grant and perfect a security interest in purchased receivables governed by the laws of England & Wales and the related security? 4.10 Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser Although security may be taken over receivables by way of that come into existence after the date of the receivables novation, attornment or (in the case of documentary receivables) purchase agreement (e.g. “future flow” securitisation)? If pledge, security is most commonly taken over receivables by way so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction of mortgage or charge. between future receivables that arise prior to or after the Receivables assigned by way of security together with a condition seller’s insolvency? for re-assignment on redemption of the secured obligation will create a mortgage over the receivables which will either be legal (if An assignment for value of an identifiable receivable, which is not the procedural requirements of s.136 LPA, more fully identified in in existence at the time of the receivables purchase agreement but question 4.2, are satisfied) or, in the absence of these requirements, which will be ascertainable in the future, is treated as an agreement equitable. Prior to the perfection of an equitable mortgage by notice to assign which will give rise to an equitable assignment of the to the obligor, the assignee’s security will be subject to prior receivable as soon as it comes into existence. See question 6.5 on equities (such as rights of set-off and other defences), will be liable the effect of an insolvency of the seller on an agreement to assign a to take priority behind a later assignment where the later assignee receivable not yet in existence. has no notice of the earlier assignment and himself gives notice to the obligor and the obligor will be capable of making good 4.11 Related Security. Must any additional formalities be discharge of its debt by paying the assignor directly (as more fulfilled in order for the related security to be transferred particularly described in questions 4.4 and 4.5). concurrently with the sale of receivables? If not all related Alternatively, the receivables may be made the subject of a fixed or security can be enforceably transferred, what methods floating charge. In comparison to a mortgage (which is a transfer are customarily adopted to provide the purchaser the of title together with a condition for re-assignment on redemption), benefits of such related security? a charge is a mere encumbrance on the receivables, giving the chargee a preferential right to payment out of the fund of Security for a receivable will typically be capable of being assigned receivables in priority to other claimants. A practical distinction in the same manner as the receivables themselves. The transfer or between a mortgage and a charge over receivables is the inability of assignment of some types of security may require additional a chargee to claim a right of action in his own name against the formalities such as registration or payment of a fee as referred to in obligor. In practice, this distinction is diminished by including a question 4.3. right to convert the charge into a mortgage together with a power of attorney to compel transfer of the receivables to the chargee. The degree of priority given to a chargee depends on whether the charge is fixed or floating. Whilst definitive definitions have remained elusive, the hallmarks of a fixed charge are that it attaches to the ascertainable receivables over which it is subject immediately upon its creation (or upon the receivable coming into existence). In

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comparison, a floating charge is a present security over a class or administration or secured creditors. However, as registration of a fund of assets (both present and future) which, prior to the charge over receivables is a perfection requirement (and not a occurrence of a specified crystallisation event, can continue to be requirement for attachment of security) an unregistered charge will managed in the ordinary course of the chargor’s business. On still be valid as against the chargor, provided the chargor is not in occurrence of a specified crystallisation event, the floating charge winding-up or administration. Similarly, registration under the will attach to the assets then presently in the fund, effectively Companies Act is not determinative as to priority such that, becoming a fixed charge over those assets. Recent case law provided that both charges are registered within the statutory 21- emphasises control of the receivable as the determining factor in day period after creation, a prior created charge will take priority distinguishing a fixed or floating charge whilst asserting that it is over a subsequently created charge even where that later charge is the substance of the security created, rather than how described or registered first. named, that is important. This distinction has some important effects in practice: first, on an 5.4 Recognition. If the purchaser grants a security interest in insolvency of the chargor, a fixed chargeholder will rank in priority receivables governed by the laws of England & Wales, England & Wales to all unsecured claims whilst a floating chargeholder will rank and that security interest is valid and perfected under the behind preferential creditors and equally with a statutory laws of the purchaser’s country, will it be treated as valid “prescribed part” (up to a maximum of £600,000) made available to and perfected in England & Wales or must additional unsecured creditors; second, a floating charge given within 12 steps be taken in England & Wales? months (or 24 months if given to a “connected” person) prior to the onset of insolvency will be void except as to new value given; and Notwithstanding the choice of law governing the purchaser’s third, whereas a fixed chargeholder will obtain an immediate right security, the law governing the receivable itself will govern the over definitive assets which can only be defeated by a purchaser in proprietary rights and obligations between the security holder and good faith of the legal interest for value without notice of the the obligor and between the security granter and the security holder existing charge (and, as summarised below, as most charges will be (including as to matters of validity, priority and perfection). registrable (or in practice registered), many purchasers will be held The relevant security must therefore be valid and perfected under to have notice of such charge accordingly), in contrast, disposing of the laws of England and Wales, as well as valid and perfected under an asset subject to an uncrystallised floating charge will, apart from the laws of the governing law of the security in order for it to be certain exceptions, generally result in the purchaser taking the given effect by the English courts. In addition, English courts will receivables free of the charge. also apply certain mandatory rules of English law which may affect In terms of perfection, where a charge or mortgage is taken over the validity of any foreign-law governed security created. certain classes of assets (including receivables constituting book debts), it is a requirement under the Companies Act 2006 (the 5.5 Additional Formalities. What additional or different “Companies Act”) for the chargor to register the charge with requirements apply to security interests in or connected to Companies House within 21 days of its creation. insurance policies, promissory notes, mortgage loans, The requirement to register a mortgage/charge over receivables consumer loans or marketable debt securities? under the Companies Act will, with some limited exceptions, apply to charges created by companies (or limited liability partnerships) Security over contractual rights under insurance policies is usually registered in England and Wales. In relation to a mortgage/charge created by security assignment. created by an overseas company before 1 October 2011, the Security over mortgage or consumer loans will be created by mortgage or charge must be registered at Companies House if the mortgage or charge. Creating security over the mortgage securing company has registered the particulars of an establishment in the a mortgage loan is generally accomplished by equitable mortgage. UK on the register (in compliance with the statutory requirement to Security over marketable debt securities or negotiable instruments do so), the mortgage/charge is over property in the UK on the date (including promissory notes and bearer debt securities) is a created and the mortgage/charge is of the type requiring complicated area that depends on whether the relevant securities are registration. A mortgage/charge created by an overseas company bearer or registered, certificated, immobilised (i.e. represented by a on/after 1 October 2011 over UK property is not required to be single global note) or dematerialised and/or directly-held or indirectly- registered at Companies House although such overseas company held. In (brief) summary, (i) directly-held and certificated debt must, within 21 days of the creation of any mortgage/charge over securities, where registered, may generally be secured by legal UK land, ships, aircraft and intellectual property registered in the mortgage (by entry of the mortgagee on the relevant register) or by UK or any floating charge over any of its property (unless UK equitable mortgage or charge (by security transfer or by agreement for property is expressly excluded) enter details of such transfer or charge), (ii) security over bearer debt securities may be mortgage/charge on its charges register. This register must be created by mortgage or pledge (by delivery together with a available for inspection as must copies of the instruments creating memorandum of deposit) or charge (by agreement to charge) and in any such mortgage/charge. These rules are currently the subject of certain limited circumstances a lien may arise, and (iii) security may ongoing review. be created over indirectly-held certificated debt securities by legal The Financial Collateral Regulations exempt certain security over mortgage (by transfer, either to an account of the mortgagee at the “financial collateral” (cash, financial instruments and credit claims) same intermediary or by transfer to the mortgagee’s intermediary or such that a security financial collateral arrangement which nominee via a common intermediary) or by equitable mortgage or constitutes a registrable security interest under the Companies Act charge (by agreement of the intermediary to operate a relevant or overseas companies registration requirements does not need to be securities account in the name of the mortgagor containing the debt registered at Companies House. In practice, it is still customary to securities to the order/control of the chargee). register these charges. To the extent the security is of a type covered by the Companies Failure to register a registrable charge within the prescribed Act, it may be required to be registered at Companies House. The statutory period will result in that security interest being void as Financial Collateral Regulations (which remove certain against a liquidator, administrator, creditors in a liquidation or requirements in relation to the creation and registration of security

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and disapply certain rules of insolvency law) will apply to any notice has not been given to an obligor, such obligor may continue security which is a “financial collateral arrangement” involving to pay the seller. Typically, such proceeds will be subject to a trust “financial collateral”. in favour of the purchaser. If such a trust has not been imposed on the collections, the purchaser will be an unsecured creditor with respect to such collections. 5.6 Trusts. Does England & Wales recognise trusts? If not, is there a mechanism whereby collections received by the seller in respect of sold receivables can be held or be 6.2 Insolvency Official’s Powers. If there is no stay of action deemed to be held separate and apart from the seller’s under what circumstances, if any, does the insolvency own assets until turned over to the purchaser? official have the power to prohibit the purchaser’s exercise of rights (by means of injunction, stay order or Trusts over collections received by the seller in respect of sold other action)? receivables are recognised under the laws of England and Wales

England & Wales provided that the trust is itself validly constituted. Assuming the receivables have been sold by legal assignment or perfected equitable assignment, an insolvency official appointed over the seller would not be able to prohibit the purchaser’s exercise 5.7 Bank Accounts. Does England & Wales recognise escrow accounts? Can security be taken over a bank account of its rights, unless there had been fraud or another breach of duty located in England & Wales? If so, what is the typical or applicable law (such as the antecedent transaction regime method? Would courts in England & Wales recognise a described below). foreign-law grant of security taken over a bank account located in England & Wales? 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or England and Wales recognises the concept of money held in a bank reverse transactions that took place during a “suspect” or account in escrow. Security granted by a depositor for a third party “preference” period before the commencement of the is typically taken over the debt represented by a credit balance by insolvency proceeding? What are the lengths of the way of a charge or security assignment. Security over a credit “suspect” or “preference” periods in England & Wales for balance granted by a depositor in favour of the bank at which such (a) transactions between unrelated parties and (b) deposit is held can only be achieved by way of charge (not by transactions between related parties? assignment) and is usually supplemented by quasi-security such as a flawed asset arrangement and a contractual right of set-off. To the The insolvency official would need a court order to reverse an extent that the security is a “security financial collateral antecedent transaction, except for a disposition of property made arrangement” over “cash” as provided for in the Financial after a winding-up petition has been presented. Such dispositions Collateral Regulations, such regulations will apply. are void and any receivables purportedly transferred during that period would remain property of the seller. Foreign-law governed security over a bank account located in England and Wales must be valid under the laws of England and Otherwise, the court may set aside a transaction made at an Wales, as well as its own governing law in order for it to be given undervalue in the two years ending with the commencement of the effect by the English courts. administration or liquidation if the company was at that time, or as a result of the transaction became, unable to pay its debts as they fell due. There is a defence if the court is satisfied that the company 6 Insolvency Laws entered into the transaction in good faith with reasonable grounds for believing that it would benefit the company. 6.1 Stay of Action. If, after a sale of receivables that is A transaction which puts a creditor or guarantor of the seller into a otherwise perfected, the seller becomes subject to an better position (in a winding-up) than it would otherwise have been in insolvency proceeding, will the insolvency laws of had that transaction not occurred can be set aside by the court if such England & Wales automatically prohibit the purchaser preference is made (i) in the two years ending with the onset of from collecting, transferring or otherwise exercising insolvency (in the case of a preference to a person “connected” with ownership rights over the purchased receivables (a “stay the company), or (ii) in the six months prior to insolvency (in the case of action”)? Does the insolvency official have the ability to stay collection and enforcement actions until he of any other preference). It is necessary to show that a preference was determines that the sale is perfected? Would the answer made with a desire to prefer the creditor or guarantor. Transactions be different if the purchaser is deemed to only be a defrauding creditors may also be reversed by the court. secured party rather than the owner of the receivables? 6.4 Substantive Consolidation. Under what facts or Most formal insolvency procedures have an automatic stay of circumstances, if any, could the insolvency official action against the insolvent entity. If the right to the receivables has consolidate the assets and liabilities of the purchaser with been transferred by legal assignment, the sale will be perfected, the those of the seller or its affiliates in the insolvency purchaser will have the right to enforce his assigned rights in his proceeding? own name and a stay of action on the insolvency of the seller should not affect the purchaser’s ability to collect income from the The equitable remedy of substantive consolidation, which permits receivables. the court to treat the assets and liabilities of one entity as though If the seller is appointed as servicer for the receivables, the stay of they were those of another, is not recognised by the English courts. action may prevent the purchaser from taking action to enforce the Only in circumstances where the assets and liabilities of two servicing contract and any proceeds held by the servicer other than companies were indistinguishably amalgamated together, and in a binding trust arrangement may be deemed to be the property of where to do so would be in the interests of both companies’ the servicer, not the purchaser. creditors, might the court sanction an arrangement reached by the insolvency official and those creditors. If the receivables have been sold by equitable assignment and

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The separate legal personality of a company will only be ignored in winding-up petition even if it were presented in breach of a non- very limited circumstances. Examples include fraud, illegality, petition clause. A party may have statutory or constitutional rights where a company is formed to evade contractual obligations or to take legal action against the purchaser or such other person which defeat creditors’ claims or where an agency or nominee relationship are not possible to be contractually disapplied. is found to exist. 7.5 Independent Director. Will a court in England & Wales 6.5 Effect of Proceedings on Future Receivables. What is the give effect to a contractual provision (even if the effect of the initiation of insolvency proceedings on (a) contract’s governing law is the law of another country) or sales of receivables that have not yet occurred or (b) on a provision in a party’s organisational documents sales of receivables that have not yet come into prohibiting the directors from taking specified actions existence? (including commencing an insolvency proceeding) without the affirmative vote of an independent director?

Where the receivables sale agreement provides that no further England & Wales action is required by the seller for the receivables (including A restriction or limitation on the ability of the directors to bring receivables arising in the future) to be transferred, the agreement insolvency proceedings contained in the articles of association of a will continue to be effective to transfer the receivables even after company or in a contract entered into by a company may be invalid the initiation of insolvency proceedings. as a matter of public policy or incompatible with certain statutory duties of the directors.

7 Special Rules 8 Regulatory Issues

7.1 Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in England & 8.1 Required Authorisations, etc. Assuming that the Wales establishing a legal framework for securitisation purchaser does no other business in England & Wales, transactions? If so, what are the basics? will its purchase and ownership or its collection and enforcement of receivables result in its being required to Other than certain tax laws, there are no laws specifically providing qualify to do business or to obtain any licence or its being for securitisation transactions. subject to regulation as a financial institution in England & Wales? Does the answer to the preceding question change if the purchaser does business with other sellers 7.2 Securitisation Entities. Does England & Wales have laws in England & Wales? specifically providing for establishment of special purpose entities for securitisation? If so, what does the law provide A purchaser of consumer receivables requires a licence under the as to: (a) requirements for establishment and CCA 1974, as amended by the CCA 2006. A purchaser of management of such an entity; (b) legal attributes and residential mortgage loans who assumes a servicing and collection benefits of the entity; and (c) any specific requirements as role with respect to such mortgage loans will require authorisation to the status of directors or shareholders? from the Financial Services Authority (the “FSA”). The purchaser may also be obliged to register under the Data Protection Act 1998 There are no laws specifically providing for the establishment of (the “DPA”). It makes no difference whether or not the purchaser special purpose entities for securitisation. does business with other sellers in England and Wales.

7.3 Non-Recourse Clause. Will a court in England & Wales 8.2 Servicing. Does the seller require any licences, etc., in give effect to a contractual provision (even if the order to continue to enforce and collect receivables contract’s governing law is the law of another country) following their sale to the purchaser, including to appear limiting the recourse of parties to available funds? before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect Provisions limiting the recourse of a creditor to the net proceeds of sold receivables? disposal or enforcement of specified assets owned by the obligor or its available funds are likely to be valid under English law. The seller is likely to need a licence from the Office of Fair Trading (the “OFT”) under the CCA 1974, as amended by the CCA 2006 7.4 Non-Petition Clause. Will a court in England & Wales give (since debt collection is a business that the OFT specifies as effect to a contractual provision (even if the contract’s requiring a licence) and registration under the DPA. Where the governing law is the law of another country) prohibiting seller continues to act as servicer with respect to residential the parties from: (a) taking legal action against the mortgage loans, it will be required to be authorised to perform such purchaser or another person; or (b) commencing an role by the FSA. Any standby or replacement servicer will require insolvency proceeding against the purchaser or another the same licences and authorisations. person?

Non-petition clauses are likely to be valid (whether governed by 8.3 Data Protection. Does England & Wales have laws English law or the law of another country), although there is little restricting the use or dissemination of data about or provided by obligors? If so, do these laws apply only to authority in English law. The most effective method for enforcing consumer obligors or also to enterprises? such a clause would be injunctive relief which, as an equitable remedy, is at the discretion of the court. A court would have to The handling and processing of information on living individuals is consider whether such a clause was contrary to public policy as an regulated by the DPA. The DPA only applies to individual obligors attempt to oust the jurisdiction of the court or the insolvency laws and not enterprises. Data controllers are subject to annual of the UK. It is possible that an English court would deal with a

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notification requirements. A data controller would include a typically securitised through the use of a UK resident purchasing purchaser of receivables serviced by the seller. company. Generally, trade receivables payments and lease rental payments are 8.4 Consumer Protection. If the obligors are consumers, will not subject to UK withholding unless they provide for the payment the purchaser (including a bank acting as purchaser) be of interest, in which case, the interest element will be subject to required to comply with any consumer protection law of withholding in the same way as interest on loan relationships. England & Wales? Briefly, what is required?

9.2 Seller Tax Accounting. Does England & Wales require The purchase of receivables would not in itself require the that a specific accounting policy is adopted for tax purchaser to be authorised as a bank, financial institution or purposes by the seller or purchaser in the context of a equivalent. securitisation? The CCA 1974, as amended by the CCA 2006, governs consumer England & Wales credit loans. A purchaser of such receivables is likely to require a The tax treatment of a company within the charge to UK licence under this legislation and will be required to comply with corporation tax would be expected, at least as a starting point, to such legislation in its dealings with obligors and with the EU follow its accounting treatment. For a company purchasing Consumer Credit Directive as implemented into the law of England receivables, in many cases the rules imposed by the appropriate and Wales. accounting regime would be expected to result in the creation of The UTCCR applies to agreements made on or after 1 July 1995. A accounting profits, and accordingly taxable profits, which do not term is “unfair” if it causes a significant imbalance in the parties’ reflect the actual cash position of the company in question. rights and obligations under the contract to the detriment of the From 1st January 2007, the Taxation of Securitisation Companies consumer. Such a term will not be binding on the consumer. Regulations 2006 came in to force. These regulations apply to The Unfair Contracts Terms Act 1977, restricts the limitation of companies which are “securitisation companies” (as defined in the liability by a party. Liability for death or personal injury caused by regulations) and permit such securitisation companies to be subject negligence cannot be limited and any clauses that limit liability for to a tax treatment reflecting the cash position of its securitisation other damage caused by negligence must satisfy the reasonableness arrangements such that it is taxed only on the cash profit retained test. within the company after the payment of its transaction disbursements according to the transaction waterfall. As such, a Mortgage contracts are regulated by the Financial Services and balanced tax treatment can be achieved and the regime has been Markets Act 2000 (“FSMA”). Entering into a regulated mortgage seen as providing effective relief from the complex or anomalous contract, arranging or administering it or advising on it is a tax rules which could otherwise apply to UK incorporated special regulated activity, requiring authorisation from the FSA under purpose entities. FSMA. Second mortgages and buy-to-let mortgages are currently excluded from “regulated mortgages”. Mortgage lenders are required to comply with the FSA’s Mortgages: Conduct of Business 9.3 Stamp Duty, etc. Does England & Wales impose stamp handbook. duty or other documentary taxes on sales of receivables?

Stamp duty exists in the UK and is chargeable on documents in 8.5 Currency Restrictions. Does England & Wales have laws certain circumstances. Transactions effected without the use of a restricting the exchange of England & Wales’ currency for document may also be subject to UK Stamp Duty Reserve Tax other currencies or the making of payments in England & Wales’ currency to persons outside the country? (“SDRT”) levied on transfers of certain types of securities whether by document or otherwise. Generally transfers of loans (which are No, subject to any restrictions imposed by United Nations not convertible and have no “equity” type characteristics, such as sanctions. profit-related interest), trade and lease receivables should not be subject to UK stamp duty or SDRT.

9 Taxation 9.4 Value Added Taxes. Does England & Wales impose value added tax, sales tax or other similar taxes on sales 9.1 Withholding Taxes. Will any part of payments on of goods or services, on sales of receivables or on fees receivables by the obligors to the seller or the purchaser for collection agent services? be subject to withholding taxes in England & Wales? Does the answer depend on the nature of the receivables, UK value added tax (“VAT”) is chargeable on supplies of goods and whether they bear interest, their term to maturity, or services which take place in the UK and which are made by where the seller or the purchaser is located? “taxable persons” in the course or furtherance of a business. The standard rate of VAT is currently 20 per cent., although certain The withholding tax treatment of UK receivables depends not only supplies (including the supply of certain financial services) are on their nature but on the nature of the recipient to whom they are exempt from VAT. paid. Very broadly, payments of interest with a UK source may be In MBNA Europe Bank Ltd v HMRC [2006] EWHC 2326 (Ch) it paid without withholding to a purchaser which is either resident in was decided by the UK High Court that the transfer of credit card the UK or carries on business in the UK through a permanent receivables by an originator in a securitisation was not a supply for establishment. Payments of interest to a non-UK resident purchaser VAT purposes. However, that decision may not apply to all such may often be subject to withholding, subject to any available treaty transfers. To the extent that the decision does not apply, a transfer relief pursuant to a double taxation convention. Generally, the use of financial receivables would generally be treated as an exempt of relief under a double taxation convention where there are pools supply for VAT purposes. of assets that run to more than a very few obligors is administratively challenging. Accordingly, loan receivables are Generally, fees payable for collection agent services are not exempt

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from VAT and will usually give rise to VAT at the standard rate, to group as the seller for VAT purposes. Although there are limited the extent they are treated as taking place in the UK. exceptions to this general position, it is unlikely that such exceptions would apply in a securitisation context. 9.5 Purchaser Liability. If the seller is required to pay value Where charged, stamp duty and SDRT are generally payable by the added tax, stamp duty or other taxes upon the sale of purchaser. receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then 9.6 Doing Business. Assuming that the purchaser conducts will the taxing authority be able to make claims for the no other business in England & Wales, would the unpaid tax against the purchaser or against the sold purchaser’s purchase of the receivables, its appointment receivables or collections? of the seller as its servicer and collection agent, or its enforcement of the receivables against the obligors, make As described above, the transfer of financial receivables would it liable to tax in England & Wales?

usually either constitute an exempt supply for VAT purposes, or fall England & Wales outside the scope of VAT altogether. However, a seller might incur Generally the purchase of receivables will not give rise to tax VAT on a supply of assets which does not fall within any of the liabilities for a purchaser conducting no other business in the UK, exemptions: for example, property or trading assets on a true sale and the appointment of a servicer by the purchaser which carries out securitisation. If so, the seller would generally be liable to account normal administrative activities on its behalf should not result in tax for such VAT to HM Revenue & Customs (“HMRC”). liabilities for the purchaser. The question of enforcement is more Broadly, HMRC would not be able to require the purchaser to complex and the particular circumstances would need to be account for VAT, unless the purchaser was a member of the same considered carefully.

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Jacky Kelly Rupert Wall

Weil, Gotshal & Manges Weil, Gotshal & Manges 110 Fetter Lane 110 Fetter Lane London EC4A 1AY London EC4A 1AY United Kingdom United Kingdom

Tel: +44 20 7903 1045 Tel: +44 20 7903 1364 Fax: +44 20 7903 0990 Fax: +44 20 7903 0990 Email: [email protected] Email: [email protected] URL: www.weil.com URL: www.weil.com

Jacky is head of Weil’s London securitisation, structured finance Rupert is a senior associate in Weil’s London securitisation, and derivatives practice. She has been practising since the mid- structured finance and derivatives practice with long-standing eighties when the UK securitisation market was conceived. expertise in a broad range of financing techniques and structures. England & Wales She has represented both banks and corporate clients on the He has experience structuring and leading securitisation deals securitisation of a wide range of asset types in some of the most across a diverse range of asset classes (including trade innovative deals in the market, including ports revenues, receivables, credit card receivables, auto-loans and residential residential mortgages, commercial real estate, trade receivables, and commercial mortgage loans), encompassing a wide range of credit cards, computer/equipment leases, auto loans, HP structures (including CDO/CLOs, RMBS, CMBS, ABCP conduits, receivables and music royalties as well as football ticket and covered bonds and whole business securitisations) and has stadium financing. Jacky also has extensive experience in advised a number of financial and structuring institutions, CLO/CDOs, SIVs, ABCP conduits and covered bonds. Legal 500 originators, arrangers, underwriters, trustees and credit UK notes that her “depth of industry and technical knowledge are enhancers in complex cross-border financing transactions. He second to none” whilst Chambers UK states that she is “able to has most recently been recommended for Securitisation in Legal cut through what appears to be insurmountable problems with 500 UK. direct and incisive advice”.

Weil’s London structured finance team has consistently been at the forefront of developments in the securitisation and derivatives industry, and has earned a reputation for developing innovative and ground-breaking structures. As the securitisation industry starts to revive, Weil has recently been called upon to advise on a number of prestigious new securitisation issuances coming to market especially those relating to the securitisation of consumer assets and residential mortgages. In 2012, Weil’s structured finance team were nominated for the 2012 Legal Business Awards “Finance Team of the Year” for their work in structuring a wholly new lease funding structure and continue to be involved in some of the most challenging and ground-breaking litigation in the securitisation market relating to issues such as contractual subordination and set-off. Chambers UK has described the Weil securitisation team as “an excellent group, superb at working as a team, providing cost-effective and thorough advice” whilst Legal 500 UK notes that Weil is “traditionally one of the top firms for securitisation” and that it “rates highly on all categories, from response times, business acumen and strength in depth to value for money”. As Weil is one of the very few firms who have top quality, highly-ranked, self-standing structured finance practices in both the UK and the US, they are able to offer access to full service global advice with regard to specialist areas which impact on structured finance products being placed both in Europe and the US such as the Securities Act, Investment Company Act, ERISA, the Dodd- Frank Act and FATCA as well as the impact of regulatory issues such as Rule 15Ga-1 of the U.S. Securities Exchange Act, Article 122a of the EU Capital Requirements Directive and ongoing Rating Agency reforms under SEC Rules 17g-5 and 17g-7.

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Attorneys at law Borenius Aivar Taro

1 Receivables Contracts time during which the loan was used shall be paid at the rate based on a half-year basis and equal to the last interest rate applicable to the main refinancing operations of the 1.1 Formalities. In order to create an enforceable debt European Central Bank before 1 January or 1 July of each obligation of the obligor to the seller, (a) is it necessary year. The respective rate prior to 1 January 2012 was 1%. that the sales of goods or services are evidenced by a (b) The late payment interest rate applicable regarding a formal receivables contract; (b) are invoices alone consumer loan may not exceed the interest rate set forth in sufficient; and (c) can a receivable “contract” be deemed the respective consumer loan contract. If parties have not to exist as a result of the behaviour of the parties? agreed on the late payment interest rate, the late payment interest rate shall be the rate applicable to the main (a) There are no formal contract requirements applicable for the refinancing operations of the European Central Bank plus sale of goods (unless the sale involves certain securities) or 7% per year. In case a contract prescribes an interest rate services. The exceptions to this rule concern the relationship exceeding the late payment interest rate applicable under the between a credit institution and its clients, any assumption of law (see above), the interest rate stipulated in the contract debt and the sale of certain types of assets (e.g. real estate). shall serve as the basis for the late payment interest rate as (b) An invoice may be considered evidence for the conclusion of well. an oral contract, but it is at the discretion of the court in case (c) Current law does not permit consumers to cancel receivables of argument. for a specified period of time. (c) If oral contracts are acceptable, an acceptance to enter into a (d) Under the Estonian consumer credit regulation, a consumer contract presented by behaviour or by the historic has the right to early payment i.e., a consumer may perform relationship of the parties may be deemed acceptable as a his obligations arising from a consumer credit contract basis for the contract. For instance, if the parties have been before the due date and in such case the consumer does not involved in long-term commercial relations and one of them owe interest or other charges for the period when the credit submits an offer for the conclusion of the contract, and the is not used. Secondly, the payments under the consumer loan other party fails to timely object. cannot be secured with contractual penalty. In general, any agreement derogating from the provisions of the consumer 1.2 Consumer Protections. Do Estonian laws (a) limit rates of credit regime provided in the Estonian Law of Obligations interest on consumer credit, loans or other kinds of Act to the detriment of the consumer is void in as much as it receivables; (b) provide a statutory right to interest on late contradicts with the mandatory regime. payments; (c) permit consumers to cancel receivables for Specific restrictions and consumer favourable regulations pertain to a specified period of time; or (d) provide other noteworthy consumer protection regarding “doorstep” and distance agreements. rights to consumers with respect to receivables owing by them? 1.3 Government Receivables. Where the receivables (a) The annual percentage rate (“APR”) payable by a consumer contract has been entered into with the government or a in connection with consumer loans is limited in Estonia. The government agency, are there different requirements and respective rate may not exceed the average annual laws that apply to the sale or collection of those percentage rate of consumer loans granted in Estonia receivables? (published and calculated by the Bank of Estonia, the central bank) more than three times. The average APR disclosed by No, there are not. the Bank of Estonia during the 12 months of 2011 was approx. 30.6%. However, conflict with the named regulation does not automatically mean that the loan is void, but serves 2 Choice of Law – Receivables Contracts as an indication that the loan may be void. If the APR conflicts with the APR regulation, the burden of proof to 2.1 No Law Specified. If the seller and the obligor do not prove whether the consumer loan is not void lies with the specify a choice of law in their receivables contract, what lender. If the consumer loan is void due to exceeding APR, are the main principles in Estonia that will determine the the party obliged to pay the interest or other charge at the governing law of the contract? time during which the loan is used, has the right to return that which is received as a result of the void transaction by the due date of the void transaction. In such case, interest for the The contract will be governed by the law of the state the contract is most closely connected to. The contract is presumed to be most

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closely connected to the state of residence or seat of the managing same law as the receivables subject to such sale. However, body of the party who is to perform the obligation characteristic of regardless of the fact that the parties have chosen a foreign law to the contract at the time of entry into the contract. govern the contract, mandatory provisions of Estonian law are If the contract is entered into in the course of the economic or applicable. For instance, if the receivable is a registered security professional activity of the party, who is to perform the obligation governed by Estonian law, the transfer of title to ownership of such characteristic of the contract, the contract is presumed to be most receivable shall be exclusively governed by Estonian law. closely connected with the state where the principal place of business of such party is located. If, under the terms of the contract, 3.2 Example 1: If (a) the seller and the obligor are located in the obligation characteristic to the contract shall be performed in a Estonia, (b) the receivable is governed by the law of

Estonia place of business other than the principal place of business, the Estonia, (c) the seller sells the receivable to a purchaser contract is presumed to be most closely connected with the state located in a third country, (d) the seller and the purchaser where such other place of business is situated. choose the law of Estonia to govern the receivables purchase agreement, and (e) the sale complies with the If the object of the contract is a real right regarding immovable requirements of Estonia, will a court in Estonia recognise property or a right to use immovable property, the contract is that sale as being effective against the seller, the obligor presumed to be most closely connected with the state where the and other third parties (such as creditors or insolvency immovable property is located. administrators of the seller and the obligor)?

2.2 Base Case. If the seller and the obligor are both resident Yes, in general, a court upholds such sale. Nevertheless, the court in Estonia, and the transactions giving rise to the shall have a right to reverse such sale in the course of insolvency receivables and the payment of the receivables take proceedings (please see question 6.3 below) and in the course of place in Estonia, and the seller and the obligor choose execution proceedings (in Estonian: täitemenetlus). the law of Estonia to govern the receivables contract, is Furthermore, please note that in Estonia, as a rule of thumb under there any reason why a court in Estonia would not give Estonian law, the obligor may set off any claims it has against the effect to their choice of law? seller also against the purchaser. The respective right is limited only (i) if the obligor has acquired the claim thereof from a third No, there is not. party and, at the time of acquiring the claim, the obligor knew or should have known that the claim against the obligor had been 2.3 Freedom to Choose Foreign Law of Non-Resident Seller assigned, or (ii) the claim of the obligor falls due later than the or Obligor. If the seller is resident in Estonia but the assigned claim and after the obligor became or should have become obligor is not, or if the obligor is resident in Estonia but aware of the assignment obligor’s claim is due. This general the seller is not, and the seller and the obligor choose the Estonian law regulation derives from the definition of “effective foreign law of the obligor/seller to govern their receivables sale”. More specifically, it is practically rather impossible to contract, will a court in Estonia give effect to the choice of prevent the obligor from setting off the receivables against any foreign law? Are there any limitations to the recognition of foreign law (such as public policy or mandatory obligations of the seller to the obligor. principles of law) that would typically apply in commercial relationships such that between the seller and the obligor 3.3 Example 2: Assuming that the facts are the same as under the receivables contract? Example 1, but either the obligor or the purchaser or both are located outside Estonia, will a court in Estonia The parties to a contract are generally free to choose the applicable recognise that sale as being effective against the seller law. The choice of law of a foreign state is not applied if the results and other third parties (such as creditors or insolvency would be in obvious conflict with the essential principles of administrators of the seller), or must the requirements of Estonian law (public policy). In such case, Estonian law applies. In the obligor’s country or the purchaser’s country (or both) case a court in Estonia is unable to identify the content of a foreign be taken into account? law within a reasonable time despite all efforts, Estonian law applies. Furthermore, if the parties have chosen a foreign law to Yes, in general, a court upholds such sale. Nevertheless, if the seller govern the contract, mandatory provisions of Estonian law are still is an Estonian company, the court shall have a right to reverse such applicable. sale in the course of insolvency proceedings (please see question 6.3 below) and in the course of execution proceedings (in Estonian: täitemenetlus). In addition, please see the answer to question 3.2 2.4 CISG. Is the United Nations Convention on the with regards to the obligor’s right to set off. International Sale of Goods in effect in Estonia?

Yes, CISG is in effect in Estonia. 3.4 Example 3: If (a) the seller is located in Estonia but the obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, (c) the seller 3 Choice of Law – Receivables Purchase sells the receivable to a purchaser located in a third Agreement country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the 3.1 Base Case. Does Estonian law generally require the sale requirements of the obligor’s country, will a court in of receivables to be governed by the same law as the law Estonia recognise that sale as being effective against the governing the receivables themselves? If so, does that seller and other third parties (such as creditors or general rule apply irrespective of which law governs the insolvency administrators of the seller) without the need receivables (i.e., Estonian laws or foreign laws)? to comply with Estonia own sale requirements?

The sale of receivables does not need to be governed under the Yes, in general, a court upholds such sale. However, if such sale is

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in obvious conflict with the essential principles of Estonian law that title to the receivables has passed to the purchaser. The major (public policy), the court will not uphold the sale and Estonian law risk in connection with the sale of receivables is related to earlier applies. transactions, not subsequent transactions. There is a risk that the receivable has already been sold, in which case the former arrangement shall prevail over the latter. 3.5 Example 4: If (a) the obligor is located in Estonia but the seller is located in another country, (b) the receivable is If the receivable represents a registered security, the sale is governed by the law of the seller’s country, (c) the seller enforceable against other creditors of the seller once the purchaser and the purchaser choose the law of the seller’s country has been entered into the relevant register as the owner of a to govern the receivables purchase agreement, and (d) registered security. the sale complies with the requirements of the seller’s country, will a court in Estonia recognise that sale as Estonia being effective against the obligor and other third parties 4.3 Perfection for Promissory Notes, etc. What additional or (such as creditors or insolvency administrators of the different requirements for sale and perfection apply to obligor) without the need to comply with Estonia’s own sales of promissory notes, mortgage loans, consumer sale requirements? loans or marketable debt securities?

Yes, in general, a court upholds such sale. However, if such sale is A promissory note can be transferred to another person by means of in obvious conflict with the essential principles of Estonian law an endorsement, unless the drawer of the promissory note has (public policy), the court will not uphold the sale and Estonian law expressly excluded the transferability. If the drawer has excluded applies. the transferability, the promissory note may be transferred as a registered security. A right arising from a registered security shall be transferred pursuant to the provisions concerning the transfer of 3.6 Example 5: If (a) the seller is located in Estonia the corresponding right in writing, concurrently with the transfer of (irrespective of the obligor’s location), (b) the receivable is the security. An endorsement of the promissory note shall be governed by the law of Estonia, (c) the seller sells the receivable to a purchaser located in a third country, (d) unconditional. An endorsement for partial transfer of the rights and the seller and the purchaser choose the law of the obligations stipulated in a promissory note is void. purchaser’s country to govern the receivables purchase Loan agreements are form-free, unless concluded by a credit agreement, and (e) the sale complies with the institution. However, since the establishment of a mortgage requirements of the purchaser’s country, will a court in requires an agreement certified by the notary public, the mortgage Estonia recognise that sale as being effective against the can be transferred in a notarised form. Consumer loans are seller and other third parties (such as creditors or generally concluded in writing, particularly where the lender is a insolvency administrators of the seller, any obligor located in Estonia and any third party creditor or insolvency credit institution, and therefore the purchase contract is also to be administrator of any such obligor)? executed in writing. The transfer of marketable debt securities is regulated depending on Yes, in general, a court upholds such sale. However, if a receivable whether the debt security is registered with the Estonian Central under a receivable contract is a registered security or a mortgage Registry of Securities. If registered, the securities are transferred governed by Estonian law, the title to ownership is transferred under electronically from one securities account to another by the Estonian law. Nevertheless, if the seller is an Estonian company, registrar. The regulation of the sale of non-registered debt securities the court shall have a right to reverse such sale in the course of may vary depending on the type of security. Marketing securities insolvency proceedings (please see question 6.3 below) and in of a special purpose entity established for securitisation may be course of execution proceedings (in Estonian: täitemenetlus). In deemed as a public offer of securities. An offer of securities is not addition, please see the answer to question 3.2 with regards to the regarded as public if the securities are offered solely (i) to a obligor’s right to set off. professional investor, (ii) to not more than ninety-nine persons per European Economic Area Member State, other than professional investors, (iii) an offer of securities addressed to investors who 4 Asset Sales acquire securities for a total consideration of at least EUR 50,000 per investor, for each separate offer, (iv) an offer of securities whose 4.1 Sale Methods Generally. In Estonian what are the denomination per unit amounts to at least EUR 50,000, or (v) an customary methods for a seller to sell receivables to a issue or offer of securities with a total consideration of less than purchaser? What is the customary terminology – is it EUR 100,000 in a period of 12 months. called a sale, transfer, assignment or something else? There are no specific restrictions as to the perfection of the sale of consumer loans. However, assigning receivables under the It is customary to execute a factoring contract or assignment of consumer loan has to be disclosed to the consumer (borrower). claim agreement to sell receivables to a purchaser. Customary However, it should be noted that an agreement precluding or terminology includes both sale and transfer. restricting a consumer’s right to plead defences, arising from a contract against third parties to whom the obligee assigns any 4.2 Perfection Generally. What formalities are required claims arising for the consumer from a consumer credit contract, or generally for perfecting a sale of receivables? Are there which precludes or restricts consumer’s right to set-off, are void. any additional or other formalities required for the sale of receivables to be perfected against any subsequent good faith purchasers for value of the same receivables from the seller?

There are no specific requirements regarding perfection of the sale of receivables other than there should be an agreement setting forth

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4.4 Obligor Notification or Consent. Must the seller or the assignment are not enforceable in Estonia in the sense that the purchaser notify obligors of the sale of receivables in assignment remains valid. However, the seller who has breached order for the sale to be effective against the obligors the receivables contract will be liable to the obligor for the accruing and/or creditors of the seller? Must the seller or the damages. The purchaser will not be liable for such breach. purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale against the obligors? Does the answer to this question 4.7 Identification. Must the sale document specifically identify vary if (a) the receivables contract does not prohibit each of the receivables to be sold? If so, what specific assignment but does not expressly permit assignment; or information is required (e.g., obligor name, invoice (b) the receivables contract expressly prohibits number, invoice date, payment date, etc.)? Do the assignment? Whether or not notice is required to perfect receivables being sold have to share objective Estonia a sale, are there any benefits to giving notice – such as characteristics? Alternatively, if the seller sells all of its cutting off obligor set-off rights and other obligor receivables to the purchaser, is this sufficient defences? identification of receivables?

Under Estonian law, the seller may assign a receivables contract in No specific information is required for the assignment of part or in full regardless of the consent of the obligor. The obligor may receivables, save for the requirement that the receivable is assign his obligations only if the seller consents with such transfer. sufficiently identifiable. Also, it is possible to assign future The notification of the obligor is not compulsory, but it is necessary receivables and contingent receivables if they are sufficiently in order for the sale to be effective against the obligor (please see defined at the time of the sale. Thus, the contract for the sale of the answer to question 3.2 with regards to the obligor’s right to set receivables should contain all the information reasonably required off). The obligor may perform his obligations to the seller to identify the receivable being transferred. inasmuch as he has been notified of the sale by the seller or However, if the seller sells all of its receivables to the purchaser, it presented with a valid assignment document. The purchaser has the may not be sufficient for the identification of receivables. right to receive such performance of an obligation from the seller. In addition, the obligor may withhold the performance of his 4.8 Respect for Intent of Parties; Economic Effects on Sale. obligation to the purchaser until presented with a valid assignment If the parties denominate their transaction as a sale and document. The notification prevents the obligor from the state their intent that it be a sale will this automatically be performance of his obligation to the seller. In case of the obligor’s respected or will a court enquire into the economic insolvency, the purchaser should notify the obligor within two characteristics of the transaction? If the latter, what months as of the declaration of the obligor’s insolvency. Depending economic characteristics of a sale, if any, might prevent on the time of notifying the obligor of the assignment, there may be the sale from being perfected? Among other things, to limitations on set-off of the receivable. what extent may the seller retain (a) credit risk; (b) interest rate risk; and/or (c) control of collections of In case the receivables contract expressly prohibits assignment of receivables without jeopardising perfection? receivables, the assignment carried out without the consent of the obligor is still valid, but the seller is liable to the obligor for damages Interpreting a transaction will be based on the actual intent of the caused by the assignment in breach of the receivables contract. parties and, among other things, the court will look into the economic characteristic of the transaction. 4.5 Notice Mechanics. If notice is to be delivered to obligors, The parties are free to agree that the seller will retain certain risks whether at the time of sale or later, are there any or control over the collection of the receivable. requirements regarding the form the notice must take or how it must be delivered? Is there any time limit beyond which notice is ineffective – for example, can a notice of 4.9 Continuous Sales of Receivables. Can the seller agree in sale be delivered after the sale, and can notice be an enforceable manner (at least prior to its insolvency) to delivered after insolvency proceedings against the obligor continuous sales of receivables (i.e., sales of receivables have commenced? Does the notice apply only to specific as and when they arise)? receivables or can it apply to any and all (including future) receivables? Are there any other limitations or The law requires that the receivables to be sold should be considerations? sufficiently identifiable at the moment of their sale. If this condition is met, then such an agreement is enforceable. The obligor may perform his obligations to the seller inasmuch as he has been notified of the sale by the seller or presented with a valid assignment document. Therefore, the notification should be 4.10 Future Receivables. Can the seller commit in an made before or simultaneously with the sale of receivables. enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables purchase agreement (e.g., “future flow” securitisation)? If 4.6 Restrictions on Assignment; Liability to Obligor. Are so, how must the sale of future receivables be structured restrictions in receivables contracts prohibiting sale or to be valid and enforceable? Is there a distinction assignment generally enforceable in Estonia? Are there between future receivables that arise prior to or after the exceptions to this rule (e.g., for contracts between seller’s insolvency? commercial entities)? If Estonia recognises prohibitions on sale or assignment and the seller nevertheless sells The transfer of the conditional receivables or those emerging in the receivables to the purchaser, will either the seller or the future is allowed, if such receivables are sufficiently identifiable at purchaser be liable to the obligor for breach of contract or the time of such sale. The sale of future receivables should be on any other basis? structured in a way that at the time of such sales transaction, the future, conditional or emerging receivables are sufficiently Restrictions in receivables contracts prohibiting the sale or identifiable.

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If, before the declaration of bankruptcy, the debtor has disposed his 5.4 Recognition. If the purchaser grants a security interest in future claims, the disposition becomes void upon the declaration of receivables governed by the laws of Estonia, and that bankruptcy in respect of the claims which arise after the declaration security interest is valid and perfected under the laws of of bankruptcy. the purchaser’s country, will it be treated as valid and perfected in Estonia or must additional steps be taken in Estonia? 4.11 Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred In general, there are no additional steps that are necessary to take concurrently with the sale of receivables? If not all under Estonian law. However, if a receivable under a receivable related security can be enforceably transferred, what contract is a registered security or a mortgage governed by Estonian methods are customarily adopted to provide the law, the respective security is only effective in Estonia if it is Estonia purchaser the benefits of such related security? created under Estonian law (registered in the relevant register). Furthermore, the law governing the receivables is Estonian law Collateral related to the receivables is deemed to be transferred to even following the security establishment under a foreign law. the purchaser upon assignment (sale) of the claim (receivable), save for mortgages and other collaterals that are not deemed related to receivables. Collaterals not related to receivables are subject to a 5.5 Additional Formalities. What additional or different separate and independent assignment procedure. Upon the transfer requirements apply to security interests in or connected to of a receivable secured by a mortgage or by a registered security insurance policies, promissory notes, mortgage loans, over a moveable, the obligor shall provide assistance in registering consumer loans or marketable debt securities? the transfer of security to the purchaser. Furthermore, the assignment of a mortgage must be carried out in notarised form and If an endorsement of a promissory note contains a written declaration registered in the Real Title Book. implying a pledge (a pledge endorsement), the holder of the promissory note may exercise all rights arising from the note as the pledgee. 5 Security Issues A real right contract entered into for the establishment of a mortgage shall be notarised. A mortgage is created once the respective entry has 5.1 Back-up Security. Is it customary in Estonia to take a been made in the Land Register. Making an entry in the Land Register “back-up” security interest over the seller’s ownership to establish a mortgage requires a notarised application by the owner interest in the receivables and the related security, in the of the immovable. event that the sale is deemed by a court not to have been A pledge over registered securities is created upon entry of the pledge perfected? in the Estonian Central Register of Securities. The registrar makes a notation concerning the pledged securities upon the respective No, it is not customary practice. application by the pledgor. In the case of financial collateral, the registrar transfers the securities pledged on the basis of a financial 5.2 Seller Security. If so, what are the formalities for the collateral arrangement to the special securities account of the pledgor seller granting a security interest in receivables and on the order of the account administrator of the pledgor. related security under the laws of Estonia, and for such The encumbrance of non-registered debt securities depends on the security interest to be perfected? type of debt security. Please see question 5.1 above. 5.6 Trusts. Does Estonia recognise trusts? If not, is there a mechanism whereby collections received by the seller in 5.3 Purchaser Security. If the purchaser grants security over respect of sold receivables can be held or be deemed to all of its assets (including purchased receivables) in be held separate and apart from the seller’s own assets favour of the providers of its funding, what formalities until turned over to the purchaser? must the purchaser comply with in Estonia to grant and perfect a security interest in purchased receivables governed by the laws of Estonia and the related security? Estonian law does not recognise the concept of trusts. However, if the seller acts as a collector for the purchaser under a In order to establish a security governed by Estonian law, relevant services contract then, according to law, the claims and movables provisions of Estonian law have to be duly fulfilled. Agreements on which a mandatary acquires when performing a mandate in the establishing a pledge governed by Estonian law must be entered mandatary’s name but on account of the mandator, and claims and into in writing. In order to establish a pledge of a claim (in Estonia: movables which the mandator transfers to the mandatary for nõuete pant) to receivables, the pledgor and the pledgee have to performance of the mandate are not included in the bankruptcy reach an agreement regarding establishing security to a receivable estate of the mandatary and they cannot be subject to a claim contract. against the mandatary in an enforcement procedure. The purchaser may grant a security interest over the mortgage. For such arrangement, the purchaser is obliged to conclude the 5.7 Bank Accounts. Does Estonia recognise escrow respective agreement in notarised form and entry into the Real Title accounts? Can security be taken over a bank account Book is necessary for establishing such security. located in Estonia? If so, what is the typical method? Would courts in Estonia recognise a foreign-law grant of security (for example, an English law debenture) taken over a bank account located in Estonia?

Escrow account arrangements are recognised in Estonia. The typical method for establishing a security over a bank account

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located in Estonia is the pledge of claims (in Estonian: nõuete other party to the transaction knew or should have known that the pantimine) against the bank deriving from the account agreement. transaction damages the interests of the creditors; (iii) the A court in Estonia shall recognise a foreign-law security transaction is made before the commencement of the term specified arrangement over a bank account located in Estonia. However, for in subsection (ii) in case the transaction was made within three instance it is a common practice in Estonia that banks are not years before the appointment of insolvency official, if the debtor willing to enter into a foreign-law security over an Estonian law intentionally damaged the interests of the creditors with the governed bank account. transaction and the other party to the transaction knew or should have known that the debtor damaged the interests of the creditors; and (iv) within five years before the appointment of insolvency 6 Insolvency Laws official, in case the debtor intentionally damaged the interests of the Estonia creditors with the transaction and the other party to the transaction 6.1 Stay of Action. If, after a sale of receivables that is was a person related to the debtor who knew or should have known otherwise perfected, the seller becomes subject to an of the damaging effect of such transaction to the debtors. In case insolvency proceeding, will Estonian insolvency laws the transaction is made six months before the court has appointed automatically prohibit the purchaser from collecting, an insolvency official, the other party to this transaction is transferring or otherwise exercising ownership rights over presumed to have known that the debtor damaged the interests of the purchased receivables (a “stay of action”)? Does the the creditors with the transaction and the person related to the insolvency official have the ability to stay collection and debtor is presumed to know that the debtor intentionally damaged enforcement actions until he determines that the sale is perfected? Would the answer be different if the the interests of the creditors with the named transaction. purchaser is deemed to only be a secured party rather than the owner of the receivables? 6.4 Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official Estonian law recognises an automatic stay regime only in consolidate the assets and liabilities of the purchaser with connection with pending compulsory execution proceedings with those of the seller or its affiliates in the insolvency respect to the debtor’s property. In such case, the court shall stay proceeding? such execution proceedings once the insolvency official is appointed. Regarding the answers to the second and the third Estonian legislation does not recognise the substantive question, please see question 6.2 below. consolidation regime. Furthermore, there are no circumstances under which the assets and liabilities of the purchaser can be consolidated with those of the seller. 6.2 Insolvency Official’s Powers. If there is no stay of action under what circumstances, if any, does the insolvency However, it is possible for the insolvency official to set off claims official have the power to prohibit the purchaser’s of the debtor against claims of creditors in the course of the exercise of rights (by means of injunction, stay order or insolvency proceedings. In the event that a creditor had a right to other action)? set off the claim against the claim of the debtor before the declaration of bankruptcy, the creditor may set off the defended Upon the appointment of the insolvency official, regardless of claim (the claim recognised at the creditors’ meeting) also after the whether the purchaser is a secured party to whose favour the declaration of bankruptcy. A petition for setting off a claim may be obligations under the receivables are fulfilled or the owner of the submitted until the last distribution proposal is submitted to the receivables, the court conducting the proceedings is entitled to court. A claim acquired through assignment may be set off in apply all measures prescribed for securing an action, including the bankruptcy proceedings only if the claim was assigned and the seizure of the debtor’s property, which is in the possession of debtor was notified of the assignment in writing not later than three another person, a prohibition on other persons from transferring months before the declaration of bankruptcy. A claim against the property to the defendant or performing other obligations with debtor which is acquired through assignment shall not be set off if regard to the defendant, which may include an obligation to transfer the claim was assigned within the preceding three years before the property to a bailiff or to pay money in a bank account prescribed appointment of an insolvency official and the debtor was insolvent by the court and other measures considered necessary by the court. at the time of the assignment and the person who acquired the claim was or should have been aware of the insolvency at the time of the assignment. 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or 6.5 Effect of Proceedings on Future Receivables. What is the “preference” period before the commencement of the effect of the initiation of insolvency proceedings on (a) insolvency proceeding? What are the lengths of the sales of receivables that have not yet occurred or (b) on “suspect” or “preference” periods in Estonia for (a) sales of receivables that have not yet come into transactions between unrelated parties and (b) existence? transactions between related parties? Any future sales of receivables may be hindered because the court Under Estonian legislation, the court shall reverse transactions the will usually impose the prohibition on further disposal of the debtor has made prior to bankruptcy proceedings with a view to debtor’s assets, and any transactions entered into by the debtor damaging the creditor’s interests. General grounds for rescinding during the period from the appointment of an insolvency official of transactions are the following: (i) the transaction is made during until the declaration of bankruptcy are subject to reverse the period from the appointment of the insolvency official until the (clawback). declaration of bankruptcy; (ii) the transaction is made within one year before the appointment of the insolvency official, in case the

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7 Special Rules rights. The breach of this duty will result in the personal civil and criminal liability of the member of the management board.

7.1 Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in Estonia 8 Regulatory Issues establishing a legal framework for securitisation transactions? If so, what are the basics? 8.1 Required Authorisations, etc. Assuming that the There are no laws specifically providing a legal framework for purchaser does no other business in Estonia, will its purchase and ownership or its collection and enforcement securitisation transactions. of receivables result in its being required to qualify to do Estonia business or to obtain any licence or its being subject to 7.2 Securitisation Entities. Does Estonia have laws regulation as a financial institution in Estonia? Does the specifically providing for establishment of special purpose answer to the preceding question change if the purchaser entities for securitisation? If so, what does the law does business with other sellers in Estonia? provide as to: (a) requirements for establishment and management of such an entity; (b) legal attributes and No. Regarding permanent establishment in terms of taxation, benefits of the entity; and (c) any specific requirements as please see question 9.6 below. to the status of directors or shareholders?

There are no laws specifically providing for the establishment of 8.2 Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables special purpose entities for securitisation. following their sale to the purchaser, including to appear before a court? Does a third party replacement servicer 7.3 Non-Recourse Clause. Will a court in Estonia give effect require any licences, etc., in order to enforce and collect to a contractual provision (even if the contract’s governing sold receivables? law is the law of another country) limiting the recourse of parties to available funds? No. However, certain legal professional requirements apply to particular persons appearing before a court. There are no legal grounds for the invalidity of such provision.

8.3 Data Protection. Does Estonia have laws restricting the 7.4 Non-Petition Clause. Will a court in Estonia give effect to use or dissemination of data about or provided by a contractual provision (even if the contract’s governing obligors? If so, do these laws apply only to consumer law is the law of another country) prohibiting the parties obligors or also to enterprises? from: (a) taking legal action against the purchaser or another person; or (b) commencing an insolvency There are a few restrictions on the use and dissemination of data proceeding against the purchaser or another person? about or provided by debtors. First, the Personal Data Protection Act prohibits consumer obligors and enterprises to process personal Generally, agreements excluding or restricting liability for data about, or provided by a natural person without their prior intentional acts are prohibited, and terms detrimental to the interests consent. Second, the Credit Institutions Act imposes upon a credit of a consumer are void. Under the Constitution of the Republic of institution an obligation to maintain banking secrecy. This Estonia, any person whose rights and freedoms are violated has a obligation covers data about each client of the credit institution, right of recourse to the courts. Therefore, the validity of agreement including the obligors and enterprises. Such data may only be restricting the right to file for bankruptcy or other lawsuits is highly transmitted to any third person with the prior written consent of the questionable. However, it is possible to waive claims against the client. Similar restrictions may apply to other institutions, such as purchaser and in such case, even if legal action is taken, the insurance companies. respective claim should remain unsatisfied.

8.4 Consumer Protection. If the obligors are consumers, will 7.5 Independent Director. Will a court in Estonia give effect the purchaser (including a bank acting as purchaser) be to a contractual provision (even if the contract’s governing required to comply with any consumer protection law of law is the law of another country) or a provision in a Estonia? Briefly, what is required? party’s organisational documents prohibiting the directors from taking specified actions (including commencing an Generally, consumer protection acts apply with respect to the insolvency proceeding) without the affirmative vote of an relationship between the seller/service provider and the consumer. independent director? We have assumed that the purchaser takes over and the seller assigns the claim against the consumer based on the conditions Estonian law does not provide a regulation on independent stipulated in the receivable contract. Therefore, the legal position directors. of the consumer will not change as the purchaser undertakes to Moreover, the prohibition on commencement of insolvency comply with regulation deriving from the receivable contract and proceedings will not have any practical implementation in under the consumer protection regulation as one party to the connection with Estonian companies because the Estonian contract is the consumer. However, the consumer protection rules Commercial Code obliges members of the management board, a are the same for the purchaser as they are for the seller. corporate body responsible for daily management, of the entity to initiate bankruptcy proceedings within 20 days of the appearance of permanent insolvency of the entity. Each member of the management board is entitled to submit bankruptcy petition irrespective of any provisions for separate or joint representation

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8.5 Currency Restrictions. Does Estonia have laws restricting 9.4 Value Added Taxes. Does Estonia impose value added the exchange of Estonia’s currency for other currencies or tax, sales tax or other similar taxes on sales of goods or the making of payments in Estonian’s currency to persons services, on sales of receivables or on fees for collection outside the country? agent services?

Legal tender in Estonia is the Euro. There are no restrictions Estonia imposes value added tax (VAT) on sales of goods and regarding the exchange of the Euro or the making of payments in services. The obligation to register as a taxable person for value Euro to persons outside Estonia. added tax purposes usually arises if the taxable turnover exceeds EUR 16,000 in a calendar year. If receivables are sold through economic activity, VAT may be imposed in certain cases. For Estonia 9 Taxation instance, an assignment of the receivable is considered to be subject to VAT if the consideration paid or received for the receivable 9.1 Withholding Taxes. Will any part of payments on differs from the nominal value of the receivable at the time of the receivables by the obligors to the seller or the purchaser transfer. The Estonian Supreme Court has considered this to be a be subject to withholding taxes in Estonia? Does the debt collection service which is a taxable event for VAT purposes. answer depend on the nature of the receivables, whether At the same time, the receivable itself transferred from one person they bear interest, their term to maturity, or where the to another during the assignment of a claim or transfer of a debt is seller or the purchaser is located? not a taxable supply as to an amount which equals the value of the receivable since a monetary claim is not a separately consumable Estonia has applied a corporate income tax system that shifts the point benefit subject to VAT. of taxation from the moment of earning the profits to the moment of Regarding a factoring service, the taxable value of a factoring their distribution. Corporate income tax is charged on profit service is the contract fee and the fee for handling the accounts. If distributions and implicit distributions (such as fringe benefits, gifts such amounts cannot be easily identified for the purposes of VAT- and donations, transfer pricing adjustments and expenditures not chargeable supply, the tax authorities can make an assessment and related to the business activities of the company). All of the above usually the difference of nominal value and the consideration paid distributions are taxed at the rate of 21/79 of the net amount of for the receivable is treated as a taxable supply of services. The distribution, which amounts to 21% of the gross amount distributed. receivable itself is not subject to taxation, but the contract fee and Undistributed profits are not subject to corporate income tax the fee for handling the accounts shall be taxable to the Estonian regardless of whether they are invested or retained. VAT of 20%. In some cases, the payments on receivables by the obligors to the In conclusion, there is no clear practice regarding taxation seller or the purchaser can be subject to withholding taxes in concerning the sales of receivables, therefore the question of Estonia, depending also on the nature of the receivable or where the taxation should be carefully examined in each individual case. seller or the purchaser is located (low tax rate territories). Income tax must be withheld on interest income of non-residents that is significantly exceeding the amount of interest payable on 9.5 Purchaser Liability. If the seller is required to pay value similar debt obligation under the market conditions. Income tax added tax, stamp duty or other taxes upon the sale of must also be withheld on rental (or similar) income of real estate receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then located in Estonia and other property subject to entry in an Estonian will the taxing authority be able to make claims for the register. Royalty payments to non-residents and on income of non- unpaid tax against the purchaser or against the sold residents derived from rendering services in Estonia are also subject receivables or collections? to withholding tax. If the non-resident is a legal person located in a low tax rate territory, income tax is charged on all income derived According to the VAT Act, the person liable for VAT is the person from rendering services to Estonian residents, irrespective of where who creates the taxable supply as a result of the business. Thus, if the services were rendered or used. the seller does not pay the tax, the claims for unpaid tax can only be Non-residents located in countries with which Estonia has a tax made against the seller and not the purchaser or on the receivables treaty may enjoy more favourable tax treatment than the or collections. It is the purchaser’s obligation to identify whether withholding requirements described above. the seller is registered as a VAT-liable person if the purchaser deducts the input VAT amount from its VAT supply. In case of the assignment of claims or transfer of debts, the purchaser may be 9.2 Seller Tax Accounting. Does Estonia require that a specific accounting policy is adopted for tax purposes by deemed to have a VAT-chargeable supply with respect to the the seller or purchaser in the context of a securitisation? difference of the nominal value and the actual consideration paid for the transfer of debt or the assignment of a claim. If the taxable There is no special regulation or any specific accounting policy for supply and the obligation to pay VAT lies with the seller, the tax tax purposes by the seller or purchaser in the context of a authorities do not usually have sufficient grounds to place their VAT securitisation. claim against the purchaser, although one cannot fully exclude this possibility in certain exceptional cases.

9.3 Stamp Duty, etc. Does Estonia impose stamp duty or other documentary taxes on sales of receivables? 9.6 Doing Business. Assuming that the purchaser conducts no other business in Estonia, would the purchaser’s purchase of the receivables, its appointment of the seller Stamp duty is not chargeable on a sale of receivables. However, as its servicer and collection agent, or its enforcement of notary’s fees may be relevant if the sale of receivables or the receivables against the obligors, make it liable to tax establishing/transferring collateral (e.g., mortgage) is carried out in in Estonia? the presence of a notary public and stamp duties will be relevant if transferring mortgages registered in the Real Title Book. The mere fact of the purchaser’s purchase of the receivables does

128 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Attorneys at law Borenius Estonia not make the purchaser liable to tax in Estonia. However, one Acknowledgment should consider the permanent establishment risk in relation to the The authors gratefully acknowledge the assistance of Mr. Jaanus actual place it may have in Estonia where it carries out its activities Mody in the preparation of the insolvency section of this chapter collecting debts (fixed place of business) or by way of having an and Mr. Egon Talur in the preparation of the tax section of this authorised representative that carries out activities as a collection chapter. agent. If the purchaser appoints the seller as its servicer and collection agent, the seller can be considered to be a representative of a non- resident. If a representative of a non-resident operates in Estonia

and is authorised to carry out and repeatedly carries out transactions Estonia in the name of the non-resident, such non-resident is deemed to have a permanent establishment in Estonia with respect to those transactions. The profits of a permanent establishment are taxed in the same way as the income of resident legal persons. Obligations are reduced for subjects of countries with which Estonia has a double taxation treaty.

Indrek Minka Aivar Taro

Attorneys at law Borenius Attorneys at law Borenius Kawe Plaza, Pärnu road 15 Kawe Plaza, Pärnu road 15 10141 Tallinn 10141 Tallinn Estonia Estonia

Tel: +372 665 1888 Tel: +372 665 1888 Fax: +372 665 1899 Fax: +372 665 1899 Email: [email protected] Email: [email protected] URL: www.borenius.ee URL: www.borenius.ee

Indrek Minka is a senior associate specialising on matters Aivar Taro is a partner heading the firm’s Real Estate & regarding banking, securities and securities market regulations, Construction practice. as well advising syndicated lending, leveraged and acquisition Aivar Taro has acted as an expert in many complex real estate finance, also asset finance and project finance projects. Further, transactions, such as acquisitions and disposals of business and he advises on M&A transactions and general corporate industrial premises, and development projects. He also has governance such as drafting corporate governance documents long-term experience practicing banking and finance law. He and shareholders’ agreements. has, among other things, been an advisor in carrying out initial Indrek’s expertise and experience includes equity offerings, and secondary public offerings, listing of shares on the stock including IPO and SPO on the Tallinn Stock Exchange. exchange, and admission to trading on alternative markets.

Attorneys at law Borenius is one of the largest law firms in Estonia advising mainly corporate clients on all aspects of law to ensure a reliable legal platform for developing new business opportunities. Their client portfolio includes enterprises from different fields such as banking, commerce, IT, media and communications, industrial technology, manufacture, energy, real estate, construction and agriculture. The law firm is a member of Borenius Group joining approximately 200 professional lawyers in Finland, Estonia, Latvia and Lithuania. The members firms of Borenius Group are independent and separate legal entities practicing advocacy for their own account and following their respective local Bar rules.

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Roschier, Attorneys Ltd. Tatu Simula

1 Receivables Contracts Consumers may cancel most types of consumer credits during a period of 14 days from receiving the required details of the terms and conditions of the credit. 1.1 Formalities. In order to create an enforceable debt obligation of the obligor to the seller, (a) is it necessary Finnish consumer law also permits the consumer to always prepay that the sales of goods or services are evidenced by a a consumer credit and limits the costs that may be charged in this formal receivables contract; (b) are invoices alone case. There are also limitations on when the creditor is entitled to sufficient; and (c) can a receivable “contract” be deemed accelerate a consumer credit. to exist as a result of the behaviour of the parties?

1.3 Government Receivables. Where the receivables There are no requirements on a receivable contract to create an contract has been entered into with the government or a enforceable debt obligation, although documentation is government agency, are there different requirements and recommended because a written receivable contract is generally laws that apply to the sale or collection of those considered complete evidence as to the existence of the receivable. receivables? The same general rules apply to receivables evidenced by a written receivable contract or an invoice, as well as receivables agreed upon No, there are no different laws or requirements in the case of a orally or deemed to exist as a result of the behaviour of the parties. receivable contract with the government. In order for a receivable contract to qualify as a negotiable promissory note, there are certain formal requirements on the receivables contract. A consumer credit must be made in written or 2 Choice of Law – Receivables Contracts electronic form. 2.1 No Law Specified. If the seller and the obligor do not 1.2 Consumer Protections. Do Finland’s laws (a) limit rates specify a choice of law in their receivables contract, what of interest on consumer credit, loans or other kinds of are the main principles in Finland that will determine the receivables; (b) provide a statutory right to interest on late governing law of the contract? payments; (c) permit consumers to cancel receivables for a specified period of time; or (d) provide other noteworthy Finland has ratified the Rome Convention on the Law Applicable to rights to consumers with respect to receivables owing by Contractual Obligations and is also bound by the Rome I them? Regulation. Consequently, the choice of law rules set out therein would be applied. Finland has implemented Directive 2008/48/EC on credit agreements for consumers. 2.2 Base Case. If the seller and the obligor are both resident Whilst there are no specific rules limiting rates of interest, other in Finland, and the transactions giving rise to the than default interest on consumer debt as set out below, the general receivables and the payment of the receivables take principles of equity also apply to interest rates. Unless otherwise place in Finland, and the seller and the obligor choose the agreed, any due and payable receivable bears default interest at a law of Finland to govern the receivables contract, is there rate being seven (7) percentage units higher than the statutory any reason why a court in Finland would not give effect to reference rate (in March 2012: 1.0%) or at the regular interest rate their choice of law? if this is higher than the statutory default interest rate. This provision may be contracted out both to the benefit and to the No, there are no such reasons. detriment of the debtor, unless the receivable consists of consumer debt, in which case it can only be contracted out to the benefit of the consumer, i.e. any default interest exceeding the above-mentioned rate would be ineffective. In respect of consumer credits, if the regular interest rate of the loan was higher than the statutory default interest rate, the creditor may charge the higher regular interest for a maximum period of 180 days or until an enforceable court judgment is received.

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2.3 Freedom to Choose Foreign Law of Non-Resident Seller 3.4 Example 3: If (a) the seller is located in Finland but the or Obligor. If the seller is resident in Finland but the obligor is located in another country, (b) the receivable is obligor is not, or if the obligor is resident in Finland but governed by the law of the obligor’s country, (c) the seller the seller is not, and the seller and the obligor choose the sells the receivable to a purchaser located in a third foreign law of the obligor/seller to govern their receivables country, (d) the seller and the purchaser choose the law contract, will a court in Finland give effect to the choice of of the obligor’s country to govern the receivables foreign law? Are there any limitations to the recognition purchase agreement, and (e) the sale complies with the of foreign law (such as public policy or mandatory requirements of the obligor’s country, will a court in principles of law) that would typically apply in commercial Finland recognise that sale as being effective against the relationships such that between the seller and the obligor seller and other third parties (such as creditors or under the receivables contract? insolvency administrators of the seller) without the need to comply with Finland’s own sale requirements? Finland As provided by the Rome I Regulation, the parties are generally free to choose the governing law of the contract, subject to the While Finnish bankruptcy law would determine which assets are exceptions (such as mandatory consumer protection and ordre available to the creditors of the seller, the lex rei sitae principle public) provided by the Regulation. From Finnish procedure law, it would normally be applied. If the requirements of the obligor’s follows that if the parties do not provide sufficient evidence of how country are met, a court in Finland would therefore recognise the the matter would be determined under the chosen law, a Finnish sale as being effective against all the parties. court could apply Finnish law instead. 3.5 Example 4: If (a) the obligor is located in Finland but the 2.4 CISG. Is the United Nations Convention on the seller is located in another country, (b) the receivable is International Sale of Goods in effect in Finland? governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country CISG is in effect in Finland. to govern the receivables purchase agreement, and (d) the sale complies with the requirements of the seller’s country, will a court in Finland recognise that sale as 3 Choice of Law – Receivables Purchase being effective against the obligor and other third parties Agreement (such as creditors or insolvency administrators of the obligor) without the need to comply with Finland’s own sale requirements? 3.1 Base Case. Does Finland’s law generally require the sale of receivables to be governed by the same law as the law A court in Finland would recognise the sale as being effective governing the receivables themselves? If so, does that between the seller and the purchaser, and, pursuant to Article 14 of general rule apply irrespective of which law governs the the Rome I Regulation, also against the obligor. However, as receivables (i.e., Finland’s laws or foreign laws)? regards enforceability against the seller’s creditors or its successors, if the laws of the seller’s domicile refer to the laws of Finland, There is no such requirement. Finland’s sale requirements would have to be followed.

3.2 Example 1: If (a) the seller and the obligor are located in 3.6 Example 5: If (a) the seller is located in Finland Finland, (b) the receivable is governed by the law of (irrespective of the obligor’s location), (b) the receivable is Finland, (c) the seller sells the receivable to a purchaser governed by the law of Finland, (c) the seller sells the located in a third country, (d) the seller and the purchaser receivable to a purchaser located in a third country, (d) choose the law of Finland to govern the receivables the seller and the purchaser choose the law of the purchase agreement, and (e) the sale complies with the purchaser’s country to govern the receivables purchase requirements of Finland, will a court in Finland recognise agreement, and (e) the sale complies with the that sale as being effective against the seller, the obligor requirements of the purchaser’s country, will a court in and other third parties (such as creditors or insolvency Finland recognise that sale as being effective against the administrators of the seller and the obligor)? seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located Yes, the sale would be effective. in Finland and any third party creditor or insolvency administrator of any such obligor)?

3.3 Example 2: Assuming that the facts are the same as The sale would not be effective against the seller’s creditors or its Example 1, but either the obligor or the purchaser or both are located outside Finland, will a court in Finland successors unless the sale is perfected in accordance with the laws recognise that sale as being effective against the seller of the obligor’s domicile. Effectiveness against the obligor would, and other third parties (such as creditors or insolvency pursuant to Article 14 of the Rome I Regulation, be determined in administrators of the seller), or must the requirements of accordance with the law governing the receivable, being in this the obligor’s country or the purchaser’s country (or both) example Finnish law and therefore requiring a notice to the obligor be taken into account? as described in question 4.4.

Finnish courts normally apply the “lex rei sitae” principle to the effectiveness of a sale of receivables in relation to inter alia third party creditors, according to which principle effectiveness of a sale of a receivable would generally be determined in accordance with the laws of the jurisdiction of the obligor of the receivable. The requirements of the obligor’s domicile would therefore have to be complied with.

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4 Asset Sales As regards perfection of an assignment of mortgage loans, perfection is achieved either by serving the debtor a notice of assignment or by delivery of the negotiable promissory note as set out in question 4.2 4.1 Sale Methods Generally. In Finland what are the above, depending on the form of the receivables contract. The right to customary methods for a seller to sell receivables to a any collateral securing the loan is transferred to the purchaser purchaser? What is the customary terminology – is it called a sale, transfer, assignment or something else? simultaneously unless otherwise agreed either between the seller and the purchaser or between the seller and the security provider. There must be a binding sale agreement between the seller and the A consumer must be notified of the transfer (even if, e.g., the purchaser. No formal requirements exist for a sale agreement, but, transfer is otherwise intended to be perfected only on the

Finland for evidence purposes, a written agreement is of course occurrence of a trigger event), unless the seller continues to act as a recommendable. The terms sale, transfer and assignment are all representative of the seller vis-a-vis the consumer. commonly used. 4.4 Obligor Notification or Consent. Must the seller or the 4.2 Perfection Generally. What formalities are required purchaser notify obligors of the sale of receivables in generally for perfecting a sale of receivables? Are there order for the sale to be effective against the obligors any additional or other formalities required for the sale of and/or creditors of the seller? Must the seller or the receivables to be perfected against any subsequent good purchaser obtain the obligors’ consent to the sale of faith purchasers for value of the same receivables from receivables in order for the sale to be an effective sale the seller? against the obligors? Does the answer to this question vary if (a) the receivables contract does not prohibit To achieve effectiveness of a transfer of ownership of receivables in assignment but does not expressly permit assignment; or (b) the receivables contract expressly prohibits relation to third party creditors of the seller, in addition to a valid assignment? Whether or not notice is required to perfect and binding sale agreement between the seller and the purchaser, a sale, are there any benefits to giving notice – such as there must be a due perfection of the transfer in accordance with the cutting off obligor set-off rights and other obligor law applicable on the basis of the “lex rei sitae” rule and where that defences? law is Finnish law further in accordance with the rules applicable to the relevant category of asset. Under Finnish law, the transfer of a By default, receivables are freely transferable without the obligor’s receivable is perfected by means of serving the debtor with a consent, and this is the case if transfers are not expressly prohibited qualifying notice of assignment or, in respect of receivables in the or permitted. However, the parties are free to restrict the form of negotiable promissory notes, by a physical transfer of the transferability or to agree that the obligor’s consent is required. The promissory note to the possession of the purchaser, with the insolvency of the obligor does not affect the situation (unless exception that where the seller is a bank, the sale of a promissory contractually so agreed), while the seller’s insolvency would note is effective against other creditors of that bank even though the generally prevent the transfer from being perfected by the notice. promissory note remains in the custody of that bank. A notice of The notice of assignment and, in the case of receivables with restricted assignment should clearly state that the receivable (which must be transferability, the consent of the obligor, are necessary: (i) to allow sufficiently individualised) has been transferred, and state the name the purchaser to enforce the debts directly against the obligors; (ii) to of the transferee and the date of the transfer. There are no other prevent the obligor and the seller from amending the receivable formalities required to ensure effectiveness of the sale of contract without the purchaser’s consent; (iii) to restrict the obligor’s receivables against subsequent purchasers that were not and should right to set off receivables against the obligations of the seller to the not have been aware of the first sale having taken place. obligor; and (iv) to require the obligors to pay the purchaser rather As regards a transfer of receivables that have not yet been earned, than the seller. Even after receipt of the notice of assignment, the i.e. future receivables, a one-off notification to the debtor at the obligor has, under certain circumstances, the right to set off outset is not likely to suffice but instead each individual assignment receivables against the obligations of the seller to the obligor. should be separately notified to the relevant debtor upon the As regards negotiable promissory notes, it is not a formal requirement receivable becoming earned. Due to commercial considerations, to notify the obligor of the sale in order for the sale to be effective the parties may sometimes feel comfortable with notifying the against the obligor, but instead the promissory notes must be delivered debtors of the transfer only upon the occurrence of a trigger event. to the purchaser to achieve the same effect. However, to avoid that The critical question then is when the trigger event occurs, so as to payments are made to the seller or that the receivables contract is enable timely perfection prior to insolvency. amended by the seller and the obligor, it is also recommended that an obligor under a negotiable promissory note be notified. 4.3 Perfection for Promissory Notes, etc. What additional or different requirements for sale and perfection apply to 4.5 Notice Mechanics. If notice is to be delivered to obligors, sales of promissory notes, mortgage loans, consumer whether at the time of sale or later, are there any loans or marketable debt securities? requirements regarding the form the notice must take or how it must be delivered? Is there any time limit beyond The perfection of a transfer of ownership in negotiable promissory which notice is ineffective – for example, can a notice of notes is carried out by physical delivery of the promissory notes to sale be delivered after the sale, and can notice be the purchaser, with the exception that where the seller is a bank, the delivered after insolvency proceedings against the obligor sale of a promissory note is effective against other creditors of that have commenced? Does the notice apply only to specific bank even though the promissory note remains in the custody of receivables or can it apply to any and all (including future) that bank. Marketable debt securities are typically dematerialised receivables? Are there any other limitations or in the form of book-entry securities, and perfection of a transfer of considerations? ownership in book-entry securities is carried out by registering the book-entry securities on the purchaser’s book-entry account. The notice must sufficiently indentify the transferred receivables

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and the transferee and, as discussed below in more detail, should legalistic, the substance-over-form doctrine is well-established instruct the obligor to pay only to the transferee. It is, however, when assessing whether a sale of an asset should be considered as recommended that the notice is delivered in writing for evidence having been entered into for the purposes of creating a security purposes. Further, it is also recommended that a written interest over the asset in question. In a receivables securitisation, acknowledgment of the notice is required so as to confirm the the insolvency estate of the seller could argue that the parties did not obligor’s awareness of the sale. In respect of receivables evidenced intend to transfer ownership of the receivables, but rather to create by invoices, the usual practice is to print or stamp the notification security over the receivables in order to secure the construed loan and payment instructions on the invoice. advanced by the purchaser to the seller. Unfortunately, Finnish case Future receivables can be included in a notice, but it is not clear law does not clearly specify the grounds for re-characterising a under Finnish law whether a further notice would nevertheless be particular transaction. As a matter of principle, the key question is Finland required to be delivered to the obligor after the receivable has been whether the economic risks and rewards associated with ownership earned to achieve perfection. Referring to question 4.10, it must be have, to a sufficient extent, been transferred to the purchaser. noted that a transfer of ‘future’ or ‘unearned’ receivables is Various re-purchase obligations, excessive reserve requirements generally not binding upon the insolvency of the Finnish seller and other similar features often encountered in securitisation despite a sale agreement which is binding between the parties. transactions all serve as an indication that the seller has retained economic interest in the receivables – thus, they may endanger the A notice delivered after the commencement of insolvency true sale analysis. proceedings against the seller would be regarded as ineffective, and the receivables would be deemed to belong to the seller’s estate. Various collection agency arrangements may cause difficulties if the seller becomes insolvent. First, the continued receipt of collections by the seller could effectively be construed as evidence 4.6 Restrictions on Assignment; Liability to Obligor. Are that the seller has not been deprived of its control over the restrictions in receivables contracts prohibiting sale or receivables. This could be argued to adversely affect the true sale. assignment generally enforceable in Finland? Are there Second, if collections have been co-mingled with the seller’s other exceptions to this rule (e.g., for contracts between commercial entities)? If Finland recognises prohibitions funds, then the collection funds would be considered part of the on sale or assignment and the seller nevertheless sells assets of the seller’s insolvency estate. To overcome these receivables to the purchaser, will either the seller or the challenges, a separate collection account should be established and purchaser be liable to the obligor for breach of contract or collections accruing from the securitised receivables should be on any other basis? channelled to this separate bank account. Furthermore, effective controls should be put in place to prevent the seller from dealing As discussed above, the parties are free to restrict assignment and with the money held in the collection account. Apart from such restrictions are generally enforceable. The seller would be contractual undertakings to such effect, there should be a cash liable for breach of contract to the obligor. If the purchaser was sweep, preferably on a daily basis, from the collection account to a aware of the transfer prohibition, it is likely that the transfer is not seller-remote transaction bank account. As an alternative, a pledge binding on the obligor. This is less clear if the purchaser acted in could be created over the collection account. As in the case of good faith or if the assignment prohibition is unreasonable. customer-debtor transfer notifications, the use of a collection agency would normally involve a trigger event mechanism whereby, after a trigger event, collections are directly channelled 4.7 Identification. Must the sale document specifically identify into a transaction bank account which is remote from the seller. each of the receivables to be sold? If so, what specific information is required (e.g., obligor name, invoice number, invoice date, payment date, etc.)? Do the 4.9 Continuous Sales of Receivables. Can the seller agree in receivables being sold have to share objective an enforceable manner (at least prior to its insolvency) to characteristics? Alternatively, if the seller sells all of its continuous sales of receivables (i.e., sales of receivables receivables to the purchaser, is this sufficient as and when they arise)? identification of receivables? The seller can agree to continuous sales of receivables, but each Yes, the sale agreement must contain sufficient information to transfer will only become effective upon identification of the identify the transferred receivables; such information can be details receivables and be subject to the perfection requirements discussed of the underlying receivable contract or invoice and the name of the above under questions 4.2, 4.3 and 4.5 above and below under obligor but identification without the name of the obligor may also question 4.10. be possible. The receivables being sold do not have to share objective characteristics. The sale of all receivables would most likely not be sufficient identification. 4.10 Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables 4.8 Respect for Intent of Parties; Economic Effects on Sale. purchase agreement (e.g., “future flow” securitisation)? If If the parties denominate their transaction as a sale and so, how must the sale of future receivables be structured state their intent that it be a sale will this automatically be to be valid and enforceable? Is there a distinction respected or will a court enquire into the economic between future receivables that arise prior to or after the characteristics of the transaction? If the latter, what seller’s insolvency? economic characteristics of a sale, if any, might prevent the sale from being perfected? Among other things, to A transfer of ‘future’ or ‘unearned’ receivables is generally not what extent may the seller retain (a) credit risk; (b) binding upon the insolvency of the Finnish seller. Consequently, interest rate risk; and/or (c) control of collections of any receivables earned after the commencement of the seller’s receivables without jeopardising perfection? insolvency proceedings, as well as any receivables earned before the insolvency but in respect of which the transfer has not been Although Finnish civil law in general can be characterised as fairly

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perfected prior to the insolvency, would be considered the seller’s 5.4 Recognition. If the purchaser grants a security interest in property, despite a sale agreement which is binding between the receivables governed by the laws of Finland, and that parties. In determining whether a receivable is in existence or security interest is valid and perfected under the laws of whether it is unearned, the decisive factor normally is whether the the purchaser’s country, will it be treated as valid and seller has fulfilled the contractual obligation that gives rise to the perfected in Finland or must additional steps be taken in Finland? receivable. In the case of a trade receivable, for instance, the assessment is made based on whether the seller has delivered the Finnish courts normally apply the “lex rei sitae” principle to the goods to the customer-debtor, thus earning the receivable. effectiveness of a security interest in relation to inter alia third party To ensure that the transfers are effective to as great an extent as creditors, according to which principle effectiveness of a security possible, the sale should be structured so that transfers are perfected Finland interest over a receivable would generally be determined in immediately when the receivable arises and again upon the accordance with the laws of the jurisdiction of the debtor of the receivables becoming earned. However, it should be noted that the receivable. If the obligor was based in Finland, the perfection of the effectiveness of the transfer of receivables arising or earned after transfer would generally be determined in accordance with the laws the commencement of insolvency proceedings, would not be of Finland. Additional steps may therefore have to be taken. accomplished even in this structure.

5.5 Additional Formalities. What additional or different 4.11 Related Security. Must any additional formalities be requirements apply to security interests in or connected to fulfilled in order for the related security to be transferred insurance policies, promissory notes, mortgage loans, concurrently with the sale of receivables? If not all consumer loans or marketable debt securities? related security can be enforceably transferred, what methods are customarily adopted to provide the The same requirements as for a sale of such assets apply (see purchaser the benefits of such related security? questions 4.3 and 5.2) with the exception that security over marketable debt securities in the form of book-entry securities This matter is not conclusively addressed in Finnish law, but views would be created by a pledge over the book-entry account on which have been expressed in legal literature that the transfer of the such securities are recorded and such pledge would be perfected by collateral needs to be perfected in accordance with the rules recording a pledge on the book-entry account. applicable to the relevant category of assets, i.e. by serving the obligor a qualifying notice, by transfer of possession to the purchaser, or by registration. 5.6 Trusts. Does Finland recognise trusts? If not, is there a mechanism whereby collections received by the seller in respect of sold receivables can be held or be deemed to 5 Security Issues be held separate and apart from the seller’s own assets until turned over to the purchaser?

5.1 Back-up Security. Is it customary in Finland to take a Finnish law does not recognise the concept of a trust. If the seller “back-up” security interest over the seller’s ownership interest in the receivables and the related security, in the receives funds in the capacity of servicer, it may be possible to event that the sale is deemed by a court not to have been separate these collections from the seller’s own assets in an perfected? insolvency scenario if the collections are not co-mingled with the seller’s assets. In practice, a separate account would most likely be As the perfection requirements for a transfer are essentially the needed. If, on the other hand, the collections are received in error same as the perfection requirements for a security interest, back-up (i.e. the obligor, having been instructed to pay to the purchaser, security does not ease the perfection requirements (i.e. makes payments to the seller), the collections, if not co-mingled circumstances where a transfer would be considered unperfected with the seller’s own assets, would have to be turned over. Finally, but a security considered perfected are very unlikely). if the collections are paid to a bank account which has been pledged and such pledge duly perfected (i.e. the seller has no access to the account), the collections would be held separate. 5.2 Seller Security. If so, what are the formalities for the seller granting a security interest in receivables and related security under the laws of Finland, and for such 5.7 Bank Accounts. Does Finland recognise escrow security interest to be perfected? accounts? Can security be taken over a bank account located in Finland? If so, what is the typical method? The requirements are the same as for a perfected transfer of the Would courts in Finland recognise a foreign-law grant of receivables, see questions 4.2, 4.3, 4.5 and 4.11 above, in addition security (for example, an English law debenture) taken to which the security providers would have to be notified before the over a bank account located in Finland? security over security interests is given. The seller cannot pledge the security interest as security for liabilities larger than those Contractual escrow account arrangements are possible under secured by the original security interest. Finnish law, and it is also possible to take security over a bank account located in Finland. The typical method is a Finnish law pledge agreement, and the perfection requirement is notification to 5.3 Purchaser Security. If the purchaser grants security over the account bank, blocking the pledgor’s access to the bank all of its assets (including purchased receivables) in account. For practical reasons, this perfection measure is typically favour of the providers of its funding, what formalities postponed until the occurrence of a trigger event. must the purchaser comply with in Finland to grant and perfect a security interest in purchased receivables Subject to the qualifications under question 2.3 above, a Finnish governed by the laws of Finland and the related security? court would recognise a foreign law security over a bank account, provided that the creation and effectiveness of the security would The requirements are the same as for the seller; see question 5.2 above. always be determined in accordance with Finnish law where the

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account bank is a Finnish entity. provided that the assets of the purchaser are separable from the assets belonging to the seller. In the case of re-characterisation, the secured creditor may be subject to up to two months’ prohibition to 6 Insolvency Laws exercise its rights to enforce the security mentioned above.

6.1 Stay of Action. If, after a sale of receivables that is 6.3 Suspect Period (Clawback). Under what facts or otherwise perfected, the seller becomes subject to an circumstances could the insolvency official rescind or insolvency proceeding, will Finland’s insolvency laws reverse transactions that took place during a “suspect” or automatically prohibit the purchaser from collecting, “preference” period before the commencement of the transferring or otherwise exercising ownership rights over insolvency proceeding? What are the lengths of the the purchased receivables (a “stay of action”)? Does the Finland “suspect” or “preference” periods in Finland for (a) insolvency official have the ability to stay collection and transactions between unrelated parties and (b) enforcement actions until he determines that the sale is transactions between related parties? perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather than the owner of the receivables? A transaction can be revoked if the transaction unduly favours a particular creditor to the detriment of another creditor, or transfers Upon initiation of insolvency proceedings against the seller, the seller property out of the reach of the creditors, or increases the debts of may no longer dispose of its assets. In the case of a duly perfected true the debtor to the detriment of the creditors, always provided: (i) that sale, Finnish laws do not prohibit the purchaser from exercising the debtor was insolvent at the time the transaction was concluded, ownership rights over the receivables as long as the assets of the or the transaction contributed to the debtor’s insolvency; and (ii) purchaser are separable from the assets of the seller. Due perfection that the other party knew or should have known of the insolvency generally requires that the payment of receivables be directed to the or of the impact of such transaction on the debtor’s financial state, purchaser or to a third party sufficiently remote from the seller, such as well as of the circumstances due to which the transaction was as a collection agent or a bank account subject to a perfected pledge in unsuitable. If such a transaction was concluded more than five favour of the purchaser or such collection agent. As regards future years before the application for bankruptcy or reorganisation was receivables in insolvency, please see question 4.10. filed with the competent court, the transaction may be revoked only if the secured party was someone closely related to the debtor. In the event that a transfer of receivables is re-characterised by a Finnish court upon insolvency of the seller, the transfer would most In the case of recharacterisation of a receivables securitisation, any likely be treated as a loan secured by the receivables. In such case, security interest granted can also be recovered by the grantor’s the purchaser would, however, have first priority to receive bankruptcy estate or by the administrator of the grantor in payment for the ‘loan’ from the proceeds of the receivables, reorganisation, if such security interest was perfected within a provided that due perfection has been carried out prior to the certain period of time prior to the commencement of the insolvency initiation of insolvency proceedings and there are no grounds for and provided that: (i) such security interest was not agreed on at the recovery of the ‘security’. time the debt came into existence; or (ii) the transfer of possession, notice of assignment or other means of perfecting the security In reorganisation proceedings, both the business operations and the interest was not carried out without undue delay after the debts of a company may be reorganised and restructured. The origination of the debt. An administrator, receiver or creditor of the initiation of the reorganisation proceedings imposes a moratorium debtor may bring an action for recovery. The suspect period for the on all legal proceedings and other enforcement actions against the granting of security is three months between unrelated parties and debtor. The district court’s decision on the commencement of two years between related parties. reorganisation proceedings results in a general prohibition on the payment, collection and execution of debts, which applies to all creditors. No creditor, including a secured creditor, has the right to 6.4 Substantive Consolidation. Under what facts or enforce its rights in respect of any collateral, or to collect any debts circumstances, if any, could the insolvency official after the initiation of the reorganisation. The moratorium remains consolidate the assets and liabilities of the purchaser with those of the seller or its affiliates in the insolvency in force until the reorganisation plan has been confirmed. proceeding? In the case of bankruptcy, the purchaser, recharacterised as a secured creditor, would enjoy the proceeds of the receivables in If collections have been co-mingled with the seller’s other funds, respect of which the security has been perfected prior to the then the collection funds would be considered part of the assets of initiation of the insolvency proceedings to the extent necessary to the seller’s insolvency estate. Please see question 4.8, second amortise the underlying construed debt, but would have to take the paragraph. unsecured creditors’ interests into consideration when exercising any of its rights as the holder of the security interest. The insolvency official may order the enforcement of security to be 6.5 Effect of Proceedings on Future Receivables. What is the stopped for a period of up to two months if the secured creditor’s effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on right to the receivables needs to be clarified or the stay is necessary sales of receivables that have not yet come into for protecting the bankruptcy estate’s interests. existence?

6.2 Insolvency Official’s Powers. If there is no stay of action A sale (or, in case of re-characterisation, a pledge) of receivables under what circumstances, if any, does the insolvency becomes effective in relation to third party creditors of the official have the power to prohibit the purchaser’s seller/pledgor upon perfection of the sale/pledge, which can exercise of rights (by means of injunction, stay order or effectively be carried out only once the receivable has been earned. other action)? Upon initiation of insolvency proceedings, the relevant debtor may no longer dispose of its assets. Consequently, the effect of the In the case of a duly perfected true sale, under no circumstances,

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initiation of insolvency proceedings in respect of the seller/pledgor 8 Regulatory Issues of future receivables is that any receivables not earned, as well as any receivables earned but in respect of which the transfer/pledge 8.1 Required Authorisations, etc. Assuming that the has not been perfected at that time, will belong to the bankruptcy purchaser does no other business in Finland, will its estate of the seller. purchase and ownership or its collection and enforcement of receivables result in its being required to qualify to do 7 Special Rules business or to obtain any licence or its being subject to regulation as a financial institution in Finland? Does the answer to the preceding question change if the purchaser does business with other sellers in Finland? Finland 7.1 Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in Finland establishing a legal framework for securitisation Mere purchase and ownership of receivables does not result in the transactions? If so, what are the basics? purchaser being required to qualify to do business or to obtain a licence for collecting receivables. No, Finland does not have such laws. Voluntary debt collection actions, i.e. actions aiming to get the debtor to voluntarily pay the matured debt of the creditor, are 7.2 Securitisation Entities. Does Finland have laws governed by the Finnish Act on Collection of Receivables. The specifically providing for establishment of special purpose debt collection business, defined as the collection of receivables on entities for securitisation? If so, what does the law behalf of a third party, as well as the collection of the collector’s provide as to: (a) requirements for establishment and own receivables when it is apparent that such receivables have been management of such an entity; (b) legal attributes and obtained by the collector exclusively for the purpose of collecting benefits of the entity; and (c) any specific requirements as them, is, in addition to the Act on Collection of Receivables, also to the status of directors or shareholders? governed by the Finnish Debt Collection Business Act and requires a licence. No, Finland does not have such laws. The Finnish Credit Institutions Act and guidelines issued by the Finnish Financial Supervisory Authority (the “FSA”) indicate that, 7.3 Non-Recourse Clause. Will a court in Finland give effect where a Finnish special purpose entity established solely for the to a contractual provision (even if the contract’s governing purpose of acquiring and administering receivables is purchasing law is the law of another country) limiting the recourse of receivables from a Finnish credit institution on an other than parties to available funds? incidental basis, the special purpose entity may, depending on the circumstances, be considered as conducting activities requiring a A contractual limitation of the liabilities to certain funds of an entity licence required under such Act. In such circumstances, it would be would be valid as such between such entity and the other recommendable to conduct at least unofficial discussions with the contracting parties, but enforcement of such a provision could be FSA in order to ensure compliance with the Credit Institutions Act. limited by general principles of equity. If the purchaser buys receivables from multiple sellers in Finland, it is more likely that a licence under the Credit Institutions Act or the 7.4 Non-Petition Clause. Will a court in Finland give effect to Debt Collection Business Act is required and it is more likely that a contractual provision (even if the contract’s governing this service is subject to VAT (see question 9.4 below). law is the law of another country) prohibiting the parties from: (a) taking legal action against the purchaser or another person; or (b) commencing an insolvency 8.2 Servicing. Does the seller require any licences, etc., in proceeding against the purchaser or another person? order to continue to enforce and collect receivables following their sale to the purchaser, including to appear An agreement not to take legal action would as such be valid as before a court? Does a third party replacement servicer between the parties thereto, but it could easily result in an require any licences, etc., in order to enforce and collect unreasonable outcome and might therefore be unenforceable due to sold receivables? general principles of equity. As discussed above under question 8.1, licences under the Credit Institutions Act or the Debt Collection Business Act may be 7.5 Independent Director. Will a court in Finland give effect necessary. Appearing before a court does not require a separate to a contractual provision (even if the contract’s governing licence. law is the law of another country) or a provision in a party’s organisational documents prohibiting the directors from taking specified actions (including commencing an 8.3 Data Protection. Does Finland have laws restricting the insolvency proceeding) without the affirmative vote of an use or dissemination of data about or provided by independent director? obligors? If so, do these laws apply only to consumer obligors or also to enterprises? Generally the parties would be allowed to agree on such limitations, but it is unclear whether this prohibition would, e.g., cause an When dealing with receivables where the debtors are individuals, otherwise valid bankruptcy filing to be dismissed by the bankruptcy data protection is an issue to address if the transaction entails the court. The most likely outcome is that the breaching party would transfer of personal data from the seller to the special purpose be liable for damages but the action as such would stand. entity. Even if the transaction would entail some transfer of customer-related data, it should normally be possible to structure the transaction so that no filings or approvals with the data protection authorities are required. 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The Finnish Personal Data Act (the “PDA”) implements the EU receivables qualify as, e.g., account receivables from foreign trade Data Protection Directive and is a general Act applicable to the use activities or loans taken abroad, this will apply to all forms of and transfer of personal data, i.e. information concerning a private payments, including interest. individual, his or her personal characteristics and which However, there are situations in which a loan taken from, or with information can be identified as concerning such individual. the assistance of, a related party abroad could be exceptionally Pursuant to the PDA, personal data may only be processed (e.g. construed as equity and withholding tax is levied on the interest, if collected, stored, transferred) without a notification to the Finnish the debtor is held to be thinly capitalised. It may also be that a Data Protection Ombudsman if the registered person has given his receivable or interest arising as a result of a guarantee would not be or her consent to the processing. Important exemptions to this rule exempt of withholding tax. We find it unlikely that either of these are, e.g., that personal data may be processed if it is necessary in scenarios would materialise in a securitisation transaction. Finland order to perform a contract to which the data subject is a party; if Other than as stated above, the location of the purchaser, the nature the processing is necessary for compliance with a task or obligation of the receivables or their term to maturity will not affect the to which the registrar is bound by virtue of an Act or an order issued assessment of whether there is any withholding tax obligation. on the basis of an Act; or if there is a relevant connection between the data subject and the operations of the registrar, based on the fact that the data subject and the operations of the registrar are 9.2 Seller Tax Accounting. Does Finland require that a contractually connected or there is a comparable relationship specific accounting policy is adopted for tax purposes by the seller or purchaser in the context of a securitisation? between the two.

The registrar of personal data is obliged to process and store the A specific accounting policy does not need to be adopted in order to data carefully, and provide the relevant individual with the data qualify for the withholding tax exemption described in question 9.1. concerning him or her, and with information on the processing of such data if requested. Any personal data processed (e.g. collecting, storing, transferring) must be accurate and relevant for the specified 9.3 Stamp Duty, etc. Does Finland impose stamp duty or purpose of processing. The controller of the personal data shall other documentary taxes on sales of receivables? compile a description of the personal data file and keep it available to anyone. Finnish transfer tax is generally payable at a rate of 1.6% on the sale of receivables that qualify as securities for Finnish tax purposes, According to the PDA, anyone engaged in debt collection as a unless the transfer takes place through the Helsinki Stock Exchange business and using or processing personal data in this activity has to on an equivalent exchange, or if both transaction parties are non- make a detailed notification of it to the Data Protection residents. Ombudsman. However, the only debt instruments that qualify as securities for Finnish transfer tax purposes are bonds whose interest is 8.4 Consumer Protection. If the obligors are consumers, will determined based on the operating result or dividend distribution of the purchaser (including a bank acting as purchaser) be the issuer, or that entitle a share of the annual profit of the issuer. In required to comply with any consumer protection law of Finnish tax court practice, for example, convertible bonds have Finland? Briefly, what is required? been held not to qualify as a securities for Finnish transfer tax purposes. The Finnish Consumer Protection Act (the “CPA”), applicable inter alia to the provision of consumer credit, has recently been amended The transfer tax, if any, is payable by the transferee. If the to meet the requirements of the Consumer Credit Directive of 2008. transferee is a non-resident or a foreign credit institution, or a The CPA includes regulation on, e.g., the conditions for foreign investment service company having no permanent accelerating a consumer loan, the information that has to be establishment in Finland, the transferor is liable for the payment of provided to a consumer regarding the loan and the consumer’s right the tax by the transferee. to set-off against both the seller and the purchaser. 9.4 Value Added Taxes. Does Finland impose value added 8.5 Currency Restrictions. Does Finland have laws restricting tax, sales tax or other similar taxes on sales of goods or the exchange of Finland’s currency for other currencies or services, on sales of receivables or on fees for collection the making of payments in Finland’s currency to persons agent services? outside the country? Yes. Value added tax (VAT) is a general tax on consumption levied No, Finland does not have any such laws. on goods and services supplied in Finland by businesses, on the import of goods into Finland, and on intra-Community acquisitions. Basically all commercial selling of goods and services in Finland is 9 Taxation subject to VAT. The standard rate of VAT is currently 23%. Certain types of goods 9.1 Withholding Taxes. Will any part of payments on and services are excluded from VAT. Among the excluded services receivables by the obligors to the seller or the purchaser are financial and insurance services such as securities trading and be subject to withholding taxes in Finland? Does the the sale of receivables. answer depend on the nature of the receivables, whether However, collection services are not tax-exempt financial services they bear interest, their term to maturity, or where the seller or the purchaser is located? and, thus, tax at 23% is imposed on any fees paid for such services. Furthermore, if the services are rendered for a foreign entity having no permanent establishment in Finland, the fees are charged without Finnish withholding tax is generally not levied on payments on Finnish VAT on a reverse charge basis. According to the Finnish receivables to a non-resident purchaser. VAT practice, in case the initial seller continues to provide the In a typical securitisation situation, i.e. where the securitised

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collecting services in relation to the receivables transferred forward, 9.6 Doing Business. Assuming that the purchaser conducts the collecting services are exempted from VAT as financial services. no other business in Finland, would the purchaser’s Recent Finnish case law by the Helsinki Administrative Court purchase of the receivables, its appointment of the seller (23.12.2010 10/1735/6, has been appealed), evoking case law by as its servicer and collection agent, or its enforcement of the European Court of Justice (case C-305/01), may be noteworthy the receivables against the obligors, make it liable to tax in Finland? in this respect. A factoring company’s activity in which a company purchased receivables, assumed the risk of the debtor’s default and Non-residents are liable to Finnish tax only on income derived from in return invoiced its clients in respect of commission, was deemed Finland. Income derived from Finland is e.g. income from business debt collection and therefore excluded from the financial services or professional activities carried out in Finland, or dividends or exemption. Depending on the outcome of the appeal, this case may

Finland interest paid by a Finnish entity. also affect the VAT treatment of debt collection in connection with transferring receivables. Furthermore, tax on income deriving from Finland is, however, subject to mitigation based on double tax treaties. Generally, Finland’s double tax treaties follow the OECD model convention. 9.5 Purchaser Liability. If the seller is required to pay value added tax, stamp duty or other taxes upon the sale of The mere purchase and enforcement of the receivables should not, receivables (or on the sale of goods or services that give as such, create a permanent establishment or make the purchaser rise to the receivables) and the seller does not pay, then liable to tax in Finland. will the taxing authority be able to make claims for the However, should the seller be appointed as a service and collection unpaid tax against the purchaser or against the sold agent of the purchaser, a permanent establishment could be held to receivables or collections? exist for Finnish tax purposes provided that such an agent would also be authorised to conclude contracts in the name of the Claims will not be made against the purchaser merely because the purchaser, and if it would habitually exercise this authority. Should seller fails to pay its own VAT, asset transfer tax or similar tax. this be the case and the seller were regarded as the dependent agent However, the purchaser can be liable to pay VAT if a so-called of the purchaser, a permanent establishment would generally exist reverse charge mechanism is applicable. for Finnish tax purposes. If the seller were construed as the independent agent of the purchaser, a permanent establishment would generally exist for Finnish tax purposes if the service and collection services carried out by the seller would be held to go beyond the ordinary course of its business.

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Helena Viita Tatu Simula

Roschier, Attorneys Ltd. Roschier, Attorneys Ltd. Keskuskatu 7 A Keskuskatu 7 A 00100 Helsinki 00100 Helsinki Finland Finland

Tel: +358 20 506 6522 Tel: +358 20 506 6561 Fax: +358 20 506 6100 Fax: +358 20 506 6100 Email: [email protected] Email: [email protected] URL: www.roschier.com URL: www.roschier.com

Helena Viita is a senior associate at Roschier’s Finance and Tatu Simula is an associate at Roschier’s Finance and Capital Finland Capital Markets practice. She is specialised in banking & finance Markets practice. Mr. Simula has gained an LL.M. from the and insolvency & restructuring. Ms. Viita has extensive University of Helsinki in 2007 and he also holds a Master’s degree experience in leveraged finance, securitisation and debt from the Helsinki School of Economics. After joining Roschier in restructuring transactions. She also regularly advises clients in 2007, Mr. Simula has been involved in acquisition and real estate netting related questions. She is recognised as one of the leading financing as well as securitisation projects. Additionally, he has experts in banking and finance in Finland (e.g. Chambers worked in Roschier’s tax practice, where he has focused on tax Europe). structuring. Mr. Simula’s working languages are Finnish, English Ms. Viita has gained an LL.M. from the University of Helsinki in and Swedish. 2002. She joined the firm in 2002 and has been a member of the Finnish Bar Association since 2006. After joining the firm, she has gained further experience through secondments to Freshfields Bruckhaus Deringer in London and Sampo Bank plc in Helsinki. Ms. Viita’s working languages are Finnish, English and Swedish.

Roschier is one of the leading law firms in Northern Europe. The firm is located in Finland and Sweden, with its main offices in Helsinki and Stockholm, and with a regional office in Vaasa. Roschier’s Finance and Capital Markets practice is strongly focused on high-end transactions, assisting lenders and borrowers with syndicated loans, acquisition finance, asset finance and different types of structured finance. The practice undertakes a wide range of financing work, including leveraged and structured finance transactions as well as debt and equity capital markets work and the regulatory aspects of banking. The lawyers in the practice combine a high degree of specialisation with strong commercial understanding and focus on providing added value to their clients. The lawyers in the practice regularly act as lead counsel in multi-jurisdictional transactions, drawing on their close relationship with top-tier firms throughout the rest of Europe.

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Freshfields Bruckhaus Deringer LLP Laureen Gauriot

1 Receivables Contracts As regards interest on late payments, the French Civil Code provides a statutory right to interest on late payment at a minimum interest rate fixed by governmental decree on an annual basis. 1.1 Formalities. In order to create an enforceable debt obligation of the obligor to the seller, (a) is it necessary A loan granted to a consumer involves certain risks for the lenders, that the sales of goods or services are evidenced by a in particular under the provisions of the French Consumer Code. formal receivables contract; (b) are invoices alone Pursuant to those provisions (procédures de surendettement et de sufficient; and (c) can a receivable “contract” be deemed rétablissement personnel), a consumer may request and obtain, to exist as a result of the behaviour of the parties? from a competent court, a moratorium and/or reduction of its debt and related interest. Moreover, under certain circumstances and As a general principle of French law, it is not necessary that the conditions, the consumer having borrowed money from a credit seller and the debtor enter into a formal receivable contract to institution may obtain the outright cancellation of its entire debts evidence the sale of goods or services. Therefore, invoices, a owed to such credit institution. historic relationship or any other type of exchange of consent between the seller and the debtor, including by oral agreement, is 1.3 Government Receivables. Where the receivables sufficient to evidence a valid debt obligation. contract has been entered into with the government or a Notwithstanding the foregoing, the enforceability of the debt government agency, are there different requirements and obligation of the debtor to the seller is a question of evidence. laws that apply to the sale or collection of those Under French law, rules of evidence are different depending on the receivables? status of the parties and of their relationship. In summary, evidence of a relationship between commercial parties French law authorises the sale of receivables to a debtor which is a (i.e. business entities) can be brought by any means. In this respect, public body, including the government or a government agency. invoices or durable business relationships can be regarded as A sale of receivables to a public entity is not subject to specific perfectly relevant presumptions of the existence of a contract and principles. However, it is worth noting that the provisions relating therefore of a perfected debt obligation. Between non-commercial to the sale of receivables shall be combined with the specific rules parties (i.e. individuals), a written document is necessary to prove applicable to such public entities. the existence of a contract of an amount greater than EUR 1,500. As regards the validity of a sale of receivables itself, it must be Finally, if the relationship is entered into between a commercial notified to the public accountant (comptable public) of the public party and a non-commercial party, the non-commercial party shall entity to which the receivable contract refers, and must be have the right to produce evidence of a contract and therefore of a accompanied with the single original (exemplaire unique) of the perfected debt obligation by any means, whereas the commercial receivable contract, where such a contract is a public procurement. party may only use the rules of the French Civil Code. Furthermore, the French Dailly Law expressly refers to public bodies. Under the French Dailly Law, the debtor may officially 1.2 Consumer Protections. Do France’s laws (a) limit rates of accept the sale of its debt to a third party. Such an acceptance interest on consumer credit, loans or other kinds of creates a direct relationship between the debtor and the purchaser receivables; (b) provide a statutory right to interest on late and must be duly authorised by the deliberative assembly where the payments; (c) permit consumers to cancel receivables for debtor is a public body. In the specific context of public-private a specified period of time; or (d) provide other noteworthy partnership agreements, the French Monetary and Financial Code rights to consumers with respect to receivables owing by provides that such an agreement may stipulate that certain them? receivables relating to the investment costs of a project are irrevocable once the public debtor has stated that such investments Under the French Monetary and Financial Code, a loan granted to a have been made. As a consequence, after the transfer of such consumer shall not carry an interest rate higher than a specified receivables to the purchaser, it is prohibited for the debtor to set off interest rate (taux d’usure). If the interest rate does exceed such a the fraction of receivable which relates to the investment costs limit, the bank, having granted the loan, is liable to a penalty of up against any other debt. to two years’ imprisonment or a fine of up to EUR 45,000. However, such a limit does not apply to corporate loans or loans It is a long-standing principle that enforcement procedures provided granted to professionals under certain conditions. by the French Code of Civil Procedure cannot be implemented against any public entity. Therefore, the enforcement of a sale of

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receivables against any public debtors will be subject to specific by the law chosen by the parties. Thus, the seller and the debtor are administrative proceedings (the Purchaser shall ask Administrative free to choose a law other than French law to govern the receivable Courts to order an injunction, a periodic penalty payment or a fine). contract and the receivables. However this is with the proviso that, where all the other elements relevant to the situation at the time of the choice are connected with France only, such choice of law will 2 Choice of Law – Receivables Contracts not prejudice the application of mandatory rules (ordre public) in France. 2.1 No Law Specified. If the seller and the obligor do not Assuming that the debtor is not resident in France, the Rome I specify a choice of law in their receivables contract, what Regulation would apply to the potential conflict of laws between are the main principles in France that will determine the

the law of the country where the debtor is situated and French law, France governing law of the contract? being the law of the country where the seller is situated and the law governing the receivables contract. According to the Rome I France has ratified the Rome Convention, dated 19 June 1980 on Regulation, the seller and the debtor are free to choose French law the law applicable to contractual obligations (the Rome to govern the receivable contract. Therefore, the choice of French Convention), which has been implemented in Regulation (EC) No law to govern the receivables contract will be recognised as a valid 593/2008 of the European Parliament and of the Council of 17 June choice of law by a French court. 2008 on the law applicable to contractual obligations (the Rome I Regulation). According to the Rome I Regulation, when the parties Assuming the seller is not resident in France, the Rome I Regulation do not specify a choice of law, the receivables contract shall be would apply in the same terms as described in the above paragraph. governed by the law of the country with which it is “most closely Therefore, the choice of French law to govern the receivables connected”. Except in the case of certain consumer contracts, it is contract will be recognised as a valid choice of law by a French presumed that the receivables contract is “most closely connected” court. with the country where the party effecting the performance which is characteristic of the contract has, at the time the contract is 2.4 CISG. Is the United Nations Convention on the concluded, its central administration. International Sale of Goods in effect in France? However, if the receivables contract is entered into in the course of that party’s trade or profession, that country is deemed to be the The United Nations Convention on the International Sale of Goods country in which the principal place of business is situated or, was ratified by France on 27 August 1981 and entered into force on where under the terms of the receivables contract the performance 1 January 1988. is to be effected through a place of business other than the principal place of business, the country in which that other place of business 3 Choice of Law – Receivables Purchase is situated. Agreement

2.2 Base Case. If the seller and the obligor are both resident 3.1 Base Case. Does France’s law generally require the sale in France, and the transactions giving rise to the of receivables to be governed by the same law as the law receivables and the payment of the receivables take governing the receivables themselves? If so, does that place in France, and the seller and the obligor choose the general rule apply irrespective of which law governs the law of France to govern the receivables contract, is there receivables (i.e., France’s laws or foreign laws)? Are any reason why a court in France would not give effect to there any exceptions to this rule that would apply to their choice of law? receivables sale transactions? The Rome I Regulation applies, subject to certain exceptions, to French law does not require the sale of receivables to be governed commercial or civil contractual obligations in any situation involving by the same law governing the receivables. Pursuant to article 14 a choice between the laws of different countries, to the extent such of the Rome I Regulation, the law applicable to the sale of countries are Member States of the EEA and are subject to the Rome receivables can be freely chosen by the seller and the purchaser of I Regulation. In relation to the base case above, there would be no the receivables. However, article 14 provides that the law conflict of laws in the absence of relevant elements of foreign law. governing the receivables will determine a certain number of Under the provisions of the French Civil Code, the French law chosen important elements such as: the possibility to assign the receivable; by the seller and the debtors in the receivable contracts will become the relationship between the assignor and the debtor; the the mandatory law applying to their relations and such choice will be requirements for the assignment to be enforceable; and the recognised as a valid choice of law by a French court. characteristics of a satisfactory payment by the debtor.

2.3 Freedom to Choose Foreign Law of Non-Resident Seller 3.2 Example 1: If (a) the seller and the obligor are located in or Obligor. If the seller is resident in France but the France, (b) the receivable is governed by the law of obligor is not, or if the obligor is resident France but the France, (c) the seller sells the receivable to a purchaser seller is not, and the seller and the obligor choose the located in a third country, (d) the seller and the purchaser foreign law of the obligor/seller to govern their receivables choose the law of France to govern the receivables contract, will a court in France give effect to the choice of purchase agreement, and (e) the sale complies with the foreign law? Are there any limitations to the recognition requirements of France, will a court in France recognise of foreign law (such as public policy or mandatory that sale as being effective against the seller, the obligor principles of law) that would typically apply in commercial and other third parties (such as creditors or insolvency relationships such that between the seller and the obligor administrators of the seller and the obligor)? under the receivables contract?

According to the Rome I Regulation, a contract shall be governed A French court will recognised such a sale as effective against the seller, the obligor and other third parties. This, however, assumes

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that the purchaser is duly authorised to acquire receivables in 3.6 Example 5: If (a) the seller is located in France France (see question 8.1) and that the law applicable to it would not (irrespective of the obligor’s location), (b) the receivable is conflict French law. The insolvency administrator is not normally governed by the law of France, (c) the seller sells the considered as being a third party. It may have some grounds to receivable to a purchaser located in a third country, (d) invalidate an assignment of receivables in certain circumstances the seller and the purchaser choose the law of the purchaser’s country to govern the receivables purchase (see question 6.3) but it is the continuation of the seller and, agreement, and (e) the sale complies with the therefore, it is bound by the assignment to the same extent as the requirements of the purchaser’s country, will a court in seller. France recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located France 3.3 Example 2: Assuming that the facts are the same as in France and any third party creditor or insolvency Example 1, but either the obligor or the purchaser or both administrator of any such obligor)? are located outside France, will a court in France recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency Assuming that the Rome I Regulation is applicable, such administrators of the seller), or must the requirements of assignment would be valid between the seller and the purchaser. the obligor’s country or the purchaser’s country (or both) However, should the requirement for the sale being enforceable be taken into account? against the obligor under the law of the purchaser’s country and under the law governing the receivable differ, such assignment Assuming that the Rome I Regulation is applicable, such might not be enforceable against the said obligor. In such example, assignment would be valid between the seller and the purchaser and with regards to the enforceability against third parties not being enforceable against the obligor. With regards to the enforceability dealt with by the Rome I Regulation, depending on the countries against third parties not being dealt with by the Rome I Regulation, involved, the situation will be unclear and potentially difficult to depending on the countries involved, the situation will be unclear resolve. Note that the same assumptions as that referred to in and potentially difficult to resolve. The same assumptions as that question 3.2 will apply. referred to in question 3.2 will apply. 4 Asset Sales 3.4 Example 3: If (a) the seller is located in France but the obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, (c) the seller 4.1 Sale Methods Generally. In France what are the sells the receivable to a purchaser located in a third customary methods for a seller to sell receivables to a country, (d) the seller and the purchaser choose the law purchaser? What is the customary terminology – is it of the obligor’s country to govern the receivables called a sale, transfer, assignment or something else? purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in Firstly, several conditions must be complied with in respect of the France recognise that sale as being effective against the receivables that are intended to be sold by a seller to a purchaser: seller and other third parties (such as creditors or (a) the receivables must exist now or in the future; insolvency administrators of the seller) without the need to comply with France’s own sale requirements? (b) the receivables must belong to the seller; and (c) the receivables must be identified and individualised or be The answer to this question is similar to question 3.3. capable of being identified and individualised. Secondly, the status of the purchaser determines the method of sale 3.5 Example 4: If (a) the obligor is located in France but the and the conditions for the sale of the receivables. In this respect, the seller is located in another country, (b) the receivable is sale of the receivables must take the form of: governed by the law of the seller’s country, (c) the seller (i) an assignment under the common regime of articles 1689 et and the purchaser choose the law of the seller’s country seq. of the French Civil Code. The sale is valid between the to govern the receivables purchase agreement, and (d) seller and the purchaser but enforceable against third parties, the sale complies with the requirements of the seller’s subject to either the debtors being notified of the sale by a country, will a court in France recognise that sale as court bailiff (voie d’huissier) or the acceptance of the sale by being effective against the obligor and other third parties the debtors in a deed executed before a public notary (acte (such as creditors or insolvency administrators of the authentique). Assuming that the debtor is identified, there obligor) without the need to comply with France’s own are no restrictions in respect of the type of receivables that sale requirements? can be assigned pursuant to the relevant provisions of the French Civil Code or in respect of the status of the purchaser. The answer to this question is mainly dealt with by the laws of the Given the costs related thereto (around EUR 250 per debtor relevant country. Should this country be France, the answer to this if a notification is served by court bailiff), this method of question is similar to the answers in question 3.3. assignment is not often used in the context of securitisation transactions; (ii) an assignment by way of subrogation pursuant to articles 1249 et seq. of the French Civil Code. Under this method, a third party (the subrogé) pays the initial creditor (the subrogeant) and takes over the initial creditor’s rights against the debtor. The subrogation must be express and must occur at the time of the payment. As from the date of the subrogation, which shall coincide with the delivery of a formal receipt by the initial creditor to the third party (quittance subrogative), the transfer of the initial creditor’s rights against the debtor to the third party shall be effective

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and enforceable against the debtor without any further The terminology varies; transfer, sale or assignment are frequently formalities. Assuming that the debtor is identified, there are used. From a legal perspective, these are equal. no restrictions in respect of the type of receivables that can be assigned by way of subrogation or in respect of the status of the purchaser. However, the initial creditor’s rights 4.2 Perfection Generally. What formalities are required against the debtor shall be transferred to the new creditor generally for perfecting (i.e., making enforceable against only up to the amount paid by it. In the context of a other creditors of the seller) a sale of receivables? Are securitisation transaction, the constraints of the date of the there any additional or other formalities required for the subrogation and of the amount paid at the time of the sale of receivables to be perfected against any subrogation may raise issues in connection with the sale of subsequent good faith purchasers for value of the same receivables from the seller?

receivables with a discount purchase price or a deferred France purchase price; (iii) an assignment under the French Dailly Law pursuant to articles In order for the sale of receivables to be perfected against third parties, L. 313-23 to L. 313-34 of the French Monetary and Financial including any later purchaser, the formalities required under the Code. The assignment of the receivables is performed by way various methods of assignment described in question 4.1 must be of a single transfer document (acte de cession) exchanged complied with. In this respect, the only method of assignment that between the seller and the purchaser. The assignment is will require the performance of formalities is the assignment under the effective between the parties and enforceable against third general regime of the French Civil Code (i.e. debtors being notified by parties as from the date affixed by the purchaser on such way of a court bailiff or acceptance of the assignment by the debtors transfer document without any further formalities. The in a deed executed before a public notary). provisions of the French Monetary and Financial Code have been amended in connection with the Dailly Law to secure the sale of future receivables and to develop the sale of receivables 4.3 Perfection for Promissory Notes, etc. What additional or in the context of international financing transactions. Despite different requirements for sale and perfection apply to these recent evolutions, there are still some restrictions as to the sales of promissory notes, mortgage loans, consumer type of receivables that can be sold under this method and as to loans or marketable debt securities? the status of the purchaser. The receivables must arise from a “professional” relationship between the seller and the debtor, Generally speaking, the requirements for the sale and perfection of and the purchaser must be a credit institution duly licensed in mortgage loans, consumer loans, promissory notes or debt France or an EU-passported credit institution; securities are the following: (iv) an assignment under the French Securitisation Law pursuant to (i) promissory notes are transferred by way of endorsement for the articles L. 214-42-1 to L. 214-49-14 of the French Monetary benefit of a credit institution; the endorsement transfers the and Financial Code. The assignment of the receivables is underlying debt to the new holder of such promissory notes; performed by way of a single transfer document (bordereau) exchanged between the seller and the purchaser. The (ii) marketable debt securities are transferred by way of a assignment is effective between the parties and enforceable transfer order (ordre de mouvement); and against third parties as from the date affixed on such transfer (iii) mortgage loans and consumer loans are transferred in document without any further formalities. As for the method of accordance with question 4.1 without the debtor’s consent assignment referred to in (iii) above, the provisions of the depending on the method of assignment, and the transfer of French Monetary and Financial Code allow the sale of future the mortgage securing the loans must be registered in the receivables and the sale of receivables in the context of name of the purchaser (except under certain circumstances if international securitisation transactions. There are no the mortgage loans are materialised by specific instruments restrictions as to the type of receivables that can be sold under such as copie exécutoire à ordre). this method. However, the purchaser must be a French fonds However, if the sale of the instruments referred to in (iii) above is commun de titrisation or FCT, which is a co-ownership entity without legal personality jointly created by a management performed under the provisions of the French Dailly Law, the company and a custodian. There are many advantages in using French SCF Law, the French SFH Law or the French Securitisation this method, including the fact that all related security interests Law to a credit institution, a SCF, a SFH, a FCT or a SDT, then in connection with the purchased receivables are automatically there are no formalities required in order to transfer the mortgage or transferred to the FCT without any further formalities, and that other security interests securing the loans. the FCT is the only French entity qualifying as a bankruptcy- remote vehicle for rating purposes. Alternatively, the purchaser may be set up under the form of a securitisation company 4.4 Obligor Notification or Consent. Must the seller or the (société de titrisation or SDT). In this case, the SDT is a purchaser notify obligors of the sale of receivables in commercial company benefiting from the same rules as for a order for the sale to be effective against the obligors FCT but being subject to a different tax treatment. From and/or creditors of the seller? Must the seller or the experience, an FCT or an SDT is the ideal tool for international purchaser obtain the obligors’ consent to the sale of securitisation transactions; or receivables in order for the sale to be an effective sale against the obligors? Does the answer to this question (v) in the case of mortgage loan receivables or receivables on vary if (a) the receivables contract does not prohibit public entities, it should be noted that another method of assignment but does not expressly permit assignment; or assignment is provided by articles L. 515-13 et seq. or in case (b) the receivables contract expressly prohibits of mortgage loans receivables only, articles L.515-34 et seq. assignment? Are there any limitations regarding the of the French Monetary and Financial Code. Basically, the purchaser notifying the obligor of the sale of receivables conditions and procedures of the assignment are the same as even after the insolvency of the seller or the obligor? the assignment under the French Dailly Law or the French Whether or not notice is required to perfect a sale, are Securitisation Law. However, the Purchaser must be a there any benefits to giving notice – such as cutting off mortgage company (société de crédit foncier (SCF) or a obligor set-off rights and other obligor defences? société de financement de l’habitat (SFH)), which are French financial institutions licensed by the French banking authorities with a limited purpose and structured as Whether or not the notification and/or the consent of the debtors is bankruptcy-remote entities. required for the sale to be enforceable against the debtors will ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 143 © Published and reproduced with kind permission by Global Legal Group Ltd, London Freshfields Bruckhaus Deringer LLP France

depend on the method of the assignment. Under the common stating that a party will only be allowed to assign the said receivables regime of the French Civil Code, the sale will be enforceable after having obtained the consent of the other party as to the identity against the debtors upon a notification being served on them by a of the assignee. Such provisions are valid but will not be enforceable court bailiff. Under the French Dailly Law or the French against the purchaser if it cannot be proven that the latter was aware Securitisation Law, the sale will be enforceable against the debtors of the existence of such a restriction. as from the date of the sale without any requirement to notify them. If (i) the receivables contract is entered into between the seller and a In all situations, notification of the assignment to the debtor freezes non-commercial party (i.e. customer) or if the receivables contract the right of set-off, (if any) of the debtor against the purchaser. contains provisions limiting the assignability of the receivables, for Under French law, in the absence of any provision of the instance by stating that a party will only be allowed to assign the said

France receivables contract expressly prohibiting assignment, the receivables after having obtained the consent of the other party as to receivables may be freely assigned even without the consent of the the identity of the assignee, and (ii) the purchaser is aware, as at the debtors, except in respect of the receivables for which French law date it purchased the receivables, of the existing restrictions as to the prohibits the assignment (e.g. receivables relating to alimony). assignment of the receivables, it might, pursuant to the provisions of In addition, the French Commercial Code (article L. 442-6-II-c) the French Civil Code and according to certain French court decisions, provides that any clause of the receivables contract prohibiting the be liable for any damage caused to the debtors for having knowingly assignment to any third party of the receivables arising from such contributed to the violation of the provisions agreed between the seller contract is null and void if such receivables contract is entered into and debtors. between commercial parties (which exclude receivables contracts Moreover, in such case, the fact of having assigned the receivables entered with consumers). without prior consent of the debtors would constitute a breach of However, the parties may still contractually limit the assignability contract by the seller. Such contractual breach could give rise to a of the receivables arising from the receivables contract, for instance claim for damages of the debtors against the seller pursuant to the by stating that a party will only be allowed to assign the said provisions of the French Civil Code. The debtors having a claim receivables after having obtained the consent of the other party as against the seller, together with any consequent set-off right, may to the identity of the assignee. cause the debtors to be or become non-eligible for the assignment.

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) receivables? Are there any other limitations or Assuming that the sale of the receivables is performed in accordance considerations? with the provisions of the French Dailly Law, the French SCF Law, the French SFH Law or the French Securitisation Law to a credit [Apart from the French Dailly Law which provides for a specific institution, a SCF, a SFH, a FCT or a SDT, the sale document (acte de notification form] the form of notice is not regulated. In all cases, cession) must contain the following mandatory information: it must be in writing and detailed enough to make it clear which (a) references to the relevant provisions of the law that governs the receivables have been sold, especially in relation to future sale document; receivables. It is generally agreed that the notification of the debtor (b) identification of the purchaser; and after the opening of insolvency proceedings against the seller is (c) identification of each receivable subject to the sale document; ineffective if the assignment took the form of the common regime each receivable must be sufficiently identified and of articles 1689 et seq. of the French Civil Code. When other legal individualised in precise detail, for instance the designation of means of assignment (see question 4.1) are used, notification of the the debtor, the amount or the maturity of the receivable (this list debtors can validly be made after the bankruptcy of the seller. being given as an example by the law). When the sale is made by a computerised process (procédé informatique) that allows the identification of receivables, then the sale document shall 4.6 Restrictions on Assignment; Liability to Obligor. Are only mention the means by which the receivables are restrictions in receivables contracts prohibiting sale or transferred, identified and individualised and an estimate of assignment generally enforceable in France? Are there their number and total amount. exceptions to this rule (e.g., for contracts between commercial entities)? If France recognises prohibitions on sale or assignment and the seller nevertheless sells 4.8 Respect for Intent of Parties; Economic Effects on Sale. receivables to the purchaser, will either the seller or the If the parties denominate their transaction as a sale and purchaser be liable to the obligor for breach of contract or state their intent that it be a sale will this automatically be on any other basis? respected or will a court enquire into the economic characteristics of the transaction? If the latter, what The French Commercial Code (article L. 442-6-II-c) provides that any economic characteristics of a sale, if any, might prevent clause of the receivables contract prohibiting the assignment to any the sale from being perfected? Among other things, to third party of the receivables arising from such contract is null and what extent may the seller retain (a) credit risk; (b) interest rate risk; and/or (c) control of collections of void if such receivables contract is entered into between commercial receivables without jeopardising perfection? parties (which exclude receivables contract entered with consumers). However, the parties may still contractually limit the assignability of Under French law, the courts are not bound by the qualification the receivables arising from the receivables contract, for instance by

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given by the parties. Pursuant to article 12 of the French Civil 4.11 Related Security. Must any additional formalities be Procedure Code, it belongs to the judge to give or restore the fulfilled in order for the related security to be transferred qualification of an agreement, without taking into account the concurrently with the sale of receivables? If not all qualification given by the parties. In doing so, the judge will related security can be enforceably transferred, what analyse the agreement and its core elements, and its “économie” i.e. methods are customarily adopted to provide the purchaser the benefits of such related security? the reciprocal obligations of the parties.

In relation to perfection, the sale of receivables is perfected under Assuming that the sale of receivables is performed under the French the various methods of assignment described in question 4.1, Dailly Law, the French Securitisation Law, the French SCF Law or subject to the completion of the relevant formalities. Upon such the French SFH Law, all related security and ancillary rights will be formalities (e.g. execution of the transfer document under the automatically and without formality (de plein droit) transferred to France French Dailly Law, the French SCF, the French SFH or the French the purchaser, including in respect of mortgages or other registered Securitisation Law), the receivables cease to belong to the seller security interest. Such transfer will be enforceable as from the date and are legally transferred to the purchaser. The fact that the seller of the sale of the receivables. retains certain risks (credit, interest rate, dilutions, etc.) and may, to a certain extent, control the collections received in its capacity as servicer on behalf of the purchaser, has no impact on the perfection 5 Security Issues of the sale. 5.1 Back-up Security. Is it customary in France to take a 4.9 Continuous Sales of Receivables. Can the seller agree in “back-up” security interest over the seller’s ownership an enforceable manner (at least prior to its insolvency) to interest in the receivables and the related security, in the continuous sales of receivables (i.e., sales of receivables event that the sale is deemed by a court not to have been as and when they arise)? perfected?

French securitisation transactions are generally structured to It is not customary in France to take a “back-up” security interest provide a commitment from the seller to assign over a certain over the seller’s ownership interest in the receivables and the period of time (revolving period) all or part of the receivables it related security. To our knowledge, subject to “covered bond” type owns. Such commitment is enforceable against the seller until its structures, no securitisation transaction implemented in France has insolvency. Upon insolvency of the seller, the insolvency official used such mechanism to secure the risk that a sale of receivables is will have the option either to continue or to terminate such deemed by a court not to have been perfected. commitment depending on the circumstances. The option of the insolvency official is, however, subject to a formal procedure set 5.2 Seller Security. If so, what are the formalities for the out by the French Commercial Code. seller granting a security interest in receivables and related security under the laws of France, and for such security interest to be perfected? 4.10 Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables See question 5.1. purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured 5.3 Purchaser Security. If the purchaser grants security over to be valid and enforceable? In that regard, is there a all of its assets (including purchased receivables) in distinction between receivables that arise prior to or after favour of the providers of its funding, what formalities the seller’s insolvency? must the purchaser comply with in France to grant and perfect a security interest in purchased receivables The French Securitisation Law specifically provides that the sale of governed by the laws of France and the related security? the receivables that come into existence after the date of the sale contract is not affected by the commencement of insolvency The French Civil Code provides for a simple procedure to pledge proceedings against the seller. According to the French receivables. Such pledge must take the form of a written agreement Securitisation Law, the sale is perfected on the date of execution of which identifies the pledged receivables (or which includes the the transfer document irrespective of the date on which the means of identification of the receivables in case of future receivables come into existence (date de naissance), the date on receivables). Such pledge is valid between the pledgor and the which they become due (date d’échéance) or the date on which they pledgee and enforceable against third parties upon signing. It is become due and payable (date d’exigibilité), including upon an enforceable against the debtors only upon notification. insolvency proceeding of the seller. The so-called “financial guarantee regime”, resulting from the The French Securitisation Law has been amended a number of European Directive on financial collateral, provides for an even times over the years, in particular, in order to ease the assignment more simplified regime which resists bankruptcy of the pledgor but of future receivables and to ensure enforceability, even in relation which is only available to financial institutions (which include, for to future receivables which are sold before, but which come into the purpose of this specific regime, French securitisation vehicles). existence after, bankruptcy of the seller. Thus, the law includes crystal clear provisions to that effect and no specific legal structuring is necessary.

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5.4 Recognition. If the purchaser grants a security interest in account. Pursuant to articles 2358 et seq. of the French Civil Code, receivables governed by the laws of France, and that the seller may grant a security interest on the balance of a bank security interest is valid and perfected under the laws of account (nantissement de compte bancaire) in accordance with the the purchaser’s country, will it be treated as valid and principles applicable to pledges over receivables (nantissement de perfected in France or must additional steps be taken in créances). France? The French Monetary and Financial Code also provides for specific It is generally agreed that a pledge over French assets should be forms of pledge over bank accounts known as garanties financières governed by French law. Accordingly, the situation described in which provide, in certain circumstances, a better protection in case this question is to be avoided. of bankruptcy of the debtor.

France The law applicable to charges (sûretés réelles) under French law is, as a matter of principle, the law of location (lex rei sitae) of the asset 5.5 Additional Formalities. What additional or different (either movable or immovable). Similarly, financial guarantees requirements apply to security interests in or connected to promissory notes, mortgage loans, consumer loans or under Directive 2002/47/CE are governed by the law of the marketable debt securities? Member State in which the financial instruments account is located. Therefore, in case a French bank account is subject to a security Under French law, depending on the type of assets and the legal interest, the law of such pledge shall be French law, according to the status of the pledgor and the pledgee, additional or specific lex rei sitae and by analogy to the provisions on financial formalities might be required on a case by case basis. guarantees. French courts are generally reluctant to recognise foreign security interests over assets located in France. They set up a series of requirements based on the principle that charges (sûretés 5.6 Trusts. Does France recognise trusts? If not, is there a réelles) are enumerated to a limited extent under French law mechanism whereby collections received by the seller in (numerus clausus). Hence, the foreign security interest shall respect of sold receivables can be held or be deemed to correspond to a type of security interest recognised in France and its be held separate and apart from the seller’s own assets until turned over to the purchaser? validity and enforceability requirements shall be similar to those requested under French law. France has not yet ratified the 1985 international convention relating to the law applicable to trust and their recognition. 6 Insolvency Laws Accordingly, trusts are generally not recognised under French law, bearing in mind that the situation evolves slowly; in particular, trusts have been expressly mentioned in recent tax laws and a court 6.1 Stay of Action. If, after a sale of receivables that is decision known as the “Belvédère” case recently recognised the otherwise perfected, the seller becomes subject to an insolvency proceeding, will France insolvency laws capacity of a trust to represent creditors in the context of a parallel automatically prohibit the purchaser from collecting, debt. In addition, a similar concept has been recently introduced transferring or otherwise exercising ownership rights over into the French Civil Code. The fiducie is a mechanism which the purchased receivables (“automatic stay”)? Does the allows a party (constituant) to isolate assets into a special-purpose insolvency official have the ability to stay collection and fund (the fiducie) which is managed by a fiduciary (fiduciaire) to enforcement actions until he determines that the sale is the benefit of the constituant or a third party beneficiary. The perfected? Would the answer be different if the fiducie is an agreement. This mechanism is generally not used in purchaser is deemed to only be a secured party rather connection with securitisation transactions. A fiducie is either set than the owner of the receivables? up for assets management purposes or as a security. The commencement of French insolvency proceedings (i.e. The French securitisation law has introduced a mechanism to secure safeguard, reorganisation or liquidation proceedings) against the the collections received by the seller in connection with the sold seller after the sale of receivables should not prohibit the purchaser receivables. Pursuant to articles L.214-46-1 and D.214-103 of the from collecting, transferring or otherwise exercising ownership French Monetary and Financial Code, specially dedicated bank rights over the receivables, provided that the sale is performed accounts are set up in the books of the collection account banks of under the French Dailly Law, the French SCF Law, the French SFH the seller to receive the collections in respect of the sold receivables Law or the French Securitisation Law to a credit institution, a SCF, and whereby the seller agrees to specially dedicate the collection a SFH, a FCT or a SDT. From an insolvency law point of view, the accounts to the FCT or the SDT. Consequently, the management sale is valid and enforceable against third parties (including an company will have the right, subject to the documentation of the insolvency official) as from the date of the sale document, and transaction, to use the amounts credited into such account, as from qualifies as a true sale by virtue of law. the date of such agreement. Creditors of the seller will not be able to claim any of the sums collected into this account, under any In respect of the sale of future receivables (i.e. receivables that arise circumstances including the opening of insolvency proceedings after the seller becomes subject to an insolvency proceeding). The against the seller. sale of such receivables by way of a Dailly, SCF, SFH, FCT or SDT sale document (acte de cession) should not be affected by the commencement of French insolvency proceedings against the seller 5.7 Bank Accounts. Does France recognise escrow as such principle is clearly stated in the law. However, recent court accounts? Can security be taken over a bank account decisions may be seen as challenging this principle, drawing a located in France? If so, what is the typical method? Would courts in France recognise a foreign-law grant of distinction between receivables which arise from a milestone security (for example, an English law debenture) taken agreement (contrat à execution successive) or another type of over a bank account located in France? agreement, outright assignment or assignment by way of security and, possibly, notified debtors and other debtors. Under French law, a security interest may be taken over a bank

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6.2 Insolvency Official’s Powers. If there is no automatic 7.2 Securitisation Entities. Does France have laws stay, under what circumstances, if any, does the specifically providing for establishment of special purpose insolvency official have the power to prohibit the entities for securitisation? If so, what does the law purchaser’s exercise of rights (by means of injunction, provide as to: (a) requirements for establishment and stay order or other action)? management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as The insolvency official could not prohibit exercise of rights by the to the status of directors or shareholders? purchaser of the receivables by means of injunction, stay order or other action (but see question 6.1). The French Securitisation Law created the fonds communs de titrisation (literally, a ‘common pool of securitisation’, although a

better translation would be ‘mutual debt fund’). The FCT is a co- France 6.3 Suspect Period (Clawback). Under what facts or ownership vehicle whose sole purpose is the acquisition of debt circumstances could the insolvency official rescind or receivables. The FCT does not have separate legal personality. It reverse transactions that took place during a “suspect” or “preference” period before the commencement of the may consist of several ring-fenced ‘compartments’. insolvency proceeding? What are the lengths of the The FCT must be constituted jointly by a management company “suspect” or “preference” periods in France for (a) and a custodian. The management company is either an investment transactions between unrelated parties and (b) management company governed by articles L.532-9 et seq. of the transactions between related parties? French Monetary and Financial Code or a management company of fonds communs de créances (common pool of receivables) In the context of reorganisation or liquidation proceedings (but not governed by article L.214-48 in the version before Ordonnance safeguard proceedings), a sale of receivables may be challenged by n°2008-556 dated 13 June 2008. the receiver during a so-called “suspect” period (période suspecte) The custodian is a credit institution incorporated in the European of up to 18 months prior to the opening of insolvency proceedings Economic Area or any institution approved by the French if the insolvency official can establish that the sale was made for government. The management company and the custodian play an inadequate value, or if the purchaser was aware of the seller’s important role in the creation and the life of the FCT, the former as insolvency at the time of the purchase. manager of its business and the latter as custodian of the FCT’s assets and as supervisor of the management company. 6.4 Substantive Consolidation. Under what facts or The French legal provisions on securitisation provides that the FCT circumstances, if any, could the insolvency official is entitled to acquire all types of debts, including existing or future consolidate the assets and liabilities of the purchaser with receivables, non-performing receivables or any type of debt those of the seller or its affiliates in the insolvency proceeding? instrument governed by French law or any foreign law. The law also provides for the possibility of multiple issues by the FCT of Generally, the insolvency official of the seller cannot request the units or any type of debt instruments, including bonds, governed by court to order consolidation of the assets and liabilities of the French law or by any foreign law. Finally, the FCT is entitled to purchaser with those of the seller or its affiliates unless the court enter into synthetic transactions either as a protection buyer or finds that there is abnormal commingling of assets between the protection provider, and is the only French entity qualifying as a purchaser and the seller (confusion de patrimoines) or the purchaser bankruptcy-remote vehicle for rating purposes. From past is considered to be a sham or a mere fiction (fictivité). In these experience, it seems that the use of a FCT is the ideal tool for circumstances, the insolvency proceedings would be extended to international securitisation transactions (see question 4.1). the purchaser and would affect its assets, in that the assets of the FCTs may also be used in order to securitise insurance risks. seller and that of the purchaser would be consolidated. As far as tax is concerned, the FCT is tax-transparent. Securitisation vehicles can also be set-up under the form of a SDT. 6.5 Effect of Proceedings on Future Receivables. What is the In this case, the SDT is a commercial company benefiting from the effect of the initiation of insolvency proceedings on (a) same rules as for a FCT but being subject to a different tax sales of receivables that have not yet occurred or (b) on treatment. sales of receivables that have not yet come into existence? 7.3 Non-Recourse Clause. Will a court in France give effect See question 6.1. to a contractual provision (even if the contract’s governing law is the law of another country) limiting the recourse of parties to available funds? 7 Special Rules The question as to whether contractual limitations on the droit de gage général (commonly referred as to “limited recourse clause”) 7.1 Securitisation Law. Is there a special securitisation law are valid has given rise to differing doctrinal views and is the (and/or special provisions in other laws) in France subject of very little jurisprudence. However, it is now generally establishing a legal framework for securitisation transactions? If so, what are the basics? admitted that a court will give effect to a limited recourse clause provided that (i) the limited recourse clause has been freely and The French Securitisation Law dated 23 December 1988, as lastly knowingly agreed to by the creditor for the benefit of its debtors amended by Ordonnance n°2009-15 dated 8 January 2009, codified (and has not been imposed on the creditor by the debtors), and (ii) in articles L.214-42-1 to L.214-49-14 of the French Monetary and is the fair consideration for the obligations set out in the agreement Financial Code, implemented a legal framework for securitisation such as those pursuant to which the debtors agree to do or not to do transactions in France. certain specific things or to allocate to the creditor certain cash flows in accordance with a specific priority of payment. See the basics in question 7.2.

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7.4 Non-Petition Clause. Will a court in France give effect to 8.3 Data Protection. Does France have laws restricting the a contractual provision (even if the contract’s governing use or dissemination of data about or provided by law is the law of another country) prohibiting the parties obligors? If so, do these laws apply only to consumer from: (a) taking legal action against the purchaser or obligors or also to enterprises? another person; or (b) commencing an insolvency proceeding against the purchaser or another person? French law regulates the transfer of personal data. The aim of such regulation is to protect the rights of individuals, including consumer The validity of a non-petition provision has been highly discussed debtors. However, it does not apply to debtors that are incorporated under French law as such provision is part of other standard as enterprises. provisions contained in the legal documentation of securitisation The applicable regulation is known as the “Loi Informatique et France transactions. However, it is generally admitted under French law Liberté” dated 6 January 1978 (as amended). Under such that a court will not give effect to such provision. regulation, the transferor of personal data must, except under certain circumstances, inform each individual of any data transfer 7.5 Independent Director. Will a court in France give effect to that directly identifies such individual or could allow his a contractual provision (even if the contract’s governing identification. The application of such regulation is placed under law is the law of another country) or a provision in a the control of the Commission Nationale Informatique et Liberté party’s organisational documents prohibiting the directors (CNIL). from taking specified actions (including commencing an insolvency proceeding) without the affirmative vote of an In practice, there have been a number of solutions implemented in independent director? order to accommodate the application of the relevant regulation within the context of securitisation transactions, such as transferring Under French law, organisational documents and/or any other only partial information or codified information. contract may prohibit directors to take certain specified actions without the vote or consultation of another director appointed as 8.4 Consumer Protection. If the obligors are consumers, will independent director. However, depending on the legal form of the the purchaser (including a bank acting as purchaser) be company (e.g. société par actions simplifiée) and the title of the required to comply with any consumer protection law of person acting on behalf of the company, such provisions may not be France? Briefly, what is required? enforceable against third parties. The purchaser will not be required to comply with any additional 8 Regulatory Issues consumer protection law except as stated in question 8.2. Consumer protection law, such as enforcement rules against consumer debtors, will continue to apply to the extent that the seller 8.1 Required Authorisations, etc. Assuming that the acts as servicer. purchaser does no other business in France, will its purchase and ownership or its collection and enforcement of receivables result in its being required to qualify to do 8.5 Currency Restrictions. Does France have laws restricting business or to obtain any licence or its being subject to the exchange of France’s currency for other currencies or regulation as a financial institution in France? Does the the making of payments in France’s currency to persons answer to the preceding question change if the purchaser outside the country? does business with other sellers in France? Under French law, it is a general principle that international Any purchaser other than a FCT or SDT must be licensed in France payments are free of any administrative or governmental control. as a credit institution in order to purchase non-matured receivables However, recent anti-money laundering rules impose an obligation on a regular basis for consideration. on credit institutions to declare any suspect payments or The fact that the purchaser does business in France with other transactions. sellers has no impact on the above requirement which relates to the nature of the contemplated operation (i.e. the purchase of non- 9 Taxation matured receivables).

9.1 Withholding Taxes. Will any part of payments on 8.2 Servicing. Does the seller require any licences, etc., in receivables by the obligors to the seller or the purchaser order to continue to enforce and collect receivables be subject to withholding taxes in France? Does the following their sale to the purchaser, including to appear answer depend on the nature of the receivables, whether before a court? Does a third party replacement servicer they bear interest, their term to maturity, or where the require any licences, etc., in order to enforce and collect seller or the purchaser is located? sold receivables? Since 1 March 2010, payments of interest and other income by Servicing and collection activities for the benefit of third parties are debtors established or domiciled in France are not subject to any also regulated activities in France unless the purchaser is a credit French withholding tax, unless they are made outside France in a institution, a FCT, or a SDT. In practice, when the seller acts as non-cooperative State or territory (NCST) within the meaning of servicer or collection agent of its own receivables for the account of Article 238-0 A of the French Tax Code (FTC), in which case they the purchaser, it is not required to comply with French regulation are subject to the 50% withholding tax set out under FTC, §125 A applying to servicing activities. It should be noted that under the III, unless a tax treaty reduces or eliminates such withholding tax. French Securitisation Law the transfer of servicing from the seller A jurisdiction is statutorily defined as a NCST if, cumulatively: (i) to any third party must be notified to the debtors. it is not a Member State of the European Union; (ii) it is under scrutiny by the OECD Global Forum on Transparency and

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Exchange of Information; and (iii) it has not entered into with 9.2 Seller Tax Accounting. Does France require that a France, or with twelve other jurisdictions, a treaty providing for specific accounting policy is adopted for tax purposes by exchange of information in relation to tax matters. the seller or purchaser in the context of a securitisation? The latest list of NCST was published by the French government on No, it does not. 26 July 2011 and includes the following countries: Anguilla; Belize; Brunei; the Cook Islands; Costa Rica; Dominica; Grenada; Guatemala; Liberia; Marshall Islands; Montserrat; Nauru; Niue; 9.3 Stamp Duty, etc. Does France impose stamp duty or Oman; Panama; the Philippines; the Turks and Caicos Islands; and other documentary taxes on sales of receivables? Saint Vincent. France The list is updated every year by the French government, with a There is no transfer tax, stamp duty or other documentary tax on the view to including jurisdictions which would qualify as NCSTs assignment of receivables (unless the assignment is voluntarily pursuant to the criteria referred to above or which would, in registered with the FTA, in which case a nominal stamp duty of practice, not be sufficiently cooperative with the FTA. In any case, EUR 125 per registered document is payable). if a State or territory is added to the list on year N, the new rules will only have effect on payments to this State or territory on 1 January 9.4 Value Added Taxes. Does France impose value added of year N+1. Jurisdictions which agree to exchange information in tax, sales tax or other similar taxes on sales of goods or relation to tax matters with France, or which are removed from the services, on sales of receivables or on fees for collection aforementioned OECD list of jurisdictions under scrutiny, would be agent services? removed from the NTSC list with immediate effect. Interest payments on debt instruments issued or entered into prior to The assignment of receivables qualifies as a VAT-exempt financial 1 March 2010 or which are to be consolidated (assimilables) with transaction. debt instruments issued before 1 March 2010 continue to benefit The servicing fee paid to a French seller qualifies as a VAT-exempt from the exemption (where available) provided by FTC, §131 financial transaction, except as regards collection services which quater. (In particular, interest paid in respect of obligations or titres are subject to French VAT on the grounds of FTC, §261 C-1° c). de créances négociables, or other debt securities considered by the FTA as falling into similar categories, are exempt from the 9.5 Purchaser Liability. If the seller is required to pay value withholding tax set forth in FTC, §125 A III under FTC, §131 added tax, stamp duty or other taxes upon the sale of quater.) receivables (or on the sale of goods or services that give The 50% withholding tax does not apply if the debtor can prove that rise to the receivables) and the seller does not pay, then the “main purpose and effect” of the transactions from which the will the taxing authority be able to make claims for the payments originate is not to “locate” income in a NCST. Pursuant unpaid tax against the purchaser or against the sold receivables or collections? to a ruling of the FTA (n°2010/11 (FP and FE) dated 22 February 2010), an issue of debt securities benefits from such exception without their issuer having to provide any proof of the purpose and No, it will not. effects of such issue if such debt instruments are: (i) offered by means of a public offer within the meaning of 9.6 Doing Business. Assuming that the purchaser conducts article L. 411-1 of the French Monetary and Financial Code no other business in France, would the purchaser’s or pursuant to an equivalent offer in a State other than a purchase of the receivables, its appointment of the seller NCST (i.e., any offer requiring the registration or submission as its servicer and collection agent, or its enforcement of of an offer document by or with a foreign securities market the receivables against the obligors, make it liable to tax authority); in France? (ii) admitted to trading on a French or foreign regulated market or multilateral securities trading system, provided that such The purchaser would have a French corporate income tax liability market or system is not located in a NCST and the operation if the place of effective management of the purchaser was in France of such market is carried out by a market operator, an or the purchaser had a permanent establishment (PE) in France. In investment services provider, or a similar foreign entity, relation to securitisations, the question is whether the fact that the provided further that such market operator, investment collection of receivables is carried out by the French seller might services provider or entity is not located in a NCST; or result in the French seller being deemed to act as a dependent agent (iii) admitted, at the time of their issue, to the clearing operations of the purchaser and thus to create a French PE of the purchaser. In of a central depositary or of a securities clearing, delivery order to reduce that risk, the seller should have limited authority to and payments systems operator within the meaning of article bind the purchaser, and the servicing agreement should be carefully L 561-2 of the French Monetary and Financial Code, or of drafted. one or more similar foreign depositaries or operators, provided that such depositary or operator is not located in a NCST.

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Hervé Touraine Laureen Gauriot

Freshfields Bruckhaus Deringer LLP Freshfields Bruckhaus Deringer LLP 2 rue Paul Cézanne 2 rue Paul Cézanne 75008 Paris 75008 Paris France France

Tel: +33 1 44 56 44 67 Tel: +33 1 44 56 29 46 Fax: +33 1 44 56 44 00/01/02 Fax: +33 1 44 56 44 00/01/02 Email: [email protected] Email: [email protected] URL: www.freshfields.com URL: www.freshfields.com France Avocat à la Cour, Hervé Touraine joined Freshfields Bruckhaus Avocat à la Cour, Laureen Gauriot joined Freshfields Bruckhaus Deringer in 1995 and became partner in 1998. His practice Deringer LLP’s Finance group in October 2009. She graduated focuses on structured finance, securitisation, capital markets and from the University of Paris XII (post-graduate degree in Business banking. In the context of securitisation transactions, Hervé has Law), from the University of PARIS II- PANTHEON ASSAS been working closely since the introduction of securitisation in (postgraduate DESS-DJCE Business Law), and from King’s France, with various arrangers, originators, rating agencies, College (LL.M in International Financial Law). Her practice monoline insurers and regulatory authorities. Hervé has advised focuses on structured finance, securitisation and debt capital on numerous domestic and international transactions (including markets. She has worked on several domestic and international many firsts in France and Europe). Hervé has an extensive securitisation programmes for major financial institutions and experience in structuring and managing cross-border corporates. securitisations involving numerous countries. He is an active player in drafting French securitisation and structured finance legislation and regulations in France.

Freshfields Bruckhaus Deringer is widely regarded as having one of the best international securitisation practices available. Through its international network it handles a significant proportion of the largest and most complex transactions, including those with a large cross-border element, in both civil law and common law jurisdictions. We award great importance to the quality of the advice we give to our clients. We strive to understand their legal, economic and commercial environment in order to anticipate their needs and assist in their strategic decision making process. We deliver creative, pragmatic advice adapted to our clients’ circumstances. The flexibility and resourcefulness of our lawyers enables our Practice to accompany our clients in their most varied projects, especially during the financial crisis where innovation and simplicity are key to success. The Finance Group in Paris currently consists of 25 lawyers, including 5 Partners and 1 Counsel. Their biographies are available on our website.

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Cleary Gottlieb Steen & Hamilton LLP Michael Kern

1 Receivables Contracts a specified date; (ii) the obligor has, after the payment became due, received a payment reminder (Mahnung); or (iii) the obligor has received an invoice and does not make payment within thirty days 1.1 Formalities. In order to create an enforceable debt of the due date and the receipt of such invoice. obligation of the obligor to the seller, (a) is it necessary that the sales of goods or services are evidenced by a For loans to consumers (and transactions, such as hire-purchase formal receivables contract; (b) are invoices alone transactions, that are closely linked to consumer loans), German sufficient; and (c) can a receivable “contract” be deemed law provides for special rules that are designed to protect borrower to exist as a result of the behaviour of the parties? consumers. In order to be enforceable in accordance with their terms, any such loan agreements have to contain certain Under German law, it is not necessary for the creation of an information on the loan (which should help the consumer to assess enforceable debt obligation of the obligor that a sale of goods or the his or her future payment obligations) and need to be in writing. In provision of services be evidenced by a formal receivables contract. addition, the lender is obligated to explain the features of the loan. It is sufficient if the parties agree orally on the sale of goods or the In the case of real estate loans, the lender also has to inform the provision of services, or if the respective agreement is deemed to consumer borrower of any possibility to assign the loan without the exist due to the facts and circumstances, including as a result of the borrower’s consent. The borrower is entitled to rescind the loan behaviour of the parties. Of course, in such cases it may, as a agreement within two weeks from its execution. Furthermore, the practical matter, be difficult to prove the scope of the sale or the lender is required to notify the borrower in advance of an interest services concerned, as well as the consideration payable therefor. reset and approaching maturity. An invoice alone, if not backed by a formal or informal receivables Borrowers may terminate loans as of the end of the period for which contract, would not be sufficient to create an enforceable debt a fixed rate of interest was agreed if such period expires prior to the obligation. maturity of the loan and no new rate of interest is agreed. In any case, borrowers may terminate loans with six months’ prior notice 1.2 Consumer Protections. Do Germany’s laws (a) limit rates as of the end of the tenth year following the disbursement of the of interest on consumer credit, loans or other kinds of loan. Loans with a floating rate of interest may be terminated with receivables; (b) provide a statutory right to interest on late three months’ prior notice. payments; (c) permit consumers to cancel receivables for Other consumer protection laws become relevant in respect of a specified period of time; or (d) provide other noteworthy contracts entered into at the place of abode of the obligor and rights to consumers with respect to receivables owing by them? contracts comprising standard business terms.

There are no German laws that would specifically regulate 1.3 Government Receivables. Where the receivables permissible rates of interest on consumer credit, loans or other contract has been entered into with the government or a kinds of receivables. Under a general provision in the German Civil government agency, are there different requirements and Code, however, a receivables contract that provides for a usurious laws that apply to the sale or collection of those rate of interest can be void. According to German case law, as a rule receivables? of thumb, the applicable limit in this regard is twice the market rate or, in periods of particularly high market rates, around 12% p.a. Where the government or its agencies enter into receivables above the market rate. The application of the referenced code contracts for general commercial purposes, no special rules apply to provision will, however, always be driven by the facts and the sale, assignment or collection of such receivables, except that circumstances. any such assignment is valid, generally, even where there is a contractual prohibition on assignments (see question 4.4 below). If the obligor is in arrears (Verzug) in discharging the receivable of Special assignment restrictions and notice requirements apply to tax the seller, German statutory law provides that the receivable bears reimbursement and similar claims. Tax authorities can enforce interest at the base interest rate (Basiszinssatz) published by assessed taxes without the help of the courts. In securitisation Deutsche Bundesbank plus 5% p.a. or, if the obligor is not a transactions, due to enforceability concerns, public law receivables consumer, 8% p.a. An obligor would generally be in arrears if it against government agencies are frequently considered ineligible. does not make payment when due and: (i) the payment was due on

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2 Choice of Law – Receivables Contracts 3 Choice of Law – Receivables Purchase Agreement 2.1 No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what 3.1 Base Case. Does Germany’s law generally require the are the main principles in Germany that will determine the sale of receivables to be governed by the same law as governing law of the contract? the law governing the receivables themselves? If so, does that general rule apply irrespective of which law In principle, under Regulation (EC) 593/2008 on the law applicable governs the receivables (i.e., Germany’s laws or foreign to contractual obligations (Rome I) (the “Regulation”), in the laws)? absence of any (explicit or implicit) choice of law by the parties to Germany the receivables contract, the laws of the country to which such As regards the relationship between the seller and the purchaser, receivables contract has the closest link govern the receivables German law (i.e., the Regulation) does not require the sale of contract. In this context, however, the Regulation contains several receivables to be governed by the law governing the receivables. presumptions which help identify what country that is. If the Accordingly, the seller and the purchaser may choose which law to specific presumptions do not apply, the laws of the country apply apply to the sale, subject to the rules described in question 2.3 where the contractual party that has to perform the characteristic above. However, as regards (i) the receivables’ assignability, (ii) obligations under the contract is located. The presumptions and this the relationship between the purchaser and the obligor, and (iii) the general rule do not apply if a contract is manifestly more closely question whether the assignment can be invoked against the obligor, connected with another country, in which case such country’s laws the law governing the receivables applies. Furthermore, the apply. Special rules apply to particular categories of contracts, Regulation is silent, and there is no other express rule in German namely consumer contracts, shipping contracts, insurance contracts law, as to what law applies to the enforceability of the sale vis-à-vis and employment contracts. third parties. While we would expect German courts in light of past practice to apply the law governing the receivables in this respect, some commentators have taken the view that the laws of the seller’s 2.2 Base Case. If the seller and the obligor are both resident jurisdiction should govern the question whether a sale of in Germany, and the transactions giving rise to the receivables and the payment of the receivables take receivables is effective vis-à-vis third parties. place in Germany, and the seller and the obligor choose the law of Germany to govern the receivables contract, is 3.2 Example 1: If (a) the seller and the obligor are located in there any reason why a court in Germany would not give Germany, (b) the receivable is governed by the law of effect to their choice of law? Germany, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser No. A German court would give effect to the parties’ choice of law. choose the law of Germany to govern the receivables purchase agreement, and (e) the sale complies with the requirements of Germany, will a court in Germany 2.3 Freedom to Choose Foreign Law of Non-Resident Seller recognise that sale as being effective against the seller, or Obligor. If the seller is resident in Germany but the the obligor and other third parties (such as creditors or obligor is not, or if the obligor is resident in Germany but insolvency administrators of the seller and the obligor)? the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables contract, will a court in Germany give effect to the choice Yes, because, under the rules described in question 3.1 above, of foreign law? Are there any limitations to the German law would apply to the question of whether the sale is recognition of foreign law (such as public policy or effective against the seller, the obligor and other third parties. mandatory principles of law) that would typically apply in commercial relationships such that between the seller and 3.3 Example 2: Assuming that the facts are the same as the obligor under the receivables contract? Example 1, but either the obligor or the purchaser or both are located outside Germany, will a court in Germany As a general rule, the Regulation permits the parties to a receivables recognise that sale as being effective against the seller contract to choose the law governing that contract. Such a choice and other third parties (such as creditors or insolvency of law can be express or implied. A choice of law provision can administrators of the seller), or must the requirements of also be added or modified after the original contract was entered the obligor’s country or the purchaser’s country (or both) into. However, where a receivables contract is exclusively be taken into account? connected with one or more EU Member States and the parties have chosen the law of a non-EU Member State, German courts would As described in question 3.1 above, neither the obligor’s, nor the apply such provisions of EU law (as implemented in Germany) purchaser’s location, is relevant for the question what law applies to which cannot be derogated from by agreement, irrespective of the the effectiveness of sales of receivables. Accordingly, a German choice of law. In addition, German courts may give effect to court would recognise the sale as being effective without regard to overriding mandatory provisions of the law of the country where any requirements of the obligor’s country or the purchaser’s the obligations out of the contract have to be performed. Finally, country (or both). any contractual choice of law is subject to the German ordre public.

2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in Germany?

Yes, the CISG has been ratified and has been in effect in Germany since 1 January 1991.

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3.4 Example 3: If (a) the seller is located in Germany but the with the requirements of such law, provided that the receivable is obligor is located in another country, (b) the receivable is assignable pursuant to the law governing it (i.e., German law). As governed by the law of the obligor’s country, (c) the seller regards the relationship between the purchaser and the obligor as sells the receivable to a purchaser located in a third well as third parties, a German court would apply German law country, (d) the seller and the purchaser choose the law (which is the law of the seller’s location as well as the law of the obligor’s country to govern the receivables governing the receivable) to the question whether the sale is purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in effective. Germany recognise that sale as being effective against the seller and other third parties (such as creditors or 4 Asset Sales insolvency administrators of the seller) without the need

to comply with Germany’s own sale requirements? Germany 4.1 Sale Methods Generally. In Germany what are the As described in question 3.1 above, a German court would customary methods for a seller to sell receivables to a generally apply the law selected by the parties as regards the purchaser? What is the customary terminology – is it relationship between the seller and the purchaser (subject to the called a sale, transfer, assignment or something else? rules described in question 2.3 above). Accordingly, a German court would recognise the sale as being effective as regards the Although not legally required, for evidentiary purposes, receivables relationship between the purchaser and the seller because the sale are generally sold and assigned under written sale and assignment complies with the requirements of the law chosen by the parties to agreements entered into between the seller and the purchaser. The govern the receivables purchase contract. Furthermore, a German customary terminology for the transfer of a receivable under court would view the sale as being effective against the obligor German law is an “assignment” (Abtretung), while a “sale” because the sale complies with the laws governing the receivable. (Verkauf) describes the contractual undertaking to assign. If a German court also applied, in light of past practice, the law However, elsewhere in this chapter, the term “sale”, in line with the governing the receivable to the question whether the sale is definition of such term above, is used to describe a transfer. effective against third parties, there would be no need to comply with Germany’s own sale requirements. If, however, the court 4.2 Perfection Generally. What formalities are required applied the law of the seller’s jurisdiction (see question 3.1 above) generally for perfecting a sale of receivables? Are there in this respect, it would consider the sale as being effective against any additional or other formalities required for the sale of the obligor only if the parties also complied with such requirements. receivables to be perfected against any subsequent good faith purchasers for value of the same receivables from the seller? 3.5 Example 4: If (a) the obligor is located in Germany but the seller is located in another country, (b) the receivable is Under German law, generally, the only requirement for an effective governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country sale of receivables is the existence of a corresponding assignment to govern the receivables purchase agreement, and (d) agreement between the seller and the purchaser. Giving notice of the sale complies with the requirements of the seller’s the assignment to the obligor is not required for the effectiveness of country, will a court in Germany recognise that sale as the sale. However, failure to give notice to the obligor results in the being effective against the obligor and other third parties obligor retaining certain defences as described in question 4.4 (such as creditors or insolvency administrators of the below. Under German law, generally, there is no good faith obligor) without the need to comply with Germany’s own acquisition of receivables. sale requirements?

Yes, because, under the rules described in question 3.1 above, the 4.3 Perfection for Promissory Notes, etc. What additional or law of the seller’s country would apply to the question of whether different requirements for sale and perfection apply to sales of promissory notes, mortgage loans, consumer the sale is effective against the seller, the obligor and other third loans or marketable debt securities? parties. In Germany, debt certificates (Schuldscheine) are frequently used 3.6 Example 5: If (a) the seller is located in Germany instruments that are similar to promissory notes in other (irrespective of the obligor’s location), (b) the receivable is jurisdictions. Debt certificates, which evidence loan obligations, governed by the law of Germany, (c) the seller sells the are not securities. No additional requirements apply to the receivable to a purchaser located in a third country, (d) assignment of debt certificates, although in practice the purchaser the seller and the purchaser choose the law of the requires the seller to hand these over in connection with an purchaser’s country to govern the receivables purchase assignment of the related loan. agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in Mortgage loans in Germany can take several forms. Liens on Germany recognise that sale as being effective against German real property can be granted in the form of an accessory the seller and other third parties (such as creditors or mortgage (Hypothek) or a non-accessory land charge insolvency administrators of the seller, any obligor located (Grundschuld). Both can be either in certificated or non- in Germany and any third party creditor or insolvency certificated form. A mortgage is accessory in that it cannot be administrator of any such obligor)? transferred without the receivable that it secures, and that it is automatically transferred if such receivable is transferred. The As described in question 3.1 above, a German court would assignment of a loan that is secured by a mortgage requires a recognise the sale as being effective against the seller because a written assignment of the loan and: (i) in the case of a certificated German court would apply (subject to the rules described in mortgage, delivery of the mortgage certificate; or (ii) in the case of question 2.3 above) the law chosen by the parties with regard to the a non-certificated mortgage, registration of the transfer with the relationship between purchaser and seller and the sale complies competent land register. A loan secured by a land charge can be

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assigned without the land charge, by way of a simple agreement 4.4 Obligor Notification or Consent. Must the seller or the between the seller and the purchaser. If the land charge is to be purchaser notify obligors of the sale of receivables in transferred as well, such transfer has to be by written assignment of order for the sale to be effective against the obligors the land charge and delivery of the certificate or registration of the and/or creditors of the seller? Must the seller or the transfer, as applicable. In addition, according to recent case law the purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale purchaser has to assume the seller’s obligations under the security against the obligors? Does the answer to this question purpose agreement setting forth the conditions under which the land vary if (a) the receivables contract does not prohibit charge may be enforced. assignment but does not expressly permit assignment; or Transferring un-certificated mortgages and land charges (which (b) the receivables contract expressly prohibits make up the vast majority of mortgages and land charges in assignment? Whether or not notice is required to perfect

Germany Germany) can, depending upon the values involved, trigger a sale, are there any benefits to giving notice – such as significant costs in connection with the required registration with cutting off obligor set-off rights and other obligor defences? the land register. In many cases, sellers express an interest in avoiding registration of the transfer in order to avoid having the In principle, under German law, giving notice to the obligor is not obligor obtain knowledge of the assignment. For this purpose, the required for an effective sale and assignment of a receivable, unless parties frequently agree that the seller shall hold the land charge as required by the receivables contract. The purchaser is generally trustee for the purchaser. (This is not possible in the case of a entitled to enforce the receivable directly against the obligor mortgage.) However, it is unclear under German law whether such (providing required evidence of the assignment), whether or not the a trust relationship would be recognised in the insolvency of the obligor was previously notified of the assignment. However, the seller, i.e., whether the purchaser would be entitled to request the obligor may generally invoke against the purchaser all defences that seller’s insolvency official to transfer the land charge. it had against the seller at the time of the sale (see below). If the In September 2005, the German Banking Act was amended to obligor is a consumer, the seller must notify it of the assignment and provide for, among other things, so-called “refinancing registers” the details of the purchaser. (Refinanzierungsregister) to be maintained by banks in respect of Unless the obligor has been notified or has otherwise obtained receivables, including mortgages or land charges securing such knowledge of the assignment, it may validly discharge its obligation receivables that such bank or a third party owns but is obligated to by making a payment to the seller, and the purchaser is bound by transfer to a securitisation vehicle. Effectively, without a perfected any amendment to the receivables contract agreed by the seller and sale being effected at the outset of the transaction, such registration the obligor. The same applies if the seller and the obligor enter into provides the purchaser with the same right to segregate the assets any other transaction relating to the receivable, such as a waiver of concerned from the seller’s insolvency estate (thereby addressing the receivable by the seller or a deferral of payments. the issues described above) as would apply if a perfected sale had occurred. In addition, the obligor continues to be able to discharge its obligation under the assigned receivable by offsetting it against a In the case of an assignment of consumer loans, the seller must payable of the seller unless (i) the obligor knew of the assignment notify the consumer of the assignment and the details of the when it acquired the payable, or (ii) the payable becomes due only purchaser without undue delay, unless the seller and the purchaser after the obligor has obtained knowledge of the assignment and agree that the seller shall exclusively continue dealing with the after the assigned receivable has become due. In other words, even consumer obligor. Also, an advance consent of the obligor (in if the obligor has obtained knowledge of the assignment, it may particular a consumer) contained in standard business terms to an continue to offset the assigned receivable against a payable of the assumption of the entire loan contract by a purchaser is no longer seller if (i) it acquired the payable before it obtained such effective, unless the purchaser is identified in the standard business knowledge, or (ii) the payable has become due before the receivable terms or the obligor is given the right to terminate the loan in case becomes due. the loan contract is transferred. Accordingly, as described above, notification of the obligor is not Additional requirements relating to the sale of debt securities under required for an effective sale of a receivable under German law, but German law depend upon the type of securities involved. The giving notice of the assignment to the obligor is beneficial in order transfer of bearer securities requires an agreement between the to cut off certain defences of the obligor. seller and the purchaser to transfer ownership and the delivery of the securities to the purchaser. Registered securities are transferred As a general rule, a receivable that is governed by German law can by way of assignment of the rights that they evidence. Instruments be freely sold and assigned without the obligor’s consent if the made out to order are transferred by way of agreement between the underlying agreement does not contain any prohibition on seller and the purchaser to transfer ownership, endorsement and assignments. A prohibition on assignments would usually be delivery of the instrument to the purchaser. Where debt securities explicit, but can also be implied in a receivables contract. Until are certificated in global form and deposited with a clearing system, 2007, it has been disputed among German courts and commentators delivery of the securities is evidenced by way of book-entry. whether the assignment of a receivable in violation of German data protection laws or contractual general bank secrecy obligations should result in an implied prohibition on assignments. However, a decision of the German Supreme Court settled the issue in 2007 such that generally neither contractual general bank secrecy obligations nor German data protection laws result in implied prohibitions on assignments. It should be noted that it is not fully clear whether this would be equally applied to an assignment of receivables involving the transfer of data whose confidentiality is protected by German criminal law (e.g., in respect of a doctor’s patient data, in respect of which a 2005 Court of Appeals decision considered an assignment void).

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Where a receivables contract contains a prohibition on assignments, breach of contract is not fully clear in respect of commercial the seller can still undertake to assign the receivable, but it cannot transactions among merchants and receivables against government effect a valid assignment in rem. The seller is liable for any agencies. damages incurred by the obligor in connection with an assignment that failed on this basis. 4.7 Identification. Must the sale document specifically identify As an exception to the foregoing rule, a seller can validly assign a each of the receivables to be sold? If so, what specific receivable (with the exception of loan claims of credit institutions) information is required (e.g., obligor name, invoice in spite of a contractual prohibition on assignments where both the number, invoice date, payment date, etc.)? Do the seller and the obligor are corporate entities, partnerships or receivables being sold have to share objective individual merchants and the receivables contract constitutes a characteristics? Alternatively, if the seller sells all of its commercial transaction, or where the obligor is a government receivables to the purchaser, is this sufficient Germany identification of receivables? agency. However, it is not fully clear whether any such assignment constitutes a breach of contract that can result in liability for It is not necessary to specifically identify each of the receivables to damages or for the payment of any contractual penalty. In any be sold in order to provide for an effective sale and assignment of event, in such a case the obligor can still discharge the receivable by German law-governed receivables. It is sufficient if the receivables making a payment to the seller (or by way of set-off), even where are identifiable, e.g., by reference to the initial letters of the obligor the obligor has been notified of the assignment. The resulting risks, names, or if all of the seller’s receivables are sold. which can be eliminated only by obtaining the obligor’s consent, generally lead rating agencies to conclude that the highest rating categories cannot be applied where the effectiveness of the 4.8 Respect for Intent of Parties; Economic Effects on Sale. assignment is based upon this exception. If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be respected or will a court enquire into the economic 4.5 Notice Mechanics. If notice is to be delivered to obligors, characteristics of the transaction? If the latter, what whether at the time of sale or later, are there any economic characteristics of a sale, if any, might prevent requirements regarding the form the notice must take or the sale from being perfected? Among other things, to how it must be delivered? Is there any time limit beyond what extent may the seller retain (a) credit risk; (b) which notice is ineffective – for example, can a notice of interest rate risk; and/or (c) control of collections of sale be delivered after the sale, and can notice be receivables without jeopardising perfection? delivered after insolvency proceedings against the obligor have commenced? Does the notice apply only to specific A German court would not automatically respect the parties’ receivables or can it apply to any and all (including future) receivables? Are there any other limitations or denomination of their transaction as a sale, but also take into considerations? account the economic characteristics of the transaction. Furthermore, the economic characteristics have no bearing under As described in question 4.4 above, under German law, generally, German law as to whether the sale is being “perfected”. However, the obligor need not be notified of the assignment to make the such characteristics could be relevant for determining whether the assignment effective, unless required by the receivables contract. sold receivables no longer form part of the seller’s insolvency However, notification is required to cut off certain defences of the estate, or whether the transaction must be re-characterised as a obligor. If a receivables contract requires notification, the notice secured loan. Given that there is no case law on point and limited must comply with the applicable contractual requirements. Where other guidance in published form in this respect, the exact a notice of assignment is specifically required under statutory law, circumstances in which a purported sale must be re-characterised as the notice must comply with the applicable statutory requirements, a secured loan are not fully clear. e.g., be given in writing or contain certain information. Generally, The general view in the market is as follows. Any true sale of if more than one receivable or future receivables are assigned, the receivables requires an effective assignment of legal ownership as assignment notice may be given for all receivables concerned. described in question 4.2 above. In connection with any such assignment, the mere retention by the seller of the risk that the receivables exist and are legal, valid, binding and enforceable does 4.6 Restrictions on Assignment; Liability to Obligor. Are not result in the true sale character of the transaction being restrictions in receivables contracts prohibiting sale or assignment generally enforceable in Germany? Are there jeopardised, and neither does the continued servicing of the exceptions to this rule (e.g., for contracts between receivables by the seller. The possible re-characterisation of the commercial entities)? If Germany recognises prohibitions transaction rests, in particular, on the seller’s retaining an excessive on sale or assignment and the seller nevertheless sells portion of the credit risk from the receivables sold, including receivables to the purchaser, will either the seller or the through representations and warranties, repurchase purchaser be liable to the obligor for breach of contract or obligations/automatic re-assignments, variable purchase prices, on any other basis? liquidity/credit enhancement provided by or on behalf of the seller or the acquisition by the seller of a first loss tranche of the securities As described in question 4.4 above, parties other than, generally, issued. The seller may retain some portion of the credit risk in line merchants in respect of commercial transactions, can enter into with historical default rates and taking into account enforcement binding prohibitions on assignments. Prohibitions to sell costs. receivables (i.e., an undertaking not to enter into a receivables Where the sale of receivables is re-characterised as a secured loan purchase agreement) would also be enforceable, but are not for insolvency law purposes, upon the opening of a German common because they do not prevent the assignment from being insolvency proceeding with respect to the seller, the seller’s effective. If a seller sells a receivable in violation of a prohibition insolvency official and not the purchaser is entitled to collect the to sell or assign the receivable, it would be liable, generally, to the receivables. In addition, the insolvency official is entitled to retain obligor for any financial damages incurred. Such liability for from the collection proceeds a flat fee (haircut) of, generally, 9% for

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the benefit of the insolvency estate. The amount of this fee may be of receivables assigned by way of security assignment adjusted where the actual enforcement costs are significantly higher (Sicherungsabtretung) as well as guarantees (Garantien) is or lower. A 4% fee applies where the insolvency official permits the transferred by way of assignment, requiring an agreement between purchaser to collect the receivables. Upon a collection by the the seller and the purchaser to assign the relevant security. insolvency official, the collection proceeds (after deduction of these Insurance claims are also assigned, usually requiring notification to, fees) are to be transferred to the purchaser. As a practical matter, and sometimes the prior consent of, the insurer. If the collateral secured creditors frequently enter into agreements with insolvency comprises security over inventory and other movable assets in the officials providing for higher haircuts. form of a security transfer (Sicherungsübereignung), the purchaser needs to obtain (indirect) possession of the inventory concerned. If the sold receivable is secured by a pledge (Pfandrecht) or surety 4.9 Continuous Sales of Receivables. Can the seller agree in Germany an enforceable manner (at least prior to its insolvency) to (Bürgschaft), no additional arrangements are necessary to transfer continuous sales of receivables (i.e., sales of receivables such collateral. as and when they arise)? See also question 5.3 below.

Yes. However, as a technical matter, in factoring or securitisation transactions involving continuous or periodic sales and transfers of 5 Security Issues receivables, the seller and the purchaser generally enter into a framework agreement that governs the terms and conditions for 5.1 Back-up Security. Is it customary in Germany to take a each future sale and transfer of receivables. The actual sale and “back-up” security interest over the seller’s ownership transfer in respect of individual receivables is then evidenced (in the interest in the receivables and the related security, in the case of continuous sales) or effected (in the case of periodic sales) event that the sale is deemed by a court not to have been on the basis an exchange of data on the transferred receivables by perfected? which the latter are identified. However, such arrangements would not prevail in an insolvency of the seller for sales not consummated No, this is not customary. prior to the insolvency. See also question 6.5. 5.2 Seller Security. If so, what are the formalities for the 4.10 Future Receivables. Can the seller commit in an seller granting a security interest in receivables and enforceable manner to sell receivables to the purchaser related security under the laws of Germany, and for such that come into existence after the date of the receivables security interest to be perfected? purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured This is not applicable in Germany (see question 5.1 above). to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the seller’s insolvency? 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities Under German law, it is possible to sell and assign receivables must the purchaser comply with in Germany to grant and arising in the future, provided that such receivables are sufficiently perfect a security interest in purchased receivables identified (or at least identifiable, see question 4.7 above). German governed by the laws of Germany and the related law does not require any specific sale structure for the sale of future security? receivables being valid and enforceable beyond the requirements applicable to receivable sales generally. In principle, the sale of Under German law, if the purchaser wants to grant security over all future receivables requires the existence of a corresponding of its assets, it must individually charge such assets in accordance assignment agreement between the seller and the purchaser (see with applicable law, i.e., German law does not know the concept of question 4.2 above). The purchaser then obtains ownership of such a floating charge over all assets of the chargor. Generally, a German receivables at the time when they arise, unless at such time other law security interest in a receivable or related security, as well as prerequisites of a valid assignment have ceased to exist, in which other assets of the purchaser, can be granted in the form of a formal case the assignment fails. The latter applies, in particular, where an pledge or a security assignment. insolvency proceeding has been opened with respect to the seller To become effective, a formal pledge of a receivable (including prior to the receivable coming into existence because in such a case guarantees) requires the execution of a pledge agreement and the seller is no longer able to dispose of its assets. It should be notification of the obligor. A security assignment, which results in noted that, in certain circumstances, it is difficult to determine the transfer of legal ownership of the receivables concerned, subject whether a receivable is in fact a “future” receivable to which these to the assignee’s undertaking to foreclose only upon a default and to rules apply (such as a claim for future rental payments) or an re-assign the receivables to the assignor upon the performance in existing receivable that is not yet due (such as the repayment claim full of the secured obligations, becomes effective on the basis of the under a loan agreement). See also question 6.5. same requirements as described above in respect of assignments of receivables generally. Accordingly, a security assignment generally 4.11 Related Security. Must any additional formalities be does not require notification of the obligor. (However, failure to fulfilled in order for the related security to be transferred notify results in the obligor retaining set-off rights and other concurrently with the sale of receivables? If not all defences as described in question 4.4 above.) Due to the fact that related security can be enforceably transferred, what assignors frequently seek to avoid such notification, security methods are customarily adopted to provide the assignments are far more common than formal pledges of purchaser the benefits of such related security? receivables. Exceptions to this rule apply where the notification of the obligor is not an issue, including in respect of inter-company See question 4.3 above in respect of transferring collateral of the receivables and bank accounts. There have been a few German type of instruments described therein. 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receivables, but this continues to be a very uncommon form of would an economic or equitable interest of the purchaser in an asset, security in Germany. as such, be sufficient to so segregate assets from the estate of the Security over inventory and other movable assets is usually granted seller. (Under certain circumstances, a trust over non-German in the form of a security transfer because a formal pledge would assets might be recognised by German courts and have the effect of require the pledgee to obtain actual possession of the assets, segregating the trust assets, but this depends on the law governing whereas indirect possession is sufficient for a security transfer. For the trust, the effects of such law, and whether such effects can be security over the types of instruments described in question 4.3 reconciled with German law concepts.) please see question 4.3. The additional requirements described In order to segregate collections from the estate of the seller, several therein generally also apply to the grant of security over such types structure alternatives exist. The safest way is to notify the obligors of instruments. of the assignment and collect the receivables in an account of the See also question 4.11 above. purchaser. Alternatively, because the parties sometimes do not wish Germany to notify the obligors of the assignment or if the notification is too cumbersome, the seller could continue to collect the receivables in 5.4 Recognition. If the purchaser grants a security interest in one or more accounts set up specifically for such purpose. Such receivables governed by the laws of Germany, and that accounts could be either pledged to the purchaser or established as security interest is valid and perfected under the laws of escrow accounts which are, generally, recognised under German the purchaser’s country, will it be treated as valid and perfected in Germany or must additional steps be taken in law. (Please note that the preference periods described in question Germany? 6.3 below might apply to the collections or disbursements thereof to the purchaser, unless such periods had already lapsed with respect The conflict of laws rules described in question 3.1 above in respect to the acquisition of the collected receivable.) of assignments of receivables generally also apply to the grant of Where it is not feasible to collect the receivables in a special security interests, whether in the form of a formal pledge or a security account (whether pledged or in the form of an escrow account), the assignment. Accordingly, as between the purchaser and the secured seller could pledge such “general” collection account to the party, the security interest would be considered valid and perfected if purchaser, but this would in most cases not offer sufficient the requirements of the law chosen to govern the security agreement protection to the purchaser in respect of collections received prior were met, provided that the receivables are assignable pursuant to the to the opening of an insolvency proceeding. Also, such pledge law governing them (i.e., German law). Whether the security interest might conflict with prior-ranking standard pledges of the account is valid and perfected with respect to the obligor depends on the law bank (which are customary in Germany). In such case, the governing the receivables. Where the receivables are governed by the purchaser would have to rely on the (automatic) termination of the laws of Germany, the purchaser and the secured party need to take seller’s entitlement to collect the receivable upon certain triggers such additional steps, if any, as German law might require to validly and a swift redirection of the collections to minimise losses, usually grant and perfect the security interest vis-à-vis the obligor. The same coupled with frequent sweeps from the general account. applies in respect of the question whether the security is valid and perfected vis-à-vis third parties if a German court in that respect 5.7 Bank Accounts. Does Germany recognise escrow applied the law governing the receivables (and not the laws of the accounts? Can security be taken over a bank account purchaser’s country, see question 3.1 above). located in Germany? If so, what is the typical method? Would courts in Germany recognise a foreign-law grant of security (for example, an English law debenture) taken 5.5 Additional Formalities. What additional or different over a bank account located in Germany? requirements apply to security interests in or connected to insurance policies, promissory notes, mortgage loans, consumer loans or marketable debt securities? As regards the recognition of escrow accounts, see question 5.6 above. Security over bank accounts located in Germany Under German law, security over insurance policies, promissory customarily takes the form of a formal pledge (see question 5.3). notes, mortgage loans, consumer loans and marketable debt Taking foreign law security over bank accounts located in Germany securities can also be granted in the form of a formal pledge or by is not customary, and there is a substantial risk that German courts way of security assignment. (In the case of debt securities, the most would not recognise such security, in particular if the requirements common form of security is a formal pledge.) As a general matter, of a formal pledge (including notification of the account bank) were the additional requirements described in question 4.3 above also not met. apply to the grant of security over these types of instruments. Security over insurance policies generally requires notification of 6 Insolvency Laws the insurance company to be effective.

6.1 Stay of Action. If, after a sale of receivables that is 5.6 Trusts. Does Germany recognise trusts? If not, is there otherwise perfected, the seller becomes subject to an a mechanism whereby collections received by the seller insolvency proceeding, will Germany’s insolvency laws in respect of sold receivables can be held or be deemed automatically prohibit the purchaser from collecting, to be held separate and apart from the seller’s own transferring or otherwise exercising ownership rights over assets until turned over to the purchaser? the purchased receivables (a “stay of action”)? Does the insolvency official have the ability to stay collection and German law concepts of fiduciary relationships or trusts are in enforcement actions until he determines that the sale is many respects different from Anglo-American trust concepts. In perfected? Would the answer be different if the particular, solely agreeing on a trust over an asset such as purchaser is deemed to only be a secured party rather collections of receivables or bank accounts would not suffice to than the owner of the receivables? separate such collections or bank accounts from the seller’s estate and would not be upheld in an insolvency of the seller. Neither Before rendering a decision on whether or not to open a formal

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insolvency proceeding and to appoint an insolvency official, assignments of receivables) that prejudice third party creditors, German insolvency courts frequently appoint a so-called provided that certain additional requirements are met. These “preliminary insolvency official” for the time period (generally one requirements are set out in statutory rules. German insolvency to three months – a so-called “preliminary insolvency proceeding”) courts do not have the same discretion in this respect that during which they assess whether the insolvent company’s assets insolvency courts have in other jurisdictions. Preference periods cover the costs of the insolvency proceeding. As a general matter, range from one month to ten years prior to the filing of the there is no stay of action on the purchaser’s right to collect, transfer application for the opening of the insolvency proceeding. and otherwise exercise ownership rights over receivables that were In particular, the insolvency official has the right to challenge acts sold to it, neither before nor after the opening of an insolvency that granted a creditor collateral or satisfaction if the act was proceeding. Recent amendments to the German Insolvency Code performed (i) during the last three months prior to the filing of the

Germany that took effect on 1 March 2012 did not result in any changes in application for the opening of an insolvency proceeding, provided this regard. German insolvency courts, however, may prohibit that at such time the debtor was unable to pay its debts as they persons owning assets not belonging to the insolvency estate (such became due and the creditor knew of such inability, or (ii) after such as purchasers of receivables in true sale transactions) or holding filing, provided that at such time the creditor knew of the debtor’s security based on a security assignment over receivables from inability to pay its debts or the filing. collecting or otherwise exercising their rights over the receivables The insolvency official can also challenge acts that granted a creditor during the preliminary insolvency proceeding. After the opening of collateral or satisfaction to which such creditor was not entitled – or an insolvency proceeding with respect to the seller, the purchaser not in such a way or not at such time – if the act was performed (i) would be entitled to collect the receivables only if the transaction during the last month prior to the filing of the application for the constituted a true sale. Where the transaction is re-characterised as opening of an insolvency proceeding or after such filing, (ii) during a secured loan, the assignment in rem of the receivables is regarded the second or third month prior to the filing of the application and the as a security assignment, which results in the insolvency official, debtor was illiquid at such time, or (iii) during the second or third rather than the purchaser, being entitled to collect the receivables month prior to the filing of the application and the creditor knew at the concerned (and to deduct a haircut from the collection proceeds, all time such act was performed that such act was detrimental to the as described in question 4.8 above). See also question 6.2 below. debtor’s third party creditors. Furthermore, the insolvency official has the right to challenge acts 6.2 Insolvency Official’s Powers. If there is no stay of action performed with the intention – as known to the creditor – to prejudice under what circumstances, if any, does the insolvency the debtor’s third-party creditors if the act was performed within ten official have the power to prohibit the purchaser’s years prior to the filing of the application for the opening of an exercise of rights (by means of injunction, stay order or other action)? insolvency proceeding or after such filing. Finally, the German Insolvency Code contains a number of As described in question 6.1 above, German insolvency courts may presumptions that make it easier for an insolvency official to challenge prohibit persons owning assets not belonging to the insolvency transactions between the debtor and its related parties. E.g., the estate (such as purchasers of receivables in true sale transactions) or insolvency official may challenge any transaction between the debtor holding security based on a security assignment over receivables and a related party if the transaction was (i) entered into for from collecting or otherwise exercising their rights over the consideration during the two years preceding the filing of the receivables during the preliminary insolvency proceeding. In application to open an insolvency proceeding, (ii) directly detrimental addition, insolvency courts have the right to issue an order to the debtor’s third party creditors, and (iii) performed by the debtor permitting a preliminary insolvency official to collect receivables with the intention to prejudice the debtor’s third-party creditors, unless that were assigned by way of security. the related party can prove that it did not know of such intention. Upon the opening of an insolvency proceeding with respect to the Where the assignment of receivables constitutes a so-called “cash seller, no injunctions, stay orders or similar court orders may be transaction” (Bargeschäft), the insolvency official is entitled to issued where there was a true sale, and there is no need for any such rescind the transaction only if it can be shown: (i) that the orders (because the insolvency official in any event has the assignment was effected with an intention to prejudice creditors and exclusive right to collect) where the transaction is re-characterised the purchaser knew of such intention; or (ii) that the purchaser was as a secured loan. However, as a practical matter, where the not entitled to the receivables assigned. An assignment of insolvency official seeks to determine whether the transaction receivables generally constitutes a “cash transaction” if the seller, at constituted a true sale or has to be re-characterised as a secured loan or about the same time as the assignment was effected, received and meanwhile prevent the purchaser from collecting the adequate consideration. In this respect, depending on the type of receivables, the insolvency official will simply notify the obligors receivables involved, an assignment may qualify as a “cash accordingly. This generally has the effect that obligors cease transaction” even where the purchase price paid reflects some making payments. discount from the nominal value of the assigned receivables. A large discount, a significant time lag between assignment and payment of the consideration, or a deferred purchase price 6.3 Suspect Period (Clawback). Under what facts or arrangement, however, disqualify the transaction as a “cash circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or transaction”. “preference” period before the commencement of the insolvency proceeding? What are the lengths of the 6.4 Substantive Consolidation. Under what facts or “suspect” or “preference” periods in Germany for (a) circumstances, if any, could the insolvency official transactions between unrelated parties and (b) consolidate the assets and liabilities of the purchaser with transactions between related parties? those of the seller or its affiliates in the insolvency proceeding? 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consolidation of assets and liabilities of sellers and purchasers or Leases pertaining to real estate are not subject to the their affiliates. Under general corporate law principles, there may insolvency official’s election right but may be terminated by be liability under piercing the corporate veil principles, but this the insolvency official (subject to statutory notice periods) does not result in any consolidation of assets and liabilities. irrespective of the agreed term of the lease. Furthermore, lease receivables under real estate leases constitute “future receivables” and cannot be validly assigned with effect for 6.5 Effect of Proceedings on Future Receivables. What is the the seller’s/lessor’s insolvency estate to the extent that they effect of the initiation of insolvency proceedings on (a) pertain to the period after the month in which the insolvency sales of receivables that have not yet occurred or (b) on proceeding is opened (or, where the opening date is later than sales of receivables that have not yet come into the 15th day of a month, the next following month). existence? Nevertheless, any such lease receivables can be (and

customarily are) covered by a mortgage or land charge over Germany German insolvency law gives an insolvency official the right to elect the relevant real estate that can be enforced by the mortgagee whether to perform or reject performance of executory contracts, i.e., in the seller’s/lessor’s insolvency. contracts that have not been fully performed by at least one party. The By contrast, as regards the securitisation of fully disbursed bank application of this general rule affects future sales of receivables as loans, that the insolvency official’s election right does not apply, well as mutually unperformed contracts underlying the (existing) given that the relevant loan agreements no longer constitute receivables sold and the assignment of receivables that have not yet executory contracts. This was clarified by a legislative amendment come into existence (i.e., future receivables). Where the insolvency in 2007. Also, receivables becoming payable from time-to-time official’s election right does not apply in respect of a contract under a bank loan do not constitute “future receivables”. underlying receivables, the contract concerned continues to bind the insolvency estate and the counterparty, but as explained below this 7 Special Rules does not always result in the enforceability of the sale and assignment of resulting receivables. The receivables purchase agreement itself may be subject to the 7.1 Securitisation Law. Is there a special securitisation law insolvency official’s election right if the agreement has not been fully (and/or special provisions in other laws) in Germany establishing a legal framework for securitisation performed by at least one party, in particular if it addresses future transactions? If so, what are the basics? sales. If properly drafted, however, receivables purchase agreements pertaining to term deals are generally not subject to the election right Germany has no laws containing a comprehensive set of rules because the seller (by assigning the receivables) has fully performed applicable to securitisation transactions. However, certain typical its relevant obligations. In the case of a receivables purchase aspects of securitisations are addressed in special statutes. In agreement in a revolving securitisation transaction which provides for particular, Germany has introduced, in the context of transposing a series of sales under a single master agreement, any election by the directive 2009/111/EC (also called CRD II) into German law, a set insolvency official to reject performance may also pertain to sales that of rules applicable to credit institutions (Kreditinstitute) and were consummated in the past. To avoid this risk, each sale under the financial services institutions (Finanzdienstleistungsinstitute) master agreement must be structured as an independent transaction. investing in, sponsoring or originating securitisation transactions. In the case of mutually unperformed contracts underlying the Most importantly, such institutions are prohibited from investing in receivables sold, where the insolvency official has an election right securitisation transactions where the originator does not retain, on and elects performance, any future payments by the obligors are due an ongoing basis, a net economic interest in the transaction of at to the insolvency estate, not to the purchaser. Where the insolvency least 5%, which amount will be increased to 10% from 2015 official elects to reject performance, the receivables do not become onwards. Moreover, institutions investing in securitisation due at all. Consequently, unless the cash flows required to service the transactions must have a comprehensive and thorough asset-backed securities are otherwise ensured, a successful understanding of the positions (and their underlying assets) they are securitisation generally requires that the insolvency official’s election investing in, and establish formal procedures in order to ensure such right does not apply to the underlying receivables contracts. In understanding and monitor the positions they have invested in. addition, an assignment of “future receivables” that come into Similar rules are expected to be enacted with respect to insurance existence after the opening of the insolvency proceeding (as opposed companies and pension funds investing in securitisation to the assignment of previously existing receivables that become due transactions. Although the rules are aimed at institutions, they after the opening of the insolvency proceeding) is not enforceable. indirectly affect other originators as well because such originators Upon the insolvency of the seller/lessor, leases and leasing need to structure their securitisation transactions accordingly (by contracts pertaining to movables are not subject to the retention of an economic interest as well as reporting obligations) in insolvency official’s election right if the acquisition of the order to allow institutions to invest in their securitisation leased objects was financed by a third party and that third transactions. party has obtained security in the form of a security transfer of the leased objects. (Legal uncertainty exists in this regard where the lessor is not identical to the owner of the leased 7.2 Securitisation Entities. Does Germany have laws objects, which is not uncommon in the German leasing specifically providing for establishment of special purpose market.) It is a question of the applicable facts and entities for securitisation? If so, what does the law circumstances (i.e., in particular the terms of the applicable provide as to: (a) requirements for establishment and lease or leasing contract) whether the receivables under such management of such an entity; (b) legal attributes and contracts are, for German insolvency law purposes, “future benefits of the entity; and (c) any specific requirements as receivables”. In general, instalments due under so-called to the status of directors or shareholders? “financial leasing” contracts are considered not to constitute “future receivables”, but to come into existence upon the Germany does not have any such laws. It should be noted that, until conclusion of the leasing agreement and to become due from some years ago, no German entities were used as purchaser vehicles time to time. in securitisation transactions. This has mainly been due to the trade

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tax issue described in question 9.6 below. Following the 8.2 Servicing. Does the seller require any licences, etc., in introduction, in 2003, of a trade tax exemption for certain purchaser order to continue to enforce and collect receivables vehicles in bank loan securitisation transactions, there have been a following their sale to the purchaser, including to appear number of transactions involving German purchaser vehicles, before a court? Does a third party replacement servicer including transactions under the German True Sale Initiative. require any licences, etc., in order to enforce and collect sold receivables?

7.3 Non-Recourse Clause. Will a court in Germany give The collection and enforcement of the sold receivables by the effect to a contractual provision (even if the contract’s purchaser itself does not trigger any licensing requirements in governing law is the law of another country) limiting the Germany. However, where the receivables are serviced by a third recourse of parties to available funds? party on behalf of the purchaser, such party generally must be Germany registered under the German Legal Services Act. An exception See question 7.4. from the registration requirement applies where the seller continues servicing the sold receivables that were originated by itself. 7.4 Non-Petition Clause. Will a court in Germany give effect Consequently, as a practical matter, this registration requirement to a contractual provision (even if the contract’s governing becomes relevant only in the case of a transfer of the servicing to a law is the law of another country) prohibiting the parties replacement servicer. In addition, any servicer must comply with from: (a) taking legal action against the purchaser or German data protection laws. another person; or (b) commencing an insolvency proceeding against the purchaser or another person? 8.3 Data Protection. Does Germany have laws restricting the The predominant view is that such non-recourse clauses and non- use or dissemination of data about or provided by obligors? If so, do these laws apply only to consumer petition clauses are valid and enforceable under German law, except obligors or also to enterprises? to the extent that the relevant underlying claim is based upon the purchaser’s wilful misconduct or gross negligence. But see Germany has data protection laws, the most important of which is question 7.5 regarding the obligation of the management of certain the Federal Data Protection Act, that restrict the use and types of companies organised under German law to file for dissemination of data about or provided by obligors. This law insolvency upon illiquidity or over-indebtedness. applies only to personal data relating to individuals (including individuals in their capacity as merchants or employees) and, in the 7.5 Independent Director. Will a court in Germany give effect view of some commentators, partnerships that have individuals as to a contractual provision (even if the contract’s governing partners. The law provides that, where the affected individual has law is the law of another country) or a provision in a not consented to the transfer of personal data, such transfer is party’s organisational documents prohibiting the directors permissible only if the transferor’s interest in transferring the data from taking specified actions (including commencing an outweighs the affected individual’s interest in avoiding such insolvency proceeding) without the affirmative vote of an independent director? transfer. The predominant view is that, in a typically structured securitisation transaction, this analysis generally results in the permissibility of the transfer of data. The argument in favour of this In the case of German SPEs (which are generally in the form of conclusion is even stronger where a securitisation transaction is limited liability companies (GmbH)), such a provision would be structured so that it involves a data trustee as referred to in the generally given effect to. However, the statutory obligation to file German bank regulator’s securitisation release described below for the opening of an insolvency proceeding where the company is (which is, however, not always the case where non-bank assets are either unable to pay its debts as they become due or over-indebted, being sold). and the incurrence by management of personal liability for damages and criminal liability upon a breach of such obligation, would Independently of data protection laws, banks are subject to bank remain unaffected by any non-petition clause in the transaction secrecy restrictions vis-à-vis their customers (individuals or other documents or the GmbH’s organisational documents. customers). These restrictions are considered to be of a contractual nature. The standard business terms of German banks generally address these expressly, but even where there is no such express 8 Regulatory Issues provision, German courts consider banks to be bound by an implicit restriction. In 1997, the German bank regulator issued a release on 8.1 Required Authorisations, etc. Assuming that the the securitisation of German bank assets, which also addressed purchaser does no other business in Germany, will its bank secrecy requirements. The regulator took the position that purchase and ownership or its collection and enforcement bank secrecy is complied with as long as the seller bank continues of receivables result in its being required to qualify to do to service the bank loans sold because no transfer of obligor-related business or to obtain any licence or its being subject to information to the purchaser is required. Where a back-up servicer regulation as a financial institution in Germany? Does the is appointed, the regulator generally requires it to be a credit answer to the preceding question change if the purchaser institution based within the EU or the European Economic Area. In does business with other sellers in Germany? any event, the regulator considers disclosure of information permissible: (i) to the extent required for an effective assignment, if The general view in the market is that, as a securitisation transaction the purchaser receives obligor-related information in anonymised does not involve the transfer of any undrawn commitments, the form, with the complete set of information being deposited with an purchase and ownership of receivables by the purchaser, and its independent data trustee; and (ii) to the extent that information is collection and enforcement of receivables owned by itself, do not “strictly technically required” to be passed on, and passed on in trigger any licensing requirements in Germany. The German bank anonymised form, to third parties (such as rating agencies, auditing regulator has confirmed this view for revolving securitisations in firms or security trustees) that are also bound by a confidentiality connection with the introduction of a new licensing requirement for obligation. Although the views expressed by the German bank factoring services providers. 160 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cleary Gottlieb Steen & Hamilton LLP Germany

regulator are not binding upon German courts, they are generally 9 Taxation considered to be of persuasive value. The general view in the German market is that bank secrecy is not violated in a 9.1 Withholding Taxes. Will any part of payments on securitisation transaction that is structured so as to comply with the receivables by the obligors to the seller or the purchaser requirements set out in the 1997 release. In addition, the German be subject to withholding taxes in Germany? Does the bank regulator stated in a release in 2007 that it will consider, in answer depend on the nature of the receivables, whether light of the court decision described in question 4.4, whether the they bear interest, their term to maturity, or where the requirements set forth in the 1997 release have to be revised. seller or the purchaser is located? Neither data protection nor bank secrecy is an issue where the obligor has approved the transfer of the relevant data. Such Payments on receivables (including interest payments) are Germany approval may be contained in a general consent to a sale and generally not subject to withholding taxes in Germany. Some assignment of receivables for refinancing purposes. Some German exceptions apply based on the nature of the receivables. banks have recently amended their standard business terms to that If the receivables qualify as hybrid debt instruments (i.e., effect. However, such consent is probably invalid if contained in participating loans, profit-contingent or convertible bonds, standard business terms permitting the assumption of the entire loan jouissance rights and silent partnership interests), a German contract by a purchaser, unless the purchaser is identified in the resident obligor would be obligated to withholding tax standard business terms or the obligor is given the right to terminate (Kapitalertragsteuer) at a rate of 26.375% on interest paid on such the loan in case the loan contract is transferred (see question 4.3 instruments. The issuer’s obligation to withhold on these hybrid above). debt instruments does not depend on the location of the seller or the purchaser (i.e., the economic owner of the receivables). 8.4 Consumer Protection. If the obligors are consumers, will A participating relationship is characterised by the fact that the the purchaser (including a bank acting as purchaser) be remuneration does not – or not solely – consist of a fixed periodic required to comply with any consumer protection law of amount but of a share in the success generated by the obligor. Germany? Briefly, what is required? Payment obligations that are contingent on the obligor’s liquidity (availability of funds) may be sufficient to characterise a loan As a general rule, the originator of the receivables (i.e., the seller) arrangement as participating. is primarily responsible for compliance with German consumer Furthermore, German tax authorities have the power to instruct a protection laws. Non-compliance may affect the validity of the German resident obligor to withhold tax at a rate of 26.375% on receivables contracts or give the obligor a rescission right. payments to a purchaser (economic owner) located outside Germany Consequently, the purchaser needs to review whether the seller has when this appears appropriate to safeguard Germany’s taxation right. been in compliance with these laws. In addition, it is customary for This only applies in limited circumstances where the purchaser is the seller to give the purchaser corresponding representation and subject to taxation in Germany on its income from such receivables; warranties. Consumer protection laws become particularly relevant this may be the case, for example, with respect to interest payments on in respect of loan agreements, receivables contracts entered into at loans that are secured by German situs real estate (with an exception the place of abode of the obligor, and receivables contracts that are being applicable to bonds and claims which are recorded in a public based upon the seller’s standard business terms. register or which are represented by global securities or securities The following recent changes to German consumer protection laws representing part of a securities issue (Teilschuldverschreibungen)). relating to consumer loans should be noted: a lender must notify its Finally, withholding tax at a rate of 26.375% is also levied when a consumer obligor three months before an agreed interest rate expires bank or financial services institution in Germany (i) pays interest or the loan matures, stating whether it is willing to agree on a new (e.g., on customer deposits) or, under certain circumstances, capital interest rate or to extend the loan. This obligation also applies to a gain in its capacity as obligor, or (ii) pays out interest or capital gain purchaser of the loan, unless the seller and the purchaser agreed that on securities in its capacity as custodian, to a purchaser (economic the seller shall exclusively continue dealing with the consumer owner) located in Germany. No such tax is withheld when the obligor. Furthermore, a lender (and a purchaser of a loan) may purchaser (economic owner) itself is a bank or financial services accelerate an annuity loan in case of a payment default only if the institution. In addition, this tax is not withheld when the purchaser consumer obligor is in default with at least two consecutive (economic owner) is outside Germany unless the income is amortisation instalments and if the aggregate amount of arrears totals allocable to a permanent establishment in Germany. at least 2.5 to 10 % of the principal amount of the loan (depending on the loan’s term and whether it is secured by real estate). Tax withheld is credited or refunded if the underlying income is included in the purchaser’s German income tax assessment. If the income is not included in such assessment (e.g., because the 8.5 Currency Restrictions. Does Germany have laws purchaser is not subject to net income tax with respect to such restricting the exchange of Germany’s currency for other income in Germany), the purchaser may nevertheless be able to currencies or the making of payments in Germany’s claim a full or partial refund of the withholding tax when the currency to persons outside the country? purchaser is eligible for an exemption from, or a reduction in the rate of, such withholding tax under German domestic law (e.g., Germany has no such laws (with the exception of those corporate holders of hybrid debt are generally entitled to a reduced implementing United Nations, EU or other international sanctions withholding tax rate of 15.825%) or an applicable income tax treaty. in respect of transactions with certain countries and persons). Where a German resident receives from, or makes payments to, non-German residents, the German resident must in certain 9.2 Seller Tax Accounting. Does Germany require that a circumstances notify such payments to Deutsche Bundesbank. specific accounting policy is adopted for tax purposes by However, such notification serves for statistical purposes only, and the seller or purchaser in the context of a securitisation? failure to notify does not affect the payment or the underlying obligation. Germany has not adopted any specific accounting policy for tax

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purposes in the context of a securitisation. German tax law 9.5 Purchaser Liability. If the seller is required to pay VAT, generally follows German GAAP. The concept of economic stamp duty or other taxes upon the sale of receivables (or ownership under German GAAP and German tax law is essentially on the sale of goods or services that give rise to the the same. The answer to the question of whether the seller or the receivables) and the seller does not pay, then will the purchaser has to show the assigned receivables in its tax balance taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold receivables or sheet depends on whether the sale of the receivables can be collections? considered a true sale or a secured loan, i.e., whether economic ownership in the receivables has been transferred. Economic The tax authorities are able to make claims against the purchaser for ownership of the receivables generally remains with the seller if the unpaid VAT, when the seller was required to pay such VAT on a sale seller continues to bear the credit risk associated with the of goods or services that gave rise to the receivables. The tax

Germany receivables. This is the case, for example, where the amounts authorities may only make claims against the purchaser if and to the retained by the purchaser to cover credit risk (e.g., purchase price extent the purchaser collects the receivables. discounts) significantly exceed the expectable default rate and are refundable (if the credit risk does not materialise). The treatment The purchaser is deemed to have collected the receivables in full if under IFRS or US GAAP is not decisive for German tax purposes. the purchaser grants a second assignment (or pledge) of the receivables to a third person (including a security assignment or pledge of the purchased receivables to a security trustee). This also 9.3 Stamp Duty, etc. Does Germany impose stamp duty or applies when the purchaser receives no consideration for this other documentary taxes on sales of receivables? second assignment. Pursuant to guidance issued by the German tax authorities, the Germany does not impose a stamp duty or other documentary taxes receivables are “deemed not to have been collected by the on sales of receivables. purchaser” (so that no liability arises) if and to the extent the purchaser pays consideration for the receivables to the free 9.4 Value Added Taxes (“VAT”). Does Germany impose disposition of the seller. On this basis, the risk of the purchaser VAT, sales tax or other similar taxes on sales of goods or becoming liable for VAT in a typical securitisation transaction is services, on sales of receivables or on fees for collection generally limited to the VAT contained in the difference between the agent services? nominal amount of the receivables sold and the purchase price delivered by the seller, e.g., due to discounts and cash reserves. Germany generally imposes VAT at a rate of 19% on sales of goods or services. The sale of receivables is exempt from VAT (but the seller can generally elect to waive this exemption). 9.6 Doing Business. Assuming that the purchaser conducts no other business in Germany, would the purchaser’s In general, Germany also imposes VAT on fees for collection agent purchase of the receivables, its appointment of the seller services. In consequence of the MKG-Kraftfahrzeuge-Factoring as its servicer and collection agent, or its enforcement of GmbH decision of the European Court of Justice (ECJ) of 26 June the receivables against the obligors, make it liable to tax 2003 (the “MKG decision”), the German tax authorities consider in Germany? the purchaser of receivables to be rendering taxable collection services (also referred to as “factoring services”) to the seller when In general, the purchase of receivables would not make a purchaser the purchaser assumes the actual collection of the receivable. The that conducts no other business in Germany liable to tax in VAT for such factoring services is generally assessed on the Germany. Exceptions may apply if the receivables give rise to difference between the nominal value of the receivables assigned income from German sources (as defined in German tax law). In and the purchase price for such receivables, less the VAT included some cases (e.g., interest payments on hybrid debt instruments), the in such difference. The German tax administration applies special purchaser’s liability to tax in Germany is then satisfied through rules to determine the assessment basis with respect to distressed withholding (see question 9.1 above). In other cases, the receivables. Upon referral by the German Federal Tax Court, the purchaser’s (corporate) income tax liability is assessed on the basis ECJ decided, on 27 October 2011, that the purchase of distressed of its net income from German sources. For example, interest receivables does not constitute a service by the purchaser to the payments on loans secured by German situs real estate give rise to seller and, consequently, is not subject to VAT, provided that the a tax liability and a filing obligation in Germany under domestic difference between the nominal value of the distressed receivables law (see question 9.1 above). In many of its income tax treaties, and the purchase price reflects the decreased economic value. It Germany waives the right to tax interest on loans secured by remains to be seen how the German tax administration will interpret German situs real estate. this ECJ decision. The appointment of the seller as the purchaser’s service and In view of the German tax authorities, no taxable collection services collection agent, or the purchaser’s enforcement of the receivables are being rendered by the purchaser where the seller continues to against the obligors, should not ordinarily make the purchaser liable collect the receivables after the sale, as is typically the case in to tax in Germany. However, the German tax authorities have in the securitisation transactions. In this case, the collection of the past indicated that they may treat the purchaser as a resident of receivables by the seller is not treated as a separate service to the Germany for tax purposes if the purchaser is an entity that has no purchaser, provided that, in collecting the receivables, the seller acts substantial presence outside of Germany. In this case, the purchaser in its own interest and on the basis of its own, retained right. Even may be treated as having its effective place of management in when the seller’s activity is based on a separate agreement, such Germany because the seller in its capacity as servicer and collection activity is viewed as a supplementary service to a tax-exempt agent makes the decisions relating to the day-to-day management of transaction and therefore the fees for such collection agent services the purchaser’s business (in particular, the enforcement of the are also exempt from VAT. The predominant view among market receivables against the obligors) in Germany. As a result, the participants is that, due to the aforementioned interpretation, the purchaser would be subject to German (corporate) income tax and issues created by the MKG decision have been resolved for typical trade tax. German securitisation transactions.

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Even where it can be established that a purchaser is effectively Acknowledgment managed from outside of Germany, the purchaser may still have a We would like gratefully to acknowledge the contribution by Dr. taxable presence in Germany if the tax authorities consider the J.F. Daniel Weyde, a tax partner at Cleary Gottlieb’s Frankfurt seller as a dependent agent in Germany due to its collection services office, of the descriptions in this chapter relating to German tax. for the purchaser. This mainly depends on whether the seller is bound by the instructions of the purchaser. If the purchaser agrees that the seller can continue the collection on its own terms and the purchaser has no possibility to intervene, a point can be made that the seller is not acting as a dependent agent.

Werner Meier Michael Kern Germany

Cleary Gottlieb Steen & Hamilton LLP Cleary Gottlieb Steen & Hamilton LLP Main Tower, Neue Mainzer Strasse 52 Main Tower, Neue Mainzer Strasse 52 60311 Frankfurt am Main 60311 Frankfurt am Main Germany Germany

Tel: +49 69 97 103-0 Tel: +49 69 97 103-0 Fax: +49 69 97 103-199 Fax: +49 69 97 103-199 Email: [email protected] Email: [email protected] URL: www.cgsh.com URL: www.cgsh.com

Werner Meier is a partner based in Cleary Gottlieb’s Frankfurt Michael Kern is a senior attorney based in Cleary Gottlieb’s office. Mr. Meier’s practice spans German and international Frankfurt office. Mr. Kern’s practice focuses on insolvency, real financing, restructuring and capital markets transactions. In estate and banking law. He also frequently advises distressed recent years, he has focused on German debt and corporate debt investors in connection with debt collections and loan-to-own restructurings, as well as syndicated loans, securitisations and strategies. In 2010, Mr. Kern advised Goldman Sachs as a lender other structured finance transactions. Mr. Meier has worked on in the restructuring of the €3.7 billion Karstadt real estate numerous German, pan-European and U.S. securitisation and financing, and in 2006 and 2008, he advised Goldman Sachs in other structured finance transactions, including in 1998/1999 the respect of the origination and restructuring thereof. In recent first synthetic securitisation transaction ever. He has also acted years, Mr. Kern advised an ad hoc group of buy-side and sell-side as counsel to Standard & Poor’s on numerous synthetic and true market participants on cross-jurisdictional insolvency issues sale securitisations, secured loan and other structured finance related to customer access to central CDS clearing platforms, transactions in Germany. Mr. Meier is widely published on which included the participation and support of ISDA, SIFMA, German and U.S. capital markets, structured finance, corporate AMG and MFA. He also acted as insolvency counsel to The law and insolvency law issues. He joined Cleary Gottlieb in 1992 Clearing Corporation, together with IntercontinentalExchange and was resident in the Firm’s New York office from 1995 to 1996. (ICE) and a consortium of derivates dealers, in the introduction of He holds a doctorate degree in law (Dr. iur.) and obtained an ICE Trust US, the first clearing and settlement platform for Credit LL.M. degree from Columbia University in 1991 and a diploma in Default Swaps. Mr. Kern joined Cleary Gottlieb in 2000. He business administration (Diplom-Kaufmann) from the Business passed the second state examination in the State of Hesse in School of the University of Bielefeld in 1990. He completed his 1998 and the first state examination at the University of Frankfurt German legal education and practical training in 1989. He is a am Main in 1996. Mr. Kern is admitted to practice in the Federal member of the Bar in New York and admitted to practice in the Republic of Germany. Federal Republic of Germany.

Cleary Gottlieb Steen & Hamilton LLP is a leading international law firm with an important U.S., European, Latin American and Asian practice, and broad experience in virtually all types of corporate, financial, securities and tax law. The firm has more than 1,100 lawyers in 14 offices located in major financial centres around the world: New York; Washington, D.C.; Paris; Brussels; London; Moscow; Frankfurt; Cologne; Rome; Milan; Hong Kong; Beijing; Buenos Aires; and São Paulo. The firm plans to open an office in Seoul, Korea, in the first half of 2012. Ever since Cleary Gottlieb helped develop the first collateralised mortgage obligation in 1983, the firm has been a recognised leader in the field of financial asset securitisation. Lawyers in the Frankfurt office have participated in some of the most innovative transactions involving the creation of asset-backed securities in Germany.

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KGDI Law Firm Athina Diamanti

1 Receivables Contracts 166/2003 transposing European Directive 2000/35/EC into Greek law. (European Directive 2000/35/EC has already been substituted by Directive 2011/7/EU, which must be 1.1 Formalities. In order to create an enforceable debt transposed to Greek law by 16 March 2013. The latter also obligation of the obligor to the seller, (a) is it necessary provides for a statutory interest for late payments in that the sales of goods or services are evidenced by a commercial transactions.) formal receivables contract; (b) are invoices alone (c) Yes. Certain clauses of receivables contracts may be unfair sufficient; and (c) can a receivable “contract” be deemed or abusive according to various legislative provisions and/or to exist as a result of the behaviour of the parties? Greek courts’ rulings. (a) A formal receivables contract is not necessary in order to (d) Greece has transposed European legislation on consumer create an enforceable debt obligation, unless otherwise protection; therefore a consumer benefits from the protection provided in the law (article 158 of the Greek Civil Code, accorded by such legislation, both general and special. GCC), e.g. certain debts arising under consumer legislation must be concluded in writing. 1.3 Government Receivables. Where the receivables (b) An invoice (depending on its terms) may itself represent the contract has been entered into with the government or a contract between the parties or evidence an obligation arising government agency, are there different requirements and from such contract. An invoice is enforceable without an laws that apply to the sale or collection of those underlying contract, provided it has been accepted by the receivables? obligor. (c) Where a contract is oral, evidence of the parties’ conduct is In most cases, yes. Products sold and services rendered to state admissible for the purposes of ascertaining the terms of the authorities and the public sector in general are governed by (a) the contract. Moreover a contract may be implied between special provisions of European legislation regulating public parties based on the conduct of the parties or continuous procurement, as such legislation is transposed into Greek law, and dealings between them (e.g. in the context of a frame (b) special Greek law provisions which reserve favourable agreement), where the obligations arising from the implied treatment to the Greek state in a series of matters (e.g. prolonged contract are sufficiently certain/specific to be enforceable. In duration of deadlines, prolonged prescription periods, approval all cases where an obligation allegedly arises from an oral contract, it is up to the competent court to determine the and/or authorisations required for the validity of certain contracts existence of such obligation and the terms thereof. concluded with the government, special delivery mechanisms, special requirements for enforcement against the government/ government agencies, etc.). 1.2 Consumer Protections. Do Greece’s laws (a) limit rates of interest on consumer credit, loans or other kinds of receivables; (b) provide a statutory right to interest on late 2 Choice of Law – Receivables Contracts 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 2.1 No Law Specified. If the seller and the obligor do not them? specify a choice of law in their receivables contract, what are the main principles in Greece that will determine the (a) There are no limits on the interest set on banking loan and governing law of the contract? credit agreements of any type; however, banking interest rates and compound interest thereon are subject to In case both the seller and the obligor are Greek residents, delivery restrictions, mainly with respect to unilateral changes of is agreed to take place in Greece and no other foreign elements interest rates by the banks and frequency of interest appear in the receivables contract, Greek law will apply. In case capitalisation. one of the parties is not a Greek resident and/or delivery is agreed Non-bank interest rates (and default interest rates) of to take place outside Greece and/or other foreign elements appear in contractual obligations are capped at a rate which is adjusted the receivables contract, the governing law thereto will be periodically by reference to the ECB rates. Compound determined, in the absence of a specific choice of law, (a) pursuant interest is allowed only subject to certain conditions. to EU Regulation 593/2008 of 17 June 2008 on the law applicable (b) Yes. A statutory right to interest on late payments in to contractual obligations (“Rome I”), in case the contract was commercial transactions is provided by presidential decree entered into on or after 17 December 2009, or (b) pursuant to the

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Rome Convention on applicable law on contractual obligations dated law governing the underlying receivables, irrespective of which law 19 June 1980 (the Rome Convention), in case the contract was governs the receivable. However, the in rem transaction resulting entered into prior to 17 December 2009. (The Rome Convention was from such sale, i.e. the transfer of the receivables, will be governed transposed into Greek law by law 1792/1988 and is in effect as of 1 by the law of the underlying receivable; therefore, formalities for April 1991.) For those contracts which fall outside the scope of the completion of the transfer, such as announcement of the transfer to Rome Convention or Rome I, the applicable law will be decided third parties or registration thereof (where applicable) in public pursuant to article 25 GCC, according to which the contract is registries, that are required under the law of the receivable, must be governed by the law to which the parties have submitted themselves complied with. and in absence thereof, by the law which is appropriate to the contract, after taking into consideration all special circumstances of the case. 3.2 Example 1: If (a) the seller and the obligor are located in Greece Specific contracts are regulated by special private international law Greece, (b) the receivable is governed by the law of provisions (such as consumer contracts, guaranties, international Greece, (c) the seller sells the receivable to a purchaser sales contracts, contracts of carriage, insurance contracts and located in a third country, (d) the seller and the purchaser individual employment contracts). choose the law of Greece] to govern the receivables purchase agreement, and (e) the sale complies with the requirements of Greece, will a court in Greece recognise 2.2 Base Case. If the seller and the obligor are both resident that sale as being effective against the seller, the obligor in Greece, and the transactions giving rise to the and other third parties (such as creditors or insolvency receivables and the payment of the receivables take administrators of the seller and the obligor)? place in Greece, and the seller and the obligor choose the law of Greece to govern the receivables contract, is there In general, yes. any reason why a court in Greece would not give effect to their choice of law? In securitisation transactions in particular in which the seller is domiciled in Greece or operates through a permanent establishment No, there is not. in Greece and the purchaser is established solely for the purpose of acquiring the business claims and is the issuer of the bonds, Greek article 10 of law 3156/2003 applies (the Securitisation Law). 2.3 Freedom to Choose Foreign Law of Non-Resident Seller Pursuant to the Securitisation Law, unless otherwise provided in the or Obligor. If the seller is resident in Greece but the respective receivables sale agreement, the agreement is governed obligor is not, or if the obligor is resident in Greece but by the relevant GCC provisions, and the transfer agreement by the the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables provisions regulating assignment contracts of the GCC, to the contract, will a court in Greece give effect to the choice of extent these are not contrary to provisions of the Securitisation Law. foreign law? Are there any limitations to the recognition In most public Greek securitisations, the receivables sale agreement of foreign law (such as public policy or mandatory is governed by foreign law, while the transfer (assignment) principles of law) that would typically apply in commercial agreement (and thus the registration obligation rising therefrom) is relationships such that between the seller and the obligor governed by Greek law. under the receivables contract? In securitisation transactions, where the seller is the government or a government agency, specific provisions apply; however, transfer Pursuant to the Rome Convention and Rome I, the contracting formalities notwithstanding, the seller and the purchaser may parties are free to choose the law of their contract (including a submit the receivables sale agreement to foreign law. foreign law); such choice may be modified only to the extent that it conflicts with overriding Greek mandatory rules or Greek public policy (ordre public) or if there are special protective provisions for 3.3 Example 2: Assuming that the facts are the same as certain contracts or for certain types of contracting parties (such as Example 1, but either the obligor or the purchaser or both consumers). For those types of contracts not within the scope of the are located outside Greece, will a court in Greece recognise that sale as being effective against the seller Rome Convention or Rome I, article 25 GCC also gives priority to and other third parties (such as creditors or insolvency the lex voluntantis (the foreign law which the parties have chosen) administrators of the seller), or must the requirements of and will modify such choice in case of abuse or violation of Greek the obligor’s country or the purchaser’s country (or both) mandatory rules or Greek public policy. be taken into account?

2.4 CISG. Is the United Nations Convention on the A Greek court will recognise the sale as effective, without taking International Sale of Goods in effect in Greece? into consideration any foreign law, as long as Greek law requirements (especially the registration obligation as regards the Yes, it has been transposed into Greek law by law 2392/1997. transfer of in rem rights over the receivables) are met; in particular as regards bankruptcy of the (Greek) seller, it should be noted that the Securitisation Law provides for the ring-fencing of the 3 Choice of Law – Receivables Purchase securitisation transaction against the subsequent bankruptcy of the Agreement seller.

3.1 Base Case. Does Greece’s law generally require the sale of receivables to be governed by the same law as the law governing the receivables themselves? If so, does that general rule apply irrespective of which law governs the receivables (i.e., Greece’s laws or foreign laws)?

Greek law does not require that a sales contract be governed by the

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3.4 Example 3: If (a) the seller is located in Greece but the 4.2 Perfection Generally. What formalities are required obligor is located in another country, (b) the receivable is generally for perfecting a sale of receivables? Are there governed by the law of the obligor’s country, (c) the seller any additional or other formalities required for the sale of sells the receivable to a purchaser located in a third receivables to be perfected against any subsequent good country, (d) the seller and the purchaser choose the law faith purchasers for value of the same receivables from of the obligor’s country to govern the receivables the seller? purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in In sales effected under the general provisions of the GCC, the Greece recognise that sale as being effective against the assignment of the claim must be notified to the obligor, the seller and other third parties (such as creditors or notification (by either the assignee or the assignor) being a insolvency administrators of the seller) without the need Greece condition to the effectiveness of the transfer vis-a-vis the obligor. to comply with Greece’s own sale requirements? Under securitisation transactions, notification is effected by Yes, it will. registration of the transaction with the competent land registry. Registration is provided as a condition to most of the privileges set out in the Securitisation Law. 3.5 Example 4: If (a) the obligor is located in Greece but the seller is located in another country, (b) the receivable is Notwithstanding effects of the notification (or registration, as the governed by the law of the seller’s country, (c) the seller case may be) but given that the assignment agreement is binding and the purchaser choose the law of the seller’s country upon its parties, it is debatable whether the purchaser may further to govern the receivables purchase agreement, and (d) transfer the assigned claim prior to the notification, the the sale complies with the requirements of the seller’s jurisprudence and legal theory having different views on the matter. country, will a court in Greece recognise that sale as In any case, prior to the notification (or registration, as the case may being effective against the obligor and other third parties be) the purchaser (and any of its transferees) bears the risk of: (a) (such as creditors or insolvency administrators of the obligor) without the need to comply with Greece’s own payment to the assignor, which releases the obligor from all its sale requirements? liabilities under the relevant contract; (b) enforcement of the assignor’s creditors against the receivable in question which is Yes. It should be noted that the provision of EU Directive 93/13 on considered to be part of its property; and (c) assignor’s insolvency, consumer protection, which characterises as abusive clauses that taking into account that the said receivable is considered to be part entitle the provider of the goods/services to assign the contract, of the bankruptcy property. even if such assignment reduces the consumer’s protection, has not been transposed into Greek law. 4.3 Perfection for Promissory Notes, etc. What additional or different requirements for sale and perfection apply to sales of promissory notes, mortgage loans, consumer 3.6 Example 5: If (a) the seller is located in Greece loans or marketable debt securities? (irrespective of the obligor’s location), (b) the receivable is governed by the law of Greece, (c) the seller sells the receivable to a purchaser located in a third country, (d) Promissory Notes and other forms of debt marketable instruments the seller and the purchaser choose the law of the are transferred following a relevant agreement, endorsement and purchaser’s country to govern the receivables purchase delivery to the purchaser (or a person acting on its behalf). agreement, and (e) the sale complies with the Mortgage loans and other secured receivables are transferred in requirements of the purchaser’s country, will a court in accordance with the abovementioned (under question 4.2) Greece recognise that sale as being effective against the procedure. The securities of such loans and receivables, being seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located ancillary rights, are transferred with the respective secured claim in Greece and any third party creditor or insolvency subject to relevant formalities (see question 4.11). administrator of any such obligor)? 4.4 Obligor Notification or Consent. Must the seller or the Please refer to our answer to question 3.1 above. 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 Asset Sales purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale 4.1 Sale Methods Generally. In Greece what are the against the obligors? Does the answer to this question customary methods for a seller to sell receivables to a vary if (a) the receivables contract does not prohibit purchaser? What is the customary terminology – is it assignment but does not expressly permit assignment; or called a sale, transfer, assignment or something else? (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect a sale, are there any benefits to giving notice – such as Receivables are sold under a sales contract. The transfer thereof is cutting off obligor set-off rights and other obligor effected through the assignment of the underlying claims (GCC 455 defences? et seq.) whereby the assignor (seller) transfers its claims against an obligor to the assignee (purchaser). Notification requirements are set out under question 4.2. The Under more complex structures of receivables’ sales, claims may be obligor’s consent is not required for the transfer of the receivable, transferred through factoring or forfeiting agreements (law unless otherwise provided in the underlying contract. 1905/1990), certain forms of covered bonds (law 3601/2007) and The sale and assignment of receivables that are subject to the securitisation transactions (Securitisation Law). Securitisation Law may be agreed without the obligor’s consent, Under such transactions, the law and relevant documentation irrespective of contractual provisions in the respective contracts usually refers to the “sale” or “transfer” of claims. imposing consent as a condition precedent to the transfer of the 166 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London KGDI Law Firm Greece

underlying receivables. However, the obligor may invoke, against list of the transferred receivables (identification of the contract, the assignee, any rights and defences (including set-off) that it had name and address of obligor(s)/guarantors, amount of the against the assignor prior to the notification, subject to certain receivables, maturity date and securities) must be annexed to the conditions. registration form. Receivables sold under the same sale agreement need not have 4.5 Notice Mechanics. If notice is to be delivered to obligors, similar characteristics. whether at the time of sale or later, are there any requirements regarding the form the notice must take or 4.8 Respect for Intent of Parties; Economic Effects on Sale. how it must be delivered? Is there any time limit beyond If the parties denominate their transaction as a sale and which notice is ineffective – for example, can a notice of state their intent that it be a sale will this automatically be Greece sale be delivered after the sale, and can notice be respected or will a court enquire into the economic delivered after insolvency proceedings against the obligor characteristics of the transaction? If the latter, what have commenced? Does the notice apply only to specific economic characteristics of a sale, if any, might prevent receivables or can it apply to any and all (including future) the sale from being perfected? Among other things, to receivables? Are there any other limitations or what extent may the seller retain (a) credit risk; (b) considerations? interest rate risk; and/or (c) control of collections of receivables without jeopardising perfection? Notice of assignment need not be effected in any particular form (special notification procedures being provided for assignments by Greek courts have the authority to examine the true legal nature of way of security), provided that there is sufficient evidence of receipt any transaction (most commonly ruling whether claims are assigned of the notification by the obligor. One of the most usual methods of genuinely or by way of security). delivery is notice by a court bailiff. The Securitisation Law requires the sale of the receivables, Registration of assignments entered into under the Securitisation invoking the applicability of the Greek Civil Code provisions on the Law is made to the competent registry by way of submission of a sale of goods; this requirement is further enhanced for banking specific form, to which are annexed lists of the assigned receivables’ securitisations, where the true sale character of the receivables. transaction is assessed pursuant to specific requirements set out by Specific time limits are not provided by the law, subject to the legal the Bank of Greece. A sale by way of security is incompatible with risks that may be incurred prior to the notification (question 4.2). the abovementioned structure. Groups of receivables (including future receivables) may be subject Under the Securitisation Law, collection and administration of the to assignment, provided that they are described in a sufficiently transferred claims may be effected by the seller in its capacity as specific way in the respective receivables sale agreement. The servicer (such structure being the market practice); alternatively, the nature of the receivables is irrelevant to the notification procedure. servicing of the receivables portfolio may be assigned to a credit/financial institution of the EEA (that must have a permanent 4.6 Restrictions on Assignment; Liability to Obligor. Are establishment in Greece, if the receivables are obligations of restrictions in receivables contracts prohibiting sale or consumers, payable in Greece) or a third party which has either assignment generally enforceable in Greece? Are there guaranteed or had undertaken collection of the receivables prior to exceptions to this rule (e.g., for contracts between the completion of the securitisation. The appointment of the commercial entities)? If Greece recognises prohibitions servicer must be registered with the competent registry. on sale or assignment and the seller nevertheless sells receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for breach of contract or 4.9 Continuous Sales of Receivables. Can the seller agree in on any other basis? an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables Contractual restrictions on assignment/transferability of claims are as and when they arise)? acknowledged by the Greek courts (but see question 4.4 on the special securitisation transactions regime overriding said Subject to the relevant formalities being complied with, continuous arrangements). Such arrangements do not have an erga omnes transfer is possible whether under simple sale and assignment or effect, but the assignor may be liable under the contract for any pursuant to a securitisation transaction. Please see above question damages resulting from breach of the relevant contractual 4.7 as regards the description of receivables. undertaking. 4.10 Future Receivables. Can the seller commit in an 4.7 Identification. Must the sale document specifically identify enforceable manner to sell receivables to the purchaser each of the receivables to be sold? If so, what specific that come into existence after the date of the receivables information is required (e.g., obligor name, invoice purchase agreement (e.g., “future flow” securitisation)? If number, invoice date, payment date, etc.)? Do the so, how must the sale of future receivables be structured receivables being sold have to share objective to be valid and enforceable? Is there a distinction characteristics? Alternatively, if the seller sells all of its between future receivables that arise prior to or after the receivables to the purchaser, is this sufficient seller’s insolvency? identification of receivables? Question 4.9 applies accordingly, subject to the identification of Assigned claims must be defined or at least be described in a clear transferred receivables (see question 4.7). If the receivables arise and unambiguous way so as to avoid nullity of the transfer due to from a legal relationship that is created post declaration of the seller uncertainty on the transferred receivables; the same applies as under bankruptcy, it is uncertain whether the transaction will be regards the identity of the obligor. ring-fenced against the effects of insolvency. For the purposes of registrations under the Securitisation Law, a full

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4.11 Related Security. Must any additional formalities be 5.5 Additional Formalities. What additional or different fulfilled in order for the related security to be transferred requirements apply to security interests in or connected to concurrently with the sale of receivables? If not all insurance policies, promissory notes, mortgage loans, related security can be enforceably transferred, what consumer loans or marketable debt securities? methods are customarily adopted to provide the purchaser the benefits of such related security? See questions 4.11 and 5.3 that also apply for the perfection of security interests on such instruments/receivables. Question 4.3 applies accordingly. The formalities required for the creation of a security interest must 5.6 Trusts. Does Greece recognise trusts? If not, is there a be repeated to perfect their transfer (i.e. (a) registration of the mechanism whereby collections received by the seller in Greece change of the beneficiary of a mortgage/prenotation of mortgage respect of sold receivables can be held or be deemed to with the competent land registry, (b) endorsement of marketable be held separate and apart from the seller’s own assets instruments, (c) court bailiff service of a pledge over receivables, until turned over to the purchaser? and (d) registration of floating charge/equipment pledge). Under the Securitisation Law, the security interests that are Greek law does not recognise the division between legal and beneficial ancillary to the transferred receivables are deemed to be transferred ownership. Thus, the institution of trust is not recognised as such. to the purchaser; the change of the beneficiary of mortgages or As regards collection of the securitised receivables, the seller may other in rem rights, that must be registered with a public record collect them in its capacity as servicer (see question 4.8). Given the under applicable law, is effected by registration of the certification true sale nature of the transaction and the authorisations contained of registration of the receivables sale agreement form with the in the servicer appointment agreement, the transferred receivables competent registry. are property of the purchaser administered by the servicer.

5 Security Issues 5.7 Bank Accounts. Does Greece recognise escrow accounts? Can security be taken over a bank account located in Greece? If so, what is the typical method? 5.1 Back-up Security. Is it customary in Greece to take a Would courts in Greece recognise a foreign-law grant of “back-up” security interest over the seller’s ownership security (for example, an English law debenture) taken interest in the receivables and the related security, in the over a bank account located in Greece? event that the sale is deemed by a court not to have been perfected? Escrow accounts are not acknowledged as such under Greek law but may be agreed contractually (account holder name, movement No, it is not. of funds, signing rights to be provided in a relevant contract), not having an erga omnes effect, as opposed to an account pledge. In 5.2 Seller Security. If so, what are the formalities for the the event that enforcement measures are initiated against the escrow seller granting a security interest in receivables and account or its holder, monies deposited therein are not ring-fenced. related security under the laws of Greece, and for such For account pledge formalities, see question 5.3 above. For foreign security interest to be perfected? law security agreements, see question 5.4. As regards securitisations, the account where payments are made This is not applicable – see above. under the transferred receivables is a segregated account, pledged in favour of the securitisation noteholders and other creditors, that is 5.3 Purchaser Security. If the purchaser grants security over held with the servicer and it is ring-fenced against enforcement and all of its assets (including purchased receivables) in insolvency procedures raised against the servicer. favour of the providers of its funding, what formalities must the purchaser comply with in Greece to grant and perfect a security interest in purchased receivables 6 Insolvency Laws governed by the laws of Greece and the related security?

6.1 Stay of Action. If, after a sale of receivables that is Security over receivables (i.e. pledge of claims) is perfected though otherwise perfected, the seller becomes subject to an notice of the pledge agreement to the obligor (for the relevant insolvency proceeding, will Greece’s insolvency laws formalities, see question 4.11 above). automatically prohibit the purchaser from collecting, transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? Does the 5.4 Recognition. If the purchaser grants a security interest in insolvency official have the ability to stay collection and receivables governed by the laws of Greece, and that enforcement actions until he determines that the sale is security interest is valid and perfected under the laws of perfected? Would the answer be different if the the purchaser’s country, will it be treated as valid and purchaser is deemed to only be a secured party rather perfected in Greece or must additional steps be taken in than the owner of the receivables? Greece?

Automatic stay is not provided under Greek insolvency laws. Whilst the contractual terms of the security agreement may be Subject to clawback provisions, the transfer of claims under the governed by foreign law, the perfection of the security on a Greek general provisions of the GCC (that is validly perfected before the law receivable must be governed by Greek law. Therefore, our declaration of bankruptcy) is not affected by the seller’s subsequent response to question 3.1 applies also on the perfection of security bankruptcy. Therefore, the bankruptcy administrator will not be interests. entitled to validly request an injunction against the purchaser to force it to stay collections.

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The same apply as regards receivables securitisations; it should be 7 Special Rules noted that under the Securitisation Law, upon registration of the receivables sale agreement form with the competent registry, the 7.1 Securitisation Law. Is there a special securitisation law validity of the sale of the receivables (including future ones) and (and/or special provisions in other laws) in Greece ancillary rights thereto, the establishment of the legal pledge on the establishing a legal framework for securitisation collection account and of any security in favour of the purchaser’s transactions? If so, what are the basics? creditors is ring-fenced against the bankruptcy (including clawback) of the seller. Greece has introduced a special law governing the securitisation of If the purchaser is deemed to be a secured party and not a true commercial receivables (which include banking receivables) and real owner of the receivables, then the Securitisation Law protections estate (the Securitisation Law). In addition, a separate law governs the Greece will not be applicable (as they do not apply to transactions where securitisation of state sector receivables. The Securitisation Law the securitisation is entered into as a means of security) and the first provides for the sale of receivables to special purpose vehicles (spv), paragraph of this answer (on GCC sales) will apply. established either in Greece or elsewhere. The purchase of the receivables is funded by the issuance of a bond loan by the spv. The 6.2 Insolvency Official’s Powers. If there is no stay of action transaction (along with the appointment of a servicer) is registered under what circumstances, if any, does the insolvency with the competent registry and benefits from a favourable tax regime official have the power to prohibit the purchaser’s and enhanced protection against insolvency/enforcement procedures exercise of rights (by means of injunction, stay order or against the seller and the servicer (see above). other action)? 7.2 Securitisation Entities. Does Greece have laws Kindly refer to question 6.1 above. specifically providing for establishment of special purpose entities for securitisation? If so, what does the law 6.3 Suspect Period (Clawback). Under what facts or provide as to: (a) requirements for establishment and circumstances could the insolvency official rescind or management of such an entity; (b) legal attributes and reverse transactions that took place during a “suspect” or benefits of the entity; and (c) any specific requirements as “preference” period before the commencement of the to the status of directors or shareholders? insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in Greece for (a) Under the Securitisation Law, a Greek law spv is established as a transactions between unrelated parties and (b) societe anonyme with registered shares. The company’s primary transactions between related parties? corporate body is the shareholders’ general assembly, whilst management is carried out by a BoD of at least 3 members. Clawback provisions apply to both related and unrelated party Publicity of certain corporate acts and several accounting transactions. The “suspect period” is set by the bankruptcy court obligations must be complied with. Shareholders’ liability is and may start as early as two years prior to the declaration of limited to their participation in the company. The Securitisation bankruptcy by the court. If, during the last 5 years before the Law does not include any requirements for non-Greek spvs. declaration of bankruptcy, the bankrupt entity entered into If the spv is a wholly owned subsidiary of the seller, issues may be transactions with the intent to cause damage to its creditors or to raised regarding the true sale nature of the transaction, regulatory favour some against others, and its counterparty was acting in bad capital obligations of the seller and accounting obligations. In faith, such transactions are revocable. Revocation of transactions particular, as regards banking securitisations: spvs are usually may be mandatory or optional, depending on their characteristics. orphan vehicles established under English law; solo consolidation Kindly refer to question 6.1 on the special ring-fencing regime of such spvs with the originating bank is mandatory under under the Securitisation Law. International Accounting Standards; and such accounting treatment is irrelevant for capital relief purposes. 6.4 Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official 7.3 Non-Recourse Clause. Will a court in Greece give effect consolidate the assets and liabilities of the purchaser with to a contractual provision (even if the contract’s governing those of the seller or its affiliates in the insolvency law is the law of another country) limiting the recourse of proceeding? parties to available funds?

The insolvency official is not entitled to consolidate assets of the In case the contract’s governing law is Greek, such choice would in purchaser with those of the seller, unless such assets are subject to principle be accepted by Greek courts, subject to the restrictions the clawback provisions discussed under question 6.3 above. mentioned above under question 2.3. Whether a contractual provision limiting the recourse rights under 6.5 Effect of Proceedings on Future Receivables. What is the foreign law will be found valid and binding by Greek courts depends effect of the initiation of insolvency proceedings on (a) on the content of such provision and the particularities of the case. sales of receivables that have not yet occurred or (b) on sales of receivables that have not yet come into existence? 7.4 Non-Petition Clause. Will a court in Greece give effect to a contractual provision (even if the contract’s governing law is the law of another country) prohibiting the parties For as long as the notification of assignment or the registration of from: (a) taking legal action against the purchaser or the securitisation is pending, the receivables form part of the another person; or (b) commencing an insolvency bankruptcy property. The same applies to future receivables whose proceeding against the purchaser or another person? status does not permit identification thereof (see question 4.7 above). Please see our answer under question 7.3 above. ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 169 © Published and reproduced with kind permission by Global Legal Group Ltd, London KGDI Law Firm Greece

7.5 Independent Director. Will a court in Greece give effect 8.3 Data Protection. Does Greece have laws restricting the to a contractual provision (even if the contract’s governing use or dissemination of data about or provided by law is the law of another country) or a provision in a obligors? If so, do these laws apply only to consumer party’s organisational documents prohibiting the directors obligors or also to enterprises? from taking specified actions (including commencing an insolvency proceeding) without the affirmative vote of an Greece has transposed EU data protection directives. In general, in independent director? Greece, the dissemination of personal data, and of data related to financial behaviour in particular, is restricted through several laws Greek courts will recognise and apply foreign law contracts or (e.g. laws 2472/1197 and 3471/2006, secondary legislation issued foreign court decisions to the extent not contrary to public order by the Data Protection Authority (DPA), etc.). The processing of Greece provisions of Greek law. Societe anonyme companies are to be data for the purposes of a securitisation transaction must comply treated as fully autonomous entities and, as such, their corporate with the legislation as in force; however, pursuant to the bodies must pursue the company’s corporate interest (failure to do Securitisation Law, such processing does not require prior approval so will incur civil and criminal liabilities – especially as regards the by the DPA or any prior consent by the obligors. The seller may requirement to commence bankruptcy proceedings in case the give to the purchaser any data related to the receivables transferred company is permanently insolvent). Consequently, the described and/or the relevant obligors; so may the purchaser to the contractual arrangement must prove to serve corporate interest and bondholders, their representatives and/or the persons participating not deprive its corporate bodies from their powers. in the securitisation transaction. Data protection legislation applies only to natural persons. 8 Regulatory Issues 8.4 Consumer Protection. If the obligors are consumers, will 8.1 Required Authorisations, etc. Assuming that the the purchaser (including a bank acting as purchaser) be purchaser does no other business in Greece, will its required to comply with any consumer protection law of purchase and ownership or its collection and enforcement Greece? Briefly, what is required? of receivables result in its being required to qualify to do business or to obtain any licence or its being subject to Yes, the purchaser must comply with all relevant Greek consumer regulation as a financial institution in Greece? Does the protection laws. For banking receivables, such protections relate to answer to the preceding question change if the purchaser the unilateral change of the interest rates of the receivables, does business with other sellers in Greece? restrictions on enforcement, as well as restrictions and/or requirements for termination of a loan/credit agreement. Under Greek law, it is not necessary that the purchaser should be or Pursuant to law 2251/1994 on consumer protection, consumer should have been licensed, qualified or otherwise entitled to carry protection legislation may also apply to legal entities. on business in Greece in order to be able to enforce its rights deriving from the securitisation transaction, nor will it be subject to regulation as a financial institution in Greece. 8.5 Currency Restrictions. Does Greece have laws restricting the exchange of Greece’s currency for other currencies or the making of payments in Greece’s currency to persons 8.2 Servicing. Does the seller require any licences, etc., in outside the country? order to continue to enforce and collect receivables following their sale to the purchaser, including to appear No, it does not. Please note that banking institutions are subject to before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect certain notification and/or report obligations to the Bank of Greece sold receivables? with respect to transfer of funds. The Bank of Greece may conduct controls to ensure that the respective reporting obligations are No licence is required for the seller to continue to enforce and complied with and impose fines or penalties in case of breach collect receivables, in its capacity as servicer, following their sale to thereof. the purchaser. A summary of the servicing agreement containing the basic 9 Taxation provisions thereof must be registered with the competent registry. The service agreement form should be filled in and submitted each 9.1 Withholding Taxes. Will any part of payments on time a servicer (including a replacement servicer) is appointed. receivables by the obligors to the seller or the purchaser In case the securitised receivables are claims against consumers be subject to withholding taxes in Greece? Does the payable in Greece, the servicer must have a permanent answer depend on the nature of the receivables, whether establishment in Greece. they bear interest, their term to maturity, or where the seller or the purchaser is located? Under Greek law, a non-lawyer cannot appear before a Greek court in the name and on behalf of the claimant (or defendant); therefore, In general, payment of interest in Greece to non-Greek beneficiaries what the seller (in its capacity as servicer) can do is assign such will be subject to withholding tax. Whether such tax will be tasks to a competent lawyer, so that the latter can act on behalf of applicable depends on the tax residence of the purchaser and the the purchaser. obligors, the nature of the receivables and the existence of a double The replacement servicer must have the same characteristics as the taxation treaty between Greece and the country of tax residence of initial servicer, namely it must be a credit/financial institution of the the purchaser. EEA or a third party which has either guaranteed or had undertaken collection of the receivables prior to the securitisation thereof.

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9.2 Seller Tax Accounting. Does Greece require that a 9.5 Purchaser Liability. If the seller is required to pay value specific accounting policy is adopted for tax purposes by added tax, stamp duty or other taxes upon the sale of the seller or purchaser in the context of a securitisation? receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then In particular, as regards banking securitisations: spvs are usually will the taxing authority be able to make claims for the orphan vehicles established under English law; solo consolidation unpaid tax against the purchaser or against the sold of such spvs with the originating bank/seller is mandatory under receivables or collections? International Accounting Standards (but not under Greek accounting principles); and such accounting treatment is irrelevant No, the purchaser is not liable for any of the taxation obligations of for capital relief purposes. the seller. Notwithstanding the above, the seller and the purchaser are jointly liable to pay to the Bank of Greece all monies they Greece collect under the securitised receivables that correspond to the levy 9.3 Stamp Duty, etc. Does Greece impose stamp duty or of law 128/1975; this levy is imposed on the interest computed other documentary taxes on sales of receivables? under banking loan agreements and it is –under current and past practice– transferred by the banks to the obligors of the loans. No, the sale and transfer of receivables pursuant to the Securitisation Law is exempt from all direct or indirect taxes, including stamp duty. 9.6 Doing Business. Assuming that the purchaser conducts no other business in Greece, would the purchaser’s purchase of the receivables, its appointment of the seller 9.4 Value Added Taxes. Does Greece impose value added as its servicer and collection agent, or its enforcement of tax, sales tax or other similar taxes on sales of goods or the receivables against the obligors, make it liable to tax services, on sales of receivables or on fees for collection in Greece? agent services? According to the prevailing legal theory, no. In addition, we are not Securitisation transactions are exempt from all direct and indirect aware of any case where the Greek tax authorities have considered Greek law taxation. VAT will be applicable on the servicing that any of the purchasers of Greek securitisations are deemed to agreement, if the servicer is not the originator of the receivables of have a permanent establishment in Greece solely on the basis of the the securitisation portfolio. transactions foreseen under the securitisation transaction documentation.

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Christina Papanikolopoulou Athina Diamanti

KGDI Law Firm KGDI Law Firm 28 Dimitriou Soutsou Street 28 Dimitriou Soutsou Street 115 21 Athens 115 21 Athens Greece Greece

Tel: +30 210 817 1500 Tel: +30 210 817 1500 Fax: +30 210 685 6657-8 Fax: +30 210 685 6657-8 Email: [email protected] Email: [email protected] URL: www.kgdi.gr URL: www.kgdi.gr Greece Christina works in the finance department. Her area of practice is Athina Diamanti joined KGDI in February 2010 and specializes in debt and equity capital markets, general bank debt finance, European and Greek banking law, structured finance and capital securitisation and structured finance and regulation of financial markets transactions. Her area of practice also includes institutions. Christina has led the KGDI team on various corporate and company law. She has recently been involved in securities offerings by companies listed on the Athens Exchange, securitisation and covered bond transactions as well as in capital most of which were combined, as well as on accelerated increases of Greek banks and has worked in the merger of two bookbuildings and similar transactions. She has also advised Greek banks. clients on securitisation and covered bond transactions launched by Greek originators. She provides advice to financial institutions regarding their day-to-day operations and specialised projects with emphasis on transactions where international partners are involved. In the corporate sector Christina has advised on transactions in a variety of industries (such as energy, construction and real estate).

In April 2006, two long established and well known Greek Law Firms, Kyriakides Georgopoulos Law Firm (1933) and Daniolos Issaias & Partners Law Firm (1923), (the latter specialising mainly in Maritime Law), decided to merge to form Greece’s largest Multidisciplinary Law Firm, competent to cover the needs of their respective clients in all fields of legal practice. Our multi-disciplinary teams of lawyers also have experience in practice areas consisting of Capital Markets, Corporate & Commercial, Banking, Tax, Project Finance, Dispute Resolution, Insurance, Energy, Labour & Employment, M&A, Maritime Law, Intellectual Property, Data Protection, Competition, E-Commerce, Restructuring & Insolvency, Natural Resources & Utilities and Real Estate Development providing a client focused service with a constructive approach to legal practices. KGDI Law Firm has offices in Athens, Piraeus and Thessaloniki. KGDI is a founding member of SEE Legal, a regional alliance of leading law firms from 11 countries in South East Europe. E-mail address: [email protected] URL: www.kgdi.gr

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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.

184 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 21 Hungary István Gárdos

Gárdos Füredi Mosonyi Tomori Erika Tomori

1 Receivables Contracts introduces an interest rate cap on consumer mortgage loans and regulates the calculation of interest rates. The new law enables debtors to ask for the amendment of contracts that 1.1 Formalities. In order to create an enforceable debt were concluded before the new law entered into force. In obligation of the obligor to the seller, (a) is it necessary addition, it amends the Civil Code by introducing a that the sales of goods or services are evidenced by a mandatory base rate plus a 24 percentage-point cap for formal receivables contract; (b) are invoices alone contracts where both parties are natural persons. The new sufficient; and (c) can a receivable “contract” be deemed law also amended the Act on Credit Institutions and to exist as a result of the behaviour of the parties? Financial Enterprises (112/1996) by introducing a 24 percentage-point cap on annual interest rates. However, the (a) There are two requirements for the creation of an enforceable cap is not applicable to high-risk, high-cost consumer loans debt obligation: a contract; and the provision of the service and credit card loans: the annual interest rates for such loans undertaken in the contract. It is not necessary that the sale of are capped at 39 percentage points over the Hungarian goods or services is evidenced by formal receivable contracts; National Bank base rate. the parties are usually free to choose the form of their (b) The Civil Code provides that a debtor, who does not pay his agreement (contractual freedom). A contract may be debt when it is due, shall pay late payment interest in concluded either in writing, orally or by conduct that implies addition to the contractual interest, and even in cases where their consensus. In general, the provision of service does not the debt originally is interest free. In addition, Hungary have to be documented either. In certain cases, however, the transposed European Directive 2005/35 on Combating Late law expressly requires specific formalities (e.g. written form is Payment on Commercial Transactions. required for the validity of a consumer loan contract; and payment may not be required until an invoice is issued). Also, (c) Hungarian law grants the consumer the right to cancel a the contracting parties may agree that specific formalities have receivable where the various EU consumer directives so to be respected for the contract to be valid. Even if there is no provide. In particular, the obligor of a consumer loan entitled such requirement, a written document may facilitate the to pay its debt prior to its due date, and the creditor is obliged evidencing of the existence of such contract or the to accept such payment and reduce the costs of the loan performance of the service in an eventual dispute. accordingly. (b) As mentioned above, there are no formal requirements either (d) In consumer loans, the creditor may not require the obligor for the creation of a contract or for the performance of the to issue a possessory note or check for securing the required service. An invoice, however, may be useful as it receivable. indicates both the existence of the agreement and also the provision of the services to which the invoice refers. However, 1.3 Government Receivables. Where the receivables in a dispute, the invoice alone may not be sufficient for contract has been entered into with the government or a evidencing an enforceable debt. The position may substantially government agency, are there different requirements and be improved by obtaining a confirmation as to the content of laws that apply to the sale or collection of those the invoice from the obligor, but even in that case the obligor receivables? may prove that the service turned out to be defective or that for any other reason he does not owe the amount of the invoice. There are no special requirements with respect to the sale (c) As mentioned above, the parties’ conduct may create a valid agreement in case the obligor under a receivables contract is the contract. Thus, historic relationships and the behaviour of the state or a government agency. parties may serve as the basis of establishing the existence of a contract regarding the sale of goods and services. 2 Choice of Law – Receivables Contracts 1.2 Consumer Protections. Do Hungary’s laws (a) limit rates of interest on consumer credit, loans or other kinds of 2.1 No Law Specified. If the seller and the obligor do not receivables; (b) provide a statutory right to interest on late specify a choice of law in their receivables contract, what payments; (c) permit consumers to cancel receivables for are the main principles in Hungary that will determine the a specified period of time; or (d) provide other noteworthy governing law of the contract? rights to consumers with respect to receivables owing by them? Choice of law is regulated by Regulation (EC) No 593/2008 of the European Parliament and of the Council (Rome I) and Act 13/1979. (a) A new law passed by Parliament in November 2011 ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 185 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gárdos Füredi Mosonyi Tomori Hungary

The Act is applicable to contracts not falling under the scope of the 3 Choice of Law – Receivables Purchase Rome I Regulation. The main principle of determining the Agreement governing law of the contract is, under both regimes, the residence of the obligor of the obligation primarily characterising the receivables contract (e.g. residence of the seller or of the party 3.1 Base Case. Does Hungary’s law generally require the sale of receivables to be governed by the same law as providing a service). The Rome I Regulation further provides that, the law governing the receivables themselves? If so, does in case of consumer contracts, the residence of the consumer that general rule apply irrespective of which law governs determines primarily the governing law. the receivables (i.e., Hungary’s laws or foreign laws)?

Hungary 2.2 Base Case. If the seller and the obligor are both resident Hungarian law does not require that the sale of the receivables be in Hungary, and the transactions giving rise to the governed by the same law as the law governing the receivables receivables and the payment of the receivables take themselves. If the parties to an assignment of receivables choose a place in Hungary, and the seller and the obligor choose law which is different from the law which governs the receivables, the law of Hungary to govern the receivables contract, is this choice is applicable to their internal relations, but does not there any reason why a court in Hungary would not give extend to external issues, such as the rights and obligations of effect to their choice of law? obligors, the obligors’ creditors and other third parties.

There is no reason why a Hungarian court would not give effect to such choice of law, even if the receivable is sold to a foreign party. 3.2 Example 1: If (a) the seller and the obligor are located in We note, however, that choice of law is permitted only when the Hungary, (b) the receivable is governed by the law of transaction has a foreign element. If both the seller and the obligor Hungary, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser are resident in Hungary, and the contract has no other foreign choose the law of Hungary to govern the receivables element either, the receivables contract will be governed by purchase agreement, and (e) the sale complies with the Hungarian law irrespective of the choice made by the parties. requirements of Hungary, will a court in Hungary recognise that sale as being effective against the seller, 2.3 Freedom to Choose Foreign Law of Non-Resident Seller the obligor and other third parties (such as creditors or or Obligor. If the seller is resident in Hungary but the insolvency administrators of the seller and the obligor)? obligor is not, or if the obligor is resident in Hungary but the seller is not, and the seller and the obligor choose the There is no reason why a Hungarian court would not give effect to foreign law of the obligor/seller to govern their receivables such choice of law. contract, will a court in Hungary give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law (such as public policy or 3.3 Example 2: Assuming that the facts are the same as mandatory principles of law) that would typically apply in Example 1, but either the obligor or the purchaser or both commercial relationships such that between the seller and are located outside Hungary, will a court in Hungary the obligor under the receivables contract? recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller), or must the requirements of If a foreign element exists (i.e., one of the parties is non-resident in the obligor’s country or the purchaser’s country (or both) Hungary), the parties are free to choose the law applicable to their be taken into account? contract. Such choice is disregarded if it conflicts with Hungarian public order. We are not aware of any limitation to the recognition There is no reason why a Hungarian court would not give effect to of foreign law that would typically apply in commercial such choice of law. transactions, in particular if the chosen law is one of the EU Member countries. Under the Rome I Regulation, the choice of law may not have the result of depriving the consumer of the protection 3.4 Example 3: If (a) the seller is located in Hungary but the afforded to him by provisions that cannot be derogated from by obligor is located in another country, (b) the receivable is agreement by virtue of the law which, in the absence of choice, governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third would have been applicable under the Regulation. Hungarian law country, (d) the seller and the purchaser choose the law and Hungarian language shall apply to contracts relating to the of the obligor’s country to govern the receivables national assets as defined by Act 196/2011. Such contracts shall purchase agreement, and (e) the sale complies with the belong to the exclusive jurisdiction of Hungarian courts, arbitral requirements of the obligor’s country, will a court in tribunals shall not have jurisdiction in relation to such contracts. Hungary recognise that sale as being effective against Such contracts shall further be governed by Hungarian law and be the seller and other third parties (such as creditors or in Hungarian language. insolvency administrators of the seller) without the need to comply with Hungary’s own sale requirements?

2.4 CISG. Is the United Nations Convention on the The parties are free to choose the governing law, if their contract International Sale of Goods in effect in Hungary? has a foreign element. If that condition is met, the parties are not restricted in their choice, the chosen law does not have to be the law Yes, the Convention entered into force on 1 January 1988. of the country which represents the foreign element in the contract. Therefore, there is no reason why a Hungarian court would not give effect to such choice of law. For the exceptions, see the answer to question 2.3.

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3.5 Example 4: If (a) the obligor is located in Hungary but the transfer of related documents is necessary). Typically, an seller is located in another country, (b) the receivable is assignment is executed in a properly signed document, considering governed by the law of the seller’s country, (c) the seller the fact that receivables are intangible, therefore no transfer of and the purchaser choose the law of the seller’s country possession is possible, thus the only proof of the transaction is the to govern the receivables purchase agreement, and (d) document itself. An assignment, however, is not effective against the sale complies with the requirements of the seller’s the obligor without notice. Prior to notification, the obligor may country, will a court in Hungary recognise that sale as being effective against the obligor and other third parties discharge his obligation by paying the assignor, or even a (such as creditors or insolvency administrators of the subsequent assignee who has given notice about the assignment. As obligor) without the need to comply with Hungary’s own the transfer becomes effective against the seller by concluding the sale requirements? assignment contract, in principle no subsequent purchaser may

acquire any right with respect to the sold receivables. However, the Hungary The parties are free to choose the governing law, if their contract obligor may discharge his obligation by paying to the subsequent has a foreign element. If that condition is met, the parties are not purchaser in case he is not informed about the first sale but receives restricted in their choice; the chosen law does not have to be the law proper notice about the sale to the subsequent purchaser. of the country which represents the foreign element in the contract. Therefore, there is no reason why a Hungarian court would not give 4.3 Perfection for Promissory Notes, etc. What additional or effect to such choice of law. For the exceptions, see the answer to different requirements for sale and perfection apply to question 2.3. sales of promissory notes, mortgage loans, consumer loans or marketable debt securities? 3.6 Example 5: If (a) the seller is located in Hungary (irrespective of the obligor’s location), (b) the receivable is Promissory notes are not widely used in Hungary; they qualify as governed by the law of Hungary, (c) the seller sells the negotiable documents which may be transferred by endorsement receivable to a purchaser located in a third country, (d) plus transfer of possession of the document (subsequent to a blank the seller and the purchaser choose the law of the endorsement, only delivery is needed). purchaser’s country to govern the receivables purchase The most commonly used marketable debt securities are bonds agreement, and (e) the sale complies with the which may be paper-based (physical) or electronic (dematerialised); requirements of the purchaser’s country, will a court in Hungary recognise that sale as being effective against physical securities may be either bearer or registered. Bearer the seller and other third parties (such as creditors or securities do not indicate the name of the holder and may be insolvency administrators of the seller, any obligor located transferred by mere transfer of possession; whoever holds the in Hungary and any third party creditor or insolvency security is considered to be entitled to the rights incorporated in the administrator of any such obligor)? security. Registered physical securities may be transferred by means of special or blank endorsements plus transfer of possession The parties are free to choose the governing law, if their contract of the security. Dematerialised securities may be transferred by has a foreign element If that condition is met, the parties are not debiting the securities account of the seller and crediting the restricted in their choice; the chosen law does not have to be the law account of the purchaser. of the country which represents the foreign element in the contract. Consumer loans and loans secured by a mortgage may be sold in the Therefore, there is no reason why a Hungarian court would not give same way as any other receivables, no additional requirements effect to such choice of law. For the exceptions, see the answer to apply. question 2.3.

4.4 Obligor Notification or Consent. Must the seller or the 4 Asset Sales 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 4.1 Sale Methods Generally. In Hungary what are the purchaser obtain the obligors’ consent to the sale of customary methods for a seller to sell receivables to a receivables in order for the sale to be an effective sale purchaser? What is the customary terminology – is it against the obligors? Does the answer to this question called a sale, transfer, assignment or something else? vary if (a) the receivables contract does not prohibit assignment but does not expressly permit assignment; or The customary method to sell accounts receivables is by (b) the receivables contract expressly prohibits assignment, whereby the rights stemming from the receivables pass assignment? Whether or not notice is required to perfect from the seller to the purchaser, and the purchaser steps into the a sale, are there any benefits to giving notice – such as shoes of the seller as creditor with respect to the sold receivables. cutting off obligor set-off rights and other obligor defences?

4.2 Perfection Generally. What formalities are required Notification of the obligor is necessary to allow the purchaser to generally for perfecting a sale of receivables? Are there enforce the debt directly against the obligor, to prevent the obligor any additional or other formalities required for the sale of and the seller from modifying the receivables agreement, and to receivables to be perfected against any subsequent good prevent the obligor from discharging his debt by paying to the seller faith purchasers for value of the same receivables from the seller? rather than the purchaser. However, even notification cannot prevent the obligor from setting off the receivables against already In order for the sale of receivables to be perfected, the seller and the existing obligations of the seller. In order to avoid such possibility, purchaser shall enter into a contract of assignment and notice shall the obligor must waive such right of set-off in addition to the be given to the obligor. No specific formalities are required notification. If the obligor is notified by the purchaser instead of the creating a valid assignment (neither registration, notarisation, nor seller, the obligor may demand evidence of the sale or confirmation from the seller before paying to the purchaser. Notification may be

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made even after the insolvency of the seller or the obligor. Consent 4.8 Respect for Intent of Parties; Economic Effects on Sale. of the obligor is not necessary, unless the receivables contract If the parties denominate their transaction as a sale and expressly prohibits assignment. state their intent that it be a sale will this automatically be respected or will a court enquire into the economic characteristics of the transaction? If the latter, what 4.5 Notice Mechanics. If notice is to be delivered to obligors, economic characteristics of a sale, if any, might prevent whether at the time of sale or later, are there any the sale from being perfected? Among other things, to requirements regarding the form the notice must take or what extent may the seller retain (a) credit risk; (b) how it must be delivered? Is there any time limit beyond interest rate risk; and/or (c) control of collections of which notice is ineffective – for example, can a notice of receivables without jeopardising perfection? sale be delivered after the sale, and can notice be

Hungary delivered after insolvency proceedings against the obligor It is not primarily the denomination given by the parties, but the have commenced? Does the notice apply only to specific economic characteristics of the transaction that will determine receivables or can it apply to any and all (including future) whether a court will treat the transaction as a true sale or an receivables? Are there any other limitations or considerations? assignment by way of security. Under current Hungarian law, it is uncertain what economic requirements have to be met in order for There are no requirements in relation to the form of the notice. It a sale of receivables to be perfected. does not even have to be in writing. A written document, however, (a) The sale in most cases will not be perfected if the seller may facilitate the evidencing of the existence of such notification in retains credit risk of the obligor; however, purely being an eventual dispute. The notice may relate to one specific liable, in case of a bad faith sale, for the insolvency of the obligor at the time of the sale probably would not render the receivable, or a group of receivables, or all existing and future sale ineffective. receivables. The only requirement is that the receivables to which (b) There is no practice about the effect of retaining interest rate the notice relates have to be identifiable. The notice can be risk on the effectiveness of the sale; the conservative view is delivered any time after the assignment of the receivable, there is no that the seller may not retain any such risk. time limit after which the notice would become ineffective. (c) Normally, using the services of the seller to manage the sold debt, and maintain contact with the obligors, would not in 4.6 Restrictions on Assignment; Liability to Obligor. Are itself re-characterise the sale. If, however, as a result of this restrictions in receivables contracts prohibiting sale or arrangement, the obligor is not informed about the sale, and assignment generally enforceable in Hungary? Are there the purchaser is deprived of the right to directly contact the exceptions to this rule (e.g., for contracts between obligor and enforce the receivables, there is a risk that the commercial entities)? If Hungary recognises prohibitions sale shall be re-characterised as a financing transaction. on sale or assignment and the seller nevertheless sells receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for breach of contract or 4.9 Continuous Sales of Receivables. Can the seller agree in on any other basis? an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables as and when they arise)? Although there are different interpretations in legal literature, courts tend to accept contractual prohibition of assignment as effective Neither commercial nor court practice is established in relation to against third parties, i.e. such a prohibition renders the transfer the continuous sale of future receivables. Probably, prior to ineffective. In addition, where the receivables contract prohibits insolvency, an agreement on continuous sale of receivables would assignment, the seller may be found liable for breach of contract. be enforceable against the seller. It is, however, unlikely that such There are, however, some new unpublished judgments where the an agreement would also be enforceable subsequent to the courts found that the assignment is valid irrespective of the non- commencement of the seller’s insolvent liquidation. In order to assignment clause, and the assignor will only be liable for breach of make the sale enforceable against the obligors, they have to receive contract vis-à-vis the obligor. notice of the assignment. Automatic sale in itself shall not be effective against obligors. 4.7 Identification. Must the sale document specifically identify each of the receivables to be sold? If so, what specific information is required (e.g., obligor name, invoice 4.10 Future Receivables. Can the seller commit in an number, invoice date, payment date, etc.)? Do the enforceable manner to sell receivables to the purchaser receivables being sold have to share objective that come into existence after the date of the receivables characteristics? Alternatively, if the seller sells all of its purchase agreement (e.g., “future flow” securitisation)? If receivables to the purchaser, is this sufficient so, how must the sale of future receivables be structured identification of receivables? to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the seller’s insolvency? The sale document must designate the receivables sold in a way that the receivables which are the subject of the sale can be identified A commitment to transfer receivables is effective between the seller unambiguously. The receivables sold may be identified and the purchaser, but probably may not be enforceable against the individually, by naming the obligor, by describing the specific obligor. There is some uncertainty about the assignability of future business from which the receivables arise, or by other forms of receivables, in particular when they cannot be specifically general description, even by stating that the sale affects all of the identified. The Supreme Court stated earlier that future receivables seller’s existing receivables (unless this renders the identification cannot be assigned, newer decisions seem to overrule this decision, impossible). but it is uncertain to what extent future receivables are assignable. It seems to follow from the court practice that receivables can only be assigned if the legal basis out of which the receivable will arise

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already exists at the time of the assignment. According to the court interest may not be granted over related security in itself. A sub- practice, sale of future receivables will not be effective with respect charge is not explicitly recognised in Hungarian law, therefore it is to receivables which arise after the seller’s insolvency. uncertain whether related security will serve the security holder over the receivables. 4.11 Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred 5.4 Recognition. If the purchaser grants a security interest in concurrently with the sale of receivables? If not all receivables governed by the laws of Hungary, and that related security can be enforceably transferred, what security interest is valid and perfected under the laws of methods are customarily adopted to provide the the purchaser’s country, will it be treated as valid and purchaser the benefits of such related security? perfected in Hungary or must additional steps be taken in

Hungary? Hungary In principle, the purchaser automatically, by operation of law, becomes the beneficiary of any mortgage, pledge and surety According to Hungarian private international law, the governing securing the sold receivables. In practice, however, in order to law of a security interest is the law of the country where the avoid future disputes, it is useful to re-register mortgages and other collateral is located. In case the collateral is a receivable, this rule charges to the name of the purchaser in the relevant registries might be interpreted in two ways; the governing law with respect to (charges registry, land registry, registry for ships and aircrafts). the security shall be either: (i) the law of the country where the With respect to personal security, it is important to find out whether residence/central administration or usual place of business of the a guarantee is given in general to secure a certain debt or obligor is; or (ii) the law of the receivable itself. Thus, the security specifically for the benefit of the seller, and to give notice to the interest perfected under the laws of the purchaser’s country will be guarantor about the sale. treated as valid and perfected in Hungary, if the obligor is located in that other country or if the governing law of the receivable is that of the other country. 5 Security Issues

5.5 Additional Formalities. What additional or different 5.1 Back-up Security. Is it customary in Hungary to take a requirements apply to security interests in or connected to “back-up” security interest over the seller’s ownership insurance policies, promissory notes, mortgage loans, interest in the receivables and the related security, in the consumer loans or marketable debt securities? event that the sale is deemed by a court not to have been perfected? The most common form of security interest that can be established on promissory notes or marketable debt securities is security A pledge over receivables may be created by a simple agreement deposit (in Hungarian: óvadék). Hungary implemented the EU’s between the pledgor and the pledgee. This agreement has to be in Financial Collateral Directive (2002/47/EC) by amending the rules writing, but there are no other formal requirements. To make this on a security deposit. A security deposit agreement shall be pledge effective against the obligor, notice has to be given. These concluded in writing and the possession of the promissory note or requirements are almost the same as for a valid and perfected of the marketable debt security shall be transferred to the chargee. assignment. Because of this simplicity, there is no risk that in case In case the marketable debt security is in dematerialised form, a the transfer is re-characterised as a secured finance transaction, the security interest can be created by transferring the security to the security will fail for lack of the required formalities. For this reason account of the chargeholder. A security interest on consumer loans it is not customary, but possible, to take back-up security in and loans secured by a mortgage can be created in the same way as connection with the sale of receivables. on any other receivable.

5.2 Seller Security. If so, what are the formalities for the 5.6 Trusts. Does Hungary recognise trusts? If not, is there a seller granting a security interest in receivables and mechanism whereby collections received by the seller in related security under the laws of Hungary, and for such respect of sold receivables can be held or be deemed to security interest to be perfected? be held separate and apart from the seller’s own assets until turned over to the purchaser? A charge may be created merely by a written agreement between the seller and the purchaser. Notification is required to make the charge Hungarian law does not recognise a trust. A similar institution effective against the debtor. which may be used for such purpose is a kind of indirect agency (in Hungarian: bizomány) where the seller acts in his own name but for 5.3 Purchaser Security. If the purchaser grants security over the benefit of the purchaser. The seller has to keep amounts all of its assets (including purchased receivables) in collected for the purchaser separated from its own assets to make it favour of the providers of its funding, what formalities clear that these amounts do not belong to his property. If this must the purchaser comply with in Hungary to grant and requirement is fulfilled, creditors of the seller may not use these perfect a security interest in purchased receivables collections to satisfy their claims against the seller. governed by the laws of Hungary and the related security? 5.7 Bank Accounts. Does Hungary recognise escrow The formalities of creating a security interest over the assets of the accounts? Can security be taken over a bank account purchaser depends on the type of security interest the purchaser located in Hungary? If so, what is the typical method? intends to create. If the security interest is a non-possessory charge, Would courts in Hungary recognise a foreign-law grant of security (for example, an English law debenture) taken a contract in a notarialised form is required and the security interest over a bank account located in Hungary? has to be registered. Regarding the creation of a security interest over the purchased receivables, it is important to note that a security Yes, escrow is recognised in Hungarian law; amounts kept in an ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 189 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gárdos Füredi Mosonyi Tomori Hungary

escrow account will not form part of the account holder’s estate. for preferential transactions), irrespective of whether the parties are Amounts in a bank account are considered as debt of the bank related or not. If, however, the parties are related, the bad faith and the towards the account holder. The account holder may create a charge gratuitous nature of the transfer shall be presumed by laws. over his rights against the bank similarly to creating security over receivables or other claims. Security over a bank account located in 6.4 Substantive Consolidation. Under what facts or Hungary may be created in accordance with the laws of Hungary. circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with 6 Insolvency Laws those of the seller or its affiliates in the insolvency proceeding?

Hungary 6.1 Stay of Action. If, after a sale of receivables that is The insolvency official does not have right to substantive otherwise perfected, the seller becomes subject to an consolidation; the initiation of an insolvency procedure against the insolvency proceeding, will Hungary’s insolvency laws seller shall not give rise to the commencement of such proceedings automatically prohibit the purchaser from collecting, against the purchaser. transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? Does the insolvency official have the ability to stay collection and 6.5 Effect of Proceedings on Future Receivables. What is the enforcement actions until he determines that the sale is effect of the initiation of insolvency proceedings on (a) perfected? Would the answer be different if the sales of receivables that have not yet occurred or (b) on purchaser is deemed to only be a secured party rather sales of receivables that have not yet come into than the owner of the receivables? existence?

The primary effect of the commencement of a bankruptcy or The legislation does not provide for the effect of insolvency liquidation procedure is that the creditors are prohibited from taking proceedings on future receivables, and the court practice is not quite enforcement actions against the debtor outside of the given insolvency settled in this respect. The court practice recognises the assignment procedure. This automatic stay however does not apply to the of those future receivables where the contract from which the collection of receivables purchased from the seller, if the sale of receivable will arise already exists at the time of the assignment. In receivables is perfected before the commencement of the procedure. such cases, the sale will not be affected by the seller’s insolvency. In this case, the receivables sold will be the property of the purchaser, The assignment of future receivables where the contract from which thus the seller’s insolvency will not affect the purchaser’s ability to the receivable will arise is not yet concluded would have no effect enforce the receivables, and the purchaser shall be entitled to continue in the insolvency proceedings. to exercise its rights over the receivables. In the case when the purchaser is deemed to only be a secured party, 7 Special Rules the court practice is that the receivables, which have not been collected from the obligor before insolvency, will belong to the estate of the seller, and the purchaser can receive money as a 7.1 Securitisation Law. Is there a special securitisation law creditor in the course of the insolvency procedure. (and/or special provisions in other laws) in Hungary establishing a legal framework for securitisation transactions? If so, what are the basics? 6.2 Insolvency Official’s Powers. If there is no stay of action under what circumstances, if any, does the insolvency There is no regulation in force specifically providing for official have the power to prohibit the purchaser’s securitisation transactions. Assignment is regulated in the Civil exercise of rights (by means of injunction, stay order or Code. There was a Government proposal some years ago, but the other action)? bill was never presented to Parliament. The new Civil Code, which is planned to be adopted in 2012 and will enter into force in 2013, The insolvency official, if he believes that the purchaser is not the will modify the provisions relating to assignment and secured owner of the receivables, but only a secured creditor, may turn to transactions. the court to prohibit the purchaser from enforcing the receivable or, alternatively, to prohibit the obligor from paying to the purchaser. In such case, the insolvency officer also may ask the court to take a 7.2 Securitisation Entities. Does Hungary have laws temporary measure to stop the purchaser collecting the receivable specifically providing for establishment of special purpose (injunction or stay order). entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and management of such an entity; (b) legal attributes and 6.3 Suspect Period (Clawback). Under what facts or benefits of the entity; and (c) any specific requirements as circumstances could the insolvency official rescind or to the status of directors or shareholders? reverse transactions that took place during a “suspect” or “preference” period before the commencement of the Hungarian law does not provide for any aspects of special purpose insolvency proceeding? What are the lengths of the entities for securitisation. “suspect” or “preference” periods in Hungary for (a) transactions between unrelated parties and (b) transactions between related parties? 7.3 Non-Recourse Clause. Will a court in Hungary give effect to a contractual provision (even if the contract’s governing The insolvency official is entitled within 1 (one) year of the law is the law of another country) limiting the recourse of commencement of the insolvency proceedings to challenge parties to available funds? fraudulent, undervalued or preferential transactions which were concluded within the suspicion period (five years for fraudulent Yes, in a sale of receivables, the parties are free to exclude or limit transactions, two years for undervalued transactions, and ninety days the right of recourse of the purchaser. It is also possible to agree 190 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gárdos Füredi Mosonyi Tomori Hungary

that certain debts are to be paid only from certain funds and only to 8.3 Data Protection. Does Hungary have laws restricting the the extent that fund is available. If the governing law is the law of use or dissemination of data about or provided by another country, Hungarian courts shall give effect to such obligors? If so, do these laws apply only to consumer contractual provision. obligors or also to enterprises?

Yes, Hungary has laws restricting the use or dissemination of data 7.4 Non-Petition Clause. Will a court in Hungary give effect about or provided by obligors. The Act on the Protection of Personal to a contractual provision (even if the contract’s governing Data applies to the data of natural persons whether consumers or not; law is the law of another country) prohibiting the parties the Civil Code provides protection of the inherent rights of any legal from: (a) taking legal action against the purchaser or another person; or (b) commencing an insolvency and natural persons, and special confidentiality rules apply to all

proceeding against the purchaser or another person? financial institutions with respect to their customers. Hungary

There is no established court practice in this regard. Probably, the 8.4 Consumer Protection. If the obligors are consumers, will court would only give effect to a prohibition with respect to taking the purchaser (including a bank acting as purchaser) be legal action or commencing insolvency proceedings, in case it was required to comply with any consumer protection law of agreed for an adequate consideration. If the contract’s governing law Hungary? Briefly, what is required? is the law of another country, and the prohibition is valid under the governing law, a Hungarian court will give effect to that provision. Consumer protection laws primarily apply to the formation of contracts with consumers. As a result of the sale of receivables, the position of the consumers as obligors may not change, in particular 7.5 Independent Director. Will a court in Hungary give effect not to the detriment of the consumer. Therefore, the purchaser will to a contractual provision (even if the contract’s governing law is the law of another country) or a provision in a not be required to comply with any additional requirements. It may party’s organisational documents prohibiting the directors be worth noting that, in case of consumer loans (with the exception from taking specified actions (including commencing an of mortgage loans), the obligor is entitled to prepayment of the debt. insolvency proceeding) without the affirmative vote of an independent director? 8.5 Currency Restrictions. Does Hungary have laws restricting the exchange of Hungary’s currency for other Hungarian company law explicitly recognises independent currencies or the making of payments in Hungary’s directors only in the context of public companies. We believe, currency to persons outside the country? however, that the organisational documents of a Hungarian company may require that one or more of the directors have to be In Hungary, there is no restriction either on making payments independent and that the affirmative vote of the independent outside of the country or on the exchange of the Hungarian currency directors is necessary for certain decisions. Such a restriction, (HUF). however, will not have any effect vis-à-vis third parties, and will not affect the validity of any transaction concluded in breach of this provision. 9 Taxation

8 Regulatory Issues 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser be subject to withholding taxes in Hungary? Does the 8.1 Required Authorisations, etc. Assuming that the answer depend on the nature of the receivables, whether purchaser does no other business in Hungary, will its they bear interest, their term to maturity, or where the purchase and ownership or its collection and enforcement seller or the purchaser is located? of receivables result in its being required to qualify to do business or to obtain any licence or its being subject to Under Hungarian law, the only withholding tax is the personal regulation as a financial institution in Hungary? Does the income tax applicable to private persons only. That is, if private answer to the preceding question change if the purchaser persons receive payments on receivables qualifying as income does business with other sellers in Hungary? (basically interest), this could be subject to withholding tax. Since, in the context of a securitisation, neither the seller nor the purchaser Purchasing receivables falls into the category of a lending operation, would be private persons, in such a context payments on which is construed as a type of financial services, which, if carried on receivables are not subject to withholding tax. as a business, is subject to authorisation from the Hungarian FSA. The same applies to the transfer of a single portfolio of receivables. No Hungarian authorisation is required if the purchaser is a regulated 9.2 Seller Tax Accounting. Does Hungary require that a financial institution in another EU country. specific accounting policy is adopted for tax purposes by the seller or purchaser in the context of a securitisation?

8.2 Servicing. Does the seller require any licences, etc., in No special accounting rules apply to securitisation for tax purposes. order to continue to enforce and collect receivables following their sale to the purchaser, including to appear before a court? Does a third party replacement servicer 9.3 Stamp Duty, etc. Does Hungary impose stamp duty or require any licences, etc., in order to enforce and collect other documentary taxes on sales of receivables? sold receivables? Hungary does not impose stamp duty or other documentary taxes on Servicing receivables is also subject to authorisation from the sales of receivables. However, stamp duty is imposed on Hungarian FSA. deregistration of mortgages which may be desirable in connection with the sale of certain receivables. ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 191 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gárdos Füredi Mosonyi Tomori Hungary

9.4 Value Added Taxes. Does Hungary impose value added However, if the obligor of the receivable qualifies as a taxable tax, sales tax or other similar taxes on sales of goods or person for VAT purposes, then the tax authority can make claims services, on sales of receivables or on fees for collection against him for the tax not paid by the seller. Consequently, if the agent services? receivable contains VAT as well, then there is some risk that the obligor would pay the amount only net of VAT if the tax authority Value added tax is imposed on sales of goods or services. In most has previously made a claim against him for paying the VAT. cases, the sale of receivables is not subject to value added tax on the basis that not the sale but the purchase of receivables is treated as financial service, which is exempted from value added tax. As a 9.6 Doing Business. Assuming that the purchaser conducts main rule, the provision of agency services is not exempt from VAT, no other business in Hungary, would the purchaser’s purchase of the receivables, its appointment of the seller

Hungary unless it qualifies as a financial service or its intermediation. as its servicer and collection agent, or its enforcement of Although a recent position paper of the Hungarian Financial the receivables against the obligors, make it liable to tax Supervisory Authority is of the opinion that the activity of a in Hungary? collection agency in general qualifies as financial intermediation, we think that the collection agent services in the context of a A non-resident purchaser of receivables shall pay company tax only securitisation would not qualify as financial intermediation and on the profit obtained from business activities conducted by their therefore such service is likely to be subject to VAT. Hungarian permanent establishments. Whether the regular purchase and enforcement of receivables (directly or through an 9.5 Purchaser Liability. If the seller is required to pay value agent) qualifies as having a permanent establishment in Hungary, added tax, stamp duty or other taxes upon the sale of requires more specific tax analysis. receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold receivables or collections?

The tax authority is not entitled to make claims against the purchaser or on the receivables or collections if the seller fails to pay VAT or other taxes upon the sale of receivables (or on the sale of goods or services that give rise to the receivables).

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István Gárdos Erika Tomori

Gárdos Füredi Mosonyi Tomori Law Office Gárdos Füredi Mosonyi Tomori Law Office Váci Utca Center, Váci u. 81. Váci Utca Center, Váci u. 81. 1056 Budapest 1056 Budapest Hungary Hungary

Tel: +36 1 327 7560 Tel: +36 1 327 7560 Fax: +36 1 327 7561 Fax: +36 1 327 7561 Email: [email protected] Email: [email protected] URL: www.gfmt.hu URL: www.gfmt.hu

István Gárdos started his career in 1980 at the National Bank of Erika Tomori started her career in 1987 at a major Hungarian Hungary Hungary. In 1986 he became senior legal counsel at a major commercial bank. She received a diploma in Securities Trading Hungarian commercial bank, and since 1992 he has been a in 1990, she continued her studies at the Academy of American partner of Gárdos Füredi Mosonyi Tomori, and continued to act and International Law in 1991, and received a certificate in primarily as a banking and securities lawyer. He advises financial Banking Law in 1995. Since 1992, she has been a partner of the institutions in both compliance and transactional matters. He has Law Office of Gárdos Füredi Mosonyi Tomori. Her primary significant litigation practice with a special focus on cases relating practice areas are banking law, securities law and corporate law. to financial services. He has been asked to participate in the Her professional experience includes the representation of codification of the new Hungarian Civil Code. Mr Gárdos is a financial institutions in establishment and licensing, litigation, member of the Budapest Bar and an external member of the final legal counselling and the representation of companies involved in examination board in civil law at Eötvös Loránd University. He the issuance of securities. She gives lectures in various has published various articles on secured transactions and is a universities; she is honorary professor at Eötvös Loránd co-author of a major book on pledge law. University and Corvinus University. Erika Tomori is the author of various publications relating to the law of securities and a standard textbook on securities law.

Gárdos Füredi Mosonyi Tomori Law Office, established in 1992, is an independent Hungarian law firm that provides its clients with high quality, personalised legal services. We aim to provide services of outstanding quality that live up to the highest professional and ethical standards to our clients in accordance with their personal needs to help them to reach their goals and to prevent and manage their operational legal risks. Our prime areas of specialisation are banking, capital markets, and insurance. As recognition of the expertise of our firm, we have participated in several major codifications in the fields of our practice areas - (Banking Act [1996], Capital Market Act [2002], Insurance Act [2003], insolvency law reform [2004], investment fund reform [2010], new Civil Code [2004 to date]). Gárdos Füredi Mosonyi Tomori Law Office won several awards for the quality of its services, such as Corporate International 2011 Banking & Finance Law Firm of the Year in Budapest, Acquisition International Hungarian Contract Law Firm of the Year, GLE 2011 Hungarian Banking Law Firm of the Year, Finance Monthly Law Awards winner 2011 Insurance Law.

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India

Dave & Girish & Co. Mona Bhide

1 Receivables Contracts guidelines with respect to micro loans and limits have also been prescribed with respect to the rate of interest that can be charged on micro loans. 1.1 Formalities. In order to create an enforceable debt obligation of the obligor to the seller, (a) is it necessary The rate of interest charged on late payments is based on the that the sales of goods or services are evidenced by a contract agreed by the parties in writing. While there is no formal receivables contract; (b) are invoices alone prescribed rate of interest on late payments, if a matter is taken to sufficient; and (c) can a receivable “contract” be deemed Court, the Court may not award the interest as was agreed by the to exist as a result of the behaviour of the parties? parties if the same is very high. (b) While there is no statutory right to recover additional payment a) Yes, while it is not necessary under the Indian Contracts Act, by way of interest on late payments, it is granted on equitable 1872 that the contract for sale of goods or services be made in writing for it to be enforceable, however, in case of an grounds in most cases. Where parties have agreed in writing under assignment or securitisation, in order to ensure an undisputed a mutual agreement to a rate of interest to be charged, the Courts flow of receivables, it is advisable that the underlying would allow that rate of interest. However, if the Court finds that contracts which are proposed to be assigned are in writing. the rate agreed is very high as compared to the current rate of An invoice coupled with a delivery receipt would also be a interest prevailing in the market, the Court may reduce the same at sufficient evidence for sale of goods. An assignment of the its discretion. debt will be required to be evidenced by a written document. (c) No, consumers do not have a right to cancel the receivables (b) As mentioned above for enforcing the sale, an invoice would except in case of a prepayment. Even prepayments will be allowed be a sufficient evidence, except that in cases of assignment of subject to such right being available under the underlying contract book debts, in order that the transaction meets with the “true or unless mutually agreed by all the concerned parties to the sale” criteria and in order to prove that the terms of assignment are in compliance with the guidelines issued by contract. the Reserve Bank of India, it will be necessary to have a (d) Where a consumer is not informed about the assignment, the written document for assignment. consumer has a right to continue to pay to the original (c) A contract can be proved by the performance of the parties. creditor/assignor. The consumer can also stop making payments if If both parties perform their respective obligations, the the original creditor undergoes a liquidation or becomes a sick contract becomes enforceable. However, such contracts are company within the meaning of the Sick Industrial Companies Act, not easy to enforce as the evidence for such performance 1985 and/or is referred to the Board of Industrial and Financial having been completed has to be proved beyond doubt. This Reconstruction on account of its net worth being totally eroded in is another reason why a written evidence of the assignment cases where the consumer is not aware of the assignment. as and by way of an agreement between the parties is necessary. The above reply is on the assumption that the underlying contract document does not restrict assignment or require any specific permission from the consumer. 1.2 Consumer Protections. Do Indian laws (a) limit rates of interest on consumer credit, loans or other kinds of Consumers have a right to challenge any unfair trade practice and receivables; (b) provide a statutory right to interest on late any restrictive trade practices in special forums set up for this payments; (c) permit consumers to cancel receivables for purpose. We also have a consumers’ forum that hears complaints of a specified period of time; or (d) provide other noteworthy consumers and decisions are binding on all. rights to consumers with respect to receivables owing by them? 1.3 Government Receivables. Where the receivables contract has been entered into with the government or a (a) With respect to lending transactions, we do have statutes government agency, are there different requirements and applicable in each state, which require each lender (which is not laws that apply to the sale or collection of those registered as a bank), to register as a moneylender. The receivables? moneylenders’ statute also prescribes the maximum rate of interest that can be charged by a moneylender. There is no different law that applies to the sale of receivables to the With a view to provide reliefs to farmers and other small Government or Governmental Agencies. entrepreneurs, some states in India have enacted laws/issued

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2 Choice of Law – Receivables Contracts 2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in India?

2.1 No Law Specified. If the seller and the obligor do not No, India has not ratified the United Nations Convention on the specify a choice of law in their receivables contract, what International Sale of Goods. are the main principles in India that will determine the governing law of the contract? 3 Choice of Law – Receivables Purchase If all the parties to a contract are parties residing in India, even if Agreement

the governing law of a contract is not specified in the contract, the India governing law of such a contract will be Indian law. 3.1 Base Case. Does the Indian law generally require the Where, however, the contract is cross-border in nature and involves sale of receivables to be governed by the same law as parties residing in different jurisdictions, or where the subject the law governing the receivables themselves? If so, matter of the contract is located in a foreign jurisdiction or where does that general rule apply irrespective of which law performance of the contract is carried out in a foreign jurisdiction, governs the receivables (i.e., Indian laws or foreign and if the governing law is not specified in the agreement, the laws)? governing law of that contract will be decided having regard to the intention of the parties, and the law of the country with which it is No, there is no legal requirement that the law governing the most closely connected, the laws of jurisdiction in which parties are underlying transactions should also be the law governing the located and laws of the country in which the contract is to be assignment. performed. The Indian Courts would apply the principles of private However, if the same law governs both the contracts, it would international law to decide any dispute arising with respect to the reduce the complications that may arise on account of governing law of the contract. contradictions, if any, between the two different governing laws. There are no exceptions to this rule. 2.2 Base Case. If the seller and the obligor are both resident in India , and the transactions giving rise to the receivables and the payment of the receivables take 3.2 Example 1: If (a) the seller and the obligor are located in place in India , and the seller and the obligor choose India, (b) the receivable is governed by Indian law, (c) the Indian law to govern the receivables contract, is there any seller sells the receivable to a purchaser located in a third reason why a court in India would not give effect to their country, (d) the seller and the purchaser choose the law choice of law? of India to govern the receivables purchase agreement, and (e) the sale complies with the requirements of Indian law, will a Court in India recognise that sale as being No, Indian Courts would definitely give effect to the choice made effective against the seller, the obligor and other third by the parties. parties (such as creditors or insolvency administrators of the seller and the obligor)? 2.3 Freedom to Choose Foreign Law of Non-Resident Seller or Obligor. If the seller is resident in India but the obligor Yes it will. is not, or if the obligor is resident in India but the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables contract, 3.3 Example 2: Assuming that the facts are the same as will a court in India give effect to the choice of foreign Example 1, but either the obligor or the purchaser or both law? Are there any limitations to the recognition of are located outside India, will a Court in India recognise foreign law (such as public policy or mandatory principles that sale as being effective against the seller and other of law) that would typically apply in commercial third parties (such as creditors or insolvency relationships such that between the seller and the obligor administrators of the seller), or must the requirements of under the receivables contract? the obligor’s country or the purchaser’s country (or both) be taken into account? (a) If the parties to a contract are persons resident in India and the contract is not relating to a cross-border transaction, the Yes, the Indian Courts should recognise the sale. The laws contract cannot be governed by a foreign law and Indian law applicable to the obligor are only with respect to the obligations of would apply by default. the obligor. With respect to a foreign purchaser, if the sale is to be (b) In the case of a cross-border contract, the parties to the enforced in India against the seller in India, the Indian Courts would contract are at liberty to choose the law of the jurisdiction in enforce the sale, unless the performance of the obligations has which either of the parties to the contract reside. In case they become illegal under Indian law. are unable to select either of the laws then the parties can select any neutral law if such law is more commercially developed and is commonly used in similar transactions. However, in both the cases (a) and (b), if the governing law of the contract is a foreign law and it is sought to be enforced in India, Indian Courts will refuse to enforce the contract if the obligation sought to be enforced in India is contrary to Indian law or contrary to public policy. For example: The governing law with respect to a contract relating to an immovable property in India cannot be a foreign law.

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3.4 Example 3: If (a) the seller is located in India but the If the receivables are loan receivables, in order for the sale to obligor is located in another country, (b) the receivable is qualify as a “trustee” for the purposes of the Securitisation governed by the law of the obligor’s country, (c) the seller Guidelines issued by the Reserve Bank of India, the terms of sale sells the receivable to a purchaser located in a third will have to be in compliance with Securitisation Guidelines in country, (d) the seller and the purchaser choose the law order for the Indian Court to enforce the same. of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a Court in India 4 Asset Sales recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency

India administrators of the seller) without the need to comply 4.1 Sale Methods Generally. In India what are the customary with India’s own sale requirements? methods for a seller to sell receivables to a purchaser? What is the customary terminology – is it called a sale, No, for the sale to be effective against the seller, the sale will have transfer, assignment or something else? to be enforceable under and in compliance with Indian law. Unlike the practice followed in the United States of America, in India a sale of receivables is generally referred to an assignment of 3.5 Example 4: If (a) the obligor is located in India but the receivables and in cases where there are multiple buyers and the seller is located in another country, (b) the receivable is sale is routed through a trust, which is used as a special purpose governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country vehicle to effect the transfer; the transaction is called a to govern the receivables purchase agreement, and (d) “securitisation”. In an assignment transaction it is customary to the sale complies with the requirements of the seller’s execute a Deed of Assignment and related documents. country, will a Court in India recognise that sale as being A sale of an account receivable is ordinarily made under a bilateral effective against the obligor and other third parties (such document structured in the form of a deed of assignment and not as as creditors or insolvency administrators of the obligor) a purchase of receivables. Under the deed of assignment all rights without the need to comply with India own sale and benefits arising under the underlying transaction are assigned in requirements? favour of the assignee. (a) If the obligor is located in India, the obligor will be required There is no legal requirement for the obligor to be a party to the to comply with Indian law. Also, the transaction that is assignment because, under Indian law, rights arising under a entered into by the obligor will have to be in accordance with contract can be assigned without the consent of the obligor unless Indian law for it to be enforceable against the obligor in the contract specifically provides that a prior permission of the India. debtor should be obtained. (b) Since the receivables are arising in the seller’s country, it is However, in order for the sale/assignment to be binding on the normal that the receivables are governed under the law of the debtor/obligor, it is advisable to give notice of a sale to the debtor, seller’s country. because without such notice the underlying debtor/obligor would be (c) Choice of a foreign law as the governing law in an validly discharged by making payments to the assignor. However, international contract is respected and accepted by the Indian if a notice of the assignment/sale is issued by the creditor/assignor Courts and in this case, since the law selected is the law of to the debtor/obligor payments made to such creditor/assignor the jurisdiction where one of the parties to the contract reside, the choice will be respected by the Indian Courts. would not amount to a valid discharge of the obligations of the However, if the assignment pertains to a financial debt, it will debtor/obligor. be necessary for the assignment to be in compliance with guidelines issued for RBI. 4.2 Perfection Generally. What formalities are required (d) Also, in order for the contract to be enforceable under Indian generally for perfecting a sale of receivables? Are there law, the contract cannot be against the Indian law or Indian any additional or other formalities required for the sale of pubic policy. receivables to be perfected against any subsequent good faith purchasers for value of the same receivables from the seller? 3.6 Example 5: If the seller is located in India (irrespective of the obligor’s location), the receivable is governed by the law of India, the seller sells the receivable to a purchaser The formalities generally are: located in a third country, the seller and the purchaser The seller and the purchaser enter into an agreement to assign with choose the law of the purchaser’s country to govern the conditions precedent on the satisfaction of which the sale takes receivables purchase agreement, and the sale complies place. It would be necessary to pay the stamp duty on the with the requirements of the purchaser’s country, will a agreement before it is signed if the same is signed in India. court in India recognise that sale as being effective against the seller and other third parties (such as Stamp duty is required to be paid on the deed of assignment, before creditors or insolvency administrators of the seller, any it is executed. The stamp duty on a deed of assignment varies from obligor located in India and any third party creditor or State to State ranging from 3% to 10% depending upon the amount insolvency administrator of any such obligor)? of the receivables assigned and the amount of stamp duty reduces to an amount of Rs. 100,000 in a few States. Indian Courts do recognise the freedom of parties to select the In the States of Maharashtra, Gujarat, Delhi, West Bengal, governing law in a cross-border transaction in cases where the Karnataka and Rajasthan, notifications have been issued which parties originate from different jurisdictions and such contracts have substantially reduced the applicable stamp duties. For would be enforceable in India so long as the obligation sought to be example: the stamp duty on a deed of assignment of receivables enforced in India is not contrary to Indian law or Indian public along with the underlying securities is payable at the rate of 0.1% policy, the transaction will be enforceable. of the amount of receivables assigned, subject to a maximum of Rs.

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100,000 (one hundred thousand Rupees) in the State of 4.3 Perfection for Promissory Notes, etc. What additional or Maharashtra. different requirements for sale and perfection apply to sales of promissory notes, mortgage loans, consumer In the State of Karnataka, if the assignment is made in a loans or marketable debt securities? securitisation transaction, the stamp duty is 0.1% of the amount of receivables transferred to the securitisation company, subject to a The sale of a promissory note is to be effected by endorsement on maximum of Rs. 100,000. the reverse of the promissory note by the person in whose favour The stamp duty in the State of Tamil Nadu is 0.1% of the amount of the promissory note is issued. If a person, who is a holder in due the mortgage loan, subject to the maximum of Rs.100,000 if sold by course, is selling the promissory note, the person who acquired the a housing finance company, including banks, to another bank or a

promissory note for a valuable consideration also has to endorse the India financial institution. same in the name of the purchaser. Accordingly, each State has its own rate of stamp duty. For additional information on perfection, please refer to the answer In some other States of India, the stamp duty is payable at the rate to question 4.2 above. of 3% of the receivables, other than mortgage loans. Where the assignment relates to the transfer of loan receivables with 4.4 Obligor Notification or Consent. Must the seller or the underlying security, being a mortgage it is advisable to have the purchaser notify obligors of the sale of receivables in assignment documents adjudicated with respect to the amount of order for the sale to be effective against the obligors stamp duty payable thereon. and/or creditors of the seller? Must the seller or the If the seller is a corporate, then the purchaser will have to ensure purchaser obtain the obligors’ consent to the sale of that the purchase of the receivables is made free from any charge receivables in order for the sale to be an effective sale created by the seller in favour of any financier. The seller, in that against the obligors? Does the answer to this question vary if (a) the receivables contract does not prohibit case, will have to modify the charge if any is recorded over the assignment but does not expressly permit assignment; or receivables in the records of the Registrar of Companies. Where the (b) the receivables contract expressly prohibits proposed assignment also pertains to the transfer of the underlying assignment? Whether or not notice is required to perfect security, which is in the form of a mortgage on an immovable a sale, are there any benefits to giving notice – such as property, a deed of modification will have to be registered with the cutting off obligor set-off rights and other obligor Sub-Registrar of the relevant land registry, within whose territorial defences? jurisdiction the immovable property is situated. This modification will be made pursuant to a deed of modification, listing the (i) If the contract between the seller and the debtor does not receivables excluded from the charge. require the consent of the debtor for selling the receivables, the assignor does not need to obtain consent from the obligor. There is a central registry which is set up for recording the receivables or sale of receivables called Central Registry of (ii) Further, under Indian law: Securitisation Asset Reconstruction and Security Interest of India (a) All rights and benefits arising under a contract are (“CERSAI”). assignable unless the contract specifically prohibits assignment. Under the Securitisation and Reconstruction of Financial Assets and (b) If the contract prohibits the transfer or assignment of Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), a receivable under the contract, the seller cannot secured creditors as defined under 2(1)(zd) of the Act can, in order assign the receivable. to perfect their sale, register the transfers with the CERSAI. The Since the assignor does not need the consent of the obligor for such secured creditors, as defined, include the following: assignment, in case the assignor becomes insolvent after the (a) Banks. assignment, the sale would still be valid and there is no limitation, (b) Financial Institutions. which would require the purchaser/assignee to notify the obligor. (c) Debenture Trustees appointed by any bank or financial The risk of not giving a notice is that the obligor would be validly institution. discharged if he made payment to the assignor. Further, if the (d) Securitisation company or reconstruction company. obligor is not informed about the assignment, and if the assignee (e) Any other trustee holding securities on behalf of a bank or undergoes liquidation, the obligor can continue to make payments financial institution. to the liquidator of the assignor and would still get a valid discharge While until last year there was no registration authority with which for its payment obligation. a transfer/assignment of a debt or the underlying security interest could be registered, the government has now set up the CERSAI 4.5 Notice Mechanics. If notice is to be delivered to obligors, which is in charge of maintaining records and registrations with whether at the time of sale or later, are there any respect to the transfer of receivables and the transfer of security requirements regarding the form the notice must take or interest and is functional. how it must be delivered? ? Is there any time limit In addition to the above, care should be taken to ensure that: beyond which notice is ineffective – for example, can a notice of sale be delivered after the sale, and can notice (1) the documents are properly executed and witnessed; be delivered after insolvency proceedings against the (2) in case of a company, (a) a common seal should be affixed if obligor have commenced? Does the notice apply only to so required by its Articles of Association; and (b) a Board specific receivables or can it apply to any and all resolution should be duly and validly passed authorising the (including future) receivables? Are there any other sale/purchase; and limitations or considerations? (3) the purchaser should insist on a certificate from a director certifying that the receivables are not encumbered/charged or There is no prescribed format for the notice, but it should ideally sold to any other person. include the following: (a) Information that the debt has been assigned. 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assignment is effective. 4.8 Respect for Intent of Parties; Economic Effects on Sale. (c) The name of the assignor and the assignee. If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be (d) Limitations to the assignment, if any. respected or will a court enquire into the economic There is no prescribed time limit for issuance of the notice of characteristics of the transaction? If the latter, what assignment. The notice would be invalid if the debtor is already economic characteristics of a sale, if any, might prevent liquidated by the time the notice is served. Further, the assignment the sale from being perfected? Among other things, to itself can be challenged by the debtor if the contract required what extent may the seller retain (a) credit risk; (b) consent of the debtor. Another factor that needs consideration is the interest rate risk; and/or (c) control of collections of receivables without jeopardising perfection? period of limitation. India The Court will examine the actual intent if the sale is contested. 4.6 Restrictions on Assignment; Liability to Obligor. (a) Are The mere act of the parties in denominating a transaction as a sale restrictions in receivables contracts prohibiting sale or or conveying their intent to sell receivables would not render it to assignment generally enforceable in India? (b) Are there exceptions to this rule (e.g., for contracts between be a true sale, or allow the receivables to be transferred from their commercial entities)? (c) If India recognises prohibitions books to any other person. The sale will have to meet all the on sale or assignment and the seller nevertheless sells requirements for true sale as prescribed by law and the Court would receivables to the purchaser, will either the seller or the enquire into all economic characteristics to determine whether or purchaser be liable to the obligor for breach of contract or not it was a true sale. However, the Court would not generally suo on any other basis? moto examine such issues until a dispute is raised before it. In order for the sale to be a true sale, all rights and interest in the (a) Yes, restrictions from assignment are enforceable. However, receivables will have to pass to the purchaser. If the sale is to be there cannot be a prohibition on any person from assigning the benefits arising under a contract unless such restriction is construed as a true sale, it has to be without recourse to the seller. reasonable or due to a consideration. The seller cannot retain credit risk or interest rate risk or retain any benefits either. The seller can, however, as a collection and paying (b) There is an exception with respect to contracts which relate to the performance of personal service, e.g., acting or agent or a servicer, participate in the collection of receivables theatrical performances, etc. without jeopardising the perfection of the sale. (c) If, in spite of a restriction on assignment, the seller still assigns the contract, the assignment may be treated as invalid 4.9 Continuous Sales of Receivables. Can the seller agree in at the option of the obligor. The obligor in such situation can an enforceable manner (at least prior to its insolvency) to refuse to recognise the assignee and continue to perform its continuous sales of receivables (i.e., sales of receivables obligations towards the assignor. as and when they arise)? However, where one party is supposed to receive payments from another party, the receiver can always nominate a third party to While the parties can enter into an agreement to sell as and when receive the payments. If no notice of assignment is given, the the receivables come into existence, the actual assignment can only payer/obligor can make payments to the original payee under the take place after the receivables come into existence. Hence, if the contract and the obligor will get full discharge upon such payment. assignor goes into insolvency after entering into a future contract for sale, the same cannot be enforced. Such a contract for the sale of future receivables will not be bankruptcy remote (i.e. it cannot be 4.7 Identification. (a) Must the sale document specifically enforced in case of the insolvency of the seller), which is one of the identify each of the receivables to be sold? (b) If so, what specific information is required (e.g., obligor name, essential characteristics for a true sale. invoice number, invoice date, payment date, etc.)? (c) Do the receivables being sold have to share objective 4.10 Future Receivables. Can the seller commit in an characteristics? (d) Alternatively, if the seller sells all of enforceable manner to sell receivables to the purchaser its receivables to the purchaser, is this sufficient that come into existence after the date of the receivables identification of receivables? purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured (a) Yes, without identifying the receivables, the sale will not be to be valid and enforceable? Is there a distinction complete and would be vague and, therefore, unenforceable. between future receivables that arise prior to or after the (b) The specific information, such as the name (and, if possible, seller’s insolvency? the address of the debtor), the amount of the debt, particulars of the invoice/document giving rise to the debt, the date of The seller will have to enter into an Agreement for Sale of invoice/document, payment date, invoice number, etc. will Receivables. The actual transfer/assignment will take place on the have to be given. realisation of the Receivables, and the seller can give an irrevocable (c) Yes, it would be desirable to have objective characteristics undertaking and power to the assignee to execute the Assignment. mentioned as it would only help to identify the receivables. (d) Even in cases where all receivables are being sold, it would be 4.11 Related Security. Must any additional formalities be preferable that particulars of the receivables being sold are fulfilled in order for the related security to be transferred mentioned because it would help in identification and to concurrently with the sale of receivables? If not all distinguish the receivables, which were sold. The list of related security can be enforceably transferred, what receivables for an entity actively involved in trading activities methods are customarily adopted to provide the changes from day to day and, therefore, it is all the more purchaser the benefits of such related security? necessary to identify the receivables which are sold. Moreover, in cases of disputes on account of multiple claimants for the same set of receivables, if the assignment documents provide Assignments can be validly entered into so as to include the identification, it helps in proving the ownership. assignment of the underlying security interest.

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The types of transaction, which pose a difficulty, are the 5.5 Additional Formalities. What additional or different assignments of mortgage loan receivables where the underlying requirements apply to security interests in or connected to security is an immovable property. This is because every transfer insurance policies, promissory notes, mortgage loans, of an immovable property requires mandatory requirement of consumer loans or marketable debt securities? registration before the office of the Sub-registrar of Assurances and such transfer also attracts heavy stamp duty. The common method While the documents for assignment would be similar in all cases, therefore prevailing in the Indian market is to transfer only the the requirements would differ on account of a difference in the receivables, and to allow the assignor to continue to hold the nature of security interest that is proposed to be transferred in mortgage security for and on behalf of the purchaser. favour of the purchaser/assignee.

If the assignment document relates to a “mortgage interest”, and if India the underlying mortgage is also being transferred then it will have 5 Security Issues to be registered with the Sub-Registrar of Assurances within whose jurisdiction the immovable property is situated and the registration 5.1 Back-up Security. Is it customary in India to take a “back- fee shall also be paid as applicable in the place where the security up” security interest over the seller’s ownership interest in document is registered. This is in addition to the registration of the receivables and the related security, in the event that security interest created under the security document registered the sale is deemed by a court not to have been with the Registrar of Companies in a case where the security perfected? interest is created by a company. However, as explained earlier, if a pool of receivables are being assigned, the common practice is to What we find commonly is a credit enhancement which is generally allow the seller to continue to hold and retain the security interest in the range of 10% to 20% of the total pool size in the form of: for and on behalf of the purchaser and if the underlying security (i) cash collateral in the form of fixed deposits retained with a interest is not being conveyed under the Deed of Assignment, it bank with a lien marked in favour of the assignee; need not be registered. (ii) bank guarantees; and Since the commencement of the operations of the CERSAI, it will (iii) corporate undertakings. be necessary to have the sale registered with the CERSAI, if the These are credit supports to be used in case of default by the seller is a bank or an institution, which qualifies for such obligors. We have yet to see a back-up security to safeguard a non- registration. perfected sale. With respect to assignment of a consumer loans, the underlying security in the form of motor vehicles, insurance policies, debt 5.2 Seller Security. If so, what are the formalities for the securities is generally held in trust for the assignee by the assignor seller granting a security interest in receivables and and the assignment documents do not convey the underlying related security under the laws of India, and for such security. security interest to be perfected? 5.6 Trusts. Does India recognise trusts? If not, is there a The seller offers credit enhancement as a support to meet defaults mechanism whereby collections received by the seller in by the underlying debtor. The enhancement is generally in form of respect of sold receivables can be held or be deemed to a cash collateral in a lien marked bank account or other supports as be held separate and apart from the seller’s own assets mentioned above. until turned over to the purchaser? The perfection mechanism would depend on the type of security that is offered and would vary based upon the nature of entity that Indian law does recognise and accept trust as a person. Yes, once offers the security. the sale of receivables is complete, the sold receivables, upon collection and before transmission to the purchaser, will be deemed to be held in trust by the seller. However, the document of 5.3 Purchaser Security. If the purchaser grants security over assignment should have this as one of the covenants by the all of its assets (including purchased receivables) in collection and paying agent/servicer and the assignor. favour of the providers of its funding, what formalities must the purchaser comply with in India to grant and perfect a security interest in purchased receivables 5.7 Bank Accounts. Does India recognise escrow accounts? governed by the laws of India and the related security? Can security be taken over a bank account located in India? If so, what is the typical method? Would courts in The question of the purchaser granting a security interest in the India recognise a foreign-law grant of security (for receivables does not arise because the purchaser, upon the purchase example, an English law debenture) taken over a bank of said receivables, becomes the full owner and has no obligation to account located in India? the seller. Yes, escrow accounts are legally recognised in India and amounts lying in bank accounts can be held for and on behalf of another 5.4 Recognition. If the purchaser grants a security interest in entity and such accounts can be regarded as bankruptcy remote receivables governed by the laws of India, and that provided a charge or lien is marked thereon and the bank with security interest is valid and perfected under the laws of whom such account is opened has taken note of such charge. the purchaser’s country, will it be treated as valid and perfected in India or must additional steps be taken in However, such charge will have to be registered with the Registrar India? of Companies and agreed to in writing. Yes, the grant of a charge over movable assets of a company can be See question 5.3 above. created in favour of a non-resident company’s obligations in favour of a non-resident creditor.

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However, since inflow and outflow of exchange in and out of India 6.4 Substantive Consolidation. Under what facts or is regulated to some extent, if a debt is obtained by an Indian circumstances, could the insolvency official consolidate company from a foreign lender it will have to be subject to the the assets and liabilities of the purchaser with those of the external commercial borrowings guidelines. The Reserve Bank of seller or its affiliates in the insolvency proceeding? India has also made regulations with respect to the issuance of debentures outside India and the nature of securities that can be The assets of the purchaser purchased from the seller can be created for the same. consolidated with those of the seller or its affiliates in the insolvency proceedings only if the receivables fall within the doctrine of fraudulent preference of voidable transfer referred to above. 6 Insolvency Laws India Also in cases of securitisation, if the documentation for the sale of receivables is defective and does not satisfy the “true sale” criteria 6.1 Stay of Action. (a) If, after a sale of receivables that is prescribed under the guidelines issued by the RBI, the receivables otherwise perfected, the seller becomes subject to an can be added back to the books of the seller for the purposes of insolvency proceeding, will India’s insolvency laws computation of the assets of the seller. However, assets of the automatically prohibit the purchaser from collecting, purchaser cannot be consolidated with assets of the seller. transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? (b) Does the insolvency official have the ability to stay collection 6.5 Effect of Proceedings on Future Receivables. What is the and enforcement actions until he determines that the sale effect of the initiation of insolvency proceedings on (a) is perfected? (c) Would the answer be different if the sales of receivables that have not yet occurred or (b) on purchaser is deemed to only be a secured party rather sales of receivables that have not yet come into than the owner of the receivables? existence?

(a) No. If the sale of the receivable is perfected, it will be The sale of receivables which were not in existence at the time bankruptcy remote and the purchaser will be entitled to when the sale was made, such as receivables for the services to be collect, transfer or otherwise exercise ownership over the rendered or receivables for goods to be sold in future, can be purchased receivables. challenged because it is dependent on performance by the seller, (b) The liquidator, in the case of a company, or the receiver or an which may not be possible after the liquidation of the seller and, official assignee, in the case of an individual, is not legally therefore, would not be bankruptcy remote and would vitiate true entitled to order or maintain any other action preventing the sale. purchaser from collecting, transferring or otherwise exercising ownership rights over the purchased receivables. (c) If the purchaser is deemed to be a secured party instead of the 7 Special Rules owner, the secured party can proceed for enforcement of security upon occurrence of an event of default. Alternatively, it would be required to wait in queue before 7.1 Securitisation Law. Is there a special securitisation law the official liquidator appointed by the Company Court (and/or special provisions in other laws) in India during the liquidation of the Company for receiving any establishing a legal framework for securitisation amounts due, for the distribution before the Company Court transactions? If so, what are the basics? hearing the winding up. Yes. The Government of India enacted the Securitisation Act, namely, the Securitisation & Reconstruction of Financial Assets & 6.2 Insolvency Official’s Powers. If there is no stay of action Enforcement of Security Interest Act, 2002 (Securitisation Act). under what circumstances, if any, does the insolvency Chapter II of the Act, which is most relevant for us, deals with official have the power to prohibit the purchaser’s securitisation. exercise of rights (by means of injunction, stay order or other action)? Basic concepts: The Securitisation Act deals with the acquisition of financial assets If the transfer of a receivable is a fraudulent preference or a (receivables) by a securitisation company (to be incorporated with the voidable transfer discussed hereinafter, the liquidator will have to prescribed level of capital) and also deals with enforcement of security make an application to set aside a voidable transfer or fraudulent by secured creditors. The Securitisation Act provides for the preference. In such case the liquidator can also make an interim acquisition and can also take place by entering into an agreement for application for a stay of payments by the debtor to the purchaser. the transfer of the financial assets on terms and conditions agreed between the parties. However, the Act does not specify the mode of 6.3 Suspect Period (Clawback). Under what facts or assignment of the financial asset to the securitisation company. circumstances could the insolvency official rescind or The Securitisation Act confers power on the Reserve Bank of India to reverse transactions that took place during a “suspect” or determine policy and formulate guidelines with respect to “preference” period before the commencement of the securitisation. Any dispute arising between any of the parties to a insolvency proceeding? What are the lengths of the securitisation transaction are to be settled by arbitration or conciliation “suspect” or “preference” periods in India for (a) as per the provisions of the Arbitration and Conciliation Act, 1996. transactions between unrelated parties and (b) transactions between related parties? RBI GUIDELINES FOR THE SECURITISATION OF STANDARD ASSETS: The purchase of a receivable by a company is open to challenge by (i) Standard assets with respect to banks are assets which are the liquidator of the seller in cases of fraudulent preference and performing assets which are recoverable loan receivables. voidable transfer as aforesaid. (ii) True sale: For enabling the transferred assets to be removed from the balance sheet of the originator in a securitisation structure, the isolation of assets or ‘true sale’ from the

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originator to the SPV is an essential prerequisite. Once this As per the guidelines, the SPV is required to be a bankruptcy is done, the originator (if a bank or a company registered remote and non-discretionary structure so as to ensure the with the Reserve Bank as a non-banking finance company) passing on of the receivables without any hindrances. will not be required to maintain any capital against the value The originator does not have a right to exercise any control, of assets so transferred from the date of such transfer. either directly or indirectly, over the SPV and the trustees, and (iii) The guidelines provide various criteria that have to be shall not settle the trust deed. satisfied to meet a true sale including the requirement that the In order to protect their interests, investors are empowered in transaction should be bankruptcy remote. the trust deed to change the trustee of the SPV at any point of (iv) SPV: Dealt with under the following question (question 7.2). time.

(v) The guidelines also prescribe the levels and forms of credit A securitisation company is allowed to perform several other India enhancements. functions provided that performance of these functions by the Other provisions: Securitisation Company does not give rise to any pecuniary liability on the securitisation company. (i) Credit enhancement in the form of credit support provided to an SPV to cover the losses on account of default in payments (c) Yes. These have been discussed under the requirements for arising in the pool of assets. The guidelines provide that such registration as a securitisation company under part (a) of this facilities can be provided either by the originator and/or third question. parties. (ii) A bank is required to hold capital against the credit risk 7.3 Non-Recourse Clause. Will a Court in India give effect to assumed when it provides credit enhancement, either explicitly a contractual provision (even if the contract’s governing or implicitly, to a special purpose vehicle or its investors. law is the law of another country) limiting the recourse of (iii) The RBI Guidelines also provide for the representations that parties to available funds? the seller is required to make. Yes. The Courts in India would recognise a sale to be complete, if it can be established that the contract provides for non-recourse of 7.2 Securitisation Entities. Does India have laws specifically parties to available funds the Courts will give effect to the same, but providing for establishment of special purpose entities for if there is a relation to India, (i.e. in the form of either party residing securitisation? If so, what does the law provide as to: (a) requirements for establishment and management of such in India, or receivables arising in India) the Court will examine the an entity; (b) legal attributes and benefits of the entity; sale from an Indian legal angle. and (c) any specific requirements as to the status of directors or shareholders? 7.4 Non-Petition Clause. Will a Court in India give effect to a contractual provision (even if the contract’s governing law Yes. The Securitisation Act has been specifically made for is the law of another country) prohibiting the parties from: encouraging the establishment and regulation of special purpose (a) taking a legal action against the purchaser or another entities for securitisation. person; or (b) commencing an insolvency proceeding The requirements for establishment of a securitisation company are against the purchaser or another person? as follows: Indian Courts will give effect to a contractual provision so long as Financial: it is not in violation of Indian laws. The Securitisation Company has to be capitalised up to the limit prescribed under the Act. 7.5 Independent Director. Will a court in India give effect to a The RBI has to be satisfied that the securitisation company has not contractual provision (even if the contract’s governing law incurred losses in any of the 3 preceding financial years and the is the law of another country) or a provision in a party’s securitisation company is required to make adequate arrangements for organisational documents prohibiting the directors from the realisation of the financial assets acquired for securitisation and taking specified actions (including commencing an shall be able to pay periodical returns and redeem on the respective insolvency proceeding) without the affirmative vote of an due dates on the investments made in the securitisation company by independent director? qualified institutional buyers. Directors: Yes, so long as such provision does not conflict with Indian laws, it would be given effect to by the Indian Courts. The RBI may require that the directors of the securitisation company have adequate professional experience in matters related to finance, securitisation and reconstruction. Also, not more than half of the 8 Regulatory Issues board of directors of the securitisation company consist of nominees of a sponsor or anyway related with the sponsor or its subsidiaries. 8.1 Required Authorisations, etc. Assuming that the Further, none of the directors shall have been convicted of any offence purchaser does no other business in India, will its involving moral turpitude. purchase and ownership or its collection and enforcement Sponsor: of receivables result in its being required to qualify to do business or to obtain any licence or its being subject to It is required that a sponsor is not a holding securitisation company of regulation as a financial institution in India? Does the the securitisation company and does not otherwise hold any answer to the preceding question change if the purchaser controlling interest in the securitisation company. does business with other sellers in India? Other conditions: (a) Apart from the above, it is also required that the securitisation If such acquisition is a regular business then it will be necessary to company complies with the prudential norms specified by RBI. obtain a licence to operate as a non-banking finance company in (b) Yes. There are prescribed attributes and benefits of the India. Only a qualified institutional buyer, i.e. a financial company which inter alia include the following: institution, insurance company, bank, State financial corporation, ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 201 © Published and reproduced with kind permission by Global Legal Group Ltd, London Dave & Girish & Co. India

State industrial development corporation, trustee or securitisation withholding tax would arise. But, if the payment is of a principal company or a reconstruction company, registered under the amount such as a hire purchase instalment or repayment of loan Securitisation Act or an asset management company of a mutual instalments, there will not be any withholding tax. fund or a foreign institutional investor are entitled to purchase security receipts issued by a securitisation company. 9.2 Seller Tax Accounting. Does India require that a specific The position is the same even if the purchaser deals with other accounting policy is adopted for tax purposes by the sellers. seller or purchaser in the context of a securitisation?

No specific accounting policies have so far been prescribed for tax

India 8.2 Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables purposes, whether by the purchaser or the seller in the context of following their sale to the purchaser, including to appear securitisation. Accounts are to be prepared as per Indian Generally before a court? Does a third party replacement servicer Accepted Accounting Principles. require any licences, etc., in order to enforce and collect sold receivables? 9.3 Stamp Duty, etc. Does India impose stamp duty or other documentary taxes on sales of receivables? The servicer does not require a licence but has to be conferred with such rights under a duly signed agreement. However, if receivables Yes, in India, as per Indian law, there is a stamp duty implication on arise from a loan transaction, the seller should have had the licence transactions. when the loans were given. Stamp duty is also payable on every securitisation/assignment document. 8.3 Data Protection. Does India have laws restricting the use or dissemination of data about or provided by obligors? If so, do these laws apply only to consumer obligors or also 9.4 Value Added Taxes. Does India impose value added tax, to enterprises? sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for collection Bankers are subject to a requirement to maintain confidentiality agent services? with respect to its customers. Further, in some cases there may be a requirement for such obligations for confidentiality even in No. There is no value added tax but there is service tax on any contracts and the parties to the contract will be bound by the same. services offered for consideration.

8.4 Consumer Protection. If the obligors are consumers, will 9.5 Purchaser Liability. If the seller is required to pay value the purchaser (including a bank acting as purchaser) be added tax, stamp duty or other taxes upon the sale of required to comply with any consumer protection law in receivables (or on the sale of goods or services that give India? Briefly, what is required? rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold Yes, because upon the assignment/sale the purchaser would be bound receivables or collections? by the obligations arising under the contract with the obligors. If the purchaser is a bank and is trading in consumer receivables, the Yes, if the seller avoids paying taxes the obligation would then flow consumer protection law will apply to the purchaser in its capacity as to the assignee/purchaser. the assignee of the rights and obligations of the assignor. The stamp authorities will recover stamp duties from all the parties, jointly and severally, if the stamp duty is not paid on a document. 8.5 Currency Restrictions. Does India have laws restricting Accordingly, the stamp duty authorities will be able to make a claim the exchange of Indian currency for other currencies or against the purchaser for stamp duty payable on assignment of the making of payments in Indian currency to persons receivables or collection for unpaid tax. outside the country?

Yes. Inflow and outflow of exchange is restricted and regulated in 9.6 Doing Business. Assuming that the purchaser conducts India. The law governing foreign exchange transactions is the no other business in India, would the purchaser’s Foreign Exchange Management Act, 1999 and the rules and purchase of the receivables, its appointment of the seller regulations made thereunder, which restrict not only exchange of as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax Indian Rupees for other currencies but also payments in Indian in India? currency to persons resident outside India. The purchaser will be taxed for its income in India. Also, if it 9 Taxation conducts its business on a regular course of activities in India, whether through an agent or otherwise, the purchaser will be liable to pay tax on income if any arises from the resale of the receivables 9.1 Withholding Taxes. Will any part of payments on or on the differential amount between the amount paid for purchase receivables by the obligors to the seller or the purchaser of the receivables or the amount of the receivables actually received be subject to withholding taxes in India? Does the answer depend on the nature of the receivables, whether by it. Whether such tax will be as applicable on a business income they bear interest, their term to maturity, or where the or on capital gains will depend on the nature of the business of the seller or the purchaser is located? purchaser.

If the receivables consist of an interest element, then the question of

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Mona Bhide

Dave & Girish & Co. 1st Floor, Sethna Building, 55 M.K. Road Marine Lines, Mumbai 400002 India

Tel: +91 22 2206 2132/92 Fax: +91 22 2208 5620 Email: [email protected] URL: www.davegirish.com India Mona Bhide joined Dave & Girish & Co. in the year 1985 and since then has been working with the firm. She has completed the B.Com and LLC Degree from Mumbai University and has also graduated with a Master Degree from the Northwestern University, School of Law, in Chicago. She has worked with the American Bar Association as well as a law firm in Chicago before she returned to Dave & Girish & Co., in the year 2002. She is now a partner at Dave & Girish & Co., handling structured finance, derivatives, banking, cross-border financing and securities and investment documentation, IPOs, GDRs/ADRs and private equity transactions.

Dave & Girish & Co. was founded in the year 1978 and is a pioneer in the field of securitisation. The firm has offices in Mumbai and Bangalore and associate offices in Delhi and Hyderabad. Dave and Girish is known for its cross-border banking, international finance and corporate law practices. Dave & Girish & Co. was the first law firm to have become a member of the International Swaps and Dealers Association and it was also the first firm to document a securitisation transaction in India. It aces the field of structured finance and derivative and is known for its skills on drafting and documenting and negotiating intricate financing documentation. The firm represents multinational banks and major corporate groups in India. The firm was started by the Late Mohanlal Dave and is currently headed by Mr. Girish Dave who is a luminary in the field of banking and corporate law. His latest transactions include an offshore syndicated loan and a Japanese Bond Issue.

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Italy

CDP Studio Legale Associato Giuseppe Schiavello & Stefano Agnoli

1 Receivables Contracts fact that no interest was previously due, and no evidence of any suffered damage is due by the creditor for this purpose. (c)/(d) Amongst the various provisions aimed at protecting 1.1 Formalities. In order to create an enforceable debt consumers contained in the Italian legal system, Articles 121 obligation of the obligor to the seller, (a) is it necessary and ff. of Legislative Decree No. 385 of 1 September 1993 that the sales of goods or services are evidenced by a (the “1993 Banking Act”) provide for certain protection formal receivables contract; (b) are invoices alone measures to consumers entering into consumer loans, which sufficient; and (c) can a receivable “contract” be deemed include: (i) the right of the consumer to terminate the loan to exist as a result of the behaviour of the parties? agreement within a specified period of time after entering into it; (ii) the right for a consumer, upon the occurrence of a (a) Under Italian law, as a matter of principle, no requirements default of a supplier of goods and services and once having as to the form of a contract are provided in order to create placed the supplier in default without effects, to act against enforceable debt obligations vis-à-vis a debtor except for the lender claiming termination of the loan agreement and those cases where the written form is required ad repayment of any instalment already paid. Such liability will substantiam or ad probationem (i.e. for the validity of a also extend to any third party to which the lender may assign contract or for giving evidence thereof). its rights deriving from the credit agreement; and (iii) the (b) In certain circumstances invoices and accounting books of right of the consumer, in case of assignment of the loan entrepreneurs: agreement or of any claim thereunder, to raise against the (i) can constitute evidence of a contractual legal assignee the same defences he could raise against the original relationship; and lender, including set off. (ii) can be per se sufficient to cause the issuance of an injunction for payment (decreto ingiuntivo) by the 1.3 Government Receivables. Where the receivables court. contract has been entered into with the government or a (c) The behaviour of the parties does not per se constitute a government agency are there different requirements and “contract”, but may, in certain circumstances, be intended as laws that apply to the sale or collection of those an implied acceptance of a proposal to enter into a contract receivables? (when the behaviour constitutes performance of that contract on the part of the “accepting” party), or may guide in the The assignment of receivables out of contracts entered into with the interpretation of a contract or in the giving of evidence Italian government or any Italian government agency is governed thereof. by Royal Decree No. 2440 of 24 November 1923, which sets forth requirements in addition to those applicable under the general 1.2 Consumer Protections. Do Italy’s laws (a) limit rates of provisions of law. The sale agreement shall have the form of a interest on consumer credit, loans or other kinds of public deed or a private deed with notarised signatures and shall be receivables; (b) provide a statutory right to interest on late notified to the relevant Public Administration by a court’s bailiff. payments; (c) permit consumers to cancel receivables for Moreover, in the case of receivables arising from a supply contract a specified period of time; or (d) provide other noteworthy or contract for bid (which have not been completely performed), the rights to consumers with respect to receivables owing by sale is not valid unless the Public Administration grants its consent. them? Finally, it is not possible to sell receivables against multiple public bodies by a single agreement. (a) Italian Law No. 108 of 7 March 1996 (the “Usury Law”) introduced legislation preventing lenders from applying Moreover, according to the provisions of Article 117 of Legislative interest rates equal to or higher than certain rates which are Decree No. 163 of 12 April 2006 (“Public Contracts Act”), a determined as the rates exceeding certain threshold rates contractor may assign receivables arising from a public contract to increased by one half. The threshold rates are set every three banks or other financial intermediaries pursuant to Law 52 (see months by decree issued by the Ministry of Economy and below). In case of public debtors, such agreement must be executed Finance. Threshold rates are set on the basis of the interest in the form of public deed or notarised private deed and notified to rates data collected on the market during the previous the relevant debtor. Further, in case of receivables originating from months. an appalto, a concessione, or a concorso di progettazione, (b) Under Article 1224 of the Italian Civil Code, legal interest assignments will be deemed to be perfected upon the expiration of (or the higher interest agreed upon by the parties) is due from a 45-day term of the date of notification, during which period the the day of the default, irrespective, as the case may be, of the

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public debtor has the right to object to the assignment by giving 2.4 CISG. Is the United Nations Convention on the notice to the assignor and the assignee. International Sale of Goods in effect in Italy? Notwithstanding notification of the assignment, the public debtor may object to the assignee all defences available against the Yes, it is. assignor on the basis of the relevant contract. Enforcement of claims against public entities may be subject to 3 Choice of Law – Receivables Purchase restrictions depending on the nature and function of the asset on Agreement which enforcement is sought. Specific stay periods may apply.

3.1 Base Case. Does Italian law generally require the sale of Italy 2 Choice of Law – Receivables Contracts receivables to be governed by the same law as the law governing the receivables themselves? If so, does that general rule apply irrespective of which law governs the 2.1 No Law Specified. If the seller and the obligor do not receivables (i.e., Italian laws or foreign laws)? specify a choice of law in their receivables contract, what are the main principles in Italy that will determine the Pursuant to Article 14 of the Rome I Regulation, the law applicable to governing law of the contract? a receivables purchase agreement may be selected or shall be determined on the basis of the same criteria governing choice of law of Pursuant to Article 4, paragraph 1, of Regulation 593/2008 of the contracts in general. The seller and the purchaser of a receivable may European Parliament on the law applicable to contractual choose a law other than that governing the receivables to regulate their obligations (the “Rome I Regulation”), if the seller and the debtor receivables sale agreement and their respective relationship thereunder. do not choose the law applicable to the contract, a number of criteria apply depending on the nature of the agreement. If none of However, if a given law governs the receivables and a different law such criteria apply, the contract shall be governed by the law of the governs the sale agreement, pursuant to Article 14 of the Rome I country where the party, who is to effect the performance which is Regulation, the law governing the receivable shall apply: characteristic of the contract, had, at the time of its entering, his (a) to determine whether the receivables are assignable to third habitual residence, or, in case of legal entities, its central parties; administration. However, whenever it is clear from all the (b) to the perfection of the sale; circumstances of the case that the contract is manifestly more (c) to test if the sale is a “true sale”; and closely connected with a country other than that identified (d) to determine whether the sale is effective and enforceable according to the above mentioned criteria or principle, the law of against the debtors, the legal relationship between the that other country shall apply. purchaser and the debtors and whether performance by the Subject to certain exceptions, consumer contracts shall be governed debtor constitutes a valid discharge of its obligations. by the law of the country where the consumer has his habitual In addition, and as consequence of the above, if Italian law applies residence. to the receivables, the perfection and true sale provisions of Article 4 of Law No. 130 of 30 April 1999 (“Law 130”) and Article 58 of the 1993 Banking Act may also apply. These provisions will be 2.2 Base Case. If the seller and the obligor are both resident described in question 4.2 below. in Italy, and the transactions giving rise to the receivables and the payment of the receivables take place in Italy, and the seller and the obligor choose the law of Italy to 3.2 Example 1: If (a) the seller and the obligor are located in govern the receivables contract, is there any reason why Italy, (b) the receivable is governed by the law of Italy, (c) a court in Italy would not give effect to their choice of law? the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the As a matter of principle, there would be no reason for a court in law of Italy to govern the receivables purchase Italy not to give effect to the choice of Italian law. agreement, and (e) the sale complies with the requirements of Italy, will a court in Italy recognise that sale as being effective against the seller, the obligor and 2.3 Freedom to Choose Foreign Law of Non-Resident Seller other third parties (such as creditors or insolvency or Obligor. If the seller is resident in Italy, but the obligor administrators of the seller and the obligor)? is not, or if the obligor is resident in Italy, but the seller is not, and the seller and the obligor choose the foreign law Yes, subject to mandatory provisions of the laws of any such of the obligor/seller to govern their receivables contract, jurisdiction as may apply to the subject matter notwithstanding any will a court in Italy give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law choice by the parties. (such as public policy or mandatory principles of law) that would typically apply in commercial relationships such 3.3 Example 2: Assuming that the facts are the same as that between the seller and the obligor under the Example 1, but either the obligor or the purchaser or both receivables contract? are located outside Italy, will a court in Italy recognise that sale as being effective against the seller and other third According to the Rome I Regulation, the parties to a contract parties (such as creditors or insolvency administrators of governing a commercial relationship may freely choose the law the seller), or must the requirements of the obligor’s which shall govern it (including the receivables deriving country or the purchaser’s country (or both) be taken into therefrom), subject to, in certain circumstances, the application of account? those provisions of law of mandatory application in the other jurisdiction or in the EU country or countries where the other Yes, subject to mandatory provisions of the laws of any such pertinent elements are located. jurisdiction as may apply to the subject matter notwithstanding any choice by the parties.

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3.4 Example 3: If (a) the seller is located in Italy but the In addition, Law No. 52 of 21 February 1991 (“Law 52”) applies to obligor is located in another country, (b) the receivable is those assignments of receivables where: (i) the seller is an governed by the law of the obligor’s country, (c) the seller entrepreneur; and (ii) the receivables derive from contracts entered sells the receivable to a purchaser located in a third into in the context of the activity of the seller’s enterprise and the country, (d) the seller and the purchaser choose the law purchaser is a bank or a financial intermediary whose corporate of the obligor’s country to govern the receivables purpose provides the purchase of “enterprise” receivables. purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in Italy Either or more of the above terms may be used, the Italian word recognise that sale as being effective against the seller being cessione. and other third parties (such as creditors or insolvency Italy administrators of the seller) without the need to comply with Italy’s own sale requirements? 4.2 Perfection Generally. What formalities are required generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of Yes, subject to mandatory provisions of the laws of any such receivables to be perfected against any subsequent good jurisdiction as may apply to the subject matter notwithstanding any faith purchasers for value of the same receivables from choice by the parties. the seller?

3.5 Example 4: If (a) the obligor is located in Italy but the Under Article 1264 of the Italian Civil Code, the sale of receivables seller is located in another country, (b) the receivable is is perfected vis-à-vis the assigned debtor when the debtor accepts it governed by the law of the seller’s country, (c) the seller or when the assignment is notified to the debtor. However, even and the purchaser choose the law of the seller’s country before being notified, the debtor paying the assignor shall not be to govern the receivables purchase agreement, and (d) released if the purchaser as assignee proves that the debtor was the sale complies with the requirements of the seller’s aware that the assignment had occurred. country, will a court in Italy recognise that sale as being effective against the obligor and other third parties (such Under Article 1265 of the Italian Civil Code, both the acceptance as creditors or insolvency administrators of the obligor) and the notification need to bear a certified true date (data certa) in without the need to comply with Italy’s own sale order for the assignment to be enforceable against third parties. In requirements? particular, if the same claim has been assigned more than once to different persons, the first assignment of which the debtor has been Yes, subject to mandatory provisions of the laws of any such notified by a court’s baliff or registered mail or which has been jurisdiction as may apply to the subject matter notwithstanding any accepted by him by an instrument bearing a certified true date (data choice by the parties. certa) shall prevail, even if it is of a later date. When Law 52 applies, perfection of a sale of receivables 3.6 Example 5: If (a) the seller is located in Italy (irrespective contemplated therein depends on the payment of the consideration of the obligor’s location), (b) the receivable is governed by and on the fact that such payment bears a certified true date (data the law of Italy, (c) the seller sells the receivable to a certa). Notification to the debtor is nevertheless necessary to make purchaser located in a third country, (d) the seller and the the assignment enforceable against it. Additional rules in the Law purchaser choose the law of the purchaser’s country to 52 govern the possibility to assert the sale against the insolvency of govern the receivables purchase agreement, and (e) the the seller. sale complies with the requirements of the purchaser’s country, will a court in Italy recognise that sale as being Different rules apply to the assignment of receivables made in the effective against the seller and other third parties (such as context of a securitisation transaction governed by Law 130 of 30 creditors or insolvency administrators of the seller, any April 1999 (“Law 130”), which in turn refers, as to the perfection obligor located in Italy and any third party creditor or of the assignment, to the provisions of Article 58 of the 1993 insolvency administrator of any such obligor)? Banking Act. When the combined provisions of Law 130 and of Article 58 of the 1993 Banking Act apply, the assignment of No: since Italian law governs the receivables, Italian law receivables is effective vis-à-vis the debtors and third parties upon requirements must be complied with. registration of notice of the assignment with the competent Register of Enterprises and publication of a notice of such assignment in the Official Gazette of the Republic of Italy (and perfection of any 4 Asset Sales additional informative formality as the Bank of Italy may require in the specific circumstances), thus achieving a significant procedural 4.1 Sale Methods Generally. In Italy what are the customary simplification and reduction of costs. With respect of securitisation methods for a seller to sell receivables to a purchaser? transactions, the notice of assignment to be published in the Italian What is the customary terminology – is it called a sale, Official Gazette and filed in the Register of Enterprises shall transfer, assignment or something else? contain, inter alia, certain indications relating to the assigned receivables, the date of the assignment, and, if necessary, the The general provisions on the assignment of receivables are formalities by which any interested person can obtain information contained in Articles 1260 through 1267 of the Italian Civil Code. about his personal situation (Bank of Italy’s Istruzioni di Vigilanza). Receivables are, as a principle, freely assignable, unless they have If more than one receivable is assigned, such assignment shall be a strictly personal nature or the transfer is not prohibited by law. identifiable “in block”. The definition of “block” is found in the An assignment is made between the parties by an oral or written Bank of Italy’s Istruzioni di Vigilanza relating to the agreement (written form is advisable in any case) between the implementation of Article 58 of the 1993 Banking Act, whereby assignor and the assignee. No obligor’s consent is needed unless “receivables identifiable in block” are those receivables which have the receivables contract provides otherwise and the seller or the a common distinctive element, which can be found, for example, in obligor prove that the purchaser was aware of such clause. the technical form, in the economic destination sectors, in the Perfection is achieved as described below.

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typology of the counterparty, in the geographical area, and in any 4.5 Notice Mechanics. If notice is to be delivered to obligors, other common element which enables the identification of the whether at the time of sale or later, are there any aggregate of the assigned legal relationships. requirements regarding the form the notice must take or how it must be delivered? Is there any time limit beyond which notice is ineffective – for example, can a notice of 4.3 Perfection for Promissory Notes, etc. What additional or sale be delivered after the sale, and can notice be different requirements for sale and perfection apply to delivered after insolvency proceedings against the obligor sales of promissory notes, mortgage loans, consumer have commenced? Does the notice apply only to specific loans or marketable debt securities? receivables or can it apply to any and all (including future) receivables? Are there any other limitations or The transfer of promissory notes (cambiali) requires the considerations? Italy endorsement (girata) of the note in favour of the purchaser. The endorsement transfers any rights deriving from the promissory note See question 4.2 (as to giving notice generally), question 1.3 (as to in favour of the transferee (Article 18 of Royal Decree No. 1669 of giving notice to public entities), and question 4.10 (as to post- 14 December 1933). insolvency notices). No specific requirements are provided for the sale of mortgage Notice cannot concern merely any and all indistinct receivables loans. However, in order to perfect the transfer of the benefit of the against the same obligor (whether existing or future receivables). mortgage securing the loans, Article 2843 of the Italian Civil Code provides that the assignment shall be annotated at the margin of the 4.6 Restrictions on Assignment; Liability to Obligor. Are registration of the mortgage in the competent Land Registry restrictions in receivables contracts prohibiting sale or Offices. assignment generally enforceable in Italy? Are there For the assignment of consumer loans, see question 1.2 above. exceptions to this rule (e.g., for contracts between commercial entities)? If Italy recognises prohibitions on The sale of marketable debt securities requires different formalities sale or assignment and the seller nevertheless sells depending from the nature of the debt securities. Under Italian law, receivables to the purchaser, will either the seller or the debt securities may be qualified as (i) bearer securities (titoli al purchaser be liable to the obligor for breach of contract or portatore), (ii) order securities (titoli all’ordine), and (iii) registered on any other basis? securities (titoli nominativi). Transfer of bearer securities is made by delivery. The holder of a bearer security is entitled to exercise See questions 4.1 and 1.3 above. the rights incorporated therein by showing the security (Article In case of a sale of receivables in violation of a contractual 2003 of the Italian Civil Code). Transfers of order securities are restriction, the seller may be liable for breach of contract vis-à-vis made by endorsement (Article 2011 of the Italian Civil Code) and the obligor, which shall have rights of compensation for any delivery of the certificate. Transfer of registered securities is made damages suffered. by entering the name of the transferee on the security, or by a certified endorsement thereof, or by the issuance of a new security registered in the name of the new owner. In addition, a notation of 4.7 Identification. Must the sale document specifically identify such entry, endorsement or new issuance shall be made in the each of the receivables to be sold? If so, what specific issuer’s register. information is required (e.g., obligor name, invoice number, invoice date, payment date, etc.)? Do the Specific requirements apply to the transfer of dematerialised and/or receivables being sold have to share objective publicly traded securities. characteristics? Alternatively, if the seller sells all of its receivables to the purchaser, is this sufficient identification of receivables? 4.4 Obligor Notification or Consent. Must the seller or the purchaser notify obligors of the sale of receivables in order for the sale to be effective against the obligors Italian law requires that the scope (oggetto) of a contract shall, inter and/or creditors of the seller? Must the seller or the alia, be determined or determinable. Accordingly, a sale document purchaser obtain the obligors’ consent to the sale of shall identify or provide criteria for the identification of the receivables in order for the sale to be an effective sale receivables to be sold and, for this purpose, provide any information against the obligors? Does the answer to this question relating to the receivables which may be necessary to determine the vary if (a) the receivables contract does not prohibit scope of the sale. assignment but does not expressly permit assignment; or Moreover, according to Law 52, the seller can assign also (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect receivables arising from contracts which have not been entered into a sale, are there any benefits to giving notice – such as at the time of the assignment. Present or future receivables can be cutting off obligor set-off rights and other obligor also assigned “in bulk” (massa). Pursuant to Article 3 of Law 52, defences? the assignment of present or future receivables in “bulk” shall be considered to have a determinate scope if the debtor is mentioned See questions 4.1 and 4.2 above. therein and if the contracts from which the future receivables arise Notice to the obligor bars set off by the obligor against the from are entered into in the following twenty four months. purchaser of its claims against the seller that have arisen after For sales of multiple receivables in “block” pursuant to Law 130 notification. If, on the other hand, the obligor accepts the and/or Article 58 of the 1993 Banking Act, see question 4.2 above. assignment without reservations, no set off may be opposed by the obligor to the purchaser based on its relationships with the seller.

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4.8 Respect for Intent of Parties; Economic Effects on Sale. security rights (see, for instance, Article 2843 of the Italian Civil If the parties denominate their transaction as a sale and Code relating to the transfer of the mortgage rights). state their intent that it be a sale will this automatically be Pursuant to the combined provisions of Article 4 of Law 130 and of respected or will a court enquire into the economic characteristics of the transaction? If the latter, what Article 58 of the 1993 Banking Act, transfer of any guarantee or economic characteristics of a sale, if any, might prevent security granted in respect of the assigned receivables is perfected by the sale from being perfected? Among other things, to virtue of registration of a notice of the assignment with the competent what extent may the seller retain (a) credit risk; (b) Register of Enterprises and publication of such notice in the Official interest rate risk; and/or (c) control of collections of Gazette. This means that no additional formality is required to such receivables without jeopardising perfection? effect, which also may result in a significant tax saving. Italy

Whilst the intention of the parties should be evident in the interpretation of a contract, a court is not bound, in assessing such 5 Security Interests intention, by the literal denomination of an agreement or of the expressions used in it, but will look at the actual scope of it as 5.1 Back-up Security. Is it customary in Italy to take a “back- transpiring from the substance of the agreement and the intention of up” security interest over the seller’s ownership interest in the parties. the receivables and the related security, in the event that Subject to any regulatory requirement being satisfied, the seller the sale is deemed by a court not to have been perfected? may act as servicer or as hedge counterparty without jeopardising perfection, unless it does so in a manner such as to contradict the This is not customary as a matter of Italian law and practice. true sale nature of the sale.

5.2 Seller Security. If so, what are the formalities for the 4.9 Continuous Sales of Receivables. Can the seller agree in seller granting a security interest in receivables and an enforceable manner (at least prior to its insolvency) to related security under the laws of Italy, and for such continuous sales of receivables (i.e., sales of receivables security interest to be perfected? as and when they arise)?

This is not applicable in Italy. Yes, provided that the cut-off date for insolvency purposes will be that of perfection. 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in 4.10 Future Receivables. Can the seller commit in an favour of the providers of its funding, what formalities enforceable manner to sell receivables to the purchaser must the purchaser comply with in Italy to grant and that come into existence after the date of the receivables perfect a security interest in purchased receivables purchase agreement (e.g., “future flow” securitisation)? If governed by the laws of Italy and the related security? so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the Security over receivables is granted under Italian law by means of seller’s insolvency? assignment by way of security or pledge. The question is not relevant as a matter of Italian law where the According to Italian law, the sale of future receivables is permitted, assignment of the receivables is made in the context of a but will become effective and perfected only when the assigned securitisation governed by Law 130, which provides for certain receivables arise. statutory segregation and destination provisions in respect of the However, after the insolvency of the seller, any action or payment assigned receivables and in favour of the noteholders and certain made by it would be ineffective vis-à-vis its creditors (Article 44 of other transaction parties (see question 7.2). the Italian Insolvency Law) and its commitment to sell future receivables after the date of its insolvency would have no effect in 5.4 Recognition. If the purchaser grants a security interest in Italy. receivables governed by the laws of Italy, and that In addition, any formalities necessary to the enforceability of such security interest is valid and perfected under the laws of sale against third parties shall have no effect vis-à-vis the creditors the purchaser’s country, will it be treated as valid and perfected in Italy or must additional steps be taken in of the seller, if carried out after the date of declaration of insolvency Italy? of the seller (Article 45 of the Italian Insolvency Law). Please refer to question 4.7 above for the assignment of “enterprise” According to Article 14, paragraphs 2 and 3, of the Rome I receivables pursuant to Law 52. Regulation, the law governing the receivable (thus Italian law) shall govern creation of security over a receivable. 4.11 Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred 5.5 Additional Formalities. What additional or different concurrently with the sale of receivables? If not all requirements apply to security interests in or connected to related security can be enforceably transferred, what promissory notes, mortgage loans, consumer loans or methods are customarily adopted to provide the marketable debt securities? purchaser the benefits of such related security? See question 4.3 above. Under Italian law, an assignment of receivables entails the automatic transfer of the guarantees and security created therefor Security on promissory notes or marketable securities will be (Article 1263 of the Italian Civil Code). However, certain perfected in the same manner as they are transferred, mutatis perfection formalities shall be fulfilled for the transfer of certain mutandis.

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Security on de-materialised securities will be perfected by way of 6.2 Insolvency Official’s Powers. If there is no stay of action, entries in appropriate accounts. under what circumstances, if any, does the insolvency official have the power to prohibit the purchaser’s exercise of rights (by means of injunction, stay order or 5.6 Trusts. Does Italy recognise trusts? If not, is there a other action)? mechanism whereby collections received by the seller in respect of sold receivables can be held or be deemed to See question 6.1 above. be held separate and apart from the seller’s own assets until turned over to the purchaser? 6.3 Suspect Period (Clawback). Under what facts or Trusts are recognised and enforced in Italy by virtue of the Hague circumstances could the insolvency official rescind or Italy Convention of 1 July 1985 on the law applicable to trusts and their reverse transactions that took place during a “suspect” or recognition, which was ratified pursuant to Italian Law No. 364 of “preference” period before the commencement of the 16 October 1989, which came into force on 1 January 1992. insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in Italy for (a) As there is no domestic legislation relating to trusts, trusts can only transactions between unrelated parties and (b) be established in Italy in accordance with the Hague Convention transactions between related parties? and subject to a foreign governing law. Segregation provisions set forth in Law 130 are described in Pursuant to Article 64 of the Italian Insolvency Law, gratuitous acts question 7.2 below. will be automatically set aside if they were made two years prior to the adjudication in bankruptcy.

5.7 Bank Accounts. Does Italy recognise escrow accounts? Pursuant to Article 65 of the Italian Insolvency Law, repayments of Can security be taken over a bank account located in debts which fall due on or after the date of the adjudication in Italy? If so, what is the typical method? Would courts in bankruptcy are also automatically set aside if they were made two Italy recognise a foreign-law grant of security (for years prior to the adjudication in bankruptcy. example, an English law debenture) taken over a bank Pursuant to Article 67, paragraph 1, of the Italian Insolvency Law, account located in Italy? the insolvency official may claw back, inter alia: (a) transactions at an undervalue (i.e. transactions where the consideration given by Escrow accounts may be constituted by granting a pledge over the the bankrupt exceeds, by more than 1/4, what he has received from rights arising from such account. That pledge would be a the other party) to their full extent (i.e. not only for the undervalue). receivables pledge. The pledged receivable would be that against This may also apply to undervalue guarantees. The “suspect the bank account in respect of payment of the amounts standing to period” is equal to one year preceding the declaration of the credit of the account. Please refer, as to applicable law issues, bankruptcy; (b) transactions (other than payment by cash or other to question 5.4 above. normal payment instruments) by which the debtor satisfies a pre- existing due and payable debt. The “suspect period” is equal to one 6 Insolvency Laws year preceding the declaration of bankruptcy; (c) pledges, anticresi, voluntary mortgages created for pre-existing debt not yet due and payable. The “suspect period” is equal to one year preceding the 6.1 Stay of Action. If, after a sale of receivables that is declaration of bankruptcy; and (d) pledges, anticresi, voluntary and otherwise perfected, the seller becomes subject to an judicial mortgages created for pre-existing due and payable debt. insolvency proceeding, will Italy’s insolvency laws The “suspect period” is equal to six months preceding the automatically prohibit the purchaser from collecting, transferring or otherwise exercising ownership rights over declaration of bankruptcy. the purchased receivables (a “stay of action”)? Does the The creditor may validly resist the claw back if it can prove that at insolvency official have the ability to stay collection and the time of the clawed back transaction it was not aware of the enforcement actions until he determines that the sale is insolvency of the bankrupt party. Such (negative) evidence is, perfected? Would the answer be different if the however, in practice very difficult to provide. purchaser is deemed to only be a secured party rather than the owner of the receivables? Pursuant to Article 67, second paragraph of the Italian Insolvency Law, the receiver may claw back, inter alia, if it evidences that the Royal Decree No. 267 of 16 April 1942 (the “Italian Insolvency other party was aware of the insolvency of the debtor: (a) any Law”) does not prevent the purchaser from collecting, transferring payments of debts fallen due and payable; (b) any transactions upon or exercising ownership rights over the receivables if the consideration; and (c) any security granted to secure debts (also of assignment was perfected prior to the date of the insolvency (see third parties) created simultaneously with the origination of the question 4.10 above), unless the assignment is clawed back secured obligations (i.e. security granted for genuine new money). pursuant to said Italian Insolvency Law. The “suspect period” is equal to six months preceding the Under Italian law, the insolvency official is given powers to declaration of bankruptcy. “restore” the economic and financial substance of the bankruptcy Certain exceptions to claw back are set forth in paragraphs 3 and 4 estate to its pre-insolvency state by setting aside transactions and/or of Article 67. claw back payments. The insolvency official does not have the Pursuant to Article 67-bis of the Italian Insolvency Law, any act ability to stay collection and enforcement actions, unless following which may impact a segregated asset (patrimonio separato) a successful claw back of the assignment. provided by Article 2447-bis of the Italian Civil Code may be subject to claw back if they impair the assets of the relevant company. Assignments of claims executed under Law 130 are subject to revocation on bankruptcy under Article 67 of the Italian Insolvency

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Law, but only in the event that the adjudication of bankruptcy of the 7.3 Non-Recourse Clause. Will a court in Italy give effect to a originator is made within three months of the securitisation contractual provision (even if the contract’s governing law transaction or, in cases where paragraph 1 of Article 67 applies, is the law of another country) limiting the recourse of within six months of the securitisation transaction. Payments by the parties to available funds? assigned debtor shall in no case be subject to claw back. A rule similar to the latter applies to payments by a borrower pursuant to a Italian courts may give effect to a limited recourse provision, even fondiario mortgage loan. if the contract’s governing law is the law of another country, provided that such provision does not constitute, depending on its Certain statutory rules governing claw back of transactions between drafting, a limitation of liability prohibited under Article 1229 related parties are set forth in Article 99 of the 1993 Banking Act

Italy (which prohibits limitation of liability of a debtor in case of its from transactions involving banks and companies belonging to the wilful misconduct or gross negligence). In addition, pursuant to same banking group. Article 2740, paragraph 2 of the Italian Civil Code, limitation of the liability of a debtor (which extends, as a rule, to the generality of its 6.4 Substantive Consolidation. Under what facts or assets) is not permitted unless in the cases set forth by the law. circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with those of the seller or its affiliates in the insolvency 7.4 Non-Petition Clause. Will a court in Italy give effect to a proceeding? contractual provision (even if the contract’s governing law is the law of another country) prohibiting the parties from (a) taking legal action against the purchaser or another Under the Italian Insolvency Law, the insolvency official cannot person; or (b) commencing an insolvency proceeding consolidate the assets and liabilities of the purchaser with those of against the purchaser or another person? the seller or its affiliates. The validity of the pactum de non petendo (“agreement not to 6.5 Effect of Proceedings on Future Receivables. What is the claim”) limiting the ability of a creditor to enforce its otherwise due effect of the initiation of insolvency proceedings on (a) and payable claims against the relevant debtor and to foreclose sales of receivables that have not yet occurred or (b) on against the relevant debtor has been recognised by Italian courts. sales of receivables that have not yet come into Remedies for breach of similar clauses are generally in contract existence? only (and give rise to the right of compensation for damages).

See question 4.10 above. 7.5 Independent Director. Will a court in Italy give effect to a contractual provision (even if the contract’s governing law 7 Special Rules is the law of another country) or a provision in a party’s organisational documents prohibiting the directors from taking specified actions (including commencing an 7.1 Securitisation Law. Is there a special securitisation law insolvency proceeding) without the affirmative vote of an (and/or special provisions in other laws) in Italy independent director? establishing a legal framework for securitisation transactions? If so, what are the basics? As general principle, a court in Italy would most probably not give effect to such provision, insofar as it would cause the specified Law 130 regulates securitisation transactions in Italy. Law 130: (a) decisions to depend on the vote of the independent director, thus allows thinly capitalised companies incorporated in Italy to prejudice the “collegiality” principle (principio di collegialità) purchase receivables and issue notes (abs); (b) ring-fences the under Article 2388 of the Italian Civil Code. securitised assets in favour of the holders of the notes and the other parties involved in the transaction structure; (c) allows the However, under Italian law, directors are obliged to commence perfection of the assignment of the relevant receivables pursuant to insolvency proceeding irrespectively from the affirmative vote of Article 58 of the 1993 Banking Act (see question 4.2 above); and an independent director if the circumstances so require. (d) provides that the servicer (i.e. the entity vested with duties to both collect the assigned receivables and manage the cash 8 Regulatory Issues payments) is a bank or an authorised financial intermediary.

8.1 Required Authorisations, etc. Assuming that the 7.2 Securitisation Entities. Does Italy have laws specifically purchaser does no other business in Italy, will its providing for establishment of special purpose entities for purchase and ownership or its collection and enforcement securitisation? If so, what does the law provide as to (a) of receivables result in its being required to qualify to do requirements for establishment and management of such business or to obtain any licence or its being subject to an entity; (b) legal attributes and benefits of the entity; regulation as a financial institution in Italy? Does the and (c) any specific requirements as to the status of answer to the preceding question change if the purchaser directors or shareholders? does business with other sellers in Italy?

Pursuant to Article 3 of Law 130, the assignee company, or the The purchase of receivables on a professional basis constitutes a issuer company (if different from the assignee), shall be in the form financial activity which requires either the possession of a banking of corporations (società di capitali - partnerships are not allowed) licence or the registration of the relevant purchaser in the register of and have as its sole corporate object the carrying out of one or more financial intermediaries held, pursuant to Article 106 of the Italian securitisation transactions. Special purpose entities are subject to Banking Act, by the Bank of Italy. certain regulatory reporting requirements vis-à-vis the Bank of Please also see, in respect of factoring companies, question 4.1, and, Italy. concerning companies incorporated pursuant to Law 130, question 7.2.

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8.2 Servicing. Does the seller require any licences, etc., in 9.2 Seller Tax Accounting. Does Italy require that a specific order to continue to enforce and collect receivables accounting policy is adopted for tax purposes by the following their sale to the purchaser, including to appear seller or purchaser in the context of a securitisation? before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect According to Article 101, fifth paragraph, of the Italian Income Tax sold receivables? Code, losses on receivables are deductible as long as they derive from definite and determined elements. Pursuant to Article 2, para. 6 of Law 130, the entity which carries In case of the sale of receivables without recourse, based on Italian out servicing duties in favour of the securitisation company has to Accounting Principles, the assigned receivables must be removed

be a bank or a financial institution enrolled in the register provided Italy from the accounts of the seller and, for tax purposes, a taxable under Article 106 of the Italian Banking Law. gain/deductible loss, equal to the difference between the book value To the extent that, out of a Law 130 transaction, collection of and the selling price, if any, must be recorded. receivables falls within the ambit of the provisions of articles 114- In case of a sale with recourse, the seller can either keep the sexies and ff. of the 1993 Banking Act governing payment services, receivables in the accounts or remove them mentioning the risk such provisions may apply. exposure related thereto in the memorandum accounts. From a tax point of view, losses, if any, cannot be deducted if such losses do 8.3 Data Protection. Does Italy have laws restricting the use not meet the requirements set forth in Article 101 mentioned above. or dissemination of data about or provided by obligors? If Companies required to comply with the International Accounting so, do these laws apply only to consumer obligors or also Standards (IAS) must apply the criteria set forth by IAS 39, to enterprises? according to which, in case the seller retains control of the financial assets following the transfer of the receivables, such financial assets The processing of personal data is regulated by Legislative Decree must be recognised in the seller’s accounts to the extent of the No. 196 of 30 June 2003, (the “Data Protection Code”), which seller’s continuing involvement in the same assets. applies to any data relating to natural or legal persons, bodies or associations that are or can be identified, even indirectly, by It is worth mentioning that International Accounting Standards reference to any other information/data. (IAS) have been implemented in Italy through Legislative Decree No. 38 of 28 February 2005, whereby listed companies, insurance companies, banks and companies issuing debt instruments to the 8.4 Consumer Protection. If the obligors are consumers, will public must draw up the consolidated balance sheet according to the the purchaser (including a bank acting as purchaser) be IAS as from 1 January 2005. The companies mentioned above must required to comply with any consumer protection law of Italy? Briefly, what is required? draw up an operating balance sheet in accordance with the IAS as from 1 January 2006. See question 1.2 above. From a tax perspective, if the seller does not remove from their books the financial assets sold, it is not entitled to deduct any capital loss arising from the sale. 8.5 Currency Restrictions. Does Italy have laws restricting the exchange of Italy’s currency for other currencies or the making of payments in Italy’s currency to persons 9.3 Stamp Duty, etc. Does Italy impose stamp duty or other outside the country? documentary taxes on sales of receivables?

No provision limiting the exchange of Euros for other currencies or As a rule, sales of receivables made in the context of a securitisation the making of payments in our country’s currency to persons transaction shall be subject to registration tax (imposta di registro) outside the country is provided under Italian law. Certain in the fixed amount. In addition, stamp duty (imposta di bollo) shall restrictions on the use of cash and certain notice and recording apply at the fixed amount for each four pages of the relevant requirements apply in respect of transactions exceeding certain document. thresholds. “Suspect” transactions, as defined in the applicable legislation, shall not be carried out. 9.4 Value Added Taxes. Does Italy impose value added tax, sales tax or other similar taxes on sales of goods or 9 Taxation services, on sales of receivables or on fees for collection agent services?

9.1 Withholding Taxes. Will any part of payments on In Italy, as a matter of principle, sales of goods or services for receivables by the debtors to the seller or the purchaser consideration are subject to VAT. be subject to withholding taxes in Italy? Does the answer depend on the nature of the receivables, whether they The sale of receivables shall be subject to VAT if carried out in the bear interest, their term to maturity, or where the seller or context of a financial transaction and if made for consideration; the purchaser is located? nevertheless, should that be the case, the sale would be VAT exempt pursuant to Article 10, paragraph 1, of the Presidential Decree No. As a principle, but subject to certain exceptions, no withholding tax 633 of 26 October 1973. is levied on payments of the face amount of commercial As to the services rendered by the collection agent (servicer), they receivables. However, withholding tax may be applicable to the are subject to Italian VAT. interest portion of the payments, if any, depending on where the beneficial owner (i.e. either the seller or the purchaser) is located.

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9.5 Purchaser Liability. If the seller is required to pay value Pursuant to certain articles of the Italian Civil Code, general or special added tax, stamp duty or other taxes upon the sale of liens are granted to the Tax Authorities for claims for taxes and duties. receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the 9.6 Doing Business. Assuming that the purchaser conducts unpaid tax against the purchaser or against the sold no other business in Italy, would the purchaser’s receivables or collections? purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of In Italy, tax liabilities are not joint and several, unless the law the receivables against the debtors, make it liable to tax in Italy? provides otherwise. Italy With regard to stamp duty and registration tax, the seller and the In this respect a case-by-case analysis should be performed in order to purchaser are jointly liable for the payment, if due. determine whether or not a permanent establishment issue may arise. In certain circumstances, the purchaser shall be obliged to issue a VAT invoice and/or to pay the relevant VAT directly to the tax authorities if the seller fails to do so.

Giuseppe Schiavello Stefano Agnoli

CDP Studio Legale Associato CDP Studio Legale Associato Via Ludovisi, 35 Via Ludovisi, 35 00187 Roma 00187 Roma Italy Italy

Tel: +39 06 45 22 401 Tel: +39 06 45 22 401 Fax: +39 06 45 22 4044 Fax: +39 06 45 22 4044 Email: [email protected] Email: [email protected] URL: www.cdplex.it URL: www.cdplex.it

Giuseppe Schiavello is a partner of the firm. Stefano Agnoli is a partner of the firm. Giuseppe advises banks, financial intermediaries, investment He specialises in banking and financial law. He has developed companies and industrial and commercial undertakings in all significant experience in the transfer of receivables and financing transactions, as well as in structured finance deals. He securitisation transactions and, in general, in structured finance advised his clients, in particular, in acquisition finance (LBOs), and public sector finance, assisting arrangers, monoline insurers, project finance (infrastructure, PPP, conventional and renewable swap counterparties, representatives of the noteholders and sources power plants, oil and gas exploration and development), rating agencies in relation to the structuring, restructuring and asset finance (aircraft financing), and real estate finance (financing unwinding of transactions of different type (RMBS, CMBS, non- relating to shopping centres, office buildings, logistic centres, performing loans, healthcare receivables, lease receivables, hotels). He has advised the arranger, the originator, the servicer public real estate, Paris Club receivables, social security and the rating agencies in a number of CMBS transactions (both contributions receivables). true sale and synthetic), trade receivables ABS and WBS. He also Stefano also advises on financing transactions (including export advises the investors in structuring complex investments in credit and project finance), on bond issues (by banks, commercial performing and non-performing assets. He is involved as legal companies, Municipalities, Regions and the Republic of Italy) and advisor in corporate and debt restructuring transactions, more often on derivatives. as lender’s counsel, advising also on the related insolvency Languages: Italian, English. matters. He also advises clients on regulatory matters, in relation to the performance of banking and financing activities and of investment services and the relevant authorisation, as well as in relation to the acquisition of banks and investment companies, and the constitution and offering of investment funds and other collective investment vehicles. He also acts as party counsel in domestic and international arbitrations relating to those matters in which he renders advice as to substantive law. Languages: Italian, English, French.

CDP Studio Legale Associato is a new Rome-based law firm created in May 2011 by a small group of professionals who have acquired a long standing experience in the fields of corporate law, financial law, insolvency, litigation, asset management and regulatory. Given the seniority of the partners and the complementary nature of their practices, CDP believes it is well-structured to provide high-level integrated legal advice, coupled with a personalised commitment to clients.

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Japan

Nishimura & Asahi Hajime Ueno

1 Receivables Contracts interest rate, any payment that the lender receives in connection with the lending will be deemed to be part of the interest payment. The Moneylenders Law is a regulatory statute governing non-bank finance 1.1 Formalities. In order to create an enforceable debt companies. The Law requires registration of those who engage in the obligation of the obligor to the seller, (a) is it necessary business of lending money, and regulates various lending practices, that the sales of goods or services are evidenced by a including marketing and collection practices, as well as the rate of formal receivables contract; (b) are invoices alone sufficient; and (c) can a receivable “contract” be deemed interest charged on loans extended by moneylenders. Lastly, a to exist as a result of the behaviour of the parties? prohibitively high rate of interest on (or interest on late repayments of) credit or other kinds of receivables may possibly be determined as It is not necessary for the sale of goods or services to be evidenced void due to public policy reasons pursuant to the general Civil Code. by a formal contract, so long as there is a legally binding, effective (b) There is a statutory right to interest on late payments; specifically, and valid contract, whether oral or implied. Whether invoices alone the general Civil Code provides that, unless otherwise agreed by the would be sufficient as evidence of the existence of an enforceable parties, interest will accrue following a late payment of a monetary debt obligation would depend on the facts of each case and be obligation at a rate of 5% per annum (6% per annum, in cases of determined by the courts. A contract can be determined to exist monetary obligations arising out of commercial conduct, as provided from evidence including the behaviour of the parties, past under the Commercial Code). relationships or commercial customs. (c) For certain consumer contracts such as instalment sales agreements (i.e., sale and purchase agreements for which payments of purchase amounts are in instalments) in respect of certain types 1.2 Consumer Protections. Do Japan’s laws (a) limit rates of interest on consumer credit, loans or other kinds of of products (including, without limitation, life insurance policies receivables; (b) provide a statutory right to interest on late purchased outside of the insurance company’s premises), the payments; (c) permit consumers to cancel receivables for Instalment Sales Law (the “ISL”) provides consumers with rights to a specified period of time; or (d) provide other noteworthy cancel contracts during the cooling-off period mandated by the law. rights to consumers with respect to receivables owing by (d) The ISL also provides consumers with protection against them? provisions providing for the business operator’s right to terminate the contract or to declare that the consumer’s obligation to pay all unpaid (a) There are usury laws that restrict the rate of interest on loans instalments has become immediately due and payable even if the (which can include various forms of credit extension), namely the consumer does not pay an instalment, unless the business operator Interest Rate Restriction Law (the “IRR Law”) and the Law for makes a demand against the consumer in writing to pay the Control of Acceptance of Contributions, Money Deposit and instalment within a period prescribed in such written demand (which Interest, Etc. (the “Contributions Law”). The IRR Law provides must be a reasonable period and may not be less than twenty days that a contractual clause providing for interest on a loan at a rate from such written demand) and the consumer fails to so pay the exceeding a certain prescribed rate (described below) is null and instalment within such period. In addition, the Consumer Contracts void with respect to the portion exceeding such rate. Significantly, Law (the “CCL”) provides, among other things, consumers with fees, default interest and other amounts received by a lender in rights to rescind consumer contracts, for example, if the consumer connection with the loan will be treated as interest payments for the had mistakenly manifested his/her intention to enter into the contract purpose of calculating the rate of interest. as a result of any misrepresentation by the business operator (who is the counterparty to the consumer contract) with respect to material Principal Maximum Rate of Interest (per annum) matters such as quality, purpose and other characteristics of goods, Less than 100,000 Yen Equal to or under 20% rights, services, etc. of such consumer contract.

From 100,000 Yen to 1,000,000 Yen Equal to or under 18% 1.3 Government Receivables. Where the receivables 1,000,000 Yen or more Equal to or under 15% contract has been entered into with the government or a government agency, are there different requirements and Under the current Contributions Law, no person in the money lending laws that apply to the sale or collection of those business may charge interest at a rate exceeding 20% per annum. receivables? Charging or receiving interest at a rate in excess of such rate is subject to criminal penalties. Similarly with the IRR Law, in calculating the As a matter of practice, when the government or a governmental

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agency enters into a receivables contract, the contract would likely public welfare or interests of Japan, then a court would not apply include a provision that prohibits transfers/assignments of rights the chosen law as the governing law. In addition, different sets of thereunder by the counterparty without the prior consent of the rules under the ALGA are applied to consumer contracts to protect government or the governmental agency, as the case may be. Also, the interests of consumers. For example, if the obligor is a such receivables contract may include a provision requiring that no consumer (as defined in the ALGA) and the seller is a business third party be appointed as a collection servicer without the prior operator (also as defined in the ALGA), then the consumer (i.e., the consent of the government. Therefore, although there is no specific obligor) may demand that the law of the jurisdiction in which statutory requirement, consent of the government or the he/she resides be the governing law. governmental agency would likely be contractually required for the

Japan sale and/or collection of receivables. 2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in Japan? 2 Choice of Law – Receivables Contracts Yes. The Convention came into effect on August 1, 2009 in Japan.

2.1 No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what 3 Choice of Law – Receivables Purchase are the main principles in Japan that will determine the Agreement governing law of the contract?

The Application of Laws (General) Act (the “ALGA”) which came 3.1 Base Case. Does Japan’s law generally require the sale into effect on January 1, 2007, provides that if the parties to a contract of receivables to be governed by the same law as the law governing the receivables themselves? If so, does that do not specifically agree on a choice of law, the law of the jurisdiction general rule apply irrespective of which law governs the having the closest relevance with the contract will govern the contract. receivables (i.e., Japan’s laws or foreign laws)? However, it is generally assumed that a Japanese court will still follow a Supreme Court ruling, made prior to the introduction of the Act, to The ALGA does not specifically require that the sale the effect that courts should first determine if the parties had implicitly agreement/contract under which receivables are sold be governed agreed on the choice of law before applying the principle above. The by the same law as the law governing the receivables themselves. Act also stipulates that if the contracting parties had not specifically However, under the ALGA, the “effects of a transfer” in terms of a agreed on a choice of law, and if the contract obligates a party to transfer of a receivable (as opposed to contractual agreements stated undertake a characteristic performance, then the law of such party’s in the sale agreement or surrounding the sale) against the obligor residence (or primary office) will be presumed to be the law of the and other third parties are to be governed by the law governing the jurisdiction having the closest relevance. receivable itself, as noted in question 3.2 below.

2.2 Base Case. If the seller and the obligor are both resident 3.2 Example 1: If (a) the seller and the obligor are located in in Japan, and the transactions giving rise to the Japan, (b) the receivable is governed by the law of Japan, receivables and the payment of the receivables take (c) the seller sells the receivable to a purchaser located in place in Japan, and the seller and the obligor choose the a third country, (d) the seller and the purchaser choose law of Japan to govern the receivables contract, is there the law of Japan to govern the receivables purchase any reason why a court in Japan would not give effect to agreement, and (e) the sale complies with the their choice of law? requirements of Japan, will a court in Japan recognise that sale as being effective against the seller, the obligor In such a case, it would be very unlikely for a court not to uphold and other third parties (such as creditors or insolvency the parties’ choice of law, at least judging from the published court administrators of the seller and the obligor)? decisions; provided, however, if the subject of the receivables contract is a movable, the ownership of which is to be registered, Under the ALGA, the effects of a transfer of a receivable against the and which is located outside of Japan, then under the ALGA, the obligor and other third parties are governed by the law governing law of the jurisdiction in which the movable is located will govern the receivable itself. Therefore, a Japanese court would determine the matters relating to the transfer of ownership. the effects of the transfer resulting from the sale of the receivables (e.g., whether the receivables are effectively transferred) on the 2.3 Freedom to Choose Foreign Law of Non-Resident Seller basis that Japanese law is the governing law. Thus, in this Example or Obligor. If the seller is resident in Japan but the 1 case, courts in Japan will recognise the sale as being effective obligor is not, or if the obligor is resident in Japan but the against the seller, the obligor and other third parties. seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables 3.3 Example 2: Assuming that the facts are the same as contract, will a court in Japan give effect to the choice of Example 1, but either the obligor or the purchaser or both foreign law? Are there any limitations to the recognition are located outside Japan, will a court in Japan recognise of foreign law (such as public policy or mandatory that sale as being effective against the seller and other principles of law) that would typically apply in commercial third parties (such as creditors or insolvency relationships such that between the seller and the obligor administrators of the seller), or must the requirements of under the receivables contract? the obligor’s country or the purchaser’s country (or both) be taken into account? Under the ALGA, parties to a contract are allowed to choose the governing law to be applied to their contractual obligations. The ALGA does not take into account the requirements of the law Accordingly, the seller and the obligor may choose a foreign law to of the obligor’s country or the purchaser’s country; and as noted in govern the receivables contract. However, if the application of the question 3.2 above, the effects of a transfer of a receivable against chosen law would result in a situation that would be against the 214 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Nishimura & Asahi Japan

the obligor and other third parties are governed by the law receivable against the obligor and other third parties are governed governing the receivable itself. by the law governing the receivable itself; therefore, the sale of the receivable needs to be, under the ALGA, governed by the law of Japan. Thus, unless the sale is governed by the law of Japan, a court 3.4 Example 3: If (a) the seller is located in Japan but the obligor is located in another country, (b) the receivable is in Japan will not recognise the sale as being effective against the governed by the law of the obligor’s country, (c) the seller seller and other third parties. However, this does not necessarily sells the receivable to a purchaser located in a third mean that the choice of law under the sale agreement will country, (d) the seller and the purchaser choose the law immediately be deemed void, since the effects of rights and of the obligor’s country to govern the receivables obligations arising directly out of the sale agreement (e.g., whether

purchase agreement, and (e) the sale complies with the an act of the seller would constitute a breach of contract giving rise Japan requirements of the obligor’s country, will a court in Japan to an indemnification obligation of the seller) would be determined recognise that sale as being effective against the seller in accordance with the law chosen as the governing law under the and other third parties (such as creditors or insolvency agreement, subject to the public welfare or interest doctrine administrators of the seller) without the need to comply described in question 2.3 above. with Japan’s own sale requirements?

As noted in question 3.2 above, the effects of a transfer of a 4 Asset Sales receivable against the obligor and other third parties are governed by the law governing the receivable itself; therefore, under the 4.1 Sale Methods Generally. In Japan what are the ALGA, the sale of the receivable is governed by the law of the customary methods for a seller to sell receivables to a obligor’s country. Thus, while there is no need to comply with purchaser? What is the customary terminology – is it Japan’s own sale requirements, a court in Japan will not recognise called a sale, transfer, assignment or something else? the sale as being effective against the seller and other third parties, unless the requirements under the law of the obligor’s country are Under the current system, the customary method for a seller to sell complied with. However, this does not necessarily mean that the receivables is to enter into a sales agreement with the purchaser in choice of law under the sale agreement will immediately be deemed which the subject receivables need to be specified, and the sale be void, since the effects of rights and obligations arising directly out perfected through one of the methods described in question 4.2 of the sale agreement (e.g., whether an act of the seller would below. In some cases the continuous sales method is adopted. The constitute a breach of contract giving rise to an indemnification terminology in the Japanese language is “baibai” (a simple obligation of the seller) would be determined in accordance with the translation would be “sale”) or “joto” (a simple translation would be law chosen as the governing law under the agreement, subject to the “assignment”). public welfare or interest doctrine described in question 2.3 above.

4.2 Perfection Generally. What formalities are required 3.5 Example 4: If (a) the obligor is located in Japan but the generally for perfecting a sale of receivables? Are there seller is located in another country, (b) the receivable is any additional or other formalities required for the sale of governed by the law of the seller’s country, (c) the seller receivables to be perfected against any subsequent good and the purchaser choose the law of the seller’s country faith purchasers for value of the same receivables from to govern the receivables purchase agreement, and (d) the seller? the sale complies with the requirements of the seller’s country, will a court in Japan recognise that sale as being The perfection of a sale of receivables is generally made by one of effective against the obligor and other third parties (such as creditors or insolvency administrators of the obligor) the following methods: without the need to comply with Japan’s own sale (a) the seller delivering notice to the obligors, or the seller or requirements? purchaser obtaining consent from the obligors, which notice or consent must bear an officially certified date (kakutei- As noted in question 3.2 above, the effects of a transfer of a hizuke) by means prescribed under law in order to perfect receivable against the obligor and other third parties are governed against third parties; or by the law governing the receivable itself. Thus, in this Example 4 (b) where the seller is a corporation, the seller registering the sale case, courts in Japan will recognise the sale as being effective of receivables in a claim assignment registration file in accordance with the Law Prescribing Exceptions, etc., to the against the seller, the obligor and other third parties without the Civil Code Requirements for Perfection of Transfers of need to comply with sale requirements under Japanese law. Movables and Receivables (the “Perfection Exception Law”). Provided one of the methods noted above is duly taken, there are no 3.6 Example 5: If (a) the seller is located in Japan additional formalities required for perfection against subsequent (irrespective of the obligor’s location), (b) the receivable is purchasers. governed by the law of Japan, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the 4.3 Perfection for Promissory Notes, etc. What additional or purchaser’s country to govern the receivables purchase different requirements for sale and perfection apply to agreement, and (e) the sale complies with the sales of promissory notes, mortgage loans, consumer requirements of the purchaser’s country, will a court in loans or marketable debt securities? Japan recognise that sale as being effective against the seller and other third parties (such as creditors or (i) Promissory notes insolvency administrators of the seller, any obligor located Under the Promissory Notes Law, the general method of sale and in Japan and any third party creditor or insolvency administrator of any such obligor)? perfection against the obligor and third parties is by the seller endorsing the promissory notes and delivering the same to the As noted in question 3.2 above, the effects of a transfer of a purchaser. ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 215 © Published and reproduced with kind permission by Global Legal Group Ltd, London Nishimura & Asahi Japan

(ii) Consumer loans (B) If registered JGBs (touroku kokusai) While there are no additional or different requirements for For perfection against third parties as well as the perfection of sales of consumer loans, see question 8.3 for government, the transfer needs to be registered in the regulations regarding sales of loans extended by moneylenders JGB registry at the Bank of Japan in accordance with regulated under the Moneylenders Law (nevertheless, the the Law Regarding Japanese Government Bonds and rules promulgated thereunder. regulations apply not only to consumer loans but to all loans (including mortgage loans) extended by a moneylender). (C) If in book-entry form under the Transfer Law (furikae kokusai) (iii) Mortgage loans For sale and perfection against the government and For the perfection of a sale of a loan secured by a hypothec (teito- Japan third parties, the amount of the JGBs assigned to the ken) or umbrella hypothec (ne-teito-ken), the following will be purchaser as a result of the sale needs to be entered necessary as additional requirements to those described in questions into the purchaser’s account book in accordance with 4.1 and 4.2: the Law Concerning Book-Entry Transfer of (a) In case of a loan secured by a hypothec Corporate Bonds, etc. (the “Transfer Law”). In order for the hypothec to be concurrently transferred to the (b) Corporate Bonds purchaser with the sale of a loan (secured by the hypothec), no (A-1) If in bearer form with physical certificates (mukimei additional action is necessary other than the requirement for the shasaiken) valid and effective sale of the loan itself (zuihansei). For perfection Under the Corporations Act, no transfer will be of the transfer of the hypothec as a result of the sale of the loan, the effected without the physical delivery to the purchaser transfer of the hypothec needs to be registered through a of the certificate in case of certificated bonds. supplemental registration (fuki-toki) in the real estate registry (A-2) If in non-bearer form with physical certificates (kimei (however, such registration is generally believed to be unnecessary shasaiken) to perfect against a third party who is a transferee of the hypothec The same as (A-1) above, under the Corporations Act, together with the loan secured thereby). no transfer will be effected without the physical (b) In case of a loan secured by an umbrella hypothec delivery to the purchaser of the certificate in case of certificated bonds. In addition, in cases of non-bearer In order for a loan to be transferred together with an umbrella bonds issued pursuant to the Corporations Act, in hypothec (or the hypothec resulting from crystallisation of the order to perfect the transfer against third parties and umbrella hypothec), and for such transfer to be perfected, either of against the issuer company, the purchaser’s name and the following methods needs to be used: address need to be recorded in the bond registry (x) For an effective transfer of an umbrella hypothec without (shasai genbo) in accordance with the Corporations crystallisation, the obligor or any other party who created the Act. umbrella hypothec must consent to the transfer (and consent (B) Book-entry bonds under the Transfer Law (furikae to amend the scope of obligations secured by the umbrella shasai) hypothec might also be necessary depending on the terms For sale and perfection against the issuer company and thereof). For perfection of the transfer of an umbrella third parties, the amount of the book-entry bonds hypothec without crystallisation, the transfer needs to be assigned to the purchaser as a result of the sale needs registered through a supplemental registration (fuki-toki) in to be entered into the purchaser’s account book in the real estate registry. accordance with the Transfer Law. (y) For an effective transfer of a loan with a hypothec resulting from the crystallisation of an umbrella hypothec that originally secured the loan, the obligations secured by such 4.4 Obligor Notification or Consent. Must the seller or the umbrella hypothec need to be crystallised (kakutei) in purchaser notify obligors of the sale of receivables in accordance with the general Civil Code prior to the sale order for the sale to be effective against the obligors becoming effective (if not crystallised, and if the consent and/or creditors of the seller? Must the seller or the described in (x) above is not obtained, the relevant loan will purchaser obtain the obligors’ consent to the sale of be transferred as an unsecured loan). For perfection of the receivables in order for the sale to be an effective sale transfer of the hypothec (occurring together with the transfer against the obligors? Does the answer to this question of the loan secured thereby) resulting from the vary if (a) the receivables contract does not prohibit crystallisation, the requirement described in (a) above assignment but does not expressly permit assignment; or applies. (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect (iv) Marketable debt securities a sale, are there any benefits to giving notice – such as While there is no legal concept equivalent to “marketable debt cutting off obligor set-off rights and other obligor securities” or any legal distinction between marketable securities defences? and non-marketable securities under Japanese law, we will focus on the sale and perfection of Japanese government bonds (“JGBs”) and Where the receivables contract prohibits a sale of the receivables bonds issued by corporations. The requirements for sale and thereunder without the consent of the obligor, the consent of the perfection of these securities depend on their form. obligor will be required. Therefore, in such case, naturally, a (a) In case of JGBs notification to the obligors would be required as a matter of fact. Otherwise, whether or not the sale is effective against the obligors (A) If in bearer form with physical certificates (mukimei kokusai shouken) is a question of perfection against the obligors. That is, if the sale is perfected against the obligors, then the sale is an effective sale For effective sale and perfection, the seller and against the obligors. Once the sale of receivables is perfected purchaser must agree to sell and purchase the JGBs and the seller should deliver the physical certificates against the obligors, for example, the purchaser will be allowed to to the purchaser. In general, there is no prohibition on enforce the debts directly against the obligors and the obligors will the transfer of bearer JGBs. be required to pay the purchaser rather than the seller. In order to

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perfect a sale of a receivable against the obligor thereof, one of the the sale or assignment of receivables, even as between commercial following methods needs to be used: entities. As prohibitions on the sale or assignment provided under (a) the seller must deliver a notice to the obligor or obtain receivables contracts are recognised, the seller will be liable to the consent from the obligor (in contrast to the perfection against obligor if any damage is incurred by the obligor when the seller third parties, there is no need for the notice/consent to bear breaches the prohibition. Provided, however, that a sale of a an officially certified date (kakutei-hizuke)); or receivable, the receivables contract in respect of which expressly (b) where the assignment of the receivables is perfected against prohibits assignment thereof, will not constitute a valid and third parties by registration under the Perfection Exception effective transfer unless the purchaser, in the absence of both the Law, the seller or purchaser must either use the method noted knowledge of such prohibition and gross negligence in having no

above in (a) or notify the obligor of the sale of the knowledge of the prohibition, purchased the receivables from the Japan receivables by delivering a registered certificate (touki jikou seller. Therefore, in cases where no transfer will be given effect, the shoumeisho), or obtain consent from the obligor thereby. obligor will usually incur no damage as a result of the sale. Where the receivables contract prohibits a sale of the receivables thereunder without the consent of the obligor, the consent of the 4.7 Identification. Must the sale document specifically identify obligor will be required (the question is whether or not the contract each of the receivables to be sold? If so, what specific prohibits assignments rather than whether the contract permits information is required (e.g., obligor name, invoice assignments). Otherwise, whether or not the sale is effective number, invoice date, payment date, etc.)? Do the against the obligors is a question of perfection against the obligors. receivables being sold have to share objective There is no legal limitation regarding the purchaser notifying the characteristics? Alternatively, if the seller sells all of its obligor of the sale of receivables after the insolvency of the seller or the receivables to the purchaser, is this sufficient obligor; in fact, the customary contractual arrangement in securitisation identification of receivables? transactions is that the purchaser will be allowed to notify the obligor of the sale once the seller or the obligor becomes insolvent. The sale agreement must specifically identify the receivables in order for the receivables to be validly sold. There is no minimum Unless a sale of a receivable is perfected, the obligor will retain set- or specific legal requirement in identifying the receivables and it off rights and other obligor defences, therefore, perfection would be will vary depending upon the types of receivables and receivables required to prevent those defences. For the avoidance of doubt, set- contracts; receivables can be identified by information such as off rights and other defences that preceded the perfection would obligor names, amounts of the receivables, invoice numbers, the remain effective (with the exception of waiver by the obligor). contract dates and/or the terms of the receivables. For so long as the receivables sold under a sales agreement are sufficiently 4.5 Notice Mechanics. If notice is to be delivered to obligors, identified, the receivables sold under the agreement do not need to whether at the time of sale or later, are there any share objective characteristics. Depending on the nature of the requirements regarding the form the notice must take or seller, it could be possible to construe that identification of how it must be delivered? Is there any time limit beyond receivables is sufficient if the seller sells all of its receivables; which notice is ineffective – for example, can a notice of however, that this will not be the case if the seller’s receivables sale be delivered after the sale, and can notice be include receivables that are restricted from sale or assignment; also, delivered after insolvency proceedings against the obligor have commenced? Does the notice apply only to specific if the sale includes the sale of future receivables, the sale may be receivables or can it apply to any and all (including future) deemed void. Please see question 4.9 for the assignability of future receivables? Are there any other limitations or receivables. considerations? 4.8 Respect for Intent of Parties; Economic Effects on Sale. With respect to the form of the notice, see questions 4.2 and 4.4. If the parties denominate their transaction as a sale and As for the time limit for delivering a notice, while notice could be state their intent that it be a sale will this automatically be delivered after an insolvency proceeding has commenced against the respected or will a court enquire into the economic obligor, such notice could be voided -- if the notice had been characteristics of the transaction? If the latter, what delivered with the knowledge of either the fact that the obligor ceased economic characteristics of a sale, if any, might prevent the sale from being perfected? Among other things, to payments or the fact that the petition for the commencement of the what extent may the seller retain (a) credit risk; (b) insolvency proceedings had been filed -- by avoidance rights of interest rate risk; and/or (c) control of collections of insolvency trustees, unless the delivery had been made within 15 receivables without jeopardising perfection? calendar days from the sale (as opposed to the commencement date of the insolvency proceedings). While a notice can be applied to Any transaction could be recharacterised based on its economic future receivables, future receivables do need to be specified in a characteristics regardless of the parties’ designation of a transaction certain manner for the notice to be legal and valid (see question 4.10). as a sale or any statement of such intent, on the other hand, economic characteristics of a sale will not prevent the sale from 4.6 Restrictions on Assignment; Liability to Obligor. Are being perfected, unless the characteristics hinder the nature of the restrictions in receivables contracts prohibiting sale or transaction and result in recharacterisation thereof. In other words, assignment generally enforceable in Japan? Are there under Japanese law, provided a transaction is not recharacterised as exceptions to this rule (e.g., for contracts between a loan or any other transaction, economic characteristics will not commercial entities)? If Japan recognises prohibitions on prevent a sale from being perfected. On the other hand, any sale or assignment and the seller nevertheless sells characteristics (which may include the seller retaining too much receivables to the purchaser, will either the seller or the credit risk, interest rate risk or control over the receivables) that is purchaser be liable to the obligor for breach of contract or inconsistent with the characteristics of sales transactions may result on any other basis? in recharacterisation. There is no general restriction on receivables contracts prohibiting

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4.9 Continuous Sales of Receivables. Can the seller agree in 5 Security Issues an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables as and when they arise)? 5.1 Back-up Security. Is it customary in Japan to take a “back-up” security interest over the seller’s ownership It is possible for the seller to agree to continuous sales of interest in the receivables and the related security, in the event that the sale is deemed by a court not to have been receivables in an enforceable manner (at least prior to its perfected? insolvency), however, such continuous sales would be subject to the insolvency officials’ right to rescind. Under Japanese law, the methods to perfect a sale of receivables and Japan methods to perfect the creation of a security interest over 4.10 Future Receivables. Can the seller commit in an receivables are basically the same. Therefore, it is not customary in enforceable manner to sell receivables to the purchaser Japan to take a “back-up” security interest. While there have been that come into existence after the date of the receivables arguments about taking a “back-up” security interest in order to purchase agreement (e.g., “future flow” securitisation)? If protect the interest of the purchaser in the event that the sale is so, how must the sale of future receivables be structured recharacterised as a financing rather than a sale (note that the to be valid and enforceable? Is there a distinction purpose is different from the term “back-up” for a failure to perfect between future receivables that arise prior to or after the seller’s insolvency? a sale), since the creation of a “back-up” security interest would seem to contradict the parties’ intention to effect a true sale and also Following a Supreme Court case ruling in 1999, the general belief because, even if recharacterised, transactions would likely be is that it is possible for the seller to commit to sell future receivables recharacterised as secured lending with a perfected security, it is for so long as the receivables are sufficiently specified and generally assumed that the taking of a “back-up” security interest identified (by, for example, the obligors thereof, the transactions would not add much protection, but, at the same time, run the risk from which the receivables are generated, the amounts of the of working against the true sale nature of the transactions and, receivables and/or the dates on which receivables are respectively therefore, parties customarily do not create any “back-up” security generated); provided that the sale of the receivables, in whole or in interest. part, may be deemed or determined to be void due to a contradiction with the public welfare/interest or for any other reasons and there 5.2 Seller Security. If so, what are the formalities for the also is a possibility of the sale of future receivables being subject to seller granting a security interest in receivables and rights of insolvency officials to rescind, especially with regard to related security under the laws of Japan, and for such receivables arising after the seller’s insolvency. security interest to be perfected?

Seller security is not applicable in Japan. 4.11 Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all 5.3 Purchaser Security. If the purchaser grants security over related security can be enforceably transferred, what all of its assets (including purchased receivables) in methods are customarily adopted to provide the favour of the providers of its funding, what formalities purchaser the benefits of such related security? must the purchaser comply with in Japan to grant and perfect a security interest in purchased receivables Provided the transfer of the receivables is enforceable and perfected governed by the laws of Japan and the related security? against third parties, it is generally believed that a related security (other than an umbrella security interest such as an umbrella Under Japanese law, there is no simple way to grant a security over hypothec) securing the transferred receivables will also “all assets” of the purchaser. The purchaser must grant specific automatically be recognised as being concurrently transferred in a security over each specific asset class/type separately. Therefore, if perfected manner (see question 4.3 above). Provided, however, receivables constitute a part of the purchaser’s “all assets”, then to with respect to certain security interests that can be registered such effect and/or perfect a security interest over such receivables, the as a hypothec, the concurrent transfer of the hypothec will not be following formalities must be complied with: perfected against a third party that acquires the related security For granting a security interest in receivables, a “pledge” (without acquiring the obligation secured thereby) unless the (shichiken) or a “security assignment” (jyoto-tampo) is usually used concurrent transfer is separately perfected; for example, in the case in Japan. of a hypothec, perfected by registration in the relevant real estate (i) Pledge registry through a supplemental registration. In order to effectively pledge receivables to the creditor, the As for umbrella securities, crystallisation thereof will be required in following need to be satisfied: order to provide the purchaser with the benefits of the security while there is no formality requirement for a pledge (although following a crystallisation, an umbrella security will no agreement, in the agreement, the same as sales of longer be an umbrella security but a regular security) or obtain the receivables, receivables to be pledged must be specified, and consent of the obligor or any other party who granted the security assignments thereof must not be prohibited under the in order to transfer the umbrella security as an umbrella security to relevant receivables contracts; and the purchaser. the pledgor must deliver to the pledgee the instruments evidencing such receivables, if such instruments need to be delivered in order to effect an assignment of such receivables. In order to perfect the creation of the pledge against third parties and obligors, one of the following methods needs to be undertaken:

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(a) the pledgor must deliver notice to the obligors, or the pledgor introduction of the ALGA. This is because, while the interpretation or pledgee must obtain consent from the obligors, which was reasoned upon the fact that the replaced statute expressly notice or consent must bear an officially certified date provided that the law of the obligor’s domicile governed the (kakutei-hizuke) by means prescribed under law in order to perfection of an assignment of a receivable, the ALGA amended the perfect against third parties (if no officially certified date is rule and provides that the governing law of the receivable itself affixed, then the creation of the pledge will still be perfected governs the perfection of an assignment of the receivable. Thus, it against the obligors but not against third parties); or is believed that the governing law of the receivable will also govern (b) if the pledgee is a corporation, the pledgee must register the the perfection of a security interest in the receivable. Therefore, if creation of the pledge in a claim assignment registration file the purchaser perfects a security interest in the receivables under the in accordance with the Perfection Exception Law.

laws of the purchaser’s country or a third country, even if the Japan (ii) Security assignment security interest is determined to be perfected under the laws of that In order to effectively assign receivables for security purposes, the country, Japanese courts will not treat the security interest as following need to be satisfied: perfected unless the subject receivables are governed by the same while there is no formality requirement for a security country’s law. assignment agreement, in the agreement, the same as with sales of receivables, receivables to be assigned for security purposes must be specified, and assignments thereof must 5.5 Additional Formalities. What additional or different not be prohibited under the relevant receivables contracts; requirements apply to security interests in or connected to and insurance policies, promissory notes, mortgage loans, consumer loans or marketable debt securities? the same as with pledges of receivables, the assignor must deliver to the assignee the instruments evidencing such (i) Insurance policies receivables, if such instruments need to be delivered in order to effect an assignment of such receivables. There is no additional or different requirement specifically In order to perfect the creation of the security assignment against applicable only to insurance policies under Japanese law. Provided, third parties and obligors, one of the following measures need to be however, that for those insurance policies that are payable to order undertaken: (i.e., those that fall under the definition of sashizu-saiken), endorsement will be required in order to effect and perfect the (a) the assignor must deliver notice to the obligors, or the transfer. assignor or assignee must obtain consent from the obligors, which notice or consent must bear an officially certified date (ii) Promissory notes (kakutei-hizuke) by means prescribed under law in order to Under the Promissory Notes Law, the general method of granting perfect against third parties; or security interests on promissory notes and perfection against the (b) if the assignor is a corporation, the assignor must register the obligor and third parties is by the grantor endorsing the promissory assignment of receivables in a claim assignment registration notes and delivering the same to the grantee. file in accordance with the Perfection Exception Law. (iii) Consumer loans Unlike the sale of (consumer) loans, regulations regarding sales of 5.4 Recognition. If the purchaser grants a security interest in loans extended by moneylenders regulated under the Moneylenders receivables governed by the laws of Japan, and that Law (see question 8.3) do not apply to the grantee of the security security interest is valid and perfected under the laws of interests on (consumer) loans, even if the loans are extended by a the purchaser’s country, will it be treated as valid and moneylender, unless and until the security interests are foreclosed. perfected in Japan or must additional steps be taken in Japan? (iv) Mortgaged loans When a security interest is validly and effectively granted over or in The ALGA, which is the law a Japanese court would apply in a loan that itself is secured by a hypothec (teito-ken) (but not in the determining the applicable governing law, does not explicitly case of an umbrella hypothec (ne-teito-ken)), the grantee will provide for rules relating to the choice of governing law in respect automatically benefit from the hypothec as the security interest will of security interests over receivables. However, according to the grasp the loan as a secured loan without any additional or different general interpretation of the statute that provided for the rules requirement (zuihansei). However, this does not mean that the relating to the choice of governing law and which was replaced by grantee would be entitled to directly enforce/foreclose on the the ALGA (which also does not explicitly provide for rules relating hypothec or umbrella hypothec. The security interest granted over to the law governing security interests over receivables), the law or in the loan secured by the hypothec or umbrella hypothec must governing a creation/granting of a pledge or a security assignment first be enforced/foreclosed. Thereafter, if the grantee acquires the in a receivable is the law governing such receivable. The general loan secured by the hypothec or umbrella hypothec himself/herself notion is that this interpretation will remain the controlling as a result of such enforcement/foreclosure, then the grantee will be interpretation even after the introduction of the ALGA. Therefore, able to enforce/foreclose on the hypothec or umbrella hypothec (but if the purchaser grants a security interest in the receivables under only if the loan is due and payable). In order to perfect the interest the laws of the purchaser’s country or a third country, even if the the grantee acquires as a result of the granting of the security security interest is valid under the laws of that country, Japanese interest over or in the loan secured by the hypothec against third courts will not treat the security interest as valid unless the subject parties who gain interest in the hypothec after the granting of the receivables are governed by the same country’s law. security interest, a registration (if the security interest is a pledge, in As for the governing law regarding perfection of a security interest the form of an amendment registration and if the security interest is in a receivable, neither the ALGA nor the statute replaced thereby a security assignment, in the form of a supplemental registration) provides or provided any express rule. While the general needs to be made in the relevant real estate registry (however, it is interpretation under the replaced statute was that the perfection generally believed that the grantee of the security interest in a would be governed by the law of the obligor’s domicile, it is not mortgaged loan will prevail over a third party who acquires the expected that the same interpretation will be controlling after the mortgage loan for so long as the granting of the security interest to

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the grantee is first perfected (even if the registration is not made or of non-bearer bonds issued pursuant to the was made after the third party’s acquisition of the mortgage loan)). Corporations Act, in order to perfect the transfer against third parties and against the issuer company, In cases where the loan over which the security interest is created is the pledgee’s name and address must be recorded in secured by an umbrella hypothec, in contrast to the above, the the bond registry (shasai genbo) in accordance with grantee will not benefit from the umbrella hypothec as an umbrella the Corporations Act. hypothec will not be transferred unless and until it is crystallised (B) If book-entry bonds under the Transfer Law (furikae into a regular hypothec. shasai) (v) Marketable debt securities In order to pledge book-entry bonds and to perfect Similarly to question 4.3 above, we will focus on the granting of a against the issuer company and third parties, the Japan pledge or a security assignment over or in JGBs or corporate bonds amount of the book-entry bonds pledged to the and perfection thereof. The requirements for the granting/creation pledgee must be entered into the pledgee’s account of security interests in respect of these securities and perfection book in accordance with the Transfer Law. thereof depend on the form of the JGBs and the bonds. The requirements for the effective granting of a security assignment (a) In case of JGBs of corporate bonds and perfection thereof are basically the same as the requirements for the effective sale and perfection thereof as In order to pledge JGBs and to perfect such pledge, the following is outlined in question 4.3 above. required: (A) If in bearer form with physical certificates (mukimei kokusai shouken) 5.6 Trusts. Does Japan recognise trusts? If not, is there a the pledgor and the pledgee must agree on the mechanism whereby collections received by the seller in creation of the pledge of JGBs and the pledgor respect of sold receivables can be held or be deemed to must deliver the physical certificates to the be held separate and apart from the seller’s own assets pledgee; and until turned over to the purchaser? for continued perfection against third parties, the pledgee must continuously keep custody of Yes, trusts are recognised under Japanese law. In fact, a statute the physical certificates. entitled the Trust Law governs and sets the statutory rules (some of which are mandatory rules rather than default rules). (B) If registered JGBs (toroku kokusai) An effective pledge of registered JGBs will arise if the seller and the purchaser agree to the creation of the 5.7 Bank Accounts. Does Japan recognise escrow pledge, provided that the JGBs do not prohibit the accounts? Can security be taken over a bank account transfer thereof. For perfection against third parties as located in Japan? If so, what is the typical method? well as the government, the transfer needs to be Would courts in Japan recognise a foreign-law grant of registered in the JGB registry at the Bank of Japan in security (for example, an English law debenture) taken accordance with the Law Regarding Japanese over a bank account located in Japan? Government Bonds and rules promulgated thereunder. (C) If in book-entry form under the Transfer Law (furikae Escrow arrangements may take several forms under Japanese law as kokusai) there is no legal concept of “escrow” per se. A trust would be one For the creation of a pledge over such JGBs and of the major legal forms that could be utilised for an escrow perfection against the government and third parties, arrangement. the amount of the JGBs pledged to the pledgee needs While a security interest can be created over rights of the holder of to be entered into the pledgee’s account book in a bank account owing money to a bank in Japan, it is not a security accordance with the Transfer Law. over the bank account per se. Also, there is an argument that a The requirements for the effective granting of a security assignment security interest created over the rights of the holder of a bank of JGBs and perfection thereof are basically the same as the account would become invalid or unperfected each time the balance requirements for the effective sale and perfection thereof as of the account changes. outlined in question 4.3 above. (b) Corporate Bonds 6 Insolvency Laws In order to pledge corporate bonds and to perfect such pledge, the following is required: (A-1) If in bearer form with physical certificates (mukimei 6.1 Stay of Action. If, after a sale of receivables that is shasaiken) otherwise perfected, the seller becomes subject to an insolvency proceeding, will Japan’s insolvency laws Under the Corporations Act and the general Civil automatically prohibit the purchaser from collecting, Code, no creation of a pledge will be effected without transferring or otherwise exercising ownership rights over the physical delivery to the pledgee of the certificate the purchased receivables (a “stay of action”)? Does the in case of certificated bonds issued pursuant to the insolvency official have the ability to stay collection and Corporations Act. For continued perfection against enforcement actions until he determines that the sale is third parties, the pledgee must continuously keep perfected? Would the answer be different if the custody of the physical certificates. purchaser is deemed to only be a secured party rather (A-2) If in non-bearer form with physical certificates (kimei than the owner of the receivables? shasaiken) The same as (A-1) above, under the Corporations Act Under Japanese law, there is no system or mechanism equivalent to and the general Civil Code, no pledge will be effected an automatic stay. Neither the filing of the petition for insolvency without the physical delivery to the pledgee of the proceedings itself nor the commencement of such proceedings certificates in case of certificated bonds issued automatically prohibits creditors from exercising or enforcing their pursuant to the Corporations Act. In addition, in cases rights; however, Japanese insolvency courts will customarily issue

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stay orders as to payments on or performance of obligations of the 6.3 Suspect Period (Clawback). Under what facts or insolvent. Also, upon and after the commencement of the circumstances could the insolvency official rescind or insolvency proceedings, the creditors to the insolvent will be reverse transactions that took place during a “suspect” or subjected to such proceedings and will be prohibited from “preference” period before the commencement of the exercising or enforcing their rights outside such proceedings; insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in Japan for (a) however, secured creditors will basically be allowed to transactions between unrelated parties and (b) enforce/foreclose on their security interest if the insolvency transactions between related parties? proceeding is either a bankruptcy proceeding under the Bankruptcy Code or a rehabilitation proceeding under the Civil Rehabilitation Separately from insolvency officials’ right to avoid intentional acts

Law, in each case subject to certain rights of the insolvency official Japan of the insolvent that are harmful to or that hinder the insolvent’s to extinguish the security interest and/or to stay the foreclosure creditors, the Bankruptcy Code, the Civil Rehabilitation Law and process of the security interest. the Corporate Reorganisation Law provide for avoidance rights of More importantly, if the sale of the receivables prior to the insolvency officials with respect to acts of the insolvent that took commencement of the insolvency proceeding is perfected, and for place after the earlier of the suspension of payments in general and so long as the sale is not recharacterised as a lending transaction the filing of a petition for the commencement of the insolvency rather than a true sale, the purchaser will not be a creditor to the proceedings, subject to certain conditions such as a requirement that insolvent in connection with the purchased receivables and, relates to the relevant creditor’s state of mind being satisfied; therefore, will have the rights and ability to collect, transfer or provided, however, that with respect to actions of the insolvent that otherwise exercise ownership rights over the purchased receivables relate to the granting of a security interest or discharging of an (note, however, that whether or not the purchaser will have the obligation of the insolvent, the insolvency official is entitled to ability to terminate a servicing agreement (entered into with the avoid actions that took place after the earlier of the insolvent’s seller, if any, in order to let the originator/seller service the inability to pay its obligations and the filing of a petition for the receivables) upon the seller becoming subject to the insolvency commencement of the insolvency proceedings, subject to certain proceeding is a separate question; if the servicing agreement cannot conditions such as a requirement that relates to the relevant be terminated, the insolvent seller may remain entitled to collect the creditor’s state of mind being satisfied (if the insolvent had no legal receivables, although the purchaser otherwise has the right and obligation to grant the security interest or to discharge its obligation ability to collect the receivables). at the time, then the insolvency official may also avoid the relevant Conversely, insolvency officials tend to challenge the true sale action provided it took place within 30 days before the insolvent’s nature of securitisation transactions in an effort to preclude the inability to pay its obligations). Furthermore, any gratuitous act purchaser from exercising ownership rights over the receivables (including acts that are deemed to be gratuitous) that took place and/or challenge that the purchaser may not terminate the servicing after the suspension of payments or the filing of a petition for the agreement, if any, so that the insolvency officials will remain in commencement of the insolvency proceedings or within 6 months control of the collection procedures. before the earlier of the two can be avoided by the insolvency official.

6.2 Insolvency Official’s Powers. If there is no stay of action (Please note that there are certain exceptions to the above described under what circumstances, if any, does the insolvency rules.) official have the power to prohibit the purchaser’s In addition to the above, creditors of the insolvent may rescind exercise of rights (by means of injunction, stay order or actions of the insolvent that would prejudice creditors if certain other action)? conditions required under the general Civil Code are satisfied.

If the sale of receivables is perfected and is a true sale, then the purchaser will not be prohibited from exercising its ownership 6.4 Substantive Consolidation. Under what facts or rights over or other rights in respect of the purchased receivables circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with (save for the uncertainty as to the termination of the servicing those of the seller or its affiliates in the insolvency agreement). proceeding? To the contrary, if the sale is not perfected prior to the insolvency or if the sale is not a true sale, then the purchaser’s exercise of rights No legal concept or theory that is equivalent or similar to the theory may be prohibited or restricted. Firstly, if the sale was a true sale of substantial consolidation under the U.S. law exists under but not perfected, then the insolvency official would effectively Japanese law. However, the insolvency official may be able to rescind the sale as a result of which the receivables would claw achieve a similar result through the application of the Japanese back to the insolvent’s estate. Furthermore, if the sale was not a version of the piercing the corporate veil doctrine. That is, if the true sale, then, irrespective of whether or not the transaction was corporate veil of the purchaser is pierced, since all the assets of the perfected, the purchaser would be a creditor, as a result of which the purchaser would be deemed part of the seller’s (or its affiliate’s) purchaser’s ability to exercise its rights may be restricted by the assets, a similar result would be achieved. According to case law, a insolvency proceedings (provided, that, as described in question corporate veil will be pierced only when: (a) the legal entity is a 6.1, if the purchaser is deemed a secured creditor with a perfected sham; or (b) the legal entity is abused so as to avoid certain legal security interest, and if the insolvency proceeding was either a provisions. Note that, while there are certain factors that are to be bankruptcy proceeding or a rehabilitation proceeding, then the taken into account in determining whether or not the doctrine purchaser as a secured creditor would be entitled to should be applied, a recent court judgment suggested that the enforce/foreclose on its security interest save for limited corporate veil of an SPC would not be pierced merely because it exceptions). was a paper company.

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6.5 Effect of Proceedings on Future Receivables. What is the 7.2 Securitisation Entities. Does Japan have laws specifically effect of the initiation of insolvency proceedings on (a) providing for establishment of special purpose entities for sales of receivables that have not yet occurred or (b) on securitisation? If so, what does the law provide as to: (a) sales of receivables that have not yet come into requirements for establishment and management of such existence? an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as to the status of In a bankruptcy proceeding, a rehabilitation proceeding or a directors or shareholders? reorganisation proceeding, the relevant insolvency official has the ability to rescind the insolvent’s obligations under a bilateral Yes, see question 7.1. contract in respect of which both parties’ obligations are yet to be (a) While there are not many special requirements in Japan fulfilled. establishing a TMK other than to name it a TMK in accordance with the statute, in order for a TMK to engage in If an insolvency proceeding is initiated prior to the transfer of the “securitisation business”, among other requirements, the receivables resulting from the sales thereof and if the sales price has TMK must file a “business commencement statement” not been paid, then the insolvency official will have the ability to (gyoumu-kaishi-todokede) with a governmental agency prior rescind the sales agreement. To the contrary, a sales agreement of to initiation of the TMK’s “securitisation business”; an “asset future receivables will not be rescinded simply because the liquidation plan” (shisan-ryuudouka-keikaku), which receivables are future receivables. Sales of future receivables may identifies the assets to be securitised and the terms and be rescinded if the sale was through a continuous sale in connection conditions of asset-backed securities to be issued and/or with which the sales price for the future receivables has not been asset-backed loans to be borrowed to finance the acquisition paid. of such assets by the TMK, must be attached to the statement as part of the exhibits thereto. As for management of TMKs, the statute provides certain 7 Special Rules rules in terms of corporate governance regime, such as the requirement that no director (torishimariyaku) or statutory auditor (kansayaku) of a TMK may be a director of the entity 7.1 Securitisation Law. Is there a special securitisation law that sells assets to the TMK as well as the requirement that (and/or special provisions in other laws) in Japan an accountant or an accountancy firm be appointed as the establishing a legal framework for securitisation TMK’s statutory accounting auditor (kaikei kansanin) when transactions? If so, what are the basics? certain conditions are met. (b) See question 7.1 above. Yes: the Law Concerning Liquidation of Assets (the “Securitisation Law”). The statute permits the setting up of a special purpose (c) While there is no positive requirement/qualification for the status of a director or of a shareholder specifically stipulated company (tokutei mokuteki gaisha; “TMK”) and a special purpose under the statute, corporations in general and certain persons trust (tokutei mokuteki shintaku; “TMS”). are barred from becoming a director (the list includes the While there were a number of benefits in comparison to seller or directors of the seller, bankrupt individuals corporations incorporated under the general corporations law used receiving no rehabilitation order, individuals convicted of for SPCs when the Securitisation Law was first introduced, certain financial crimes, etc.). following a series of amendments to the general corporations law, many of the benefits were lost as they no longer belong only to 7.3 Non-Recourse Clause. Will a court in Japan give effect to TMKs. The primary benefits that still remain are: the pass-through a contractual provision (even if the contract’s governing tax status; beneficial tax treatment in connection especially with law is the law of another country) limiting the recourse of real estate taxes; and withholding tax on securities. parties to available funds? Characteristically, a TMK is allowed to acquire only certain types of assets listed under the statute and the rules promulgated The general belief is that non-recourse provisions will be upheld as thereunder. In addition, TMKs are required to obtain evaluation(s) valid at least prior to the insolvency of the obligor. The same of the assets that each will acquire prior to the actual acquisitions applies with most types of contracts even if a given contract is thereof and the evaluations are required to be made by certain governed by non-Japanese law, so long as the provision is valid individuals/entities satisfying the qualifications stipulated in the under that governing law. To the contrary, validity and legal effects statute. TMKs are allowed to issue bonds (tokutei shasai), physical of non-recourse provisions upon the insolvency of the obligor are CPs (tokutei yakusoku tegata) and book-entry CPs (tokutei tanki not clear under Japanese law. shasai) and preferred equity securities (yusen shusshi) to finance their acquisition of assets to be securitised. While a TMK may 7.4 Non-Petition Clause. Will a court in Japan give effect to a borrow money to finance such acquisition, some tax benefits would contractual provision (even if the contract’s governing law be lost if not from lenders that are qualified institutional investors is the law of another country) prohibiting the parties from: defined under the Financial Instruments and Exchange Act of Japan (a) taking legal action against the purchaser or another (which is the main body of securities regulations of Japan). Since person; or (b) commencing an insolvency proceeding TMKs are designed to be SPCs in nature, the statute prohibits against the purchaser or another person? TMKs from certain matters such as hiring employees, having a branch office, not appointing an underwriter/dealer in respect of its The general belief is that non-petition provisions will be upheld as securities, doing business other than its “securitisation business” valid for so long as the scope of a provision is reasonable (such as and not delegating the management (including sale and other the effective term of the provision being limited to 1 year and 1 day dispositions) of its assets to qualified third parties. after the payment in full to the investors); however, a Japanese court A TMS has almost never been used due to its inflexibility in may treat a petition made in violation of a non-petition as a valid connection with structuring and the absence of tax benefits in petition and determine that the remedy for the violation is to be respect of withholding tax, etc. provided through monetary compensation rather than dismissing the petition.

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Since the matter concerns proceedings under the Japanese legal 8.2 Servicing. Does the seller require any licences, etc., in system, the governing law of non-petition provisions should be order to continue to enforce and collect receivables Japanese law. Whether Japanese courts will uphold non-petition following their sale to the purchaser, including to appear provisions governed by non-Japanese law is unclear. before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect sold receivables? 7.5 Independent Director. Will a court in Japan give effect to a contractual provision (even if the contract’s governing There is no general restriction on a seller of receivables continuing law is the law of another country) or a provision in a to collect receivables following their sale to the purchaser, however, party’s organisational documents prohibiting the directors collection activities of the seller are legally permissible only to the from taking specified actions (including commencing an Japan extent that they do not constitute or involve “legal affairs”, which insolvency proceeding) without the affirmative vote of an independent director? include appearance before a court. Save for limited exceptions available to judicial scriveners and the The general belief is that such arrangements cannot be made under the exception made available to licensed special servicers, only an Japanese legal environment, and therefore, in most cases, a Japanese attorney or a legal corporation (which is an incorporated law firm) SPC will have a sole independent director rather than having multiple can represent a third party and appear before a court. Therefore, directors that may include non-independent directors. unless the seller is a special servicer licensed under the Servicer Law (the Act on Special Measures concerning Business of Management and Collection of Claims), the seller will not be able 8 Regulatory Issues to appear before a court in enforcing the receivables sold to the purchaser. 8.1 Required Authorisations, etc. Assuming that the purchaser does no other business in Japan, will its 8.3 Data Protection. Does Japan have laws restricting the purchase and ownership or its collection and enforcement use or dissemination of data about or provided by of receivables result in its being required to qualify to do obligors? If so, do these laws apply only to consumer business or to obtain any licence or its being subject to obligors or also to enterprises? regulation as a financial institution in Japan? Does the answer to the preceding question change if the purchaser does business with other sellers in Japan? Yes: the Law Concerning the Protection of Personal Information regulates the: (i) acquisition; (ii) management and use; and (iii) First, under Japanese law, there is no concept of a qualification to disclosure of personal information about individuals (kojin-jyoho), do business in Japan applicable to foreign corporations; however, by certain enterprises/individuals handling such personal foreign corporations are required to (1) appoint at least one information (kojin-jyoho-toriatukai-gyousha). The statute protects representative officer/director who resides in Japan, and (2) register information in respect of individuals but not of corporations. with a governmental agency, if they are to continuously do business In addition, certain businesses such as financial institutions and in Japan; provided, further, that a foreign corporation whose banks are required to maintain and otherwise handle information primary purpose is to do business in Japan may not continuously do and data about or provided by its clients (especially individuals, but business in Japan, and a foreign corporation whose head office is not excluding corporations or other enterprises) with the due care of located in Japan also may not continuously do business in Japan. professionals and maintain adequate confidentiality. Whether a one-time purchase and ownership or its collection and enforcement of receivables by a foreign SPC will be deemed a 8.4 Consumer Protection. If the obligors are consumers, will “continuous business” remains a subtle question, the answer to the purchaser (including a bank acting as purchaser) be which is unclear (but if the foreign SPC does business with other required to comply with any consumer protection law of sellers, then there is a chance that it will be deemed as doing Japan? Briefly, what is required? continuous business in Japan; however, the governmental authority has suggested that the regulation is not intended to be applied to If the receivables are loans extended by moneylenders regulated foreign corporations used as vehicles in securitisation transactions). under the Moneylenders Law, the purchaser thereof will be subject Separately, regardless of whether the purchaser is a foreign entity or to certain provisions of the statute, including, without limitation, the a domestic entity, the purchaser may be prohibited from purchasing provisions providing for the following requirements: receivables depending on the asset class. That is, since the Lawyers the purchaser will be required to deliver to each obligor, Code provides that no person may engage in the business of without delay, a notice that clearly indicates certain details of purchasing or otherwise acquiring receivables to enforce the the relevant loan as required under the statute and rules receivables by means of litigation, mediation, conciliation or other promulgated thereunder upon the purchase of such means, the purchase of receivables may be deemed a violation of receivables; and the Code, for example, if all of the purchased receivables are the purchaser will be required to furnish a receipt to each destined to be enforced through litigation. However, the Supreme obligor every time the purchaser receives a payment from the Court has opined that a purchase of receivables does not violate the obligor in accordance with the Moneylenders Law. Code if the purchase does not harm the obligors’ or public citizens’ rights and legal interests and if the purchase falls within socially 8.5 Currency Restrictions. Does Japan have laws restricting and economically justified business. the exchange of Japan’s currency for other currencies or In addition, if the receivables to be purchased are, or include, a loan the making of payments in Japan’s currency to persons outside the country? or loans extended by a moneylender regulated under the Moneylenders Law, then certain provisions of the statute will (i) The Foreign Exchange and Foreign Trade Law, which is the become applicable to the purchaser (even if the purchaser is a statute primarily governing exchanges of currency does not foreign entity); see question 8.3. restrict the exchange of Japanese currency for other

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currencies; however, that there are certain after-the-fact 9.4 Value Added Taxes. Does Japan impose value added reporting requirements. tax, sales tax or other similar taxes on sales of goods or (ii) Under the same statute, the making of payments or other services, on sales of receivables or on fees for collection transfer of money to persons of certain countries such as agent services? countries the subject of economic sanctions is subject to approval by the government. Also, if a payment or other Consumption tax (shohi-zei) and local consumption tax (chiho- transfer of money to persons outside of the country is made shohi-zei) are imposed on the sale of goods or services otherwise by a resident of Japan, then such resident will be required to exempted by relevant laws or regulations. With respect to sales of make an after-the-fact report to the relevant authority, except receivables, no consumption tax is imposed, whereas consumption for cases prescribed in the relevant rules (such as a payment

Japan tax and local consumption tax will be imposed on fees for collection of less than a hundred million yen). agent services.

9 Taxation 9.5 Purchaser Liability. If the seller is required to pay value added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give 9.1 Withholding Taxes. Will any part of payments on rise to the receivables) and the seller does not pay, then receivables by the obligors to the seller or the purchaser will the taxing authority be able to make claims for the be subject to withholding taxes in Japan? Does the unpaid tax against the purchaser or against the sold answer depend on the nature of the receivables, whether receivables or collections? they bear interest, their term to maturity, or where the seller or the purchaser is located? (i) Stamp duty The issue depends on a number of factors, such as the nature of the The purchaser is liable jointly and severally with the seller, if both receivables, whether they bear interest, whether the seller (or the the purchaser and the seller have prepared the documents together. purchaser) is a resident of Japan, whether there is a tax treaty (ii) Consumption tax and local consumption tax between Japan and the country or jurisdiction of the seller (or the The taxing authority cannot make claims against the purchaser or purchaser), and whether the payment by the obligor is made within on the receivables (so long as the sale is a true and perfected sale) Japan. for the unpaid tax.

9.2 Seller Tax Accounting. Does Japan require that a 9.6 Doing Business. Assuming that the purchaser conducts specific accounting policy is adopted for tax purposes by no other business in Japan, would the purchaser’s the seller or purchaser in the context of a securitisation? purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of The Corporations Tax Law generally requires corporations to adopt the receivables against the obligors, make it liable to tax the Japanese GAAP unless otherwise required by law. Since there in Japan? is no statute that specifically provides for an accounting policy for the seller or the purchaser in the context of a securitisation As for stamp duty, see question 9.5 (stamp duty will be imposed transaction, the Japanese GAAP will generally control; although irrespective of the status of the purchaser). With respect to income there are certain matters for which tax law requires modifications to tax, if the purchaser is a foreign corporation or a non-resident of the accounting principles. For securitisation of receivables, the Japan, the income from the collection of the receivables will be Accounting Policy regarding Financial Products introduced by the taxable in Japan (and, if the purchaser has no “permanent Accounting Standards Board of Japan, as well as the Practical establishment” in Japan, then withholding tax would generally be Policy regarding Financial Products Accounting and Q&A for the imposed with respect to certain income from receivables such as Financial Products Accounting published by a committee of the interest on loans). As for corporate tax, the purchaser’s purchase of Japanese Institute of Certified Public Accountants provide the the receivables, its appointment of the seller as its servicer and accounting rules. collection agent, or its enforcement of the receivables against the obligors will not generally make it liable to corporate tax in Japan as long as the purchaser conducts no other business in Japan and is 9.3 Stamp Duty, etc. Does Japan impose stamp duty or other documentary taxes on sales of receivables? treated as having no permanent establishment nor its agent/representative in Japan with certain authority to act on behalf of the purchaser. Stamp duty (inshi-zei) of 200 Yen is imposed on a contract whereby a receivable is assigned (e.g., a receivables sale agreement) with a Note that if there is a tax treaty between Japan and the jurisdiction sale value equal to or greater than 10,000 yen. of the foreign corporation, the rules described above might be amended thereby.

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Hajime Ueno

Nishimura & Asahi Ark Mori Building 1-12-32 Akasaka, Minato-ku Tokyo 107-6029 Japan Tel: +81 3 5562 8500 Fax: +81 3 5562 9711 Email: [email protected] URL: www.jurists.co.jp/en/ Japan Hajime Ueno is renowned for his expertise in the areas of structured finance, reorganisation finance and international finance. He has been involved in numerous significant securitisation transactions concerning various structures -- such as true sale and synthetic structures; master trust structures, ABCP programmes -- and asset classes, including residential and commercial mortgages, trade receivables, export financing, nonperforming and sub-performing loans, bonds and bank loans, including small and medium enterprise loans, as well as other assets that are not monetary claims including real properties, movable properties, whole business and intellectual properties. His extensive practice also covers other international finance areas, such as banking, trust and securities regulation, as well as BIS regulations. He is a graduate of the University of Tokyo (LL.B., 1997) and Harvard Law School (LL.M., 2004). Fluent in both Japanese and English, Mr. Ueno has co-authored a number of international and domestic journals and publications.

Nishimura & Asahi is one of Japan’s premier full-service law firms, covering all aspects of domestic and international business and corporate activity. The firm currently has 486 Japanese and foreign lawyers and employs over 550 support staff, including tax accountants, and one of the largest teams of paralegals in Japan. Through the enhancement of professional and organisational synergies due to the expansion in scale of the firm, it is able to share expertise and assist clients cost effectively in all areas of legal services, and provide an unprecedented level of client service in highly specialised and complex areas of commercial law. In order to further enhance its overseas practice, the firm opened a representative office in Beijing in April 2010, Ho Chi Minh City in October 2010, Hanoi in August 2011, and Singapore in January 2012. Key areas of practice: Acquisition Finance, Administrative Disputes, Antitrust, Asset Finance, Asset Management, Assistance to Administrative Organisations, Banking, Capital Markets, Civil & Commercial Disputes, Compliance, Corporate Crisis Management, Education and Professional Activities, General Corporate, Insurance, International Trade, International Transactions, IP Disputes, IP Licences, Labour Law, M&A, PFI/Project Finance, Real Estate/Environmental, Restructuring/Insolvency, Specialised Disputes, Start-up Businesses, Structured Finance/Securitisation, Tax, Tax Disputes, Telecommunications/Media, Transnational Dispute Settlement, Trusts & Estates, Venture Capital/IP Finance.

Managing Partner: Mr. Masaki Hosaka. Languages Spoken: Japanese, English, Chinese (Mandarin) and French. Total number of lawyers: 486. Email: [email protected]

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Kim & Chang Hoin Lee

1 Receivables Contracts per annum, and (ii) the sum of 12% per annum and the agreed interest rate on the applicable loans if the agreed default interest rate exceeds 25% per annum. The Interest 1.1 Formalities. In order to create an enforceable debt Rate Limitation Law limits the maximum interest rate of a obligation of the obligor to the seller, (a) is it necessary loan extended by a lender (other than a financial institution that the sales of goods or services are evidenced by a and a lending business company) to 30% per annum. formal receivables contract; (b) are invoices alone (b) Unless there is an agreement with regard to default interest sufficient; and (c) can a receivable “contract” be deemed between the parties, the statutory interest rate of 6% per to exist as a result of the behaviour of the parties? annum will apply as the default interest rate for commercial transactions under the Korean Commercial Code. In (a) Under the general principle of the Korean Civil Code, it is addition, if a lawsuit is filed, the Court may order the losing not necessary that the receivable contract be executed in the debtor to pay default interest calculated at the rate of 20% per form of a formal written contract in order to create an annum, starting the day immediately after the date when the enforceable debt obligation of the debtor to the seller. complaint was served on the debtor. (b) When there exists a basic agreement or historical relationship (c) The Law Concerning Regulation of Adhesion Contracts, the between the seller and the debtor with regard to sales of Framework Act on Consumers, the Act on the Consumer goods or services, an invoice alone or together with other Protection in Electronic Commerce Transactions, etc., the related evidence (e.g., an order issued by the debtor) may Instalment Transactions Act and the Door-to-Door Sales Act serve as evidence of the existence of an agreement for the provide certain special protections to consumers as set forth individual sale. below (for the general description of such laws, please refer (c) Whether a receivable “contract” can be deemed to exist as a to the answer to question 8.4). Under the Law Concerning result of a historic relationship with regard to sales of goods Regulation of Adhesion Contracts, a seller who uses standard or services between the parties would depend on specific terms and conditions should explain important terms and details of the historic relationship of each case and on other conditions to the customers and any clause in the standard evidence (e.g. an order and/or invoice issued for a particular terms and conditions which are unreasonably unfair to the sale). customers shall be invalid. The Instalment Transactions Act, the Door-to-Door Sales Act and the Act on the Consumer Protection in Electronic Commerce Transactions, etc. 1.2 Consumer Protections. Do Korea’s laws (a) limit rates of provide consumers with noteworthy protections, such as the interest on consumer credit, loans or other kinds of right to receive written contract from the seller, the right to receivables; (b) provide a statutory right to interest on late rescind the offer for purchase within 7 days (in the case of the payments; (c) permit consumers to cancel receivables for Instalment Transaction Act and the Act on the Consumer a specified period of time; or (d) provide other noteworthy Protection in Electronic Commerce Transactions, etc.) or 14 rights to consumers with respect to receivables owing by days (in the case of the Door-to-Door Sales Act) of the them? receipt of the concerned contract or delivery of the goods, whichever comes later, and limitation of the amount of (a) Under the Act on Registration of Lending Business and damage claims by the seller against the customers. Protection of Financial Users (the “Lending Business Act”), the interest rate as well as the default interest rate of the loans extended to individuals or small size enterprises by a 1.3 Government Receivables. Where the receivables registered lending company may not exceed 39% per annum. contract has been entered into with the government or a The Lending Business Act also limits the interest rate of the government agency, are there different requirements and loans extended by certain licensed Korean financial laws that apply to the sale or collection of those institutions to 39% per annum and further regulates the receivables? maximum default interest rate of the loans extended by certain licensed Korean financial institutions. For a The Act on Contracts with Government applies when the Korean commercial bank, the default interest rate may not exceed the Government is a party to a contract. This Act mainly addresses the lesser of (i) 39% per annum, and (ii) 1.3 times the agreed procedural requirements in entering into a contract with the interest rate on the applicable loan if the agreed default Government as a party. The Government will not be granted interest rate exceeds 25% per annum; and mutual savings sovereign immunity in commercial transactions. The Act does not banks, credit-specialised financial companies, insurance companies and certain other financial institutions may not have a provision expressly prohibiting the sale of the receivables apply a default interest rate that exceeds the lesser of (i) 39% arising under a contract with the Government. The relevant 226 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kim & Chang Korea

contract, however, may prohibit the sale of the receivables arising party to enter into contracts; and (iii) Korean law, decrees and thereunder or require consent of the Government to the sale of the regulations requiring governmental approvals, and authorisations or receivables. consents for actions taken or contracts executed by the parties. In addition, in the case of a receivables contract with a consumer obligor as set forth in our answer to question 2.1, the consumer shall 2 Choice of Law – Receivables Contracts not be deprived of the protections provided pursuant to the mandatory laws of the country of the consumer’s habitual 2.1 No Law Specified. If the seller and the obligor do not residence, notwithstanding the governing law of the receivable specify a choice of law in their receivables contract, what contract (Article 27(1) of the KPIL).

are the main principles in Korea that will determine the Korea governing law of the contract? 2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in Korea? If a governing law of the contract has not been chosen by the parties under a receivables contract, the law of the country which has the The accession of Korea to the United Nations Convention on the closest relevancy with the contract shall be the governing law of the International Sale of Goods was made on 17 February 2004 without contract pursuant to Article 26 of the Private International Law of any declarations or reservations, and the Convention became Korea (“KPIL”). However, in the case of a receivables contract effective on 1 March 2005 in Korea. with a consumer debtor who has habitual residence in a country, if before the receivables contract was entered into with the consumer: (i) solicitation, order or other business activities related to the 3 Choice of Law – Receivables Purchase receivables contract took place within or towards that country and Agreement the consumer performed the acts required for the execution of the contract in that country; (ii) the order was received by the seller in that country; or (iii) the seller induced the consumer to go to a 3.1 Base Case. Does Korean law generally require the sale foreign country and place the order for purchase there, such of receivables to be governed by the same law as the law governing the receivables themselves? If so, does that receivables contract with a consumer debtor shall also be governed general rule apply irrespective of which law governs the by the law of the country of the consumer’s habitual residence in receivables (i.e., Korea’s laws or foreign laws)? respect of the consumer protections provided pursuant to the mandatory laws thereof (Article 27(2) of KPIL). No, generally the seller and the purchaser can choose the law governing their sale agreement regardless of the law governing the 2.2 Base Case. If the seller and the obligor are both resident receivables themselves (Article 25(1) of KPIL). However, the in Korea, and the transactions giving rise to the governing law of the receivables will apply to the assignability of receivables and the payment of the receivables take the receivables and the effect of their assignment against the place in Korea, and the seller and the obligor choose the underlying debtors and third parties (Article 34(1) of KPIL). law of Korea to govern the receivables contract, is there any reason why a court in Korea would not give effect to their choice of law? 3.2 Example 1: If (a) the seller and the obligor are located in Korea, (b) the receivable is governed by the law of Korea, Since there is no foreign factor in the above-mentioned case, a (c) the seller sells the receivable to a purchaser located in Korean court will give effect to their choice of Korean law. a third country, (d) the seller and the purchaser choose the law of Korea to govern the receivables purchase agreement, and (e) the sale complies with the 2.3 Freedom to Choose Foreign Law of Non-Resident Seller requirements of Korea, will a court in Korea recognise or Obligor. If the seller is resident in Korea but the obligor that sale as being effective against the seller, the obligor is not, or if the obligor is resident in Korea but the seller is and other third parties (such as creditors or insolvency not, and the seller and the obligor choose the foreign law administrators of the seller and the obligor)? of the obligor/seller to govern their receivables contract, will a court in Korea give effect to the choice of foreign The seller and the purchaser in another country can choose the law of law? Are there any limitations to the recognition of Korea to govern their sale agreement (Article 25(1) of KPIL). In the foreign law (such as public policy or mandatory principles event of any legal proceeding brought in a Korean court, the Korean of law) that would typically apply in commercial court would apply the governing laws of receivables (i.e., Korean law) relationships such that between the seller and the obligor concerning the assignability of the receivables and the effect of their under the receivables contract? assignment against the underlying debtors and third parties. The resident seller and non-resident debtor (or non-resident seller and resident debtor) may choose the foreign law of the 3.3 Example 2: Assuming that the facts are the same as obligor/seller to govern their receivables contract and the Korean Example 1, but either the obligor or the purchaser or both courts would recognise the choice of the foreign law to govern the are located outside Korea, will a court in Korea recognise receivables contract insofar as the choice of law provisions thereof that sale as being effective against the seller and other are valid under the law so chosen and the application of relevant third parties (such as creditors or insolvency administrators of the seller), or must the requirements of provisions of the laws so chosen is not manifestly contrary to the the obligor’s country or the purchaser’s country (or both) public policy of Korea; provided that in the event of any legal be taken into account? proceeding brought in a Korean court, the Korean court would apply: (i) the mandatory laws of Korea, which should be applied by Please see our answer to question 3.2 above. In addition, the their nature irrespective of the governing law; (ii) the laws of the Korean court would also apply the laws of the jurisdiction of a jurisdiction of a party’s incorporation (the jurisdiction of domicile, party’s incorporation (the jurisdiction of domicile, in case the party in case the party is an individual) bearing upon the capacity of such ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 227 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kim & Chang Korea

is an individual) bearing upon the capacity of such party to enter effect of their assignment against the underlying debtors and third into contracts. parties.

3.4 Example 3: If (a) the seller is located in Korea but the 3.6 Example 5: If (a) the seller is located in Korea obligor is located in another country, (b) the receivable is (irrespective of the obligor’s location), (b) the receivable is governed by the law of the obligor’s country, (c) the seller governed by the law of Korea, (c) the seller sells the sells the receivable to a purchaser located in a third receivable to a purchaser located in a third country, (d) country, (d) the seller and the purchaser choose the law the seller and the purchaser choose the law of the of the obligor’s country to govern the receivables purchaser’s country to govern the receivables purchase

Korea purchase agreement, and (e) the sale complies with the agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in Korea requirements of the purchaser’s country, will a court in recognise that sale as being effective against the seller Korea recognise that sale as being effective against the and other third parties (such as creditors or insolvency seller and other third parties (such as creditors or administrators of the seller) without the need to comply insolvency administrators of the seller, any obligor located with Korea’s own sale requirements? in Korea and any third party creditor or insolvency administrator of any such obligor)? The seller and the purchaser in another country can choose the law of the obligor’s country to govern their sale agreement (Article As discussed in our answer to question 3.5 above, the seller and the 25(1) of KPIL). The Korean courts would recognise the choice of purchaser in another country can choose the law of the purchaser’s another country’s law to govern the sale agreement insofar as the country to govern their sale agreement (Article 25(1) of KPIL). The choice of law provisions thereof are valid under the law so chosen Korean courts would recognise the choice of another country’s law and the application of relevant provisions of the laws so chosen is to govern the sale agreement insofar as the choice of law provisions not manifestly contrary to the public policy of Korea; provided that thereof are valid under the law so chosen and the application of in the event of any legal proceeding brought in a Korean court, the relevant provisions of the laws so chosen is not manifestly contrary Korean court would apply: (i) the mandatory laws of Korea, which to the public policy of Korea; provided that in the event of any legal should be applied by their nature irrespective of the governing law; proceeding brought in a Korean court, the Korean court would (ii) the laws of the jurisdiction of a party’s incorporation (the apply: (i) the mandatory laws of Korea which should be applied by jurisdiction of domicile, in case the party is an individual) bearing their nature irrespective of the governing law; (ii) the laws of the upon the capacity of such party to enter into contracts; (iii) Korean jurisdiction of a party’s incorporation (the jurisdiction of domicile, law, decrees and regulations requiring governmental approvals and in case the party is an individual) bearing upon the capacity of such authorisations or consents for actions taken or contracts executed by party to enter into contracts; (iii) Korean law, decrees and the parties; and (iv) the governing laws of receivables (i.e., the law regulations requiring governmental approvals and authorisations or of the obligor’s country) concerning the assignability of the consents for actions taken or contracts executed by the parties; and receivables and the effect of their assignment against the underlying (iv) the governing laws of receivables (i.e., Korean law) concerning debtors and third parties. the assignability of the receivables and the effect of their assignment against the underlying debtors and third parties. Therefore, a Korean court would not recognise that sale as being 3.5 Example 4: If (a) the obligor is located in Korea but the effective against the obligor and other third parties unless that sale seller is located in another country, (b) the receivable is governed by the law of the seller’s country, (c) the seller satisfies the requirements of the governing law of the receivables and the purchaser choose the law of the seller’s country (i.e., Korean law). to govern the receivables purchase agreement, and (d) the sale complies with the requirements of the seller’s country, will a court in Korea recognise that sale as being 4 Asset Sales effective against the obligor and other third parties (such as creditors or insolvency administrators of the obligor) 4.1 Sale Methods Generally. In Korea what are the without the need to comply with Korea’s own sale customary methods for a seller to sell receivables to a requirements? purchaser? What is the customary terminology – is it called a sale, transfer, assignment or something else? As discussed in our answer to question 3.5 above, the seller and the purchaser in another country can choose the law of the seller’s In the case of accounts receivable payable by a resident debtor to a country to govern their sale agreement (Article 25(1) of KPIL). The resident seller, usually, promissory notes are issued by the debtor to Korean courts would recognise the choice of another country’s law the seller for the payment of accounts receivables. In such case, in to govern the sale agreement insofar as the choice of law provisions order to sell accounts receivable, the seller transfers to the thereof are valid under the law so chosen and the application of purchaser the promissory notes alone or both the promissory notes relevant provisions of the laws so chosen is not manifestly contrary and the underlying claims. In the case where promissory notes were to the public policy of Korea; provided that in the event of any legal not issued, accounts receivables are sold by transferring accounts proceeding brought in a Korean court, the Korean court would receivables to the purchaser. Sometimes, the seller transfers to the apply: (i) the mandatory laws of Korea which should be applied by purchaser beneficial certificates issued by a trustee to which their nature irrespective of the governing law; (ii) the laws of the accounts receivable were entrusted by the seller. If the number of jurisdiction of a party’s incorporation (the jurisdiction of domicile, the debtors is large and the seller is qualified as an originator under in case the party is an individual) bearing upon the capacity of such the Law Concerning Asset-Backed Securitisation of Korea party to enter into contracts; (iii) Korean law, decrees and (“Securitisation Law”), accounts receivables (together with the regulations requiring governmental approvals and authorisations or promissory notes, if any) are also sold through a securitisation consents for actions taken or contracts executed by the parties; and transaction governed by the Securitisation Law, whereby accounts (iv) the governing laws of receivables (i.e., the law of the seller’s receivable can be transferred by the seller to a Special Purpose country) concerning the assignability of the receivables and the Company (“SPC”) or a trustee (by a more simple and convenient

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perfection process as set forth in our answer to question 4.2) which (iii) Consumer Loans issues bonds or beneficial certificates to the investors. All the terms A sale of an unsecured consumer loan and the requirements for the referred to above are customarily used to describe a sale of perfection thereof are not different from sales of other accounts receivables from seller to purchaser. receivable. (iv) Marketable Debt Securities 4.2 Perfection Generally. What formalities are required According to the KPIL, the laws of the country where a bearer bond generally for perfecting a sale of receivables? Are there is located would apply with respect to assignment of the bearer any additional or other formalities required for the sale of bond (Article 21 of the KPIL). In the case of a registered bond, it receivables to be perfected against any subsequent good is generally understood that the governing law of such bond will be faith purchasers for value of the same receivables from Korea the seller? applied with respect to the assignment of such bond. If Korean law is applied, a bearer bond may be transferred by delivery, and a In order for the sale of accounts receivable to be perfected against registered bond may be transferred by delivery and completion of any later purchasers of the same accounts receivable from the seller transfer registration in the bondholders’ registry. If bonds are or to be effective as against the debtor and a third party, the seller deposited at the Korea Securities Depository, such bonds may be must give notice of assignment to the debtor with a fixed-date transferred through book entry. stamp affixed thereon (which means, e.g., a notice of assignment to the debtor by a contents-certified mail via a post office in Korea), 4.4 Obligor Notification or Consent. Must the seller or the or the consent to such assignment with a fixed-date stamp affixed purchaser notify obligors of the sale of receivables in thereon must be obtained from the debtor (Article 450, Paragraph 2 order for the sale to be effective against the obligors of the Civil Code). If accounts receivable are represented by debt and/or creditors of the seller? Must the seller or the securities, such as a promissory note and bill of exchange, or are purchaser obtain the obligors’ consent to the sale of guaranteed by a letter of credit, separate procedures must be taken receivables in order for the sale to be an effective sale against the obligors? Does the answer to this question for the assignment of such instruments or letter of credit, as the case vary if (a) the receivables contract does not prohibit may be. In the case of a securitisation transaction under the assignment but does not expressly permit assignment; or Securitisation Law, if the assignment of accounts receivable from (b) the receivables contract expressly prohibits the seller to an SPC or a trustee is registered with the Financial assignment? Whether or not notice is required to perfect Supervisory Commission of Korea as required by such law, the a sale, are there any benefits to giving notice – such as assignment shall be effective as against third parties (other than the cutting off obligor set-off rights and other obligor debtors) (Article 7 of the Securitisation Law). If the sale of defences? accounts receivable is perfected as above, the sale shall be protected against any subsequent purchasers without any additional or other Unless the assignment of receivables is prohibited or consent of the formalities even though the subsequent purchasers have good faith debtor is required for such assignment under the applicable statute and paid the purchase price. or contract, the seller may assign the receivables by notifying the debtor of such assignment. When such notification is made to the debtor, the assignment will be effective vis-a-vis the debtor (Article 4.3 Perfection for Promissory Notes, etc. What additional or 450, Paragraph 1 of the Civil Code). In addition, if consent of the different requirements for sale and perfection apply to sales of promissory notes, mortgage loans, consumer debtor to the assignment is provided to the seller or the purchaser, loans or marketable debt securities? the assignment shall also become an effective sale against the debtor. Please note, however, that the debtor can have a defence (i) Promissory Notes (including a right of set-off) against the purchaser if the debtor acquired such defence against the seller before the notice of According to the KPIL, the law of the country where the promissory assignment was given to the debtor, or before the consent to the note was endorsed will govern the method of assignment (Article assignment (with reservation of such defence) was given by the 53(1) of the KPIL). If Korean law is applied, assignment of debtor (Article 451 of the Civil Code). Further, notwithstanding the promissory notes would be perfected by endorsement and delivery assignment of the receivables to the purchaser, the seller or the of the promissory note pursuant to the Bills Act. debtor may rescind the receivables contract if the other party (ii) Mortgage Loans breaches such contract. Therefore, the purchaser may need to make Because a mortgage loan is a monetary claim like accounts contractual or other arrangements with the seller (e.g., seller’s receivable, insofar as the loan receivable is concerned, the methods representations and covenants) in order to protect the seller from of sale and perfection of sale are the same as those for accounts such risks. receivable. In order to perfect the assignment of a mortgage from As described in our answer to question 4.2 above, in order for the the seller to the purchaser, such assignment must be registered at the assignment of receivables to be perfected against any later real estate registry maintained at the relevant court. When a purchasers of the same accounts receivable from the seller or to be mortgage loan is assigned from the seller to an SPC or a trustee effective as against third parties, the seller must give notice of under the securitisation transaction governed by the Securitisation assignment to the debtor with a fixed-date stamp affixed thereon Law, the assignment of the loan and the mortgage shall be effective (which means, e.g., a notice of assignment to the debtor by a vis-à-vis a third party (other than the debtor) when such assignment contents-certified mail via a post office in Korea), or the consent to is registered with the Financial Supervisory Commission of Korea. such assignment with a fixed-date stamp affixed thereon must be If the mortgage is a Kun-mortgage where the principal amount of obtained from the debtor (Article 450, Paragraph 2 of the Civil the mortgage debt may fluctuate within the registered maximum Code). mortgage amount, the Kun-mortgage can only be assigned without the consent of the debtor if the principal amount of the mortgage If the receivables contract requires consent from the debtor for the debt has been fixed. Otherwise, the Kun-mortgage cannot be assignment or otherwise prohibits the assignment, the seller or the assigned without consent of the debtor. purchaser must obtain the debtor’s consent to the sale of receivables

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with a fixed-date stamp affixed thereon in order for the sale to be an (by number and/or date), the amount of the receivables, and effective sale against the debtors and third parties (including payment dates are required. The receivables being sold under a creditors of the seller). single sale agreement need not share objective characteristics: Please note, however, that under the Debtor Rehabilitation and different types of receivables with different debtors may be sold Bankruptcy Law, a sale may be avoided by a bankruptcy under one sale agreement. Although there is no court precedent administrator in bankruptcy proceedings and receiver of the debtor directly on point, we do not believe that it would be sufficient company in rehabilitation proceedings if it was perfected (i.e., with identification of receivables if the seller sells all of its receivables to a fixed-date stamp notice/consent) later than 15 days after it takes the purchaser without specifying the obligor and the underlying place and the purchaser had knowledge at the time of the perfection receivables contract.

Korea of such sale that the seller was insolvent (i.e., stopped payment or filed a petition to commence insolvency proceedings). 4.8 Respect for Intent of Parties; Economic Effects on Sale. If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be 4.5 Notice Mechanics. If notice is to be delivered to obligors, respected or will a court enquire into the economic whether at the time of sale or later, are there any characteristics of the transaction? If the latter, what requirements regarding the form the notice must take or economic characteristics of a sale, if any, might prevent how it must be delivered? Is there any time limit beyond the sale from being perfected? Among other things, to which notice is ineffective – for example, can a notice of what extent may the seller retain (a) credit risk; (b) sale be delivered after the sale, and can notice be interest rate risk; and/or (c) control of collections of delivered after insolvency proceedings against the obligor receivables without jeopardising perfection? have commenced? Does the notice apply only to specific receivables or can it apply to any and all (including future) receivables? Are there any other limitations or Although the parties’ intent for the sale would be the primary factor considerations? in determining the true sale nature of the transaction, the court will also enquire into the economic characteristics of the transaction. In Please see our answers to questions 4.2 and 4.4 above. this connection, we note that Article 13 of the Securitisation Law sets forth requirements for a true sale with respect to the transfer of the assets to an SPC in a securitisation transaction implemented 4.6 Restrictions on Assignment; Liability to Obligor. Are under such law. The said Article 13 is a “safe harbour” provision in restrictions in receivables contracts prohibiting sale or order to deem a sale as a true sale, not as the creation of a security assignment generally enforceable in Korea? Are there exceptions to this rule (e.g., for contracts between interest. The requirements are as follows: commercial entities)? If Korea recognises prohibitions on (1) the transfer should be effected by means of a sale and sale or assignment and the seller nevertheless sells purchase or an exchange; receivables to the purchaser, will either the seller or the (2) the transferee should have the right to make profits from, and purchaser be liable to the obligor for breach of contract or the right to dispose of, the securitisation assets; provided that on any other basis? even if the transferor has the right of first refusal to purchase the securitisation assets at the time when the transferee Yes, a contractual prohibition against the assignment of receivables disposes of the assets, the right to make profits from, and the is enforceable and valid under the laws of Korea. This prohibition right to dispose of, the assets shall still be deemed as being can be made effective by mutual agreement among the parties held by the transferee; including commercial entities and there is no particular (3) the transferor should not have right to claim back the requirement, such as the registration of such prohibitions. If the securitisation assets, and the transferee should not have right seller assigns accounts receivable to the purchaser in breach of a to claim back the price paid for the transferred securitisation provision in the receivables contract explicitly prohibiting assets; and assignment of accounts receivable, the seller shall be liable for the (4) the transferee should assume the risks associated with the damages arising from such breach pursuant to the provisions of the securitisation assets; provided that this shall not apply where receivables contract and/or the Civil Code. In addition, if the the transferor retains such risks for a specific period of time or bears warranty liabilities (including the transferor’s purchaser had knowledge of the prohibition of assignment under the warranty for the debtor’s financial capability to pay). contract at the time of the assignment or if the purchaser did not have such knowledge due to its gross negligence, it may not Under the above provisions of the Securitisation Law, it would be exercise the right to the receivables against the debtor (Article 449, against the nature of true sale if the seller retains credit risk or Paragraph 2 of the Civil Code). interest rate risk. With respect to the control of collections on receivables, however, the seller may collect the receivables as a servicer on behalf of the purchaser without jeopardising its legal 4.7 Identification. Must the sale document specifically identify characterisation as a true sale under the Securitisation Law; each of the receivables to be sold? If so, what specific provided that the seller as servicer obtains consent from the SPC or information is required (e.g., obligor name, invoice the business trustee of the SPC to dispose of the sold receivables. number, invoice date, payment date, etc.)? Do the receivables being sold have to share objective Further, apart from the true sale issue, the Securitisation Law characteristics? Alternatively, if the seller sells all of its requires that the collections received by the servicer shall not be receivables to the purchaser, is this sufficient commingled with other assets of the servicer. Although the above identification of receivables? provisions concerning the true sale apply only to the transfer of assets to an SPC in securitisation transactions under the The sale agreement, as well as the notice of assignment to the Securitisation Law, it is possible that the Korean courts may apply debtor or the consent of the debtor to the assignment, must similar standards in determining the true sale nature of other types sufficiently identify the receivables to be sold. In general, the of sale transactions. debtor’s name, the identification of the underlying receivables contract (by date, parties and object), identification of the invoice 230 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kim & Chang Korea

4.9 Continuous Sales of Receivables. Can the seller agree in be the same person and, accordingly, the security may not be granted an enforceable manner (at least prior to its insolvency) to to a third party or a security trustee acting as trustee for the creditor(s). continuous sales of receivables (i.e., sales of receivables In the same context, when receivables are transferred to the purchaser, as and when they arise)? any security related to the receivables should also be transferred to the purchaser accordingly. If not all related security can be transferred to If the receivables to be sold are sufficiently identified under the the purchaser of the receivables, the receivables owned by the contract for continuous sale, such sale would be enforceable as purchaser would no longer be secured by such security which fails to between the seller and the purchaser; provided that enforcement be transferred to the purchaser. Therefore, in such case, the seller may may be affected by the insolvency proceedings of the seller. Each consider: (i) reducing the purchase price of the receivables; or (ii) to individual sale to be made under such continuous sale, however, the extent permitted by law, entering into a participation agreement Korea shall be effective against the debtor and third parties when the with the seller (in lieu of the sale agreement) in respect of all or part relevant receivables actually arise and are assigned by the seller to of the receivables, whereby the receivables held by the grantor of the the purchaser and such assignment is perfected. participation (i.e., the seller) may continue to be secured by all or relevant security. 4.10 Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables 5 Security Issues purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured 5.1 Back-up Security. Is it customary in Korea to take a to be valid and enforceable? Is there a distinction “back-up” security interest over the seller’s ownership between future receivables that arise prior to or after the interest in the receivables and the related security, in the seller’s insolvency? event that the sale is deemed by a court not to have been perfected? Under the Korean Supreme Court precedents, future receivables (i.e. receivables which do not yet exist) may be transferred if: (i) It is not customary in Korea to take a back-up security over the such receivables are “specifiable”; and (ii) it is “reasonably seller’s ownership interest in the receivables and the related security expected” that such receivables will arise “in the near future”. If the when the court deems the sale of such receivables not to be above requirements are met, the seller can assign future receivables perfected. As the perfection requirements for the creation of such to the purchaser by a single sale on a certain date, and may perfect back-up security under Korean law would be the same or similar to the assignment at the time of such sale by the same methods that are the perfection requirements for the sale of the receivables, creating applied to the assignment of existing receivables. Thus, there can a back-up security may not be effective to cover the risk of the be a true sale of receivables that do not yet exist (as in a “future failure to perfect the sale of receivables. Thus, the purchaser may flow” securitisation) if such receivables meet the above consider obtaining security interest in other receivables or assets of requirements, so that a single sale on a certain date (prior to the the seller (other than the receivables to be sold to the purchaser) to insolvency of the seller) results in the purchaser automatically being secure the purchaser’s claims for damages arising from the seller’s the owner of the “sold” receivables immediately when they come failure to perfect the sale of receivables. into existence (both prior to and after the seller’s insolvency). As long as the above requirements are met, as described in our answer to question 6.5, generally there would be no distinction between 5.2 Seller Security. If so, what are the formalities for the seller granting a security interest in receivables and receivables that arise prior to or after the seller’s insolvency. Please related security under the laws of Korea, and for such note, however, that even if a notice of assignment has been made to security interest to be perfected? the debtor for the perfection of the sale of such future receivables, the debtor and the seller may amend the receivables contract We assume that the back-up security is created on either the without the purchaser’s consent, and the receivables assigned to the receivables which will be sold to the purchaser or other receivables purchaser may fail to accrue by virtue of such amendment. which will be retained by the seller. In Korea, a pledge or Therefore, the purchaser may need to make contractual or other assignment by way of security (yangdo-dambo) is generally used to arrangements with the seller (e.g., seller’s representations and establish a security interest over the receivables. Such pledge and covenants) in order to protect the seller from such risk. In this yangdo-dambo may be created and perfected in the manners similar connection, please also note that as described in our answer to to an assignment of accounts receivables. A pledge may be created question 6.5, a bankruptcy administrator in bankruptcy proceedings and perfected by: (i) a pledge agreement between the seller (as the or a receiver of the debtor company in rehabilitation proceedings is pledgor) and the purchaser (as the pledgee); and (ii) giving a notice entitled to either rescind or assume the executory contract. On the of the pledge by the pledgor to, or obtaining consent to the pledge other hand, if either of the above requirements for the transferability from, the debtor of the receivables (assuming that there is no of future receivables is not met, the assignment of the future restriction on the transferability of the receivables). Such notice receivables may be made and perfected only when they have must be given with a fixed-date stamp affixed thereon (e.g., by a actually arisen and prior to the insolvency of the seller. contents-certified mail) and such consent must be obtained with a fixed-date stamp affixed thereon as in the case of an assignment of 4.11 Related Security. Must any additional formalities be receivables. Yangdo-dambo may be created and perfected by: (i) a fulfilled in order for the related security to be transferred yangdo-dambo agreement between the owner of the receivables (as concurrently with the sale of receivables? If not all the assignor) and the creditor (as the assignee); and (ii) giving a related security can be enforceably transferred, what notice of assignment to, or obtaining consent to the assignment methods are customarily adopted to provide the from, the debtor of the accounts receivables in the same manner as purchaser the benefits of such related security? above (assuming that there is no restriction on the transferability of accounts receivable). Granting such a security interest (pledge or Under the Civil Code, the creditor and the holder of security should yangdo-dambo) in the related security should be perfected

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separately in accordance with the requirements applicable to the execution of the relevant security agreement and delivery of the relevant security. Please see our answer to question 5.5 below. insurance policies. Please note that insurance policies often In addition, a new statute allowing the granting of a security right prohibit the assignment of the insurance policies. Please also see over movable assets and claims (including receivables) (Act on our answer to question 5.2 above. Registration of Security Right over Movable Assets, Claims, etc. (ii) Promissory Notes (the “Asset Registration Act”)) was enacted on June 10, 2010 and A pledge or yangdo-dambo can be created and perfected by the will become effective on June 11, 2012. The Asset Registration Act execution of the relevant security agreement, and endorsement and contemplates granting of a security right over a monetary claim in delivery of the promissory note. respect of which the creditor is determined. Such monetary claim (iii) Mortgage Loans Korea includes not just claims that have already arisen but also claims that The methods of creation and perfection of a pledge or yangdo- are expected to arise in the future. The Asset Registration Act also dambo on the loan receivable are the same as in the case of accounts permit granting of a security right over multiple monetary claims so receivable. A pledge or yangdo-dambo on a mortgage (excluding a long as the claims can be separately specified (e.g., by way of type, Kun-mortgage if the principal amount of its mortgage debt has not cause, date, etc.). However, a claim that is not assignable (whether been fixed) may be created and perfected by registering the pledge by contract or law) may not be granted as collateral under the Asset or the assignment in the real estate registry. Please also see our Registration Act. The creation or transfer of this new security right answer to question 5.2 above. over claims is perfected against third parties (but not against the underlying debtor) if and when it is registered in the security (iv) Consumer Loans registry with the court. Perfection against the underlying debtor can A pledge or yangdo-dambo on an unsecured consumer loan may be be achieved by way of (i) the grantor or secured creditor delivering created and perfected in the same manner as a pledge or yangdo- a certificate of security right registration to the underlying debtor, dambo on the accounts receivable. Please also see our answer to or (ii) the consent of the underlying debtor. This perfection method question 5.2 above. is similar to the notice/consent requirement under the Korean Civil (v) Marketable Debt Securities Code and the underlying debtor will be able to exercise set-off A pledge or yangdo-dambo on a bearer bond may be created and rights and any other defences against the grantor that has been perfected by delivery of the bond, and a pledge or yangdo-dambo acquired prior to such notice/consent. on a registered bond may be created and perfected by delivery of the bond and completion of registration in the bondholders’ registry. 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in 5.6 Trusts. Does Korea recognise trusts? If not, is there a favour of the providers of its funding, what formalities mechanism whereby collections received by the seller in must the purchaser comply with in Korea to grant a respect of sold receivables can be held or be deemed to security interest in purchased governed by the laws of be held separate and apart from the seller’s own assets Korea and the related security? until turned over to the purchaser? The formalities for the purchaser granting to its creditor a security Yes, trusts are recognised under Korean law. However, declaration of interest in receivables and related security are the same as the trust by the trustor, which means the trustor and the trustee are the formalities for the seller granting a security interest in receivables same entity (i.e., a ‘self-trust’), is not recognised under Korean law and related security as set forth in our answer to question 5.2 above. except for a self-trust created in accordance with the Securitisation Please also see our answer to question 5.5 below. Law which is rarely used in practice. Please note that the Securitisation Law requires the servicer to separately manage the 5.4 Recognition. If the purchaser grants a security interest in securitisation assets, including money obtained from the management the receivables governed by the laws of Korea, and that and disposal of the securitisation assets from its own assets, and the security interest is valid and perfected under the laws of books for the management of the securitisation assets to be separately the purchaser’s country, will it be treated as valid and prepared and maintained. In this regard, Article 17 of the Rules perfected in Korea or must additional steps be taken in Concerning Asset Securitization Business Regulation for the Korea? Securitisation Law provides that “…‘separate management of securitization assets’… means physically separating the securitization According to Article 23 of the KPIL, the security interest over a assets from the own assets and separately keeping and administrating receivable is governed by the laws governing such receivable. As the relevant evidentiary documents and ‘separate management of such, if a security interest in the receivables is created and perfected by money’ means setting up and managing separate accounts… [and] the purchaser in accordance with the governing law of such ‘preparing and maintaining separate books’… means keeping a receivables, such security interest would be treated as valid and separate management book (book or records) for the securitization perfected in Korea without any additional steps being taken. On the assets”. The collections from the securitisation assets so managed will other hand, such security interest would not be treated as valid and not belong to the insolvency estate of the servicer in the case of the perfected in Korea if such security interest does not satisfy the servicer’s insolvency. However, please note that this protection is requirements of the governing law of the receivables (i.e., Korean law). available only to securitisation transactions under the Securitisation Law. Please also note that an amended Trust Act is scheduled to 5.5 Additional Formalities. What additional or different become effective on July 26, 2012 and the ‘self-trust’ is permitted requirements apply to security interests in or connected to under this amended Trust Act. However, as this is the first time ‘self- insurance policies, promissory notes, mortgage loans, trust’ is being implemented in Korea, it remains to be seen what the consumer loans or marketable debt securities? specific requirements and permitted scope will be (e.g., whether a trust business licence will be necessary for self-trusts for financing (i) Insurance Policies purposes, whether a notice to the underlying obligor or his/her consent A pledge or yangdo-dambo can be created and perfected by the would be required, etc.).

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5.7 Bank Accounts. Does Korea recognise escrow accounts? perfection of the assignment has already been completed, the Can security be taken over a bank account located in exercise of rights by the purchaser would not be prohibited by Korea? If so, what is the typical method? Would courts means of injunction, stay order or other action of the insolvency in Korea recognise a foreign-law grant of security (for official. However, if the sale of the receivables is not recognised as example, an English law debenture) taken over a bank a true sale, the sale of receivables may be regarded as a security account located in Korea? assignment, or yangdo-dambo. In such case, the purchaser will not be deemed as an owner of the receivables but as a security interest Korean law does not acknowledge the concept of escrow, but it holder; and as set forth in the answer to question 6.1 above, the would be possible to achieve similar results through contractual purchaser’s exercise of its rights will be automatically stayed upon means. Security interest can be taken over bank accounts, typically

commencement of general rehabilitation proceedings of the seller, Korea by way of a pledge or a security entrustment. As set forth in our and even before the commencement of such proceedings an answer to question 5.4, the security interest over a receivable is injunction or stay order may be issued by the insolvency court. governed by the law governing such receivable. As such, security However, even if the sale is not recognised as a true sale but as the interest in the bank accounts can be created and perfected in creation of a security interest, the exercise of rights by the purchaser accordance with the governing law of such bank accounts. If the would not be stayed if bankruptcy proceedings or special governing law of the concerned bank account is a foreign law, a rehabilitation proceedings for individual debtors commence against security interest granted pursuant to such foreign law would be the seller, insofar as the perfection of the assignment has been possible, but it could be difficult in practice to have a foreign law already completed. govern an account opened with a bank in Korea.

6.3 Suspect Period (Clawback). Under what facts or 6 Insolvency Laws circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or “preference” period before the commencement of the 6.1 Stay of Action. If, after a sale of receivables that is insolvency proceeding? What are the lengths of the otherwise perfected, the seller becomes subject to an “suspect” or “preference” periods in Korea for (a) insolvency proceeding, will Korea’s insolvency laws transactions between unrelated parties and (b) automatically prohibit the purchaser from collecting, transactions between related parties? transferring or otherwise exercising ownership rights over the purchased receivables (“automatic stay”)? Does the insolvency official have the ability to stay collection and Payments or other acts (such as granting a security interest or the enforcement actions until he determines that the sale is sale of assets) performed by the seller may be avoided by the perfected? Would the answer be different if the insolvency official after commencement of insolvency proceedings purchaser is deemed to only be a secured party rather if, in general, they fall into one of the following four categories: (i) than the owner of the receivables? malicious payments or acts with the actual intent to harm the creditors; (ii) any act detrimental to the creditors which was done If the receivables were transferred to the purchaser as a true sale and after suspension of payment or filing for insolvency proceedings; the assignment was perfected before the commencement of (iii) a payment for an obligation or granting of a security interest insolvency proceedings (i.e., general rehabilitation proceedings, without the pre-existing obligation to do so if such act was made bankruptcy proceedings or special rehabilitation proceedings for after, or within 60 days before, suspension of payment or filing for individual debtors), the purchaser would not be prohibited from insolvency proceedings (the suspect period will be extended from collecting, transferring or otherwise exercising ownership rights 60 days to one year if the specially related party is the counterparty over the receivables upon commencement of insolvency of such act); and (iv) any gratuitous act performed after, or within proceedings. However, if the sale of the receivables was not a true six (6) months before, the suspension of payment or filing for sale (i.e., the purchaser is deemed to only be a secured party rather insolvency proceedings (such six (6)-month period will be extended than the owner of the receivables), then the exercise of the rights to to one year if a specially related party is the counterparty of such the receivables would be automatically stayed upon act). As to the avoidance of perfection of the sale, please refer to commencement of general rehabilitation proceedings of the seller our answer to question 6.1 above. (which is similar to Chapter 11 proceedings under the U.S. Bankruptcy Law). Even if it were a true sale, in the event that the 6.4 Substantive Consolidation. Under what facts or assignment of the receivables has been perfected after the circumstances, if any, could the insolvency official suspension of payment by the seller occurred or a petition for the consolidate the assets and liabilities of the purchaser with commencement of insolvency proceedings was made in respect of those of the seller or its affiliates in the insolvency the seller, the perfection (and accordingly, the ownership right of proceeding? the purchaser) may be avoided by the insolvency official during the insolvency proceedings if the perfection of the assignment was Korean insolvency laws do not have provisions pursuant to which made later than 15 days after the date of the sale and with the insolvency official can consolidate the assets and liabilities of knowledge of the above-mentioned suspension of payment or the purchaser with those of the seller during insolvency petition for insolvency proceedings. proceedings. Outside of insolvency proceedings, there are a few Supreme Court cases where the Court applied the doctrine of 6.2 Insolvency Official’s Powers. If there is no automatic “piercing the corporate veil” by denying the corporate existence of stay, under what circumstances, if any, does the a subsidiary where the parent company had incorporated such insolvency official have the power to prohibit the subsidiary (usually a paper company) for the purpose of harming its purchaser’s exercise of rights (by means of injunction, creditors or circumventing any application of laws or regulations stay order or other action)? against the parent company. In such cases, the Supreme Court held that the assets and liabilities of the subsidiary belonged to the parent If the sale of the receivables is recognised as a true sale and if company. Thus, unless the corporate existence of the purchaser is

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to be denied based on the doctrine established by the above 7.2 Securitisation Entities. Does Korea have laws specifically Supreme Court precedents, the assets and the liabilities of the seller providing for establishment of special purpose entities for and the purchaser would not be consolidated involuntarily during securitisation? If so, what does the law provide as to: (a) insolvency proceedings. requirements for establishment and management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as to the status of 6.5 Effect of Proceedings on Future Receivables. What is the directors or shareholders? effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on The Securitisation Law specifically provides for establishment of an sales of receivables that have not yet come into SPC as a securitisation vehicle. An SPC may be incorporated within Korea existence? or outside of Korea as a company exclusively engaging in the securitisation business. The SPC incorporated in Korea (“Korean With respect to (a), if a sale of receivables (e.g., an individual sale SPC”) shall be in the form of a limited liability company (yuhan- under continuous sales) has not occurred at the time of the hoesa). The Korean SPC may not establish a branch nor hire an commencement of insolvency proceedings, and if the sale employee. Under the Securitisation Law and Korean tax laws, various agreement is an executory contract and the obligations of the seller benefits in perfection procedures and tax benefits are granted to the and the purchaser remain outstanding as of the commencement of SPC or the Korean SPC. There are no specific requirements as to the the insolvency proceedings, the insolvency official of the seller or status of directors or equity holders. Under the Securitisation Law, the the purchaser is entitled to either rescind or assume such sale servicing of the SPC’s assets must be delegated to a qualified servicer, agreement pursuant to insolvency laws. and the corporate and other administrative matters of the Korean SPC With respect to (b), if the sale of future receivables: (i) has met the (other than the matters that require equity holders’ resolutions, the requirements for the transferability as mentioned in the answer to matters that belong to a director’s power to represent the company and question 4.10 above; (ii) is a true sale; and (iii) has been perfected the matters that belong to the power of an internal auditor) must be before the commencement of insolvency proceedings, the delegated to a business trustee. Further, in order to protect investors’ discussions in the answer to question 6.1 above would generally interest, the Securitisation Law provides that a resolution of the equity apply. Namely, if the assignment of future receivables and holders of the Korean SPC which is contrary to the securitisation plan perfection of the assignment have been completed before the or prejudices the rights of the holders of the securities issued by the commencement of insolvency proceedings against the seller, the Korean SPC shall be null and void. exercise by the purchaser of ownership rights over the future receivables would not be stayed or affected by the insolvency 7.3 Non-Recourse Clause. Will a court in Korea give effect to proceedings of the seller. However, if the receivables contract is an a contractual provision (even if the contract’s governing executory contract and the obligations of the seller and the debtor law is the law of another country) limiting the recourse of remain outstanding as of the commencement of the insolvency parties to available funds? proceedings, the insolvency official is entitled to either rescind or assume such contract pursuant to insolvency laws. In the case of The contractual provision limiting the recourse of parties to rescission of the receivables contract, the purchaser may not acquire available funds are generally considered valid and we believe that ownership rights over the future receivables since the receivables the Korean courts would give effect to such contractual provision may not actually arise due to such rescission. even if the contract’s governing law is not Korean law.

7 Special Rules 7.4 Non-Petition Clause. Will a court in Korea give effect to a contractual provision (even if the contract’s governing law is the law of another country) prohibiting the parties from: 7.1 Securitisation Law. Is there a special securitisation law (a) taking legal action against the purchaser or another (and/or special provisions in other laws) in Korea person; or (b) commencing an insolvency proceeding establishing a legal framework for securitisation against the purchaser or another person? transactions? If so, what are the basics? With respect to (a), a contractual provision (even if the contract’s The Securitisation Law is the special law governing securitisation governing law is not Korean law) prohibiting the parties from taking transactions. The Securitisation Law basically provides that: (i) if a legal actions (other than insolvency or certain other exceptional qualified originator (owner of securitisation assets) transfers its assets proceedings) is generally considered valid and we believe that Korean to an SPC in a manner of “True Sale” (as such term is defined under courts would give effect to such contractual provisions. the Securitisation Law), such transfer shall not be deemed as a secured loan transaction; and (ii) the originator may entrust its assets With respect to (b), although we are not aware of any Korean court to a trust established with a licensed trust company which will serve precedent relating directly to this point, a contractual provision as a securitisation vehicle. For securitisation, the SPC or the trustee prohibiting parties (other than the obligor) from petitioning for the shall register a securitisation plan and the originator shall also register commencement of insolvency proceedings (even if the contract’s the transfer of the securitisation assets, respectively, with the governing law is not Korean law) is generally considered valid and Financial Supervisory Commission. Further, the Securitisation Law we believe that Korean courts would give effect to such provision. provides for a more simple and convenient perfection process as set Notwithstanding the foregoing, we cannot rule out the possibility forth in our answers to questions 4.2 and 4.3. that a court would not reject a petition filed in violation of such contractual provisions solely based on such contractual provision. Further, we note that such contractual provision prohibiting the obligor from petitioning for the commencement of insolvency proceedings in respect of itself may not be valid, as discussed in our answer to question 7.5 below.

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7.5 Independent Director. Will a court in Korea give effect to Securitisation Law (in which case defaulted receivables can be a contractual provision (even if the contract’s governing serviced by a qualified servicer under the Securitisation Law, which law is the law of another country) or a provision in a includes the originator, without having obtained a collection business party’s organisational documents prohibiting the directors licence), a specific licence (i.e., a collection business licence) is from taking specified actions (including commencing an required for the servicing of defaulted receivables, including when the insolvency proceeding) without the affirmative vote of an originator acts as servicer. Likewise, whether a particular type of independent director? entity may act as servicer will require a review of the statutes and regulatory provisions applicable to that entity. Generally, only a It is not clear whether a Korean court would give effect to such a licensed attorney may appear before a court in Korea. contractual provision (whether or not the contract’s governing law is Korean law). If a provision is provided for in a Korean Korea company’s organisational documents (e.g., articles of 8.3 Data Protection. Does Korea have laws restricting the incorporation), such provision would be considered invalid. use or dissemination of data about or provided by Further, in the case of insolvency proceedings, the obligor’s right to obligors? If so, do these laws apply only to consumer seek commencement of insolvency proceedings in respect of itself obligors or also to enterprises? is a fundamental right granted to the obligor by law and aims at fair and equitable treatment of creditors. Therefore, we believe that the The Use and Protection of Credit Information Act of Korea restricts provisions included in the contract or the articles of incorporation the use or dissemination of credit information about the debtors. or other organisational documents of the obligor that prohibits the Whilst this law applies to both enterprise debtors and individual obligor company or its directors from applying for commencement debtors (regardless of whether or not they are consumer debtors), it of insolvency proceedings may not be valid. provides for stricter restrictions to protect credit information regarding the debtors who are individuals. In addition, the Personal Information Protection Act (“PIPA”) 8 Regulatory Issues became effective on September 30, 2011. When personal information of individuals is being collected, PIPA in principle 8.1 Required Authorisations, etc. Assuming that the requires the consent of each individual. PIPA treats the person purchaser does no other business in Korea, will its collecting such personal information as a personal information purchase and ownership or its collection and enforcement processor and it would be prudent to obtain the consent of the of receivables result in its being required to qualify to do individuals at the time such information is being collected. PIPA in business or to obtain any licence or its being subject to principle also requires the consent of the individual when the regulation as a financial institution in Korea? Does the individual’s personal information is being provided to third parties. answer to the preceding question change if the purchaser A simple notification to the relevant individuals that his/her does business with other sellers in Korea? personal information may be transferred will not be sufficient for the purpose of complying with PIPA. Generally, other than certain applicable FX requirements, the purchaser would not be required to qualify to do business in Korea or to obtain a licence in Korea, or be subject to regulations as a financial 8.4 Consumer Protection. If the obligors are consumers, will institution in Korea solely as a result of: (i) the purchase and the purchaser (including a bank acting as purchaser) be ownership of the receivables; (ii) passively collecting the receivables required to comply with any consumer protection law of from outside Korea; or (iii) initiating legal proceedings for Korea? Briefly, what is required? enforcement purposes when the receivables are defaulted. However, if the purchaser conducts business activities for purchasing and The consumer protection laws of Korea include, among others: (i) servicing loan receivables on a continuous basis, the purchaser will the Framework Act on Consumers, which provides general be required to be registered with the relevant municipality in principles to protect consumers’ rights; (ii) the Instalment accordance with the Lending Business Act. Further, if the purchaser Transactions Act, the Door-to-Door Sales Act and the Act on the conducts business activities for the purchasing and/or the servicing of Consumer Protection in Electronic Commerce Transactions, etc., receivables including loan receivables in Korea, a business presence which regulate certain transactions to prevent unfair infringement may be created which may give rise to tax or regulatory issues. on consumer rights through special forms of transactions such as an Various factors need to be considered on a case-by-case basis to instalment transaction, door-to-door sale or electronic commerce determine whether the purchaser is considered engaging in business transaction; and (iii) the Law Concerning Regulation of Adhesion in Korea in relation to the purchase of the receivables. Contracts, which regulates and invalidates certain unreasonably unfair general terms and conditions of an adhesion contract in order to protect the interests of the consumers. Under the KPIL, if a 8.2 Servicing. Does the seller require any licences, etc., in contract is a receivables contract with a consumer debtor as set forth order to continue to enforce and collect receivables in our answers to questions 2.1 and 2.3, and if the country of the following their sale to the purchaser, including to appear consumer’s habitual residence is Korea, the consumer shall not be before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect deprived of the protections provided pursuant to the mandatory sold receivables? laws of Korea, even if the governing law of the receivable contract is not Korean law (Article 27(1) of KPIL). In general, the seller will be allowed to service and manage the receivables transferred to the purchaser. Likewise, there is no 8.5 Currency Restrictions. Does Korea have laws restricting general prohibition or legal requirement applicable to a third party the exchange of Korea’s currency for other currencies or entity being appointed as the servicer of the receivables. Whether the making of payments in Korea’s currency to persons any licences, etc., will be required will depend on the type of asset outside the country? that has been transferred and who the servicer is. For example, unless the securitisation transaction is done pursuant to the Under the Foreign Exchange Transactions Act and the Regulations

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thereunder (the “FETR”), when a prior report on the underlying 9.4 Value Added Taxes. Does Korea impose value added transaction has been made (unless such reporting is exempted under tax, sales tax or other similar taxes on sales of goods or the FETR): (i) the exchange of Korean Won (or a foreign currency) services, on sales of receivables or on fees for collection to another foreign currency and remittance of such foreign currency agent services? to a party within or outside Korea may be made without further restrictions thereon; and (ii) the making of payments in Korean Won Value-added tax (“VAT”) is imposed upon the supply of goods, to a non-resident may be made if such payment is made into a non- services, and importation of goods at the rate of 10%. Business resident free Won account of such person opened in a foreign entities are required to collect and pay to the relevant tax office VAT exchange bank in Korea, from which account the non-resident may collected from purchasers. Goods for exportation and services provided outside Korea are subject to zero-rate VAT. Since Korea from time to time remit funds to a party overseas after converting the funds into a foreign currency. receivables are not considered goods for VAT purposes, a sale of receivables is not subject to VAT. In addition, the collection agent service is a VAT-exempt service under the VAT Law, insofar as the 9 Taxation collection agent service is provided by a licensed debt collection company by December 31, 2012. 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser 9.5 Purchaser Liability. If the seller is required to pay value be subject to withholding taxes in Korea? Does the added tax, stamp duty or other taxes upon the sale of answer depend on the nature of the receivables, whether receivables (or on the sale of goods or services that give they bear interest, their term to maturity, or where the rise to the receivables) and the seller does not pay, then seller or the purchaser is located? will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold The interest income paid by a Korean debtor will be subject to receivables or collections? withholding taxes in the following cases: (i) if the payee (i.e., the seller or the purchaser) is a domestic company (excluding a In the case of sales of receivables, the purchaser would not be liable financial institution); (ii) if the payee is a foreign company having for such tax obligations of the seller. In the case where receivables a permanent establishment in Korea, when the revenues from the are transferred as a part of a comprehensive business transfer, the receivables are attributable to such permanent establishment purchaser may be liable for all taxes payable by the seller with (excluding a financial institution); or (iii) if the payee is a foreign respect to the transferred business if seller does not have sufficient company without a permanent establishment in Korea. In the case assets to discharge such tax obligations. of (iii), the amount of withholding tax may be reduced or exempted by the applicable tax treaty between Korea and the country of the 9.6 Doing Business. Assuming that the purchaser conducts payee’s registered head office. no other business in Korea, would the purchaser’s purchase of the receivables, its appointment of the seller 9.2 Seller Tax Accounting. Does Korea require that a specific as its servicer and collection agent, or its enforcement of accounting policy is adopted for tax purposes by the the receivables against the obligors, make it liable to tax seller or purchaser in the context of a securitisation? in Korea?

In general, Korean Generally Accepted Accounting Principles In theory, when the purchaser is a resident of a country which has a (“Korean GAAP”) will apply to the seller or the purchaser in Korea tax treaty with Korea, the onshore servicer’s actions on behalf of the in the context of a securitisation. If the purchaser is an SPC purchaser should not give rise to a permanent establishment (“PE”) incorporated pursuant to the Securitisation Law, the Accounting risk if either of the following conditions are satisfied: (i) the Principles for Securitisation Companies will also apply. The servicer neither has/exercises any discretionary authority, nor Korean GAAP and, if relevant, the above Accounting Principles for concludes any contracts on behalf of the purchaser; or (ii) the Securitisation Companies, are generally applied for tax accounting servicer is acting in the ordinary course of its business, and is thus purposes. From 2011, if the seller is a listed company or a financial legally and economically independent from the purchaser. institution, Korean International Financial Reporting Standards (K- Notwithstanding the above theoretical considerations, it may be IFRS) has been applied as Korean GAAP. difficult for the servicer not to exercise any discretionary authority or not to determine certain terms and conditions of contracts (i.e., satisfy the condition (i) above). If an offshore purchaser is deemed 9.3 Stamp Duty, etc. Does Korea impose stamp duty or other to have a PE in Korea by virtue of the servicer’s activities in Korea, documentary taxes on sales of receivables? the business profits attributable to such a PE will be subject to Korean corporate income tax, VAT and other taxes. If a sale of receivables is a true sale, no stamp duty or other documentary taxes are imposed with respect to the sale agreement. If the sale of receivables is recognised not as a true sale but as a secured loan, and the purchaser (i.e., the lender) or the seller (i.e., the borrower) is a Korean financial institution, stamp duty must be paid for each original of the sale agreement executed in Korea.

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Yong-Ho Kim Hoin Lee

Kim & Chang Kim & Chang 39 Sajik-ro 8-gil 39 Sajik-ro 8-gil (Seyang Bldg., Naeja-dong) (Seyang Bldg., Naeja-dong) Jongno-gu, Seoul 110-720 Jongno-gu, Seoul 110-720 Korea Korea Tel: +822 3703 1019 Tel: +822 3703 1682 Fax: +822 737 9091 Fax: +822 737 9091 Email: [email protected] Email: [email protected] URL: www.kimchang.com URL: www.kimchang.com Korea Yong-Ho Kim is a senior attorney in the firm’s banking practice Hoin Lee is a senior foreign attorney in the firm’s banking and group and heads the structured finance practice group. structured finance groups. Mr. Kim’s expertise covers a wide range of cross-border and Mr. Lee has extensive experience representing issuers, domestic financial transactions, with an emphasis on asset underwriters, lenders, swap counterparties, institutional securitisation, ABCP conduit programme, credit derivatives and investors, arrangers, collateral managers and structuring agents real estate project financing, as well as development of new in various types of structured financings (in particular, financial products. securitisations of financial assets) and capital market Mr. Kim has been very closely involved in the development in transactions. He also has extensive experience advising banks Korea of laws and regulations on asset securitisation and related and other financial institutions on banking and financial regulatory matters. Mr. Kim served as the primary drafter of the Law matters. Concerning Asset-Backed Securitization of Korea enacted in Mr Lee received his BA in law from Seoul National University and 1998, and also participated in the subsequent drafting of related his JD from New York University School of Law. He is a member laws, such as the Housing Mortgage-Backed Securitization of the New York Bar. Company Act enacted in 1999 and the Korea Housing Finance Corporation Act enacted in 2003. Mr. Kim received his BA in law from Seoul National University and his LLM from Cornell Law School. He is admitted to the bar in Korea and New York.

Kim & Chang is widely recognised as Korea’s premier law firm. Established in 1973, the firm has set the standard for excellence for legal services in every major area of practice including corporate/m&a, antitrust, banking & finance, dispute resolution, intellectual properties as well as other specialties from industry sector. Having advised in the majority of major transactions, projects, and cases in Korea, the firm has earned an unrivalled track record for developing innovative solutions to the increasingly complex legal challenges that clients face, both in Korea and increasingly overseas. The outstanding quality of Kim & Chang’s professionals who number more than 800 today is the main source of the success. Its Korea- and overseas-trained attorneys, foreign attorneys, and other professionals who served in the public sector offer a breadth and depth of resources, far beyond that offered by any other law firm in Korea.

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Cervantes Sainz, S.C. Alejandro Sainz

1 Receivables Contracts 1.3 Government Receivables. Where the receivables contract has been entered into with the government or a government agency, are there different requirements and 1.1 Formalities. In order to create an enforceable debt laws that apply to the sale or collection of those obligation of the obligor to the seller, (a) is it necessary receivables? that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone Yes. Government entities acting as sellers are subject to special sufficient; and (c) can a receivable “contract” be deemed laws and, thus, different requirements apply to agreements to exist as a result of the behaviour of the parties? assigning receivables owned by the Mexican Government or Mexican Government agencies. The scope and the kind of different It depends on the goods or services to be transferred. As provided requirements to be fulfilled depend on the Government and the in the Federal Civil Code (“Civil Code”) of the United Mexican Government agency itself and their nature in accordance with States (“Mexico”), the general rule is that the transfer of real estate Mexican administrative law. property or rights in rem on real estate property must be evidenced by a written agreement and formalised, in some cases, before a Notary Public. However, the transfer of property of mobile goods 2 Choice of Law – Receivables Contracts and rights in rem in connection with such kinds of goods, as well as the transfer of rights to services, is effective upon an agreement 2.1 No Law Specified. If the seller and the obligor do not between the seller and buyer being reached, regardless of such specify a choice of law in their receivables contract, what agreement being evidenced in a document or not. However, in any are the main principles in Mexico that will determine the case, it is convenient to evidence the sale of goods or services with governing law of the contract? a written agreement for purposes of having an enforceable obligation of the obligor to the seller. Notice to the obligor is Basically, the creation, regime and termination of rights in rem on needed when receivables are assigned so that the obligor real estate property, leasing of real estate property agreements and acknowledges that payments are to be made to the assignee instead agreements regarding the limited time use of such kinds of goods, of to the seller. In certain agreements it may be required to obtain as well as mobile goods located in Mexico, will be governed by the the obligor’s agreement to effectuate the assignment of the laws of Mexico. Other commercial or mercantile agreements receivables. executed between parties will be governed by the laws contractually agreed by the parties, or in absence of such agreement by the laws 1.2 Consumer Protections. Do Mexico’s laws (a) limit rates of of the place in which the contract was executed. interest on consumer credit, loans or other kinds of receivables; (b) provide a statutory right to interest on late 2.2 Base Case. If the seller and the obligor are both resident payments; (c) permit consumers to cancel receivables for in Mexico, and the transactions giving rise to the a specified period of time; or (d) provide other noteworthy receivables and the payment of the receivables take rights to consumers with respect to receivables owing by place in Mexico, and the seller and the obligor choose the them? law of Mexico to govern the receivables contract, is there any reason why a court in Mexico would not give effect to No. There is no limitation on interest rates on consumer credits, their choice of law? loans or other kinds of receivables. The Mexican Central Bank (Banco de México) is the authority that may impose limits on No, there is no reason. interest rates. As of this date, such authority has not imposed any limitations. Moreover, the Mexican Supreme Court (Suprema Corte de Justicia de la Nación) has ruled that it is legal for banks to charge interest on interest.

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2.3 Freedom to Choose Foreign Law of Non-Resident Seller 3.3 Example 2: Assuming that the facts are the same as or Obligor. If the seller is resident in Mexico but the Example 1, but either the obligor or the purchaser or both obligor is not, or if the obligor is resident in Mexico but the are located outside Mexico, will a court in Mexico seller is not, and the seller and the obligor choose the recognise that sale as being effective against the seller foreign law of the obligor/seller to govern their receivables and other third parties (such as creditors or insolvency contract, will a court in Mexico give effect to the choice of administrators of the seller), or must the requirements of foreign law? Are there any limitations to the recognition the obligor’s country or the purchaser’s country (or both) of foreign law (such as public policy or mandatory be taken into account? principles of law) that would typically apply in commercial relationships such that between the seller and the obligor Both requirements of the obligor’s and the purchaser’s countries under the receivables contract?

will be taken into account. A Mexican court should recognise any Mexico foreign court resolution that transfers are valid pursuant to foreign Besides those cases in which the receivables represent collection laws and that transfers have been validly performed without rights to real estate property, in which case the law governing the affecting creditors in accordance with foreign insolvency laws, if all assignment of such rights and the transactions thereon would be the requirements of article 1347-A of the Mexican Commerce Code Mexican law, the seller and the obligors may choose another law (Código de Comercio) are duly fulfilled to have a foreign court different from Mexican law. resolution acknowledged, recognised and validated.

2.4 CISG. Is the United Nations Convention on the 3.4 Example 3: If (a) the seller is located in Mexico but the International Sale of Goods in effect in Mexico? obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, (c) the seller Yes, it is. sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables 3 Choice of Law – Receivables Purchase purchase agreement, and (e) the sale complies with the Agreement requirements of the obligor’s country, will a court in Mexico recognise that sale as being effective against the seller and other third parties (such as creditors or 3.1 Base Case. Does Mexico’s law generally require the sale insolvency administrators of the seller) without the need of receivables to be governed by the same law as the law to comply with Mexico’s own sale requirements? governing the receivables themselves? If so, does that general rule apply irrespective of which law governs the Yes, parties may freely choose the law governing the receivables receivables (i.e., Mexico’s laws or foreign laws)? transfer or sale agreement. Assuming that the sale of receivables by the seller to the obligor is not limited or prohibited by law or by Yes, provided that the receivables are not rights in rem as mentioned agreement between the seller and obligor and provided that the in questions 2.1 and 2.3 above. A Mexican court would give effect transfer is not performed within the mentioned 270-day “claw to their choice of law. However, it is important to consider that back” period provided for under the Mexican Insolvency Act (Ley pursuant to the Mexican Commerce Code (Código de Comercio) in de Concursos Mercantiles) in the case of a possible insolvency the absence of a fixed domicile of the parties in the sale agreement, (concurso) of the seller, the sale should be valid and recognised by the Judge of the place where the contract was entered into shall be a Mexican court. competent to act when the action is personal, and that of the location of the property when the action pertains to real estate property. In principle, we do not foresee any exceptions to this rule. 3.5 Example 4: If (a) the obligor is located in Mexico but the seller is located in another country, (b) the receivable is governed by the law of the seller’s country, (c) the seller 3.2 Example 1: If (a) the seller and the obligor are located in and the purchaser choose the law of the seller’s country Mexico, (b) the receivable is governed by the law of to govern the receivables purchase agreement, and (d) Mexico, (c) the seller sells the receivable to a purchaser the sale complies with the requirements of the seller’s located in a third country, (d) the seller and the purchaser country, will a court in Mexico recognise that sale as choose the law of Mexico to govern the receivables being effective against the obligor and other third parties purchase agreement, and (e) the sale complies with the (such as creditors or insolvency administrators of the requirements of Mexico, will a court in Mexico recognise obligor) without the need to comply with Mexico’s own that sale as being effective against the seller, the obligor sale requirements? and other third parties (such as creditors or insolvency administrators of the seller and the obligor)? Yes, the Mexican courts should recognise such transfer for the same reasons and subject to the same limitations set forth in question 3.4 Yes, provided that the sale of the receivables to the obligor is not above. limited or prohibited by law or by agreement between the seller and the obligor. Additionally, in respect to the creditors of the obligor and the seller in an scenario of a insolvency of either the obligor or the seller, transfers of the receivables from the obligor to the seller and from seller to purchaser should be valid and not questioned by a Mexican court if such transfers are not performed within the 270 calendar-day “claw back” period provided for in the Mexican Insolvency Act (Ley de Concursos Mercantiles).

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3.6 Example 5: If (a) the seller is located in Mexico by law or by previous agreement between the seller and obligor, or (irrespective of the obligor’s location), (b) the receivable is (ii) by the nature of the right to be assigned, making such governed by the law of Mexico, (c) the seller sells the assignment impossible. Therefore, provided that there is no receivable to a purchaser located in a third country, (d) limitation as to the assignment and transfer of the receivables and the seller and the purchaser choose the law of the accounts receivable to the Trustee, only a written notice of the purchaser’s country to govern the receivables purchase assignment and transfer to the SPV addressed to the obligor is agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in required (the “Notice”). The Notice must be given either by an Mexico recognise that sale as being effective against the officer of a court or out-of-court by a document witnessed by two seller and other third parties (such as creditors or witnesses or even formalised before a Mexican notary public. insolvency administrators of the seller, any obligor located

Mexico The Notice is required, so any payment to be made under the in Mexico and any third party creditor or insolvency receivables and the accounts receivables is directed to the assignee administrator of any such obligor)? only and not to the assignor (the seller) as from the date of the Assignment Agreement. Yes, the Mexican courts should recognise such transfer for the same If rights in rem on real estate property are to be assigned, then such reasons and subject to the limitations expressed in question 3.4 assignment and transfer must be recorded in the public registry of above. the property of the place in which the real estate property is located. Entities of the Mexican financial system, including banks and other 4 Asset Sales financial institutions, are entitled to avoid giving Notice to the obligors and to record the assignment and transfer in the public registry of the property, as long as the assignor acts, not only as the 4.1 Sale Methods Generally. In Mexico what are the seller, but as the servicer as well. customary methods for a seller to sell receivables to a purchaser? What is the customary terminology – is it called a sale, transfer, assignment or something else? 4.3 Perfection for Promissory Notes, etc. What additional or different requirements for sale and perfection apply to The seller usually enters into an assignment agreement with the sales of promissory notes, mortgage loans, consumer purchaser (the “Assignment Agreement”). By the Assignment loans or marketable debt securities? Agreement, the assignor (the seller) irrevocably assigns and transfers the property of the receivables and the accounts receivable In the case of promissory notes, such negotiable instruments must to the assignee (the purchaser). The transfer of the receivables is be endorsed by the seller in favour of the Trustee, as assignee, as not considered a loan having the receivables as collateral. provided in the Mexican General Law on Negotiable Instruments Usually, the purchaser is a trustee (the “Trustee”). The Trustee and Credit Transactions (Ley General de Títulos y Operaciones de shall receive the assigned and transferred receivables and the Crédito). No other formalities are generally required, but those accounts receivables. Such receivables and accounts receivable mentioned in question 4.2 above. will be part of the corpus of a trust specifically created, as a special purpose vehicle (“SPV”), to manage such receivables and accounts 4.4 Obligor Notification or Consent. Must the seller or the receivables, as well as other assets forming the wealth of the SPV. purchaser notify obligors of the sale of receivables in Additionally, one on the main purposes of the Trust is to issue the order for the sale to be effective against the obligors securities that will later be publicly traded on the Stock Exchange. and/or creditors of the seller? Must the seller or the purchaser obtain the obligors’ consent to the sale of Since the transfer of receivables and accounts receivable under the receivables in order for the sale to be an effective sale Assignment Agreement to the Trustee is effective and definitive, in against the obligors? Does the answer to this question principle such assets should no longer be subject to risks of further vary if (a) the receivables contract does not prohibit foreclosure in case of the insolvency proceeding of the seller. It is assignment but does not expressly permit assignment; or customary to use any of such terminologies but it is more usual to (b) the receivables contract expressly prohibits use the terminology “Assignment Agreement” (Contrato de Cesión assignment? Whether or not notice is required to perfect de Derechos). a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor defences? 4.2 Perfection Generally. What formalities are required generally for perfecting a sale of receivables? Are there Yes. Despite the legal validity and effectiveness of the assignment any additional or other formalities required for the sale of and transfer of the receivables and accounts receivable upon the receivables to be perfected against any subsequent good faith purchasers for value of the same receivables from execution of the Assignment Agreement, the Trustee shall be the seller? entitled to require payment to the obligor only if the Notice is given. Otherwise, the obligor may discharge its payment obligation by The assignment and transfer of receivables and accounts receivable paying to the assignor, as original creditor. The Notice itself has no is valid upon agreement between the seller and the Trustee. impact on the obligor’s set off rights and other obligor defences. However, it is necessary to evidence such assignment and transfer Said rights and defences have their origin in law and in the obligor’s by the Assignment Agreement. In some cases, such assignment and and seller’s agreement. For that reason, even the Notice itself has transfer must be evidenced in a Mexican public deed depending on no impact in connection with those rights and defences, it would be the nature of the right itself to be assigned (i.e. rights in rem to real convenient to have the transfer notified to the obligor to prevent any estate property). intention of the obligor to claim such rights and defences since they have been transferred to the purchaser. It would be important to No consent on the side of the obligor is required by the seller to determine whether or not such receivables transferred to the assign and transfer the receivables and accounts receivable to the purchaser are subject to limitations derived from certain other Trustee, unless (i) such assignment and transfer is prohibited either obligors’ rights or not.

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4.5 Notice Mechanics. If notice is to be delivered to obligors, 4.8 Respect for Intent of Parties; Economic Effects on Sale. whether at the time of sale or later, are there any If the parties denominate their transaction as a sale and requirements regarding the form the notice must take or state their intent that it be a sale will this automatically be how it must be delivered? Is there any time limit beyond respected or will a court enquire into the economic which notice is ineffective – for example, can a notice of characteristics of the transaction? If the latter, what sale be delivered after the sale, and can notice be economic characteristics of a sale, if any, might prevent delivered after insolvency proceedings against the obligor the sale from being perfected? Among other things, to have commenced? Does the notice apply only to specific what extent may the seller retain (a) credit risk; (b) receivables or can it apply to any and all (including future) interest rate risk; and/or (c) control of collections of receivables? Are there any other limitations or receivables without jeopardising perfection? considerations? Mexico The assignment and transfer of the receivables to the SPV is Notice is normally given in written and it would be convenient to perfected between the parties upon the execution of the Assignment formalise it before a Mexican notary public or any other public Agreement. Usually, the SPV and the legal structure created using attestor, such as a Mexican corredor public. Usually the notice of the Trust have the purpose of isolating the wealth used to fulfil transfer is simultaneously informed to the obligor or within the next payment obligations preventing the seller to retain credit and days following the transfer from seller to purchaser. Notice may be interest rate risks; in other words the assignment and transfer of used for current and future receivables. Limitations or prohibitions assets to the SPV is a True Sale. Actually, the seller retains the to the transfer of the receivables may arise only if the transfer is control of collections and acts as servicer on behalf of the Trustee. limited by law or by agreement between obligor and seller. A servicing agreement is executed between the seller and the Trustee for such purpose. However, in case of any wrong 4.6 Restrictions on Assignment; Liability to Obligor. Are performance of the seller under the servicing agreement, a restrictions in receivables contracts prohibiting sale or substitute servicer, obviously different from the seller, would assignment generally enforceable in Mexico? Are there collect payments for the Trustee for the final benefit of the holders exceptions to this rule (e.g., for contracts between of debt securities. commercial entities)? If Mexico recognises prohibitions on sale or assignment and the seller nevertheless sells receivables to the purchaser, will either the seller or the 4.9 Continuous Sales of Receivables. Can the seller agree in purchaser be liable to the obligor for breach of contract or an enforceable manner (at least prior to its insolvency) to on any other basis? continuous sales of receivables (i.e., sales of receivables as and when they arise)? The general rule is that no consent is required from the obligor to Yes. Unless, other (i) agreements (containing specific negative assign and transfer the receivables and the accounts receivable or covenants) to which the seller is party, (ii) court orders, or (iii) any other right as well. However, restrictions to the free assignment specific laws preclude the seller to do so. and transfer of rights may be imposed either by law or by contract or even by the nature of the right itself to be assigned to the SPV. Yes. The seller in such a case would be liable for damages caused 4.10 Future Receivables. Can the seller commit in an to the obligor as a consequence of the actual assignment of enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables receivables, provided that such assignment and transfer was purchase agreement (e.g., “future flow” securitisation)? If expressly forbidden. so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction 4.7 Identification. Must the sale document specifically identify between future receivables that arise prior to or after the each of the receivables to be sold? If so, what specific seller’s insolvency? information is required (e.g., obligor name, invoice number, invoice date, payment date, etc.)? Do the Yes, it can. The sale of future receivables shall be structured in the receivables being sold have to share objective same manner as current receivables are sold to be valid and characteristics? Alternatively, if the seller sells all of its enforceable. receivables to the purchaser, is this sufficient identification of receivables? 4.11 Related Security. Must any additional formalities be It is strongly advisable that the Assignment Agreement contains a fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all description of the receivables and the accounts receivable assigned related security can be enforceably transferred, what thereunder. The list of such receivables is attached to the methods are customarily adopted to provide the Assignment Agreement, so further lists may be part of said purchaser the benefits of such related security? agreement as so required from time to time. However, if the rights to be assigned and transferred under the Assignment Agreement The assignment and transfer of a credit right implies also the may be generally identified, there is no need to specifically describe transfer of all accessory rights including related securities such as in detail each receivable assigned and transferred to the SPV. A mortgages, bonds, or pledges and even accrued interests, if any. general description on the characteristics of the rights to be assigned The concurrent transfer of rights and accessory rights as related and transferred would be sufficient. The rationale is that the security is mandatory, unless such accessory rights are personal receivables and the accounts receivable to be assigned and rights of the seller, in which case, as a consequence of such quality transferred are or may be determined pursuant to the Assignment or kind of rights, they cannot be separated, and thus, the related Agreement. security cannot be assigned to the purchaser. Formalities regarding the registration in the corresponding registries of related securities must be fulfilled.

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5 Security Issues has to be made; (iv) the date and place of payment; (v) the date and place in which the promissory note is being executed; and (vi) the signature of the obligor or obligors. 5.1 Back-up Security. Is it customary in Mexico to take a “back-up” security interest over the seller’s ownership If the price of the asset that is being mortgaged exceeds 375 times interest in the receivables and the related security, in the the daily minimum wage (approximately US$1,700.00), the event that the sale is deemed by a court not to have been mortgage has to be granted before a Mexican notary public and, in perfected? the event of default, the asset would need to be transferred before a notary public. No. It is not customary to take a back up security over the seller’s

Mexico ownership interest. Notwithstanding the foregoing, it is customary 5.6 Trusts. Does Mexico recognise trusts? If not, is there a to get additional receivables from the seller. Mexican courts will mechanism whereby collections received by the seller in analyse whether the assignment of the assets is legal or not. respect of sold receivables can be held or be deemed to Therefore transferring additional receivables protects the security be held separate and apart from the seller’s own assets holder’s rights. until turned over to the purchaser?

5.2 Seller Security. If so, what are the formalities for the Mexico does recognise Trusts. Trusts are used as a mechanism seller granting a security interest in receivables and whereby collections received by the seller in respect of sold related security under the laws of Mexico, and for such receivables can be held or be deemed held separate and apart from security interest to be perfected? the seller’s own assets until turned over to the purchaser.

As explained above, the formalities depend on the nature of the 5.7 Bank Accounts. Does Mexico recognise escrow rights that are being transferred. In certain cases, it is necessary to accounts? Can security be taken over a bank account transfer the right before a Notary Public in the form of a public located in Mexico? If so, what is the typical method? deed. Would courts in Mexico recognise a foreign-law grant of security (for example, an English law debenture) taken over a bank account located in Mexico? 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities Normally, in Mexico, rights to the bank account funds may be must the purchaser comply with in Mexico to grant and pledged in favour of a creditor or an instruction is irrevocably given perfect a security interest in purchased receivables by an obligor to a Trustee or a bank to release funds from a bank governed by the laws of Mexico and the related security? account in favour of a creditor in case of default. Such instruction and the terms and conditions whereby the funds may be transferred Usually for structuring this kind of transaction, a Mexican Trust is to the creditor are usually documented through a mandate formed as an SPV. The seller will assign its receivables to the Trust, agreement. and certain additional receivables in excess, which will constitute collateral. Provisions obligating the seller to contribute an 6 Insolvency Laws additional cash amount as additional collateral would be included in the trust agreement. In addition to such collateral, the Trust may be allowed to apply for a line of credit and grant as collateral the assets 6.1 Stay of Action. If, after a sale of receivables that is forming the wealth of the Trust. otherwise perfected, the seller becomes subject to an insolvency proceeding, will Mexico’s insolvency laws automatically prohibit the purchaser from collecting, 5.4 Recognition. If the purchaser grants a security interest in transferring or otherwise exercising ownership rights over receivables governed by the laws of Mexico, and that the purchased receivables (a “stay of action”)? Does the security interest is valid and perfected under the laws of insolvency official have the ability to stay collection and the purchaser’s country, will it be treated as valid and enforcement actions until he determines that the sale is perfected in Mexico or must additional steps be taken in perfected? Would the answer be different if the Mexico? purchaser is deemed to only be a secured party rather than the owner of the receivables? In principle, Mexican Law will recognise security interests granted under the law of any third country. Notwithstanding, the granting Yes. Under the Mexican Insolvency Law (Ley de Concurso of such security interests would have to comply with all Mexican Mercantiles) (“MIL”), the insolvency official has the ability to stay law requirements in order for such security interests to be collection and enforcement actions until he/she determines that the enforceable in Mexico. In the case of rights in rem, Mexican law is sale is perfected. mandatorily applicable.

6.2 Insolvency Official’s Powers. If there is no stay of action 5.5 Additional Formalities. What additional or different under what circumstances, if any, does the insolvency requirements apply to security interests in or connected to official have the power to prohibit the purchaser’s insurance policies, promissory notes, mortgage loans, exercise of rights (by means of injunction, stay order or consumer loans or marketable debt securities? other action)?

Each security document has its own formalities. Pursuant to Under the MIL, there is a single insolvency proceeding known as Mexican law, a promissory note has to contain: (i) the fact that it is “Concurso Mercantil” (“Concurso Procedure”). The Concurso a promissory note; (ii) the unconditional promise to pay a certain Procedure consists of two main stages: the conciliation stage; and amount of money; (iii) the name of the person to whom the payment the bankruptcy stage, each of them supervised by the Federal

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Institute of Specialists in Insolvency & Bankruptcy Procedures 6.3 Suspect Period (Clawback). Under what facts or (Instituto Federal de Especialistas de Concursos Mercantiles) circumstances could the insolvency official rescind or (“IFECOM”). The Concursos Law forms part of the Federal reverse transactions that took place during a “suspect” or commercial legislation of Mexico. Pursuant to Article 17 of the “preference” period before the commencement of the Concursos Law, jurisdiction over a commercial bankruptcy case insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in Mexico for (a) lies in the Federal District Court of the obligor’s corporate domicile, Court transactions between unrelated parties and (b) or its principal place of business, as the case may be (“ ”). transactions between related parties? The Concursos Law further provides that all claims against an obligor must be brought before the Court hearing the case, in order Pursuant to the MIL any of the following transactions may be to avoid different courts hearing claims against the estate in a

invalidated if entered during the period starting on the day which is Mexico “piecemeal” fashion. 270 calendar days before the declaration of insolvency by a The MIL is based upon certain general principles, as follows: (i) all competent Court: (i) transactions made by an obligor before the creditors of the same class shall be treated the same, without regard declaration of insolvency with the intention to defraud creditors to nationality, domicile or capacity; (ii) all creditors of the obligor, (knowledge of the counterparty is not required if the act was whether domestic or foreign, shall have access to the Concurso gratuitous); (ii) gratuitous transactions; (iii) transactions at an Procedure, and shall collect in equal proportion (according to the undervalue; (iv) transactions not made at an arm’s length basis; (v) class) from the assets located within the territorial jurisdiction of the waivers of debts made by an obligor; (vi) payments of obligations Court; (iii) the obligor’s operations should be preserved where before their maturity date; and (vii) discounts made by an obligor. possible for the benefit of the general economy of Mexico. This Additionally, there is a presumption that the following transactions principle seeks to avoid the phenomenon of “chain bankruptcies”, are made in fraud of creditors, unless the obligor proves good faith: where the commercial bankruptcy of one company and its cessation (i) to create new security interests or to increase any existing of operations causes the commercial bankruptcy of its creditors; and security interests if the original obligation did not contemplate the (iv) all assets of the obligor shall be consolidated and liabilities foregoing; (ii) payments made with assets other than money if such determined. This principle is the basis for actions taken to eliminate form of payment was not originally agreed; and (iii) transactions dubious credits, such as the commencement of legal proceedings to made by an obligor with related persons, such as its spouse, collect debts due in favour of the obligor, or actions to invalidate relatives, members of the board or decision-making persons within fraudulent conveyances or other transfers contrary to the MIL taken the business, or with companies where at least 51% of their capital by the obligor in violation of the principle that all creditors of the stock is owned or voted by any of the foregoing persons. same class should be treated the same. Also, in furthering the goals of this principle, third parties are permitted to recover assets in the Any creditor or group of creditors that represent, at least, 10% of obligor’s possession that are not owned by the obligor. the value of the credits owed by the obligor, pursuant to the provisional list of credits, has the right to request the Court to Following the declaration of insolvency, the Court (by its own appoint an Intervener in the Concurso Procedure. The Intervener decision or acting upon the Examiner’s (visitador) can request the Court to establish a retroactive date prior to the 270 recommendation) may issue restriction orders on obligor’s conduct calendar days before the Declaration of Insolvency is declared, of business, including the prohibition of making payment under provided that such requests are filed prior to the decision current and previous obligations or disposing of any property. acknowledging, grading and establishing preference of credits. During the Conciliation stage, the obligor may continue its ordinary course of business with a Conciliator reviewing the obligor’s 6.4 Substantive Consolidation. Under what facts or operations and accounting. In principle, the obligor keeps circumstances, if any, could the insolvency official management of its business, unless the Conciliator requests from consolidate the assets and liabilities of the purchaser with the Court the removal of the obligor in order to protect the pool of those of the seller or its affiliates in the insolvency assets. If the obligor keeps the management, the Conciliator shall: proceeding? (i) supervise the accounting and all transactions performed by the obligor; (ii) decide if any existing agreements binding on the Pursuant to the MIL, the insolvency procedures of the parent obligor must be terminated; (iii) approve, with the prior opinion of company and the subsidiary can be heard before the same Court but the interveners appointed by the creditors, new credits in favour of in separate or parallel procedures. In principle, an insolvency the obligor, the creation of new security interests, the substitution of official cannot consolidate the assets and liabilities of the purchaser any existing security interests or the sale of any assets not involved with those of the seller in the insolvency proceeding. in the ordinary course of business of the obligor; and (iv) call the board or any other decision-making committee of the obligor to discuss and approve any kind of matters relating to the obligor’s 6.5 Effect of Proceedings on Future Receivables. What is the business. In the event the obligor is removed from the management effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on of its business, the Conciliator will become the administrator and sales of receivables that have not yet come into will be granted full authority to conduct the business, on the existence? understanding that the authorities of the obligor and its decision- making committees shall cease. The Conciliator may also request As explained above, during the Conciliation stage, the obligor may from the Court to suspend the obligor’s operations if the pool of continue its ordinary course of business with a Conciliator assets or an increase in the obligor’s liabilities is at risk. The Court reviewing the obligor’s operations and accounting. In principle, the may adopt measures to safeguard assets of the obligor for the obligor keeps management of its business, unless the conciliator benefit of the creditors, and assure that no actions are taken outside requests from the Court the removal of the obligor in order to the ordinary course of business. protect the pool of assets. If the obligor keeps the management, the Conciliator shall: (i) supervise the accounting and all transactions performed by the obligor; (ii) decide if any existing agreements binding on the obligor must be terminated; (iii) approve, with the

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prior opinion of the interveners appointed by the creditors, new receivables and the proceeds therefrom. Therefore, this kind of credits in favour of the obligor, the creation of new security financing is without recourse against the seller. Mexican courts will interests, the substitution of any existing security interests or the give effect to a contractual provision limiting the recourse of the sale of any assets not involved in the ordinary course of business of parties to available funds. the obligor; and (iv) call the board or any other decision-making committee of the obligor to discuss and approve any kind of matters 7.4 Non-Petition Clause. Will a court in Mexico give effect to relating to the obligor’s business. In the event the obligor is a contractual provision (even if the contract’s governing removed from the management of its business, the Conciliator will law is the law of another country) prohibiting the parties become the administrator and will be granted full authority to from: (a) taking legal action against the purchaser or conduct the business, on the understanding that the authorities of another person; or (b) commencing an insolvency Mexico the obligor and its decision-making committees shall cease. proceeding against the purchaser or another person?

Yes it will. However, under the MIL, any contractual provision that 7 Special Rules creates a burden on the obligations of the debtor as a consequence of the filing of an insolvency procedure (i.e. an increase in interest 7.1 Securitisation Law. Is there a special securitisation law rate) will be disregarded by the Court. (and/or special provisions in other laws) in Mexico establishing a legal framework for securitisation transactions? If so, what are the basics? 7.5 Independent Director. Will a court in Mexico give effect to a contractual provision (even if the contract’s governing law is the law of another country) or a provision in a No. There is no specific law governing securitisation transactions. party’s organisational documents prohibiting the directors In fact, several laws are applicable for securitisation structured from taking specified actions (including commencing an financings. The Civil Code (Código Civil), the Code of Commerce insolvency proceeding) without the affirmative vote of an (Código de Comercio), the Stock Exchange Act (Ley del Mercado independent director? de Valores), the Credit Institutions Act (Ley de Instituciones de Crédito), and the Income Tax Law (Ley del Impuesto sobre la It is valid to provide in the company’s bylaws that the Board of Renta), are applicable, among others. Additionally, rules issued by Directors are prevented to resolve a voluntary insolvency petition the Mexican National Banking and Securities Commission without the unanimous vote of the members or a super majority (Comisión Nacional Bancaria y de Valores) (“CNBV”) are vote, however, it is important to then limit the powers vested to mandatory with respect to certain aspects of the securitisation attorneys-in-fact since, under Mexican law, there is no requirement process. to receive the approval of the Board for a company to file a voluntary insolvency procedure. 7.2 Securitisation Entities. Does Mexico have laws specifically providing for establishment of special purpose 8 Regulatory Issues entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and management of such an entity; (b) legal attributes and 8.1 Required Authorisations, etc. Assuming that the benefits of the entity; and (c) any specific requirements as purchaser does no other business in Mexico, will its to the status of directors or shareholders? purchase and ownership or its collection and enforcement of receivables result in its being required to qualify to do There is no provision forcing an entity to establish an SPV for business or to obtain any licence or its being subject to securitisation transactions. However, as mentioned above, it is regulation as a financial institution in Mexico? Does the common that Trusts are used as SPVs for such purpose. Besides the answer to the preceding question change if the purchaser creditworthiness of the issuer, the legal structure using an SPV does business with other sellers in Mexico? improves the rating of the debt securities intended to be traded, particularly, since the assets, including the receivables and the Since the Trust is the SPV commonly formed for securitisation accounts receivable are isolated and totally separated from the transactions, the Trustee must act as purchaser. Trustees are usually wealth of the seller, preventing (i) the seller to use the proceeds banks who have authorisation to act as such by the Mexican from the receivables and the accounts receivable for other purposes Ministry of Treasury and Public Credit (Secretaría de Hacienda y different from fulfilling payment obligations to holders of the Crédito Público). Corporations may issue debt securities as a issued debt securities, and (ii) in principle, any foreclosure on the consequence of securitisation processes without the need to have an transferred assets for the benefit of the mentioned holders in case of authorisation from said Ministry. However, to publicly trade the insolvency of the seller. Mainly, what is referred to in items (i) and mentioned securities, in either cases, if issued by a Trustee or (ii) before are the legal benefits of the SPV. There are no specific directly by a company or corporation, authorisation in that regard is requirements as to the status of directors or shareholders since the mandatory and is granted by the CNBV and the Mexican Stock SPV is not a corporation or a company but a Trust created to Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.). perform securitisation transactions. 8.2 Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables 7.3 Non-Recourse Clause. Will a court in Mexico give effect following their sale to the purchaser, including to appear to a contractual provision (even if the contract’s governing before a court? Does a third party replacement servicer law is the law of another country) limiting the recourse of require any licences, etc., in order to enforce and collect parties to available funds? sold receivables?

Yes. Usually the financing structure created for securitisations Usually, the only requirement is that seller and the purchaser enter transactions has the purpose of isolating the seller from the into a servicing agreement for the collection of the sold receivables. 244 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cervantes Sainz, S.C. Mexico

8.3 Data Protection. Does Mexico have laws restricting the 9.2 Seller Tax Accounting. Does Mexico require that a use or dissemination of data about or provided by specific accounting policy is adopted for tax purposes by obligors? If so, do these laws apply only to consumer the seller or purchaser in the context of a securitisation? obligors or also to enterprises? No. The only policy is to follow Mexican GAAP and to prepare the All the information on the obligor of the receivables, its accounting information to be quarterly and annually disclosed to the creditworthiness and history is part of the information contained in stock exchange market following those principles. the debt securities offering memorandum or prospectus. There is some information kept by the Trustee that is protected by the Trust 9.3 Stamp Duty, etc. Does Mexico impose stamp duty or secrecy provisions under the Credit Institutions Act. However, other documentary taxes on sales of receivables? almost all the information required from the obligor to offer the Mexico debt securities is disclosed in the mentioned memorandum or No, it doesn’t. prospectus. This is a natural request since the level of demand of the issued debt securities depends importantly on the payment capacity of the obligors. 9.4 Value Added Taxes. Does Mexico impose value added tax, sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for collection 8.4 Consumer Protection. If the obligors are consumers, will agent services? the purchaser (including a bank acting as purchaser) be required to comply with any consumer protection law of Yes, value added tax (“VAT”) on the sales of goods and services Mexico? Briefly, what is required? applies. In principle, the rate is 16% provided that the VAT can be lower in certain zones of the country. The Trustee has to maintain the confidentiality of the name of each obligor, pursuant to the Credit Institutions Act. There is a banking secret provision forbidding banks to disclose certain specific 9.5 Purchaser Liability. If the seller is required to pay value information. added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then 8.5 Currency Restrictions. Does Mexico have laws restricting will the taxing authority be able to make claims for the the exchange of Mexico’s currency for other currencies or unpaid tax against the purchaser or against the sold the making of payments in Mexico Mexico’s currency to receivables or collections? persons outside the country? No. The seller will charge 16% of the amount of the sales No. However, please be informed that any obligation in foreign transaction as VAT, and it is responsible to pay such retained currency to be paid in Mexican territory may be discharged by the amount to the Mexican tax authorities following certain tax rules. obligor by paying pesos at the applicable exchange rate on the date Hence, the purchaser only has the obligation to pay such amount to of payment published by the Mexican Central Bank, pursuant to the the seller for subsequent delivery to the tax authorities, as Mexican Currency Act (Ley Monetaria). applicable.

9 Taxation 9.6 Doing Business. Assuming that the purchaser conducts no other business in Mexico, would the purchaser’s purchase of the receivables, its appointment of the seller 9.1 Withholding Taxes. Will any part of payments on as its servicer and collection agent, or its enforcement of receivables by the obligors to the seller or the purchaser the receivables against the obligors, make it liable to tax be subject to withholding taxes in Mexico? Does the in Mexico? answer depend on the nature of the receivables, whether they bear interest, their term to maturity, or where the In this case, the purchaser pays VAT in the acquisition of the seller or the purchaser is located? receivables. Withholding tax on interests will be paid by final beneficiary depending on his/her/its nationality and the fact that Withholding tax is not triggered by payments of the obligor under Mexico has a treaty to avoid double taxation with the country of the receivables to the SPV. Instead, withholding tax is triggered origin of the holder of the debt securities. when payment is made to the debt security holder as final beneficiary. Withholding tax will be paid on interest paid or due and payable and the rates depend on provisions of treaties to avoid double taxation which Mexico is party. Rates for withholding tax may be as low as 4.9% in certain cases.

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Diego Martínez Rueda-Chapital Alejandro Sainz

Cervantes Sainz, S.C. Cervantes Sainz, S.C. Blvd. Manuel Avila Camacho 24-6 Blvd. Manuel Avila Camacho 24-6 Colonia Lomas de Chapultepec Colonia Lomas de Chapultepec Deleg. Miguel Hidalgo Deleg. Miguel Hidalgo 11000 México, D.F. 11000 México, D.F. Tel: +52 55 9178 5040 Tel: +52 55 9178 5040 Fax: +52 55 5540 3433 Fax: +52 55 5540 3433 Email: [email protected] Email: [email protected] URL: www.cervantessainz.com URL: www.cervantessainz.com Mexico Diego Martinez is a prestigious lawyer practicing in the areas of Alejandro Sainz represents national and multinational clients in a banking, corporate and securities, including, structured broad range of transactional matters, providing legal advice in the financings, secured and unsecured lending transactions, areas of corporate, banking, finance and commercial law, restructuring and work-outs, venture capital and private equity, including reorganisations, restructurings and work-outs, private and public offerings of debt and equity, securitisation and bankruptcy and insolvency procedures, project & corporate asset-backed finance transactions, mergers and acquisitions, finance, mergers & acquisitions, foreign investment, joint project finance and financial regulatory matters as well as real ventures, and infrastructure, real estate, and telecommunications estate. He is also very active in data privacy matters. He has transactions. He is one of the most well-known attorneys in been repeatedly, in the last years, appointed by Who’s Who as restructuring matters. Mr. Sainz was selected by Latin Lawyer as one of the most prestigious lawyers in Mexico practicing banking one of Mexico’s top lawyers. Mr. Sainz is author of several law. He is former Manager of Banking Projects at the National articles in corporate, mergers and acquisitions, restructuring and Banking and Securities Commission (Comisión Nacional insolvency matters. Bancaria y de Valores) (CNBV). He is a member of the Committee of Best Practices of Best Governance of the Mexican Entrepreneurial Council (Consejo Coordinador Empresarial) and member of the Board of Directors of prestigious Mexican companies.

CERVANTES SAINZ is a full service law firm with an extensive array of creative problem-solving techniques for optimum, lasting outcomes. The Firm was founded by, and is composed of prestigious lawyers accumulating large years of experience, who ventured to form and achieve an innovative style of organisation. Its rapid growth reflects the dynamic nature of a vital and healthy developing law firm. We represent clients in a broad spectrum of transactional and litigious matters. Our clients range from some of the world’s largest companies to individuals and small businesses. The client and practice variety is matched by the diversity of our lawyers. As lawyers of lawyers, we handled complex litigation for Mexican firms’ clients, and have worked with most of the respected international law firms in various types of cross-border transactions. CERVANTES SAINZ offers services in a variety of areas of the law, which overlap and complement a mixture of client industries.

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Netherlands Mariëtte van ‘t Westeinde

Loyens & Loeff N.V. Jan Bart Schober

1 Receivables Contracts 6:119a of the Dutch Civil Code (Burgerlijk Wetboek), damages due because of a delay in the payment of a sum of money consist of the statutory interest on that sum over the 1.1 Formalities. In order to create an enforceable debt period during which the obligor is in default. Section 6:119a obligation of the obligor to the seller, (a) is it necessary of the Dutch Civil Code applies to agreements between that the sales of goods or services are evidenced by a companies and/or persons acting in the course of their formal receivables contract; (b) are invoices alone profession or business and which relate to the supply of sufficient; and (c) can a receivable “contract” be deemed goods or the provision of services. At the end of each year to exist as a result of the behaviour of the parties? the sum for which the statutory interest is calculated is increased by the interest due over that year. The statutory (a) No, it is not required under Dutch law that the debt obligation interest is fixed by governmental decree. The amount of the of the obligor to the seller be documented in, or evidenced damages actually suffered is irrelevant. The creditor is by, a formal receivable contract in order for this debt entitled to the statutory interest, unless the parties have obligation to be enforceable. If the existence of the debt agreed to an interest rate higher than the statutory rate. receivable can be substantiated in any other way than by (c) Consumers may cancel a distance contract (overeenkomst op means of a formal receivable contract, such receivable can afstand, e.g. a contract concluded over the internet or by equally be enforced. telephone) without owing a fine and without giving reasons, (b) An invoice can serve as such alternative, written proof of the during a period of 14 calendar days commencing on the day existence of the receivable, subject to proof to the contrary when that contract was concluded, or during a period of 14 by the obligor. calendar days commencing on the day when the consumer (c) In view of the fact that a creditor-obligor relationship can be received the information that the company was required to assumed to exist even in the absence of a formal receivable supply. Consumers may cancel their credit contract, without contract, a receivable “contract” can be deemed to exist as a owing a fine and without giving reasons, during a period of result of the behaviour of parties. 14 calendar days commencing on the day when that contract was concluded, or during a period of 14 calendar days commencing on the day when the consumer received the 1.2 Consumer Protections. Do the Netherlands’ laws (a) limit information that the company was required to supply, rates of interest on consumer credit, loans or other kinds irrespective of whether it is a distance contract of receivables; (b) provide a statutory right to interest on (overeenkomst op afstand) or not. Besides, if a consumer has late payments; (c) permit consumers to cancel a credit contract for an indefinite period of time, the receivables for a specified period of time; or (d) provide consumer may terminate the credit agreement and repay the other noteworthy rights to consumers with respect to outstanding amount thereunder at any time. If a notice receivables owing by them? period has been included, this notice period may not be longer than one month. (a) The Decree credit compensation (Besluit kredietvergoeding) (d) Besides the provisions that limit the maximum interest to be contains provisions limiting the maximum interest to be charged by a lender in respect of consumer credits, there are charged by the lender. This Decree regulates the offering of several provisions protecting consumers. For example, the most common types of consumer credit (excluding, inter pursuant to section 33 of the Dutch Consumer Credit Act alia, mortgage loans) by companies and/or persons acting in (Wet op het consumentenkrediet), which regulates the the course of their profession or business to private providing of credit by companies and/or persons acting in the individuals (consumers). As to credits and other receivables course of their profession or business to private individuals not covered by the Decree credit compensation, parties are, (consumers), a consumer credit contract is, inter alia, null in principle, free to fix the rate of interest or, as the case may and void if (i) the borrower has an obligation to enter into be, default interest. Although usury rules as such do not exist another agreement except if such borrower is free to choose in the Netherlands, exorbitant interest rates may be held to its counterparty to such agreement, or (ii) the borrower has contravene morality (bonos mores) or public order. an obligation to assign or pledge to the lender its income, Consequently, contract clauses that provide for such interest social security benefits or other similar payments as security rates may be void or voidable. It might also be contrary to for its payments under the relevant consumer credit contract. the principles of reasonableness and fairness to attempt to Consumer protecting provisions can also be found in the enforce usurious interest rate clauses. Compounding of Dutch Civil Code. The Dutch Civil Code, for example, interest is permissible in the Netherlands. contains extensive rules as to the information which should (b) Pursuant to section 6:119, or as the case may be, section be provided to the consumer before entering into the contract

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and as to the contents of the contract. The Dutch Civil Code country other than that indicated in article 4(1) or 4(2), the law of further contains a “black and grey” list of provisions that, if the other country shall apply. In addition, article 4(4) of Rome I included in the general conditions applicable to a contract stipulates that if parties to a contract have not specified the law entered into with a consumer, are considered to be or deemed applicable to such contract, the contract cannot be categorised as to be unreasonably onerous towards such consumer as a being one of the types of contract as specified in Rome I and in the result of which the consumer is able to declare the relevant absence of a characteristic performance of a contract, the contract provision void. Each of the lists contains fourteen items amongst which the provision that excludes the consumer’s should be governed by the law of the country with which it is most right to set-off any amount it owes to its counterparty with closely connected (nauwst verbonden). In order to determine the any amount it owes from such counterparty. country to which the contract is more or most closely connected, the relationship between the contract in question and other contracts should be taken into account. Furthermore, Rome I contains some

Netherlands 1.3 Government Receivables. Where the receivables provisions with respect to the law applicable to contracts of contract has been entered into with the government or a carriage, consumer contracts, insurance contracts and individual government agency, are there different requirements and laws that apply to the sale or collection of those employment contracts (articles 5 to 8 of Rome I). If a professional receivables? has entered into a contract with a consumer and there is no choice of law specified in the contract, pursuant to article 6(1) of Rome I, No, in principle no other requirements apply when a government or such contract will, despite the law applicable pursuant to article 4 of government agency has entered into a receivables contract. It Rome I, be governed by the law of the country where the consumer should be noted, however, that, according to the Dutch Civil Code, has his habitual residence, provided that the professional pursues or any rights to which a person is entitled pursuant to private law may directs his commercial activities in or to this country. If there is a not be exercised contrary to the written or unwritten rules of public choice of law specified in the contract with a consumer then this law. Essentially, this means that if a government entity or agency choice of law will not set aside the non-dispositive consumer exercises any rights to which it is entitled pursuant to rules or protection rules of the law of the country in which the consumer has principles of private law, such entity always needs to act in his residence. In the Dutch Civil Code, it is explicitly stated that if accordance with so-called general principles of good management it concerns a credit agreement with a consumer, which has a close (algemene beginselen van behoorlijk bestuur), which should always connection with one or more of the Member States of the European serve as a guiding principle for government entities, and may even Union, the consumer protecting rules on the basis of the Consumer limit such government entity’s ability to act as it considers fit if Credit Directive (Directive 2008/48/EC) cannot be set aside, doing so would constitute improper management. Furthermore, it irrespective of the law governing the credit agreement. should be noted that, according to well-established case law, a government entity or agency may not exercise any rights which it 2.2 Base Case. If the seller and the obligor are both resident may have under private law to serve any public interests, to the in the Netherlands, and the transactions giving rise to the extent that public law grants such entity sufficient powers to realise receivables and the payment of the receivables take such public goals. To the extent that any public regulation does not place in the Netherlands, and the seller and the obligor sufficiently provide for such means, the exercise of such rights choose the law of the Netherlands to govern the provided under private law may not thwart the public law receivables contract, is there any reason why a court in provisions in an unacceptable manner. the Netherlands would not give effect to their choice of law?

2 Choice of Law – Receivables Contracts No, the choice of Dutch law as the law governing the contract will be valid and binding and be recognised by a Dutch court.

2.1 No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what 2.3 Freedom to Choose Foreign Law of Non-Resident Seller are the main principles in the Netherlands that will or Obligor. If the seller is resident in the Netherlands but determine the governing law of the contract? the obligor is not, or if the obligor is resident in the Netherlands but the seller is not, and the seller and the If the parties to a contract have not specified the law applicable to obligor choose the foreign law of the obligor/seller to such contract, the applicable law will be determined on the basis of govern their receivables contract, will a court in the article 4 of EC Regulation on the law applicable to contractual Netherlands give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law obligations of 17 June 2008 (“Rome I”). Article 4(1) specifies the (such as public policy or mandatory principles of law) that applicable law for certain particular types of contract listed therein, would typically apply in commercial relationships such such as a contract for the sale of goods (which shall be governed by that between the seller and the obligor under the the law of the country where the seller has his habitual residence), receivables contract? a franchise contract (which shall be governed by the law of the country where the franchisee has his habitual residence) and a Under Dutch law, the seller and the obligor are free to choose the distribution contract (which shall be governed by the law of the law to govern the receivable contract to be entered into by them, country where the distributor has his habitual residence). Where the including the law of any relevant jurisdiction (other than the contract cannot be categorised as being one of the specified types of Netherlands) (“Foreign Law”), and this choice of law is valid and contract, it will be governed by the law of the country where the binding as between the seller and the obligor, except that a Dutch party required to effect the characteristic performance court may give effect: (i) to the extent that any term of the relevant (kenmerkende prestatie) of the contract has his habitual residence receivable contract or any provision of Foreign Law applicable to (article 4(2) of Rome I). There are certain exceptions to the such receivable contract is manifestly incompatible with the aforementioned rules. Pursuant to article 4(3) of Rome I, if it overriding mandatory provisions of the Netherlands or of another appears, from all the circumstances of the case, that the contract is jurisdiction where the performance of the relevant receivable manifestly more closely connected (nauwer verbonden) with a contract takes place or must take place, such overriding mandatory

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provisions; (ii) if all other elements relevant to the situation at the suspension of payments (surseance van betaling) and other laws of time of the choice of law are located in the Netherlands or in general application in effect, relating to or affecting the another jurisdiction, mandatory rules of Dutch law or of the laws of enforcement or protection of creditors’ rights. another jurisdiction, if and insofar as, under Dutch law or of the laws of that other jurisdiction, those rules must be applied 3.3 Example 2: Assuming that the facts are the same as irrespective of the chosen law; and (iii) in case the Foreign Law is Example 1, but either the obligor or the purchaser or both of a jurisdiction which is not a Member State of the EU and all other are located outside the Netherlands, will a court in the elements relevant to the situation at the time of the choice of law are Netherlands recognise that sale as being effective against located in one ore more Member State(s) of the EU, the mandatory the seller and other third parties (such as creditors or rules of European Community Law (gemeenschapsrecht), as insolvency administrators of the seller), or must the implemented by the relevant Member State(s), if and insofar as, requirements of the obligor’s country or the purchaser’s such European Community Law must be applied irrespective of the country (or both) be taken into account? Netherlands chosen law. Yes, a Dutch court would recognise an assignment of a receivable executed between such seller and purchaser in accordance with 2.4 CISG. Is the United Nations Convention on the Dutch law, pursuant to a receivables purchase agreement which is International Sale of Goods in effect in the Netherlands? governed by Dutch law, as being effective against the seller and third parties of the seller irrespective of whether or not the Yes, as from 1 January 1991, the United Nations Convention on the requirements for assignment under the law of the obligor’s or International Sale of Goods is in effect in the Netherlands. purchaser’s country (or both) have been taken into account, subject of course to the provisions of any applicable bankruptcy 3 Choice of Law – Receivables Purchase (faillissement), insolvency, fraudulent conveyance (actio Pauliana), Agreement reorganisation, suspension of payments (surseance van betaling) and other laws of general application in effect, relating to or affecting the enforcement or protection of creditors’ rights. 3.1 Base Case. Does the Netherlands’ law generally require the sale of receivables to be governed by the same law as the law governing the receivables themselves? If so, 3.4 Example 3: If (a) the seller is located in the Netherlands does that general rule apply irrespective of which law but the obligor is located in another country, (b) the governs the receivables (i.e., the Netherlands’ laws or receivable is governed by the law of the obligor’s country, foreign laws)? (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose Pursuant to Dutch private international law, the assignment of a the law of the obligor’s country to govern the receivables receivable will be governed by the chosen law of, or the law purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in the otherwise applicable to, the agreement which contains the Netherlands recognise that sale as being effective against undertaking to assign such receivable, irrespective of the law the seller and other third parties (such as creditors or governing the receivable. The law of the agreement containing the insolvency administrators of the seller) without the need undertaking determines the validity of the assignment of the to comply with the Netherlands’ own sale requirements? receivable. However, the law governing the receivable which is purported to be assigned determines the topics set forth in article Yes, a Dutch court would recognise an assignment of a receivable 14(2) of Rome I, being (i) the assignability of the receivable, (ii) the executed between such seller and purchaser in accordance with the relationship between the assignee and the obligor, (iii) the law governing the purchase receivables agreement as being conditions under which the assignment of the receivable can be effective against the seller and third parties of the seller, irrespective enforced against the obligor, as well as (iv) the question whether the of whether or not the requirements for assignment under Dutch law obligor’s obligations under the receivable have been paid and have been complied with, subject of course to the provisions of any discharged in full. applicable bankruptcy (faillissement), insolvency, fraudulent conveyance (actio Pauliana), reorganisation, suspension of 3.2 Example 1: If (a) the seller and the obligor are located in payments (surseance van betaling) and other laws of general the Netherlands, (b) the receivable is governed by the law application in effect, relating to or affecting the enforcement or of the Netherlands, (c) the seller sells the receivable to a protection of creditors’ rights. purchaser located in a third country, (d) the seller and the purchaser choose the law of the Netherlands to govern the receivables purchase agreement, and (e) the sale 3.5 Example 4: If (a) the obligor is located in the Netherlands complies with the requirements of the Netherlands, will a but the seller is located in another country, (b) the court in the Netherlands recognise that sale as being receivable is governed by the law of the seller’s country, effective against the seller, the obligor and other third (c) the seller and the purchaser choose the law of the parties (such as creditors or insolvency administrators of seller’s country to govern the receivables purchase the seller and the obligor)? agreement, and (d) the sale complies with the requirements of the seller’s country, will a court in the Netherlands recognise that sale as being effective against Yes, a Dutch court would recognise an assignment of a receivable the obligor and other third parties (such as creditors or executed between such seller and purchaser in accordance with insolvency administrators of the obligor) without the need Dutch law, pursuant to a receivables purchase agreement which is to comply with the Netherlands’ own sale requirements? governed by Dutch law, as being effective against the seller, obligor and other third parties of the seller and the obligor, subject of course Yes, a Dutch court would recognise an assignment of a receivable to the provisions of any applicable bankruptcy (faillissement), executed between such seller and purchaser in accordance with the insolvency, fraudulent conveyance (actio Pauliana), reorganisation, law governing the purchase receivables agreement as being

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effective against the obligor and third parties of the obligor, (levering), pursuant to a valid title (geldige titel), by a person who irrespective of whether or not the requirements for assignment has the power of disposal over the assets under Dutch law have been complied with, subject of course to the (beschikkingsbevoegdheid). The title required for the assignment of provisions of any applicable bankruptcy (faillissement), insolvency, receivables may be constituted by a receivables purchase agreement fraudulent conveyance (actio Pauliana), reorganisation, suspension between the seller and the purchaser. For the delivery of of payments (surseance van betaling) and other laws of general receivables, section 3:94(1) of the Dutch Civil Code requires: (i) a application in effect, relating to or affecting the enforcement or deed of assignment signed by the assignor and the assignee; and (ii) protection of creditors’ rights. notification to the relevant obligors of the assignment. Pursuant to section 3:94(3) of the Dutch Civil Code, which was added to the Dutch Civil Code on 1 October 2004, an assignment of receivables 3.6 Example 5: If (a) the seller is located in the Netherlands (irrespective of the obligor’s location), (b) the receivable is can also be effected by means of a notarial or registered deed of Netherlands governed by the law of the Netherlands, (c) the seller assignment, without notification of the assignment to the relevant sells the receivable to a purchaser located in a third obligors being required, provided that such receivables exist at the country, (d) the seller and the purchaser choose the law time of registration or directly result from an existing legal of the purchaser’s country to govern the receivables relationship (rechtstreeks zullen worden verkregen uit een purchase agreement, and (e) the sale complies with the bestaande rechtsverhouding). However, notification to the obligors requirements of the purchaser’s country, will a court in the will still be required so that such obligors can no longer validly Netherlands] recognise that sale as being effective discharge their obligations (bevrijdend betalen) under the against the seller and other third parties (such as receivables by paying the seller. creditors or insolvency administrators of the seller, any obligor located in the Netherlands and any third party There are no additional perfection requirements for the sale of creditor or insolvency administrator of any such obligor)? receivables which would protect the first transferee of such receivables against a possible further sale of the receivables by the Yes, a Dutch court would recognise an assignment of a receivable seller to a later purchaser. The extent to which the first transferee executed between such seller and purchaser in accordance with the of the receivables is protected against a later purchaser, who claims law governing the purchase receivables agreement as being to be the rightful owner of such receivables, depends on the level of effective against the seller, any obligor located in the Netherlands protection which a later purchaser of such receivables, who has and third parties of the seller and such obligor, subject of course to acted in good faith in the purchase of such receivables, will be the provisions of any applicable bankruptcy (faillissement), granted under Dutch law. Under the general third party protection insolvency, fraudulent conveyance (actio Pauliana), reorganisation, clause, a third person who, on the basis of another’s declaration or suspension of payments (surseance van betaling) and other laws of conduct, assumes the creation, existence or extinction of a certain general application in effect, relating to or affecting the juridical relationship which is reasonable in the circumstances, and enforcement or protection of creditors’ rights. However, Dutch law who acts reasonably in reliance on the accuracy of that assumption, would determine the conditions under which such assignment can cannot have the inaccuracy of that assumption invoked against him be enforced against the obligor (see the answer to question 3.1 by the other person. Although it would technically be possible for above). a third party to be protected against the lack of power of disposition of the seller following the first transfer of the receivable, it will not be easy to comply with the above requirements in order to be so 4 Asset Sales protected.

4.1 Sale Methods Generally. In the Netherlands what are the 4.3 Perfection for Promissory Notes, etc. What additional or customary methods for a seller to sell receivables to a different requirements for sale and perfection apply to purchaser? What is the customary terminology – is it sales of promissory notes, mortgage loans, consumer called a sale, transfer, assignment or something else? loans or marketable debt securities?

The customary method for a seller to sell receivables in the The law on negotiable instruments such as a promissory note is set Netherlands would be a sale (verkoop) of such receivables by forth in the Dutch Commercial Code (Wetboek van Koophandel). entering into a sale and purchase agreement with the purchaser The relevant provisions of this Code reflect, for the most part, the followed by an assignment (cessie) of such receivables pursuant to terms of the 1930 and 1931 Geneva Conventions to which the which the purchaser becomes the legal owner of such receivables. Netherlands is party. However, it is of note that these statutory rules As set forth under question 4.2 below, Dutch law makes a only apply to a promissory note payable to order (provided such distinction between the undertaking to sell a receivable constituting instrument does contain the elements which are required according the title (titel) required for a valid transfer (overdracht) of a to the Dutch Commercial Code in order to qualify as a negotiable receivable and the delivery (levering) of such receivable (named instrument within the meaning thereof). A promissory note payable assignment (cessie)) pursuant thereto. to order must state the name of the person to whom or to whose order payment must be made. Under Dutch law a promissory note payable to order is transferred by means of physical delivery of the 4.2 Perfection Generally. What formalities are required instrument to the endorsee (geëndosseerde) and an endorsement to generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of be written on (the back of) the promissory note itself or on a slip receivables to be perfected against any subsequent good affixed thereto (verlengstuk). Such delivery must be effectuated faith purchasers for value of the same receivables from pursuant to a valid title by a person who has the power to dispose the seller? over the instrument. A promissory note payable to bearer is governed by the principles Pursuant to section 3:84(1) of the Dutch Civil Code, the transfer of of Dutch law regarding bearer instruments in general. A transfer of ownership of assets (which includes receivables) requires delivery ownership of a bearer instrument requires a physical delivery

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pursuant to a valid title by a person who has the power to dispose does prohibit such assignment without the obligor’s consent, or of the instrument. contains other restriction clauses on the assignment of the Pursuant to Dutch rules of private international law, the proprietary receivables. aspects (such as a transfer) of book-entry securities (girale effecten) In case of a non-disclosed assignment, prior to notification being held in a securities account with a bank or other entity, which is made, an obligor can only validly discharge its obligations allowed to offer securities accounts to its customers are governed (bevrijdend betalen) under the relevant receivable by paying to the by the laws of the state in whose territory the relevant bank seller. Any payments made by the obligor to the seller after the date maintains the securities account to which such securities are on which the seller has been declared bankrupt (failliet verklaard) credited. Such laws specifically determine (i) which proprietary or has been granted a suspension of payments (surseance van rights can be vested in the securities as well as the nature and betaling verleend), but prior to notification having been made, will contents of such rights, (ii) the perfection requirements for a form part of the bankruptcy estate of the seller, albeit that the transfer of the securities or for the vesting of a proprietary right purchaser will be a ‘creditor of the estate’ (boedelschuldeiser) in Netherlands therein, (iii) who is entitled to exercise the rights attached to the respect of such payments. This risk no longer exists after securities, (iv) the manner in which the contents of proprietary notification is made; as from that moment, the obligor can only rights in the securities can vary, the manner in which proprietary validly discharge its obligations by making a payment to the rights in the securities pass by operation of law (overgaan) and the purchaser. manner in which proprietary rights in the securities terminate and Under Dutch law, a debtor has a right of set-off (verrekening) if he what the mutual relationship is between various proprietary rights, has a claim which corresponds to his debt to the same counterparty and (v) how to foreclose upon the securities. and he is entitled to pay his debt as well as to enforce payment of Under Dutch law, securities held through and registered with his claim. Unless the set-off right is effectively waived by an Euroclear Netherlands will be transferred in accordance with the obligor in the underlying receivables contract, prior to notification Securities Giro Act (Wet Giraal Effectenverkeer or “Wge”) by being made, such obligor will, provided that the statutory means of a simple book-entry in the name of the purchaser at the requirements for set-off are met, be entitled to set-off any amounts relevant bank. due by the seller to it with any receivables owed by it to the seller. There are no additional or different requirements for the sale and After notification of the assignment, the obligor will have such right assignment of receivables resulting from consumer loans and of set-off vis-à-vis the purchaser, provided that the statutory mortgage loans. requirements for set-off are met, and further provided that (i) the counterclaim of the obligor results from the same legal relationship as the relevant receivable, or (ii) the counterclaim of the obligor has 4.4 Obligor Notification or Consent. Must the seller or the been originated (opgekomen) and become due (opeisbaar) prior to purchaser notify obligors of the sale of receivables in the assignment of the receivable and notification thereof to the order for the sale to be effective against the obligors obligor. It is of note that, under Dutch law, a waiver of set-off rights and/or creditors of the seller? Must the seller or the purchaser obtain the obligors’ consent to the sale of is not enforceable in all circumstances, in particular not when the receivables in order for the sale to be an effective sale obligor qualifies as a private individual not acting in the course of against the obligors? Does the answer to this question its business or profession. vary if (a) the receivables contract does not prohibit assignment but does not expressly permit assignment; or 4.5 Notice Mechanics. If notice is to be delivered to obligors, (b) the receivables contract expressly prohibits whether at the time of sale or later, are there any assignment? Whether or not notice is required to perfect requirements regarding the form the notice must take or a sale, are there any benefits to giving notice – such as how it must be delivered? Is there any time limit beyond cutting off obligor set-off rights and other obligor which notice is ineffective – for example, can a notice of defences? sale be delivered after the sale, and can notice be delivered after insolvency proceedings against the obligor The assignment of receivables should be distinguished from the have commenced? Does the notice apply only to specific enforceability of such assignment against the obligors. With receivables or can it apply to any and all (including future) respect to the assignment of receivables, as set out in our answer to receivables? Are there any other limitations or question 4.2, Dutch law requires a deed of assignment and (a) considerations? notification thereof to the obligors (assignment pursuant to section 3:94(1) of the Dutch Civil Code), or (b) registration of the deed of The relevant sections of the Dutch Civil Code do not contain any assignment with the Dutch tax authorities (assignment pursuant to formal requirements as to how notification of an assignment to the section 3:94(3) of the Dutch Civil Code). Only in case of a obligor must take place or the form thereof. Notification may, in disclosed assignment, i.e. (a), is notification required for an principle, even be done orally. However, for evidence purposes, it assignment of the receivables to be effective. As regards the is advisable to deliver a notice in writing. A notification of an enforceability of such assignment of receivables against the assignment will only be completed upon receipt by the obligor of obligors of the receivables (in the way referred to above under the relevant notice, except if a failure to receive notice is deemed to question 4.2), notification of such obligors of such assignment will be for the risk of such obligor (e.g. in case the obligor has changed be required (both in case of a disclosed and non-disclosed location and did not inform its creditors thereof). It is possible to assignment). Further, pursuant to section 7:69 of the Dutch Civil notify an obligor by one single notice of the assignment of any and Code, which applies if it concerns consumer credit agreements, the all receivables which the seller currently has or in the future may consumer should be informed about an assignment. This rule, acquire against such obligor. however, does not apply if the original credit provider will manage Under Dutch law, the purchaser may notify the obligor of the sale the credit agreement after the assignment. and assignment of the receivables at all times, even after the Under Dutch law, the obligor’s consent as to an assignment of a bankruptcy (faillissement) or suspension of payments (surseance receivable is not required, unless the relevant receivables contract van betaling) of the seller or the obligor. However, it should be

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noted that, in case of an assignment pursuant to section 3:94(1) of description, e.g. all receivables that are recorded in the books of the the Dutch Civil Code, which requires notification, notification on or seller on the date of assignment, will be sufficient as well. after the date the seller has been declared bankrupt (failliet verklaard) or granted suspension of payments (surseance van 4.8 Respect for Intent of Parties; Economic Effects on Sale. betaling verleend) will not be effective. Consequently, in such If the parties denominate their transaction as a sale and event, the legal ownership to the receivables will not pass to the state their intent that it be a sale will this automatically be purchaser. Furthermore, in case of an assignment pursuant to respected or will a court enquire into the economic section 3:94(3) of the Dutch Civil Code, which requires notification characteristics of the transaction? If the latter, what to the obligors in order for the obligors to validly discharge their economic characteristics of a sale, if any, might prevent obligations (bevrijdend betalen) under the receivables by paying to the sale from being perfected? Among other things, to the seller, any payments made by the obligor to the seller after the what extent may the seller retain (a) credit risk; (b)

Netherlands date on which the seller has been declared bankrupt (failliet interest rate risk; and/or (c) control of collections of verklaard) or has been granted a suspension of payments receivables without jeopardising perfection? (surseance van betaling verleend), will form part of the bankruptcy estate of the seller, albeit that the purchaser will be a ‘creditor of the Under Dutch law, legal title to a receivable will pass to the estate’ (boedelschuldeiser) in respect of such payments. purchaser if such receivable is validly delivered by the seller pursuant to a valid title (geldige titel) and the seller had the power of disposal (beschikkingsbevoegdheid) over such receivable. Upon 4.6 Restrictions on Assignment; Liability to Obligor. Are the purchaser becoming the legal owner of the receivable, the restrictions in receivables contracts prohibiting sale or receivable becomes part of the purchaser’s estate. In principle (i.e. assignment generally enforceable in the Netherlands? subject to fraudulent conveyance and similar principles of Dutch Are there exceptions to this rule (e.g., for contracts law), the creditors of the seller (or its insolvency official) would not between commercial entities)? If the Netherlands recognises prohibitions on sale or assignment and the be able to recover receivables that have become part of the seller nevertheless sells receivables to the purchaser, will purchaser’s estate. either the seller or the purchaser be liable to the obligor In relation to the requirement of a valid title (geldige titel), being the for breach of contract or on any other basis? obligation for the seller to sell and assign the receivable, generally to be constituted by a receivables purchase agreement, we first note Under Dutch law, restrictions in receivables contracts prohibiting that according to a judgment of the Netherlands Supreme Court sale or assignment are generally enforceable. It does not make a dated 13 March 1981 (HR 13 March 1981, NJ 1981, 635, Haviltex) difference if a contract is entered into with commercial entities or the intention of the parties is of great importance to assess and with persons not acting in the course of their profession or business. interpret the terms and conditions of an agreement. If it is the In the event that a receivables contract, which is governed by Dutch intention of the parties involved to have a sale and assignment of a law, does prohibit assignment of the receivables, or otherwise receivable and such is stipulated in the receivables purchase contains restriction clauses on the assignment of such receivables, agreement, this will most likely be respected by a court. However, this would affect the validity of the assignment of such receivables only in cases where it is evident that the intention of the parties is because, under Dutch private international law, the question of different from what is stated in the agreement, which is dependent whether a receivable is transferable is governed by the law governing on all relevant circumstances (including the economic such receivable. This means that if the receivables contract prohibits characteristics of an agreement), a court could come to the assignment or otherwise contains any restrictions on the assignment conclusion that no sale and assignment of the receivable is foreseen of receivables, this would affect their transferability. For the and that a valid title for the assignment of the receivable is missing. avoidance of doubt, a breach of a restriction clause would affect the Secondly, we note that section 3:84(3) of the Dutch Civil Code transfer itself; in other words there will be no valid transfer of the provides that an agreement which purports to transfer an asset as relevant receivables. Therefore, the question whether the seller will security for a liability or which does not purport the transferred assets be liable for breach of contract is not relevant. to become part of the assets of the transferee, does not constitute a valid title. The fact that it has been agreed between the seller and the 4.7 Identification. Must the sale document specifically identify purchaser that the seller retains the whole credit risk related to the each of the receivables to be sold? If so, what specific assigned receivable or that the purchaser is entitled to re-transfer all information is required (e.g., obligor name, invoice defaulted or uncollectable receivable to the seller may involve the number, invoice date, payment date, etc.)? Do the risk that the sale agreement is not considered to constitute a valid title. receivables being sold have to share objective However, this risk is considered to be remote since case law, in characteristics? Alternatively, if the seller sells all of its particular the judgment of the Netherlands Supreme Court dated 19 receivables to the purchaser, is this sufficient May 1995 (HR 19 May 1995, NJ 1996, 119, Mr. Keereweer q.q. identification of receivables? Sogelease) has limited the effects of the restrictions resulting from section 3:84(3) of the Dutch Civil Code considerably. According to It is a Dutch law requirement that the receivables to be assigned this judgment, only the transfer of ownership for the sole purpose of pursuant to a deed of assignment are specified in such deed. protecting the interests of the transferee as a creditor of the transferor According to case law, this requirement is satisfied if the deed does constitutes an invalid title (fiducia cum creditore). contain such details in respect of the relevant receivables that one can determine which receivables the parties have intended to assign. In order to avoid any discussions (either between the 4.9 Continuous Sales of Receivables. Can the seller agree in parties, or more in particular with any bankruptcy trustee) as to an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables whether or not certain receivables have been validly assigned, it is as and when they arise)? preferred that as much detail as possible is included in the deed of assignment (such as invoice numbers). However, based upon case Yes, a seller may agree to a sale of all receivables that it currently law, there are valid arguments to take the view that a more general owes and may owe in the future, subject of course to provisions of 252 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Loyens & Loeff N.V. Netherlands

any applicable insolvency, fraudulent conveyance (actio pauliana) 5.2 Seller Security. If so, what are the formalities for the and other laws of general application in effect at the time of the seller granting a security interest in receivables and agreement or thereafter, relating to or affecting the enforcement or related security under the laws of the Netherlands, and protection of creditor’s rights. for such security interest to be perfected?

See the answer to question 5.1 above. 4.10 Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables 5.3 Purchaser Security. If the purchaser grants security over purchase agreement (e.g., “future flow” securitisation)? If all of its assets (including purchased receivables) in so, how must the sale of future receivables be structured favour of the providers of its funding, what formalities to be valid and enforceable? Is there a distinction must the purchaser comply with in the Netherlands to

between future receivables that arise prior to or after the grant and perfect a security interest in purchased Netherlands seller’s insolvency? receivables governed by the laws of the Netherlands and the related security? Under Dutch law, a receivable which does not exist yet may be sold and assigned in advance (bij voorbaat) by the seller so that the A right of pledge over receivables (including, without limitation, purchaser automatically becomes the owner thereof when it comes accounts receivable) is created by the execution of a deed of pledge. into existence, provided that the receivable is sufficiently identified Under Dutch law, a right of pledge over receivables can either be a in the deed of assignment and the requirements for the transfer of disclosed pledge (openbaar pandrecht), in which case the obligor of ownership are met. If the assignment is effected pursuant to section the pledged receivables is given notification of the pledge, or an 3:94(1) of the Dutch Civil Code, the assignment of a “future” undisclosed right of pledge (stil pandrecht), in which case the receivable has to be notified to the relevant obligors and, if the obligor is not notified of the pledge. However, in order to create a assignment is effectuated pursuant to section 3:94(3) of the Dutch valid undisclosed right of pledge, the relevant deed of pledge must Civil Code, the legal relationship from which such receivable be in the form of a notarial deed executed before a Dutch civil law results must already exist at the time of the assignment in advance. notary, or registered with the appropriate unit of the Dutch Tax However, it is of note that an assignment of a future receivable will Revenue Service. not be effective to the extent that the receivable comes into No statutory provision exists on the issue whether, upon the existence after or on the date on which the seller has been declared creation of a right of pledge over a receivable and notification bankrupt or has had a suspension of payments granted to it. thereof to the relevant obligor, the pledgee is entitled to exercise the accessory rights and the ancillary rights connected to the receivable 4.11 Related Security. Must any additional formalities be upon the exercise of the right of pledge. However, the majority fulfilled in order for the related security to be transferred view is that, if a right of pledge is created over a contractual right concurrently with the sale of receivables? If not all which itself is secured by a mortgage or a pledge, the pledgee is related security can be enforceably transferred, what entitled to exercise the rights of the relevant pledgor under such methods are customarily adopted to provide the mortgage or pledge, provided such right of mortgage or pledge is purchaser the benefits of such related security? disclosed to the relevant obligor.

No additional formalities need to be fulfilled if the related security 5.4 Recognition. If the purchaser grants a security interest in qualifies as an accessory right (afhankelijke recht) in the meaning of receivables governed by the laws of the Netherlands, and section 3:7 of the Dutch Civil Code and/or ancillary right that security interest is valid and perfected under the laws (nevenrecht) in the meaning of section 6:142 of the Dutch Civil Code, of the purchaser’s country, will it be treated as valid and such as a mortgage right, right of pledge or suretyship (borgtocht). perfected in the Netherlands or must additional steps be Pursuant to section 3:82 of the Dutch Civil Code, accessory rights taken in the Netherlands? and ancillary rights follow the right with which they are connected. Consequently, if a receivable is assigned, in principle the accessory The statements made above under question 3.1 apply mutatis rights and the ancillary rights pass by operation of law to the assignee mutandis. This means that the granting of security right over a of the receivable upon completion of the assignment, except if the receivable will be governed by the chosen law of, or the law relevant right by its nature is, or has been construed by the parties as, otherwise applicable to, the agreement which contains the a purely personal right of the assignor. If a security right is not solely undertaking to grant a security right over such receivable, granted to secure a particular receivable, but it secures also other irrespective of the law governing the receivable. The law of the amounts that are or may become due by the relevant obligor, it is not agreement containing the undertaking determines the validity of the entirely certain whether upon assignment of the receivable such granting of a security right over the receivable. However, the law security right follows the relevant receivable. governing the receivable over which a security right is purported to be granted determines (i) whether the receivable is capable of being encumbered, (ii) the relationship between the grantee of the security 5 Security Issues right and the obligor, (iii) the conditions under which the granting of a security right over the receivable can be enforced against the 5.1 Back-up Security. Is it customary in the Netherlands to obligor, as well as (iv) the question whether the obligor’s take a “back-up” security interest over the seller’s obligations under the receivable have been paid and discharged in ownership interest in the receivables and the related full. security, in the event that the sale is deemed by a court not to have been perfected? It is of note that there is no conclusive case law in the Netherlands with respect to the enforcement by the Dutch courts of security rights established under and governed by a law other than Dutch No, it is not customary in Dutch transactions involving a sale of law. However, from Dutch case law as it currently stands, the receivables to take up such a “back-up” security interest. following can be deduced: the foreclosure and ranking of security

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rights in the Netherlands will be subject to Dutch law, which has a 5.7 Bank Accounts. Does the Netherlands recognise escrow fixed system and a mandatory ranking of security rights. Subject to accounts? Can security be taken over a bank account the exceptions to the validity of the choice of the purchaser’s located in the Netherlands? If so, what is the typical country or a third country (other than the Netherlands) and the method? Would courts in the Netherlands recognise a above paragraph, such foreign security rights will be recognised in foreign-law grant of security (for example, an English law debenture) taken over a bank account located in the the Netherlands, without any additional steps being required. If Netherlands? recognised, a foreign security right will be enforced, and have the same ranking, as the Dutch security right which most closely Dutch law does not know the legal concept of escrow accounts. resembles such foreign security right. This means that the secured However, regular bank accounts in which amounts are credited party will not have more rights than it would have had if Dutch law which have a special purpose are being used frequently (especially had governed such foreign security right. in case of a sale and transfer of real estate). In case such an account Netherlands is maintained by a notary and qualifies as a so-called designated 5.5 Additional Formalities. What additional or different account (kwaliteitsrekening), the amounts standing to the account requirements apply to security interests in or connected to are separated from the estate of the notary. insurance policies, promissory notes, mortgage loans, A right of pledge over accounts receivables is generally created as consumer loans or marketable debt securities? a disclosed pledge (openbaar pandrecht) by the execution of a deed of pledge and notification thereof to the account bank. It should be Under Dutch law, a right of pledge over a promissory note payable noted that, pursuant to the general banking conditions (algemene to the bearer is created by the pledgor and the pledgee entering into bankvoorwaarden), the account bank generally retains a right of a deed of pledge, and by the physical delivery of the instrument to pledge in respect of the account and that, in case a first ranking right the pledgee or a third party agreed upon by the pledgor and the of pledge over account receivables is envisaged, the account bank pledgee. A right of pledge over a promissory note payable to order should be contacted and requested to waive the right of pledge is created in the same manner, provided that in addition to that, an created in favour of the account bank. endorsement is written on (the back of) the promissory note itself or on a slip affixed thereto (verlengstuk). As to the recognition of a foreign law security right in respect of a bank account located in the Netherlands, see the answer to question If the marketable debt securities held by the seller are cleared 5.4 above. through and registered with Necigef pursuant to the Wge, then a pledge over these securities is effectuated by means of a simple book-entry in the name of the pledgee in such bank’s records. As is 6 Insolvency Laws the case with the transfer of marketable debt securities cleared through and registered with foreign clearing institutions (see question 4.3 above), in principle, the creation of a security interest 6.1 Stay of Action. If, after a sale of receivables that is otherwise perfected, the seller becomes subject to an in such securities will also be governed by the laws of the location insolvency proceeding, will the Netherlands’ insolvency of such institution. We note however that, pursuant to Dutch rules laws automatically prohibit the purchaser from collecting, of private international law, the law governing the creation of a transferring or otherwise exercising ownership rights over security interest in securities held in a securities account with a the purchased receivables (a “stay of action”)? Does the bank or other entity, which is allowed to offer securities accounts to insolvency official have the ability to stay collection and its customers, is the laws of the state in whose territory the relevant enforcement actions until he determines that the sale is bank maintains the account to which such securities are credited. perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather There are no additional or different requirements for the creation than the owner of the receivables? and perfection of a right of pledge over receivables resulting from consumer loans and mortgage loans. If the seller of receivables under Dutch law becomes subject to insolvency proceedings following the sale and transfer of 5.6 Trusts. Does the Netherlands recognise trusts? If not, is ownership rights in such receivables, the purchaser of these there a mechanism whereby collections received by the receivables is free to exercise any ownership rights over the seller in respect of sold receivables can be held or be receivables (including collection and transfer). Dutch law is not deemed to be held separate and apart from the seller’s familiar with any “automatic stay” provisions which a purchaser own assets until turned over to the purchaser? would have to comply with following an effective sale and transfer of receivables (or a true sale, if you like) in such circumstances. Dutch law does not know the legal concept of trusts. However, It should be noted in this respect that Dutch law makes a distinction under Dutch law, pursuant to the Trust Convention, a trust created between ‘existing’ and ‘future’ receivables: if receivables are to be in accordance with the chosen law, will be recognised by the courts regarded as future receivables, a sale and transfer will be ineffective in the Netherlands, provided that the chosen law provides for trusts to the extent that the receivables come into existence on or after the and the trust has been created voluntarily and is evidenced in date on which the seller has been declared bankrupt or has had a writing. Pursuant to section 13 of the Trust Convention, the courts suspension of payments granted to it (see question 4.10 above). in the Netherlands will, however, not be bound to recognise a trust, The purchaser will, in that case, not be able to exercise any the significant elements of which are more closely connected with ownership rights as such rights have not been effectively transferred states which do not provide for the institution of the trust. As an to it. alternative to a trust, a bankruptcy remote foundation may be used, which is incorporated for the sole purpose of managing and Furthermore, if the assignment of the receivables was effected by distribution of certain amounts received by it to the persons who are means of a notarial deed or registered deed of assignment without entitled to receive such amounts in accordance with the object notification being made to the obligors (see question 4.2), until such clause in its articles of association. notification to the obligors has been made, such obligors can only validly discharge their obligations (bevrijdend betalen) under the

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relevant receivables contract by making a payment to the seller. and transfer on the basis of general defences under Dutch law in Payments made by the obligors to the seller prior to notification but respect of the validity and enforceability of contractual obligations, after bankruptcy or suspension of payments in respect of the seller such as avoidance on the grounds of duress (bedreiging), deceit having been declared, will be part of the seller’s bankruptcy estate. (bedrog), undue influence (misbruik van omstandigheden) or However, the purchaser has the right to receive the amounts paid by mistake (dwaling). the obligors by preference after deduction of the general bankruptcy costs (algemene faillissementskosten). Notification to the obligors 6.3 Suspect Period (Clawback). Under what facts or of the transfer of legal title can still be validly made after the seller circumstances could the insolvency official rescind or has been declared bankrupt or has been granted a suspension of reverse transactions that took place during a “suspect” or payments. After such notification, the obligors are required to make “preference” period before the commencement of the the payments under the relevant receivables contracts to the insolvency proceeding? What are the lengths of the purchaser. “suspect” or “preference” periods in the Netherlands for Netherlands In case the purchaser is granted a right of pledge over the (a) transactions between unrelated parties and (b) transactions between related parties? receivables, the purchaser, as pledgee, may act “as if there were no bankruptcy” and foreclose its right of pledge. A right of pledge over The insolvency official may try to void voluntarily executed receivables governed by Dutch law may be enforced by collection transactions, provided he can establish that both parties to the of such receivables (after notice of the right pledge to the relevant transaction – seller and purchaser – knew or should have known obligor) and applying the net proceeds of such sale in satisfaction that the transaction would have the effect of decreasing the amount of the payment obligations secured by such pledge or by having the which the seller’s creditors would have received, had the sale and receivables sold in a public auction or by a private sale and applying transfer of the receivables to the purchaser not taken place. Such the net proceeds of such auction or sale towards satisfaction of the knowledge is presumed by law, subject to proof to the contrary, for payment obligations secured by such pledge, all with due all transactions performed within one year prior to an adjudication observance of the applicable provisions of Dutch law. of bankruptcy of the seller, and provided it can also be established It should be noted that the court may, in the case of a suspension of that the transaction falls within one of the following categories: payments and a bankruptcy, for a period of two months with a (i) the seller received substantially less than the estimated value possible extension of two months, order a general stay (a so-called of the assets sold; cool down period (afkoelingsperiode)) during which secured (ii) the transaction was entered into by the seller as a natural creditors, such as a holder of a pledge over receivables, may only person, with certain of its next of kin; foreclosure its right of pledge after having obtained the approval of the administrator (in case of suspension of payments) or the (iii) the transaction was entered into by the seller as a legal entity with members of its management board and/or supervisory bankruptcy trustee (in case of bankruptcy). It is noted that the board and/or its shareholders and some of each of their next ordering of a cool down period does not prevent the collection by of kin; or the pledgee of amounts due under the receivables, but only the (iv) the transaction was entered into by the seller as a legal entity application by the pledgee of the proceeds thereof towards with a group company. satisfaction of the payment obligations secured by the right of pledge during the cool down period. Furthermore, in the case of bankruptcy, under the Dutch 6.4 Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official Bankruptcy Code (Faillissementswet), a bankruptcy trustee may consolidate the assets and liabilities of the purchaser with determine a reasonable period within which pledgees and those of the seller or its affiliates in the insolvency mortgagees must foreclose their security rights. If a pledgee or proceeding? mortgagee fails to do so, the bankruptcy trustee may sell the assets subject to the security right himself in a manner provided for in the Dutch law is not familiar with the concept of “consolidation of Dutch Bankruptcy Code (Faillissementswet). It is not certain assets and liabilities” of the purchaser with those of the seller. If the whether this provision applies to a pledgee of intangible assets, sale and transfer of the receivables is perfected under Dutch law and such as receivables. In legal literature, it has been argued that this the purchaser has obtained full legal title to such receivables, the provision is not applicable to a pledge over receivables, since it only insolvency official in the seller’s insolvency will not be able to refers to sale of assets subject to a right of pledge or mortgage and consolidate assets and liabilities of the purchaser with those of the not to a collection of receivables and, furthermore that the exercise seller. Should the sale and transfer of the receivables not be of collection powers which pass to the pledgee upon notification, perfected prior to the insolvency of the seller, the receivables will cannot by its nature be limited to a period. fall in the seller’s bankruptcy. As a practical matter, however, a bankruptcy trustee in a Dutch bankruptcy would sometimes apply 6.2 Insolvency Official’s Powers. If there is no stay of action consolidation of assets and liabilities, e.g. in the event that affiliated under what circumstances, if any, does the insolvency entities are declared bankrupt (i.e. a parent company and its official have the power to prohibit the purchaser’s subsidiaries), there would be a strong interrelationship among these exercise of rights (by means of injunction, stay order or entities (i.e. because of joint and several liability arrangements other action)? between these entities) and such consolidation would not be harmful to the interests of creditors, taking into account that the In the absence of any “automatic stay” provisions under Dutch law, consolidation would save the costs of making a distinction between and assuming the sale and transfer of the ownership rights in the the asset and debt position of the individual entities. On the basis receivables would be effective, the insolvency official could seek to of the Netherlands Supreme Court dated 25 September 1987 (HR prohibit the exercise of such ownership rights by the purchaser by 25 September 1987, NJ 1988, 136, Van Kempen en Begeer vs. the having the sale and transfer of the receivables to the purchaser bankruptcy trustees of Zilfa and DCW), it can be deducted that a avoided under the Dutch fraudulent conveyance provisions. consolidation of the bankruptcies of various entities is allowed in Alternatively, such insolvency official could try to avoid the sale the event that the assets and liabilities of such entities are

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intermingled to such extent that it would basically be impossible to If the contract is governed by a law other than Dutch law, a Dutch separate these. court would give effect to such contractual provision in accordance with the rules of the relevant law. 6.5 Effect of Proceedings on Future Receivables. What is the effect of the initiation of insolvency proceedings on (a) 7.4 Non-Petition Clause. Will a court in the Netherlands give sales of receivables that have not yet occurred or (b) on effect to a contractual provision (even if the contract’s sales of receivables that have not yet come into governing law is the law of another country) prohibiting existence? the parties from: (a) taking legal action against the purchaser or another person; or (b) commencing an Under Dutch law, future receivables can be assigned in advance (bij insolvency proceeding against the purchaser or another voorbaat) by the seller to the purchaser, provided that such person? Netherlands receivables directly result from a legal relationship which existed at the time if it concerns an assignment which is effected pursuant to Yes, such contractual provisions would in principle be valid and section 3:94(3) of the Dutch Civil Code. However, if such future enforceable under Dutch law. If any of the other parties to such receivables come into existence after the moment that the seller has contractual arrangement took legal action against the special purpose been granted a suspension of payments or has been declared entity or commenced insolvency proceedings against it, in violation bankrupt, the assignment of such receivables cannot be invoked of the contractual obligation not to, the other party or parties to such against the bankrupt estate (boedel). The receivables will then fall contractual arrangement could initiate proceedings against the within the bankrupt estate of the seller. ‘violator’ and claim compensation for damages, if any, suffered by them due to the special purpose entity being declared bankrupt. However, under Dutch law, any contractual restrictions imposed on a 7 Special Rules party to a contract to institute or join any other person in instituting insolvency proceedings against the special purpose vehicle will not 7.1 Securitisation Law. Is there a special securitisation law result in such party becoming legally incompetent to institute or join (and/or special provisions in other laws) in the any person in instituting such proceedings. It is therefore possible Netherlands establishing a legal framework for that a Dutch court would deal with a petition for bankruptcy securitisation transactions? If so, what are the basics? (faillissement) in respect of the purchaser or such other person, notwithstanding that such petition has been presented in breach of a No such laws exist. non-petition covenant. The court, when dealing with such petition, may come to the conclusion that the purchaser or such other person has ceased to pay its debts as they fall due (being the legal ground for 7.2 Securitisation Entities. Does the Netherlands have laws bankruptcy in the Netherlands). A Dutch court may also deal with a specifically providing for establishment of special purpose entities for securitisation? If so, what does the law petition for suspension of payments (surseance van betaling). provide as to: (a) requirements for establishment and If the contract is governed by a law other than Dutch law, a Dutch management of such an entity; (b) legal attributes and court would give effect to such contractual provision in accordance benefits of the entity; and (c) any specific requirements as with the rules of the relevant law. to the status of directors or shareholders?

No such laws exist. Typically, an issuer in a securitisation is 7.5 Independent Director. Will a court in the Netherlands give incorporated as a straightforward private company with limited effect to a contractual provision (even if the contract’s governing law is the law of another country) or a provision liability (besloten vennootschap met beperkte aansprakelijkheid) in a party’s organisational documents prohibiting the under Dutch law, the shares in which are held by a foundation directors from taking specified actions (including (stichting). In its ‘Decree on Securitisation Wft 2010’, the Dutch commencing an insolvency proceeding) without the Central Bank (De Nederlandsche Bank N.V.) has set as affirmative vote of an independent director? requirements for credit institutions to be able to qualify under solvency relief provisions in relation to securitisation transactions, There is no reason why such limitation on the competence of the inter alia, that: management of the relevant entity would not be valid and (i) the originating credit institution may not hold any share enforceable against it. If such limitation is violated by the capital or other form of proprietary interest in or control over management board, the special purpose entity could hold the the issuing special purpose entity; management personally liable for damages, if any, suffered by the (ii) the issuer is not in any way affiliated to the originator; and special purpose entity due to the violation. (iii) the name of the issuer does not include the name of the originator nor implies any connection with it. 8 Regulatory Issues

7.3 Non-Recourse Clause. Will a court in the Netherlands 8.1 Required Authorisations, etc. Assuming that the give effect to a contractual provision (even if the purchaser does no other business in the Netherlands, will contract’s governing law is the law of another country) its purchase and ownership or its collection and limiting the recourse of parties to available funds? enforcement of receivables result in its being required to qualify to do business or to obtain any licence or its being Generally, limited recourse provisions are valid and enforceable subject to regulation as a financial institution in the under Dutch law. Section 3:276 of the Dutch Civil Code even Netherlands? Does the answer to the preceding question provides a legal basis for such provisions where it states that a change if the purchaser does business with other sellers creditor has recourse on all assets of a obligor unless provided in the Netherlands? otherwise by law or by contract. Under the Act on the Financial Supervision (Wet op het financieel

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toezicht) (the “Financial Services Act”), which entered into force example, certain (continuing) information obligations in relation to on 1 January 2007, financial services providers, including offerers the customer such as that the credit provider, on the request of the and brokers of financial products such as consumer loans, mortgage customer, must provide the customer with a specified overview of loans and any form of credit, are subjected to licence requirements the outstanding balance. The rules maximising the interest to be and continuous conduct supervision by the Netherlands Authority charged by the lender also apply. Further, the customer should be for the Financial Markets (Autoriteit Financiële Markten, the allowed to perform an advanced repayment of the loan. “AFM”). In addition, pursuant to the Financial Services Act, a The sale and assignment by the seller of the receivables resulting person who becomes the legal owner of loan receivables and from consumer loans will be without prejudice to the rights and the consequently services (beheert), or who administers (uitvoert) such protection afforded by Dutch law to the relevant borrowers. loan receivables, would be required to have a licence as of the In addition the provider of the consumer loan will be subject to moment legal title was transferred to it. If the purchaser of the certain licence requirements (see question 8.1 above). receivables is a licensed credit institution, it holds such a licence Netherlands under the Financial Services Act by law. If a special purpose company or other entity acts as purchaser of such loan receivables, 8.5 Currency Restrictions. Does the Netherlands have laws it will be exempt from obtaining a licence under the Financial restricting the exchange of the Netherlands’ currency for Services Act if it has outsourced the servicing of the loan other currencies or the making of payments in the receivables and the administration thereof to an entity holding a Netherlands’ currency to persons outside the country? licence under the Financial Services Act. The above licence requirements do not apply with respect to receivables that do not The Money Transactions Offices Act (Wet inzake de qualify as a financial product within the meaning of the Financial geldtransactiekantoren) states that money transfer offices have to Services Act. The purchase, ownership, collection and/or register at the Dutch Central Bank before they are allowed to carry enforcement of such receivables do not result in the purchaser out money transactions. Every individual or legal person who, in becoming subject to the Financial Services Act or otherwise being the course of its business, performs money transactions on request required to qualify to do business in the Netherlands. or in favour of a third person, qualifies as a money transaction office. Only those money transaction offices that comply with The above answer will not change when the purchaser does requirements concerning the trustworthiness of individuals business with other sellers in the Netherlands. involved in a money transactions office and with the requirements relating to business operations and administrative organisation will 8.2 Servicing. Does the seller require any licences, etc., in be registered by the Dutch Central Bank. order to continue to enforce and collect receivables On July 1, 2012, the Money Transactions Offices Act will be following their sale to the purchaser, including to appear repealed and the law regarding money transaction offices will be before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect included in the Financial Services Act. As of that date, everyone sold receivables? who, in the course of its business, performs exchange transactions qualifies as an exchange office. It is not allowed to perform See the answer to question 8.1 above. exchange transactions without having obtained a licence from the Dutch Central Bank. Under the External Financial Relations Act 1994 (Wet financiële 8.3 Data Protection. Does the Netherlands have laws betrekkingen buitenland 1994) and the balance of payments restricting the use or dissemination of data about or provided by obligors? If so, do these laws apply only to reporting instructions 2003 (Rapportagevoorschriften consumer obligors or also to enterprises? betalingsbalansrapportages 2003), the Dutch Central Bank may appoint entities which have to report to the Dutch Central Bank in Yes, the use or dissemination of data about or provided by obligors order to allow it to compile the national balance of payments. This may be subject to the provisions of the Dutch Data Protection Act means that the Dutch Central Bank makes sure that there is an (Wet Bescherming Persoonsgegevens). This act contains provisions accounting record of all monetary transactions between the with respect to the processing of personal data, ‘personal data’ Netherlands and other countries. In connection therewith, the being information on private individuals or information which can Dutch Central Bank periodically collects data from groups of be traced back to private individuals, and ‘processing’ including the reporting entities selected by the Dutch Central Bank relating to, dissemination or transfer of such data amongst or to third parties. among others, cross-border transactions. The act sets requirements on the way personal data should be collected and states that such collection is only allowed if any of the 9 Taxation limitative grounds for assembling such information as mentioned in the Act apply. Furthermore, the Act indicates what requirements on quality need to be met, which reporting requirements exist and what 9.1 Withholding Taxes. Will any part of payments on rights the individuals whose information is collected may exercise receivables by the obligors to the seller or the purchaser towards the data collector in relation to such data collection. be subject to withholding taxes in the Netherlands? Does the answer depend on the nature of the receivables, whether they bear interest, their term to maturity, or 8.4 Consumer Protection. If the obligors are consumers, will where the seller or the purchaser is located? the purchaser (including a bank acting as purchaser) be required to comply with any consumer protection law of In principle, no withholding tax will be due in the Netherlands, the Netherlands? Briefly, what is required? unless the rules on hybrid debt apply. These rules, however, do not normally apply in relation to securitisation transactions. With a view to protect the interests of consumers, there are certain limitations and restrictions in relation to consumer loans and underlying contracts (see also question 1.2 above). There are, for

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9.2 Seller Tax Accounting. Does the Netherlands require that Factoring case, (26 June 2003, C-305/01), that an economic activity a specific accounting policy is adopted for tax purposes whereby an entrepreneur purchases debts, is assuming the risk of by the seller or purchaser in the context of a the debtor’s default and in return invoices its clients in respect of securitisation? commission, constitutes debt collection and factoring which is VAT taxed. In this respect, the ECJ has ruled in the GFKL Financial No specific accounting policy needs to be applied for tax purposes Services case (27 October 2011, C-93/10) that a transfer of in the Netherlands. receivables, in itself, does not imply a factoring service from the perspective of the transferee. Pursuant to the guidance of the State 9.3 Stamp Duty, etc. Does the Netherlands] impose stamp Secretary of Finance (Infobulletin 87/1974), factoring is considered duty or other documentary taxes on sales of receivables? as a VAT-taxable service if it concerns a continuing agreement in addition to which the entrepreneur is committed to take or all the Netherlands The Netherlands does not levy stamp duty, registration tax, transfer risks of collecting the receivables. The incidental purchase of tax or other similar taxes on sales of receivables. However, Dutch receivables does not qualify as factoring. real property transfer tax may be due if the receivables represent an interest in, or rights over, real property situated in the Netherlands. 9.5 Purchaser Liability. If the seller is required to pay value In practice, the latter does not generally apply. added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then 9.4 Value Added Taxes. Does the Netherlands impose value will the taxing authority be able to make claims for the added tax, sales tax or other similar taxes on sales of unpaid tax against the purchaser or against the sold goods or services, on sales of receivables or on fees for receivables or collections? collection agent services?

If the seller is required to pay the VAT, it is not possible to make The supply of goods and services is VAT-taxed in the Netherlands claims against the purchaser. The seller, and not the purchaser, is if, according to the rules for the place of supply, the services are the VAT-taxable person. deemed to be rendered in the Netherlands and no exemption is applicable. No stamp duty will be due. The transfer of receivables in the context of a Securitisation transaction is VAT-exempt, as a result of which no VAT is due on the 9.6 Doing Business. Assuming that the purchaser conducts transfer. If a taxable person, who is generally entitled to deduct no other business in the Netherlands, would the VAT, transfers receivables in such transaction, the transfer should purchaser’s purchase of the receivables, its appointment not have adverse consequences with respect to the transferor’s of the seller as its servicer and collection agent, or its general right to deduct VAT on costs. enforcement of the receivables against the obligors, make it liable to tax in the Netherlands? Collection agent services are in principle taxed with VAT. However, on the basis of guidance of the State Secretary of Finance, Non-residents will not generally become liable to Dutch income tax such services may be treated as VAT-exempt insofar as the services or corporation tax, as the case may be, by virtue only of the constitute collection from non-defaulting debtors. purchase of receivables or the appointment of a servicer or Furthermore, the transferee may render a VAT-taxed service in case collection agent, in respect of a securitisation transaction. of factoring. The ECJ has ruled in the MKG-Kraftfahrzeuge-

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Mariëtte van ‘t Westeinde Jan Bart Schober

Loyens & Loeff N.V. Loyens & Loeff N.V. Fred. Roeskestraat 100 Fred. Roeskestraat 100 1076 ED Amsterdam 1076 ED Amsterdam The Netherlands The Netherlands

Tel +31 20 578 57 85 Tel: +31 20 578 54 51 Fax +31 20 578 58 00 Fax: +31 20 578 58 25 Email [email protected] Email: [email protected] URL www.loyensloeff.com URL: www.loyensloeff.com

Mariëtte van ‘t Westeinde, a partner in the Loyens & Loeff Jan Bart Schober (1975) is a tax partner in the International Tax

Amsterdam office, graduated from Utrecht University in 1990, practice group of Loyens & Loeff. He specialises inter alia in Netherlands where she studied business and social-economic law. Mariëtte structured finance. In particular, he focuses on securitisations, started her law career in 1991 and has held various positions repackagings and similar financial transactions, both in the Dutch ranging from in-house company attorney to attorney-at-law. She domestic market as well as cross-border. Currently Jan Bart is joined Loyens & Loeff in April 2002 as member of the Banking based in the Amsterdam office. Before that, he worked in the and Securities law practice group. Mariëtte has a broad London office of Loyens & Loeff for three years. experience in all kinds of specialised financial transactions, ranging from asset finance to public and private debt issues and asset management, but has a special focus on securitisations. In the domestic market the securitisation team of Loyens & Loeff is one of the market leaders. Mariëtte regularly publishes articles and is co-author of a book on securitisation in the Netherlands.

Loyens & Loeff’s Banking & Finance team, made up of lawyers from the Amsterdam, Brussels, Luxembourg, London, New York, Paris and Tokyo offices, renders advice on all aspects of financial transactions. The team has broad and in-depth experience and expertise in a wide variety of transaction and financing structures, including asset and project financing, lease transactions, secured and unsecured (syndicated) bank lending, structured financing and derivative transactions and securitisations. Where international transactions are concerned, the team collaborates with leading law firms in other jurisdictions. The securitisation department at Loyens & Loeff is a market leader in the Netherlands and, thanks to its close cooperation with our outstanding tax lawyers, the team is also highly regarded in the structured finance market. In 2009 Loyens & Loeff N.V. was awarded the Chambers Award for Benelux Firm of the Year for the second time.

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Chapman Tripp John Sproat

1 Receivables Contracts c) A consumer credit contract may be cancelled by the obligor within a short period, provided that the obligor pays the cash price of the property or services, or returns the advance and 1.1 Formalities. In order to create an enforceable debt any other property received. obligation of the obligor to the seller, (a) is it necessary that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone 1.3 Government Receivables. Where the receivables sufficient; and (c) can a receivable “contract” be deemed contract has been entered into with the government or a to exist as a result of the behaviour of the parties? government agency, are there different requirements and laws that apply to the sale or collection of those It is not necessary for there to be a formal receivables contract in receivables? order for an enforceable debt obligation to be created. The contract may be oral, based on invoices, or deemed to exist as a consequence Generally, there are no different requirements or laws that apply to of dealings between the parties. However, in each case, in the event the sale or collection of receivables contracts entered into with the that there is a dispute as to the extent of an agreement between the New Zealand Government or governmental agencies. parties, the contents of the agreement will be a matter of evidence to be determined by a Court. 2 Choice of Law – Receivables Contracts Furthermore, to the extent that the debt obligation creates or contains a security interest, the Personal Property Securities Act 2.1 No Law Specified. If the seller and the obligor do not 1999 (“PPSA”) requires that in order for the seller, as creditor, to specify a choice of law in their receivables contract, what preserve its priority interest in the obligation against third parties, are the main principles in New Zealand that will determine the obligor is required to sign, or assent by some written means to, the governing law of the contract? the debt obligation. Generally, the proper law of a contract is determined by reference 1.2 Consumer Protections. Do New Zealand’s laws (a) limit to the terms of the contract and the surrounding circumstances. rates of interest on consumer credit, loans or other kinds Courts attempt to identify the legal system with the closest and most of receivables; (b) provide a statutory right to interest on real connection with the transaction. There are various relevant late payments; (c) permit consumers to cancel factors that can be taken into account in conducting this analysis, receivables for a specified period of time; or (d) provide including: other noteworthy rights to consumers with respect to where the contract was made; receivables owing by them? where the contract is to be performed; a) Generally, there is no limit on rates of interest on receivables. the nature and location of the subject matter of the contract; However, the Credit Contracts and Consumer Finance Act the currency in which payment is to be made; 2003 (“CCCFA”) may be relevant. If an interest rate is the place of the parties’ residence or business; and considered “oppressive”, then it may not be enforceable. Oppressive is defined as meaning oppressive, harsh, unjustly a choice by the parties that the Courts of a particular country burdensome, unconscionable or in contravention of are to have jurisdiction over the contract. reasonable standards of commercial practice. An interest rate that constitutes a penalty may be unenforceable under 2.2 Base Case. If the seller and the obligor are both resident common law. Looking to the future, we note there is a in New Zealand, and the transactions giving rise to the Government sanctioned proposal to add responsible lending receivables and the payment of the receivables take requirements to the CCCFA. place in New Zealand, and the seller and the obligor b) There is no statutory right to interest on late payments under choose the law of another country to govern the New Zealand law. However, the CCCFA provides, in receivables contract, is there any reason why a court in relation to consumer credit contracts, that a higher default New Zealand would not give effect to their choice of law? rate of interest can only be charged if there is a default in payment and then only while the default continues or if the If a receivables contract contains a clause expressly electing a debt exceeds the contracted credit limit and only while the jurisdiction other than New Zealand as the governing law of the credit limit is exceeded. transaction, the general presumption is that this is likely to be valid,

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including if the parties have chosen a legal system with which the 3.2 Example 1: If (a) the seller and the obligor are located in contract has no connection. New Zealand , (b) the receivable is governed by the law of New Zealand, (c) the seller sells the receivable to a However, such an election is not certain to be upheld. It must be purchaser located in a third country, (d) the seller and the made in good faith and not be avoidable on public policy grounds. purchaser choose the law of the purchaser’s country to There are several New Zealand statutes that override normal choice govern the receivables purchase agreement, and (e) the of law rules. For instance, section 137 of the CCCFA provides that sale complies with the requirements of the purchaser’s the CCCFA applies to credit contracts, guarantees, leases, or country, will a court in New Zealand recognise that sale residential real estate buy-back transactions that are governed by as being effective against the seller, the obligor and other the law of New Zealand or that would be governed by the law of third parties (such as creditors or insolvency administrators of the seller and the obligor)? New Zealand, but for a choice of law provision in the contract, guarantee, lease or transaction.

Subject to what we have said in questions 2.2 and 2.3, generally a New Zealand Court will recognise the sale as being effective. 2.3 Freedom to Choose Foreign Law of Non-Resident Seller or Obligor. If the seller is resident in New Zealand but the obligor is not, or if the obligor is resident in New Zealand 3.3 Example 2: Assuming that the facts are the same as but the seller is not, and the seller and the obligor choose Example 1, but either the obligor or the purchaser or both the foreign law of the obligor/seller to govern their are located outside New Zealand, will a court in New receivables contract, will a court in New Zealand give Zealand recognise that sale as being effective against the effect to the choice of foreign law? Are there any seller and other third parties (such as creditors or limitations to the recognition of foreign law (such as public insolvency administrators of the seller), or must the policy or mandatory principles of law) that would typically requirements of the obligor’s country or the purchaser’s apply in commercial relationships such that between the country (or both) be taken into account? seller and the obligor under the receivables contract? The principles outlined in questions 2.2 and 2.3 will apply. The principles mentioned above in respect of a choice of law for a receivables contract in which the seller and obligor are resident in 3.4 Example 3: If (a) the seller is located in New Zealand but New Zealand also apply for a situation where the seller or obligor the obligor is located in another country, (b) the are resident in a different country. receivable is governed by the law of the obligor’s country, Provided the choice of the law of the obligor’s/seller’s country or a (c) the seller sells the receivable to a purchaser located in third country to govern the contract is bona fide, and is not contrary a third country, (d) the seller and the purchaser choose to public policy, New Zealand Courts usually respect the parties’ the law of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the autonomy in their choice. requirements of the obligor’s country, will a court in New Zealand recognise that sale as being effective against the 2.4 CISG. Is the United Nations Convention on the seller and other third parties (such as creditors or International Sale of Goods in effect in New Zealand? insolvency administrators of the seller) without the need to comply with New Zealand’s own sale requirements? Yes, pursuant to the Sale of Goods (United Nations Convention) Act 1994. See question 3.2.

3 Choice of Law – Receivables Purchase 3.5 Example 4: If (a) the obligor is located in New Zealand but the seller is located in another country, (b) the Agreement receivable is governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country to govern the receivables purchase 3.1 Base Case. Does New Zealand’s law generally require agreement, and (d) the sale complies with the the sale of receivables to be governed by the same law requirements of the seller’s country, will a court in New as the law governing the receivables themselves? If so, Zealand recognise that sale as being effective against the does that general rule apply irrespective of which law obligor and other third parties (such as creditors or governs the receivables (i.e., New Zealand’s laws or insolvency administrators of the obligor) without the need foreign laws)? to comply with New Zealand’s own sale requirements? If there has been no express or implied choice of law, the sale of See question 3.2. receivables will be governed by whichever system of law has the closest and most real connection with the contract of sale. In general, this is likely to be the law governing the receivables themselves. Where the sales of receivables contract specifically elects a law other than the law governing the receivables themselves, and that election was made in good faith and not contrary to public policy, there is a general presumption this choice will be valid. See question 2.2.

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3.6 Example 5: If (a) the seller is located in New Zealand 4.2 Perfection Generally. What formalities are required (irrespective of the obligor’s location), (b) the receivable is generally for perfecting a sale of receivables? Are there governed by the law of New Zealand, (c) the seller sells any additional or other formalities required for the sale of the receivable to a purchaser located in a third country, receivables to be perfected against any subsequent good (d) the seller and the purchaser choose the law of the faith purchasers for value of the same receivables from purchaser’s country to govern the receivables purchase the seller? agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in See question 4.1. New Zealand recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller, any 4.3 Perfection for Promissory Notes, etc. What additional or obligor located in New Zealand and any third party different requirements for sale and perfection apply to sales of promissory notes, mortgage loans, consumer New Zealand creditor or insolvency administrator of any such obligor)? loans or marketable debt securities? See question 3.2. With regard to sales of negotiable instruments (which include promissory notes), “chattel paper” (e.g. finance leases and hire 4 Asset Sales purchase agreements) and investment securities (which include marketable debt securities) it is possible to take “possession” of 4.1 Sale Methods Generally. In New Zealand what are the such securities under the PPSA. Accordingly, it may be desirable to customary methods for a seller to sell receivables to a provide for perfection of the security interest arising under the purchaser? What is the customary terminology – is it PPSA by taking possession of the securities in addition to called a sale, transfer, assignment or something else? registration. A purchaser of “chattel paper” will also need to ensure that the A sale of receivables is customarily called a sale (although its legal seller has registered its security interest against the obligor in effect is usually referred to as an assignment). respect of the underlying goods. In order to be a statutory assignment, an assignment must be The Land Transfer Act 1952 (“LTA”) is relevant to loans secured by absolute and not by way of security only, in writing and signed by mortgages of land. A mortgage of land can be registered under the the seller. While consent from the debtor need not be obtained, LTA. Upon registration, the interest of the mortgagee is protected written notice of the assignment must be given to the debtor in order by the indefeasibility provisions of the LTA. This means that, in for the assignment to be effective as between the obligor and the general terms, the registration of a mortgage created later in time assignee. Consideration is not required, and no particular form of will defeat earlier equitable interests of unregistered purchasers or assignment is required. This is reflected in section 50 of the unregistered mortgagees. Property Law Act 2007 (“PLA”). Mortgages of land that have been registered under the LTA may be An assignment that is not a statutory assignment may still be valid transferred from the seller to the purchaser by memorandum of in equity. However, such an assignment will create an equitable transfer. Registration of the transfer of mortgage is not notice to the interest in the property only (i.e. the seller retains legal title to the mortgagor, so it is still necessary to give the mortgagor notice. underlying asset, but holds such title subject to the equitable interest Until notice is given, the mortgagor is entitled to continue paying of the purchaser). principal and interest to the original mortgagee. Normally, securitisations will provide for a statutory assignment of The PPSA does not apply to transfers of land interests. However, receivables, with the right to give notice of the assignment to the because the loan receivable is not usually recorded in the mortgage obligor arising upon a default only. document, it is common practice to also register such a transfer on It should be noted that, while a statutory assignment operates to the Personal Property Securities Register – see question 4.1. convey legal title, the assignment of an account receivable or chattel paper will also give rise to a deemed security interest for the 4.4 Obligor Notification or Consent. Must the seller or the purposes of the PPSA. purchaser notify obligors of the sale of receivables in Accordingly, the transaction should also comply with the PPSA to order for the sale to be effective against the obligors ensure that the deemed security interest satisfies the requirements and/or creditors of the seller? Must the seller or the needed to preserve the priority of the purchaser’s claim. This purchaser obtain the obligors’ consent to the sale of requires the assignment to: receivables in order for the sale to be an effective sale against the obligors? Does the answer to this question be signed or assented to by the seller; vary if (a) the receivables contract does not prohibit contain an adequate description of the collateral (being the assignment but does not expressly permit assignment; or receivables); and (b) the receivables contract expressly prohibits “attach” through the purchaser giving value and obtaining assignment? Whether or not notice is required to perfect rights under the assignment. a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor To ensure the best available protection under the PPSA, the defences? assignment should also be “perfected” (generally by registration in the Personal Property Securities Register, although an assignment The seller or the purchaser must notify the obligors of the sale of of “chattel paper”, such as a finance lease or hire purchase receivables in order for the sale to be effective against the obligors agreement, is also capable of being perfected by possession which of the seller. could, in a priority dispute, prevail over perfection by registration). Provided the contract is not for personal services or the receivables contract does not expressly require consent or prohibit an assignment, receivables can be sold without the obligor’s consent.

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There is no requirement for assignment to be expressly permitted. There is no need for the receivables to share objective The provision of notice to the obligor fixes priorities as against characteristics. If the seller sells all of its receivables to the other assignees of the receivables (in circumstances where the purchaser, this is unlikely to be sufficient identification of deemed security interest provisions of the PPSA have not been receivables. complied with), and prevents the obligor from being able to assert against the purchaser any defences or claims (e.g. rights of set off) 4.8 Respect for Intent of Parties; Economic Effects on Sale. that the obligor had against the seller that accrued before the giving If the parties denominate their transaction as a sale and of notice. state their intent that it be a sale will this automatically be respected or will a court enquire into the economic characteristics of the transaction? If the latter, what 4.5 Notice Mechanics. If notice is to be delivered to obligors, economic characteristics of a sale, if any, might prevent whether at the time of sale or later, are there any

the sale from being perfected? Among other things, to New Zealand requirements regarding the form the notice must take or what extent may the seller retain (a) credit risk; (b) how it must be delivered? Is there any time limit beyond interest rate risk; and/or (c) control of collections of which notice is ineffective – for example, can a notice of receivables without jeopardising perfection? sale be delivered after the sale, and can notice be delivered after insolvency proceedings against the obligor A Court will normally respect the intent of the parties that such a have commenced? Does the notice apply only to specific receivables or can it apply to any and all (including future) transaction be characterised as a sale. While there is a residual risk receivables? Are there any other limitations or of the arrangement being “re-characterised” as something other considerations? than a sale, this risk is considered to be relatively low, particularly if the transaction was a genuine sale (i.e. not a sham) and if the way Subject to the terms of the receivables contract itself, there are no in which the intention of the parties had been expressed was requirements for, or restrictions on, notices, so long as it is in consistent with the language of a sale. writing. Note also the comments in question 4.1 that an assignment of an account receivable or “chattel paper” is a deemed security interest 4.6 Restrictions on Assignment; Liability to Obligor. Are under the PPSA. restrictions in receivables contracts prohibiting sale or assignment generally enforceable in New Zealand? Are 4.9 Continuous Sales of Receivables. Can the seller agree in there exceptions to this rule (e.g., for contracts between an enforceable manner (at least prior to its insolvency) to commercial entities)? If New Zealand recognises continuous sales of receivables (i.e., sales of receivables prohibitions on sale or assignment and the seller as and when they arise)? nevertheless sells receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for Sellers can agree to continuous sales of receivables. While there is breach of contract or on any other basis? a risk such a contract could be characterised as an agreement to agree in the future (and potentially unenforceable), it is likely that a Generally, restrictions in receivables contracts prohibiting sale or Court would characterise the contract as a current agreement to sell assignment are enforceable, irrespective of the types of entities to the a future receivable. contract. If a seller were to sell receivables in breach of a prohibition, it is likely that it would be liable to the obligor for damages for breach of contract. Depending on the nature and terms of the contract (e.g. 4.10 Future Receivables. Can the seller commit in an whether the prohibition was an essential term) the obligor may have enforceable manner to sell receivables to the purchaser other remedies (e.g. a right to terminate the receivables contract) or that come into existence after the date of the receivables the sale of the receivables contract may be void. purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction 4.7 Identification. Must the sale document specifically identify between future receivables that arise prior to or after the each of the receivables to be sold? If so, what specific seller’s insolvency? information is required (e.g., obligor name, invoice number, invoice date, payment date, etc.)? Do the Equity views a contract for future receivables as a contract to sell receivables being sold have to share objective those receivables at the point when they come into existence. characteristics? Alternatively, if the seller sells all of its Consideration from the purchaser is necessary for the contract to be receivables to the purchaser, is this sufficient enforceable. There is no other particular form or structure for such identification of receivables? a sale to be valid and enforceable. If the receivables being sold are accounts receivable or “chattel On this basis, receivables that arise after the seller’s insolvency will paper”, then the sale will be a deemed security interest (see question be deemed to be sold at the time of insolvency. Therefore under 4.1). Accordingly, the sale document must contain an adequate section 292 of the Companies Act, there is a risk that the receivables description of the accounts receivable being sold, which must could be “clawed back”. See question 6.3. enable the collateral to be identified. There is no guidance as to what specific information is required, but practice normally 4.11 Related Security. Must any additional formalities be includes providing information as to the obligor and other unique fulfilled in order for the related security to be transferred identities of the receivable. concurrently with the sale of receivables? If not all In respect of other receivables, there is no statutory requirement as related security can be enforceably transferred, what to the description of these in the sale document, but there could be methods are customarily adopted to provide the purchaser the benefits of such related security? evidential issues as to what is being sold, if there is an insufficient description of the receivables being sold. See questions 4.2 and 4.3.

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5 Security Issues 5.5 Additional Formalities. What additional or different requirements apply to security interests in or connected to insurance policies, promissory notes, mortgage loans, 5.1 Back-up Security. Is it customary in New Zealand to take consumer loans or marketable debt securities? a “back-up” security interest over the seller’s ownership interest in the receivables and the related security, in the There are no special requirements for security interests in event that the sale is deemed by a court not to have been promissory notes and marketable debt securities, although perfected? depending on the nature of the notes or securities, there may be additional steps under the PPSA which are desirable. The same It is not customary to take any “back-up” security interest so long applies to insurance policies where security is taken over the policy as the purchaser registers the deemed security interest in relation to rather than there being an outright transfer. Life insurance policies the receivable. See question 4.1. New Zealand are treated differently. The receivables in question should be checked against the definitions in the PPSA, particularly for 5.2 Seller Security. If so, what are the formalities for the “chattel paper”, “negotiable instruments” and “investment seller granting a security interest in receivables and securities”, as it may be desirable to perfect the security interest related security under the laws of New Zealand, and for arising under the PPSA by taking possession. See questions 4.1, 4.3 such security interest to be perfected? and 5.3. Security interests in payments made under leases of land and Not applicable. mortgages of land are excluded from the PPSA (see questions 4.1 and 4.3). The transfer of a mortgage will need to be registered or 5.3 Purchaser Security. If the purchaser grants security over be capable of being registered (for example, by the purchaser under all of its assets (including purchased receivables) in power of attorney) under the LTA. Payments in respect of loans favour of the providers of its funding, what formalities secured by, but not forming part of, mortgages are considered to fall must the purchaser comply with in New Zealand to grant within the PPSA and be treated in the same way as other and perfect a security interest in purchased receivables receivables. governed by the laws of New Zealand and the related security? 5.6 Trusts. Does New Zealand recognise trusts? If not, is As a general principle, under the PPSA a security agreement is there a mechanism whereby collections received by the effective in accordance with its terms. The funding provider(s) seller in respect of sold receivables can be held or be should sign the relevant security agreement, and that agreement will deemed to be held separate and apart from the seller’s need to satisfy the requirements set out in the PPSA so as to be own assets until turned over to the purchaser? enforceable against third parties. For requirements relating to priority and perfection, see question 4.1 above - the requirements Yes, it does. for deemed security interests apply equally to actual security interests. The funding provider will also need to ensure that the 5.7 Bank Accounts. Does New Zealand recognise escrow purchaser has complied with the priority and perfection accounts? Can security be taken over a bank account requirements for the deemed security interest in relation to the located in New Zealand? If so, what is the typical transferred receivable. method? Would courts in New Zealand recognise a foreign-law grant of security (for example, an English law debenture) taken over a bank account located in New 5.4 Recognition. If the purchaser grants a security interest in Zealand? receivables governed by the laws of the purchaser, and that security interest is valid and perfected under the laws Yes. Security can be taken over a New Zealand bank account. This of the purchaser’s country, will it be treated as valid and can be done through a specific security agreement, or is often perfected in New Zealand or must additional steps be taken in New Zealand? encompassed in the general security agreement, if applicable. Generally, the Courts would recognise a foreign-law grant of Where the security interest is in accounts receivable or is of a “non- security over a New Zealand bank account. possessory” type (which will be the case in most circumstances for securitisations), the PPSA provides that the validity, perfection and 6 Insolvency Laws effect of perfection will be governed by the law of the jurisdiction where the debtor (the purchaser) is located when the security interest attaches, and will be treated as valid and perfected in New 6.1 Stay of Action. If, after a sale of receivables that is Zealand if it is perfected overseas. If the purchaser is a body otherwise perfected, the seller becomes subject to an corporate, it is located in the country of its incorporation. In the insolvency proceeding, will New Zealand’s insolvency case of other entities, the purchaser is located in its principal place laws automatically prohibit the purchaser from collecting, of business or residence. transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? Does the If the security interest is of a “possessory type” different rules insolvency official have the ability to stay collection and apply, which may result in the security interest being treated as enforcement actions until he determines that the sale is being governed by New Zealand law and require compliance with perfected? Would the answer be different if the the PPSA in relation to perfection and validity. purchaser is deemed to only be a secured party rather than the owner of the receivables?

Assuming that there is a true sale (see question 4.8), then the asset will no longer be the seller’s asset and will not be subject to the

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insolvency regime relating to an insolvent seller or be available to In each case, the same period applies irrespective of whether the any of the other secured creditors of the seller. transaction is between unrelated parties or related parties. In certain circumstances, it is possible under the Companies Act However, under section 299 of the Companies Act 1993, there is a 1993 for a liquidator of a company to set aside certain transactions right for a Court to set aside certain security interests granted in and security, even on a true sale. However, this should not happen favour of related persons if a Court considers it just and equitable to so long as: do so, having regard to a number of factors. the sale is sufficiently “arm’s length” to provide valuable (not under value) consideration; 6.4 Substantive Consolidation. Under what facts or the seller was able to pay its debts as they fall due at the time circumstances, if any, could the insolvency official of the sale; consolidate the assets and liabilities of the purchaser with the transaction was part of the seller’s ordinary course of those of the seller or its affiliates in the insolvency

proceeding? New Zealand business; and the seller is not placed in liquidation within two years from Under section 271 of the Companies Act 1993, a Court may order the date of the sale. that a company that is, or has been, related to a company in The Corporations (Investigation and Management) Act 1989 and liquidation must pay the liquidator the whole or part of any or all the Reserve Bank of New Zealand Act 1989 provide for claims made in the liquidation, if the Court is satisfied that it is just corporations (and their associates) to be placed into statutory and equitable to do so. management. However, provided the securitisation is properly structured, with clear ownership/business separation between the seller and purchaser, an association between the seller and 6.5 Effect of Proceedings on Future Receivables. What is the purchaser should not eventuate. effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on sales of receivables that have not yet come into 6.2 Insolvency Official’s Powers. If there is no stay of action existence? under what circumstances, if any, does the insolvency official have the power to prohibit the purchaser’s Under section 269 of the Companies Act 1993, a liquidator may exercise of rights (by means of injunction, stay order or disclaim onerous property. A valid disclaimer will end all of the other action)? company’s rights, interests and liabilities in relation to that property. Onerous property is an unprofitable contract, property which is Where there has been a true sale, and none of the circumstances unsaleable or which may create an obligation to pay money or perform referred to in question 6.3 below are present, the insolvency official an onerous act. A person who suffers a loss because of a disclaimer will not have the power to prohibit the purchaser’s exercise of may claim as a creditor for the amount of that loss, or they may apply rights. for a Court order transferring to them the disclaimed property. Where the full transfer of all ownership rights has not yet been perfected and the purchaser relies on a power of attorney from the seller to take certain action to perfect the transfer of the receivables 7 Special Rules then, so long as certain requirements have been met, the purchaser will not be prevented from using the power of attorney if the seller 7.1 Securitisation Law. Is there a special securitisation law is in liquidation. However, there are potential issues where the (and/or special provisions in other laws) in New Zealand seller is in statutory management. establishing a legal framework for securitisation transactions? If so, what are the basics?

6.3 Suspect Period (Clawback). Under what facts or There are currently no special securitisation laws in New Zealand, circumstances could the insolvency official rescind or although consideration is being given to establishing a special reverse transactions that took place during a “suspect” or “preference” period before the commencement of the regime for covered bond structures. insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in New Zealand for (a) 7.2 Securitisation Entities. Does New Zealand have laws transactions between unrelated parties and (b) specifically providing for establishment of special purpose transactions between related parties? entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and A transaction entered into by a company which was unable to pay management of such an entity; (b) legal attributes and its due debts at the time may be set aside: benefits of the entity; and (c) any specific requirements as under section 292 of the Companies Act 1993, if it involved to the status of directors or shareholders? the transfer or conveyance of property, the giving of a security interest over property or the incurring of an There are currently no New Zealand laws specifically providing for obligation, it has a preferential effect and was entered into the establishment of special purpose entities for securitisation, but within the two years before the liquidation; or the proposed regime for covered bond structures may alter this under section 293 of the Companies Act 1993, if it position. constitutes the giving of a security interest and was entered into within two years before the liquidation. 7.3 Non-Recourse Clause. Will a court in New Zealand give Under section 297 of the Companies Act 1993, the liquidator of a effect to a contractual provision (even if the contract’s company may recover any excess benefit provided by a company governing law is the law of another country) limiting the under a transaction entered into at an undervalue and within two recourse of parties to available funds? years before liquidation (unless certain solvency tests are satisfied). Contractual limitations on the right of recourse should be valid and

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enforceable, so long as the contract in which it is contained is valid 8.2 Servicing. Does the seller require any licences, etc., in and enforceable. However, such limitations will not override order to continue to enforce and collect receivables statutory liabilities, e.g. those arising under consumer protection following their sale to the purchaser, including to appear legislation. before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect sold receivables? 7.4 Non-Petition Clause. Will a court in New Zealand give effect to a contractual provision (even if the contract’s The seller will not require any licences merely in order to enforce governing law is the law of another country) prohibiting or collect receivables following a sale to the purchaser. However, the parties from: (a) taking legal action against the if, as an incidental part of this service, it provides financial services purchaser or another person; or (b) commencing an or financial advice, it will need to comply with the FSPA and the insolvency proceeding against the purchaser or another Financial Advisors Act 2008. See question 8.4.

New Zealand person?

Such a provision should be valid and enforceable, so long as the 8.3 Data Protection. Does New Zealand have laws restricting contract in which it is contained is valid and enforceable. the use or dissemination of data about or provided by obligors? If so, do these laws apply only to consumer obligors or also to enterprises? 7.5 Independent Director. Will a court in New Zealand give effect to a contractual provision (even if the contract’s The Privacy Act 1993 establishes 12 principles relating to the governing law is the law of another country) or a provision in a party’s organisational documents prohibiting the collection, use and storage of data relating to individuals (natural directors from taking specified actions (including persons) in New Zealand, whether or not they are consumers. It commencing an insolvency proceeding) without the will not apply to information collected about enterprises. The affirmative vote of an independent director? Privacy Act aims to protect and limit the use and disclosure of personal information about individuals in New Zealand. The obligation of a person, in their capacity as director, to exercise duties prescribed in the Companies Act 1993 cannot be restricted by 8.4 Consumer Protection. If the obligors are consumers, will a contractual or constitutional provision. However, outside these, the purchaser (including a bank acting as purchaser) be as a general proposition, there is no reason why such provision required to comply with any consumer protection law of should not be valid and enforceable. New Zealand? Briefly, what is required?

The purchaser will be required to comply with New Zealand 8 Regulatory Issues consumer protection laws, including: Credit Contracts and Consumer Finance Act 2003. This Act 8.1 Required Authorisations, etc. Assuming that the applies to credit contracts entered into after 1 April 2005. Credit purchaser does no other business in New Zealand, will its contracts entered into before 1 April 2005 will be governed by the purchase and ownership or its collection and enforcement Credit Contracts Act 1981, unless the creditor elected otherwise of receivables result in its being required to qualify to do business or to obtain any licence or its being subject to (which is most likely to be the case). The Act aims to protect regulation as a financial institution in New Zealand? consumers’ interests under “consumer credit contracts”; where the Does the answer to the preceding question change if the debtor is a natural person and the contract is made for mainly purchaser does business with other sellers in New personal, domestic or household purposes. The purchaser must Zealand? comply with certain disclosure requirements in the Act. The Act allows a debtor to seek variation to a consumer credit contract in The purchaser, if an overseas company, may be required to register certain circumstances of unforeseen hardship, and grants Courts the as an overseas company in New Zealand under the Companies Act power to vary oppressive credit contracts. 1993 if it is “carrying on business” in New Zealand. However, the Credit (Repossession) Act 1997. This Act sets out the rules that mere purchase and ownership of receivables, with the seller apply when a purchaser takes possession of consumer goods with carrying out services in respect of them, should not, ordinarily, security interests. amount to carrying on business in New Zealand. However, doing Fair Trading Act 1986. This Act aims to prohibit the purchaser business with other sellers could affect this position. from engaging in misleading or deceptive conduct in trade. The If the purchaser is an overseas person, consent may also be required purchaser is also prevented from making false representations in under the Overseas Investment Act 2005. This applies to the trade regarding the supply of goods and services. acquisition by the overseas person of property in New Zealand used Financial Advisers Act 2008. This Act sets standards and imposes for carrying on business in New Zealand where the total conduct and disclosure obligations on financial advisers. The consideration for the acquisition of the property exceeds $100 purchaser will be classed as a financial adviser if, inter alia, it gives million, although there are certain exemptions for acquiring “financial advice”. Broadly, financial advice includes a security interests from other persons and higher thresholds for recommendation or opinion in relation to acquiring or disposing a purchasers from Australia. financial product. If the financial institution uses the words “bank”, “banker” or Financial Service Providers (Registration and Dispute “banking” in its name then it will need to register as a bank in New Resolution) Act 2008. This Act requires providers of a “financial Zealand. In addition, if the financial institution provides financial service” to register under the Act and join an approved dispute services then it will need to register under the Financial Service resolution scheme if they provide the financial service to retail Providers (Registration and Dispute Resolution) Act 2008 (the clients. There is a risk that the purchaser will be classed as a “FSPA”). See question 8.4. “financial service provider” under the Act.

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Consumer Guarantees Act 1993. This Act regulates the quality of financial institution is treated for tax purposes, as carrying on the goods and services the purchaser supplies to consumers. activities, deriving the income, etc. of the FISPV. A “financial institution” is a registered bank or certain other retail deposit takers or lenders. An FISPV, amongst other things, must be a trust or a 8.5 Currency Restrictions. Does New Zealand have laws restricting the exchange of New Zealand’s currency for company that issues residential mortgage backed securities. other currencies or the making of payments in New Zealand’s currency to persons outside the country? 9.3 Stamp Duty, etc. Does New Zealand impose stamp duty or other documentary taxes on sales of receivables? There are limited foreign exchange and monetary controls in New Zealand. These controls apply only to payments made to persons in No, it does not. certain restricted jurisdictions specified in regulations made under the United Nations Act 1946 or persons, groups or associated New Zealand entities specified under the Terrorism Suppression Act 2002. 9.4 Value Added Taxes. Does New Zealand impose value added tax, sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for 9 Taxation collection agent services?

Goods and services tax (“GST”) applies to the supply of most goods 9.1 Withholding Taxes. Will any part of payments on or services, including debt collection services provided by a person receivables by the obligors to the seller or the purchaser other than the creditor whose debt is being collected. The standard be subject to withholding taxes in New Zealand? Does rate of GST is 15%. The sale of receivables or the collection of the answer depend on the nature of the receivables, whether they bear interest, their term to maturity, or receivables by the creditor should be treated as an exempt financial where the seller or the purchaser is located? service and not subject to GST.

Any interest component of a payment could be subject to New 9.5 Purchaser Liability. If the seller is required to pay value Zealand withholding tax. added tax, stamp duty or other taxes upon the sale of Interest derived from New Zealand and paid to a non-resident, not receivables (or on the sale of goods or services that give engaged in business through a fixed establishment in New Zealand, rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the will be subject to non-resident withholding tax. Alternatively, unpaid tax against the purchaser or against the sold interest paid to a resident, or a non-resident engaged in business in receivables or collections? through a fixed establishment in New Zealand, will prima facie be subject to resident withholding tax (“RWT”) unless the recipient The Commissioner of Inland Revenue cannot impose a GST holds an RWT exemption certificate. liability on a recipient of a supply but can issue attachment notices Withholding obligations could also apply to royalties and to any debtor of the supplier. dividends.

9.6 Doing Business. Assuming that the purchaser conducts 9.2 Seller Tax Accounting. Does New Zealand require that a no other business in New Zealand, would the purchaser’s specific accounting policy is adopted for tax purposes by purchase of the receivables, its appointment of the seller the seller or purchaser in the context of a securitisation? as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax Tax legislation does not require securitisation parties to account for in New Zealand? securitisations under any external accounting standards. However, tax rules regulate recognition of income and expenditure New Zealand’s domestic legislation taxes the worldwide income of from financial arrangements and require those amounts be spread residents and New Zealand sourced income of non-residents. over the arrangement term. Entities that use the New Zealand The purchase of receivables, the appointment of a servicer and Equivalent to International Financial Reporting Standards (“IFRS”) collection agent or the enforcement of receivables in New Zealand for financial reporting purposes may spread using IFRS subject to should not, on their own, make a person a New Zealand tax certain modifications. The financial arrangement rules are relevant resident. However, income derived from the receivables by a non- to New Zealand resident purchasers or those who enter into resident could be subject to New Zealand tax as being “derived securitisations for the purpose of a business carried on through a from New Zealand” (subject to possible relief under an applicable New Zealand fixed establishment. Double Tax Agreement). A securitisation vehicle that is a “financial institution special purpose vehicle” (“FISPV”) is ignored for tax purposes. The

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Dermot Ross John Sproat

Chapman Tripp Chapman Tripp 23 Albert Street 10 Customhouse Quay Auckland Wellington New Zealand New Zealand

Tel: +64 9 357 9068 Tel: +64 4 498 4936 Fax: +64 9 357 9099 Fax: +64 4 472 7111 Email: [email protected] Email: [email protected] URL: www.chapmantripp.com URL: www.chapmantripp.com

Dermot Ross is one of New Zealand’s most highly regarded John Sproat specialises in corporate finance law, practising finance lawyers, and has practised law for over 25 years. principally in bank lending, securitisation, structured and project New Zealand His principal practice areas are in syndications, capital markets financing and capital markets. His clients include major New programmes, acquisition financings, corporate financing Zealand and international corporates and banks. structures, workouts and other complex transactions. With over 20 years’ experience, John acts for issuers and Dermot has acted in many of New Zealand’s most significant arrangers of debt securities to New Zealand and international financings, workouts and acquisitions by foreign companies. He capital markets (including the US, European and Asian capital has also acted on a number of major securitisations and other markets) and advises on project financing and structured structured financings. financing transactions, including domestic and cross-border Dermot acts for a number of Chapman’s Tripp’s most significant leasing, asset securitisation and other asset-based financing corporate clients with regard to their fundraisings, and frequently transactions. advises major New Zealand and international banks and John has also been involved in the design and implementation of syndicates on their New Zealand lending and capital markets many securitisation programmes and structured finance transactions. transactions, including mortgage securitisation programmes, Dermot is a former president of the Australian-based Banking and “credit rated” motor vehicle and heavy equipment finance Financial Services Law Association. receivables securitisation programmes, the off-balance sheet securitisation of export receivables, and commercial property purchases funded from the off-balance sheet securitisation of property lease rental payments.

Chapman Tripp is New Zealand’s pre-eminent full service law firm, delivering the highest levels of legal and business solutions to clients located throughout New Zealand, the Pacific, Asia, Europe and North America. We have a nationwide banking and finance team of nine partners and 21 lawyers, with seven of our lawyers recommended as leaders in their field by the 2012 edition of the independently researched client guide, Chambers Asia Pacific. With cutting edge knowledge and a wide clientele including global organisations, innovative local businesses and Crown entities, we advise on all areas of banking and finance including syndicated, club and bilateral funding facilities; secured and unsecured (i.e. negative pledge) arrangements; securitisations; covered bond programmes and other structured financings; asset-based financings; project, acquisition and mezzanine financings; regulatory issues; day to day banking matters including consumer finance law; and litigation where needed. Securitisation transactions are one of our banking and finance team’s specialty areas and we have one of the largest and most experienced securitisation teams in New Zealand, operating nationally across our Auckland, Wellington and Christchurch offices.

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Poland Marcin Gruszko

TGC Corporate Lawyers Grzegorz Witczak

1 Receivables Contracts In addition, it must be noted that Polish law significantly limits freedom of contract when a consumer is a party to the contract. A number of clauses cannot be used in contracts with consumers; a list 1.1 Formalities. In order to create an enforceable debt is published by the unfair competition authority. obligation of the obligor to the seller, (a) is it necessary that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone 1.3 Government Receivables. Where the receivables sufficient; and (c) can a receivable “contract” be deemed contract has been entered into with the government or a to exist as a result of the behaviour of the parties? government agency, are there different requirements and laws that apply to the sale or collection of those Under Polish law, a legally binding contract may be concluded in receivables? any form, even as a result of the behaviour of the parties. However, there are some exceptions, in particular when the contract relates to The same legal provisions govern the sale and collection of the sale of real properties, the law requires a form of notary deed, receivables arising from contracts executed with both governmental otherwise the transaction is null and void. The sale of chattels or and non-governmental entities. services being subject to VAT requires the issuance of an invoice. It is common practice between business entities cooperating on a regular basis that a sale is evidenced by an invoice only. Invoices 2 Choice of Law – Receivables Contracts prove the fact that a sale took place and will be sufficient where the law does not require a particular form of a contract. 2.1 No Law Specified. If the seller and the obligor do not However, in certain cases, when specific provisions should apply, specify a choice of law in their receivables contract, what the law does require a particular form of contract; e.g. a retention of are the main principles in Poland that will determine the governing law of the contract? title clause is effective towards the creditors of a purchaser only if it is in writing and certified by an authority or notary public. The governing law of contracts under Polish law will be determined under Regulation No 593/2008 of the European Parliament and of 1.2 Consumer Protections. Do Polish laws (a) limit rates of the Council of 17 June 2008 on the law applicable to contractual interest on consumer credit, loans or other kinds of obligations (Rome I). receivables; (b) provide a statutory right to interest on late payments; (c) permit consumers to cancel receivables for According to the Rome I regulation, if the parties do not specify a a specified period of time; or (d) provide other noteworthy governing law, the type of contract will determine which law rights to consumers with respect to receivables owing by applies; e.g. contracts for the sale of goods/provision of services them? will be governed by the law of the country where the seller/the service provider has his habitual residence, but contracts relating to Under Polish law, the maximum interest rate per annum cannot be rights in real estate will be governed by the law of the country higher than four times the lombard rate of the National Bank of where the property is situated. Poland. The current maximum interest rate amounts to 24% annually. This maximum interest rate applies to any kind of 2.2 Base Case. If the seller and the obligor are both resident receivables, inter alia consumer credit, loans, etc. in Poland, and the transactions giving rise to the Furthermore, Polish law provides a statutory right to interest on late receivables and the payment of the receivables take payment (statutory interest rate). The statutory interest rate place in Poland, and the seller and the obligor choose the currently amounts to 13% per annum. This rate applies unless the law of Poland to govern the receivables contract, is there parties decide otherwise. any reason why would not give effect to their choice of law? For consumers, the standard time bar period under Polish law is 3 years. It must be noted that the expiration of the time bar does not No, in such circumstances, the laws of Poland would apply; a Polish cancel the receivable itself. It cancels only a creditor’s right to court would not apply foreign law. demand fulfilment of this receivable.

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2.3 Freedom to Choose Foreign Law of Non-Resident Seller against the seller and other third parties (such as creditors or or Obligor. If the seller is resident in Poland but the insolvency administrators of the seller) regardless of the fulfilment obligor is not, or if the obligor is resident in Poland but the of requirements of the law of the obligor’s country or the seller is not, and the seller and the obligor choose the purchaser’s country (or both). foreign law of the obligor/seller to govern their receivables contract, will a court in Poland give effect to the choice of foreign law? Are there any limitations to the recognition 3.4 Example 3: If (a) the seller is located in Poland but the of foreign law (such as public policy or mandatory obligor is located in another country, (b) the receivable is principles of law) that would typically apply in commercial governed by the law of the obligor’s country, (c) the seller relationships such that between the seller and the obligor sells the receivable to a purchaser located in a third under the receivables contract? country, (d) the seller and the purchaser choose the law Poland of the obligor’s country to govern the receivables In general, the law chosen by the parties takes priority over local law. purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in However, if a foreign law would have consequences contrary to the Poland recognise that sale as being effective against the fundamental principles of public policy in Poland, a Polish court seller and other third parties (such as creditors or may refuse application of such foreign law. Furthermore, a court insolvency administrators of the seller) without the need may apply such provisions of Polish law which are applicable to to comply with Polish own sale requirements? any situation falling within their scope, irrespective of the choice of foreign law. In such a scenario, in most typical cases, a court should recognise the sale as being effective against the seller and other third parties 2.4 CISG. Is the United Nations Convention on the (such as creditors or insolvency administrators of the seller) International Sale of Goods in effect in Poland? regardless of the fulfilment of requirements of Polish law. However, it must be noted that if the foreign law would have Yes, the United Nations Convention on the International Sale of consequences contrary to the fundamental principles of public Goods came into effect in Poland on 1st June 1996. policy in Poland, a court may refuse application of such foreign law. Furthermore, a court may apply such provisions of Polish law which are applicable to any situation falling within their scope 3 Choice of Law – Receivables Purchase irrespective of the choice of foreign law. Agreement

3.5 Example 4: If (a) the obligor is located in Poland but the 3.1 Base Case. Does Polish law generally require the sale of seller is located in another country, (b) the receivable is receivables to be governed by the same law as the law governed by the law of the seller’s country, (c) the seller governing the receivables themselves? If so, does that and the purchaser choose the law of the seller’s country general rule apply irrespective of which law governs the to govern the receivables purchase agreement, and (d) receivables (i.e., Polish laws or foreign laws)? the sale complies with the requirements of the seller’s country, will a court in Poland recognise that sale as Yes, Polish law sets out that the sale of receivables is governed by being effective against the obligor and other third parties the same law as the law governing the receivables. This rule applies (such as creditors or insolvency administrators of the irrespective of which law governs the receivable. obligor) without the need to comply with Polish own sale requirements?

3.2 Example 1: If (a) the seller and the obligor are located in Please refer to the answer to question 3.4 above. Poland, (b) the receivable is governed by the law of Poland, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser 3.6 Example 5: If (a) the seller is located in Poland choose the law of Poland to govern the receivables (irrespective of the obligor’s location), (b) the receivable is purchase agreement, and (e) the sale complies with the governed by the law of Poland, (c) the seller sells the requirements of Poland, will a court in Poland recognise receivable to a purchaser located in a third country, (d) that sale as being effective against the seller, the obligor the seller and the purchaser choose the law of the and other third parties (such as creditors or insolvency purchaser’s country to govern the receivables purchase administrators of the seller and the obligor)? agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in Yes, in such circumstances a court will recognise the sale as being Poland recognise that sale as being effective against the effective against the seller, the obligor and other third parties (such seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located as creditors or insolvency administrators of the seller and the in Poland and any third party creditor or insolvency obligor). administrator of any such obligor)?

3.3 Example 2: Assuming that the facts are the same as Under Polish law, the sale of receivable is governed by the same Example 1, but either the obligor or the purchaser or both law as the law governing the receivable. Thus, if the receivable is are located outside Poland, will a court in Poland governed by Polish law, requirements of Polish law must be met in recognise that sale as being effective against the seller order that the sale be recognised effective against the seller and and other third parties (such as creditors or insolvency other third parties, despite the fact the seller and purchaser have administrators of the seller), or must the requirements of chosen foreign law for the sale of this receivable. the obligor’s country or the purchaser’s country (or both) be taken into account?

In such a case, a court will recognise the sale as being effective

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4 Asset Sales 4.4 Obligor Notification or Consent. Must the seller or the purchaser notify obligors of the sale of receivables in order for the sale to be effective against the obligors 4.1 Sale Methods Generally. In Poland what are the and/or creditors of the seller? Must the seller or the customary methods for a seller to sell receivables to a purchaser obtain the obligors’ consent to the sale of purchaser? What is the customary terminology – is it receivables in order for the sale to be an effective sale called a sale, transfer, assignment or something else? against the obligors? Does the answer to this question vary if (a) the receivables contract does not prohibit The customary method in Poland for the sale of receivables is to assignment but does not expressly permit assignment; or execute a contract for assignment of receivables with a purchaser. (b) the receivables contract expressly prohibits In Poland, the transfer of receivables is customarily called an assignment? Whether or not notice is required to perfect Poland assignment. a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor defences? 4.2 Perfection Generally. What formalities are required generally for perfecting a sale of receivables? Are there Under Polish law, a receivable may be assigned without an any additional or other formalities required for the sale of obligor’s consent. A sole assignment contract will be sufficient for receivables to be perfected against any subsequent good the sale to be effective (e.g. against an obligor or creditors of the faith purchasers for value of the same receivables from seller). As stated in question 4.2 above, notification of the obligor the seller? has only the consequence that, from such notification, the obligor can no longer fulfil the relevant obligation direct to the seller. Under Polish law, the assignment of a receivable must be executed in written form only if the receivable is stated in writing, which is If the receivables contract expressly prohibits assignment, an the most typical case. It must be noted that this rule applies even if attempted assignment will be ineffective. In other cases, where the receivables contract has not been executed in writing, but an there is no prohibition but no express permission either, assignment invoice has been issued. In such circumstances the assignment will be possible unless it is prohibited by law or the character of the agreement should also be executed in writing. relationship from which it arises. If the receivable is not stated in writing, a written form of an assignment is not required. It is, however, recommended for 4.5 Notice Mechanics. If notice is to be delivered to obligors, evidentiary purposes. whether at the time of sale or later, are there any requirements regarding the form the notice must take or The assignment, from its execution, is effective towards the obligor, how it must be delivered? Is there any time limit beyond but until the obligor has been notified about the assignment, he can which notice is ineffective – for example, can a notice of effectively fulfil his obligation to the seller unless he knew about sale be delivered after the sale, and can notice be the assignment. delivered after insolvency proceedings against the obligor There are no other formalities required for the sale of receivables to have commenced? Does the notice apply only to specific be perfected against any subsequent good faith purchasers for value receivables or can it apply to any and all (including future) receivables? Are there any other limitations or of the same receivables from the seller. The subsequent assignment considerations? of the same receivable by the initial seller will be null and void. There are no special requirements regarding the form of notice. 4.3 Perfection for Promissory Notes, etc. What additional or However, for evidentiary purposes it should be delivered in writing. different requirements for sale and perfection apply to There is no time limit for delivery of the notice, but it would be sales of promissory notes, mortgage loans, consumer reasonable to serve it as soon as the assignment was executed. The loans or marketable debt securities? notice can be delivered after the commencement of insolvency proceedings against the obligor, but it must be noted that if the Under Polish law, promissory notes are typically transferred by assignment took place after the insolvency proceedings have endorsement unless the clause “not to the order” is on the note. If commenced, the purchaser may be limited in his right to set off such such a clause exists, the note may be transferred only by means of receivables with receivables of the obligor towards him. an ordinary assignment. Moreover, in each case, it is necessary to hand over the note to the purchaser in order to perfect the The notice may apply to a whole group of receivables provided that transaction. there are no doubts which receivables have been transferred. However, from the purchaser’s point of view, it would be better to Assignment of a mortgage loan, in most typical cases, transfers the inform the obligor precisely that specific receivables should be paid mortgage to the purchaser as well. In order to perfect such an directly to him, not to the seller. assignment, the purchaser must be entered into the land and mortgage register. Transfer of a consumer loan is permissible under Polish law. 4.6 Restrictions on Assignment; Liability to Obligor. Are However, the agreement for such a loan cannot stipulate that, in the restrictions in receivables contracts prohibiting sale or assignment generally enforceable in Poland? Are there event of an assignment, some defences due to the consumer are exceptions to this rule (e.g., for contracts between excluded. Such provision will be ineffective under the law on commercial entities)? If Poland recognises prohibitions consumer loans. on sale or assignment and the seller nevertheless sells Different requirements apply to the transfer of various types of receivables to the purchaser, will either the seller or the marketable debt securities. In general, Polish law permits the purchaser be liable to the obligor for breach of contract or assignment of such rights, but, when a right is evidenced by a on any other basis? document, a transfer of this document would usually be required for assignment. Under Polish law, a receivable cannot be assigned if the receivables contract prohibits assignment. An assignment attempted in breach

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of a receivables contract is ineffective. In such circumstances, the 4.10 Future Receivables. Can the seller commit in an seller will be liable to the purchaser for breach of contract. Liability enforceable manner to sell receivables to the purchaser of the seller to the obligor is also possible but the latter must prove that come into existence after the date of the receivables damage incurred by the assignment. purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction 4.7 Identification. Must the sale document specifically identify between future receivables that arise prior to or after the each of the receivables to be sold? If so, what specific seller’s insolvency? information is required (e.g., obligor name, invoice number, invoice date, payment date, etc.)? Do the Yes, the sale of future receivables is possible under Polish law. If receivables being sold have to share objective Poland the future receivable is strictly defined in the assignment agreement characteristics? Alternatively, if the seller sells all of its (i.e. in a manner which excludes doubts as to which receivable is receivables to the purchaser, is this sufficient being transferred) then this receivable will be transferred effectively identification of receivables? when it comes into existence without any other acts of the parties. If not, a further confirmation of assignment will be necessary. The sale document must specifically identify receivables to be sold. However each of the receivables do not have to be identified It should be added that under Polish law, on declaration of individually. It is possible to identify a whole group of receivables, bankruptcy, a bankrupt entity will lose its right to manage its estate. e.g. receivables which arise from a specific contract between the Consequently it cannot validly and effectively sell its receivables. parties from one date to another date. Furthermore, acts of disposition executed by the bankrupt up to 12 The receivables being sold do not have to share objective months before filing of the bankruptcy petition may be declared characteristics. ineffective if gratuitous or if considerations of the parties are severely disproportionate. A sale of all receivables without further identification might be considered insufficient to transfer all those receivables effectively. 4.11 Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred 4.8 Respect for Intent of Parties; Economic Effects on Sale. concurrently with the sale of receivables? If not all If the parties denominate their transaction as a sale and related security can be enforceably transferred, what state their intent that it be a sale will this automatically be methods are customarily adopted to provide the respected or will a court enquire into the economic purchaser the benefits of such related security? characteristics of the transaction? If the latter, what economic characteristics of a sale, if any, might prevent the sale from being perfected? Among other things, to Under Polish law, the method of transfer of related securities will what extent may the seller retain (a) credit risk; (b) depend on the type of security. There are types of security which interest rate risk; and/or (c) control of collections of pass automatically with the sale of a receivable, those which require receivables without jeopardising perfection? registration with the relevant authorities to pass, and those for which a transfer will depend on the parties’ decision. For example: If an agreement is executed in writing, it is denominated as a sale a civil pledge passes automatically for the purchaser of a receivable, agreement and it expresses clear intention of the parties to sell an a registered pledge and mortgage pass after the registration of the object or right for a particular price, then such an agreement will be purchaser with the relevant registry, and a bank guarantee passes respected unless it is proved that it was e.g. a sham agreement. only if the parties decide so. Sham agreements are generally null and void under Polish law. However if a sham agreement is made to conceal another legal act; 5 Security Issues e.g. a sale concealing a donation, such an agreement may be valid if certain conditions are met. To establish whether an agreement was a sham, a court may examine whether the price was paid or the 5.1 Back-up Security. Is it customary in Poland to take a other obligation of the parties were performed, but the scope of “back-up” security interest over the seller’s ownership examination will depend on specific circumstances. interest in the receivables and the related security, in the event that the sale is deemed by a court not to have been perfected? 4.9 Continuous Sales of Receivables. Can the seller agree in an enforceable manner (at least prior to its insolvency) to No. It would be considered unusual if the parties to a receivables continuous sales of receivables (i.e., sales of receivables sale contract assumed at any stage of the transaction that the sale as and when they arise)? could be deemed not perfected by the court. Furthermore, such security could only be conditional on the court issuing a final Yes, continuous sales of receivables are possible under Polish law. decision of invalidity of the sale, because at the moment of the sale Such future receivables, arising from one or a few particular legal being effective (if not finally declared otherwise by the court) the relationships, will be effectively transferred when they come into receivables are owned by the purchaser and not by the seller. existence.

5.2 Seller Security. If so, what are the formalities for the seller granting a security interest in receivables and related security under the laws of Poland, and for such security interest to be perfected?

Please refer to the response to question 5.1 above. If the security is a registered pledge, the formalities include a written agreement and registration in the Polish public pledge register. If the security is a

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conditional assignment, it is required to be in written form. If such 5.7 Bank Accounts. Does Poland recognise escrow conditional assignment is supported by a submission to accounts? Can security be taken over a bank account enforcement (poddanie się egzekucji), it will require a notarial deed. located in Poland? If so, what is the typical method? An ordinary pledge on receivables requires a form with certification Would courts in Poland recognise a foreign-law grant of of date and notification to the receivables’ debtor; the same security (for example, an English law debenture) taken over a bank account located in Poland? formalities plus registration in the land and mortgage register are required for a mortgage on a receivable secured by a mortgage. Yes, Polish banking law recognises escrow accounts. Yes, security can be taken over a bank account located in Poland; more precisely, 5.3 Purchaser Security. If the purchaser grants security over over receivables from the bank account agreement. Typical

all of its assets (including purchased receivables) in methods for taking bank account security are: registered pledge; Poland favour of the providers of its funding, what formalities conditional assignment of rights; and power of attorney over the must the purchaser comply with in Poland to grant and relevant bank account. perfect a security interest in purchased receivables governed by the laws of Poland and the related security? In relation to foreign law recognition, please refer to the response to question 5.4 above. Please refer to the response to question 5.2 above. 6 Insolvency Laws 5.4 Recognition. If the purchaser grants a security interest in receivables governed by the laws of Poland, and that 6.1 Stay of Action. If, after a sale of receivables that is security interest is valid and perfected under the laws of otherwise perfected, the seller becomes subject to an the purchaser’s country, will it be treated as valid and insolvency proceeding, will Poland’s insolvency laws perfected in Poland or must additional steps be taken in automatically prohibit the purchaser from collecting, Poland? transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? Does the This is an unusual situation and not market practice, as normally insolvency official have the ability to stay collection and Polish law receivables are subject to Polish law security. In most enforcement actions until he determines that the sale is cases it should be treated as valid and perfected security in Poland, perfected? Would the answer be different if the subject to the enforcement procedure requirements, which may purchaser is deemed to only be a secured party rather include certain additional steps to be taken. The scope of the than the owner of the receivables? enforcement procedure requirements depends on whether the (court) award providing the basis for enforcement comes from an Subject to certain clawback provisions (see below) and if the sale of EU country or a non-EU country. receivables has been perfected, there is no automatic stay under Polish law against the purchaser.

5.5 Additional Formalities. What additional or different Under Polish insolvency law, the decisive issue will be whether an requirements apply to security interests in or connected to asset is classified as part of the bankruptcy estate or not. If the insurance policies, promissory notes, mortgage loans, receivables transferred to the purchaser as a secured party are consumer loans or marketable debt securities? determined by the insolvency official to be part of the bankruptcy estate, the purchaser will not be able to exercise the rights stated Insurance policies: a written agreement is required. Promissory above in relation to the receivables. If the receivables transferred notes: there are a number of specific requirements as stipulated in are determined not to be part of the bankruptcy estate, the owner the Polish law on bills of exchange (prawo wekslowe - Journal of will be able to exercise ownership rights. Laws of 28 April 1936 no. 37, item 282) concerning issuing, transferring, payment and enforcement of promissory notes. 6.2 Insolvency Official’s Powers. If there is no stay of action Mortgage loans (mortgages): in certain cases, requirements as to under what circumstances, if any, does the insolvency the form of the document establishing the mortgage; registration by official have the power to prohibit the purchaser’s the court in the land and mortgage register. exercise of rights (by means of injunction, stay order or other action)? 5.6 Trusts. Does Poland recognise trusts? If not, is there a mechanism whereby collections received by the seller in Further to the response to question 6.2 above, if the receivables are respect of sold receivables can be held or be deemed to not part of the bankruptcy estate and if there is no clawback, the be held separate and apart from the seller’s own assets insolvency official does not have any such powers. until turned over to the purchaser?

6.3 Suspect Period (Clawback). Under what facts or Trusts are not recognised by Polish law and it is unlikely that an circumstances could the insolvency official rescind or alternative mechanism would be effective. The purchaser has a reverse transactions that took place during a “suspect” or valid claim against the seller requiring the seller to turn over “preference” period before the commencement of the collections paid to the seller by a debtor acting in good faith, but insolvency proceeding? What are the lengths of the these collections are not separated from other assets of the seller. “suspect” or “preference” periods in Poland for (a) transactions between unrelated parties and (b) transactions between related parties?

Polish insolvency law (prawo upadłościowe i naprawcze) provides for a number of clawback rules, including (but not limited to): i) provisions of a contract, which provide for a change to or

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termination of such contract on declaration of bankruptcy, 7 Special Rules are invalid; ii) legal transactions made during the year prior to filing the 7.1 Securitisation Law. Is there a special securitisation law motion for bankruptcy, where such legal transactions have (and/or special provisions in other laws) in Poland been made by the insolvent without consideration or for establishing a legal framework for securitisation consideration disproportionately lower than the transactions? If so, what are the basics? consideration, asset, service, etc. received by the insolvent under the same; There is no special securitisation law in Poland and the term iii) granting security for or payment of a debt not yet due, made during the two months prior to filing the motion for “securitisation” is not legally defined in Polish law. The existing Poland bankruptcy (although a beneficiary can claim to consider legal framework for securitisation transactions concerns bank these actions valid if the beneficiary did not know grounds receivables and is set by two legal acts: for bankruptcy at the moment of accepting the security or i) banking law (prawo bankowe); and receipt of the payment); ii) law on investment funds (ustawa o funduszach iv) legal transactions made with consideration during the six inwestycyjnych). months prior to filing the motion for bankruptcy with certain Further to the above, Polish law provides for a securitisation related parties (e.g. shareholders); and mechanism for bank receivables using an investment fund or v) pledge, registered pledge, mortgage or maritime mortgage – securitisation fund structure regulated by the law on investment established by the insolvent during the year prior to filing the funds. The securitisation is done through a receivables assignment motion for bankruptcy – if the insolvent has not been a personal debtor of the secured creditor and in relation to the agreement or sub-participation agreement made between the bank security the insolvent has not received any consideration; the and the securitisation fund. The other party can also be a company clawback action here begins upon the motion of the receiver limited by capital for issue by such company of the securities and is subject to the decision of the judge-commissioner. secured on the (transferred) receivables. If any asset (including receivables) is transferred by the seller to the It is also possible to enter into a loan risk transfer agreement using purchaser as a security for the seller’s obligation towards the a loan derivative instrument. purchaser, the transferring contract, in order to be effective against the bankruptcy estate (i.e. to avoid clawback), has to be signed with 7.2 Securitisation Entities. Does Poland have laws a certification of the date (data pewna). specifically providing for establishment of special purpose entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and 6.4 Substantive Consolidation. Under what facts or management of such an entity; (b) legal attributes and circumstances, if any, could the insolvency official benefits of the entity; and (c) any specific requirements as consolidate the assets and liabilities of the purchaser with to the status of directors or shareholders? those of the seller or its affiliates in the insolvency proceeding? Please refer to the response to question 7.1 above. There are no Substantive consolidation, as described in the question above, is not specific laws in Poland relating to securitisation. Under the possible under Polish insolvency law. banking law, the securitisation entity can be an investment fund creating a securitisation fund, a securitisation fund or a company limited by capital issuing securities secured on the (transferred) 6.5 Effect of Proceedings on Future Receivables. What is the receivables. For the latter, such a company cannot be related by effect of the initiation of insolvency proceedings on (a) means of capital or organisation with the bank and such company sales of receivables that have not yet occurred or (b) on can trade only within the limited scope indicated above. sales of receivables that have not yet come into existence? Requirements for the establishment and management of investment funds and securitisation funds are set out in the law on investment Under Polish insolvency law, there are two types of insolvency funds. An investment fund can be created only by an investment proceedings: i) with liquidation of assets; and ii) with the possibility fund association. An association manages the fund. Creation of a of making an amicable agreement with creditors. securitisation fund requires consent of the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego). In the first type of insolvency proceedings, the insolvent entity is deprived of its assets (which become the bankruptcy estate) and is A securitisation fund is a close-ended investment fund, issuing not allowed to manage them in any way – therefore any actions investment certificates (certyfikaty inwestycyjne). A securitisation including a sale of receivables can be performed by the receiver. If fund (like an investment fund) is a legal person. There are two there is a general agreement under which the insolvent is obliged to types of securitisation fund: standardised; and non-standardised, sell receivables and receivables that have not yet been transferred which differ in as to their permitted investment portfolio. but exist, they become due and payable as at the day of declaration The directors of an investment fund association are required to fulfil of bankruptcy. The receiver, however, can rescind such a general certain criteria set out in the law on investment funds. Minimum agreement. requirements are full legal capacity, clear criminal record and good In the second type of insolvency proceedings, if there is a general reputation in relation to the performed functions. At least two board agreement under which the insolvent is obliged to sell the members, including the president of the board need to fulfil further receivables, such obligations cannot be performed until the specific requirements (including experience requirements). amicable agreement becomes final or the proceedings are finally redeemed. The comments above should also relate to future receivables, as the initiation of insolvency proceedings does not impair their coming into existence under the base contract. 274 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London TGC Corporate Lawyers Poland

7.3 Non-Recourse Clause. Will a court in Poland give effect meet the requirements set out in the Polish Banking Law, to the to a contractual provision (even if the contract’s governing extent that the Polish Banking Law implements Directive law is the law of another country) limiting the recourse of 2006/49/EC of the European Parliament and of the Council of 14 parties to available funds? June 2006 on capital adequacy of investment firms and credit institutions. This should be recognised by a court in Poland as an effective The legal situation would differ in circumstances where the contractual provision, if the party whose recourse is limited has purchaser establishes a Polish entity, where he must meet the agreed directly in the agreement (except in cases of gross requirements set up the Law on freedom of economic activity of 2 negligence or wilful misconduct of the party for whose benefit the July 2004, as well as other general requirements set up for polish recourse is limited).

entities. Poland

7.4 Non-Petition Clause. Will a court in Poland give effect to 8.2 Servicing. Does the seller require any licences, etc., in a contractual provision (even if the contract’s governing order to continue to enforce and collect receivables law is the law of another country) prohibiting the parties following their sale to the purchaser, including to appear from: (a) taking legal action against the purchaser or before a court? Does a third party replacement servicer another person; or (b) commencing an insolvency require any licences, etc., in order to enforce and collect proceeding against the purchaser or another person? sold receivables? These provisions would be very far-reaching, even for a Representation before a court in Poland is an activity reserved for commercial, non-consumer contract in Poland. A Polish court may, qualified persons, including legal advisors and advocates, but also therefore, be willing to hear arguments purporting legal defects or employees of a represented entity as well as any person with whom even the invalidity of such provisions. such entity has concluded a permanent service agreement. For collection of receivables, the formal enforcement procedure 7.5 Independent Director. Will a court in Poland give effect to must be carried out by a bailiff, who is authorised to use coercion. a contractual provision (even if the contract’s governing Some activities may also be covered by the Law on detective law is the law of another country) or a provision in a services of 6 July 2001. Conducting detective services is a party’s organisational documents prohibiting the directors from taking specified actions (including commencing an regulated activity and requires entry into the register of detective insolvency proceeding) without the affirmative vote of an activities. In addition, any person providing detective services must independent director? hold a licence.

This structure would be highly unusual. If such a restriction of 8.3 Data Protection. Does Poland have laws restricting the directors’ powers were contained in a company’s organisational use or dissemination of data about or provided by documents, this would not have external application, i.e. if a obligors? If so, do these laws apply only to consumer “limited” director undertakes any legal action with a third party obligors or also to enterprises? without the affirmative vote of an independent director, such legal action will be valid and effective; the company has only a potential The Personal Data Protection Act of 29 October 1997 sets out the claim against the “limited” director for damage caused as a result of key rules for processing personal data. Personal data is allowed to the action in breach of the company’s organisational document. be revealed to a purchaser, even without the debtor’s consent, For insolvency specifically, a director can be held liable for a provided that due regard is paid to the protection of fundamental company’s debts, if enforcement against the company is ineffective rights, freedom and the privacy of the data subject. and if the director does not file a motion for bankruptcy in due time. The Law on access to economic and business data exchange of 9 Each director therefore has a right and an obligation to file a motion April 2010 also applies in this respect, which, in particular, sets out for bankruptcy of a company in due time, if such company is conditions for revealing a consumer’s personal data to the economic insolvent or has excessive indebtedness, notwithstanding the vote data bureau. of any third party. The Banking Law also sets out conditions for exceptions to the banking secrecy obligation regarding the data of debtors whose 8 Regulatory Issues debts are to be sold. The Banking Law also sets out specific rules for processing personal data which must be observed by banks and other listed entities. 8.1 Required Authorisations, etc. Assuming that the purchaser does no other business in Poland, will its purchase and ownership or its collection and enforcement 8.4 Consumer Protection. If the obligors are consumers, will of receivables result in its being required to qualify to do the purchaser (including a bank acting as purchaser) be business or to obtain any licence or its being subject to required to comply with any consumer protection law of regulation as a financial institution in Poland? Does the Poland? Briefly, what is required? answer to the preceding question change if the purchaser does business with other sellers in Poland? Please see comments above regarding consumer data protection. The purchaser will also be required to observe consumer rights The Polish Banking law of 29 August 1997 defines a financial when conducting its activities. Pursuant to the Law on competition institution as an undertaking other than a bank or a credit institution, and consumer protection of 16 February 2007, the President of the whose core operations, being the source of the major part of its Office of Competition and Customer Protection (President of income, consist in conducting business activities involving, inter UOKiK) is authorised to issue a decision identifying a practice as alia, providing debt trading services. A foreign financial institution infringing collective consumer interests and ordering that the same whose registered office is located in an EU Member State must be discontinued, as well as impose a fine on the infringing entity.

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The President of UOKiK has historically exercised these powers the location of the recipient of payment, although for tax havens towards debt collection as well as other entities. there would be no double tax treaty available.

8.5 Currency Restrictions. Does Poland have laws restricting 9.2 Seller Tax Accounting. Does Poland require that a the exchange of Poland’s currency for other currencies or specific accounting policy is adopted for tax purposes by the making of payments in Poland’s currency to persons the seller or purchaser in the context of a securitisation? outside the country? There is no specific mandatory accounting policy with regard to The Exchange Law of 27 July 2002 regulates foreign exchange securitisation.

Poland turnover with other countries and trading in foreign exchange in Poland, as well as business operations which consist of buying and 9.3 Stamp Duty, etc. Does Poland impose stamp duty or selling foreign exchange, and brokerage services with respect to other documentary taxes on sales of receivables? buying and selling foreign exchange. Generally, these restrictions apply to relations with third countries which are states other than Please see the response to question 9.4 below. the Republic of Poland, Member States of the European Union, or Members of the European Economic Area or the Organization for Economic Cooperation and Development. These restrictions apply, 9.4 Value Added Taxes. Does Poland impose value added in particular, to: tax, sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for collection the acquisition by residents (both directly and through other agent services? undertakings) of foreign exchange sold by non-residents from third countries, or claims and other rights, the exercise of which involves money settlements, sold by non-residents Stamp duty applies to sales of receivables which are not subject to from third countries; or VAT or are VAT-exempt. Stamp duty is calculated as 1% of the the selling by residents (both directly and through other market value – usually the agreed price. The purchaser is the sole undertakings) in third countries, of claims and other rights, taxpayer. the exercise of which involves money settlements, with the Historically, sales of receivables, in particular when carried out for exception of those acquired in such countries under a foreign a price below their nominal value, were often interpreted as debt exchange permit or which have arisen in turnover with non- administration services. The service provider was the purchasing residents from third countries, to the extent not requiring party and the services were deemed to consist in lifting the risk such a permit; and from the original obligor and contributing to the obligor’s cash money settlements by residents and non-residents from third flow. Such services, if considered factoring, were subject to 22% countries in performance of actions mentioned above, (until 1 January 2011) and 23% (since 1 January 2011) VAT. If excluding actions which do not require a foreign exchange permit. considered other financial services – they were VAT-exempt. Either way, if the transaction was subject to VAT (including VAT-exempt) Departures from these restrictions may be authorised by a general no stamp duty was triggered. or individual foreign exchange permit. Notwithstanding the above, the Court of Justice of the European Union (CoJ) on 27 October 2011 delivered judgment in case GFKL 9 Taxation Financial Services AG C-93/10 on the application of EU VAT provisions to sales of bad debts. CoJ ruled that the negative difference between the nominal value of the receivables and the price for which 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser the receivables are sold may not be considered remuneration for be subject to withholding taxes in Poland? Does the services rendered by the purchasing party. Hence, the sale of answer depend on the nature of the receivables, whether receivables should be considered a straightforward sale of rights. they bear interest, their term to maturity, or where the The immediate effect of this judgment is that sales of receivables seller or the purchaser is located? would most probably no longer be considered by the Polish tax authorities as rendering services by the purchaser. Whether payments on receivables are subject to withholding tax in This basically means that the sale of receivables should, in general, Poland depends on the characteristics of the receivables. be considered subject to stamp duty at 1%. However, it remains Polish tax law stipulates situations when an obligor would be ambiguous whether this judgment should apply to all sales of required to withhold tax. These include, but are not limited to, receivables or just to sales of bad debts. royalties and interest payments as well as remuneration for intangible services and lease of real estate located in Poland. 9.5 Purchaser Liability. If the seller is required to pay value The maximum standard withholding tax rate for these is 20%, added tax, stamp duty or other taxes upon the sale of subject to applicable double tax treaties and special measures receivables (or on the sale of goods or services that give available to transactions between related EU entities. rise to the receivables) and the seller does not pay, then The treaty rates for interest and royalties are between 5% and 15%. will the taxing authority be able to make claims for the Moreover, a number of double tax treaties provide for a general unpaid tax against the purchaser or against the sold exemption for any interest payments or interest paid on bank loans, receivables or collections? subject to additional prerequisites. Stamp duty is payable by the purchaser only. The majority of trade debts, however, would not be subject to withholding tax, unless there is an interest component. This also Before the CoJ judgment referred to above, and since 2010, in the applies to repayment of principals of loans and credits. case of an intra-community transaction when: a sale of receivables was considered services rendered by There are no specific measures applying with regard to maturity or their purchasers;

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these services were subject to VAT and were not VAT- If the seller is acting as a dependent agent of the purchaser, and exempt; and services and collects the receivables on the purchaser’s behalf, the the seller was a trader as defined in the VAT regulations, purchaser would be deemed to have a permanent establishment in the seller was required to settle the VAT on a reverse charge basis. Poland. Consequently, the income received through or in relation In cases of failure to comply, the tax authorities would not make to activities of the agent could be taxable in Poland. claims for the unpaid tax against the purchaser or against the sold If there is no permanent establishment in Poland, income received receivables or collections. from Polish sources could, in general, be exempt in Poland, provided that there is a double tax treaty available and no withholding tax applies. 9.6 Doing Business. Assuming that the purchaser conducts no other business in Poland, would the purchaser’s Poland purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax in Poland?

The purchase of receivables would not be considered a taxable event for the purchaser under the income tax provisions in Poland.

Marcin Gruszko Grzegorz Witczak

TGC Corporate Lawyers TGC Corporate Lawyers ul. Legnicka 51-31 ul. Hrubieszowska 2 54-203 Wrocław 01-209 Warsaw Poland Poland

Tel: +48 71 733 1313 Tel: +48 22 295 3319 Fax: +48 71 733 1314 Fax: +48 22 295 3301 Email: [email protected] Email: [email protected] URL: www.tgc.eu URL: www.tgc.eu

Marcin, a Polish legal adviser, has been with TGC Corporate Grzegorz Witczak, a Polish advocate, advises domestic and Lawyers since 2001 and is director of the firm’s banking and international clients on all aspects of commercial law issues. He finance practice. He advises Polish and foreign banks and has particular experience in drafting and negotiating commercial companies on loan and credit facilities (senior and mezzanine contracts and also successfully represents clients in all types of credit facilities, syndicated lending), inter-creditor documents, commercial litigation. As a member of TGC’s commercial team, taking security and the perfection of security, project finance, real Grzegorz has also gained specific expertise in handling estate finance, foreign exchange and all other matters that arise commercial contract disputes as well as cases involving in banking transactions. Marcin acts for major multinationals and insolvency. Grzegorz acts for global corporations as well as large entrepreneurs as well as major financial institutions including a Polish firms from industries such as automotive, electronic number of the top 10 international banks. He also has significant products, food services and consumer products. expertise in the following areas: mergers and acquisitions; transformations and stock market listings; joint ventures; capital markets; dispute resolution; and real estate transactions.

TGC Corporate Lawyers is an international corporate law firm providing constructive and cost effective advice and assistance to clients in Poland, Czech Republic and Slovakia. We act for some of the world’s leading companies, offering a breadth of services including corporate, M&A, litigation, finance, real estate, oil & gas and tax advice that is combined with a deep understanding of industry sectors such as financial services, real estate, FMCG, pharmaceuticals, manufacturing and companies involved in international trade. Through our network of offices in Central Europe we are able to provide clients with expert, local knowledge throughout Poland (Warsaw, Wrocław, Łódź and Kraków), the Czech Republic (Prague and Brno) and Slovakia (Bratislava).

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Portugal Paula Gomes Freire

Vieira de Almeida & Associados Benedita Aires

1 Receivables Contracts apply to credit institutions. However, in accordance with the Portuguese legal framework for consumer credit (Decree- Law no. 133/2009, dated 2 June 2009, implementing 1.1 Formalities. In order to create an enforceable debt Directive 2008/48/CE on consumer credit agreements), the obligation of the obligor to the seller, (a) is it necessary Annual Percentage Rate of Charge charged by credit that the sales of goods or services are evidenced by a institutions to consumers (including in relation to leasing formal receivables contract; (b) are invoices alone transactions) is limited to a 3-month average disclosed by the sufficient; and (c) can a receivable “contract” be deemed Bank of Portugal plus one third of that average. For the 2nd to exist as a result of the behaviour of the parties? quarter of 2012, this means that the maximum Annual Percentage Rate of Charge for consumer credit is (i) 20.5 per The legal requirements applicable to the form of a contract between cent., for personal loans (other than loans for specific a seller and an obligor depend to a large extent on the nature of the purposes such as health or education, or financial leases of contract (if it is a loan agreement made by a bank to a customer, an equipment), (ii) between 9 and 17 per cent. for automobile agreement between a utility company and a customer, etc.). As an loans (depending on whether the vehicle is new or used), and (iii) 36.5 per cent. for credit cards, credit lines, current example, the general rule applicable to the granting of credit accounts or overdraft facilities. facilities to consumers is that the relevant contract has to be in writing. (b) As a general rule, the Portuguese Civil Code applies delay interest. As per (a) above, the legal delay interest rate is set The general civil law principle, however, (i.e. the rule which applies at 4 per cent., except if the remuneratory interest (i.e. interest by default whenever there is no specific rule applicable to a certain charged under (a) above) is higher or if the parties agree on type of contractual relationship), is that there is no prescribed a higher delay interest rate. Similar to (a) above, stipulated generally applicable formality for contracts to be entered into, and delay interest rates may not exceed the legal delay interest therefore a valid contractual relationship for the sale of goods and rate by more than 7 per cent. (if the obligation is secured) or services can even be established orally (unless otherwise stated in a by more than 9 per cent. (if it is not). Delay interest specific legal provision), and in those circumstances the existence stipulated over these limits is deemed reduced accordingly. of an invoice is naturally also sufficient to document the relevant However, under the Portuguese Commercial Code, where the contract. creditor is a commercial company (which may be a legal or a natural person, for instance an individual merchant acting In order for a receivable contract to be deemed to exist as a result as such) a special delay interest rate applies. At the moment, of the parties’ behaviour alone, it has to be possible to conclude this rate is set at 8 per cent. The limitations to stipulated based solely on the parties’ actions that their intention was to enter delay interest rates mentioned in the previous paragraphs into a contract. In other words, the parties’ behaviour has to be, for also apply, with the legal rate being 8, instead of 4, per cent. all purposes, equivalent to a contractual statement. With regard to credit institutions, there is a special framework which also limits the delay interest rate which may be charged. In accordance with this special framework, 1.2 Consumer Protections. Do Portuguese laws (a) limit credit institutions may stipulate delay interest rates of up to 4 rates of interest on consumer credit, loans or other kinds per cent. over (i) the rate which would be applied to the of receivables; (b) provide a statutory right to interest on transaction if it had been renewed, or (ii) to the maximum late payments; (c) permit consumers to cancel permitted interest rate for active transactions of similar receivables for a specified period of time; or (d) provide maturity. other noteworthy rights to consumers with respect to receivables owing by them? (c) There is, in most circumstances, an unconditional right to terminate the receivables contract during the initial 14 days (a) As a general rule, the Portuguese Civil Code foresees a legal after execution, in which case the advanced amount is given interest rate. This rate is currently set at 4 per cent. Any back to the lender and the contractual relationship stipulation of an interest rate superior to the legal rate must terminates, but the financial institution may not charge any be made in writing. Also, stipulated rates may not exceed the additional fees with regard to the termination. legal interest rate by more than 3 per cent. (if the obligation (d) Under the Portuguese consumer credit legal framework, is secured) and by more than 5 per cent. (if it is not). Interest financial institutions may only carry out the acceleration of stipulated over these limits is deemed reduced to the defaulted loans (or terminate the relevant agreement) when aforementioned maximum rates. more than two instalments (totalling more than 10 per cent. The general rules described in the previous paragraphs do not of the entire amount outstanding) are due and only following

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notification to the debtor to that effect, granting him at least 2.3 Freedom to Choose Foreign Law of Non-Resident Seller fifteen days to pay the amounts due and expressly warning or Obligor. If the seller is resident in Portugal but the him of the possibility of accelerating the loan. Other rights obligor is not, or if the obligor is resident in Portugal but mostly relate to information and contents obligations, the the seller is not, and the seller and the obligor choose the right to render the contract void or voidable if information is foreign law of the obligor/seller to govern their receivables not provided, etc. contract, will a court in Portugal give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law (such as public policy or 1.3 Government Receivables. Where the receivables mandatory principles of law) that would typically apply in contract has been entered into with the government or a commercial relationships such that between the seller and government agency, are there different requirements and the obligor under the receivables contract?

laws that apply to the sale or collection of those Portugal receivables? If the Rome I Regulation or the Rome Convention apply, then Article 3 of the Rome I Regulation would allow the parties to Public procurement rules may apply. If the government is acting choose a governing law. This choice would be subject to the under private law, it shouldn’t have special prerogatives. In any limitations set out in the Rome I Regulation. Of these limitations, case, specific rules may apply in relation to issues such as the we believe those applicable to consumer contracts are probably validity of a delegation of powers. those which would be more likely to apply in the context of a receivables contract, i.e. if the obligor is a consumer. Limitations in 2 Choice of Law – Receivables Contracts relation to public policy and mandatory principles of law also apply, but they would be less typical. If the Rome I Regulation or the Rome Convention do not apply, the 2.1 No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what general principle in Portugal is that the parties may elect the are the main principles in Portugal that will determine the governing law applicable. However, there are certain governing law of the contract? circumstances in which the parties are not entirely free to choose the law applicable to the whole or part of the contract. The parties If the parties fail to specify the law chosen to govern the receivables may not choose foreign law with the intent of fraudulently avoiding contract, it should first be considered whether EC Regulation no. Portuguese law. Furthermore, the choice of foreign law may not 593/2008 (“Rome I Regulation”) or the Rome Convention on the law offend Portuguese international public policy. applicable to contractual obligations (“Rome Convention”) apply to Also, regardless of the applicability of the Rome I Regulation or the the relevant conflict. Rome Convention, if the obligor is resident in Portugal and to the If the Rome I Regulation or the Rome Convention apply, then Article extent that the receivables agreement could be deemed to include 4 and, to the extent applicable, Articles 5 to 7 of the Rome I Regulation general contractual clauses (i.e. those which the obligor may only shall determine the governing law. accept without prior individual negotiation), the choice of foreign law is likely not to preclude the full application of the provisions of If neither the Rome I Regulation nor the Rome Convention apply, the Portuguese law on general contractual clauses. main principles of Portuguese law in relation to the governing law of contracts determine that contracts are governed by the law which the parties considered when executing the contract (even if they have not 2.4 CISG. Is the United Nations Convention on the expressly stated it), or, if this is impossible to determine (i.e. the International Sale of Goods in effect in Portugal? parties’ behaviour is not conclusive in this respect), the law applicable in the place where the parties have their domicile (or, if the parties are As of 23 March 2012, the United Nations Convention on the domiciled in different jurisdictions, the law of the place where the International Sale of Goods is not in effect in Portugal. contract was entered into). 3 Choice of Law – Receivables Purchase 2.2 Base Case. If the seller and the obligor are both resident Agreement in Portugal, and the transactions giving rise to the receivables and the payment of the receivables take place in Portugal, and the seller and the obligor choose 3.1 Base Case. Does Portuguese law generally require the the law of Portugal to govern the receivables contract, is sale of receivables to be governed by the same law as there any reason why a court in Portugal would not give the law governing the receivables themselves? If so, does effect to their choice of law? that general rule apply irrespective of which law governs the receivables (i.e., Portuguese laws or foreign laws)? If all of the relevant aspects of the receivables contract have a connection with Portugal, there is no reason why a Portuguese court Portuguese law does not generally require that an assignment of would not give effect to the parties’ choice of Portuguese law as the receivables is governed by the same law which governs the law governing the contract. Please note, however, that there may be assigned receivables. However, our experience (and that of the mandatory provisions of law in other jurisdictions requiring certain Portuguese authorities) is that assignment agreements for aspects of a contract to be governed by such law (for instance, if the Portuguese-originated receivables have usually been governed by transaction at stake pertains to, or is secured by, real estate property Portuguese law. located in another jurisdiction). In any case, given Article 14 of the Rome I Regulation (and, when the Rome I Regulation does not apply, the risk that a Portuguese court would attempt to enforce a solution similar to that which is set out therein), the parties to an assignment of Portuguese-originated receivables should comply with the obligor notification procedures set out in the Portuguese Civil Code (to the extent not covered by

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the exemption of notification procedures set out in the the receivables agreement may not deprive the obligor of the Securitisation Law). protection granted by mandatory provisions of Portuguese law. We understand that the debtor notification requirements of the Portuguese Civil Code (when not waived by the application of the 3.2 Example 1: If (a) the seller and the obligor are located in Portugal, (b) the receivable is governed by the law of Securitisation Law) are mandatory provisions protecting the debtor Portugal, (c) the seller sells the receivable to a purchaser and that, as such, the level of debtor protection enshrined in them located in a third country, (d) the seller and the purchaser must be met either by directly applying Portuguese law or choose the law of Portugal to govern the receivables provisions of the law of the seller’s country which provide the same purchase agreement, and (e) the sale complies with the level of protection. requirements of Portugal, will a court in Portugal If the obligor is a consumer and the Rome I Regulation and Rome

Portugal recognise that sale as being effective against the seller, Convention do not apply, we still believe that the reasoning of the the obligor and other third parties (such as creditors or previous paragraph should apply, as we understand that there would insolvency administrators of the seller and the obligor)? be a risk that a Portuguese court attempted to enforce a similar solution. We see no reason for a Portuguese court not to recognise the effectiveness of the assignment in this scenario, be it against the If the obligor is not a consumer, the assignment may be deemed seller or against the obligor. The same may be said with regard to valid if the obligor notification procedures mandated by the law effectiveness towards the relevant third parties. governing the receivables agreement are followed. In any case and from a risk mitigating perspective, we would 3.3 Example 2: Assuming that the facts are the same as recommend that all assignments of receivables owed by Portuguese Example 1, but either the obligor or the purchaser or both resident entities be notified to the debtor in writing. are located outside Portugal will a court in Portugal recognise that sale as being effective against the seller 3.6 Example 5: If (a) the seller is located in Portugal and other third parties (such as creditors or insolvency (irrespective of the obligor’s location), (b) the receivable is administrators of the seller), or must the requirements of governed by the law of Portugal, (c) the seller sells the the obligor’s country or the purchaser’s country (or both) receivable to a purchaser located in a third country, (d) be taken into account? the seller and the purchaser choose the law of the purchaser’s country to govern the receivables purchase From a Portuguese law perspective, we understand that the fact that agreement, and (e) the sale complies with the the obligor or the purchaser are located outside Portugal would not requirements of the purchaser’s country, will a court in cause a Portuguese court to decide differently from Example 1. Portugal recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located 3.4 Example 3: If (a) the seller is located in Portugal but the in Portugal and any third party creditor or insolvency obligor is located in another country, (b) the receivable is administrator of any such obligor)? governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third If either the Rome I Regulation or Rome Convention apply, we country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables believe that Portuguese courts would, under Articles 3 and 14 of the purchase agreement, and (e) the sale complies with the Rome I Regulation, recognise the choice of foreign law regarding requirements of the obligor’s country, will a court in sale of the assets and would, as such, have no reason not to deem Portugal recognise that sale as being effective against the the sale effective against the seller. The same result would be seller and other third parties (such as creditors or achieved if neither the Rome I Regulation nor Rome Convention insolvency administrators of the seller) without the need apply, in this case through the application of the general principle of to comply with Portugal own sale requirements? the Portuguese Civil Code under which the parties are free to elect a governing law. In this scenario, if the assignment is valid under its governing law, As for effectiveness against the obligor, if the receivable is we believe that a Portuguese court would recognise the sale as governed by Portuguese law then the obligor is entitled to the effective against the seller and any relevant third parties. protection granted to debtors by the mandatory provisions of Portuguese law applicable to assignments of receivables. As such, 3.5 Example 4: If (a) the obligor is located in Portugal but the we would recommend that the debtor notification requirements of seller is located in another country, (b) the receivable is the Portuguese Civil Code (when not waived by the application of governed by the law of the seller’s country, (c) the seller the Securitisation Law) are met in relation to the obligor. and the purchaser choose the law of the seller’s country to govern the receivables purchase agreement, and (d) the sale complies with the requirements of the seller’s 4 Asset Sales country, will a court in Portugal recognise that sale as being effective against the obligor and other third parties (such as creditors or insolvency administrators of the 4.1 Sale Methods Generally. In Portugal what are the obligor) without the need to comply with Portugal’s own customary methods for a seller to sell receivables to a sale requirements? purchaser? What is the customary terminology – is it called a sale, transfer, assignment or something else? In this scenario, we also believe that a Portuguese court would recognise the sale as being effective, subject to the considerations In the context of securitisation, the customary method for a seller to made in the next few paragraphs. sell receivables to a purchaser is under the framework of the Securitisation Law, approved by Decree-Law no. 453/99, dated 5 If the obligor is a consumer and either the Rome I Regulation or November 1999, as amended from time to time (the Rome Convention apply, the choice of the seller’s country to govern

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“Securitisation Law”). The Securitisation Law has implemented a de preenchimento”) which grants the originator the power to specific securitisation legal framework in Portugal, which contains complete the promissory note. In order to perfect the assignment of a simplified process for the assignment of credits for securitisation such promissory notes to the assignee, the assignor will have to purposes. In fact, the sale of credits for securitisation is effected by endorse and deliver these instruments to the assignee. way of assignment of credits, such being the customary The assignment of marketable debt instruments in perfected by the terminology. update of the corresponding registration entries in the relevant securities accounts, in accordance with the Portuguese Securities 4.2 Perfection Generally. What formalities are required Code. generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of

4.4 Obligor Notification or Consent. Must the seller or the Portugal receivables to be perfected against any subsequent good purchaser notify obligors of the sale of receivables in faith purchasers for value of the same receivables from order for the sale to be effective against the obligors the seller? and/or creditors of the seller? Must the seller or the purchaser obtain the obligors’ consent to the sale of There are no specific formality requirements for an assignment of receivables in order for the sale to be an effective sale credits under the Securitisation Law. A written private agreement against the obligors? Does the answer to this question between the parties is sufficient for a valid assignment to occur vary if (a) the receivables contract does not prohibit (including an assignment of loans with underlying mortgages or assignment but does not expressly permit assignment; or other guarantees subject to registration under Portuguese law). (b) the receivables contract expressly prohibits Transfer by means of a notarial deed is not required. In the case of assignment? Whether or not notice is required to perfect an assignment of mortgage loans, the signatures to the assignment a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor contract must be certified by a notary public, lawyer or the company defences? secretary of each party under the terms of the Securitisation Law, such certification being required for the registration of the In what concerns obligor notification or consent, and if the relevant assignment at the relevant Portuguese Real Estate Registry Office. receivables contract is silent in this respect, please refer to question Additionally, the assignment of any security over real estate, or of 4.2 above. On the contrary, if the relevant receivables contract an asset subject to registration, in Portugal is only effective against expressly requires the consent or notification of the obligors, then third parties acting in good faith further to registration of such such consent or notice is required in order for the assignment to be assignment with the competent registry by or on behalf of the effective against such obligors. Any set-off rights or other means of assignee. The assignee is entitled under the Securitisation Law to defences exercisable by the obligors against the assignee are effect such registration. crystallised or cut-off on the relevant date the assignment becomes In accordance with article 6 of the Securitisation Law, the effective, (i) regardless of notification when such notice is assignment of the relevant assets becomes immediately valid and dispensed as in question 4.2 above, or (ii) upon notification or effective between the parties upon the execution of the relevant awareness of the debtor when such is required. assignment agreement, irrespective of the debtor’s consent, notification or awareness, when the assignor is, inter alia, a credit 4.5 Notice Mechanics. If notice is to be delivered to obligors, institution or a financial company. whether at the time of sale or later, are there any When such is not the case, and in relation to the effectiveness of the requirements regarding the form the notice must take or assignment as far as the relevant debtors are concerned, the general how it must be delivered? Is there any time limit beyond rule is that a notification is required for the assignment to become which notice is ineffective – for example, can a notice of effective, following the general principle under Article 583 of the sale be delivered after the sale, and can notice be Portuguese Civil Code. delivered after insolvency proceedings against the obligor have commenced? Does the notice apply only to specific receivables or can it apply to any and all (including future) 4.3 Perfection for Promissory Notes, etc. What additional or receivables? Are there any other limitations or different requirements for sale and perfection apply to considerations? sales of promissory notes, mortgage loans, consumer loans or marketable debt securities? Under the Securitisation Law, when applicable, notification to the debtor is required to be made by means of a registered letter (to be As mentioned in question 4.2 above, in order to perfect an sent to the debtor’s address included in the relevant receivables assignment of mortgage loans and ancillary mortgage rights which contract) and such notification will be deemed to have occurred on are capable of registration at a public registry against third parties, the third business day following the date of posting of the registered the assignment must be followed by the corresponding registration letter. of the transfer of such mortgage loans and ancillary mortgage rights An exception to this requirement applies when the assignment of in the relevant Real Estate Registry Office. credits is made under the Securitisation Law as described in The Portuguese real estate registration provisions allow for the question 4.2 above. registration of the assignment of any mortgage loan at any There is no applicable time limit to the delivery of notice to the Portuguese Real Estate Registry Office, even if the said Portuguese obligors, bearing into account in any case that, if no exception Real Estate Registry Office is not the office where such mortgage applies, the assignment shall only be effective towards the obligors loan is registered. The registration of the transfer of the mortgage upon delivery of the relevant notice. loans requires the payment of a fee for each such mortgage loan. When required, notice of assignment of credits must be given to In what concerns promissory notes (“livranças”), the usual practice each obligor, even though notice may be given for future credits. is for these to be blank promissory notes in relation to which the originator has obtained from a borrower a completion pact (“pacto

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4.6 Restrictions on Assignment; Liability to Obligor. Are risk, interest rate risk or control of collections (for its own benefit) restrictions in receivables contracts prohibiting sale or could be seen as colliding with such true sale concept. In what assignment generally enforceable in Portugal? Are there concerns the control of collections, we would note additionally, that exceptions to this rule (e.g., for contracts between where the seller is a credit institution in the context of a commercial entities)? If Portugal recognises prohibitions securitisation, usually the purchaser mandates such seller to act as on sale or assignment and the seller nevertheless sells servicer of the receivables and ensure receipt of collections from the receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for breach of contract or borrowers on behalf of the purchaser, it being clear, however, that on any other basis? any amounts so held by the servicer do not pertain to the servicer (even in a servicer event) and rather belong to the purchaser, in Restrictions on assignment existing in the underlying receivables accordance with the Securitisation Law. In this sense, an Portugal contracts are enforceable in Portugal, even though such contractual assignment under the Securitisation Law will typically be a prohibitions can only be effective towards the assignee if it were perfected assignment. aware of such prohibition on the assignment date, as set out in the Portuguese Civil Code. If a given receivables contract comprises 4.9 Continuous Sales of Receivables. Can the seller agree in such a contractual prohibition on assignment and nevertheless the an enforceable manner (at least prior to its insolvency) to seller assigns the receivables to a third party, then the seller will be continuous sales of receivables (i.e., sales of receivables liable towards the obligor for breach of contract, i.e., wilful default as and when they arise)? (“incumprimento culposo”) of an obligation, in accordance with the provisions of the Portuguese Civil Code. Without prejudice to question 4.10 below regarding future receivables, continuous sales would be possible under the Securitisation Law provided they are in compliance with question 4.7 Identification. Must the sale document specifically identify 4.7 above. However, sellers have rather opted to carry out each of the receivables to be sold? If so, what specific information is required (e.g., obligor name, invoice securitisation transactions with revolving periods for assignment of number, invoice date, payment date, etc.)? Do the additional receivables on a periodic basis, against payment out of receivables being sold have to share objective collections and additional funding by issuance of further notes. characteristics? Alternatively, if the seller sells all of its receivables to the purchaser, is this sufficient 4.10 Future Receivables. Can the seller commit in an identification of receivables? enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables The assignment agreement must identify, specifically, the purchase agreement (e.g., “future flow” securitisation)? If receivables which are being assigned under a given contract, given so, how must the sale of future receivables be structured that the object of the assignment must be determinable in to be valid and enforceable? Is there a distinction accordance with the Portuguese Civil Code, such usually being between future receivables that arise prior to or after the done by listing the relevant receivables in a schedule to the seller’s insolvency? assignment agreement. Such list of assigned receivables refers to standard characteristics of the relevant credits, without disclosing Pursuant to Article 4.3 of the Securitisation Law, future receivables personal data of the obligors which would allow their identification, may be assigned for securitisation purposes provided such in accordance with the applicable data protection rules. Under the receivables (i) arise from existing relationships, and (ii) are Securitisation Law, bulk assignments are not considered and the quantifiable (a confirmation of the estimations made by the seller will not assign all of its undetermined receivables to a given originator in respect of the quantum of the future receivables that purchaser, rather identifying those receivables to be actually are being securitised usually being sought). In terms of structure, assigned and which comply with the Securitisation Law eligibility the originator will assign to the purchaser certain rights over the criteria. future receivables, in an amount equivalent to a given overcollateralised percentage of the debt service and the originator will guarantee that the future receivables generated during each 4.8 Respect for Intent of Parties; Economic Effects on Sale. collection period will be sufficient to cover the agreed debt service If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be and, accordingly, for each interest period it will transfer to the respected or will a court enquire into the economic purchaser an amount equivalent to 100 per cent. of the debt service characteristics of the transaction? If the latter, what in respect of such interest period. Furthermore, in case the economic characteristics of a sale, if any, might prevent originator is unable to originate sufficient future receivables to meet the sale from being perfected? Among other things, to its obligations for a given interest period, it will, in any event, pay what extent may the seller retain (a) credit risk; (b) to the purchaser an amount equal to such shortfall of future interest rate risk; and/or (c) control of collections of receivables, in order to ensure an amount equal to 100 per cent. of receivables without jeopardising perfection? the relevant debt service. In respect of insolvency, we refer to question 6.5 below. The assignment of the receivables under a receivables sale agreement is generally construed to constitute a valid and true assignment of receivables from an originator to the assignee. 4.11 Related Security. Must any additional formalities be In terms of economic characteristics of an assignment of fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all receivables, we note that the Securitisation Law requires a true and related security can be enforceably transferred, what complete assignment, not being subject to any term or condition. methods are customarily adopted to provide the Furthermore, neither the originating entity, nor any of its group purchaser the benefits of such related security? companies, may provide any guarantees or enhancement in the context of the assignment or undertake responsibility for payments Under the Portuguese Civil Code, the general rule is that the made by the underlying obligors. As such, the seller retaining credit

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assignment of credits also implies the transfer of any kind of security interest in accordance with Portuguese law in order for it to security or other form of guarantee, unless the relevant assignment be effective against said debtor. agreement provides otherwise. If certain formalities apply to the creation of security, then such formalities also usually need to be 5.5 Additional Formalities. What additional or different complied with for a valid transfer of security. Please see question requirements apply to security interests in or connected to 4.2 and 4.3 regarding transfer of mortgages under the Securitisation insurance policies, promissory notes, mortgage loans, Law and question 5.5. consumer loans or marketable debt securities?

5 Security Issues In respect of additional formalities for validly creating security interests in respect to assets abovementioned, we note that formalities regarding evidence to third parties must be followed, Portugal 5.1 Back-up Security. Is it customary in Portugal to take a such as: (a) security over insurance policies needs to be notified to “back-up” security interest over the seller’s ownership the relevant insurance provider; (b) security over promissory notes interest in the receivables and the related security, in the needs to be endorsed by the security grantor to the benefit of the event that the sale is deemed by a court not to have been security beneficiary on the relevant title; (c) creation of mortgages perfected? or subsequent transfers of entitlements in respect thereof need to be registered with the competent registry office; and (d) security in Back-up security in the context of the Securitisation Law is not respect of marketable debt securities needs to be registered either in customary in Portugal, considering that noteholders and secured the relevant securities account (in respect of book-entry securities) creditors benefit from the legal creditors’ privilege set forth in or in the relevant title and securities register (in respect of physical Article 63 of the Securitisation Law, which covers the transactions securities). assets located in and outside of Portugal.

5.6 Trusts. Does Portugal recognise trusts? If not, is there a 5.2 Seller Security. If so, what are the formalities for the mechanism whereby collections received by the seller in seller granting a security interest in receivables and respect of sold receivables can be held or be deemed to related security under the laws of Portugal, and for such be held separate and apart from the seller’s own assets security interest to be perfected? until turned over to the purchaser?

Under Portuguese securitisation transactions, the sellers do not In general, Portuguese law does not recognise the legal concept of provide security interests to the receivables, given that such could a trust. However, in terms of collections received by the seller be considered as jeopardising the true sale nature of the transaction. pertaining to a given securitisation transaction, we refer to the segregation principle and autonomous estate nature as set out in 5.3 Purchaser Security. If the purchaser grants security over question 7.2 below. Furthermore, in respect of collections held by all of its assets (including purchased receivables) in the servicing entity, we would also refer to question 4.8 above. favour of the providers of its funding, what formalities must the purchaser comply with in Portugal to grant and perfect a security interest in purchased receivables 5.7 Bank Accounts. Does Portugal recognise escrow governed by the laws of Portugal and the related accounts? Can security be taken over a bank account security? located in Portugal? If so, what is the typical method? Would courts in Portugal recognise a foreign-law grant of security (for example, an English law debenture) taken The purchasers in Portuguese securitisation transactions do not over a bank account located in Portugal? usually provide additional security to the noteholders and secured creditors of a given transaction, given that these entities benefit Portuguese law does not expressly govern escrow accounts; from the legal creditors’ privilege mentioned in question 5.1 above. however, similar types of arrangements can be contractually set up Other than obtaining the relevant approval for incorporation of the and are commonly used by Portuguese banks. Security interests fund or asset digit code approval from the Portuguese Securities can be taken over bank accounts in Portugal and the typical method Market Commission (“CMVM”) which confirms the applicability to so do would be by granting a pledge over such bank account. A of the legal creditors’ privilege in respect of a given portfolio of reference should be made to the form of financial pledges which are receivables pertaining to certain notes issued, no additional the customary method of taking security over bank accounts by formalities are required in order to perfect such legal creditors’ financial institutions, financial pledges being governed by the privilege, given that it is not subject to registration. regime of Decree-Law no. 105/2004, dated 8 May 2004, in line with the financial collateral arrangements directive. The important 5.4 Recognition. If the purchaser grants a security interest in characteristic of such financial pledges being that the collateral receivables governed by the laws of Portugal, and that taker may have the possibility to use and dispose of financial security interest is valid and perfected under the laws of collateral provided as the owner of it. English law pledges over the purchaser’s country, will it be treated as valid and Portuguese bank accounts are possible, but the relevant Portuguese perfected in Portugal or must additional steps be taken in bank (as debtor in relation to the balance of that account from time Portugal? to time) should be notified of the granting of the pledge.

The security interest would be recognised as valid and effective in Portugal provided that any applicable Portuguese formalities relating to the protection of interested third parties are followed (we refer to question 5.5 below). For instance, it would be possible to grant an English law pledge over Portuguese law receivables, however, the debtor of those receivables should be notified of such

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6 Insolvency Laws 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or 6.1 Stay of Action. If, after a sale of receivables that is “preference” period before the commencement of the otherwise perfected, the seller becomes subject to an insolvency proceeding? What are the lengths of the insolvency proceeding, will Portugal’s insolvency laws “suspect” or “preference” periods in Portugal for (a) automatically prohibit the purchaser from collecting, transactions between unrelated parties and (b) transferring or otherwise exercising ownership rights over transactions between related parties? the purchased receivables (a “stay of action”)? Does the insolvency official have the ability to stay collection and Acts that may be qualified as detrimental to the insolvent estate, enforcement actions until he determines that the sale is

Portugal performed within four years prior to the opening of the corporate perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather insolvency proceedings, may be challenged by the insolvency than the owner of the receivables? administrator on behalf of the insolvent estate. The relevant acts for this purpose are those that diminish, frustrate, aggravate, put in In accordance with Article 6 of the Securitisation Law, the general danger or delay the rights of the debtor’s creditors. These acts can rule is that the assignment of receivables (described in question 4.2 only be challenged if it is proved that they were motivated by the above) becomes immediately valid and effective between the parties’ bad faith (where the counterparty to the act or the parties upon the execution of the relevant assignment agreement, beneficiary of the act is a person or entity related to the insolvent irrespective of the debtor’s consent, notification or awareness. entity, the relevant act will be deemed to be motivated by bad faith if carried out within a period of two years prior to the opening of the This means that the assignment of the receivables under the corporate insolvency proceedings). Securitisation Law constitutes a valid and true assignment of receivables from the seller to the purchaser, namely to the extent The parties’ bad faith is defined as knowledge of any of the that the insolvency of the seller will not cause the sale or following circumstances on the date of the relevant act: assignment to be declared void from a legal stand point and neither (a) that the debtor was insolvent, i.e., unable to fulfil its any insolvency official, any borrower nor any creditor of the seller obligations as they fall due or the debtor’s liabilities exceed would be able to have set aside such assignment unless it could its assets; provide evidence as to the fact that the assignment had been made (b) that the act was of a detrimental nature and that the debtor in bad faith (vd. Article 8 of the Securitisation Law). To set aside was in a situation of imminent insolvency; or the assignment conducted on these terms, this would have to be (c) that insolvency proceedings had commenced. made either by evidencing, in the context of the insolvency, the There are certain acts and transactions which are legally deemed to parties’ bad faith or, within the period of five years following be detrimental to the insolvent company’s estate by themselves completion of the sale of the receivables, through an application for without need of any additional proof (such as proof of bad faith of an unenforceability judgment (“impugnação pauliana”) of such any party). This is the case where: assignment and only providing the claiming party is capable of (a) security was granted within a period of six months prior to proving that: (i) the sale of the receivables has decreased the assets the commencement of corporate insolvency proceedings or increased the liabilities of the originator; (ii) the claim of the (where such security was granted in respect of pre-existing relevant creditor has arisen before completion of the sale of the obligations); receivables (although claims arising after completion of the date of (b) security was granted simultaneously with the secured receivables may also be affected to the extent that the relevant obligations, within a period of 60 days prior to the creditor provides evidence that such sale has been entered with for commencement of the corporate insolvency proceedings; the specific purpose of avoiding the payment satisfaction of the (c) gratuitous acts (i.e. those for which the debtor did not receive creditors’ claim); (iii) completion of the sale of the receivables has any consideration) were performed less than two years caused or worsened the insolvency situation of the originator; and before the commencement of the corporate insolvency (iv) both the originator and the purchaser acted in bad faith, that is, proceedings where the act results in a reduction in the assets both of them were aware that completion of the sale of the of the debtor; receivables would have the effect described in subparagraph (iii) (d) surety, sub-surety, guarantee and credit mandates are given, above. provided they were issued by the insolvent debtor in the six months preceding the date of the commencement of the corporate insolvency proceedings and do not relate to 6.2 Insolvency Official’s Powers. If there is no stay of action transactions with any real benefit to the debtor; under what circumstances, if any, does the insolvency (e) payment of debts or the performance of other acts occur, official have the power to prohibit the purchaser’s which have the effect of performing obligations (for example exercise of rights (by means of injunction, stay order or set-off) which would become due after the date on which other action)? insolvency proceedings are commenced (if such payment or set-off occurs during the six months before the opening of Other than as indicated in question 6.3 below, and on the the corporate insolvency proceedings); assumption that a true sale is in place, the only means to prohibit the (f) payment of debts or the performance of other acts occur, exercise of rights by the purchaser would be through an injunction which have the effect of performing obligations (for example (providência cautelar não especificada) followed by the competent set-off) during the six months prior to the opening of the main court action. corporate insolvency proceedings if such payment or set-off is considered unusual according to standard commercial practices and the creditor was not able to demand payment; (g) acts are performed by the debtor less than a year before the opening of the corporate insolvency proceedings in which the obligations assumed by the debtor significantly exceed those of the counterparty (i.e. transactions at an undervalue); and

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(h) reimbursement of shareholder loans occur, if made in the 7.2 Securitisation Entities. Does Portugal have laws year that precedes the commencement of the corporate specifically providing for establishment of special purpose insolvency proceedings. entities for securitisation? If so, what does the law In any event, it must be noted that, should an assignment of provide as to: (a) requirements for establishment and management of such an entity; (b) legal attributes and receivable have been made under the Securitisation Law, the burden benefits of the entity; and (c) any specific requirements as of proving bad faith is reversed as the assumption that the above to the status of directors or shareholders? typified acts were made in bad faith will not apply. If an assignment of receivables has been made under the Securitsation Law, the A flexibility concern seems to have led to the establishment of two relevant interested parties must always prove bad faith in order for different types of securitisation vehicles, the credit securitisation the assignment to be declared void. funds (“FTCs”) and the credit securitisation companies (“STCs”). Portugal The FTC structure is necessarily a tripartite one - (a) the Fund 6.4 Substantive Consolidation. Under what facts or which must be managed by a (b) Fund Manager, pursuant to the circumstances, if any, could the insolvency official terms of the applicable fund regulation and one sole (c) Depository, consolidate the assets and liabilities of the purchaser with qualifying as a credit institution, must hold the assets of the Fund. those of the seller or its affiliates in the insolvency proceeding? Fund Managers (Sociedade Gestora), are financial companies who are required to: (i) hold registered offices and effective management This is not applicable the context of the Securitisation Law. in Portugal; (ii) qualify as a sociedade anónima (public limited liability company) whose share capital is represented by nominative or registered bearer shares; (iii) be exclusively engaged in the 6.5 Effect of Proceedings on Future Receivables. What is the management of one or more funds on behalf of the holders of effect of the initiation of insolvency proceedings on (a) Securitisation Units; and (iv) include in its name the expression sales of receivables that have not yet occurred or (b) on “SGFTC”. sales of receivables that have not yet come into existence? As Fund Managers are financial companies, their incorporation is subject to approval by the Bank of Portugal and their activity is If the assignment of future receivables is made under the generally subject to supervision by this regulatory authority. Securitisation Law then the indications provided under question 6.1 One same Fund Manager may have a number of different funds above will also apply and therefore such future receivables will not under management and it is the Fund Manager who is responsible form part of the insolvency estate of the seller even when they only for the application for approval of incorporation of each new fund, become due and payable after the date of declaration of insolvency by filing the relevant approval request with the CMVM - the entity of the seller. responsible for approving the incorporation of each new fund In case the assignment is not made under the Securitisation Law and through the approval of the relevant fund regulation. The the seller becomes insolvent, then the insolvency official may, at its incorporation of a fund is deemed to occur upon payment of the discretion, choose between executing or not executing the subscription price for the relevant securitisation units, something receivables sale agreement as this agreement will be suspended by that may only occur upon CMVM’s approval having been obtained. virtue of the declaration of insolvency. As the FTC itself has no legal personality (it is an autonomous pools of assets held jointly by a different number of entities), its 7 Special Rules management is entrusted to the Fund Manager who must manage the fund in accordance with the fund regulation and with certain legal limitations on the management of the FTC such as, for 7.1 Securitisation Law. Is there a special securitisation law example, the requirement that the funds’ funds are used for the (and/or special provisions in other laws) in Portugal initial or subsequent acquisition of credits (for securitisation establishing a legal framework for securitisation purposes) and that such credits represent at least 75 per cent. of the transactions? If so, what are the basics? securitisation funds’ assets. Of relevant notice is also the fact that fund managers are subject to Generally, the Securitisation Law provides for: (i) the establishment specific capital adequacy requirements. A minimum share capital of a standard and specific securitisation legal framework by requirement of Euro 250,000 applies while they must have own regulating the establishment and activity of the securitisation funds which are equal to, or higher than, a certain percentage of the vehicles, the type of credits that may be securitised and the entities net value of all funds managed: up to Euro 75 million – 0.5 per who may assign credits for securitisation purposes; (ii) a cent., in excess of Euro 75 million - 0.1 per cent. simplification of the assignment process by providing for specific rules on the assignment of credits; and (iii) the expansion of the Securitisation companies are companies who are required to: (i) class of eligible assets to include mortgage loans by providing for a qualify as a sociedade anónima (public limited liability company) simplified mechanism of assignment of this type of credits. whose share capital is represented by nominative shares; (ii) include in its name the expression “STC”; and (iii) be exclusively engaged A special securitisation tax regime is also in place. It was in the carrying out of securitisation transactions by means of established through Decree-Law 219/2001, dated 4 August 2011 (as acquiring, managing and transferring receivables and of issuing amended from time to time) (the “Securitisation Tax Law”). notes as a source of financing such acquisitions. The incorporation of STCs is subject to an approval process near the CMVM and, although they do not qualify as financial companies, this process imposes compliance with a number of requirements that are similar to those arising under all relevant Banking Law requirements. These requirements may be said to have an impact in terms of the shareholding structure an STC is to

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have to the extent that full disclosure of both direct and indirect issuer’s insolvency, however, remote, such event may be in the ownership is required for the purposes of allowing the CMVM to context of the Portuguese securitisation vehicles. assess the reliability and soundness of the relevant shareholding structure. The same applies in respect of the members of corporate 7.4 Non-Petition Clause. Will a court in Portugal give effect bodies, namely directors who must be persons whose reliability and to a contractual provision (even if the contract’s governing availability must ensure the capacity to run the STC business in a law is the law of another country) prohibiting the parties sound and prudent manner. from: (a) taking legal action against the purchaser or STCs are also subject to specific capital adequacy requirements. A another person; or (b) commencing an insolvency minimum share capital requirement of Euro 250,000 applies while proceeding against the purchaser or another person? they must have own funds which are equal to, or higher than, a Portugal certain percentage of the net value of issued outstanding Non petition, limited recourse and priority of payments securitisation notes: up to Euro 75 million – 0.5 per cent., in excess arrangements, as usually contained in the securitisation transactions of Euro 75 million - 0.1 per cent. documentation are valid under Portuguese law, deriving directly from the provisions of Articles 60 et seqs. of the Securitisation Law. In terms of legal attributes and benefits, we believe it is fair to say that both vehicles are quite similar as they both allow for a full segregation of the relevant portfolios and their full dedication to the 7.5 Independent Director. Will a court in Portugal give effect issued securities. While in a fund structure this is achieved through to a contractual provision (even if the contract’s governing the structure itself, as the assets of each fund are only available to law is the law of another country) or a provision in a meet the liabilities of such fund in a company structure, certain party’s organisational documents prohibiting the directors relevant legal provisions establish a full segregation principle and a from taking specified actions (including commencing an insolvency proceeding) without the affirmative vote of an creditors’ privileged entitlement over the assets that are so independent director? segregated and which collateralise a certain issue of notes. This segregation principle means that the receivables and other As per the Portuguese Insolvency Code, the commencement of related assets and amounts existing at a given moment for the insolvency proceedings is an obligation of the board of directors of benefit of an STC, and which are related to a certain issuance of any given company that is found to be insolvent and therefore there notes, constitute an autonomous and ring-fenced pool of assets should not be a limitation as to the fulfilment of this legal (“património autónomo”) which is exclusively allocated to such obligation. issuance of Notes and which is not, therefore, available to creditors of the STC other than the noteholders, and to the services providers existing specifically in the context of such issuance of notes until all 8 Regulatory Issues the amounts due in respect of the notes have been repaid in full. To this effect, the assets integrated in each património autónomo are 8.1 Required Authorisations, etc. Assuming that the listed and filed with the CMVM and subject to an asset purchaser does no other business in Portugal, will its identification code that is also granted by the CMVM. purchase and ownership or its collection and enforcement In addition to the above, and in order to render this segregation of receivables result in its being required to qualify to do principle effective, the noteholders and the other creditors relating business or to obtain any licence or its being subject to regulation as a financial institution in Portugal? Does the to each series of securitisation notes issued by the STC are further answer to the preceding question change if the purchaser entitled to a legal creditor’s privilege (equivalent to a security does business with other sellers in Portugal? interest) over all of the assets allocated to the relevant issuance of securitisation notes, including assets located outside Portugal. In The mere purchase and management of a certain portfolio of fact, according to Article 63 of the Securitisation Law, this legal receivables does not in itself qualify as a banking or financial special creditor’s privilege (“privilégio creditório especial”) exists activity (unless it is to be carried out on a professional and regular in respect of all assets forming part of the portfolio allocated to each basis) as should therefore not give rise to the need for any kind of transaction related to an issuance of notes and therefore has effect authorisation or licence being obtained. over those assets existing at any given moment in time for the benefit of the STC that are allocated to the relevant issuance of securitisation notes. 8.2 Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables following their sale to the purchaser, including to appear 7.3 Non-Recourse Clause. Will a court in Portugal give effect before a court? Does a third party replacement servicer to a contractual provision (even if the contract’s governing require any licences, etc., in order to enforce and collect law is the law of another country) limiting the recourse of sold receivables? parties to available funds? No. When the seller remains in charge of the collection of receivables Limited recourse provisions are valid and binding under Portuguese (as, in fact, is foreseen in the Securitisation Law for example when the law, deriving directly from the provisions of Articles 60 et seqs. of seller is a bank) no licence or authorisation is required for the seller to the Securitisation Law. Insofar as limited recourse arrangements continue to enforce and collect receivables, including to appear before are concerned, we would furthermore take the view that they a court (assuming the debtors are not aware of the assignment). correspond to an application in a specific context (that of However, should the assignment of the receivables have been notified securitisation) of a possibility of having a contractual limitation on to the debtors then the servicer will need to show sufficient title to the assets which are liable for certain obligations or debts, which is appear in court, like a power of attorney, in case its legitimacy is provided for by Portuguese law on general terms (see Article 602 of challenged by the relevant debtor as, in fact, only a fully fledged the Portuguese Civil Code). Once they result from the quoted creditor has the relevant legitimacy (legitimidade processual) to claim provisions of the law, limited recourse shall not be affected by the a certain credit in court.

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In case a third party replacement servicer is appointed to replace the Decree Law no. 220/94, dated 23 August 1994, states the minimum seller as original servicer, CMVM’s approval to this effect is required level of information to be included in loans, such as the annual whenever the seller is a credit institution, a financial company, an effective rate. insurance company, a pension fund or a pension fund manager (as in these cases the law actually imposes that the seller remains as servicer). 8.5 Currency Restrictions. Does Portugal have laws When the seller is not one of any of the above types of entities, any restricting the exchange of Portugal’s currency for other third party may take on the servicing role, provided it is a reliable currencies or the making of payments in Portugal’s entity for the purposes of the Securitisation Law. currency to persons outside the country?

Other than in international embargo circumstances, there are no

8.3 Data Protection. Does Portugal have laws restricting the Portugal laws in Portugal restricting foreign exchange transactions or free use or dissemination of data about or provided by obligors? If so, do these laws apply only to consumer international capital movements. obligors or also to enterprises? 9 Taxation There are, indeed, applicable data protection laws, which apply exclusively in respect of consumer obligors or individuals and not to enterprises. However, the use or dissemination of personal data 9.1 Withholding Taxes. Will any part of payments on in respect of directors of enterprises who are individuals will also receivables by the obligors to the seller or the purchaser be subject to restrictions. be subject to withholding taxes in Portugal? Does the answer depend on the nature of the receivables, whether Law no. 67/98 of 26 October 1998, (the “Data Protection Law”), they bear interest, their term to maturity, or where the which implemented Directive 95/46/EC, of 24 October 1995, seller or the purchaser is located? provides for the protection of individuals regarding the processing and transfer of personal data. The Securitisation Tax Law has established the tax regime Pursuant to the Data Protection Law, any processing of personal applicable to the securitisation transactions carried out under the data requires express consent from the data subject, unless the Securitisation Law. Its main goal was to ensure a tax neutral processing is necessary in certain specific circumstances as treatment to the securitisation transactions set up by each one of the provided under the relevant laws. securitisation vehicles provided for in the Securitisation Law. The entity collecting and processing personal data must obtain prior Therefore, under Articles 2(5) and 3(4) of the Securitisation Tax authorisation from the Comissão Nacional de Protecção de Dados Law, there is no withholding tax on (i) the payments made by the (the “CNPD”), the Portuguese Data Protection Authority, before purchaser (either an STC or an FTC) to the seller in respect of the processing such data. purchase of the receivables, (ii) the payments by the obligors under the loans, and (iii) the payments of collections by the servicer (who Transfer of personal data to an entity within a Member State does usually is also the seller) to the purchaser are not subject to not require authorisation by the CNPD but must be notified to the Portuguese withholding tax. The nature or the characteristics of the relevant data subjects. receivables and the location of the seller do not have any influence on the tax regime referred to above. However the purchaser must 8.4 Consumer Protection. If the obligors are consumers, will be an STC or an FTC resident for tax purposes in Portugal in order the purchaser (including a bank acting as purchaser) be to benefit from the special tax regime. required to comply with any consumer protection law of On the other hand, payments of interest and principal in respect of Portugal? Briefly, what is required? the various series of securitisation notes/units the purchaser issues are exempt from Portuguese income tax, including withholding tax, Portuguese law (namely the Portuguese Constitution, the Civil provided the relevant noteholder or unitholder qualifies as a non- Code and the Consumer Protection Law) contains general Portuguese resident having no permanent establishment in Portugal. provisions in relation to consumer protection. These provisions This exemption shall cease to apply if, for some reason: (i) more cover general principles of information disclosure, information than 25 per cent. of the share capital of the relevant noteholder or transparency (contractual clauses must be clear, precise and legible) unitholder is held, either directly or indirectly, by Portuguese and a general duty of diligence, neutrality and good faith in the residents; or (ii) the relevant noteholder or unitholder becomes a negotiation of contracts. resident of a jurisdiction designated by the Ministry of Finance of Decree Law no. 446/85, dated 25 October 1985, as amended by Portugal as not qualifying for the above exemption (currently Decree Law no. 220/95, dated 31 July 1995 and Decree Law no. referred to in Ministerial order no. 150/2004 of 13 February 2004, 249/99, dated 7 July 1999 (which implemented Directive as amended from time to time). 93/13/CEE of 5 April 1993) and Decree Law no. 323/2001, dated 17 December 2001 known as the Lei das Cláusulas Contratuais Gerais (the Law of General Contractual Clauses) prohibits, in 9.2 Seller Tax Accounting. Does Portugal require that a specific accounting policy is adopted for tax purposes by general terms, the introduction of abusive clauses in contracts the seller or purchaser in the context of a securitisation? entered into with consumers. Pursuant to this law, a clause is deemed to be abusive if such clause has not been specifically No specific tax accounting requirements need to be complied with by negotiated by the parties and leads to an unbalanced situation the seller under the securitisation regime. However, the CMVM insofar as the rights and obligations of the consumer (regarded as Regulation no. 1/2002, dated 5 February, sets forth the specific the weaker party) and the rights and obligations of the counterparty accountancy regime for the FTC, and the CMVM Regulation no. (regarded as the stronger party) are concerned and the law provides 12/2002, dated 18 July, establishes specific accountancy rules for the for an extended list of prohibited clauses. The use of such clauses STC (although the accounting procedure of this type of corporate that are prohibited will cause the relevant clauses to be considered entity follows the general Portuguese Accountancy Standards). null and void.

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9.3 Stamp Duty, etc. Does Portugal impose stamp duty or 9.5 Purchaser Liability. If the seller is required to pay value other documentary taxes on sales of receivables? added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give Pursuant to the Securitisation Tax Regime, no stamp duty is due on: rise to the receivables) and the seller does not pay, then (i) the sale of receivables being securitised; or (ii) the fees and will the taxing authority be able to make claims for the commissions which fall under Article 5 (i.e. referring to acts unpaid tax against the purchaser or against the sold receivables or collections? necessary to ensure a good management of the receivables and, if applicable, of the respective guarantees, and to ensure collection This is not applicable since the assignment of the receivables services, the administrative services relating to the receivables, all benefits from a stamp tax and a VAT exemption. relations with the debtors and also maintaining, modifying and

Portugal extinguishing acts related to guarantees, if any) and under Article 24 (i.e. referring to any of the described attributions of the 9.6 Doing Business. Assuming that the purchaser conducts depositary), both of the Securitisation Law, that may be charged by no other business in Portugal, would the purchaser’s the servicer to the purchaser. In addition, no documentary taxes are purchase of the receivables, its appointment of the seller due in Portugal. as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax in Portugal? 9.4 Value Added Taxes. Does Portugal impose value added tax, sales tax or other similar taxes on sales of goods or Considering the above, it is important to highlight that the purchase services, on sales of receivables or on fees for collection of the receivables is qualified as a true sale transaction under the agent services? Securitisation Law, the purchaser being the legal owner of the receivables and therefore the purchaser is subject to tax in Portugal The sale of receivables is VAT exempt under articles 9(27)(a) and (namely in respect of income arising from the receivables). (c) of the Portuguese VAT Code, which are in line with article However, despite being viewed as an ordinary taxpayer, in order to 135(a) and (c) of the VAT Directive (EC Directive 2006/112/EC). ensure a tax neutral treatment on the securitisation transactions, the Pursuant to the Securitisation Tax Regime, no Value Added Tax is taxable income of the purchaser tends to be equivalent to zero for due on the administration or management of securitisation funds tax purposes since the income payments made to the noteholders / and also on the fees and commissions regarding management unitholders are tax deductible. services which fall under Article 5 and transactions undertaken by depositary entities pursuant to Article 24 of the Securitisation Law, as described in question 9.3 above. Acknowledgment This chapter has been prepared with the contributions of Ricardo Seabra Moura and Pedro Bizarro of Vieira de Almeida & Associados.

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Paula Gomes Freire Benedita Aires

Vieira de Almeida & Associados Vieira de Almeida & Associados Av. Duarte Pacheco, 26 Av. Duarte Pacheco, 26 1070-110 Lisboa 1070-110 Lisboa Portugal Portugal

Tel: +351 21 311 3400 Tel: +351 21 311 3400 Fax: +351 21 311 3406 Fax: +351 21 311 3406 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt

Law Degree, University of Lisbon, Faculty of Law. Law Degree, University of Oporto, Faculty of Law. Portugal Post-graduate studies in English Commercial Law, College of Post-graduate in Banking Law by University of Lisbon, Faculty of Law, London University. Law. Joined Vieira de Almeida & Associados in 1996. She is a partner Post-graduate in Commercial Law by Portuguese Catholic in the Banking & Finance area of practice, where she has been University, Faculty of Law. actively involved in several transactions, in Portugal and abroad, LL.M. Advanced Master of Law by Católica Global School of Law. mainly focused on the issue and placement of debt and equity Joined Vieira de Almeida & Associados in 2003 and is currently a instruments, namely EMTN programmes, commercial paper, senior associate in the Banking & Finance practice area, where preferential shares and public offerings. She has also been she has been actively involved in several transactions, in Portugal actively working on securitisation transactions and other types of and abroad, mainly focused on the issue and placement of debt asset-backed transactions. and equity instruments and other structured financial products Before joining the firm, she worked as an associate at McKenna and classic financing. She has also been actively working in & Co, in London and at Azevedo Neves, Benjamim Mendes, securitisation transactions, covered bonds issuances and other Pereira de Miranda & Associados, in Lisbon. types of asset-backed transactions. Seconded to Clifford Chance Admitted to the Portuguese Bar Association and the Law Society LLP, London office, integrating the Structured Debt team during of England and Wales. 2007 to 2008. Admitted to the Portuguese Bar Association and registered as a European Registered Lawyer.

Established in 1976, VdA’s innovative approach has been a stepping stone for its growth. VdA has led some of the most important and groundbreaking transactions that took place in the financial and infrastructural sectors in the last decades. Its team of more than 160 lawyers provides high quality services and advice on the following practice areas: Banking & Finance; Competition & EU; Litigation & Arbitration; Insolvency & Restructuring, Corporate & Governance, Tax, Real Estate, Planning & Environment, Employment & Benefits; M&A, Corporate Finance; Capital Markets; Public Law; Privacy & Data Protection; Projects - Infrastructure, Energy & Natural Resources; Intellectual Property; Life Sciences; Telecoms & Media; IT & Outsourcing. As a result of our continuous efforts, Chambers & Partners considered VdA ‘Portuguese Firm of the Year 2011’. Through VdAtlas, the firm’s international platform, VdA provides its clients with a professional network based on exclusive or preferential relations in the Portuguese speaking countries, Europe, South America, Asia and in the world’s main financial centres, bringing together highly specialised local support with a profound knowledge of the client’s business. A particular expertise has been developed in Mozambique, Angola and Brazil, where VdA has been involved in some of the biggest transactions that have taken place in such markets.

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Saudi Arabia Nabil A. Issa

King & Spalding LLP Martin P. Forster-Jones

1 Receivables Contracts will require that such contract is governed by Saudi Arabian laws and regulations, that the agreement is in Arabic and that any dispute will be heard by the local courts rather than arbitration in or outside 1.1 Formalities. In order to create an enforceable debt of Saudi Arabia. obligation of the obligor to the seller, (a) is it necessary that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone 2 Choice of Law – Receivables Contracts sufficient; and (c) can a receivable “contract” be deemed to exist as a result of the behaviour of the parties? 2.1 No Law Specified. If the seller and the obligor do not In theory, a contract could be deemed to exist as a result of the specify a choice of law in their receivables contract, what behaviour of the parties and/or with the provision of evidence in the are the main principles in Saudi Arabia that will determine form of invoices. Oral contracts are a recognised form of the governing law of the contract? contractual agreement in Saudi Arabia. Nevertheless, this approach is not advisable as the interpretation of a contract, which is not If no law is specified, the assumption is that the laws and evidenced in writing, will be left to the discretion of the relevant regulations of Saudi Arabia apply. adjudicating system. In the absence of the concept of precedent, each dispute is decided on its individual merits, which is 2.2 Base Case. If the seller and the obligor are both resident unpredictable. Any assignment of receivables needs to be executed in Saudi Arabia, and the transactions giving rise to the by all three parties, the obligor, obligee and original party. receivables and the payment of the receivables take In order to avoid a claim that the signature was fraudulently place in Saudi Arabia, and the seller and the obligor choose the law of Saudi Arabia to govern the receivables obtained, a contract should be executed and witnessed by two contract, is there any reason why a court in Saudi Arabia Muslim males. would not give effect to their choice of law?

1.2 Consumer Protections. Do Saudi Arabia’s laws (a) limit It is difficult to envision a scenario where a court in Saudi Arabia rates of interest on consumer credit, loans or other kinds would not give effect to the fact that both parties are resident in of receivables; (b) provide a statutory right to interest on Saudi Arabia, the contract is governed by the laws of Saudi Arabia late payments; (c) permit consumers to cancel and the contract relates to the payment of receivables in Saudi receivables for a specified period of time; or (d) provide Arabia. other noteworthy rights to consumers with respect to receivables owing by them? 2.3 Freedom to Choose Foreign Law of Non-Resident Seller Under the Shari’ah, which is the paramount body of law in Saudi or Obligor. If the seller is resident in Saudi Arabia but the Arabia, the charging and payment of interest are prohibited, in light obligor is not, or if the obligor is resident in Saudi Arabia of this questions 1.2(a) and 1.2(b) above are not applicable. but the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their In respect of questions 1.2(c) and 1.2(d) above, there is no specific receivables contract, will a court in Saudi Arabia give applicable consumer protection legislation in Saudi Arabia, but the effect to the choice of foreign law? Are there any Ministry of Commerce & Industry does advise businesses to follow limitations to the recognition of foreign law (such as public some basic consumer protection guidelines, which in themselves policy or mandatory principles of law) that would typically are guidelines and not enforceable. apply in commercial relationships such that between the seller and the obligor under the receivables contract?

1.3 Government Receivables. Where the receivables contract Saudi Arabia follows the Shari’ah and more importantly the has been entered into with the government or a Hanbali School/Guild which generally permits freedom of contract government agency, are there different requirements and to the extent such does not violate the Shari’ah or a specific Saudi laws that apply to the sale or collection of those receivables? law. Saudi courts and other adjudicatory authorities do not traditionally recognise the choice of foreign law regardless of In an agreement with a governmental entity, a governmental entity whether one of the parties is not resident in Saudi Arabia.

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With respect to enforcement of foreign law judgments, the Board of 3.3 Example 2: Assuming that the facts are the same as Grievances would ordinarily require that the party seeking Example 1, but either the obligor or the purchaser or both recognition demonstrate: (i) either that Saudi Arabia and the are located outside Saudi Arabia, will a court in Saudi relevant foreign law jurisdiction are parties to a bilateral or Arabia recognise that sale as being effective against the multilateral agreement for the reciprocal interpretation or seller and other third parties (such as creditors or insolvency administrators of the seller), or must the enforcement of judgments or, in the absence of such agreement, that requirements of the obligor’s country or the purchaser’s such country would recognise and enforce a Saudi judgment in the country (or both) be taken into account? same manner as a domestic judgment; (ii) that the Saudi judgment debtor was accorded due process in the foreign proceeding, If the receivables and the purchase contract are governed by the including due notice and the opportunity to appear in and defend laws of Saudi Arabia, then the location of one of the parties outside itself in such proceeding; (iii) that such foreign judgment is final in of Saudi Arabia is irrelevant. Saudi courts and other adjudicatory the country where it was issued; and (iv) that such foreign judgment Saudi Arabia authorities will interpret the sale from a Saudi law perspective and contains nothing that contravenes the Shari’ah or the public policy apply Saudi law exclusively. Adherence to foreign law of Saudi Arabia. requirements of the parties based outside Saudi Arabia will not be With the exception of judgments issued by the courts of Arab taken into account unless such requirements are compatible with the League and GCC countries (that are subject to the 1983 Convention laws of Saudi Arabia. on Judicial Co-operation between States of the Arab League (the If all formalities have been adhered to and the sale complies with local Riyadh Convention)), Saudi courts are not likely to recognise law requirements, then the sale, in theory, should be recognised as foreign judgments. However, in our experience, for example, we being effective against the seller and other third parties. are aware of Bahraini and other GCC judgments (and arbitral awards) being enforced in Saudi Arabia, but not any non-GCC foreign judgments (or arbitral awards). 3.4 Example 3: If (a) the seller is located in Saudi Arabia but the obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, 2.4 CISG. Is the United Nations Convention on the (c) the seller sells the receivable to a purchaser located in International Sale of Goods in effect in Saudi Arabia? a third country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables At the time of writing this chapter, Saudi Arabia has not yet ratified purchase agreement, and (e) the sale complies with the the United Nations Convention on the International Sale of Goods. requirements of the obligor’s country, will a court in Saudi Arabia recognise that sale as being effective against the seller and other third parties (such as creditors or 3 Choice of Law – Receivables Purchase insolvency administrators of the seller) without the need Agreement to comply with Saudi Arabia’s own sale requirements?

As previously mentioned, Saudi courts and other adjudicatory 3.1 Base Case. Do Saudi Arabia’s law generally require the authorities do not recognise the choice of foreign law. Regardless sale of receivables to be governed by the same law as of whether the sale complies with the requirements of the obligor’s the law governing the receivables themselves? If so, does country, there is no guarantee that such sale will be recognised as that general rule apply irrespective of which law governs the receivables (i.e., Saudi Arabia’s laws or foreign laws)? being effective under the laws of Saudi Arabia. The Saudi courts will consider the sale from a Saudi law perspective. In effect, the laws of Saudi Arabia do require the sale of receivables In circumstances where a judgment has been enforced in the to be governed by the same law as the law governing the obligor’s and purchaser’s country in respect of the sale, the ability receivables themselves, as the Saudi courts and other adjudicatory of the obligor to enforce a foreign judgment will be subject to the authorities do not traditionally recognise the choice of foreign law discretion of the Board of Grievances. The parameters as to how regardless of whether the sale contract or the receivables they exercise their discretion were outlined above in question 2.3. themselves are governed by foreign law. 3.5 Example 4: If (a) the obligor is located in Saudi Arabia but 3.2 Example 1: If (a) the seller and the obligor are located in the seller is located in another country, (b) the receivable Saudi Arabia, (b) the receivable is governed by the law of is governed by the law of the seller’s country, (c) the Saudi Arabia, (c) the seller sells the receivable to a seller and the purchaser choose the law of the seller’s purchaser located in a third country, (d) the seller and the country to govern the receivables purchase agreement, purchaser choose the law of Saudi Arabiato govern the and (d) the sale complies with the requirements of the receivables purchase agreement, and (e) the sale seller’s country, will a court in Saudi Arabia recognise that complies with the requirements of Saudi Arabia, will a sale as being effective against the obligor and other third court in Saudi Arabia recognise that sale as being parties (such as creditors or insolvency administrators of effective against the seller, the obligor and other third the obligor) without the need to comply with Saudi parties (such as creditors or insolvency administrators of Arabia’s own sale requirements? the seller and the obligor)? Saudi courts and other adjudicatory authorities do not recognise the If both the receivables and the purchase agreement are governed by choice of foreign law. Regardless of whether the sale complies with the laws of Saudi Arabia, then the Saudi courts will recognise the the requirements of the seller’s country, there is no guarantee that choice law and apply Saudi law exclusively. If all formalities have such sale will be recognised as being effective under the laws of been adhered to, and the sale complies with local law requirements, Saudi Arabia. The Saudi courts will consider the sale from a Saudi then the sale, in theory, should be recognised as being effective law perspective. against the seller, the obligor and other third parties. In circumstances where a judgment has been enforced in the seller’s country in respect of the sale, and despite Saudi Arabia being a

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signatory to the New York Convention, the ability of the obligor to few methods to perfect security under current Saudi law. enforce a foreign judgment will be subject to the discretion of the Board of Grievances. The parameters as to how they exercise their 4.3 Perfection for Promissory Notes, etc. What additional or discretion were outlined above in question 2.3. different requirements for sale and perfection apply to sales of promissory notes, mortgage loans, consumer 3.6 Example 5: If (a) the seller is located in Saudi Arabia loans or marketable debt securities? (irrespective of the obligor’s location), (b) the receivable is governed by the law of Saudi Arabia, (c) the seller sells Promissory notes should be obtained separately for each obligation the receivable to a purchaser located in a third country, (e.g. in the case of a loan - the principal and profit payments) so as (d) the seller and the purchaser choose the law of the to avoid any question of invalidating the note. In Saudi Arabia purchaser’s country to govern the receivables purchase ‘payable on demand’ promissory notes are only valid for a period of Saudi Arabia agreement, and (e) the sale complies with the 12 Hijri months. Therefore loan documentation should also be requirements of the purchaser’s country, will a court in drafted to provide for replacement notes to be issued every 11 Saudi Arabia recognise that sale as being effective months. The failure to supply such replacement notes should also against the seller and other third parties (such as creditors or insolvency administrators of the seller, any constitute an event of default. Normally, separate promissory notes obligor located in Saudi Arabia and any third party are provided for the principal versus the profit/interest portion. creditor or insolvency administrator of any such obligor)? Under the Shari’ah, a mortgage is not validly created unless transfer from the mortgagor to the mortgagee of actual possession and control In this instance the seller’s country is Saudi Arabia and the of the collateral occurs. If any collateral is not transferred to the actual receivables are governed by Saudi Arabia, as such the receivables possession of the mortgagee, the mortgage or pledge would be will be interpreted in line with the laws of Saudi Arabia and so incomplete and revocable with respect to such collateral. would have to comply with the requirements of Saudi Arabia.

The purchase contract itself would be interpreted in line with the 4.4 Obligor Notification or Consent. Must the seller or the laws of Saudi Arabia as Saudi courts do not recognise the choice of purchaser notify obligors of the sale of receivables in foreign laws. order for the sale to be effective against the obligors If the sale complied with the requirements of the purchaser’s and/or creditors of the seller? Must the seller or the country, this would be relevant in so far as such sale was consistent purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale with Saudi Arabia’s own sale requirements. This would also be the against the obligors? Does the answer to this question case when determining if the sale is effective against the seller. vary if (a) the receivables contract does not prohibit In circumstances where the purchaser, based in another jurisdiction, is assignment but does not expressly permit assignment; or able to demonstrate that the sale is effective in his/her own jurisdiction (b) the receivables contract expressly prohibits and is awarded a judgment to that effect, it will be up to the purchaser assignment? Whether or not notice is required to perfect to demonstrate in front of the Board of Grievances that such judgment a sale, are there any benefits to giving notice – such as is transferable and should be awarded in Saudi Arabia. cutting off obligor set-off rights and other obligor defences?

4 Asset Sales In order to give effect to a sale of receivables and for such sale to be effective, the obligor must be issued with notice and provide the seller and/or purchaser with an acknowledgment of such notice 4.1 Sale Methods Generally. In Saudi Arabia what are the accepting the terms and conditions of the sale. This customary methods for a seller to sell receivables to a purchaser? What is the customary terminology – is it acknowledgment must then be returned to the purchaser. called a sale, transfer, assignment or something else? The answer is also dependant upon the underlying agreement in respect of the receivables. If the receivables contract is silent then For purposes of a Shari’ah-compliant sukuk and receivables it is customary for notice to be provided as a means to achieve thereunder, there is normally only a sale contractually rather than a assumed compliance, enforceability and good customer relations. true sale of property. For most sukuk, the receivables should reflect If the receivables contract expressly prohibits an assignment, then at least 35% of the assets be true tangible assets rather than simply such a prohibition can only be circumvented with the express a sale of receivables. A three-party assignment is the most common permission of the obligors. method.

4.5 Notice Mechanics. If notice is to be delivered to obligors, 4.2 Perfection Generally. What formalities are required whether at the time of sale or later, are there any generally for perfecting a sale of receivables? Are there requirements regarding the form the notice must take or any additional or other formalities required for the sale of how it must be delivered? Is there any time limit beyond receivables to be perfected against any subsequent good which notice is ineffective – for example, can a notice of faith purchasers for value of the same receivables from sale be delivered after the sale, and can notice be the seller? delivered after insolvency proceedings against the obligor have commenced? Does the notice apply only to specific For perfection to take place in Saudi Arabia, it is a principle of the receivables or can it apply to any and all (including future) Shari’ah that “everything is possessed in accordance with its receivables? Are there any other limitations or considerations? nature”. There are no clear definitions under the laws and regulations of Saudi Arabia of what actually constitutes This will depend entirely upon the notice provisions of the “possession” for this purpose. The Hanbali school takes the underlying receivables, there is no legislation pertaining to notice position that actual possession and control is required as a mechanics in Saudi Arabia. prerequisite for perfection to occur. As discussed below, there are

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4.6 Restrictions on Assignment; Liability to Obligor. Are 4.9 Continuous Sales of Receivables. Can the seller agree in restrictions in receivables contracts prohibiting sale or an enforceable manner (at least prior to its insolvency) to assignment generally enforceable in Saudi Arabia? Are continuous sales of receivables (i.e., sales of receivables there exceptions to this rule (e.g., for contracts between as and when they arise)? commercial entities)? If Saudi Arabia recognises prohibitions on sale or assignment and the seller Continuous sales of receivables as and when they arise are not nevertheless sells receivables to the purchaser, will either possible in Saudi Arabia, as such a sale is not arguably Shari’ah the seller or the purchaser be liable to the obligor for compliant. Shari’ah requires that, for an asset to be sold, the seller breach of contract or on any other basis? must have a right, title or interest in the asset at the time of sale.

Assignments are very much a feature of commercial agreements in the Saudi market. 4.10 Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser Saudi Arabia In order to give effect to an assignment of contract receivables, an that come into existence after the date of the receivables assignment agreement must be put in place. The standard approach purchase agreement (e.g., “future flow” securitisation)? If under Saudi law is to have a three-party agreement or a fairly basic so, how must the sale of future receivables be structured assignment agreement executed and a notice then sent to the third to be valid and enforceable? Is there a distinction party, requesting that a fairly detailed written acknowledgment between future receivables that arise prior to or after the accepting the terms and conditions of the assignment be returned seller’s insolvency? addressed to the new beneficiary. Preferably there is a three-party agreement. Future sales of receivables as and when they arise are arguably not An assignment implemented along these lines would give rise to a possible in Saudi Arabia as such a sale is not Shari’ah-compliant. contractual obligation requiring the third party to fulfil his/her Shari’ah requires that, for an asset to be sold, the seller must be in contractual obligations. In the event that the third party does not possession of the asset at the time of sale. However, it is common honour his/her agreement and pays the previous beneficiary rather than to assign receivables that are to be received as a matter of practice. the assignee, the assignee should have a claim against the third-party. 4.11 Related Security. Must any additional formalities be 4.7 Identification. Must the sale document specifically identify fulfilled in order for the related security to be transferred each of the receivables to be sold? If so, what specific concurrently with the sale of receivables? If not all related information is required (e.g., obligor name, invoice security can be enforceably transferred, what methods number, invoice date, payment date, etc.)? Do the are customarily adopted to provide the purchaser the receivables being sold have to share objective benefits of such related security? characteristics? Alternatively, if the seller sells all of its receivables to the purchaser, is this sufficient Both the security and the receivables must pass concurrently, identification of receivables? however it should be noted that this will depend on the nature of the underlying receivables. Each receivable being sold should be documented with all available There are currently very limited codified regulations in Saudi information pertaining to the relevant receivable. Needless to say, Arabia governing secured transactions or mortgages, pledges and this will largely depend upon the nature of the receivables contract assignments, and the ability to create a legal, valid, binding and itself. For a sale to be effected, it must be possible to definitively enforceable security interest is limited. determine the assets which are being sold. There are effective mortgage regulations in relation to ships. There are, however, regulations in relation to mortgage/pledge of 4.8 Respect for Intent of Parties; Economic Effects on Sale. If movables but the registration mechanism has not yet been the parties denominate their transaction as a sale and implemented. state their intent that it be a sale will this automatically be respected or will a court enquire into the economic characteristics of the transaction? If the latter, what 5 Security Issues economic characteristics of a sale, if any, might prevent the sale from being perfected? Among other things, to what extent may the seller retain (a) credit risk; (b) 5.1 Back-up Security. Is it customary in Saudi Arabia to take interest rate risk; and/or (c) control of collections of a “back-up” security interest over the seller’s ownership receivables without jeopardising perfection? interest in the receivables and the related security, in the event that the sale is deemed by a court not to have been perfected? As previously mentioned, in the absence of the concept of precedent, each dispute is decided on its individual merits as there This will be transaction-specific and dependent upon the credit is no case law from which to take definitive guidance. To the extent analysis of the transaction as well as the legal opinion, if or where that the parties have denominated the transaction as a sale and relevant. clearly stated their intentions in the agreement, the only determination of the court would be as to whether the contract adheres to local law requirements. 5.2 Seller Security. If so, what are the formalities for the seller If elements of the contract are unclear or the contract has not adhered granting a security interest in receivables and related security under the laws of Saudi Arabia, and for such to the requirements of Saudi Arabia, it is more likely that the economic security interest to be perfected? characteristics of the transaction will be examined more closely. In respect to the retention of control, this is not possible for the Any security taken in Saudi Arabia will have to adhere to the seller as under the laws of Saudi Arabia, the sale must constitute a Commercial Mortgage Regulations established under Royal Decree true sale and a divestment of the seller’s interest. No. M/75 dated 21/11/1424H (corresponding to 27 February

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2004G) and supplemented by the implementing regulations issued 5.7 Bank Accounts. Does Saudi Arabia recognise escrow by the Minister of Commerce and Industry, Decision No. 6320 accounts? Can security be taken over a bank account dated 18/6/1425H (published in Umm Al Qura edition no. 4016 located in Saudi Arabia? If so, what is the typical method? dated 29 October 2004G). Would courts in Saudi Arabia recognise a foreign-law grant of security (for example, an English law debenture) The commercial mortgage regulations establish a statutory taken over a bank account located in Saudi Arabia? framework applicable to mortgages and pledges over movable property. However, the extent to which the Commercial Mortgage Saudi law generally upholds pledge/retention agreements related to Regulations apply in practice, and the procedures required of a bank accounts. From a practical viewpoint, lenders in the Saudi person seeking to comply with the Commercial Mortgage market tend to rely heavily on flow-through accounts that would be Regulations in order to perfect security, is not yet in effect. pledged in their favour and include a right of set-off. Note there is not the possibility of a floating pledge of a bank account. The Saudi Arabia 5.3 Purchaser Security. If the purchaser grants security over relevant documentation must make it clear that the lender will have all of its assets (including purchased receivables) in a right of set-off over the relevant account, since such a right must favour of the providers of its funding, what formalities be created contractually as a matter of Saudi law. must the purchaser comply with in Saudi Arabia to grant and perfect a security interest in purchased receivables governed by the laws of Saudi Arabia and the related 6 Insolvency Laws security?

6.1 Stay of Action. If, after a sale of receivables that is Please see question 5.2 above. otherwise perfected, the seller becomes subject to an insolvency proceeding, will Saudi Arabia’s insolvency 5.4 Recognition. If the purchaser grants a security interest in laws automatically prohibit the purchaser from collecting, receivables governed by the laws of Saudi Arabia, and transferring or otherwise exercising ownership rights over that security interest is valid and perfected under the laws the purchased receivables (a “stay of action”)? Does the of the purchaser’s country, will it be treated as valid and insolvency official have the ability to stay collection and perfected in Saudi Arabia or must additional steps be enforcement actions until he determines that the sale is taken in Saudi Arabia? perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather than the owner of the receivables? Please refer to question 2.3 in relation to interpretation of foreign law in Saudi Arabia. Liquidation of companies is dealt with briefly under certain provisions of the Saudi Companies Law. However, these provisions 5.5 Additional Formalities. What additional or different do not address a number of issues that arise in relation to the requirements apply to security interests in or connected to bankruptcy of companies, and tend to focus on voluntary insurance policies, promissory notes, mortgage loans, liquidation. Bankruptcy under Islamic law focuses more on consumer loans or marketable debt securities? personal rather than corporate bankruptcy and several of its provisions are difficult to interpret definitively. Accordingly, it is Security interests against pledged collateral can only be enforced unclear to what extent the CCR bankruptcy provisions would be after obtaining an order from the Board Grievances. To do so, the applied by a Saudi court (and whether such provisions would be lender would apply to the Board of Grievances to sell all or part of applied to a corporate entity). In the limited cases where the pledged collateral, after having given the pledgor-debtor three bankruptcy proceedings have been filed under the CCR, it appears business days’ notice to pay amounts due and owing. The order of that the courts have relied primarily on Islamic law principles of the Board of Grievances may only be executed five days after the fairness. Board of Grievances notifies the debtor-pledgor of the place, date and time of the public auction sale. The Commercial Pledge Regulations also contemplate circumstances where an application 6.2 Insolvency Official’s Powers. If there is no stay of action may be made for an immediate sale (such as when the pledged under what circumstances, if any, does the insolvency assets may be likely to be destroyed, or are very costly to maintain). official have the power to prohibit the purchaser’s exercise of rights (by means of injunction, stay order or other action)? 5.6 Trusts. Does Saudi Arabia recognise trusts? If not, is there a mechanism whereby collections received by the Please see question 6.1 above. seller in respect of sold receivables can be held or be deemed to be held separate and apart from the seller’s own assets until turned over to the purchaser? 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or Saudi Arabia does not recognise common law trusts and the concept reverse transactions that took place during a “suspect” or “preference” period before the commencement of the of a security trustee, as such, does not exist in Saudi Arabia. Under insolvency proceeding? What are the lengths of the the Shari’ah, however, the concept of an “adl” (a trustee-arbitrator) “suspect” or “preference” periods in Saudi Arabia for (a) or agency does exist, and there is some overlap between the concept transactions between unrelated parties and (b) of a “security trustee” and that of an “adl”. transactions between related parties? In light of the above, an “adl” can be used as a security agent in certain Shari’ah-compliant structured transactions in Saudi Arabia The laws of Saudi Arabia do not make any reference to “suspect rather than using a security trustee. periods”, however a Saudi court may set aside a disposal or the grant of a security interest that it considers to be fraudulent.

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6.4 Substantive Consolidation. Under what facts or 7.5 Independent Director. Will a court in Saudi Arabia give circumstances, if any, could the insolvency official effect to a contractual provision (even if the contract’s consolidate the assets and liabilities of the purchaser with governing law is the law of another country) or a provision those of the seller or its affiliates in the insolvency in a party’s organisational documents prohibiting the proceeding? directors from taking specified actions (including commencing an insolvency proceeding) without the Please see question 6.1 above. affirmative vote of an independent director?

It is impossible to determine the court’s interpretation as this has not 6.5 Effect of Proceedings on Future Receivables. What is the yet been tested in Saudi Arabia. effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on

sales of receivables that have not yet come into 8 Regulatory Issues Saudi Arabia existence?

Please see question 6.1 above. 8.1 Required Authorisations, etc. Assuming that the purchaser does no other business in Saudi Arabia, will its purchase and ownership or its collection and enforcement 7 Special Rules of receivables result in its being required to qualify to do business or to obtain any licence or its being subject to regulation as a financial institution in Saudi Arabia? Does 7.1 Securitisation Law. Is there a special securitisation law the answer to the preceding question change if the (and/or special provisions in other laws) in Saudi Arabia purchaser does business with other sellers in Saudi establishing a legal framework for securitisation Arabia? transactions? If so, what are the basics? Any entity which is involved in the purchase, ownership or The securitisations market in Saudi Arabia is in its very early stages. collection of receivables in Saudi Arabia with a view to The legislation governing securitisations would be the Capital securitisation must be licensed to do so by the CMA. The entity Markets Law and such securitisations would be regulated by the will also be regulated in its activities by the CMA. If the purchaser CMA. does business with or via other sellers in Saudi Arabia rather than directly purchasing, owning and collecting the receivables, then 7.2 Securitisation Entities. Does Saudi Arabia have laws these sellers must be appropriately licensed and authorised by the specifically providing for establishment of special purpose CMA to participate in such activities. entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and 8.2 Servicing. Does the seller require any licences, etc., in management of such an entity; (b) legal attributes and order to continue to enforce and collect receivables benefits of the entity; and (c) any specific requirements as following their sale to the purchaser, including to appear to the status of directors or shareholders? before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect There are no special purpose entities for a securitisation. sold receivables?

7.3 Non-Recourse Clause. Will a court in Saudi Arabia give Any entity which is involved in the servicing of receivables in effect to a contractual provision (even if the contract’s Saudi Arabia as part of a securitisation must also be licensed to do governing law is the law of another country) limiting the so by the CMA. The entity will also be regulated in its activities by recourse of parties to available funds? the CMA. A third party replacement must be also appropriately licensed and authorised by the CMA to participate in such activities. It is impossible to determine the court’s interpretation of a non- recourse clause, as this has not yet been tested in Saudi Arabia. 8.3 Data Protection. Does Saudi Arabia have laws restricting the use or dissemination of data about or provided by 7.4 Non-Petition Clause. Will a court in Saudi Arabia give obligors? If so, do these laws apply only to consumer effect to a contractual provision (even if the contract’s obligors or also to enterprises? governing law is the law of another country) prohibiting the parties from: (a) taking legal action against the Saudi Arabia restricts data that may be held outside of Saudi Arabia. purchaser or another person; or (b) commencing an Any data collected should be at the express written consent of the insolvency proceeding against the purchaser or another concerned person or party. person?

It is impossible to determine the court’s interpretation of a non- 8.4 Consumer Protection. If the obligors are consumers, will petition clause, as this has not yet been tested in Saudi Arabia. the purchaser (including a bank acting as purchaser) be required to comply with any consumer protection law of Saudi Arabia? Briefly, what is required?

There is no official consumer protection legislation in Saudi Arabia but the Ministry of Commerce does advise businesses to follow some basic consumer protection guidelines, which in themselves are not enforceable.

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8.5 Currency Restrictions. Does Saudi Arabia have laws If there is a sale of receivables, payments by a company or restricting the exchange of Saudi Arabia’s currency for individual from a source in Saudi Arabia to a non-resident based other currencies or the making of payments in Saudi outside of Saudi Arabia will be subject to withholding tax. currency to persons outside the country?

There are currently no currency restrictions in Saudi Arabia, except 9.4 Value Added Taxes. Does Saudi Arabia impose value in relation to Israel sheckels, restricting the exchange of currency added tax, sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for for other currencies. collection agent services?

9 Taxation There are no value added taxes in Saudi Arabia. Please see question 9.3 above in relation to Zakat for income taxation. Saudi Arabia 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser 9.5 Purchaser Liability. If the seller is required to pay value be subject to withholding taxes in Saudi Arabia? Does the added tax, stamp duty or other taxes upon the sale of answer depend on the nature of the receivables, whether receivables (or on the sale of goods or services that give they bear interest, their term to maturity, or where the rise to the receivables) and the seller does not pay, then seller or the purchaser is located? will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold Payments by a company or individual from a source in Saudi Arabia receivables or collections? to a non-resident of Saudi Arabia are subject to withholding tax of between 5% and 20% depending on the nature of the business. There are no value added taxes or stamp duties in Saudi Arabia. The withholding tax does not apply to payments made on contracts for goods, but does apply to payments made for services, and at the 9.6 Doing Business. Assuming that the purchaser conducts rate of 5% on interest payments under loan agreements. no other business in Saudi Arabia, would the purchaser’s purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of 9.2 Seller Tax Accounting. Does Saudi Arabia require that a the receivables against the obligors, make it liable to tax specific accounting policy is adopted for tax purposes by in Saudi Arabia? the seller or purchaser in the context of a securitisation? This will largely depend on the location of the purchaser and the All accounting matters in Saudi Arabia are monitored by SOCPA extent of its activities. If the purchaser is based in Saudi Arabia and who set the rules and regulations for GAAP of Saudi Arabia. All receives proceeds from the servicer and collection agent or from the companies in Saudi Arabia are required to comply with GAAP of enforcement against the obligors then this income stream is likely Saudi Arabia. Standards set by the government are through the to be subject to Zakat. MOCI, and the accounting standards issued by SOCPA. If the purchaser is not based in Saudi Arabia and receives proceeds from the servicer and collection agent or from the enforcement 9.3 Stamp Duty, etc. Does Saudi Arabia impose stamp duty against the obligors then this income stream, if repatriated to the or other documentary taxes on sales of receivables? purchaser from Saudi Arabia is likely to be subject to withholding tax. Taxation in Saudi Arabia is administered and regulated by the DZIT and governed by the Income Tax regulations issued pursuant to Royal Decree No. M/1 dated 15/1/1425H. Acknowledgment There is no stamp duty in Saudi Arabia, however Zakat is payable The authors would like to acknowledge the assistance of their by entities incorporated in Saudi Arabia that are wholly owned by colleague, Rizwan H. Kanji, a partner with King & Spalding Saudi or GCC nationals. The computation of Zakat is complicated, specialising in debt capital markets and securitisations, in the but it is essentially an assessment of 2.5% of the net wealth of the preparation of this chapter. relevant entity.

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Nabil A. Issa Martin P. Forster-Jones

King & Spalding LLP King & Spalding LLP Kingdom Centre, 20th Floor Kingdom Centre, 20th Floor King Fahad Road King Fahad Road PO Box 14702 Riyadh PO Box 14702 Riyadh 11434 Saudi Arabia 11434 Saudi Arabia Tel: +966 1 466 9409 Tel: +966 1 466 9451 Fax: +966 1 211 0033 Fax: +966 1 211 0033 Email: [email protected] Email: [email protected] URL: www.kslaw.com URL: www.kslaw.com

Nabil Issa is a partner in the Middle East and Islamic Finance Martin Forster-Jones is an Associate in King & Spalding’s

Group of King & Spalding, working from the Dubai and affiliated affiliated Riyadh office and a member of the firm’s Global Islamic Saudi Arabia Riyadh offices. Prior to joining King & Spalding, Mr. Issa worked Finance and Investment Group. Mr. Forster-Jones has for leading law firms in Dubai and Riyadh and was also an adjunct experience in Structured Finance, Equity and Debt Capital professor of business law at the University of Sharjah’s College of Markets, Asset Finance and Derivatives and Structured Products. Business and Management. Mr. Issa also completed Prior to joining the firm, Mr. Forster-Jones worked for another secondments in Houston and Washington, D.C., with Baker Botts global firm’s structured finance practice in London, Hong Kong LLP prior to joining King & Spalding. and Moscow. Mr. Issa’s experience includes work in the areas of banking and finance, Shari’ah-compliant funds, private equity, international investments, healthcare industry transactions, and Islamic finance issues. Mr. Issa has been recognised in the 2006 and 2007 editions and is highly ranked in the 2008, 2009, 2010 and 2011 editions of Chambers Global: The World’s Leading Lawyers for Business for his work in both Saudi Arabia and the U.A.E., in addition to investment funds in the Middle East. In the 2011 edition of Chambers Global, Mr. Issa is ranked in Band 1 for his work in Saudi Arabia and in Band 2 for his work on investment funds in the Middle East. Mr. Issa is also recommended as a leading lawyer in banking and financing matters in the Legal 500 Europe, Middle East & Africa and was named among the “Leading Lawyers” by Islamic Finance News in all 15 categories. Moreover, Mr. Issa is included in the inaugural 2008 and 2010 editions of Euromoney’s “Guide to the World’s Leading Islamic Finance Lawyers” and 2010 edition of Euromoney’s “Guide to the World’s Leading Emerging Markets Lawyers”.

Abu Dhabi ● Atlanta ● Austin ● Charlotte ● Dubai ● Frankfurt ●Geneva ● Houston ● London ● New York ● Paris ● Riyadh ● San Francisco ● Silicon Valley ● Singapore ● Washington, D.C. King & Spalding is a leader in Islamic finance and investment. Our work in the Middle East and our experience with Islamic finance date back to the early 1980s. In 1995, we were the first law firm to establish a dedicated Islamic finance and investment practice group. Our award-winning group has been successful in developing the legal architecture needed by our clients to break new ground in this specialised field. We are the only law firm with recognised experience and the depth to structure and implement sophisticated Shari’ah-compliant investment and financing transactions in the Middle East, Europe and the United States. Our offices in these jurisdictions are staffed with an integrated group of 30 professionals who are dedicated to Islamic finance and investment, and they are supported by an international law firm with more than 800 lawyers located in 17 offices.

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Scotland Bruce Stephen

Brodies LLP Marion MacInnes

1 Receivables Contracts 1.3 Government Receivables. Where the receivables contract has been entered into with the government or a government agency, are there different requirements and 1.1 Formalities. In order to create an enforceable debt laws that apply to the sale or collection of those obligation of the obligor to the seller, (a) is it necessary receivables? that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone With the exception of potential immunity issues associated with sufficient; and (c) can a receivable “contract” be deemed state entities, there are no different requirements and laws to exist as a result of the behaviour of the parties? applicable to the sale or collection of receivables from the government or government agencies in Scotland. It is generally not necessary for the sale of goods or services to be evidenced by a formal receivables contract. Certain types of contract are required to be in writing in order to be binding between 2 Choice of Law – Receivables Contracts the parties, including certain regulated consumer credit arrangements. An invoice in conjunction with the actings of the 2.1 No Law Specified. If the seller and the obligor do not parties may be sufficient to establish a contract between the parties specify a choice of law in their receivables contract, what and evidence a debt. are the main principles in Scotland that will determine the governing law of the contract? 1.2 Consumer Protections. Do Scotland’s laws (a) limit rates of interest on consumer credit, loans or other kinds of The choice of law is determined with reference to the Contracts receivables; (b) provide a statutory right to interest on late (Applicable Law) Act 1990 (the 1990 Act), the Rome I Regulation payments; (c) permit consumers to cancel receivables for (Regulation (EC) 593/2008, dated 17 June 2008) or Scots common a specified period of time; or (d) provide other noteworthy law. The 1990 Act applies the Rome Convention on contractual rights to consumers with respect to receivables owing by obligations (the Rome Convention) in respect of contracts entered them? into before 17 December 2009 and the Rome I Regulation applies to contracts entered into from that date. In consumer credit arrangements, there are statutory restrictions which may affect interest chargeable. Excessive interest could be Under the Rome Convention, in the absence of an express choice of challenged if, prior to 6 April 2007, it constituted an extortionate law, the principle of closest connection is applied in determining the credit transaction under s137 of the Consumer Credit Act 1974 (the law of the contract. Closest connection is presumed to be the CCA) and from 6 April 2007 it constituted an unfair relationship country where a party who is to effect the performance of the under s140A of the CCA. Default interest provisions which are contract has its habitual residence (or equivalent), unless the penalties may be unenforceable. Certain provisions in consumer contract is entered into in the course of a party’s trade or profession contracts may be unenforceable as being unfair under the Unfair in which case the closest connection is presumed to be the country Terms in Consumer Contracts Regulations 1999. in which the party’s principal business is located or if performance is in another place of business, the country where that other place of The Late Payment of Commercial Debts (Interest) Act 1998 business is located. provides for payment of interest in commercial transactions where the parties have not specified that interest is payable following late Under the Rome I Regulation, the position is similar, save that payment under the contract. The Act applies to commercial habitual residence is a fixed rule with exceptions for particular contracts for the sale of goods and services but does not apply to contract classes where specific rules apply. If, however, it is clear consumer contracts. that the contract is more closely connected with the law of a different country, the law of that country is the applicable law. The CCA contains consumer protections regarding certain forms of consumer credit arrangement including the ability for the consumer To the extent the relevant contract is outwith the scope of the 1990 to cancel receivables contracts within a specified period of time. Act or the Rome I Regulation, Scots common law will determine the choice of law where the contract is silent. Scots common law applies the ‘proper law’ to the contract being the law which the parties intended or may fairly be presumed to have intended to invoke in creating the contractual relationship.

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2.2 Base Case. If the seller and the obligor are both resident 3.2 Example 1: If (a) the seller and the obligor are located in in Scotland, and the transactions giving rise to the Scotland, (b) the receivable is governed by the law of receivables and the payment of the receivables take Scotland, (c) the seller sells the receivable to a purchaser place in Scotland, and the seller and the obligor choose located in a third country, (d) the seller and the purchaser the law of Scotland to govern the receivables contract, is choose the law of Scotland to govern the receivables there any reason why a court in Scotland would not give purchase agreement, and (e) the sale complies with the effect to their choice of law? requirements of Scotland, will a court in Scotland recognise that sale as being effective against the seller, No, there is not. the obligor and other third parties (such as creditors or insolvency administrators of the seller and the obligor)?

2.3 Freedom to Choose Foreign Law of Non-Resident Seller Yes, the Scottish courts will recognise the express choice of Scots Scotland or Obligor. If the seller is resident in Scotland but the law. obligor is not, or if the obligor is resident in Scotland but the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables 3.3 Example 2: Assuming that the facts are the same as contract, will a court in Scotland give effect to the choice Example 1, but either the obligor or the purchaser or both of foreign law? Are there any limitations to the are located outside Scotland, will a court in Scotland recognition of foreign law (such as public policy or recognise that sale as being effective against the seller mandatory principles of law) that would typically apply in and other third parties (such as creditors or insolvency commercial relationships such that between the seller and administrators of the seller), or must the requirements of the obligor under the receivables contract? the obligor’s country or the purchaser’s country (or both) be taken into account? The parties may expressly choose the governing law relating to the contract and such choice will be recognised by the Scottish courts It is likely that the Scottish courts will recognise the sale contract under certain exceptions specified under the 1990 Act or the Rome and in particular give effect to the sale to the purchaser in questions I Regulation. For contracts outwith the scope of the 1990 Act or the against the seller and any creditor of, or insolvency practitioner Rome I Regulation, the Scottish courts are likely, subject to issues appointed to, the seller. The effect of the sale contract in questions of public policy, to recognise the express choice of law of the against the relevant obligor and the purchaser may require local parties provided such choice of law coincides with the intention of country law to be considered. the parties. It should be noted that, to the extent a law other than Scots law is expressly applied to the contract, such choice of law 3.4 Example 3: If (a) the seller is located in Scotland but the would need to be pled in order for it to be recognised by the Scottish obligor is located in another country, (b) the receivable is courts. governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third 2.4 CISG. Is the United Nations Convention on the country, (d) the seller and the purchaser choose the law International Sale of Goods in effect in Scotland? of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in The Convention is not in effect in Scotland. Scotland recognise that sale as being effective against the seller and other third parties (such as creditors or 3 Choice of Law – Receivables Purchase insolvency administrators of the seller) without the need to comply with Scotland’s own sale requirements? Agreement It is likely that the Scottish courts will recognise the choice of law 3.1 Base Case. Does Scotland’s law generally require the in respect of the sale contract and will not require any additional sale of receivables to be governed by the same law as Scots law formalities to be complied with in order to give effect to the law governing the receivables themselves? If so, does the transfer of the receivables pursuant to the sale in questions that general rule apply irrespective of which law governs against the seller, the creditors of or insolvency administrator the receivables (i.e., Scotland’s laws or foreign laws)? appointed to the seller.

The parties are generally permitted to choose the law to govern contractual obligations between them including those arising under 3.5 Example 4: If (a) the obligor is located in Scotland but a receivables purchase agreement. the seller is located in another country, (b) the receivable is governed by the law of the seller’s country, (c) the It is common for portfolios of Scottish receivables to be sold under seller and the purchaser choose the law of the seller’s a contract governed by a law other than Scots law. It is not country to govern the receivables purchase agreement, necessary for the contract of sale to be governed by the same law as and (d) the sale complies with the requirements of the the underlying receivables. To the extent that the sale contract seller’s country, will a court in Scotland recognise that creates rights to the underlying receivables beyond mere contractual sale as being effective against the obligor and other third rights (for example, the purchaser acquiring an equitable parties (such as creditors or insolvency administrators of proprietary interest in the underlying receivables by execution of the obligor) without the need to comply with Scotland’s own sale requirements? the sale contract only), it is unlikely that such additional rights would be effective in respect of Scottish receivables without further See question 3.4 above. action being required.

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3.6 Example 5: If (a) the seller is located in Scotland 4.3 Perfection for Promissory Notes, etc. What additional or (irrespective of the obligor’s location), (b) the receivable is different requirements for sale and perfection apply to governed by the law of Scotland, (c) the seller sells the sales of promissory notes, mortgage loans, consumer receivable to a purchaser located in a third country, (d) loans or marketable debt securities? the seller and the purchaser choose the law of the purchaser’s country to govern the receivables purchase Mortgage loans and related security are transferred by formal agreement, and (e) the sale complies with the assignation with notice and, in the case of the transfer of the requirements of the purchaser’s country, will a court in mortgage security, by registration of such transfer at the Scottish Scotland recognise that sale as being effective against land registers. Many securitisations are structured on the basis of the seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located equitable assignments of mortgage loans and related security.

Scotland in Scotland and any third party creditor or insolvency Generally, such arrangements are implemented in Scotland by administrator of any such obligor)? means of an express trust. Securities which are in bearer form are generally transferable by It is likely that the Scottish courts will recognise the choice of law mere delivery of the relevant security certificate. Instruments in respect of the sale contract. On the basis that the receivables are which are negotiable in nature may be transferred by a combination governed by Scots law, the transfer of the receivables pursuant to of endorsement and delivery with, in certain circumstances, the sale in compliance with the requirements of the purchaser’s intimation to the relevant obligor under the instrument. country will be recognised by the Scottish courts provided they also comply with the Scots law requirements in respect of the transfer of 4.4 Obligor Notification or Consent. Must the seller or the such receivables. purchaser notify obligors of the sale of receivables in order for the sale to be effective against the obligors 4 Asset Sales and/or creditors of the seller? Must the seller or the purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale 4.1 Sale Methods Generally. In Scotland what are the against the obligors? Does the answer to this question customary methods for a seller to sell receivables to a vary if (a) the receivables contract does not prohibit purchaser? What is the customary terminology – is it assignment but does not expressly permit assignment; or called a sale, transfer, assignment or something else? (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect The most common way of a seller to sell receivables to a purchaser a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor is by means of a sale contract supported by an assignation or defences? assignment of the receivables with notice to the relevant obligors or where notice is unattractive (or inconsistent with arrangements to Notice is a requirement of Scots law for the formal transfer of the be put in place in other jurisdictions for that particular portfolio) seller’s interest in the receivable. Prior to notification the obligor then a trust is declared over the relevant interests under the can obtain a valid discharge of the debt by paying the seller. The receivables contracts and related receivables and cash receipts. proprietary interest in the receivable remains with the seller until Scots law does not recognise equitable transfers in respect of the transfer is intimated to the obligor. Consequently, unless a trust Scottish assets and, accordingly, an equitable assignment of the has been declared over the receivables, such interests are available receivable would not as a matter of Scots law pass a proprietary to the creditors of the seller on insolvency. interest in the receivables to the purchaser. The trust would, however, create a protected interest in the Scottish receivables The consent of the obligor to the sale is not necessary unless which would be good against the seller or any insolvency expressly required under the contract or unless the principle of administrator appointed to the seller. delictus personae applies (the contract being of a nature specific to the parties to it). The contract does not need to expressly permit one party to assign or sell its interest to be assignable. 4.2 Perfection Generally. What formalities are required generally for perfecting a sale of receivables? Are there Notice has the effect of limiting rights of set-off affecting the any additional or other formalities required for the sale of receivables arising from other on-going arrangements between the receivables to be perfected against any subsequent good obligor and the seller. The purchaser acquires the receivable subject faith purchasers for value of the same receivables from to any existing rights of set-off the obligor has against the seller. the seller? Notice also prevents the obligor from obtaining a valid discharge of the debt from the seller. The sale of Scottish receivables is perfected by the relevant obligors receiving notice of the assignation. Scots law recognises various 4.5 Notice Mechanics. If notice is to be delivered to obligors, forms of notice. While the assignation is effective from the date of whether at the time of sale or later, are there any receipt of notice by the obligor, an acknowledgment of such notice requirements regarding the form the notice must take or provides evidence of both receipt and understanding of the new how it must be delivered? Is there any time limit beyond arrangements by the relevant obligor. which notice is ineffective – for example, can a notice of If the same receivables are assigned by the seller to several third sale be delivered after the sale, and can notice be party purchasers all acting in good faith, the order of priority delivered after insolvency proceedings against the obligor have commenced? Does the notice apply only to specific between such purchasers is determined by the date of receipt of receivables or can it apply to any and all (including future) notice by the obligor of the assignations. Accordingly, a subsequent receivables? Are there any other limitations or third party purchaser who acquires in good faith and notifies the considerations? obligor first will take a better title to the receivables than the first purchaser and any intervening purchaser. The form of notice is not prescribed under Scots law. Various forms of notice or intimation are recognised including those permitted by 300 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brodies LLP Scotland

the Transmission of Moveable Property (Scotland) Act 1862. The courts in Scotland as potentially a secured financing in certain 1862 Act provides for notarial intimation and postal intimation. In circumstances. A true sale analysis of the sale is usually the latter case, to obtain the benefit of the terms of the Act, the undertaken. In the Scottish context, this involves reviewing the intimation should contain a certified true copy of the assignation. transaction documentation and deal structure and considering the The notice can be delivered after the sale. The transfer would, tests applicable in the English case of Re Inglefield and an however, be subject to rights of parties who have effected diligence assessment of the ‘ultimate right’ in the receivables sold. in the meantime, third party purchasers acquiring in good faith, No single factor will result in the transaction being characterised as perfected security holders and insolvency administrators appointed a sale or a secured financing. Retention of credit risk by the seller to the seller. The intimation can be delivered after the may suggest that the purchaser has not truly acquired the commencement of insolvency proceedings against the obligor. receivables and accordingly buy back provisions are required to be While an assignation of receivables arising under future contracts is formulated with care. Again, interest rate risk may be characterised Scotland theoretically possible under Scots law, the position is subject to much as either an indication of true ownership being retained by the seller academic debate and issues arise around the ability to clearly identify or merely a purchase price adjustment mechanism. Control of the receivable in question. It is a fundamental principle of Scots law collections of receivables when such services are provided for a for the assignation to be effective that the receivable is either identified commensurate fee and where the seller does not retain any or identifiable. Accordingly, assignations of receivables arising under economic exposure to the receivables either for failing to collect or future contracts should be treated with care. entitlement to profit from collection is unlikely in itself to result in the sale being re-characterised. 4.6 Restrictions on Assignment; Liability to Obligor. Are restrictions in receivables contracts prohibiting sale or 4.9 Continuous Sales of Receivables. Can the seller agree in assignment generally enforceable in Scotland? Are there an enforceable manner (at least prior to its insolvency) to exceptions to this rule (e.g., for contracts between continuous sales of receivables (i.e., sales of receivables commercial entities)? If Scotland recognises prohibitions as and when they arise)? on sale or assignment and the seller nevertheless sells receivables to the purchaser, will either the seller or the The seller can agree in an enforceable manner to a continuous sale purchaser be liable to the obligor for breach of contract or of receivables as and when they arise (at least so far as the purchaser on any other basis? acquiring a contractual right to the receivables) provided such receivables are identifiable. Such contractual arrangements would Such restrictions are generally enforceable in Scotland. There are be effective until insolvency of the seller. no particular exceptions to this rule. If a sale is effected in breach of a prohibition, the sale is likely to be ineffective as between the seller and the obligor. A claim for damages for breach of contract 4.10 Future Receivables. Can the seller commit in an may also be available to the obligor. enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables purchase agreement (e.g., “future flow” securitisation)? If 4.7 Identification. Must the sale document specifically identify so, how must the sale of future receivables be structured each of the receivables to be sold? If so, what specific to be valid and enforceable? Is there a distinction information is required (e.g., obligor name, invoice between future receivables that arise prior to or after the number, invoice date, payment date, etc.)? Do the seller’s insolvency? receivables being sold have to share objective characteristics? Alternatively, if the seller sells all of its See question 4.9 above. The transfer of such receivables to the receivables to the purchaser, is this sufficient purchaser would, however, need to be documented separately and identification of receivables? an automatic transfer of such receivables (at least in respect of Scottish receivables) is unlikely to be recognised by the Scottish The receivables must be identified or identifiable for the purposes courts without the Scottish formalities being met. To the extent of the sale and transfer of the receivables. The receivables must be relating to future receivables, we would generally recommend that ascertainable for the purpose of any transfer. Relevant information express supplemental trusts are declared over receivables as and usually includes the obligor’s name, invoice number, invoice date when they are originated (or regularly in batches) pending formal and amount. The receivables being sold do not need to share transfer of the receivables to the purchaser. objective characteristics. It is possible for the seller to contract to sell all of their receivables to the purchaser. It is unlikely that this would be sufficient to identify the receivables for the purpose of an 4.11 Related Security. Must any additional formalities be assignation and notice. fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all related security can be enforceably transferred, what 4.8 Respect for Intent of Parties; Economic Effects on Sale. methods are customarily adopted to provide the If the parties denominate their transaction as a sale and purchaser the benefits of such related security? state their intent that it be a sale will this automatically be respected or will a court enquire into the economic Each relevant interest should be transferred in accordance with the characteristics of the transaction? If the latter, what formal transfer requirements under Scots law unless the security is economic characteristics of a sale, if any, might prevent held on a syndicatable security trust basis. Related security is the sale from being perfected? Among other things, to what extent may the seller retain (a) credit risk; (b) generally assigned to the purchaser under Scots law and notice interest rate risk; and/or (c) control of collections of given to obligors or registrations at the relevant Scottish land receivables without jeopardising perfection? register depending upon the security involved. Under Scots law, an assignation has the effect of ‘ruling off’ the liabilities secured by the A transaction expressed to be a sale may be re-characterised by the related security at the time of the transfer. Accordingly, further advances would be unsecured unless the security is amended or new

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security is granted to support the further advance. Pending formal 5.5 Additional Formalities. What additional or different transfer, a trust is commonly declared in favour of the purchaser requirements apply to security interests in or connected to over the receivables and related security. This can also cover insurance policies, promissory notes, mortgage loans, certain ancillary rights which are difficult to formally transfer to the consumer loans or marketable debt securities? purchaser. See questions 4.3 and 4.11 above.

5 Security Issues 5.6 Trusts. Does Scotland recognise trusts? If not, is there a mechanism whereby collections received by the seller in 5.1 Back-up Security. Is it customary in Scotland to take a respect of sold receivables can be held or be deemed to

Scotland “back-up” security interest over the seller’s ownership be held separate and apart from the seller’s own assets interest in the receivables and the related security, in the until turned over to the purchaser? event that the sale is deemed by a court not to have been perfected? Trusts are recognised as a matter of Scots law under the Recognition of Trusts Act 1987. It is not customary in Scotland to take back up security over the seller’s interest in the receivables in the event that the sale is 5.7 Bank Accounts. Does Scotland recognise escrow deemed by the court not to have been perfected or being re- accounts? Can security be taken over a bank account characterised as a secured financing. located in Scotland? If so, what is the typical method? Would courts in Scotland recognise a foreign-law grant of 5.2 Seller Security. If so, what are the formalities for the security (for example, an English law debenture) taken seller granting a security interest in receivables and over a bank account located in Scotland? related security under the laws of Scotland, and for such security interest to be perfected? Scotland recognises arrangements whereby parties hold funds in a designated account and agree to the release of such amounts The formalities for granting fixed security over receivables are following satisfaction of certain conditions or on the consent of all similar to those in respect of the transfer of such an interest. relevant parties. Security can be created over bank accounts in Accordingly, the receivable should be assigned to the purchaser and Scotland. Certain issues arise in respect of security granted over notice given to the obligor. The form of security required in respect accounts in favour of the account bank. In such circumstances the of related security interests will depend upon the security involved. security relies upon the operation of set-off. The typical method of In addition, a corporate seller may grant a floating charge over its taking security is by means of a bank account pledge and assets including the receivables and related security. assignation duly intimated to the account bank. The Scottish courts would recognise a foreign law grant of security taken over a bank The security may also need to be registered at Companies House. account to the extent that the form of security complies with the The Financial Collateral Arrangements No.2 Regulations 2003 also Scots law formalities for such a charge. apply in Scotland.

6 Insolvency Laws 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities 6.1 Stay of Action. If, after a sale of receivables that is must the purchaser comply with in Scotland to grant and otherwise perfected, the seller becomes subject to an perfect a security interest in purchased receivables insolvency proceeding, will Scotland’s insolvency laws governed by the laws of Scotland and the related automatically prohibit the purchaser from collecting, security? transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? Does the Same as question 5.2 above. The purchaser may also hold an insolvency official have the ability to stay collection and interest as beneficiary under a trust declared by the seller over the enforcement actions until he determines that the sale is perfected? Would the answer be different if the relevant receivables. Such an interest is capable of being subject to purchaser is deemed to only be a secured party rather fixed security by means of an assignation duly intimated to the than the owner of the receivables? seller. Most insolvency proceedings for corporate entities provide for 5.4 Recognition. If the purchaser grants a security interest in some form of automatic stay of action or moratorium preventing receivables governed by the laws of Scotland, and that court proceedings from being raised or enforcement action being security interest is valid and perfected under the laws of taken against the insolvent entity or its assets for a period of time the purchaser’s country, will it be treated as valid and without either the insolvency practitioner’s consent or consent of perfected in Scotland or must additional steps be taken in the court. This would prohibit the purchaser from collecting, Scotland? transferring or otherwise exercising ownership rights over the purchased receivables to the extent they continued to be assets of To the extent that the receivables are governed by Scots law, the the seller at the time of commencement of insolvency proceedings. Scottish courts may not recognise any security granted over such If, however, ownership of the receivables have been transferred to receivables which falls short of the Scots law formalities in respect the purchaser and that transfer has been perfected, the purchaser of such security. The appropriate form of security is set out under could sue the obligor in its own name without reference to the question 5.2 above. insolvent entity.

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6.2 Insolvency Official’s Powers. If there is no stay of action the grant of an assignation duly notified to the relevant obligors), under what circumstances, if any, does the insolvency the Scottish receivables will remain the property of the seller unless official have the power to prohibit the purchaser’s the Insolvency Official transfers the receivables to the purchaser exercise of rights (by means of injunction, stay order or pursuant to the sale contract. other action)?

On the basis that the receivables have been transferred to the 7 Special Rules purchaser and that transfer has been perfected, the Insolvency Official should have no power to interfere with the purchaser’s 7.1 Securitisation Law. Is there a special securitisation law exercise of rights in respect of the receivables unless the transfer is (and/or special provisions in other laws) in Scotland capable of challenge under the various creditor protection establishing a legal framework for securitisation Scotland provisions outlined under question 6.3 below. transactions? If so, what are the basics?

6.3 Suspect Period (Clawback). Under what facts or There is no special securitisation law or special provisions in other circumstances could the insolvency official rescind or law in Scotland establishing a legal framework for securitisation reverse transactions that took place during a “suspect” or transactions, although particular tax laws may apply. “preference” period before the commencement of the insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in Scotland for (a) 7.2 Securitisation Entities. Does Scotland have laws transactions between unrelated parties and (b) specifically providing for establishment of special purpose transactions between related parties? entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and management of such an entity; (b) legal attributes and UK Insolvency legislation contains creditor protections which give benefits of the entity; and (c) any specific requirements as rise to suspect periods during which transactions may be rescinded to the status of directors or shareholders? or reversed. Certain protections have UK-wide application and, as such, also apply in Scotland (for example, section 245 (Avoidance There are no mandatory or special requirements in respect of the of certain floating charges) of the Insolvency Act 1986. establishment of special purpose entities for securitisations in Transactions entered into by Scottish companies and certain Scotland. overseas companies may be subject to the provisions of sections 242 and 243 of the 1986 Act (Gratuitous alienations and Unfair preferences) and to Scots common law equivalents. 7.3 Non-Recourse Clause. Will a court in Scotland give effect to a contractual provision (even if the contract’s The relevant period for challenge of a gratuitous alienation is 5 governing law is the law of another country) limiting the years for a transaction with a connected party and 2 years for any recourse of parties to available funds? other person and the period for challenge of an unfair preference is 6 months. An alienation cannot be challenged as gratuitous if: (i) Generally the courts in Scotland would recognise a non-recourse immediately or at any other time after the alienation the company’s clause. assets were greater than its liabilities; or (ii) the alienation was made for adequate consideration. An unfair preference is a transaction which has the effect of creating a preference in favour 7.4 Non-Petition Clause. Will a court in Scotland give effect to a contractual provision (even if the contract’s governing of a creditor to the prejudice of the general body of creditors. A law is the law of another country) prohibiting the parties transaction is not a preference if (i) it is in the ordinary course of from: (a) taking legal action against the purchaser or trade or business, or (ii) it involves the parties undertaking another person; or (b) commencing an insolvency reciprocal obligations unless the transaction was collusive with the proceeding against the purchaser or another person? purpose of prejudicing the general body of creditors. Although there is no direct Scottish authority in this regard, non- 6.4 Substantive Consolidation. Under what facts or petition clauses are likely to be valid in Scotland provided such circumstances, if any, could the insolvency official provisions are not contrary to public policy. A Scottish court might consolidate the assets and liabilities of the purchaser with still accept a winding up petition contrary to the terms of a non- those of the seller or its affiliates in the insolvency petition clause resulting instead in only a damages claim for breach. proceeding?

7.5 Independent Director. Will a court in Scotland give effect This doctrine is not recognised under Scots law. In addition, the to a contractual provision (even if the contract’s governing courts will only pierce the corporate veil in very limited law is the law of another country) or a provision in a circumstances. party’s organisational documents prohibiting the directors from taking specified actions (including commencing an 6.5 Effect of Proceedings on Future Receivables. What is the insolvency proceeding) without the affirmative vote of an effect of the initiation of insolvency proceedings on (a) independent director? sales of receivables that have not yet occurred or (b) on sales of receivables that have not yet come into As a matter of UK company law, directors are unable to limit the existence? exercise of their powers. Constitutional documents may be drafted so as to require director consent for certain actions. However to the The contractual obligations continue albeit the purchaser is likely to extent such provisions are contrary to public policy they would be have only a claim against the seller’s estate which will rank with unenforceable. The directors have overriding duties to creditors other unsecured creditors. As the future Scottish receivables are not including where appropriate to call for winding up or administration transferred to the purchaser without further action of the seller (i.e. of a corporate entity in certain circumstances. It is unlikely that

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such provisions would be overridden by contractual or 8.5 Currency Restrictions. Does Scotland have laws constitutional document provisions. restricting the exchange of Scotland’s currency for other currencies or the making of payments in Scotland’s currency to persons outside the country? 8 Regulatory Issues Subject to currency transfer and dealing restrictions applicable 8.1 Required Authorisations, etc. Assuming that the under current United Nations Sanctions and to compliance with purchaser does no other business in Scotland, will its anti-money laundering/anti-terrorism legislation, there are no purchase and ownership or its collection and enforcement restrictions on currency exchange or the making of payments to of receivables result in its being required to qualify to do persons outside Scotland.

Scotland business or to obtain any licence or its being subject to regulation as a financial institution in Scotland? Does the answer to the preceding question change if the purchaser 9 Taxation does business with other sellers in Scotland? 9.1 Withholding Taxes. Will any part of payments on The acquisition, collection or ownership of receivables will not in receivables by the obligors to the seller or the purchaser itself result in the purchaser being required to do business or to be subject to withholding taxes in Scotland? Does the obtain a licence or its being subject to regulation as a financial answer depend on the nature of the receivables, whether institution in Scotland unless such activities are regulated (for they bear interest, their term to maturity, or where the example, origination or administration of regulated mortgage seller or the purchaser is located? contracts for which FSA authorisation would be required) or constitute consumer credit activities (for which a consumer credit Withholding tax is subject to UK-wide legislation. Accordingly, the licence would be required). In either case, Data Protection Act Scottish rules follow that applicable elsewhere in the UK. In registration should also be obtained. summary, withholding tax applies in respect of payments of interest unless the purchaser is resident in the UK, or carries on business in the UK through a permanent establishment. Withholding tax may 8.2 Servicing. Does the seller require any licences, etc., in be subject to treaty relief under a Double Taxation Convention, order to continue to enforce and collect receivables following their sale to the purchaser, including to appear though there are practical difficulties, so a UK purchaser may be before a court? Does a third party replacement servicer required. require any licences, etc., in order to enforce and collect sold receivables? 9.2 Seller Tax Accounting. Does Scotland require that a specific accounting policy is adopted for tax purposes by Servicing activities are likely to require a CCA licence or require the seller or purchaser in the context of a securitisation? FSA authorisation if they relate to consumer credit activities or regulated activities. Any third party replacement servicer will The seller tax treatment follows the UK tax requirements, which are require the same licences and authorisations. based on the accounting treatment subject to specific regulations.

8.3 Data Protection. Does Scotland have laws restricting the 9.3 Stamp Duty, etc. Does Scotland impose stamp duty or use or dissemination of data about or provided by other documentary taxes on sales of receivables? obligors? If so, do these laws apply only to consumer obligors or also to enterprises? Certain documents are subject to stamp duty in Scotland and certain transactions to the extent not documented are subject to stamp duty The provisions of the Data Protection Act 1998 apply in Scotland. reserve tax (SDRT). The transfer of mortgages, lease and trade The laws apply only to individuals and not to enterprises. receivables and finance payments are normally exempt from stamp duty and SDRT. 8.4 Consumer Protection. If the obligors are consumers, will the purchaser (including a bank acting as purchaser) be 9.4 Value Added Taxes. Does Scotland impose value added required to comply with any consumer protection law of tax, sales tax or other similar taxes on sales of goods or Scotland? Briefly, what is required? services, on sales of receivables or on fees for collection agent services? If the obligors are consumers, the purchaser will probably be required to comply with the UK consumer credit protection laws VAT is generally payable in Scotland in respect of the supply of and to be licensed under the CCA. goods and services within the UK by taxable persons in the course If the contract constitutes a regulated mortgage contract for the or furtherance of a business. The current standard rate of VAT is purposes of the Financial Services and Markets Act 2000, the 20%, although different rates apply depending upon the goods or purchaser would need to be authorised by the FSA and comply with services supplied. Certain supplies are exempt and some transfers the detailed requirements of the FSA Handbook relating to such are outside the scope of VAT. contracts. Certain unfair terms in consumer contracts may not be enforceable against the consumer. Similarly, provisions in a contract, which purport to restrict liability of a party for damage caused, may be restricted or struck at by the Unfair Contract Terms Act 1977.

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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 Scotland, 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 Scotland? receivables or collections? The purchase of receivables by the purchaser or its appointment of To the extent payable, VAT has to be accounted for by the provider the seller as its servicer and collection agent should not in itself of services only (i.e. the seller). Stamp duty liability falls to the result in the purchaser being liable to pay tax in Scotland; however, party seeking to enforce the transfer (i.e. the purchaser). Generally,

as with the rest of the UK, enforcement of receivables may require Scotland HM Revenue & Customs would not have a claim against the more detailed consideration. In each case, however, all purchaser for VAT for which the seller had to account. circumstances need to be considered and advice obtained.

Bruce Stephen Marion MacInnes

Brodies LLP Brodies LLP 15 Atholl Crescent 15 Atholl Crescent Edinburgh EH3 8HA Edinburgh EH3 8HA Scotland Scotland

Tel: +44 131 656 0260 Tel: +44 131 656 0288 Fax: +44 131 228 3878 Fax: +44 131 228 3878 Email: [email protected] Email: [email protected] URL: www.brodies.com URL: www.brodies.com

Bruce is head of the Banking, Restructuring and Insolvency Marion is a Senior Associate in Brodies’ Banking, Restructuring department at Brodies and runs the securitisation practice at the and Insolvency Department. She has extensive experience firm. A recognised specialist in the UK independent legal acting for financial institutions, corporates and investors on a wide directories, Bruce is both Scots and English law qualified and has range of complex leveraged finance, project finance, structured considerable experience in advising in all forms of receivables finance and securitisation transactions. finance and securitisations including CMBS, RMBS, trade Marion has advised on the Scottish aspects of a number of receivables and autoloan securitisations as well as large loan securitisation transactions involving a diverse range of asset book acquisitions and related finance and related enforcement classes from real estate backed securitisations (including both and restructuring work. residential and commercial property) to non real estate asset He is author of the Scottish chapter on security over receivables: securitisations involving lease, HP and vehicle receivables. She an international handbook published by Oxford Press. also has experience advising on the Scottish aspects of mortgage loan portfolio acquisitions and sales (acquired portfolios and originated) including back to back sales.

Brodies LLP offers clients the largest specialist legal resource in Scotland. As well as numerous practice areas being top-ranked by independent international legal directories, the firm has won industry awards and plaudits for its client services, innovation, use of technology, commercial awareness and business acumen. With offices in Edinburgh, Glasgow, Aberdeen and Brussels, Brodies provides business-focused advice to virtually every sector of the Scottish economy. One of the few specialist securitisation teams in the country, Brodies offers expertise and experience spanning all asset classes with track record in CMBS, RMBS, trade receivables and auto and equipment HP/hire contract securitisations, conduit structures and pre-securitisation warehousing finance acting for originator groups, trustees, arrangers, special servicers and monoline insurers.

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Singapore Petrus Huang

Drew & Napier LLC Ron Cheng

1 Receivables Contracts the case of an unsecured loan not exceeding $3,000 granted to an individual whose annual income on the date of the grant for the loan is less than $20,000, 18% per annum. In the case of a loan that does 1.1 Formalities. In order to create an enforceable debt not exceed $3,000 granted to an individual whose annual income on obligation of the obligor to the seller, (a) is it necessary the date of the grant for the loan is less than $20,000, Rule 11(3) that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone provides that the maximum rate of late interest shall be the rate of sufficient; and (c) can a receivable “contract” be deemed interest charged on the amount of the loan actually disbursed. Rule to exist as a result of the behaviour of the parties? 11(4) provides that in Rule 11(2) and subject to Rule 11(5): “secured loan” means any loan given with security; and “unsecured It is not legally necessary for the sales of goods or services to be loan” means any loan given without security. The Government has evidenced by a formal receivables contract. From an evidentiary announced impending changes in the manner in which such interest point of view, it is advisable to have a written receivables contract rate is to be calculated and the relevant legislation is expected to be in place. However, a debt obligation may equally be enforceable if introduced soon. there is a verbal or implied agreement giving rise to that obligation Section 23(6) of the Moneylenders Act provides that where in any and which is supported by consideration. An implied agreement proceedings in court initiated by a licensed moneylender to enforce can be established through the conduct of the respective parties. a loan or where proof of a debt has been filed against a borrower, it Invoices may constitute evidence as to the existence of a contract, is found that the interest or late interest charged on any loan exceeds especially if the respective parties have a pre-existing business such maximum rate of interest or late interest as may be prescribed relationship of a similar kind contemplated in the invoice. for the loan, the court or the official assignee, as the case may be, shall presume, unless the contrary is proved, that the interest or late 1.2 Consumer Protections. Do Singapore’s laws (a) limit interest charged in respect of the loan is excessive and that the rates of interest on consumer credit, loans or other kinds transaction is unconscionable or substantially unfair. of receivables; (b) provide a statutory right to interest on Save for the foregoing, there is no limit on the rate of interest on late payments; (c) permit consumers to cancel consumer credit, loans or other kinds of receivables provided that: receivables for a specified period of time; or (d) provide (i) any interest imposed for delays in payment is a genuine pre- other noteworthy rights to consumers with respect to estimate of loss and not an in terrorem penalty; receivables owing by them? (ii) any interest imposed on consumer credit, loans and other receivables arose from bona fide contracts for the sale of Section 23(1) of the Moneylenders Act (Cap 188, 2010 Revised goods and services and are not disguised money-lending Edition) provides that when proceedings are brought in any court by sham transactions which would otherwise require licensing a licensed moneylender for the recovery of a loan or the under the Moneylenders Act (Cap 188), nor is the interest, or enforcement of a contract for a loan or any guarantee or security late interest charged, excessive and unconscionable or given for a loan, and the court is satisfied that the interest or late substantially unfair; interest charged in respect of the loan is excessive and that the (iii) the terms of the contract with a person dealing as consumer transaction is unconscionable or substantially unfair, the court shall are reasonable within the meaning of the Unfair Contract re-open the transaction and take an account between the licensee Terms Act (Cap 396); and and the person being sued. Section 23(5) provides that where a (iv) the interest imposed does not amount to an extortionate licensed moneylender has filed, in the bankruptcy of a borrower or credit transaction within the meaning of section 103 of the surety, a proof of debt arising from a loan granted by him, the Bankruptcy Act (Cap 20), which transaction may be voided official assignee may exercise such powers as may be exercised by by the court if it was entered into within 3 years before the a court when assessing whether the debt or liability is proved and commencement of the bankruptcy of the consumer. its value. Save for the foregoing, we are not aware of any statutory provisions Rule 11(2) of the Moneylenders Rules 2009 provides that the in Singapore providing for a statutory right to interest on late maximum rate of interest on a loan by a registered moneylender payments on receivables or for other noteworthy rights to shall be: (a) in the case of a secured loan not exceeding $3,000 consumers with respect to the receivables. granted to an individual whose annual income on the date of the grant for the loan is less than $20,000, 12% per annum; and (b) in

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1.3 Government Receivables. Where the receivables governing law in the receivables contract, unless the choice of law contract has been entered into with the government or a was contrary to public policy, illegal or made in bad faith. On the government agency, are there different requirements and circumstances of the base case, the court in Singapore would give laws that apply to the sale or collection of those effect to their choice of law. receivables?

Claims against the Singapore government (which includes certain 2.3 Freedom to Choose Foreign Law of Non-Resident Seller Singapore government-owned or government-controlled entities or Obligor. If the seller is resident in Singapore but the established in Singapore) would be subject to the defence of obligor is not, or if the obligor is resident in Singapore but the seller is not, and the seller and the obligor choose the sovereign immunity and to the provisions of the Government foreign law of the obligor/seller to govern their receivables Contracts Act (Cap 118).

contract, will a court in Singapore give effect to the choice Singapore Section 7(1) of the Government Proceedings Act provides that, of foreign law? Are there any limitations to the notwithstanding any other provisions of the Government recognition of foreign law (such as public policy or Proceedings Act to the contrary, no proceedings, other than mandatory principles of law) that would typically apply in proceedings for a breach of contract, shall lie against the commercial relationships such that between the seller and Government on account of anything done or omitted to be done or the obligor under the receivables contract? refused to be done by the Government or any public officer in exercise of the public duties of the Government. A Singapore court would give effect to a contractual choice of governing law in the receivables contract, unless the choice of law Section 10(1) of the Government Proceedings Act provides that all was contrary to public policy, illegal or made in bad faith. If the debts due and claims owing from time to time by any person to the seller and/or obligor are resident in Singapore and the contractual Government, whether upon judgment, bond, or other specialty, or choice of governing law is some other law than Singapore law, this upon simple contract or otherwise, shall be entitled from the date of would be a factor in considering whether such choice of law was the accrual thereof, respectively, to a preference of payment over all made in bad faith but would not for this reason alone result in the debts or claims of every kind which shall, subsequent to such date, Singapore court refusing to recognise such foreign choice of law. have been contracted or incurred by or become due from such If, additionally, the payment of receivables takes place in person to any other person whomsoever. Section 10(2) provides Singapore, this would be taken into consideration as to whether that nothing in section 10 shall affect any right vested in any person such choice of non-Singapore law was made in bad faith. by virtue of a mortgage or charge of immovable property duly registered in the manner provided by law for the registration of such Section 27(2) of the Unfair Contract Terms Act (Cap 396) provides mortgage or charge. that: “… this Act has effect notwithstanding any contract term which applies or purports to apply the law of some country outside Singapore, where (either or both) (a) the term appears to the court, 2 Choice of Law – Receivables Contracts or arbitrator or arbiter to have been imposed wholly or mainly for the purpose of enabling the party imposing it to evade the operation of this Act; or (b) in the making of the contract one of the parties 2.1 No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what dealt as consumer, and he was then habitually resident in are the main principles in Singapore that will determine Singapore, and the essential steps necessary for the making of the the governing law of the contract? contract were taken there, whether by him or by others on his behalf” [emphasis added]. Singapore courts generally embark upon three stages in determining the governing law of a contract. The first stage is to determine if 2.4 CISG. Is the United Nations Convention on the there is an express choice of governing law. If there is none, the International Sale of Goods in effect in Singapore? second stage is to determine whether an intention of the parties to choose a governing law could be inferred. If the court was faced Section 3(1) of the Sale of Goods (United Nations Convention) Act with a multiplicity of factors, each pointing to a different governing (Chapter 283A) provides that subject to section 3(2), the provisions law, then the proper approach would be to move on to the third of the United Nations Convention on Contracts for the International stage, which was to determine the law with the closest and most real Sale of Goods adopted in Vienna, Austria, on 10th April 1980 connection with the contract. (“Convention”) shall have the force of law in Singapore. Section The aim of the third stage is not to divine any “intent” of the parties, 3(2) provides that Article 1 paragraph (1)(b) of the Convention shall but to consider, on balance, which law had the most connection with not have the force of law in Singapore and accordingly the the contract in question and the circumstances surrounding the Convention will apply to contracts of the sale of goods only inception of that contract. The “closest and most real connection” between those parties whose places of business are in different test was the same as the objective test of what the reasonable man States when the States are contracting States to the Convention. ought to have intended if he had thought about the matter at the time Section 4 provides that the provisions of the Convention shall when he made the contract. prevail over any other law in force in Singapore to the extent of any inconsistency. Hence, the Convention does not apply when the 2.2 Base Case. If the seller and the obligor are both resident contract of the sale of goods is between parties whose places of in Singapore, and the transactions giving rise to the business are in Singapore and a non-Contracting State respectively. receivables and the payment of the receivables take place in Singapore, and the seller and the obligor choose the law of Singapore to govern the receivables contract, is there any reason why a court in Singapore would not give effect to their choice of law?

A Singapore court would give effect to a contractual choice of

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3 Choice of Law – Receivables Purchase If the obligor is located in Singapore, the assignability of the Agreement obligations of such obligor and the validity of such obligations in the event of bankruptcy or liquidation of such obligor would be governed by Singapore law. 3.1 Base Case. Does Singapore’s law generally require the sale of receivables to be governed by the same law as If the seller is a corporation incorporated in Singapore, the question the law governing the receivables themselves? If so, does of such seller’s capacity to contract for the sale of the receivable, that general rule apply irrespective of which law governs the perfection of such assignment by way of sale of such receivable, the receivables (i.e., Singapore’s laws or foreign laws)? and the validity of such sale in the event of liquidation of such seller would be governed by Singapore law. There is no general rule under Singapore law requiring the sale of Singapore receivables (i.e. the sale agreement) to be governed by the same law 3.4 Example 3: If (a) the seller is located in Singapore but as the law governing the receivables themselves. However, the obligor is located in another country, (b) the questions regarding assignability and perfection would be governed receivable is governed by the law of the obligor’s country, by the law of the receivables and not by the governing law of the (c) the seller sells the receivable to a purchaser located in sale agreement. Furthermore, the enforceability or recoverability of a third country, (d) the seller and the purchaser choose receivables may be determined by the law governing the the law of the obligor’s country to govern the receivables receivables, irrespective of the law governing the sale agreement. purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in It should be noted in passing that certain rights may well be Singapore recognise that sale as being effective against incapable of assignment under foreign law. In Singapore (i) the seller and other third parties (such as creditors or pensions and salaries payable out of national funds to public insolvency administrators of the seller) without the need officers, (ii) a bare right of litigation, and (iii) rights under contracts to comply with Singapore’s own sale requirements? that involve personal skill or confidence, are examples of rights that cannot be assigned. As such, ‘assignees’ of such ‘rights’ may not be Assuming that Singapore is an appropriate forum for an action to be able to enforce those rights as against the obligor. brought against the seller and other third parties, a Singapore court will generally give effect to the contractual choice of governing law 3.2 Example 1: If (a) the seller and the obligor are located in in respect of the receivables contract and the sale agreement Singapore, (b) the receivable is governed by the law of respectively, i.e. the law of the obligor’s country in the given Singapore, (c) the seller sells the receivable to a hypothetical situation, unless the choice of law was contrary to purchaser located in a third country, (d) the seller and the public policy, illegal or made in bad faith. If the laws of the purchaser choose the law of Singapore to govern the obligor’s country are upheld as the governing law of the receivables receivables purchase agreement, and (e) the sale contract and the sale agreement respectively, the sale requirements complies with the requirements of Singapore, will a court under Singapore law will not apply. in Singapore recognise that sale as being effective against the seller, the obligor and other third parties (such If the seller is a corporation incorporated in Singapore, the question as creditors or insolvency administrators of the seller and of such seller’s capacity to contract for the sale of the receivable and the obligor)? the validity of such sale in the event of bankruptcy or liquidation of such seller would be governed by Singapore law. A Singapore court would give effect to a contractual choice of governing law in the receivables contract and the sale agreement, 3.5 Example 4: If (a) the obligor is located in Singapore but unless the choice of law in either case was contrary to public policy, the seller is located in another country, (b) the receivable illegal or made in bad faith. In the given hypothetical situation, is governed by the law of the seller’s country, (c) the without further information which may qualify our response, it is seller and the purchaser choose the law of the seller’s likely that a Singapore court would recognise the sale as being country to govern the receivables purchase agreement, effective against the seller, the obligor and other third parties. and (d) the sale complies with the requirements of the seller’s country, will a court in Singapore recognise that sale as being effective against the obligor and other third 3.3 Example 2: Assuming that the facts are the same as parties (such as creditors or insolvency administrators of Example 1, but either the obligor or the purchaser or both the obligor) without the need to comply with Singapore’s are located outside Singapore, will a court in Singapore own sale requirements? recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency Assuming that Singapore is an appropriate forum for an action to be administrators of the seller), or must the requirements of brought against the obligor and other third parties, a Singapore the obligor’s country or the purchaser’s country (or both) court will generally give effect to the contractual choice of be taken into account? governing law in respect of the receivables contract and the sale agreement respectively, i.e. the law of the seller’s country in the A Singapore court would give effect to a contractual choice of given hypothetical situation, unless the choice of law was contrary governing law in the receivables contract and the sale agreement, to public policy, illegal or made in bad faith. If the obligor is unless the choice of law in either case was contrary to public policy, located in Singapore, the assignability of the obligations of such illegal or made in bad faith. In the given hypothetical situation, the obligor and the validity of such obligations in the event of fact that the obligor and/or the purchaser do not reside in Singapore liquidation of such obligor would be governed by Singapore law. would be taken into consideration as to whether such choice of Singapore law was made in bad faith. A Singapore court will also look at whether the payment of receivables takes place outside of Singapore.

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3.6 Example 5: If (a) the seller is located in Singapore 4.2 Perfection Generally. What formalities are required (irrespective of the obligor’s location), (b) the receivable is generally for perfecting a sale of receivables? Are there governed by the law of Singapore, (c) the seller sells the any additional or other formalities required for the sale of receivable to a purchaser located in a third country, (d) receivables to be perfected against any subsequent good the seller and the purchaser choose the law of the faith purchasers for value of the same receivables from purchaser’s country to govern the receivables purchase the seller? agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in For perfection of an equitable assignment of receivables, the Singapore recognise that sale as being effective against procedural requirements described under question 4.1 in relation to the seller and other third parties (such as creditors or legal assignments must be satisfied. This usually requires that a insolvency administrators of the seller, any obligor located written notice be provided to the obligor.

in Singapore and any third party creditor or insolvency Singapore administrator of any such obligor)? If the first purchaser obtains a legal assignment of the receivables (i.e. no perfection of title required), such first purchaser enjoys In the given hypothetical situation, without further information that priority over all subsequent good faith purchasers for value of the may qualify our response and assuming that Singapore is an same receivables purchased from the seller (Second Purchaser). appropriate forum for such an action to be brought against the However, if the first purchaser obtains an equitable assignment of relevant parties: the receivables, then such first purchaser will lose priority to a If the seller is a corporation incorporated in Singapore, the question Second Purchaser unless the latter was not bona fide or was aware of such seller’s capacity to contract for the sale of the receivable, of the earlier purchase by the first purchaser at the time the Second the perfection of such assignment by way of the sale of such Purchaser was assigned the same receivables. It follows that the receivable, and the validity of such sale in the event of liquidation first purchaser should give notice of the assignment to the obligor of such seller would be governed by Singapore law. in order to perfect its title against a Second Purchaser. If the obligor is located in Singapore, the assignability of the obligations of such obligor and the validity of such obligations in 4.3 Perfection for Promissory Notes, etc. What additional or the event of bankruptcy or liquidation of such obligor would be different requirements for sale and perfection apply to governed by Singapore law. sales of promissory notes, mortgage loans, consumer loans or marketable debt securities?

4 Asset Sales In Singapore, mortgage loans are transferred by assignment, as with any other loan. However, for the accompanying mortgage to be 4.1 Sale Methods Generally. In Singapore what are the transferred, registration of the mortgage (for registered land) or customary methods for a seller to sell receivables to a registration of a transfer (for unregistered land) must be effected purchaser? What is the customary terminology – is it with the Singapore Land Authority for a fee. called a sale, transfer, assignment or something else? A negotiable instrument is transferred by an act of negotiation, such as delivery or endorsement. The transfer of bills of exchange and Accounts receivable are generally sold by way of an assignment or, promissory notes is dealt with in the Bills of Exchange Act (Cap 23). in the case of future receivables, by way of an agreement for the Generally, a bearer instrument is transferred by delivery and a assignment of receivables when they come into existence. registered instrument is transferred by entry in the appropriate Assignments can take the form of legal assignments (if certain register. procedural requirements are complied with) or equitable Marketable debt securities (i.e. book-entry interests in instruments) assignments (which is essentially an assignment that does not meet which are held in a clearing system will generally be transferred by the requirements of a legal assignment). arrangement with the institution holding the account in the clearing For a valid legal assignment in Singapore, the following system in which the instruments are held, either directly or through requirements must be complied with: an intermediary custodian. (a) the contract between the obligor and seller must permit such With regard to consumer loans, please refer to our response to assignment; question 8.4. (b) the assignment must be absolute; (c) the assignment is of a ‘debt or other legal chose in action’; 4.4 Obligor Notification or Consent. Must the seller or the (d) the assignment must be in writing under the hand of the purchaser notify obligors of the sale of receivables in assignor; and order for the sale to be effective against the obligors (e) express notice in writing must be given to the obligor. and/or creditors of the seller? Must the seller or the Another common method of selling receivables is by way of purchaser obtain the obligors’ consent to the sale of novation, where all parties (i.e. the obligor, seller and purchaser) receivables in order for the sale to be an effective sale against the obligors? Does the answer to this question agree to the transfer of the rights and obligations of the seller in the vary if (a) the receivables contract does not prohibit underlying contract to the purchaser for a nominal consideration assignment but does not expressly permit assignment; or paid to the obligor. If the obligor is cooperative, novations are (b) the receivables contract expressly prohibits generally simpler to effect and enforce than assignments. assignment? Whether or not notice is required to perfect Finally, another method of selling receivables is by way of a sale, are there any benefits to giving notice – such as declaration of trust. cutting off obligor set-off rights and other obligor defences? There is no specific customary terminology applicable. It depends on the mode of sale of the receivables to the purchaser. The seller, being a party to the receivables contract, does not need to give further notice to enforce the contract against the obligor. The purchaser (assignee), however, will need to notify the obligor ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 309 © Published and reproduced with kind permission by Global Legal Group Ltd, London Drew & Napier LLC Singapore

in order to enforce the receivables contract against the obligor they are capable of being identified at the time of the purported without the need to join the seller (assignor) as a party to the assignment (or at the time they come into existence, for a sale of proceedings. It is not necessary to obtain the obligor’s consent to future receivables). It must be clear what is being assigned. If the the assignment if there is no express prohibition of such assignment sale is by declaration of trust, the subject matter of the trust, i.e. the in the receivables contract. receivables being sold, must be sufficiently certain and the In relation to enforcing the receivables contract or the receivables respective interests of the purchaser and any other beneficiaries of purchase agreement against the trustee-in-bankruptcy or liquidator the trust must be capable of determination at any time. There is no (as the case may be) of the obligor/seller in Singapore, the trustee- requirement for the receivables being sold to share objective in-bankruptcy or liquidator may be able to challenge such sale or characteristics. assignment of receivables if the transaction was (i) an unfair

Singapore preference, (ii) at an undervalue, or (iii) an extortionate credit 4.7 Identification. Must the sale document specifically identify transaction. For a brief explanation of these terms, refer to our each of the receivables to be sold? If so, what specific response to question 6.3. information is required (e.g., obligor name, invoice Our answer does not change if there is no express clause in the number, invoice date, payment date, etc.)? Do the receivables being sold have to share objective receivables contract prohibiting assignment. However, if there is characteristics? Alternatively, if the seller sells all of its such a clause prohibiting assignment, then the purchaser will not receivables to the purchaser, is this sufficient have any legal right to claim directly from the obligor and would identification of receivables? have to join the seller in the legal proceedings against the obligor (unless prior consent of the obligor was obtained). A contract to sell receivables must describe the receivables so that Generally, a purchaser-assignee will be subject to equities that existed they are capable of being identified at the time of the purported prior to the notice of assignment given to the obligor. Such equities assignment (or at the time they come into existence, for a sale of may include rights of set-off that may have existed between the future receivables). It must be clear what is being assigned. If the obligor and the seller-assignor. If, however, notice is not required for sale is by declaration of trust, the subject matter of the trust, i.e. the perfecting a sale, i.e. the purchaser maintains a direct right of action receivables being sold, must be sufficiently certain and the against the obligor on the strength of the sale agreement without the respective interests of the purchaser and any other beneficiaries of need to join the seller as a party (which is not the case under Singapore the trust must be capable of determination at any time. There is no law), giving notice to the obligor may additionally preserve the requirement for the receivables being sold to share objective obligor’s assets and avoid the situation where the obligor mistakenly characteristics. pays the seller under the receivables contract.

4.8 Respect for Intent of Parties; Economic Effects on Sale. 4.5 Notice Mechanics. If notice is to be delivered to obligors, If the parties denominate their transaction as a sale and whether at the time of sale or later, are there any state their intent that it be a sale will this automatically be requirements regarding the form the notice must take or respected or will a court enquire into the economic how it must be delivered? Is there any time limit beyond characteristics of the transaction? If the latter, what which notice is ineffective – for example, can a notice of economic characteristics of a sale, if any, might prevent sale be delivered after the sale, and can notice be the sale from being perfected? Among other things, to delivered after insolvency proceedings against the obligor what extent may the seller retain (a) credit risk; (b) have commenced? Does the notice apply only to specific interest rate risk; and/or (c) control of collections of receivables or can it apply to any and all (including future) receivables without jeopardising perfection? receivables? Are there any other limitations or considerations? For a sale of receivables to be treated as perfected and as a ‘true sale’, it must avoid being classed as a sham transaction or re- The notice must be given in writing, but there is no particular characterised as a secured loan. It must also not be vulnerable upon method of delivery prescribed. A notice of assignment can be the seller’s insolvency. delivered contemporaneously with or after the assignment of A transaction may be found to be a sham when the written receivables, subject that an assignment without notice being given document does not properly reflect the actual agreement between (i.e. an equitable assignment) will remain vulnerable in terms of the parties. There must be a common intention by the parties to priority to intervening assignments of which notice is given to the conceal the actual agreement - an element of impropriety or obligor. This would also apply after insolvency proceedings against dishonesty. In this case, the court will ignore the document and the obligor have commenced, subject that there may be rewrite the agreement to reflect the real rights and obligations. The enforcement restrictions. Singapore courts look at the substance of a transaction rather than The notice may apply to both specific and future receivables, just the label given to it by the parties. If the document claims to be subject to our further response to question 4.6 below. a sale, the court will examine whether it creates rights and obligations consistent with a sale (“whether it is in truth what it 4.6 Restrictions on Assignment; Liability to Obligor. Are purports to be”). It is not relevant that the economic effect of the restrictions in receivables contracts prohibiting sale or transaction is indistinguishable from a secured loan (“not what the assignment generally enforceable in Singapore? Are transaction is”). The court will look at the description of the there exceptions to this rule (e.g., for contracts between agreement and determine whether the actual rights and obligations commercial entities)? If Singapore recognises of the parties created by the agreement are consistent with this prohibitions on sale or assignment and the seller description. nevertheless sells receivables to the purchaser, will either The Singapore Court of Appeal in Thai Chee Ken v Banque the seller or the purchaser be liable to the obligor for breach of contract or on any other basis? Paribas [1993] 2 SLR 609 (“Thai Chee Ken”) at [8], and the Singapore High Court in RBG Resources plc (in liquidation) v A contract to sell receivables must describe the receivables so that Banque Cantonale Vaudoise and Others [2004] 3 SLR 421 at 310 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Drew & Napier LLC Singapore

[97]), cited the following passage in Re George Inglefield [1993] 4.10 Future Receivables. Can the seller commit in an Ch 1 (C.A) (“Re George Inglefield”) at 27 (per Romer LJ) with enforceable manner to sell receivables to the purchaser approval: that come into existence after the date of the receivables purchase agreement (e.g., “future flow” securitisation)? If “The only question that we have to determine is whether, so, how must the sale of future receivables be structured looking at the matter as one of substance, and not of to be valid and enforceable? Is there a distinction form, the discount company has financed the dealers in this between future receivables that arise prior to or after the case by means of a transaction of mortgage and charge, or by seller’s insolvency? means of a transaction of sale; because, of course, financing can be done in either the one way or the other, and to point out that it is a transaction of financing throws no light upon The seller can agree in an enforceable manner with the purchaser to the question that we have to determine.” [Emphasis added.] sell receivables to the purchaser that come into existence after the date of the receivables purchase agreement under an agreement to Singapore With regards to the rights and obligations that are consistent with an assign. However, notice is still required to perfect the assignment, agreement characterised as a sale, as opposed to a secured loan, and prior to that, the assignment will remain vulnerable in terms of three essential differences were set out by Romer LJ in Re George priority to intervening assignments of which notice is given to the Inglefield at page 27: obligor. “In a transaction of sale the vendor is not entitled to get back the subject-matter of the sale by returning to the purchaser Prior to a seller’s insolvency, an assignment for valuable the money that has passed between them. In the case of a consideration of receivables that do not exist at the time of the mortgage or charge, the mortgagor is entitled, until he has assignment will be treated as an agreement to assign, and will not been foreclosed, to get back the subject-matter of the be a legal assignment. Pursuant to section 4(8) of the Civil Law Act, mortgage or charge by returning to the mortgagee the money there are three conditions that must be satisfied if an assignment is that has passed between them. to derive validity from the statute: (a) it must be absolute; (b) it The second essential difference is that if the mortgagee must be written; and (c) written notice must be given to the debtor. realizes the subject-matter of the mortgage for a sum more This agreement will operate to assign the receivables as soon as than sufficient to repay him, with interest and the costs, the they come into existence (and written notice to the debtor is still money that has passed between him and the mortgagor he required to perfect the assignment). has to account to the mortgagor for the surplus. If the purchaser sells the subject-matter of the purchase, and Once the seller enters into insolvency proceedings, a previous realizes a profit, of course he has not got to account to the agreement to assign future receivables will only continue vendor for the profit. automatically to transfer receivables as they arise where there is Thirdly, if the mortgagee realizes the mortgage property for nothing further to be done by the seller in order to be entitled to the a sum that is insufficient to repay him the money that he has receivables. paid to the mortgagor, together with interest and costs, then the mortgagee is entitled to recover from the mortgagor the balance of the money, either because there is a covenant by 4.11 Related Security. Must any additional formalities be the mortgagor to repay the money advanced by the fulfilled in order for the related security to be transferred mortgagee, or because of the existence of the simple contract concurrently with the sale of receivables? If not all related security can be enforceably transferred, what debt which is created by the mere fact of the advance having methods are customarily adopted to provide the been made. If the purchaser were to resell the purchased purchaser the benefits of such related security? property at a price which was insufficient to recoup him the money that he paid to the vendor, of course he would not be entitled to recover the balance from the vendor.” [Emphasis The customary methods for a seller to transfer related security to a added.] purchaser would depend on the nature of such related security. (Hence as regards queries (a) and (b), it would not be consistent Where the related security comprises stock, shares or bonds, the with a ‘true sale’ for the seller to retain the credit risk or an interest transfer of such related security would usually be a mortgage, or rate risk.) charge, or an assignment by way of charge. As regards query (c), upon the sale of the receivables, the purchaser Where the related security comprises goods or other inventory, and should obtain unencumbered ownership of the receivables which it if the giver of the security is a corporation (and not an individual), has purchased, such that it has the sole right vis-à-vis the control of the transfer of such related security may be by way of an collections of receivables. If the seller is allowed to retain control assignment of debenture. of collections of receivables, such retention of control should be Where the related security comprises immovable property or provided in an agreement making clear that the seller is collecting interests in immovable property, the transfer of such security would the receivables on behalf of the purchaser. be by way of assignment of mortgage.

4.9 Continuous Sales of Receivables. Can the seller agree in 5 Security Issues an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables as and when they arise)? 5.1 Back-up Security. Is it customary in Singapore to take a “back-up” security interest over the seller’s ownership The seller can agree in an enforceable manner with the purchaser to interest in the receivables and the related security, in the continuous sales of receivables under an agreement to assign. event that the sale is deemed by a court not to have been However, notice is still required to perfect the assignment, and prior perfected? to that, the assignment will remain vulnerable in terms of priority to intervening assignments of which notice is given to the obligor. The Singapore “true sale” analysis (based on legal principles set out in question 4.8 above) would therefore require that all aspects of the transaction be consistent with a sale of receivables rather than a secured loan. ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 311 © Published and reproduced with kind permission by Global Legal Group Ltd, London Drew & Napier LLC Singapore

Registering a ‘back-up’ security (such as a charge) might prejudice to receivables) are governed by the law governing the receivables. the true sale analysis since it would indicate that (a) the parties were Thus, the effect of granting a security interest over receivables, the uncertain of their intentions and (b) that the parties may not have application of the rules of priority to the receivables and the intended an outright sale of the receivables. It is therefore not requirements to perfect security in the receivables against the advisable to create a ‘back-up’ security interest in a true sale of a underlying debtor will be determined by the law governing the receivables contract. receivables. If the seller is a corporation incorporated in Singapore, the question of such seller’s capacity to grant such security interest in such receivables, the perfection of such security interest over 5.2 Seller Security. If so, what are the formalities for the seller granting a security interest in receivables and such receivables, and the validity of such grant of such security related security under the laws of Singapore, and for such interest in the event of liquidation of such seller would be governed

Singapore security interest to be perfected? by Singapore law.

Related security could comprise: 5.5 Additional Formalities. What additional or different (a) stock, shares or bonds (transferred by way of a mortgage, requirements apply to security interests in or connected to charge or an assignment by way of charge); insurance policies, promissory notes, mortgage loans, (b) goods or other inventory (transferred by a corporate entity by consumer loans or marketable debt securities? way of an assignment of debenture); or (c) immovable property or interests in immovable property Where the security interest in mortgage loans creates an interest in (transferred by way of assignment of mortgage). real property, such security interest should be registered with the Singapore Land Authority pursuant to section 37 of the Land Titles As the method of transferring security would depend on each type Act (Cap 157) in the case of registered land and pursuant to section of security and the formalities would necessarily depend on such 5 of the Registration of Deeds Act (Cap 269) in the case of land method of transferring security, it is beyond the scope of this which is not registered under the Land Titles Act. Where such a memorandum to set out in full all such methods and formalities. security interest should be registered but is not registered, it will be Please also see our response to question 5.1. void as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the secured property. 5.3 Purchaser Security. If the purchaser grants security over Security interests granted over book-entry securities held in the all of its assets (including purchased receivables) in Central Depository (Pte) Limited may be created by way of a favour of the providers of its funding, what formalities statutory security upon compliance with the requisite filing of must the purchaser comply with in Singapore to grant and perfect a security interest in purchased receivables security forms or by way of a security interest under common law. governed by the laws of Singapore and the related Security interest in negotiable instruments, including bearer debt security? securities and promissory notes, may be created in the form of a pledge over such negotiable instruments. The formalities for the purchaser granting a security interest and the perfection of such security interest in respect of various categories 5.6 Trusts. Does Singapore recognise trusts? If not, is there of assets in Singapore are as follows: a mechanism whereby collections received by the seller (a) receivables generally (secured by way of assignment thereof in respect of sold receivables can be held or be deemed and perfected by way of notice of assignment to the obligor); to be held separate and apart from the seller’s own (b) stocks, shares or bonds (secured by way of a mortgage or assets until turned over to the purchaser? charge thereof and perfected by way of registering the security holder or its nominee in the register of members as Trusts are recognised under the laws of Singapore. the registered holder of such stocks, shares or bonds. The creation of such charge by a Singapore company should also be entered into the register of charges of such Singapore 5.7 Bank Accounts. Does Singapore recognise escrow company); accounts? Can security be taken over a bank account (c) goods or other inventory (secured by way of a charge in the located in Singapore? If so, what is the typical method? form of a debenture by a Singapore company in favour of the Would courts in Singapore recognise a foreign-law grant security holder and the creation of such charge in the register of security (for example, an English law debenture) taken of charges of such Singapore company); and over a bank account located in Singapore? (d) immovable property or interests in immovable property Escrow accounts are recognised by Singapore law. Security may be (secured by way of a mortgage or an assignment of mortgage thereof and perfected by way of registering the security taken over a bank account located in Singapore and typically such holder’s interest in the Register of Land Titles against such security is by way of an assignment by way of charge over such immovable property. The creation of such charge by a bank account. Singapore company should also be entered into the register The courts in Singapore would recognise a foreign law grant of of charges of such Singapore company). security over a bank account located in Singapore subject to the perfection requirements under Singapore law. 5.4 Recognition. If the purchaser grants a security interest in receivables governed by the laws of Singapore, and that security interest is valid and perfected under the laws of the purchaser’s country, will it be treated as valid and perfected in Singapore or must additional steps be taken in Singapore?

In Singapore, generally questions of a proprietary nature (in relation

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6 Insolvency Laws Transactions at an undervalue The insolvency official could reverse transactions at an undervalue 6.1 Stay of Action. If, after a sale of receivables that is which took place within 5 years before the commencement of otherwise perfected, the seller becomes subject to an insolvency proceedings. A transaction at an undervalue is one insolvency proceeding, will Singapore’s insolvency laws where the insolvent party (a) made a gift to another person or enters automatically prohibit the purchaser from collecting, into a transaction for which the insolvent party receives no transferring or otherwise exercising ownership rights over consideration, (b) enters into a transaction with another person in the purchased receivables (a “stay of action”)? Does the consideration of marriage, or (c) enters into a transaction for a insolvency official have the ability to stay collection and consideration the value of which is significantly less than the value enforcement actions until he determines that the sale is of the receivables. perfected? Would the answer be different if the Singapore purchaser is deemed to only be a secured party rather Unfair preference than the owner of the receivables? The insolvency official could reverse transactions where the insolvent party intended and gave an unfair preference to any The purchaser would be entitled to deal with the receivables in creditor, surety or guarantor (Recipient) for any of the insolvent Singapore as the owner of the receivables if there was a ‘true sale’ of party’s debts or other liabilities, where the Recipient will be in a the receivables and subject to such sale by the seller not being an better position than they would be in the event of the insolvent unfair preference or at an undervalue and not being an extortionate party’s bankruptcy, and where such preference was given within credit transaction. This would apply notwithstanding the subsequent two years (or, for a preference where the Recipient is not an insolvency or bankruptcy of the seller. The insolvency official would associate of the insolvent party, six months). There is no general not have the ability to stay collection and enforcement actions. doctrine of substantive consolidation under Singapore law. Only in If the sale of receivables was not a “true sale” and instead was very limited circumstances would the separate legal personality of treated as a secured loan, such grant of security would be void a company be ignored (e.g. fraud). against a liquidator and other creditors of a Singapore corporate Extortionate credit transactions seller if such charge were not lodged with the Registrar of The insolvency official could reverse extortionate credit Companies within 30 days of creation of such charge (Section 131, transactions within 3 years before the commencement of the Companies Act (Cap 50)). insolvency proceedings. A transaction is presumed extortionate if An agreement to assign future receivables will operate to transfer (a) grossly exorbitant payments are to be made by the insolvent those receivables when they come into existence but where there is party in consideration of its receipt of credit, or (b) if the terms of any insolvency of such assignor and if any action is needed on the the credit transaction were harsh and unconscionable or part of such assignor to transfer the receivables, the purchaser substantially unfair. would not be entitled to assume that such assignor will continue to carry out those actions. 6.4 Substantive Consolidation. Under what facts or When a judicial management order is made in respect of a circumstances, if any, could the insolvency official Singapore company, any receiver shall vacate office and no consolidate the assets and liabilities of the purchaser with execution or other legal process shall be commenced against the those of the seller or its affiliates in the insolvency company or its property, except with the consent of the judicial proceeding? manager or with leave of the court. Similarly, no steps shall be taken to enforce security over the company’s property or to Generally, the insolvency of a company will merely involve the repossess any goods except with the consent of the judicial manager consolidation of the available assets and liabilities of that company. or with leave of the court. In very limited circumstances (e.g. fraud), the courts will pierce the veil of incorporation and look to the assets of other companies (such as its affiliates) for such consolidation. 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 6.5 Effect of Proceedings on Future Receivables. What is the exercise of rights (by means of injunction, stay order or effect of the initiation of insolvency proceedings on (a) other action)? sales of receivables that have not yet occurred or (b) on sales of receivables that have not yet come into In the case of a “true sale”, the insolvency official would not have existence? that power. Once the seller enters into insolvency proceedings, a previous agreement to assign future receivables will only continue 6.3 Suspect Period (Clawback). Under what facts or automatically to transfer receivables as they arise where there is circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or nothing further to be done by the seller in order to earn the receivables. “preference” period before the commencement of the insolvency proceeding? What are the lengths of the 7 Special Rules “suspect” or “preference” periods in Singapore for (a) transactions between unrelated parties and (b) transactions between related parties? 7.1 Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in Singapore In the case of a ‘true sale’ that is not an unfair preference or at an establishing a legal framework for securitisation undervalue and is not an extortionate credit transaction, the transactions? If so, what are the basics? insolvency official would not have the power to prohibit the purchaser’s exercise of rights. The MAS has issued Notice No. 628 pursuant to section 55 of the

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Banking Act (Cap 19) which applies to all banks in Singapore. Part 7.5 Independent Director. Will a court in Singapore give I (sections 3 to 5 and the Annexes) of the Notice sets out mandatory effect to a contractual provision (even if the contract’s requirements, with the exception of footnotes labelled as governing law is the law of another country) or a provision guidelines; and Part II (section 6) sets out non-mandatory in a party’s organisational documents prohibiting the guidelines on the responsibilities of banks in respect of directors from taking specified actions (including commencing an insolvency proceeding) without the securitisation. affirmative vote of an independent director? Other than the foregoing and certain tax laws (see our responses to questions 9.1 and 9.6 below), there are no laws specifically A restriction or limitation in the articles of association of a company providing for securitisation transactions. on the ability of a director to bring insolvency proceedings may be invalid as a matter of public policy, or as a fetter on the proper Singapore 7.2 Securitisation Entities. Does Singapore have laws regulation of a limited company. 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 Regulatory Issues management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as 8.1 Required Authorisations, etc. Assuming that the to the status of directors or shareholders? purchaser does no other business in Singapore, will its purchase and ownership or its collection and enforcement The MAS Notice No. 628 referred to in question 7.1 above provides of receivables result in its being required to qualify to do for the establishment of special purpose entities for securitisation by business or to obtain any licence or its being subject to banks. Annex A of the said Notice provides that any bank acting as regulation as a financial institution in Singapore? Does an asset-back commercial paper programme sponsor, a manager or the answer to the preceding question change if the an originator shall not, inter alia, in relation to the special purpose purchaser does business with other sellers in Singapore? entity (SPE) used in the securitisation: If the purchaser continues to purchase and enforce receivables (a) in the case where the SPE is a corporation, own any share capital in the SPE, including ordinary or preference shares, successively and repetitively with a view to commercial gain or in the case where the SPE is a trust, own any share capital (especially if it does business with other sellers in Singapore), it in the trustee or be a beneficiary of the SPE; may be regarded as carrying on business in Singapore. Relevant (b) name the SPE in such manner as to imply any connection factors in considering whether or not a foreign company is carrying with the bank; on business in Singapore would include by way of example: (c) have any director, officer or employee on the board of the (a) the establishment of a place of business in Singapore; SPE unless: (i) the board is made up of at least three (b) the employment of an employee or agent in connection with members the majority of whom are independent directors; the business; and (ii) the officer representing the bank does not have veto (c) the raising of loans or finance; powers; (d) collection of information or soliciting of business; and (d) directly or indirectly control the SPE; or (e) trading within Singapore. (e) provide implicit support or bear any of the recurring expenses of the securitisation. However, the mere purchase and ownership of receivables (without any form of physical presence in Singapore, either through the Aside from the abovementioned Notice, there are no laws establishment of an office or having employees present in specifically providing for establishment of special purpose entities Singapore) should not in itself be regarded as a carrying on of for securitisation. business in Singapore.

7.3 Non-Recourse Clause. Will a court in Singapore 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) limiting the following their sale to the purchaser, including to appear recourse of parties to available funds? before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect It is likely that such a contractual provision would be regarded as sold receivables? valid and upheld by the Singapore courts. No licence is required for a seller to enforce and collect receivables. 7.4 Non-Petition Clause. Will a court in Singapore give effect However, in the course of doing so, a seller who is not a licensed to a contractual provision (even if the contract’s governing advocate and solicitor of Singapore cannot (in its own capacity or law is the law of another country) prohibiting the parties as agent for the purchaser) (i) issue any writ, summons or process, from: (a) taking legal action against the purchaser or (ii) commence, carry on, solicit or defend any action, suit or other another person; or (b) commencing an insolvency proceeding in the name of any other person or in his own name in proceeding against the purchaser or another person? any of the courts in Singapore, or (iii) draw or prepare any document or instrument relating to any proceeding in such courts. It is likely that a non-petition clause is valid, although there is little A seller also cannot, for any fee, gain or reward, do any of the authority either way in Singapore law. A court would have to following: (a) directly or indirectly draw or prepare any document consider whether such a clause was contrary to public policy as an or instrument relating to any movable property (which would attempt to oust the jurisdiction of the court or the insolvency laws include receivables) or to any legal proceeding; and (b) on behalf of of Singapore. It is possible that a Singapore court would deal with a claimant write, publish or send a letter or notice threatening legal a winding-up petition even if it was presented in breach of a non- proceedings other than a letter or notice that the matter will be petition clause. handed to a solicitor for legal proceedings.

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For all intents and purposes, the position of a third party 9.2 Seller Tax Accounting. Does Singapore require that a replacement servicer (who is not an advocate and solicitor) is the specific accounting policy is adopted for tax purposes by same as that of the seller. the seller or purchaser in the context of a securitisation?

There is no mandatory requirement that a specific accounting policy 8.3 Data Protection. Does Singapore have laws restricting must be adopted for tax purposes by the seller or purchaser in the the use or dissemination of data about or provided by context of a securitisation. obligors? If so, do these laws apply only to consumer obligors or also to enterprises? 9.3 Stamp Duty, etc. Does Singapore impose stamp duty or Save for banking secrecy laws/regulations which are applicable to other documentary taxes on sales of receivables? banks, merchant banks, finance companies and certain other Singapore regulated entities, there is no legislation relating to data protection No stamp duty or other documentary tax is chargeable on the sales or privacy of data about or provided by obligors. of receivables in Singapore.

8.4 Consumer Protection. If the obligors are consumers, will 9.4 Value Added Taxes. Does Singapore impose value the purchaser (including a bank acting as purchaser) be added tax, sales tax or other similar taxes on sales of required to comply with any consumer protection law of goods or services, on sales of receivables or on fees for Singapore? Briefly, what is required? collection agent services?

In Singapore, the terms of a contract with a person dealing as a In Singapore, the Goods and Services Tax Act (Cap 117A) provides consumer must be reasonable within the meaning of the Unfair for a goods and services tax on the supply of goods and services Contract Terms Act (Cap 396). The Consumer Protection (Fair made in Singapore by a taxable person in the course of any business Trading) Act (Cap 52A) also regulates “unfair practice” in the case carried on by him; and on the importation of goods into Singapore. of certain “financial services” and “financial products” and might The sale of receivables is exempted from such tax as the sale of affect a purchaser (including a bank acting as purchaser) of a receivables is regarded as an exempt financial service as specified consumer receivables contract. in paragraph 1 of the Fourth Schedule of the Goods and Services Financial institutions which are regulated by the Monetary Tax Act. Authority of Singapore are required to comply with codes of conduct, notices and directives issued by the MAS in regard to their 9.5 Purchaser Liability. If the seller is required to pay value transactions with customers (including consumers). added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then 8.5 Currency Restrictions. Does Singapore have laws will the taxing authority be able to make claims for the restricting the exchange of Singapore’s currency for other unpaid tax against the purchaser or against the sold currencies or the making of payments in Singapore’s receivables or collections? currency to persons outside the country? There are no taxes on the sale of receivables in Singapore. Yes, in particular the Exchange Control Act (Cap 99). However, the said Act was suspended by the Monetary Authority of Singapore on 1 June 1978, which lifted exchange controls in Singapore. 9.6 Doing Business. Assuming that the purchaser conducts no other business in Singapore, would the purchaser’s purchase of the receivables, its appointment of the seller 9 Taxation as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax in Singapore? 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser The purchaser’s purchase of the receivables from obligors in be subject to withholding taxes in Singapore? Does the answer depend on the nature of the receivables, whether Singapore, its appointment of the seller as its servicer and collection they bear interest, their term to maturity, or where the agent for such obligors in Singapore, and its enforcement of the seller or the purchaser is located? receivables against the obligors in Singapore, may make such purchaser liable to tax in Singapore. Withholding tax is applicable to interest on overdue trade accounts and interest on credit terms paid to a non-resident supplier. This is the case even if the interest charged on the late payment of the sale of goods is treated as part of the seller’s trade income.

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Petrus Huang Ron Cheng

Drew & Napier LLC Drew & Napier LLC 10 Collyer Quay 10 Collyer Quay #10-01 Ocean Financial Centre #10-01 Ocean Financial Centre Singapore 049315 Singapore 049315

Tel: +65 6531 2208 Tel: +65 6531 2230 Fax: +65 6535 4906 Fax: +65 6535 4906 Email: [email protected] Email: [email protected] URL: www.drewnapier.com URL: www.drewnapier.com

Singapore Petrus Huang is a Director at Drew & Napier LLC with over 20 Ron Cheng is a Senior Associate with the Corporate & Finance years of practical experience. He has been highly recommended Department of Drew & Napier LLC. Ron has practised corporate for his expertise in Banking & Finance by Global Counsel 3000 and commercial law with top law firms in Singapore as well as a and Which Lawyer? 2007 and 2008, published by Practical Law top-ten national law firm in Australia. Company. Under his leadership, the firm was the Finance Ron’s practice areas include mergers and acquisitions, corporate Monthly Global Awards 2012 winner in the category of Private finance, private equity and funds. Ron has advised listed and Funds Law Firm of the Year, Singapore. His practice includes unlisted companies, banks, consortiums and individuals on a debt capital market issuances and initial public offerings and range of issues involving investments in Singapore and Australia. listings of real estate investment trusts and other property funds. Ron graduated from the National University of Singapore in 2002 Petrus is also the editor of the CCH Annotated Singapore Stock with Honours. He is an Advocate & Solicitor of Singapore, a Exchange Listing Rules and contributor to Halsburys’ Laws of Solicitor of England & Wales and a Barrister & Solicitor of Singapore on Securities Law. He is a member of the Disciplinary Victoria. Committee of the Singapore stock exchange (SGX). He is a Director of SGX-listed Scintronix Limited. Petrus graduated in law from Cambridge University and is a holder of a Diploma (Investments) with the Institute of Banking and Finance. He is a barrister-at-law at Lincoln’s Inn (London) as well as an Advocate & Solicitor of Singapore.

Established in 1889, Drew & Napier LLC is one of Singapore’s leading and largest law firms, with over 250 lawyers and fee- earners. Drew & Napier LLC was named Singapore National Law Firm of the Year at the Chambers Asia-Pacific Awards 2012. Its regular clientele includes Singapore Government agencies, Statutory Boards and Government-linked corporations as well as investment agencies. Drew & Napier LLC has market leading practices in Corporate & Finance, Competition & Antitrust, Telecommunications, Media & Technology, and Admiralty & Shipping and has been consistently rated top tier in dispute resolution over the years by international ranking organisations such as Asia Pacific Legal 500, Chambers Global, Practical Law Company and Asia Law Profiles. The firm has seven practising Senior Counsel (Singapore’s equivalent of the U.K.’s Q.C.), the highest number of any law firm in Singapore. Drew & Napier LLC is also rated top tier in Corporate Insolvency & Restructuring, Intellectual Property and Tax. The Corporate & Finance practice group within Drew & Napier LLC is a top-tier team acting for a variety of clients in all areas of corporate practice including mergers & acquisitions, capital markets, financing and advice on regulatory, compliance and tax matters.

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Werksmans Attorneys Tracy-Lee Janse van Rensburg

1 Receivables Contracts The current regulations to the NCA prescribe the following maximum interest rates, applicable to consumers: Maximum Prescribed Interest Rates 1.1 Formalities. In order to create an enforceable debt obligation of the obligor to the seller, (a) is it necessary Sub-sector Maximum Prescribed Interest Rate that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone sufficient; and (c) can a receivable “contract” be deemed Mortgage agreements [(RR x 2.2) + 5%] per year to exist as a result of the behaviour of the parties? Credit facilities [(RR x 2.2) + 10%] per year The National Credit Act, 2005 (“NCA”) stipulates a number of requirements which need to be met for the valid conclusion of a Unsecured credit transactions [(RR x 2.2) + 20%] per year credit agreement under the NCA. These agreements must be evidenced by a formal receivables contract and the provision of Developmental credit agreements invoices alone is not sufficient. —for the development of a small business [(RR x 2.2) + 20%] per year The NCA requires that all credit agreements be recorded on paper or electronically. A failure to comply with these formalities does —for low income housing (unsecured) [(RR x 2.2) + 20%] per year not affect the validity of the agreement, but may render a credit provider liable to a fine of up to either ZAR 1 million or 10 per cent Short term credit transactions 5% per month of its annual turnover during the preceding financial year, whichever is the greater. The credit provider also runs the risk that Other credit agreements [(RR x 2.2) + 10%] per year its registration with the National Credit Regulator might be cancelled. Incidental credit agreements 2% per month Under the Consumer Protection Act, 2008 (“CPA”), a supplier of goods or services must provide a written record of each transaction to the consumer to whom the goods or services are delivered. (Where “RR” indicates the reference rate, being the ruling SA Under the CPA, the minister may prescribe certain categories of Reserve Bank Repurchase Rate.) agreements that must be in writing. In terms of the NCA, the interest rate applicable to an amount in Section 50 of the CPA expressly provides that if a consumer default or an overdue payment under a credit agreement may not agreement between a supplier and a consumer is not in writing, the exceed the highest interest rate applicable to any part of the supplier must keep a record of the transaction entered into over the principal debt under that agreement. Despite any provision of the telephone or any other recordable form as prescribed. To the extent common law or a credit agreement to the contrary, any interest that the invoices comply with requirements of the CPA, in relation amount or fee that accrues during the time that a consumer is in to content and language, an invoice would be sufficient. default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs. 1.2 Consumer Protections. Do South Africa’s laws (a) limit rates of interest on consumer credit, loans or other kinds Under the NCA, a consumer may terminate a credit lease or an of receivables; (b) provide a statutory right to interest on instalment agreement, entered into at any location other than the late payments; (c) permit consumers to cancel registered business premises of the credit provider, within five receivables for a specified period of time; or (d) provide business days after the date on which the agreement was signed by other noteworthy rights to consumers with respect to the consumer, by delivering a notice in the prescribed manner to the receivables owing by them? credit provider and tendering the return of any money or goods, or paying in full for any services, received by the consumer in respect The Republic of South Africa (“RSA”) legislation regulating the of the agreement. rate of interest on consumer credit is the NCA. The application of A consumer may terminate a credit agreement at any time by paying the NCA is, however, limited in that certain provisions of the NCA the settlement amount to the credit provider. In addition, a will not apply to consumers that are juristic persons or to consumers consumer may terminate an instalment agreement, secured loan or that fall within certain prescribed thresholds. lease of movable property, by surrendering to the credit provider the

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goods that are the subject of that agreement and by paying to the may, (subject to certain limitations), elect the law that is to govern credit provider any remaining amount demanded. an agreement to which it is a party. Once the law that governs the Under the CPA, a consumer has a number of rights of relevance agreement has been selected by the parties, such law would then be which includes, inter alia, the right to a cooling off period after applied in resolving any dispute that may arise between the parties direct marketing, the right to choose or examine goods, the various in respect thereof. rights in relation to delivery of goods or supply of services and the There are, however, at least three instances where the choice of a right to return goods. The rights afforded under the CPA will, foreign law would not be upheld by a South African Court, namely: however, only be applicable insofar as the goods or services 2.3.1 where the foreign law is repugnant to the values of the South supplied are governed by the provisions of the CPA. African legal system. In other words, where the application of the foreign law would be, or have a result or effect, fundamentally offensive to South African law or public

South Africa 1.3 Government Receivables. Where the receivables policy; contract has been entered into with the government or a government agency, are there different requirements and 2.3.2 where the parties agree to be bound by a foreign law for laws that apply to the sale or collection of those purposes of evading South African law; and receivables? 2.3.3 where the parties elect to be bound by a foreign law, where the foreign law is illegal under South African statutory or Yes, any receivables contract entered into with government will common law. have to comply with the provisions of the Public Finance In light of the above, there is no reason why the seller and the Management Act 1 of 1999 and/or the Municipal Finance obligor would be prevented (under RSA law) from electing to be Management Act 56 of 2003. bound by a different country’s law to govern the receivable contract and the receivables. More specifically, the receivables contract and the receivables themselves could only be governed by a foreign law 2 Choice of Law – Receivables Contracts if and to the extent that the provisions of such foreign law was not elected for purposes of evading South African consumer protection 2.1 No Law Specified. If the seller and the obligor do not legislation. specify a choice of law in their receivables contract, what are the main principles in South Africa that will determine the governing law of the contract? 2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in South Africa? In determining the governing law of a contract, the courts will have No, it is not. regard to: 2.1.1 the domicile of the parties; 2.1.2 where the agreement was concluded; 3 Choice of Law – Receivables Purchase 2.1.3 the location of the subject matter of the receivables contract; Agreement and 2.1.4 where the obligations under the receivables contract are to be 3.1 Base Case. Does South Africa’s law generally require performed. the sale of receivables to be governed by the same law as the law governing the receivables themselves? If so, does that general rule apply irrespective of which law 2.2 Base Case. If the seller and the obligor are both resident governs the receivables (i.e., South Africa’s laws or in South Africa, and the transactions giving rise to the foreign laws)? receivables and the payment of the receivables take place in South Africa, and the seller and the obligor choose the law of South Africa to govern the receivables This is not a requirement under RSA law. Subject to our comments contract, is there any reason why a court in South Africa in question 2.3, as a general rule, the parties to the sale of would not give effect to their choice of law? receivables may elect the law that is to govern the sale agreement, whilst the receivables may be governed by the laws of RSA. The choice of law provisions contained within the receivable contract will, subject to our comments in question 2.3, be 3.2 Example 1: If (a) the seller and the obligor are located in recognised and upheld by the courts of the RSA as a valid choice of South Africa, (b) the receivable is governed by the law of law. We know of no reason why the courts of the RSA would not South Africa, (c) the seller sells the receivable to a give effect to the choice of South Africa as the governing law. purchaser located in a third country, (d) the seller and the purchaser choose the law of South Africa to govern the receivables purchase agreement, and (e) the sale 2.3 Freedom to Choose Foreign Law of Non-Resident Seller complies with the requirements of South Africa’s, will a or Obligor. If the seller is resident in South Africa but the court in South Africa recognise that sale as being obligor is not, or if the obligor is resident in South Africa effective against the seller, the obligor and other third but the seller is not, and the seller and the obligor choose parties (such as creditors or insolvency administrators of the foreign law of the obligor/seller to govern their the seller and the obligor)? receivables contract, will a court in South Africa give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law (such as public Yes, as the seller, obligor and receivables are within the jurisdiction policy or mandatory principles of law) that would typically of South Africa and as the parties elected RSA law to govern the apply in commercial relationships such that between the receivables purchase agreement, the RSA courts will recognise the seller and the obligor under the receivables contract? sale as being effective against the seller, the obligor and other third parties. Under South African law, as a general rule, a party to an agreement

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3.3 Example 2: Assuming that the facts are the same as 3.6 Example 5: If (a) the seller is located in South Africa Example 1, but either the obligor or the purchaser or both (irrespective of the obligor’s location), (b) the receivable is are located outside South Africa, will a court in South governed by the law of South Africa, (c) the seller sells Africa recognise that sale as being effective against the the receivable to a purchaser located in a third country, seller and other third parties (such as creditors or (d) the seller and the purchaser choose the law of the insolvency administrators of the seller), or must the purchaser’s country to govern the receivables purchase requirements of the obligor’s country or the purchaser’s agreement, and (e) the sale complies with the country (or both) be taken into account? requirements of the purchaser’s country, will a court in South Africa recognise that sale as being effective As the receivables are located within the jurisdiction of the RSA against the seller and other third parties (such as courts and as the parties elected South African law to govern the creditors or insolvency administrators of the seller, any receivables purchase agreement, the courts will recognise the sale obligor located in South Africa and any third party seller

or insolvency administrator of any such obligor)? South Africa as being effective against the seller and other third parties. It will not be necessary for the court to take the foreign law into account. Yes, an RSA court will recognise the sale as being effective against the seller and other third parties subject to the limitations specified 3.4 Example 3: If (a) the seller is located in South Africa but in question 2.3. the obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in 4 Asset Sales a third country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the 4.1 Sale Methods Generally. In South Africa what are the requirements of the obligor’s country, will a court in South customary methods for a seller to sell receivables to a Africa recognise that sale as being effective against the purchaser? What is the customary terminology – is it seller and other third parties (such as creditors or called a sale, transfer, assignment or something else? insolvency administrators of the seller) without the need to comply with South Africa’s own sale requirements? In order for a seller to sell accounts receivable (which we have for purposes hereof assumed to be only incorporeal rights), such sale Where the seller and the purchaser elected a foreign law to govern would be effected through a cession of all of the seller’s rights, title their relationship in respect of the sale of the receivables, RSA law and interest in and to such accounts receivable. would not be applicable in determining whether the sale was effective against the seller, save in instances where the election of 4.2 Perfection Generally. What formalities are required the foreign law was unenforceable as described in question 2.3, but generally for perfecting a sale of receivables? Are there rather the foreign law. However, South African law would be any additional or other formalities required for the sale of applicable in determining whether the sale is perfected against the receivables to be perfected against any subsequent good creditors of the seller and upon the insolvency of the seller. faith purchasers for value of the same receivables from the seller?

3.5 Example 4: If (a) the obligor is located in South Africa but There are no legislative requirements to be met in order to give the seller is located in another country, (b) the receivable is governed by the law of the seller’s country, (c) the effect to cessions under RSA law. RSA law does not provide for seller and the purchaser choose the law of the seller’s any register of cessions, nor is there any requirement that a cession country to govern the receivables purchase agreement, must be in writing. and (d) the sale complies with the requirements of the There are, however, certain requirements under South African seller’s country, will a court in South Africa recognise that common law which need to be met to give effect to a valid cession sale as being effective against the obligor and other third of receivables. These include: parties (such as creditors or insolvency administrators of the obligor) without the need to comply with South 4.2.1 the seller must have the intention to transfer all of its rights, Africa’s own sale requirements? title and interest in and to the receivables to the purchaser, who must similarly have the intention to acquire same; Yes, an RSA court will recognise the sale as being effective against 4.2.2 there must be an underlying causa (interest) for the cession. the obligor and other third parties. An RSA court will recognise the Generally, the fact that the purchaser pays some sort of consideration to the seller would be sufficient for these choices of a foreign law subject to the limitations specified in purposes; question 2.3. 4.2.3 the rights constituting the seller’s right, title and interest in and to the receivables to be transferred should be clearly identified. The document creating the cession is to describe the rights which are being transferred with a sufficient degree of specificity. This has traditionally been a problem in relation to cessions of future rights under RSA law and should be closely considered in the circumstances; and 4.2.4 the requirements which must be generally present in order for any agreement to be legal, valid and binding (for example the parties must have the requisite capacity and authority to enter into the agreement).

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4.3 Perfection for Promissory Notes, etc. What additional or (securities evidenced by a written document) and uncertificated different requirements for sale and perfection apply to securities are set out in the Companies Act, 2008 (“the Companies sales of promissory notes, mortgage loans, consumer Act”). loans or marketable debt securities? The registration and transfer of certificated securities is dealt with in terms of section 51 of the Companies Act which provides for the The additional or different requirements applicable to promissory issue, to a holder, of a certificate evidencing any certificated notes, mortgage loans and marketable debt securities differ. As securities held in the company. In terms of section 51, a company such, each type of instrument is dealt with separately. must enter in its securities register every transfer of any certificated Promissory notes securities and may only make such an entry if the transfer is The Bills of Exchange Act, 1964 (“Bills of Exchange Act”) defines evidenced by a proper instrument of transfer that has been delivered promissory notes and regulates the manner in which they may be to the company or if the transfer was effected by operation of law. South Africa transferred. As described above generally, the rights in and to a The registration and transfer of uncertificated listed securities, and document would be transferred by way of cession but the Bills of certificated securities lodged with a central securities depository (or Exchange Act describes a particular method of statutory transfer a central securities depository participant), is governed by the known as “negotiation” which enables the transferee to acquire title Companies Act and the Securities Services Act, 2004 (“Securities in and to the promissory note and to sue in its own name. The Services Act”) which obligates an issuer of uncertificated securities concept of negotiability (meaning transfer free from equities) to register and deposit such securities with a central securities applies to promissory notes as defined in the Bills of Exchange Act depository (or a central securities depository participant). In terms (briefly, a promissory note is defined as being an unconditional of Section 42 of the Securities Services Act, the transfer of promise in writing made by one person to another, signed by the securities held by a central securities depository (or the relevant maker and engaging him to pay on demand or at a fixed determined participant) must be effected by entry in the (central) securities future time a sum certain in money to a specified person, his order account of the transferor and the transferee kept by the central or to bearer). securities depository (or the relevant participant) as prescribed by Reference should be had to the Bills of Exchange Act for full details the rules of the central securities depository. Uncertificated as to the manner in which title to promissory notes may be securities must also comply with Sections 52 and 53 of the transferred; however, briefly, if the promissory note is a bearer Companies Act, which further require that a company enter into a instrument, the instrument may be transferred by mere delivery. In sub-register of members to that security the number of securities order for the instrument to be negotiated, however, the party who held in such uncertificated form. The transfer of such shall be takes it must take the instrument both in good faith and for value. effected upon the debiting and crediting, respectively, of both the If the promissory note is an order instrument, it may be transferred account in the sub-register from which the transfer is effected and both by delivery and endorsement (i.e. the note will not be payable the account in the sub-register to which transfer is to be made. to the maker’s order unless and until it has been endorsed). Mortgage loans 4.4 Obligor Notification or Consent. Must the seller or the Mortgage loans are made up of personal rights and real rights. It is purchaser notify obligors of the sale of receivables in the mortgage itself that constitutes the real right of security and it is order for the sale to be effective against the obligors and/or creditors of the seller? Must the seller or the the principal debt that constitutes the personal right. purchaser obtain the obligors’ consent to the sale of Although there are numerous ways to approach a sale (or cession) receivables in order for the sale to be an effective sale of mortgage loans, the RSA courts have stated that when a claim against the obligors? Does the answer to this question secured by a mortgage loan is to be transferred, the parties require vary if (a) the receivables contract does not prohibit that the real right (constituted by the mortgage bond) and the assignment but does not expressly permit assignment; or personal right (constituted by the loan) must be transferred. (b) the receivables contract expressly prohibits Accordingly, there will be two elements to the transfer of any assignment? Whether or not notice is required to perfect a sale, are there any benefits to giving notice – such as mortgage loan, namely the cession of the loan (being the principal cutting off obligor set-off rights and other obligor debt) and the cession of the relevant mortgage bond. Whilst the defences? cession of the personal right constituted by the loan will be governed by the same principles outlined in questions 4.1 and 4.2, Further to our comments in question 4.1, as a general rule, a cession in order for a cession of a mortgage bond to be valid, registration of of rights may take place without the co-operation, consultation or such cession is required in the relevant Deeds Registry Office consent of an obligor. The question as to whether or not notice is where such mortgage bond was registered. As such, no cession of required to be given by a seller and/or a purchaser to an obligor in mortgage bond shall be valid vis-a-vis third parties until registration order to allow the sale to be effective vis-a-vis the obligor is of same in the relevant Deeds Registry Office has taken place. therefore dependent upon the provisions of the receivables contract Marketable debt securities itself. To the extent the receivables contract is silent on whether or There are certain legislative requirements in respect of the transfer not a cession of the seller’s rights may occur, such rights may, of marketable debt securities. These requirements are dependent on subject to the exceptions listed below, be ceded and transferred the nature of the marketable debt securities in question. without the obligor’s consent. The phrase “marketable debt securities” has various meanings There are, however, certain exceptions to this general rule under under RSA law depending on the particular legislation applicable. common law, including, for example, that a cession will be However, in relation to the transfer of marketable debt securities the unenforceable to the extent that it weakens the obligor’s position or distinction in relation to the legalities required to effect such renders it more onerous than it was prior to such cession taking transfer is largely dependent on whether the debt security is place. As such, the transfer of a portion of the debt resulting in a certificated or uncertificated and whether the marketable debt splitting of claims such that the obligor may be required to face two security is a debenture (or similar instrument) or a preference share. creditors is invalid, save with the obligor’s consent. Furthermore, The requirements for the registration of the transfer of certificated whilst a cession of rights may take place without the obligor’s

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consent, should the seller wish to delegate its obligations under a between the obligor and the seller. The reasoning behind the receivables contract, the obligor’s consent would then be required. requirement that a prohibition on assignment may only occur in In other words, to the extent that parties agree that notice or consent situations where an obligor has a particular interest in restricting the is required before the purchaser can enforce the receivables directly seller’s ability to assign its rights seems to be that an absolute against the obligor, such notice or consent must be given or restriction on the right to assign where no such interest was present obtained (as the case may be). would impede the free-flow of commerce. In the event that the receivables contract is silent, no notice is The RSA courts have extensively considered the requirements of an required to be given to the obligor in order to allow the purchaser to interest on the part of the obligor and in fact there has recently been enforce the receivables directly against the obligor. However, in the some doubt expressed as to whether this additional requirement will event that the obligor is unaware of the fact that the sale of the still apply in circumstances where the restriction on the rights of receivables has taken place, the obligor may continue to validly assignment was contained in the agreement between the obligor and discharge its obligations to the seller instead of the purchaser and the seller at the time the right was created. However, since this South Africa the purchaser would have no recourse against the obligor in this point has not been finally decided, it seems prudent to assume that regard. such interest should be present. The RSA courts have held that the The effect of a provision prohibiting assignment within a need for an obligor to be aware of the seller’s identity will constitute receivables contract is that no valid cession will take place without sufficient interest for a prohibition on assignment to be justified. the requirements of the clause relating to the prohibition of Should an assignment be concluded, notwithstanding a restriction assignment being fulfilled. Any purported assignment contrary to a in the underlying agreement thereto, the seller will remain bound by prohibition in such a receivables contract may be set aside by the the terms of the agreement between itself and the obligor and the party in favour of whom the restriction was stipulated or, in purchaser will not become a party to that agreement and the seller appropriate circumstances, may be treated as a breach of contract. can be liable to the obligor for breach of contract. An obligor who has not been given notice of the sale of the Whether the obligor will be entitled to sue either the seller or the receivables may set off the amounts owed to it by the seller (this is purchaser in circumstances where an assignment was purportedly obviously to the extent that set-off is not precluded between the concluded notwithstanding such prohibition, the obligor would be obligor and the seller) until such time as it is given proper notice of entitled, assuming prohibition on assignment was stipulated in its the sale and thereby required to discharge its obligations under the favour, to either set the assignment aside or, to the extent that it has receivables directly to the purchaser and not to the seller. suffered damages as a result thereof, sue the seller, being the party in breach of its obligations to the obligor, for damages.

4.5 Notice Mechanics. If notice is to be delivered to obligors, whether at the time of sale or later, are there any 4.7 Identification. Must the sale document specifically identify requirements regarding the form the notice must take or each of the receivables to be sold? If so, what specific how it must be delivered? Is there any time limit beyond information is required (e.g., obligor name, invoice which notice is ineffective – for example, can a notice of number, invoice date, payment date, etc.)? Do the sale be delivered after the sale, and can notice be receivables being sold have to share objective delivered after insolvency proceedings against the obligor characteristics? Alternatively, if the seller sells all of its have commenced? Does the notice apply only to specific receivables to the purchaser, is this sufficient receivables or can it apply to any and all (including future) identification of receivables? receivables? Are there any other limitations or considerations? The sale document should, as far as practically possible, identify the receivables sold with sufficient particularity to enable such The form, method and time of delivery of a notice to an obligor will receivables to be easily identified. To this end, it is prudent to depend entirely on the terms and conditions of the receivables include as much information in relation to the receivables to allow contract. Generally there are no time limits in which notice has to for easy identification from amongst the ambit of receivables being be given and it can be given after the sale and after insolvency sold. This could include information such as, inter alia, obligor’s proceedings have commenced against the obligor. Notice must be name, description of receivables, account numbers, invoice given in such a way that the obligor receives effective notice which numbers and any and all such other information to allow for the can be achieved through registered mail, electronic mail or normal ease of identification thereof. It is not incumbent that the postal delivery. Notice applies to all receivables. receivables being sold are to share objective characteristics. For so long as the seller and the purchaser have agreed on the scope of the receivables to be sold, which are easily identifiable and in relation 4.6 Restrictions on Assignment; Liability to Obligor. Are restrictions in receivables contracts prohibiting sale or to which particulars can be included or set out within the sale assignment generally enforceable in South Africa? Are agreement and the parties are in agreement on the sale thereof, same there exceptions to this rule (e.g., for contracts between would be in order. commercial entities)? If South Africa recognises To the extent that the seller sells “all” of its receivables to the prohibitions on sale or assignment and the seller purchaser, this would be sufficient identification of the receivables, nevertheless sells receivables to the purchaser, will either subject thereto that the receivables are once again easily identifiable the seller or the purchaser be liable to the obligor for amongst the seller’s assets. breach of contract or on any other basis?

RSA law recognises that rights and obligations may be rendered incapable of assignment in situations where the obligor has a particular interest in restricting the seller’s ability to assign its rights and obligations. Such prohibitions against assignment would, in such circumstances, be contained in the underlying agreement

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4.8 Respect for Intent of Parties; Economic Effects on Sale. 4.10 Future Receivables. Can the seller commit in an If the parties denominate their transaction as a sale and enforceable manner to sell receivables to the purchaser state their intent that it be a sale will this automatically be that come into existence after the date of the receivables respected or will a court enquire into the economic purchase agreement (e.g., “future flow” securitisation)? If characteristics of the transaction? If the latter, what so, how must the sale of future receivables be structured economic characteristics of a sale, if any, might prevent to be valid and enforceable? Is there a distinction the sale from being perfected? Among other things, to between future receivables that arise prior to or after the what extent may the seller retain (a) credit risk; (b) seller’s insolvency? interest rate risk; and/or (c) control of collections of receivables without jeopardising perfection? It is a well accepted principle of RSA law that future rights can be ceded and transferred in anticipation of a coming into existence. The RSA courts will always consider the substance of an agreement Whilst the agreement to cede the future or contingent rights take South Africa over its form and will give effect to the true intention of the effect immediately (in that it creates rights and obligations between contracting parties regardless of how the parties denominate their the parties to such cession), the transfer of such rights to the transaction. cessionary only occurs once the future or contingent rights come The regulations to the Banks Act, 1990 (“Banks Act”) which into existence. As such, should a cedent be liquidated prior to a addresses securitisation transactions (“Securitisation right coming into existence, the liquidator of the cedent may elect Regulations”) set out requirements relating to the disassociation by not to transfer the future right to the cessionary upon such right the seller of its risk into the receivables which are generally actually coming into existence. considered to be the requirements which should be fulfilled in order for a sale to occur. These requirements include: 4.11 Related Security. Must any additional formalities be 4.8.1 the seller, being the originator, is required to be totally fulfilled in order for the related security to be transferred divested of all rights and obligations originating from the concurrently with the sale of receivables? If not all underlying transactions and risks in connection with the related security can be enforceably transferred, what assets transferred; and methods are customarily adopted to provide the 4.8.2 the purchaser may have no rights of recourse against the purchaser the benefits of such related security? seller in respect of losses incurred in connection with an asset after its transfer, unless same was pursuant to a breach of To concurrently transfer the related security with the sale of warranty, provided that the warranties given by the seller receivables, the related security similarly has to be ceded by way of a may not relate to the future creditworthiness of the cession in securitatem debiti and no additional formalities are required. underlying obligor. In addition to the foregoing, the Securitisation Regulations: 5 Security Issues 4.8.3 require that a risk relating to an asset may only be transferred if the transfer would not result in a breach of the underlying relevant transaction; 5.1 Back-up Security. Is it customary in South Africa to take 4.8.4 require that the transfer has to be of such a nature that should a “back-up” security interest over the seller’s ownership there be any amendment in the underlying terms of the interest in the receivables and the related security, in the underlying transaction, such amendment would be effective event that the sale is deemed by a court not to have been as between the purchaser and the relevant obligor and would perfected? not be effective vis-a-vis the transferring institution; 4.8.5 place limitations on the circumstances in which assets No, the concept of taking “back-up” security over the seller’s transferred to the seller could be repurchased or replaced ownership interest in the receivables and the related security is not with other assets; and customary. 4.8.6 require that where the payments in respect of the assets are routed to the purchaser through a seller acting in a primary 5.2 Seller Security. If so, what are the formalities for the role (such as a collection agent), such institution is not to be seller granting a security interest in receivables and under any obligation to remit the funds to the purchaser related security under the laws of South Africa, and for unless and until the payments are actually received from the such security interest to be perfected? underlying obligor.

See our response to question 5.1. 4.9 Continuous Sales of Receivables. Can the seller agree in an enforceable manner (at least prior to its insolvency) to continuous sales of receivables (i.e., sales of receivables 5.3 Purchaser Security. If the purchaser grants security over as and when they arise)? all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities must the purchaser comply with in South Africa to grant A seller can agree, in an enforceable manner, to continuous sales of and perfect a security interest in purchased receivables receivables. It is common practice in such agreements for the seller governed by the laws of South Africa and the related to sell to the purchaser all current and future receivables owned or security? acquired by the seller. However, in the event of the insolvency of the seller, the liquidator of its insolvent estate will have the choice In order to grant a security interest in accounts receivables under to either abide by the contract or to repudiate the contract. RSA law, the accounts receivable (which we have for the purpose hereof assumed to only be incorporeal rights) must by ceded by way of a cession in securitatem debiti (i.e. a security cession). There is currently debate in South Africa as to whether a cession in securitatem debiti should be given the construction of an out and out cession or whether it should be given the construction of a

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pledge. Recent decisions have, however, indicated that a cession in Deeds Registry Office, the security granted by such cession securitatem debiti is of a nature of an out and out cession as will not be effective as against third parties; and indicated by the fact that the cessionary must, after the extinction of 5.5.3 a cession or pledge of dematerialised securities, in terms of the principal debt, re-cede the rights which are subject to the cession the Security Services Act (specifically section 43), must be in securitatem debiti back to the cedent. effected by entering same into the relevant central securities account or securities account of the applicable pledgor or As such, we are of the view that the most likely construction the cedent (as the case may be) in favour of the cessionary RSA courts would give to a cession in securitatem debiti is that of specifying the name of the cessionary, the interest in the an out and out cession and the only formalities which would be relevant securities ceded and the date. required in order to perfect such security would be those referred to In respect of insurance policies, the insurer should be given notice in question 4.2 relating to the formalities required for an out and out and should endorse the necessary cession or pledge against the cession. It would not be necessary to meet any additional

insurance policy. South Africa formalities in order to perfect the security. What should be noted, however, is that a cession in securitatem debiti has generally been considered in RSA to be an ancillary 5.6 Trusts. Does South Africa recognise trusts? If not, is obligation and as such there must be some causa (or interest) for the there a mechanism whereby collections received by the seller in respect of sold receivables can be held or be cedent to grant such security interest in favour of the seller. deemed to be held separate and apart from the seller’s own assets until turned over to the purchaser? 5.4 Recognition. If the purchaser grants a security interest in receivables governed by the laws of South Africa, and RSA law does recognise trusts and the concept that one person can that security interest is valid and perfected under the laws hold assets in trust and on behalf of and for the benefit of another of the purchaser’s country, will it be treated as valid and person. Collections are usually received by the seller in its general perfected in South Africa or must additional steps be collections account. To prevent co-mingling risk, sweeping taken in South Africa? mechanisms are usually applied in respect of which collections in relation to receivables sold are transferred on a periodic basis (i.e. The general rule is that the parties to an agreement may, subject to daily, weekly or monthly) to the purchaser. A separate collections certain limitations, choose the law that is to govern such agreement account can also be created. and, accordingly, such general rule would be equally applicable to the granting of any security. However, where there are specific statutory requirements (for example, registration in the applicable 5.7 Bank Accounts. Does South Africa recognise escrow Deeds Registry Office or the like), any security interest, in order to accounts? Can security be taken over a bank account be enforceable in South Africa will, notwithstanding that it may be located in South Africa? If so, what is the typical method? Would courts in South Africa recognise a foreign-law governed by the provisions of a foreign law, have to comply with grant of security (for example, an English law debenture) any statutory requirements. So, should a purchaser wish to grant a taken over a bank account located in South Africa? cession in security over a mortgage bond registered as security for a principal debt, such cession, notwithstanding that it may be The RSA does recognise escrow accounts, whilst the concept is not governed by a foreign law, would only be recognised in South commonly used within the RSA. Africa if the cession of such mortgage bond was registered in the applicable Deeds Registry Office. Security can be taken over bank accounts located in the RSA. Once again, it is common for a cession in securitatem debiti agreement, on the basis as discussed in question 5.3, to be provided, pursuant 5.5 Additional Formalities. What additional or different to which all of the cedent’s rights, title and interest in and to the requirements apply to security interests in or connected to bank account set out within the cession document is ceded by the insurance policies, promissory notes, mortgage loans, cedent to and in favour of a cessionary. consumer loans or marketable debt securities? RSA courts will recognise a foreign-law grant of security taken over As indicated in question 5.3, in order to grant a security interest in a bank account located in the RSA, however, enforcement against respect of incorporeal rights, the parties would conclude a cession that bank account will have to comply with RSA laws. in securitatem debiti agreement whereby all of the cedent’s rights, title and interest in and to the applicable incorporeal rights would be 6 Insolvency Laws ceded as security for an underlying interest or debt. As also indicated in question 5.3, the requirements for a cession in 6.1 Stay of Action. If, after a sale of receivables that is securitatem debiti to be validly effected are the same as those for out otherwise perfected, the seller becomes subject to an and out cessions described in question 4.1. As such, in order to grant insolvency proceeding, will South Africa’s insolvency laws security over the rights comprised in the applicable promissory notes, automatically prohibit the purchaser from collecting, mortgage loans or marketable debt securities, a cession in securitatem transferring or otherwise exercising ownership rights over debiti would be the applicable construction. However, in addition to the purchased receivables (a “stay of action”)? Does the the aforegoing, certain additional statutory requirements will be insolvency official have the ability to stay collection and required to be fulfilled in regard to granting security in relation to: enforcement actions until he determines that the sale is 5.5.1 a promissory note, due to the nature of a promissory note, perfected? Would the answer be different if the delivery of the promissory note, is of great evidential value; purchaser is deemed to only be a secured party rather than the owner of the receivables? 5.5.2 a mortgage bond, in respect of which the relevant cession in securitatem debiti would be required to be registered in the If there has been a valid sale, the receivables will form part of the applicable Deeds Registry Office where the original mortgage bond was registered. Until such time as such purchaser’s estate and as such there will be no prohibition on the cession in securitatem debiti is registered in the applicable purchaser collecting, transferring or otherwise exercising its

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ownership rights over the receivables provided that the sale and “suspect” or “preference” period prior to the commencement transfer of the assets could not be set aside by either a liquidator or of the insolvency of the seller are those transactions which creditor of the seller upon the insolvency of the seller. constitute impeachable transactions under RSA insolvency law. Impeachable transactions are voidable at the instance of If, however, the purchaser is deemed to only be a secured party the relevant insolvency official but will stand until such time rather than the owner of the receivables, the receivables would form as they are actually set aside by an RSA court or by an part of the seller’s estate and the liquidator would be responsible for agreement between the relevant insolvency official and the the collection of all proceeds under the receivables. The purchaser other contracting parties. The Insolvency Act, 1936 would be required to lodge a claim with the liquidator and would be (“Insolvency Act”) makes provision for the setting aside of entitled, once the seller’s estate is wound up, to be paid out of the impeachable transactions in the following circumstances: estate before any preferent or concurrent creditors. 6.3.1.1 where an insolvency official proves that at any time It must be noted that the business rescue process has recently been before the liquidation of the insolvent estate, the South Africa incorporated into RSA law. Business rescue proceedings allows for insolvent made a disposition of its property and that immediately after such disposition the insolvent’s the rehabilitation of a company that is financially distressed by liabilities exceeded its assets, the disposition may be providing for the temporary supervision of the company, and of the set aside by the court if the insolvency official is able management of its affairs, business and property as well as for a to prove that the disposition was not made for value. temporary moratorium on the rights of claimants against the Alternatively, where an insolvency official proves that company or in respect of property in its possession. at any time within two years of the liquidation of the During business rescue proceedings and despite any provision of an insolvent, the insolvent made a disposition of its agreement to the contrary, the business rescue practitioner may: property (again not for value) such disposition may be set aside unless the person who benefited as a result of 6.1.1 entirely, partially or conditionally suspend, for the duration the alleged disposition proves that immediately after of the business rescue proceedings, any obligation of the the alleged disposition was made the insolvent’s assets company that: exceeded its liabilities; 6.1.1.1 arises under an agreement to which the company was 6.3.1.2 a disposition made by an insolvent prior to its a party at the commencement of the business rescue liquidation could be attacked in circumstances where proceedings; and the disposition was effected not more than six months 6.1.1.2 would otherwise become due during those preceding the date of such liquidation and had the proceedings; or effect of preferring one creditor of the insolvent over 6.1.2 apply urgently to a court to entirely, partially or conditionally another and, in addition, immediately succeeding such cancel, on any terms that are just and reasonable in the disposition the liabilities of the insolvent exceeded its circumstances, any agreement to which the company is party. assets. Again, in such circumstances, such disposition may be set aside by an RSA court unless the entity in If a business rescue practitioner suspends a provision of an whose favour the disposition was made proves that the agreement relating to security granted by the company, that disposition was made in the ordinary course of provision will nevertheless continue to apply, with respect to any business of the insolvent and that the disposition was proposed disposal of property by the company. not intended to prefer one creditor over another; and 6.3.1.3 a transfer of receivables could be attacked on the 6.2 Insolvency Official’s Powers. If there is no stay of action basis where, prior to the insolvency of the seller, the under what circumstances, if any, does the insolvency transfer was effected in collusion (that is with official have the power to prohibit the purchaser’s fraudulent intent) with another person and in such a exercise of rights (by means of injunction, stay order or manner that it had the effect of prejudicing the other action)? creditors of the insolvent or alternatively preferring one creditor over another. As discussed in question 6.1, the concept of “automatic stay” relates 6.3.2 Under the common law, a disposition may also be set aside to the seller’s estate upon the insolvency of the seller and not the estate where the creditors of the insolvent can prove that: of the purchaser. As such, the question of whether or not there is an 6.3.2.1 the disposition reduced the assets of the insolvent; automatic stay is not linked to whether the insolvency official of the 6.3.2.2 the insolvent and the purchaser or entity in favour of seller could prohibit the exercise of the rights of the purchaser (by whom the disposition was made had a common means of injunction or otherwise) but rather as to whether the actual intention to defraud or prejudice the creditors of the transfer of the receivables by the seller to the purchaser could be insolvent; and attacked on any of the basis set out in question 6.3. 6.3.2.3 the prejudice to the insolvent’s creditors was caused by the fraud referred to in question 6.3, paragraph Again, as stated in question 6.1, to the extent that there has been a 6.3.2.2. valid sale, there would be no basis upon which an insolvency official could prohibit the exercise by the purchaser of any rights under the 6.3.3 The sale of receivables by a seller could, in addition, be attacked under section 34 of the Insolvency Act if the receivables by means of injunction, stay order or otherwise. relevant notices required by the aforesaid section are not given. Briefly, section 34 of the Insolvency Act provides that 6.3 Suspect Period (Clawback). Under what facts or if a trader transfers any business belonging to him or the circumstances could the insolvency official rescind or goodwill of such business or any goods or property forming reverse transactions that took place during a “suspect” or part thereof (save in the ordinary course of that business or “preference” period before the commencement of the for the purpose of securing the payment of a debt) and such insolvency proceeding? What are the lengths of the trader has not published a notice of the intended transfer in “suspect” or “preference” periods in South Africa for (a) the Government Gazette within a period of not less than transactions between unrelated parties and (b) thirty and not more than sixty days prior to the date of such transactions between related parties? transfer, the transfer shall be void as against the creditors of the seller for a period of six months after such transfer and in 6.3.1 Transactions which may be reversed or rescinded during a addition shall be void against the insolvency official if the

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estate of the seller is liquidated within such time period. contract which is executory or not completed as at the date on 6.3.4 Lastly, the sale of receivables by the seller could be attacked which the concursus creditorum is instituted), the liquidator of the on the basis that the sale does not constitute a “true sale” but seller will have an election to either abide by the agreement or to rather constitutes a simulated transaction, that is a pre- repudiate its obligations under same. ordained transaction having no real commercial purpose Should the liquidator elect to abide by the agreement, the agreement other than the removal of assets from the estate of the seller and all the obligations thereunder will be enforceable. Should the (and that the creditors of the seller) upon or preceding the insolvency of the seller. liquidator elect to terminate the agreement, the purchaser will be entitled to lodge a claim for damages against the seller’s estate and Please take cognisance thereof that the Insolvency Act does not will rank as a concurrent creditor, entitling the purchaser to share in distinguish between the lengths of the “suspect” or “preference” the free residue. period in relation to transactions between unrelated parties and/or

transactions between related parties. South Africa 7 Special Rules 6.4 Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official 7.1 Securitisation Law. Is there a special securitisation law consolidate the assets and liabilities of the purchaser with (and/or special provisions in other laws) in South Africa those of the seller or its affiliates in the insolvency establishing a legal framework for securitisation proceeding? transactions? If so, what are the basics?

An insolvency official could attend to consolidate the assets and Within the RSA, securitisation transactions are regulated pursuant liabilities of the purchaser with those of the seller where such to the Securitisation Regulations, published under Government official attacks the sale of the assets on the basis that such sale does Notice 2 in Government Gazette 30628 of 1 January 2008. not constitute a “true sale” but rather constitutes a simulated These regulations were promulgated as an exception to certain transaction. In this context, a simulated transaction would mean a provisions of the Banks Act 94 of 1990, which requires for certain pre-ordained transaction having no real commercial purpose other conduct to be regarded as the “business of a bank” and which would than the removal of the assets of the creditors of the seller upon or require registration as a bank. preceding an insolvency of the seller. The Securitisation Regulations regulate the corporate status, The only circumstances where the assets and liabilities of the ownership and control of an issuer of commercial paper under a purchaser would be consolidated with those of the seller or its securitisation transaction. affiliates would be in circumstances where the corporate veil (i.e. the separate legal identity) of the purchaser and the seller would be Please see our further comments below. pierced and, as such, the purchaser and seller would really be considered to be a single legal entity. Whilst the concept of separate 7.2 Securitisation Entities. Does South Africa have laws legal personality of a company is recognised and empowered in specifically providing for establishment of special purpose RSA law (save in exceptional circumstances) and the RSA courts entities for securitisation? If so, what does the law have no discretion to disregard the existence of a separate corporate provide as to: (a) requirements for establishment and identity where it is simply convenient to do so, the RSA courts management of such an entity; (b) legal attributes and would generally, however, pierce the corporate veil, between benefits of the entity; and (c) any specific requirements as to the status of directors or shareholders? holding and wholly owned subsidiary companies where there is an element of fraud or other improper conduct in the establishment or In terms of the Securitisation Regulations, an issuer of commercial use of such subsidiary company or the conduct of its affairs. In this paper is required to be a vehicle (either a trust or a company) which regard the words “device”, “strategy”, “cloak” and “sham” have is insolvency remote. For purposes of the Securitisation been used to describe the nature of transactions where the corporate Regulations, “insolvency remote” means that the assets of the veil will be lifted. As such, assuming the transfer and sale of the relevant issuer must not be subject to any claim from the institution receivables is on commercial terms, without fraud or intention to transferring such assets (i.e. the seller) whether as a result of the defraud and assuming that the purchaser is operating as a self seller’s insolvency or otherwise. standing separate, and independent legal entity to the seller, there would seem to be no basis upon which the corporate veil should be In addition, an issuer is required to have an independent board of pierced and accordingly upon which the assets and liability of the directors (or in the case of a trust, trustees). However, the purchaser and the seller will be consolidated upon the insolvency of Securitisation Regulations do permit an institution acting in a primary the seller. role (i.e. a sponsor, originator or the like) to appoint one director to the board of directors of such issuer (or in the case of a trust, a single trustee) provided that in such circumstances the board of directors or 6.5 Effect of Proceedings on Future Receivables. What is the trustee (as applicable) comprises at least three persons. effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on Further, in addition to the foregoing, the Securitisation Regulations sales of receivables that have not yet come into stipulate that: existence? 7.2.1 the name of an issuer of commercial paper may not be associated or linked to the name of the bank which is acting Liquidation of a company does not terminate an executory contract as sponsor or arranger in respect of the relevant securitisation lying outside the categories specifically covered by the Insolvency scheme; Act, but the liquidator cannot be forced to render specific 7.2.2 institutions acting in a primary role (i.e. as sponsor, performance in terms of the contract. originator or the like), to hold (directly or indirectly) no more than 20% of the equity share capital, (in the case of a To the extent that any agreement to sell any future receivables company), or 20% of the interest, beneficial or otherwise (in obtained by the seller constitutes an executory contract (i.e. a the case of a trust); and

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7.2.3 no institution acting in a primary role (as described above) from taking any other specified action without the affirmative vote may have the right to determine the outcome of voting at any of an independent director, is given effect, consideration should be meeting of the issuer. had to the provision of section 20 of the Companies Act, which provides that if a company’s memorandum of incorporation limits, 7.3 Non-Recourse Clause. Will a court in South Africa give restricts or qualifies the purposes, powers or activities of that effect to a contractual provision (even if the contract’s company, no action of the company is void by reason only that the governing law is the law of another country) limiting the action was prohibited by that limitation, restriction or qualification recourse of parties to available funds? or as a consequence of that limitation, restriction or qualification, the directors had no authority to authorise the action by the As a general rule the courts will not interfere in an individual’s right company. Furthermore, section 20 provides that in any legal to vary or discharge their contract as they deem fit and, accordingly, proceeding, other than proceedings between the company and its

South Africa the parties to an agreement may limit the recourse of parties to shareholders, directors or prescribed officers, or the shareholders available funds. However, the courts have a discretion, albeit one and directors or prescribed officers of the company, no person may which is exercised sparingly, to set aside a contractual provision rely on such limitation, restriction or qualification to assert that an which it deems to be unfair, unreasonable or unjust (i.e. against action is void. However, whilst a company cannot escape liability public policy). on the grounds of lack of capacity or power, the company may be The CPA provides that a supplier must not offer to supply or enter able to assert that the act in question was beyond the authority of the into an agreement to supply, any goods or services on terms that are directors of the company. Where the memorandum of incorporation unfair, unreasonable or unjust or require a consumer, or other not only limits the power and capacity of the company, but also person to whom any goods or services are supplied at the direction limits the power and capacity of the organs of the company of the consumer to waive any rights or waive any liability of the (including the board of directors of the company), as the supplier on terms that are unfair, unreasonable or unjust, or impose memorandum of incorporation of a company is a public document, any such terms as a condition of entering into a transaction. a person who dealt with the company’s directors would be prevented from asserting the lack of authority of such directors. In terms of the CPA, a transaction or agreement, a term or condition of a transaction or agreement, or a notice to which a term or In light of the foregoing, the provisions in the memorandum of condition is purportedly subject, is unfair, unreasonable or unjust if incorporation of the SPV, which purport to ring fence the objects of it is excessively one-sided in favour of any person other than the the company, must, in addition, limit the power and capacity of consumer or other person to whom goods or services are to be directors to commence an insolvency proceeding against the supplied or the terms of the transaction or agreement are so adverse company in order for such clause to be valid and enforceable. to the consumer as to be inequitable. 8 Regulatory Issues 7.4 Non-Petition Clause. Will a court in South Africa give effect to a contractual provision (even if the contract’s 8.1 Required Authorisations, etc. Assuming that the governing law is the law of another country) prohibiting purchaser does no other business in South Africa, will its the parties from: (a) taking legal action against the purchase and ownership or its collection and enforcement purchaser or another person; or (b) commencing an of receivables result in its being required to qualify to do insolvency proceeding against the purchaser or another business or to obtain any licence or its being subject to person? regulation as a financial institution in South Africa? Does the answer to the preceding question change if the 7.4.1 Such a clause is often utilised by the parties to a purchaser does business with other sellers in South securitisation transaction, however, there is some concern Africa? that such a clause may be found to be contrary to public policy in that it deprives a creditor of its right to enforce his claim against the relevant debtor in a court of law. Whilst the The question of whether the purchase, ownership or collection and court has a discretion to refuse to allow a contract to be enforcement of receivables would result in a purchaser being enforced where the court considers that such enforcement required to qualify to do business or obtain any licence in South would be contrary to public policy, it has been held that no Africa or being subject to regulation as a financial institution in court should shrink from the duty of declaring a contract RSA will depend entirely on the nature of the business in question contrary to public policy when the occasion so demands. and the particular facts and circumstances. We therefore cannot express a general view in relation to this issue. 7.5 Independent Director. Will a court in South Africa give effect to a contractual provision (even if the contract’s 8.2 Servicing. Does the seller require any licences, etc., in governing law is the law of another country) or a provision order to continue to enforce and collect receivables in a party’s organisational documents prohibiting the following their sale to the purchaser, including to appear directors from taking specified actions (including before a court? Does a third party replacement servicer commencing an insolvency proceeding) without the require any licences, etc., in order to enforce and collect affirmative vote of an independent director? sold receivables?

As discussed in questions 7.3 and 7.4, the parties to an agreement may No, however, depending on the nature of its business, the seller may vary or discharge their contract as they deem fit, provided that such require a general licence (i.e. be registered as a bank under the agreement does not offend public policy. Accordingly, the parties to Banks Act or be registered in terms of the Financial Advisory and an agreement may prohibit directors from taking specified actions. Intermediary Services Act 37 of 2002). Furthermore, the seller In determining whether a provision, which provides that the would be required to register as a debt collector and to comply with directors or managers will not commence an insolvency proceeding the provisions contained in the Debt Collectors Act 114 of 1998. unless required under applicable law, or which prohibits a director

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8.3 Data Protection. Does South Africa have laws restricting affecting exchange controls in the RSA is founded upon and the use or dissemination of data about or provided by is to be discerned from: obligors? If so, do these laws apply only to consumer 8.5.1.1 the Currency and Exchanges Act, 1933; obligors or also to enterprises? 8.5.1.2 the RSA Exchange Control Regulations (“Excon Regulations”) issued in terms of section 9 of the There is currently no formal legislation in South Africa regulating Currency and Exchanges Act; data privacy, however the Protection of Personal Information Bill 8.5.1.3 the orders and rules issued under the Excon (“POPI”), which is expected to come into force during the course Regulations; of this year, aims to safeguard personal information by regulating 8.5.1.4 the delegation to the exchange control department of the manner in which it may be processed, retained and destroyed. the South African Reserve Bank (“Excon”) of most of POPI introduces information protection principles so as to establish the powers, functions and duties assigned to and minimum requirements for the processing of personal information imposed upon the Treasury by the Excon Regulations; South Africa and to regulate the flow of personal information across the borders 8.5.1.5 the system of appointment of authorised dealers of the RSA. Once POPI is legislated, any purchaser or seller would (“Authorised Dealers”) (certain banks who co- be required to comply with the provisions of the act. A failure to administer certain of the Exchange Controls in terms comply with the Act could result in imprisonment or an of the exchange control rulings) in foreign exchange; administrative fine of up to ZAR 1,000,000. and In the interim, the Constitution of the Republic of South Africa Act, 8.5.1.6 the issue by Excon of the exchange control rulings 1996 (“Constitution”) and the common law places certain restrictions (“Excon Rulings”) which are from time-to-time amended by circulars. on the processing and disclosure of personal information. An obligor’s “personal information” would comprise all information 8.5.2 An overview of the legal framework in question 8.5, about the obligor as an identifiable individual, including his or her paragraph 8.5.1 makes it apparent that: identity/passport number, addresses, e-mail addresses, telephone 8.5.2.1 the Excon Regulations contain either an absolute numbers, and salary and other financial details. prohibition or an absolute direction or decree, in each case tempered by a provision creating the possibility The common law right to privacy encompasses the competence of of exemptions and/or permissions to be granted by individuals to determine the destiny of personal information. The Treasury (and thus Excon by virtue of the delegation individual concerned is entitled to dictate the ambit and method of referred to in question 8.5, paragraph 8.5.1.4), in disclosure. Similarly, a person is entitled to decide when and under respect of the export of capital and/or revenue from what conditions personal information may be made public. the RSA and/or the dealing in foreign exchange; Although RSA courts recognise that juristic entities and enterprises 8.5.2.2 the Excon Rulings contain the conditions, permissions have a right to privacy (especially in relation to the enterprise’s and limits applicable to transactions in foreign reputation), the extension of the right to enterprises is approached exchange which may be undertaken by Authorised Dealers, on behalf of their clients, as well as details of cautiously and the law in this regard remains undefined. related and administrative responsibilities. Residents The Electronic Communications and Transactions Act, 2002 of the RSA are restricted in their ability to export (“ECTA”) contains principles that apply to personal information that capital and/or deal in foreign currency and may only is collected electronically (through websites, e-mail, facsimile and the do so, pursuant to the Excon Rulings, to the extent that like). Adherence to the principles set out in ECTA is voluntary (there it can be demonstrated or is accepted that it is to the is no penalty for non-compliance). Nonetheless, these principles are benefit of the RSA; and based on international fair and lawful data processing standards and 8.5.2.3 aspects of Exchange Control which fall outside the provide an indication of what may ultimately be required in the ambit of the Excon Rulings must be referred by anticipated privacy and data protection legislation. Authorised Dealers to Excon which has the power, in specific cases referred to it by Authorised Dealers for From a regulatory perspective, it is advisable to adhere to the consideration, to grant permissions and/or exemptions principles outlined in ECTA and to bear in mind the legal risk of subject to such conditions which Excon itself imposes litigation instituted by obligors on the basis of the unauthorised use, in regard to any such matter. disclosure or processing of personal information under the 8.5.3 The Excon Regulations, Orders and Rules and the Excon Constitution and the common law. Rulings set out the only permissible manner in which a resident is entitled to export capital from the RSA and/or deal in or acquire foreign currency. 8.4 Consumer Protection. If the obligors are consumers, will the purchaser (including a bank acting as purchaser) be 8.5.4 Exchange Controls only apply to residents of the RSA and required to comply with any consumer protection law of non-residents have been granted general approval (subject to South Africa? Briefly, what is required? certain administrative requirements), pursuant to the Excon Rulings, to deal in RSA assets and to freely invest in and disinvest from the RSA. This general approval, in respect of A purchaser of consumer receivables (whether a bank or otherwise) non residents, would include the entitlement by non- will be required to comply with the provisions of the consumer residents to exchange the currency of the RSA for foreign protection legislation in the RSA, such as the NCA and the CPA. currency when disinvesting from the RSA. Notwithstanding See question 1.2 above. this general approval, residents of the RSA who wish to allow investments by non-residents in RSA debt securities, are required, when doing so, to comply with the requirements 8.5 Currency Restrictions. Does South Africa have laws of the Excon Rulings and in particular the securities control restricting the exchange of South Africa’s currency for provisions thereof. These requirements include, inter alia, other currencies or the making of payments in South residents obtaining the prior approval of Excon before Africa’s currency to persons outside the country? issuing or listing any form of debt security which may be invested in and/or acquired by a non-resident. 8.5.1 The precise nature and content of the legal framework

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9 Taxation 9.5 Purchaser Liability. If the seller is required to pay value added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give 9.1 Withholding Taxes. Will any part of payments on rise to the receivables) and the seller does not pay, then receivables by the obligor to the seller or the purchaser will the taxing authority be able to make claims for the be subject to withholding taxes in South Africa? Does the unpaid tax against the purchaser or against the sold answer depend on the nature of the receivables, whether receivables or collections? they bear interest, their term to maturity, or where the seller or the purchaser is located? Not in terms of the legislation which regulates VAT in South Africa. The entity liable for VAT will be the seller. Currently there is no withholding tax on interest under RSA law, whether domestic or international. However from 1 January 2013, South Africa there will be withholding tax on foreign interest payments, subject 9.6 Doing Business. Assuming that the purchaser conducts to double taxation agreements, at a rate of 15%. There will be no no other business in South Africa, would the purchaser’s purchase of the receivables, its appointment of the seller local withholding tax on interest payments. as its servicer and collection agent, or its enforcement of the receivables against the obligor, make it liable to tax in 9.2 Seller Tax Accounting. Does South Africa require that a South Africa? specific accounting policy is adopted for tax purposes by the seller or purchaser in the context of a securitisation? Yes, but only if the purchaser is earning income, for example, it acquires interest bearing receivables or other receivables at a No, it does not. discount. If the purchaser is a non-resident, such purchaser will pay tax on income regarded from an RSA source, such as interest. Further activities may result in such a purchaser creating a 9.3 Stamp Duty, etc. Does South Africa impose stamp duty or other documentary taxes on sales of receivables? permanent establishment.

No, stamp duty was previously payable on the cession of insurance Acknowledgment policies but has been abolished. Transfers of shares will attract We would like to gratefully acknowledge the assistance of Leon securities transfer tax. Rood, Ina Meiring and Megan Lawrence in the preparation of this chapter. 9.4 Value Added Taxes. Does South Africa impose value added tax, sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for collection agent services?

There is value added tax (“VAT”) on sales of goods or services and on fees. Generally speaking, a sale of a receivable is an exempt financial service. Where the receivable arose out of a sale of goods or services which included VAT, and the receivable is sold without recourse, and the receivable becomes irrecoverable thereafter, the seller of the receivable may not reclaim the VAT contained therein, but the purchaser would, if it is registered for VAT, have that right. Where the receivable is sold with recourse and becomes irrecoverable, and is ceded back to the seller of the receivable, the seller can at that stage reclaim the VAT.

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Richard Roothman Tracy-Lee Janse van Rensburg

Werksmans Attorneys Werksmans Attorneys 155, 5th Street, Sandton 155, 5th Street, Sandton Sandown 2196 Sandown 2196 South Africa South Africa

Tel: +27 11 535 8115 Tel: +27 11 535 8227 Fax: +27 11 535 8715 Fax: +27 11 535 8527 Email: [email protected] Email: [email protected] URL: www.werksmans.com URL: www.werksmans.com

Areas of Practice Areas of Practice

Securitisation, Debt Capital Markets, Structured Finance, Securitisation, Debt Capital Markets, Structured Finance, South Africa Syndicated Lending, Leveraged Finance, Exchange Control, Syndicated Lending, Leveraged Finance and General Project Finance and General Commercial Work. Commercial Work. Qualifications Qualifications BCom LLB (Pretoria, RSA). BCom LLB (University of Johannesburg, RSA). LLM (Cornwell, USA). Various diploma courses. LLM (Tax) (Witwatersrand, RSA). History History Tracy was admitted as an attorney in 1998 and joined Richard was admitted as an attorney in 1997 and as a member of Werksmans in 2008. the New York Bar in 1996. From 1997 to 2000 he worked in the Tracy became a director in the commercial department of Amsterdam office of a major English law firm specialising in Werksmans in March 2010. She is presently part of the firm’s securitisations and debt capital market transactions. Richard banking and finance team. Tracy has acted for some of the major joined Werksmans as a director in the commercial department in financial institutions in South Africa and is mainly involved in the 2007. negotiation and drafting of finance, banking and commercial Richard is presently part of the firm’s banking and finance team transactions with a particular focus on securitisations and the and heads up the firm’s banking and finance practice. He is debt capital market transactions. involved in the negotiation and drafting of finance, banking and commercial transactions with a particular focus on securitisations, debt capital market transactions, project finance, structured finance and leveraged finance transactions. Richard has acted for some of the major financial institutions in South Africa and abroad and has advised arrangers and issuers in respect of residential mortgage backed, store card receivables and auto loan securitisation transactions.

About Werksmans Attorneys Established in the early 1900s, Werksmans Attorneys is a leading South African corporate and commercial law firm serving multinationals, listed companies, financial institutions, entrepreneurs and government. Werksmans operates in Gauteng and the Western Cape and is connected to an extensive African network through Lex Africa*. With a formidable track record in mergers and acquisitions, banking and finance, and commercial litigation and dispute resolution, the firm is distinguished by the people, clients and work that it attracts and retains. Werksmans’ more than 190 lawyers are a powerful team of independent-minded individuals who share a common service ethos. The firm’s success is built on a solid foundation of insightful and innovative deal structuring and legal advice; a keen ability to understand business and economic imperatives; and a strong focus on achieving the best legal outcome for clients. Go to www.werksmans.com for more information. *In 1993, Werksmans co-founded the Lex Africa legal network, which now has member firms in 27 African countries.

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Spain Ramiro Rivera Romero

Uría Menéndez Abogados, S.L.P. Pedro Ravina Martín

1 Receivables Contracts institutions to consumers and associated to a bank account may be drawn upon in excess of the available funds. Any such overdraft shall bear interest at an effective rate which cannot exceed the legal 1.1 Formalities. In order to create an enforceable debt limit of 2.5 times the legal interest rate in force from time to time obligation of the obligor to the seller, (a) is it necessary (the legal interest rate is regularly fixed by the Government on a that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone yearly basis). Similarly, certain public housing-related mortgages sufficient; and (c) can a receivable “contract” be deemed are subject to interest rate limitations or, otherwise, require the use to exist as a result of the behaviour of the parties? of regulated criteria and formulae which result in rate restrictions. Additionally, the Spanish Government has recently approved urgent As a general rule, under Spanish law, agreements need not be measures (Real Decreto-ley 6/2012, of 9 March) whereby Spanish formalised in writing. Verbal agreements and tacit agreements credit entities and professional lenders which elect to be adhered to (those which are construed as a result of the behaviour of the a sort of good practices code proposed by the Government shall be parties) are, as a matter of principle and except for certain types of obliged to temporarily cap the ordinary interest rate applicable to contracts, fully enforceable between the contracting parties. already existing residential mortgage loans granted for the However, the difficulties to evidence the contracting terms and acquisition of properties for a price below certain levels to conditions for verbal and tacit agreements have resulted in a individuals who now evidence to be in an extraordinarily difficult generalised use of written agreements for the sale of goods and situation (as it is legally defined). services. As a result, the Spanish Civil Code favours the written Interest on late payments: Unless the contract between the seller form for contracts and, though not refusing to render valid verbal and the obligor provides otherwise, the Spanish Civil Code agreements, does vest the parties with the right to request written provides that late payments trigger the obligation on the obligor to form from their counterparties. Moreover, specific Spanish pay default interest to the seller, at the legal interest rate and regulations (such as some of those protecting consumers, banking, calculated as from the date the seller demands payment of the etc.) do impose mandatory written form. relevant amount. As they are not usually signed by the recipient, invoices do not per The urgent measures referred to above also provide for a se create an enforceable debt obligation of the obligor to the seller. compulsory (i.e., not subject to adherence to the good practices However, together with other means of evidence, they can help to code by the creditors) cap for default interest applicable to already prove the existence of a contract between the obligor and the seller. existing residential mortgage loans granted to individuals who now evidence to be in an extraordinarily difficult situation (as it is 1.2 Consumer Protections. Do Spanish laws (a) limit rates of legally defined). interest on consumer credit, loans or other kinds of Consumers’ withdrawal rights: Consumers are entitled to cancel receivables; (b) provide a statutory right to interest on late an agreement (and therefore the receivables arising thereunder) if payments; (c) permit consumers to cancel receivables for provided under the applicable sector legislation (for instance, a specified period of time; or (d) provide other noteworthy financial and telecommunications sectors include withdrawal rights rights to consumers with respect to receivables owing by them? in favour of the consumers) or as agreed between the seller and the obligor-consumer. Unless a different term is provided under the Limits on rates of interest: Spanish law does not provide for a applicable sector legislation, consumers are entitled to cancel the specific threshold rate beyond which interest should be generally consumer agreement during a period of seven working days since treated as usurious (which would render the relevant loan or credit the delivery of the goods or the execution of the service agreement provision null and void). The only parameter is set out in the law (as the case may be), provided that the seller duly informed the on Usury Repression, of 23 July 1908, which establishes that loan obligor-consumer of the existence and characteristics of the agreements providing for rates of interest, which exceed by far the withdrawal right (otherwise, the term would be seven working days legal interest, shall be null and void. Over the years, this law has since the information obligations have been duly fulfilled, up to a been applied in a large number of judicial precedents, which maximum of three months since the delivery of the goods or the examine the specific circumstances surrounding each case, thus execution of the service agreement). making it difficult to draw general conclusions. When it comes specifically to consumer financing, Spanish Act Interest rate restrictions apply as well in the context of certain 16/2011, of 25 June, which implements Directive 2008/48/EC, of consumer-related transactions. Credit facilities granted by credit 23 April, provides for a withdrawal right in favour of the obligor- 330 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Uría Menéndez Abogados, S.L.P. Spain

consumer for a period of 14 calendar days as from the later date 2.2 Base Case. If the seller and the obligor are both resident between (i) the date of execution of the credit agreement, and (ii) in Spain, and the transactions giving rise to the the date of delivery of certain financial information and terms by receivables and the payment of the receivables take the credit institution to the consumer. place in Spain, and the seller and the obligor choose the law of Spain to govern the receivables contract, is there any reason why a court in Spain would not give effect to 1.3 Government Receivables. Where the receivables their choice of law? contract has been entered into with the government or a government agency, are there different requirements and No, there is not. laws that apply to the sale or collection of those

receivables? Spain 2.3 Freedom to Choose Foreign Law of Non-Resident Seller Law 30/2007, of 30 October, on public sector contracts, provides for or Obligor. If the seller is resident in Spain but the obligor the legal regime applicable to agreements entered into by the majority is not, or if the obligor is resident in Spain but the seller is not, and the seller and the obligor choose the foreign law of public entities (which would include the general, regional or local of the obligor/seller to govern their receivables contract, administrations, but also public-owned or public-controlled entities, will a court in Spain give effect to the choice of foreign such as organismos autónomos, entidades públicas empresariales and law? Are there any limitations to the recognition of empresas públicas) and third parties. Specific provisions are provided foreign law (such as public policy or mandatory principles therein for the sale and collection of receivables. of law) that would typically apply in commercial That said, the legal regime applicable to the sale of receivables relationships such that between the seller and the obligor arising out of agreements subject to Law 30/2007 is, in substance, under the receivables contract? equivalent to the general regime provided under the Spanish Civil Code (and which shall be described below), including, in particular, Yes, pursuant to the freedom of choice principle established by the need to notify the obligor in order for the assignment to be fully Article 3 of Regulation 593/2008. effective against it. The collection of receivables against public However, application of the Spanish overriding mandatory entities is subject to customary procedures followed by public provisions (i.e., those provisions the respect for which is regarded entities (e.g. the need to have budgetary support for any agreed as crucial by Spain for safeguarding its public interests, such as its payment, applicable sovereign immunity principles, etc.), and is political, social or economic organisation) shall not be limited. usually based in the issuance of payment mandates by the relevant Furthermore, Spanish courts may refuse the application of a entity. Law 30/2007 and other regulations on the payment of provision of the chosen law if such application is manifestly business receivables impose strict payment terms of the Spanish incompatible with Spanish public policy. public administrations and entities, including very onerous late Typically, none of these limitations would apply in commercial payment interest duties. relationships such that between the seller and the obligor under a receivables contract. 2 Choice of Law – Receivables Contracts 2.4 CISG. Is the United Nations Convention on the International Sale of Goods in effect in Spain? 2.1 No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what are the main principles in Spain that will determine the Yes, and it is in force in Spain as from 1 August 1991. governing law of the contract? 3 Choice of Law – Receivables Purchase Under Regulation (EC) No 593/2008 of The European Parliament Agreement and of the Council, of 17 June 2008, on the law applicable to contractual obligations (Rome I) (“Regulation 593/2008”), which is directly applicable in Spain, to the extent that the law applicable 3.1 Base Case. Does Spanish law generally require the sale to the contract has not been chosen by the parties, the law governing of receivables to be governed by the same law as the law the contract shall be in principle determined in light of the nature of governing the receivables themselves? If so, does that the agreement. Pursuant to paragraphs (a) and (b) of Article 4.1 of general rule apply irrespective of which law governs the receivables (i.e., Spanish laws or foreign laws)? Regulation 593/2008, the law governing the contracts for the sale of goods or the provision of services would be, in principle, the law of Pursuant to the freedom of choice principle established by Articles the country where the seller or provider of services has his habitual 3 and 14 of Regulation 593/2008, the sale of receivables can be residence. Having said that, if it is clear from all the circumstances governed by a law different from that governing the receivable of the case that the contract is manifestly more closely connected itself. This notwithstanding, where all other elements relevant to with a country other than that resulting from the application of the situation at the time of the choice are located in a country other Article 4.1 of Regulation 593/2008, the law of that other country than the country whose law has been chosen, the choice of the shall apply. parties shall not prejudice the application of provisions of the law However, where the contract for the sale of goods or the provision of that other country which cannot be derogated from by agreement of services is entered into with obligors qualifying as consumers, it (i.e., the so-called “mandatory provisions”). shall be governed by the law of the country where the consumer has Moreover, Article 14.2 of Regulation 593/2008 establishes that the his habitual residence, provided that the professional (a) pursues his law governing the receivable shall determine (i) its transferability, commercial or professional activities in the country where the (ii) the relationship between the assignee and the debtor, (iii) the consumer has his habitual residence, or (b) by any means, directs conditions under which the assignment can be invoked against the such activities to that country or to several countries including that debtor, and (iv) whether the debtor’s obligations have been country, and the contract falls within the scope of such activities. discharged.

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Likewise, some of the rights and obligations arising under provisions of Regulation 593/2008) would make generally promissory notes, bills of exchange and other types of negotiable advisable the fulfilment of the legal requirements for purposes of instruments executed and delivered in Spain may not be submitted enforceability of the transfer vis-à-vis third parties both under to the laws of a different country. Spanish law and under the law of the location of the obligor, in Where the obligations arising under the receivables are secured by order to ensure recognition by Spanish and obligor’s country courts. security interests on Spanish assets (for instance, a mortgage on real estate located in Spain), mandatory Spanish laws will apply to any 3.4 Example 3: If (a) the seller is located in Spain but the such right in rem, and will govern, inter alia, the perfection and obligor is located in another country, (b) the receivable is foreclosure of the security interest as well as the assignment thereof governed by the law of the obligor’s country, (c) the seller Spain for the benefit of third parties. sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables 3.2 Example 1: If (a) the seller and the obligor are located in purchase agreement, and (e) the sale complies with the Spain, (b) the receivable is governed by the law of Spain, requirements of the obligor’s country, will a court in Spain (c) the seller sells the receivable to a purchaser located in recognise that sale as being effective against the seller a third country, (d) the seller and the purchaser choose and other third parties (such as creditors or insolvency the law of Spain to govern the receivables purchase administrators of the seller) without the need to comply agreement, and (e) the sale complies with the with Spanish own sale requirements? requirements of Spain, will a court in Spain recognise that sale as being effective against the seller, the obligor and Please refer to questions 3.1 and 3.2 as to the law applicable to other third parties (such as creditors or insolvency contractual aspects of the assignment, the conditions under which administrators of the seller and the obligor)? the assignment can be invoked against the obligor and the enforceability of the transfer vis-à-vis third parties. Pursuant to Articles 3 and 14 of Regulation 593/2008, Spanish law would be, in principle, the law applicable to govern the contractual Thus, if the sale complies with the foreign legal requirements for aspects of the sale agreement, as well as the conditions under which such purposes, a Spanish court would recognise the sale as being the assignment can be invoked against the obligor in this Example 1 effective against the seller (such requirements and foreign law need (please refer to question 3.1 above). Thus, if the sale complies with to be duly evidenced to the Spanish court). the Spanish legal requirements for such purposes (please refer to However, the fact that the seller is located in Spain (and in absence questions 4.1 and 4.4), a Spanish court would recognise the sale as of additional development of the provisions of the Regulation being effective against the seller and the obligor. 593/2008) would make generally advisable the fulfilment of the However, Regulation 593/2008 fails to regulate which law should be legal requirements for purposes of enforceability of the transfer vis- considered to determine whether the transfer of the receivables is à-vis third parties both under Spanish law and under the law of the enforceable vis-à-vis third parties (in fact, Article 27.2 of Regulation location of the obligor, in order to ensure recognition by Spanish 593/2008 refers to a report to be prepared by the Commission on this courts. topic as the basis for the amendment of the Regulation). Having said that, taking into account the circumstances of Example 3.5 Example 4: If (a) the obligor is located in Spain but the 1 (all connected to Spain except for the location of the purchaser), seller is located in another country, (b) the receivable is the different solutions on this matter proposed by Spanish scholars governed by the law of the seller’s country, (c) the seller in the past and the discussions in the context for the preparation of and the purchaser choose the law of the seller’s country Regulation 593/2008, it is likely that a Spanish court would to govern the receivables purchase agreement, and (d) the sale complies with the requirements of the seller’s recognise the sale as being effective vis-à-vis third parties if the sale country, will a court in Spain recognise that sale as being complies with the Spanish legal requirements for such purposes effective against the obligor and other third parties (such (please refer to question 4.2). as creditors or insolvency administrators of the obligor) without the need to comply with Spanish own sale 3.3 Example 2: Assuming that the facts are the same as requirements? Example 1, but either the obligor or the purchaser or both are located outside Spain, will a court in Spain recognise Please refer to questions 3.1 and 3.2 as to the law applicable to that sale as being effective against the seller and other contractual aspects of the assignment, the conditions under which third parties (such as creditors or insolvency the assignment can be invoked against the obligor and the administrators of the seller), or must the requirements of enforceability of the transfer vis-à-vis third parties. the obligor’s country or the purchaser’s country (or both) Thus, if the sale complies with the foreign legal requirements for be taken into account? such purposes, a Spanish court would recognise the sale as being effective against the obligor (such requirements and foreign law Please refer to questions 3.1 and 3.2 as to the law applicable to need to be duly evidenced to the Spanish court). contractual aspects of the assignment, the conditions under which the assignment can be invoked against the obligor and the However, the fact that the obligor is located in Spain (and in enforceability of the transfer vis-à-vis third parties. absence of additional development of the provisions of Regulation 593/2008) would make generally advisable the fulfilment of the If the sale complies with the Spanish legal requirements for such legal requirements for purposes of enforceability of the transfer vis- purposes (please refer to questions 4.1 and 4.4), a Spanish court would à-vis third parties both under Spanish law and under the foreign law, recognise the sale as being effective against the seller and the obligor. in order to ensure recognition by Spanish courts. However, the fact that the obligor is located in a jurisdiction other than Spain (and in absence of additional development of the

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3.6 Example 5: If (a) the seller is located in Spain receivables arise from its business activity; (irrespective of the obligor’s location), (b) the receivable is (b) the assignee is a credit entity or a securitisation fund; governed by the law of Spain, (c) the seller sells the (c) the receivables exist at the time of execution of the receivable to a purchaser located in a third country, (d) receivables transfer agreement. However, the sale of the seller and the purchaser choose the law of the “future” receivables is also allowed, provided that those purchaser’s country to govern the receivables purchase receivables arise from the business activity of the seller agreement, and (e) the sale complies with the within a maximum term of one year from the date of requirements of the purchaser’s country, will a court in execution of the agreement or, otherwise, the future debtors Spain recognise that sale as being effective against the are clearly identified in the agreement; seller and other third parties (such as creditors or

insolvency administrators of the seller, any obligor located (d) the assignee pays to the seller, either upon closing or on a Spain in Spain and any third party creditor or insolvency deferred basis, the consideration agreed for the receivables, administrator of any such obligor)? less the costs of the services rendered (i.e., financing, collection, etc.); and Please refer to questions 3.1 and 3.2 as to the law applicable to (e) where the assignment is agreed on a non-recourse basis, contractual aspects of the assignment, the conditions under which there is evidence that the purchaser has paid, in full or in part, the assignment can be invoked against the obligor and the the consideration for the receivables prior to the maturity of enforceability of the transfer vis-à-vis third parties. such receivables. Thus, if the sale complies with the foreign legal requirements for 3. FTA. In accordance with Royal Decree 926/1998, of May 14, on such purposes, a Spanish court would recognise the sale as being Asset-Backed Securitisation Funds, additional requirements apply effective against the seller (such requirements and foreign law need to ordinary assignments made in favour of FTA, a form of regulated to be duly evidenced to the Spanish court). securitisation SPV which, subject to local registration, is allowed to issue asset-backed notes under insolvency-related privileged However, as the seller is located in Spain and the receivable is conditions (please refer to question 6.3). These requirements governed by Spanish law (and in absence of additional development include the following, among others: of the provisions of Regulation 593/2008), it would be generally (a) the transfer of receivables must be agreed on a non-recourse advisable that the legal requirements for purposes of enforceability basis to the seller, subject to no conditions, and for the of the transfer vis-à-vis third parties both under Spanish law and remaining maturity of the receivables; and under the foreign law are fulfilled, in order to ensure recognition by (b) the seller cannot grant any kind of warranty (garantía) in Spanish courts. favour of the purchaser nor guarantee the success of the transaction (asegurar el buen fin de la operación). 4 Asset Sales Notwithstanding this, it is customary to agree on certain limited representations and warranties in order to ensure that the securitised portfolio conforms to the agreed eligibility 4.1 Sale Methods Generally. In Spain what are the criteria. customary methods for a seller to sell receivables to a purchaser? What is the customary terminology – is it 4.2 Perfection Generally. What formalities are required called a sale, transfer, assignment or something else? generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of Under Spanish law, receivables may be transferred from a seller to receivables to be perfected against any subsequent good a purchaser in the following different ways, in all cases involving faith purchasers for value of the same receivables from the execution of an agreement providing for the transfer of the the seller? receivable to the purchaser: 1. ordinary assignment pursuant to the Spanish Commercial No special formalities are required in order for an ordinary or and Civil Codes; privileged sale of receivables (or for a sale to a FTA) to be effective 2. assignment pursuant to the 3rd Additional Provision of Law between the contracting parties, though (a) the written form is 1/1999, of 5 January, on Capital-Risk Entities; and customary, and (b) where the receivables result from a contract agreed 3. assignment to a Spanish Asset-Backed Securitisation Funds in a public document, the parties may legally require that the (Fondo de Titulización de Activos, hereinafter “FTA”). assignment be executed also as a public document (though failure to Although there is no a common terminology, the above transactions do it does not affect the validity of the transfer amongst themselves). will be customary named as receivables transfers (cesiones de Nevertheless, under Articles 1218, 1227 and 1526 of the Spanish Civil crédito). Code, certainty of the date of the transfer is required in order for it to 1. Ordinary assignment. Under the Spanish Commercial and be fully effective vis-à-vis third parties (for instance, in order to ensure Civil Codes, the seller remains liable before the purchaser for the that true sale treatment is achieved or for insolvency protection existence of the receivable and for the validity of its legal title purposes). This certainty of the date of the transfer may be achieved, thereto, but it is not liable for the insolvency of the debtor, unless so inter alia, by formalising the transfer in a public deed (escritura agreed with the purchaser. It is thus possible to agree on sales with pública or póliza intervenida) before a Spanish Notary Public. or without recourse, though in the absence of a specific provision thereon, there will be no recourse against the seller. 4.3 Perfection for Promissory Notes, etc. What additional or 2. Privileged assignment. In accordance with the 3rd Additional different requirements for sale and perfection apply to Provision of Law 1/1999, a specific and more beneficial sales of promissory notes, mortgage loans, consumer insolvency-related regime will be applicable to those assignments loans or marketable debt securities? of credits which, though generally structured as ordinary assignments, fulfil the following requirements: 1. Payment instruments. Receivables represented by way of bills of exchange (letras de cambio), promissory notes (pagarés) and (a) the seller is a business company (or an entrepreneur) and the other analogous securities supporting abstract means of payment

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(efectos cambiarios) may be transferred by means of the physical 4.4 Obligor Notification or Consent. Must the seller or the delivery of the security document, followed (in the case of purchaser notify obligors of the sale of receivables in negotiable bills of exchange and registered promissory notes) by an order for the sale to be effective against the obligors endorsement, that is, a written and signed transfer statement issued and/or creditors of the seller? Must the seller or the by the seller in the title itself. Such means of transfer result in a full purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale transfer of all rights attached to the relevant efecto cambiario, against the obligors? Does the answer to this question though not necessarily in a full transfer of the underlying vary if (a) the receivables contract does not prohibit receivable. assignment but does not expressly permit assignment; or The issuance and transfer of efectos cambiarios is regulated by a (b) the receivables contract expressly prohibits Spain special law, is specifically excluded from the application of assignment? Whether or not notice is required to perfect Regulation 593/2008 and may involve Stamp duty (please refer to a sale, are there any benefits to giving notice – such as question 9.3). cutting off obligor set-off rights and other obligor defences? 2. Mortgage loans. The transfer of a single mortgage loan needs to be documented in a public document and registered with the Unless otherwise is stated in the receivables contracts, consent of relevant Property Registry. Otherwise, the transfer will be valid the obligors is not required in order for the sale of receivables to be amongst the parties, but will not be effective vis-à-vis third parties effective against the obligor. and the foreclosure procedure may be severely limited. Similar The parties may or may not serve notice of the sale on the obligor. requirements apply to the transfer of receivables secured with a If they choose not to do it, the obligor will be allowed to validly chattel mortgage (hipoteca mobiliaria) or a pledge without discharge its obligations by paying the seller as the original creditor. displacement of possession (prenda sin desplazamiento de Likewise, the legal regime applicable to the obligor’s defences to posesión). challenge or object payment demands under the receivable varies The transfer by credit entities of mortgage loans meeting the depending on the date of the transfer and the date when transfer eligibility criteria set forth in Section 2 of Law 2/1981, of 25 March, notice is served (for instance, the debtor’s right of set-off will apply on the Mortgage Market, can be also perfected by means of the to those seller obligations arising prior to the transfer notice, but not issue of mortgage certificates (participaciones hipotecarias). to those arising afterwards, unless the debtor explicitly approves the Where these mortgage loans fail to meet any of those criteria and transfer). Accordingly, failure or delay in serving notice on the provided that the purchaser is a qualified investor or an FTA, the debtor may result in an increased number of valid objections against transfer may be perfected by means of the issue of mortgage any payment demand filed under the transferred receivable. conveyance documents (certificados de transmisión de hipoteca). If the receivable contract does prohibit assignment or requires the Participaciones hipotecarias and certificados de transmisión de consent of the obligor and the latter is not obtained, many Spanish hipoteca qualify as transferable securities. scholars maintain that the sale contract will remain valid amongst In addition to a more favourable tax and insolvency regime (which the parties to the sale agreement as a source of indemnity shall be described below), the main advantage of this means of obligations, but will not be enforceable against the assigned transfer of mortgage loans is that, under certain conditions, the issue obligors. Thus the receivables shall not be deemed transferred by of both participaciones hipotecarias and certificados de the seller, who shall remain as the owner of the receivables. transmisión de hipoteca needs not to be documented in a public However, other scholars believe that the transfer of the receivables deed (escritura pública) or registered in the relevant Property would be valid and enforceable against the obligor, who will be Registries. entitled to claim damages to the seller for the contractual breach. In any event, the seller/issuer of the certificates remains as the Spanish courts have failed to reach a definitive conclusion in nominee and holder of record of the underlying loans in the relation to this matter. corresponding Property Registries, but the holder of the certificates becomes the beneficial owner of the mortgage loan, subject to 4.5 Notice Mechanics. If notice is to be delivered to obligors, certain conditions that confer upon the transfer the “true sale” whether at the time of sale or later, are there any treatment. requirements regarding the form the notice must take or 3. Consumer loans. No special requirements apply for the sale of how it must be delivered? Is there any time limit beyond receivables when the obligors are consumers. However, Article 31 which notice is ineffective – for example, can a notice of of the Act 16/2011, of 25 June, requires that notice of the transfer is sale be delivered after the sale, and can notice be served on the consumer, where the seller ceases to provide delivered after insolvency proceedings against the obligor servicing. have commenced? Does the notice apply only to specific receivables or can it apply to any and all (including future) 4. Debt securities. In addition to the assignment contract, those receivables? Are there any other limitations or securities represented in book-entry form shall be transferred considerations? through an accounting record transfer. Those securities represented in registered form shall be transferred through the endorsement of There are no formal requirements regarding notification to the obligor, the relevant title or under an ordinary assignment of receivables. thus it may be executed by any means, by the seller or the purchaser. Finally, those securities represented in bearer form shall be However, it is generally recommended to notify by any means that transferred by physical delivery of the title. may latter be regarded as proof on court (i.e., notarial acta de notificación or certified mail with acknowledgement of receipt). No limitations apply regarding the purchaser notifying the obligor of the sale of receivables even after the insolvency of the seller or the obligor, without prejudice to the effects of the lack of notice in terms of discharge of the obligor and the obligor’s defences as set out in question 4.4, which shall be applicable as long as notice of the transfer is not served.

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4.6 Restrictions on Assignment; Liability to Obligor. Are (causa), suggest otherwise (for instance, a form of security), a court restrictions in receivables contracts prohibiting sale or is allowed to recharacterise the transaction as per its genuine nature. assignment generally enforceable in Spain? Are there Generally the courts have upheld the true sale treatment of the sale exceptions to this rule (e.g., for contracts between commercial entities)? If Spain recognises prohibitions on of receivables, irrespective of the parties agreeing to such transfer sale or assignment and the seller nevertheless sells on a recourse or non-recourse basis, but always provided that the receivables to the purchaser, will either the seller or the purchaser advances all or part of the funds agreed as consideration purchaser be liable to the obligor for breach of contract or for the transfer of the receivable (in other words, where such on any other basis? transfer is agreed in terms such that the acquirer does not advance any funds, does not bear the risk of the receivable, and is thus used In general terms, contractual restrictions to the sale or assignment for collection purposes only, the transfer shall not be treated as a Spain of receivables are not prohibited under Spanish law. true sale). This having been said, in the past, in conferring true sale If the receivable contract does prohibit assignment or requires the treatment to any given transfer, the fact that the seller may have consent of the obligor and the latter is not obtained, the assigned retained credit risk (e.g., by representing the solvency of the debtor) obligors will not be given any right to sue the purchaser, has occasionally been construed by the courts (for instance, in particularly if the purchaser acted in good faith (i.e., was unaware certain minority rulings on factoring agreements entered into by of the existence of any such restriction). Please also refer to credit institutions) as an evidence that the transfer ought not to be question 4.4 above. treated as a sale, but rather as a collateralised loan granted by the purchaser. The fact that the parties agree to vest upon the seller collection 4.7 Identification. Must the sale document specifically identify responsibilities does not alter the above views (by way of example, each of the receivables to be sold? If so, what specific information is required (e.g., obligor name, invoice where the sale of purchase is an FTA, collection responsibilities number, invoice date, payment date, etc.)? Do the shall be retained by the seller unless otherwise agreed). receivables being sold have to share objective In addition to the above, legal characterisation or effects of a characteristics? Alternatively, if the seller sells all of its particular transaction is not necessarily coincident with its treatment receivables to the purchaser, is this sufficient under other conditions. For instance, Spanish accounting and identification of receivables? capital adequacy rules applicable to credit entities focus on certain terms of the transaction (mainly credit risk retention) to determine Identification requirements are not specifically required in the whether a sale of receivables can benefit from off-balance sheet context of the transfer of receivables, but generally stem from treatment. Spanish law principles which expect the parties to be able to identify the subject of any contract in between them. Accordingly, no specific details need to be provided, other than those which 4.9 Continuous Sales of Receivables. Can the seller agree in allow the parties to identify, in clear and undisputable terms, the an enforceable manner (at least prior to its insolvency) to transferred receivables. continuous sales of receivables (i.e., sales of receivables as and when they arise)? Where the receivables are to be transferred to an FTA, the rules require that the parties define the securitised assets (legally and Yes, though the effectiveness vis-à-vis third parties depends on the financially) and provide details on matters such as outstanding need to provide proper identification, as well as execute a public balances, yields, financial flows, collection terms, amortisation document each time new receivables are transferred. schedule and maturity dates. Transactions where all existing receivables (or all receivables 4.10 Future Receivables. Can the seller commit in an fulfilling certain conditions) are sold to the purchaser are generally enforceable manner to sell receivables to the purchaser valid under Spanish law but may face difficulties where necessary that come into existence after the date of the receivables to prove effectiveness vis-à-vis third parties. Accordingly, the purchase agreement (e.g., “future flow” securitisation)? If above referred rules on identification apply as well. so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the 4.8 Respect for Intent of Parties; Economic Effects on Sale. seller’s insolvency? If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be respected or will a court enquire into the economic 1. Ordinary assignment. Although it is generally accepted that the characteristics of the transaction? If the latter, what transfer of future receivables may be validly agreed upon by means economic characteristics of a sale, if any, might prevent of an ordinary assignment, the scholars and the courts have failed to the sale from being perfected? Among other things, to reach a common view on whether the acceptance by the purchaser what extent may the seller retain (a) credit risk; (b) (or any other formal requirement, such as the notice to the debtor) interest rate risk; and/or (c) control of collections of upon each receivable effectively coming into existence is necessary receivables without jeopardising perfection? (thus casting a shadow of doubt on the efficacy of any such transfer until such time), or if the purchaser is ab initio the owner of such Under Spanish law, contracts are to be interpreted not on the basis receivables from the moment they arise. It is thus advisable to of the name or character that the parties wish to attribute to them ensure that periodic transfers are executed in public documents. (for instance, in the name or the headings of the different clauses), 2. Privileged assignment. The transfer of future receivables is but rather on the basis of the actual legal nature of the terms and allowed, provided that those receivables arise from the business conditions agreed thereunder. Thus, if the parties regard a activity of the seller within a maximum term of one year from the transaction (for instance, by using that term in the headings or in the date of execution of the agreement or, otherwise, the future debtors contents) as an assignment or other form of “true sale”, but the are clearly identified in the agreement (please refer to question 4.1 terms and conditions thereof and, in particular, its real intent above).

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3. FTA. Existing FTA regulations allow the securitisation of future intangible asset), many scholars understand that the displacement of receivables to the extent, amongst other requirements, that they possession is effected through the notice to the debtor, while others produce a flow of income of an already known or estimated amount. (as well as Spanish insolvency rules) maintain that the mere Among the types of future receivables which are eligible for such a agreement of the parties is sufficient for validity purposes, with no transfer, the FTA regulations include lease rentals, flows arising out need to notify the obligor. In order to ensure that the ordinary of toll road projects, flows resulting from public concession pledge is enforceable and effective vis-à-vis the obligor and any contracts, IP rights, etc. Pursuant to Orden EHA/3536/2005, of 10 other third party, the pledge needs to be executed in a public November, the transfer of future receivables in favour of an FTA document (escritura pública or póliza intervenida). The pledge shall fulfil the following requirements (i) the transfer must be full needs not to be registered in any public registry. However, in case

Spain and unconditional (plena e incondicionada), and (ii) the of insolvency of the pledgor, the special privilege for claims incorporation deed of the FTA must include (a) the terms of the secured with ordinary pledges and generated after the insolvency agreement or activity which will generate the future receivables, (b) declaration is subject to discussion following a recent (and, in the the powers of the seller over those future receivables transferred, (c) opinion of most of the scholars, defective) amendment to the the terms and conditions of the transfer, and (d) the risk allocation Spanish insolvency law. between the seller and the purchaser of the receivables. 2. Pledge without displacement of possession. In order for the Please refer to questions 6.1 and 6.5 below on the treatment of pledge without displacement of possession to be valid, it shall be receivables arising prior to or after the declaration of insolvency. executed in a public document (escritura pública or póliza intervenida) and shall be duly registered with the relevant movable assets registry (Registro de Bienes Muebles). This may attract 4.11 Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred certain tax costs. concurrently with the sale of receivables? If not all 3. Financial guarantees. Following a recent reform of the Spanish related security can be enforceably transferred, what legal regime applicable to financial guarantees (i.e., those resulting methods are customarily adopted to provide the from the implementation in Spain of the Directive 2002/47/EC, of purchaser the benefits of such related security? 6 June, on financial guarantees), certain receivables held by credit institutions may be the object of financial guarantees in the form of In general terms, the sale of a receivable entails the automatic pledge or repos (such securities benefitting from the privileged transfer of all rights accessory to such receivable, such as personal legal regime applicable to financial guarantees in terms of, inter guarantees (fianzas), pledge, mortgage or privileges (unless alia, perfection, enforcement and insolvency). otherwise agreed by the relevant guarantor). However, please refer to question 4.3 as to the specific conditions for the sale of mortgage loans. 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities 5 Security Issues must the purchaser comply with in Spain to grant and perfect a security interest in purchased receivables governed by the laws of Spain and the related security? 5.1 Back-up Security. Is it customary in Spain to take a “back-up” security interest over the seller’s ownership Please refer to question 5.2 above. interest in the receivables and the related security, in the event that the sale is deemed by a court not to have been perfected? 5.4 Recognition. If the purchaser grants a security interest in receivables governed by the laws of Spain, and that Such practice is not customary in Spain. security interest is valid and perfected under the laws of the purchaser’s country, will it be treated as valid and perfected in Spain or must additional steps be taken in 5.2 Seller Security. If so, what are the formalities for the Spain? seller granting a security interest in receivables and related security under the laws of Spain, and for such As per Article 14.3 in Regulation 593/2008 (please refer to question security interest to be perfected? 3.4 above), the principles set out in this rule are expected to apply to any form of assignment by way of collateral. Accordingly, the Mainly, receivables can be subject to ordinary pledge, pledge concept of “assignment” includes “not only outright transfers of without displacement of possession or financial guarantee. Spanish claims, (but also) transfers of claims by way of security and pledges national legal regime (described below) applies generally to these or other security rights over claims”. securities but, depending on the location of the pledged object, Generally speaking, provided that the applicable conflict of law regional regulations may also be applicable. rules are complied with, the granting of a security interest under a The benefit of a security interest perfected over a receivable will foreign law would be treated as valid and perfected in Spain. also extend to any related security (please refer to question 4.11 As mentioned above, Regulation 593/2008 leaves open the question above). In addition, under certain limited circumstances, additional of the enforceability of the sale vis-à-vis third parties (see Article security interests may be perfected over existing security interests 27(2)). It is therefore not fully clear which law should govern the (e.g., perfecting a mortgage over a pre-existing mortgage or effectiveness of a pledge of receivables as against other creditors of perfecting a pledge over the rights stemming from a pre-existing the seller, insolvency administrators or even third parties alleging a pledge or a personal guarantee (fianza)). priority legal title on the relevant pledged receivables. In the 1. Ordinary pledge. A “displacement of the possession” of the meantime, it is generally advisable that, when enforceability of a pledged asset is required in order for the pledge to be valid. pledge vis-à-vis third parties is expected to be sought before a Although it is not clear how this dispossession requirement is to be Spanish court (for instance, in the context of an insolvency of a interpreted when the object of the pledge is a receivable (i.e., an Spanish-based pledgor or where the obligor is located in Spain),

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Spanish law perfection requirements be met as well. Under Spanish recognised (i.e., generally accepted by Spanish courts) under law, a security interest over receivables (either formalised as an Spanish law and practice. It is therefore not usual to find trusts used ordinary pledge, as a pledge without displacement or a financial as a means to ensure that flows resulting from the assigned guarantee) is generally a right in rem. Spanish Civil Code provides receivable and temporarily held by the seller are kept legally that rights in rem over assets located in Spain must be governed by isolated from the rest of the seller’s assets. However, similar effects Spanish law. Location of receivables is not a clear-cut issue, but to the may be achieved through a pledge over the bank account where the extent that receivables are deemed located in the country of the law collections received by the seller are credited, securing the seller’s governing the receivable, or where the seller or obligor operate, and obligations vis-à-vis the purchaser. Such a pledge would in the country of the purchaser is different from those, Spanish courts principle create a special privilege in favour of the purchaser over may refuse enforcement of the pledge, even if requirements for the the balance of the account, either in an insolvency or non- Spain validity and perfection of the security interest have been followed. insolvency situation (although claims of the purchaser arising after The above notwithstanding, it must be noted that Spanish regulations the insolvency declaration might face difficulties to be recognised implementing the Directive 2002/47/EC, of 6 June, on financial as privileged claims in light of the current regulations). Moreover, guarantees have been recently amended and now expressly provide special arrangements with the credit entity where the account is that, when the object of the financial guarantee is receivables (please opened could be implemented so that, upon the occurrence of a refer to question 5.2 above), the law governing the enforceability of specified insolvency event on the seller, disposal instructions need the financial guarantee vis-à-vis third parties shall be the law to be received from the purchaser. governing the underlying receivable which is the object of the guarantee. Although it is true that this provision refers to a very 5.7 Bank Accounts. Does Spain recognise escrow accounts? specific security interest, it cannot be discarded that Spanish courts Can security be taken over a bank account located in make, in the absence of any other Spanish or EU legal provision on Spain? If so, what is the typical method? Would courts this matter, an analogous interpretation of this rule and apply it to other in Spain recognise a foreign-law grant of security (for type of security interest over receivables and even to the enforceability example, an English law debenture) taken over a bank of receivables transfers vis-à-vis third parties. account located in Spain?

Bank accounts opened in the name of a given party, but where 5.5 Additional Formalities. What additional or different disposal by its record holder is limited, blocked or otherwise requirements apply to security interests in or connected to conditioned to the occurrence of a specific event, the consent or insurance policies, promissory notes, mortgage loans, instructions of a third party or any other circumstance, are legally consumer loans or marketable debt securities? admissible and market practice under Spanish law. Moreover, security can be taken over receivables arising out of a bank account In addition to those requirements set forth in question 5.2, the located in Spain, through an ordinary pledge or a pledge without granting of security interests on each of those assets require the displacement (please refer to question 5.2 above for more details on following: these types of securities). Pledge over bank accounts can benefit 1. Mortgage loans. Under Spanish law, the creditor in a mortgage from a specific privileged regime (especially when it comes to loan may grant an additional mortgage on its right of credit (the so- enforcement and in case of insolvency of the seller) if certain called “mortgage on the mortgage” or “sub-mortgage”). This conditions in relation to the nature of the parties to the pledge and mortgage needs be executed in a public deed and registered in the the secured obligations are met. relevant Public Registry. In case that a bank account is located in Spain (i.e., it is opened in 2. Promissory notes and marketable debt securities. Where a Spanish credit entity), receivables deriving thereunder shall most those securities have been represented in book entry form, the likely be understood as located in Spain and, as a result, Spanish creation of a pledge needs to be registered in the relevant registry to courts may refuse enforcement of a foreign law pledge which has ensure effectiveness vis-à-vis third parties. If the securities have not been perfected as per applicable Spanish rules (please refer to been issued in registered form, the securities must be delivered to question 5.4 above on more details on this issue). the beneficiary-pledgee and the pledge needs be registered in the relevant certificate by way of an “endorsement for guarantee purposes”. If the securities have been issued in bearer form, the 6 Insolvency Laws securities must be delivered to the beneficiary-pledgee. 3. Insurance policies. No specific requirements are applicable for 6.1 Stay of Action. If, after a sale of receivables that is the granting of security interest over rights arising out of insurance otherwise perfected, the seller becomes subject to an policies. However, in case of creation of any security interest over insolvency proceeding, will Spanish insolvency laws assets which are insured against damages, the scope of the security automatically prohibit the purchaser from collecting, shall be extended to the indemnities recovered by the insured party transferring or otherwise exercising ownership rights over as a consequence of an insured event (for such purpose, the the purchased receivables (a “stay of action”)? Does the insolvency official have the ability to stay collection and insurance company must be served notice of the creation of the enforcement actions until he determines that the sale is security). perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather 5.6 Trusts. Does Spain recognise trusts? If not, is there a than the owner of the receivables? mechanism whereby collections received by the seller in respect of sold receivables can be held or be deemed to Sale of receivables. No stay of action would be applicable under be held separate and apart from the seller’s own assets Spanish insolvency regulations. Where the transferred receivables until turned over to the purchaser? have been properly identified, the purchaser should be allowed to continue collecting and exercising ownership rights over the The concept of “trust” is not one which is regulated and/or fully transferred receivable. If not done already, the purchaser is allowed

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to serve notice of transfer on the obligors. Additional transfers insolvent party; (ii) the creation of in rem guarantees (e.g., in the context of a sale of future receivables or a continuous (security interests) for the benefit of pre-existing obligations sale of receivables) may be delayed or even suspended. Funds held or of new obligations replacing previously existing ones for credit by the seller (e.g., collection monies) for the account of (except for refinancing transactions where certain conditions the purchaser, may be subject to insolvency proceedings are met); and (iii) payments or other actions aimed at discharging obligations secured with an in rem right with an (commingling risk). original date of maturity subsequent to the date of the As a matter of practice, though, where administration of receivables insolvency declaration; is still being conducted by the seller (and therefore some acts by the (iv) in the case of actions not included in any of the above two seller are necessary so that the purchaser may continue to collect the categories, the detriment must be proven by the person Spain receivables), it cannot be discarded that the insolvency officials bringing the action of rescission (e.g., the insolvency dispute the need to continue serving the receivables and/or that official); specific arrangements are put in place to allow collection funds to (v) ordinary actions taken by the debtor as part of the ordinary be paid out of the insolvency proceedings. course of business under normal conditions shall not be Pledge of receivables. Unless the foreclosure proceedings have subject to claw-back actions described in paragraphs (i) to reached certain stages before the insolvency proceedings have (iv); and started, the enforcement of security interests over assets owned by (vi) notwithstanding the above, actions of rescission will not be the seller and used for its professional or business activities will be available in the event that the beneficiary of the detrimental stayed following the declaration of insolvency until the first of the action proves that such a transaction is governed by a foreign law which does not permit its rescission in any case. following circumstances occurs: (a) approval of a creditors’ composition agreement (unless the content has been approved by This general regime applies to the sale of receivables benefiting the favourable vote of the purchaser as secured creditor, in which from the ordinary and privileged regimes. Notwithstanding, where case it will be bound by the composition agreement); or (b) one year the sale of receivables is made in favour of an FTA, such sale shall has elapsed since the declaration of insolvency without liquidation not be rescindable unless evidence is given of the fact that fraud proceedings being initiated. existed at the time the assignment was made. There is general controversy on whether a pledge on a portfolio of receivables would qualify as a security on assets “used for its 6.4 Substantive Consolidation. Under what facts or professional or business activities”. circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with those of the seller or its affiliates in the insolvency 6.2 Insolvency Official’s Powers. If there is no stay of action proceeding? under what circumstances, if any, does the insolvency official have the power to prohibit the purchaser’s Such consolidation should not be carried out under normal exercise of rights (by means of injunction, stay order or circumstances. Spanish law does not contemplate “substantive” other action)? consolidation in an insolvency scenario, other than in respect of certain procedural matters and in situations where purchaser and Please refer to question 6.1 above. seller are closely related parties (e.g., member of the same group) and the respective estates cannot be separated, in the terms of 6.3 Suspect Period (Clawback). Under what facts or Chapter III of the Spanish insolvency law. circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or “preference” period before the commencement of the 6.5 Effect of Proceedings on Future Receivables. What is the insolvency proceeding? What are the lengths of the effect of the initiation of insolvency proceedings on (a) “suspect” or “preference” periods in Spain for (a) sales of receivables that have not yet occurred or (b) on transactions between unrelated parties and (b) sales of receivables that have not yet come into transactions between related parties? existence?

Pursuant to the general regime set forth under the Spanish Where an agreement has been entered into by the seller and the insolvency law, upon the insolvency of a Spanish party (an entity or purchaser for the sale of the seller’s future receivables arising out of an individual) being declared: contracts, as specified or generally described in the sale agreement, (i) those actions which are judged detrimental to the estate of and the seller is declared insolvent, the general principles should the insolvent party and which have been carried out during provide for the need to ensure that the transfer is generally the two years preceding such date, may be rescinded even in respected and that the receivable arises in the estate of the the absence of fraudulent intention; purchaser, even in the context of an insolvency of the seller. (ii) the detriment to the estate is presumed iuris et de iure (i.e., However, this matter remains a disputed issue under Spanish law, without possibility of providing evidence to the contrary) in i.e., whether the receivables arising after the declaration of the the case of actions of disposal without consideration, and insolvency situation must be subject to the insolvency or directly payments or other actions aimed at discharging obligations arise as part of the purchaser´s estate, thus being left outside of the with an original date of maturity subsequent to the date of the seller´s insolvency estate. insolvency declaration, except where the discharged Though the court precedents are scarce and not yet definitive, it is obligation is secured with an in rem right, in which case paragraph (iii) shall apply; generally accepted that “privileged” transfers of future receivables (please refer to question 4.1) should be upheld by the insolvency (iii) furthermore, detriment is presumed iuris tantum (i.e., unless officials and the judge. evidence is provided to the contrary) in the event of: (i) disposal actions carried out in favour of a party related to the

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7 Special Rules addressed to institutional investors and the relevant bonds will not be listed in the Spanish regulated markets. The securitised receivables must be audited by an auditor. 7.1 Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in Spain Formalisation of a public deed of incorporation before a establishing a legal framework for securitisation Spanish Notary Public. transactions? If so, what are the basics? 5. Managing company A Spanish managing company of securitisation funds (Sociedad Standard, market-oriented securitisation transactions are structured Gestora de Fondos de Titulización) duly incorporated and through FTAs, and their close relatives, Mortgage-Backed authorised by the CNMV, will be responsible for the incorporation, Spain Securitisation Funds (Fondos de Titulización Hipotecaria, management and representation of the FTA. The managing hereinafter, “FTH” and together with FTA, the “Funds”), where company will be empowered with any rights conferred upon the specially defined mortgage loans are securitised. Those Funds are Fund as holder of the securitised portfolio of assets. the standard vehicles designed by the Spanish legislator to develop the local market for securitisation transactions aimed at the general public. Additionally “private” securitisation (i.e., non-listed 7.2 Securitisation Entities. Does Spain have laws specifically providing for establishment of special purpose entities for transactions addressed to qualified investors) are allowed under the securitisation? If so, what does the law provide as to: (a) FTA/FTH format, provided that the relevant ABS/MBS bonds will requirements for establishment and management of such not be listed in the Spanish regulated markets. an entity; (b) legal attributes and benefits of the entity; A Fund is defined as a separate estate that lacks legal personality and (c) any specific requirements as to the status of (personalidad juridíca) and is represented by the managing directors or shareholders? company. Therefore, all actions taken by, and all agreements, transactions or arrangements entered into by the managing Please refer to question 7.1 above. company on behalf of the Fund will be deemed, under Spanish law, Funds enjoy a special treatment in relation to some legal aspects, such to be actions taken and agreements, transactions or arrangements as claw-back provisions in case of insolvency of the seller or a special entered into by the Fund. tax regime, which are analysed in other questions of this chapter. 1. Assignment of receivables to an FTA As Funds are not legal entities, they do not have shareholders or Please refer to questions 4.1, 4.2 and 4.10 above for a discussion on directors; however, shareholders with a significant stake in a the conditions for the assignment of receivables to an FTA. management company (basically, more than 10%) need to meet 2. Types of FTA certain individual suitability standards, and members of the board of directors need to be honourable, the majority of them having to Closed funds: the assets transferred thereto and the liabilities thereof be experienced. will not be modified as from the date of the incorporation of the Fund, without prejudice to possible replacements in certain cases, such as the existence of non-eligible assets. FTH shall be closed funds. 7.3 Non-Recourse Clause. Will a court in Spain give effect to Open funds: the assets of the fund, or its liabilities, or both of them, a contractual provision (even if the contract’s governing law is the law of another country) limiting the recourse of may be modified (renewed) and/or extended after the incorporation parties to available funds? of the fund. For instance, new assets may be assigned to the FTA or new notes issued to finance the existing portfolio. A court would in principle give effect to a contractual provision 3. Funding of the FTA whereby one of the parties agrees to limit recourse to a limited Fixed income securities. The total amount of the securities issued number of the other party’s assets. must be above 50% of the total liabilities. The financial risk of the securities issued must be rated by a rating agency recognised by the 7.4 Non-Petition Clause. Will a court in Spain give effect to a Spanish Commission for the Securities Market (Comisión Nacional contractual provision (even if the contract’s governing law del Mercado de Valores; hereinafter “CNMV”) for such purposes. is the law of another country) prohibiting the parties from: The securities are issued under the terms of the incorporation public (a) taking legal action against the purchaser or another deed of the Fund. Unlike other markets, there is no such thing as a person; or (b) commencing an insolvency proceeding trustee; the bondholders will be represented by the managing against the purchaser or another person? company and they will not have any individual right other than the claim against the Managing Company/Fund for breach of the Voluntary waiving of rights recognised by law shall not be valid if relevant contracts and legal duties. deemed to be contrary to public order, or made to the prejudice of a Loans granted by credit institutions. Contributions by qualified third party; furthermore, under Spanish law, waiver of future rights investors (Inversores Institucionales), such as credit institutions, not yet existing or of pure expectations could be deemed null and insurance companies, certain investment firms and other types of void, unless ratified at the time of the existence of the rights. The schemes and investment entities established under Spanish laws, right to bring action where in the presence of fraud of wilful which will have rights on the residual value of the Fund. misconduct cannot be validly avoided by the parties. Further, a full and unconditional waiver of any action may be found to lack any 4. Incorporation of an FTA cause and be held invalid. The basic requirements (some of which may be exempted) are the As for the non-insolvency clauses, they may be validly agreed upon following: by the parties, though no such clause will have any efficacy vis-à-vis Previous communication to the CNMV. third parties. Even if the contractual provision was deemed valid and Informative Prospectus (Offering Circular), which must be effective, it is most likely that the court would admit the legal action registered with the CNMV and examined thereby; the or the application of insolvency, without prejudice to the effects Prospectus will not be required in the event that the issue is among the parties that such contractual breach could bring..

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7.5 Independent Director. Will a court in Spain give effect to identified by the European Commission or the Spanish Data a contractual provision (even if the contract’s governing Protection Agency, do not afford an adequate level of protection, law is the law of another country) or a provision in a then the controller must obtain the Spanish Data Protection party’s organisational documents prohibiting the directors Agency’s prior authorisation, unless the controller -despite not from taking specified actions (including commencing an being legally required to do so- obtains the data subject’s consent to insolvency proceeding) without the affirmative vote of an process his/her personal data in such country. independent director? Organic Law 15/1999 does not apply to data of enterprises. Spanish directors are bound by fiduciary and other legal duties However, other rules (for instance, banking secrecy and including, among others, the duty to seek for insolvency protection confidentiality duties) may hinder the ability of a seller/purchaser to Spain where legally required. Failure to comply with those duties will disclose in a publicly available document (e.g., a prospectus) key expose the directors to direct and immediate legal responsibility vis- data of the assigned debtor. à-vis the company and its creditors, among others. 8.4 Consumer Protection. If the obligors are consumers, will 8 Regulatory Issues the purchaser (including a bank acting as purchaser) be required to comply with any consumer protection law of Spain? Briefly, what is required? 8.1 Required Authorisations, etc. Assuming that the purchaser does no other business in Spain, will its No. However, if the receivables assigned to the purchaser are purchase and ownership or its collection and enforcement subject to Law 16/2011, of 24 June, consumer finance, the of receivables result in its being required to qualify to do consumer-obligor may exercise against the purchaser the same business or to obtain any licence or its being subject to exceptions which he could exercise against the seller (including the regulation as a financial institution in Spain? Does the right to set off). answer to the preceding question change if the purchaser does business with other sellers in Spain? 8.5 Currency Restrictions. Does Spain have laws restricting In principle, the only activity reserved to credit institutions in Spain the exchange of Spanish currency for other currencies or is the gathering of reimbursable funds from the public (deposits) on the making of payments in Spanish currency to persons a general basis. Therefore, the business of acquiring existing outside the country? portfolios of receivables is not generally regarded as one requiring prior administrative authorisation as a financial entity. No restrictions are imposed to the transfer of receivables from the seller to a foreign purchaser. However, since these kinds of Needless to say, these principles would not apply to locally based transactions may be construed as financing structures, similar to Funds and other entities subject to local capital market regulations. loans granted by foreign entities to domestic non-banking companies, it is necessary to obtain a financial identification 8.2 Servicing. Does the seller require any licences, etc., in number (número de operación financiera or “NOF”) from the Bank order to continue to enforce and collect receivables of Spain, provided that the amount of the transaction exceeds Euro following their sale to the purchaser, including to appear 3,000,000. before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect sold receivables? 9 Taxation

Servicing and administration of the assigned receivables does not 9.1 Withholding Taxes. Will any part of payments on itself entail the need to obtain a local licence. However, to the receivables by the obligors to the seller or the purchaser extent that the actual activities within the scope of the be subject to withholding taxes in Spain? Does the administration fall within the scope of a regulated sector (e.g., answer depend on the nature of the receivables, whether insurance mediation), a local licence may be required. they bear interest, their term to maturity, or where the Additionally, as a general rule, the assistance of a court seller or the purchaser is located? representative (procurador) and a lawyer is required to appear in courts. Income obtained by the non-Spanish resident purchaser on the difference between (i) the payments made by the obligors, and (ii) the purchase price paid by the purchaser to the seller (i.e., taking 8.3 Data Protection. Does Spain have laws restricting the into consideration any agreed discount) may be regarded by the use or dissemination of data about or provided by Spanish tax authorities as either Spanish source interest income or obligors? If so, do these laws apply only to consumer obligors or also to enterprises? as a capital gain. To the best of our knowledge, there are no rulings issued by the Spanish tax authorities or the Spanish courts on the Yes. Organic Law 15/1999, of December 13, on Personal Data subject of the transfer of receivables and its classification for Protection, restricts the use and dissemination of personal data of Spanish direct income tax purposes. individual obligors. In order for a personal data controller to However, under an internal exemption of the Non-Resident Income transfer personal data to a third party legally (regardless of whether Tax, income obtained by the purchaser, regarded either as interest the third party is located in Spain or abroad), the data subject must or as capital gains, will not be subject to Spanish tax to the extent be informed, before or upon the transfer, of the circumstances of the that the purchaser (i) is resident of a Member State of the European transfer, and then, as a general rule, the data subject’s prior consent Union for tax purposes and may obtain and submit a certificate of regarding the transfer must be obtained. tax residence issued by the relevant tax authorities of its country of In certain cases in which the data are transferred to a country residence, (ii) does not act with respect to the transaction through a outside the European Economic Area whose regulations, as permanent establishment located in Spain or outside the European

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Union, and (iii) does not act through a territory regarded as a tax However, under the general rule contained in Article 69.1 of the haven jurisdiction for Spanish tax purposes. VAT Law concerning the place from where the supply of services is Regarding interest paid by the obligor to the seller if the latter is a deemed to be rendered for VAT purposes, collection services are Spanish company, it will be typically subject to a 19% (21% for deemed to be supplied in the state where the customer has calendar years 2012 and 2013) withholding tax (this does not apply established its business, or has a fixed permanent establishment to to a recipient which is a financial entity). Indeed, since the which the service is supplied, or, in the absence of such place, the assignment of the receivable is not disclosed to the obligor, the place where it has its permanent address or usually resides. obligor will assume that the payment is due to the Spanish seller, Thus, if the entity to which the services are supplied (i.e., the and that the withholding tax is due i.e., the tax is levied on the purchaser) is not established in Spain for VAT purposes, the Spanish seller, not on the purchaser. services will not be deemed to be supplied in Spain and, therefore, Spain will not be subject to Spanish VAT. 9.2 Seller Tax Accounting. Does Spain require that a specific Having said the above, if the agreement entered into by the seller accounting policy is adopted for tax purposes by the and the purchaser qualifies as a factoring agreement, there would be seller or purchaser in the context of a securitisation? a range of services deemed to be rendered for VAT purposes by the purchaser to the seller (namely, financial services, management and A Spanish seller will need to follow the Spanish GAAP on de- collection services and, if applicable, a guarantee services). In recognition of financial assets. This rule focuses on the existence particular, the management and collection services, and the of an actual transfer of risk and benefits by the seller to the guarantee services, would be subject to and not exempt from purchaser and is in line with the International Accounting Standards Spanish VAT and the seller should assess the VAT due on that adopted by the European Commission. The tax law will follow the transaction given that the supplier of the service (i.e., the purchaser) accounting rule in this matter. is not established in the Spanish VAT territory. Additionally, the delivery of the receivables by the seller to the purchaser will not qualify as a VAT taxable transaction and will be disregarded for any 9.3 Stamp Duty, etc. Does Spain impose stamp duty or other VAT purposes (including for purposes of assessing the entitlement documentary taxes on sales of receivables? of the seller to deduct any input VAT borne). Stamp duty will be levied upon the issuance of those Spanish receivables which credit right is evidenced by bills of exchange 9.5 Purchaser Liability. If the seller is required to pay value (letras de cambio), promissory notes (pagarés), or other draft added tax, stamp duty or other taxes upon the sale of documents in which the document has the purpose of transferring receivables (or on the sale of goods or services that give funds (titulo-valor, documento cambiario or instrumento con rise to the receivables) and the seller does not pay, then función de giro), on the basis of its amount and its maturity. will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold However, registered promissory notes which are issued on a non- receivables or collections? endorseable basis (pagarés nominativos no a la orden) will not be subject to Stamp Duty unless, pursuant to Article 33 of the Transfer Following Spanish VAT Law, recipients of the supplies of goods Tax and Stamp Duty Law, they are issued as part of a series, with a and services might be liable for the unpaid VAT under certain maturity shorter than eighteen months and with a consideration circumstances. That is the case of those recipients of goods or represented by a discount over the face value. This notwithstanding, services which, through any intentional acts or omissions, avoid the in such a case, these notes will benefit from the exemption regulated correct chargeability of the VAT. in Article 45.I.B) 15 of the Transfer Tax and Stamp Duty Law. Likewise, any purchaser of goods might be liable for any unpaid In general terms, stamp duty will be levied at the issuance of the liability triggered on prior acquisitions of the same goods acquired draft document rather than as a consequence of its transfer. when the goods were purchased for a price lower than the market However, any person that intervenes in connection with the value, if the acquirer should have presumed in light of the relevant circulation of the draft documents, including the purchaser, will be evidences that the VAT corresponding to the previous supply of the joint and severally liable with the issuer of the instrument for any same goods was not paid. Finally, there are a number of cases unpaid stamp duty. where entities acting in the name of the importer (either as an agent or as a representative) might be liable for VAT not paid by the 9.4 Value Added Taxes. Does Spain impose value added taxpayer (the importer). tax, sales tax or other similar taxes on sales of goods or As it could be followed, the role of the purchaser (limited to the services, on sales of receivables or on fees for collection acquisition of receivables from the seller) should not lead to this agent services? entity becoming liable for any VAT not charged or unpaid by the seller in its commercial dealings with the obligors. In accordance with Spanish law, a sale of receivables, as any In addition, General Tax Law allows the tax authorities to claim the transfer of credits, is subject to, but exempt from VAT, to the extent payment of taxes to entities or individuals other than the taxpayer the transfer of credits by the seller to the purchaser is made without (the seller) when such Spanish tax authorities understand and recourse and, consequently, the seller does not assume the risks of provide evidence of (i) the collaboration of the purchaser in the tax insolvency of the debtors. law infringement, or (ii) the transfer of a business activity to the In principle, under Spanish VAT Law, collection services receive a purchaser as an on-going concern (which would not be applicable different tax treatment than that applicable to the transfer of credit in a sale of receivables). with or without recourse. Therefore, there would be grounds to maintain that the collection services provided to the purchaser should be subject to VAT since collection services do not benefit from the VAT exemption set forth in the VAT Law for transfer of credits without recourse (Article 20.1.18.e of the VAT Law).

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9.6 Doing Business. Assuming that the purchaser conducts This would typically not be the case. Nevertheless, in order to no other business in Spain, would the purchaser’s exclude the risk of a permanent establishment, the seller should not purchase of the receivables, its appointment of the seller be provided with any powers of attorney of relevance with respect as its servicer and collection agent, or its enforcement of to the purchased receivables (e.g., contemplating the right to the receivables against the obligors, make it liable to tax forgive, set off, reduce or postpone collection of the receivables), in Spain? but only with the faculties related to the cash collection of the receivables. In such an scenario, the seller may constitute a permanent establishment of the purchaser in Spain (and thus, subject to Spanish taxation), if the seller, in its condition as services provider, Spain acts as an agent of the purchaser with the right to enter into agreements with third parties e.g., the obligors, on behalf of the purchaser.

Ramiro Rivera Romero Pedro Ravina Martín

Uría Menéndez Abogados, S.L.P. Uría Menéndez Abogados, S.L.P. c/ Príncipe de Vergara 187 c/ Príncipe de Vergara 187 Plaza de Rodrigo Uría Plaza de Rodrigo Uría 28002 Madrid 28002 Madrid Spain Spain Tel: +34 91 586 0073 Tel: +34 91 586 0145 Fax: +34 91 586 0777 Fax: +34 91 586 0471 Email: [email protected] Email: [email protected] URL: www.uria.com URL: www.uria.com

Ramiro Rivera is a partner in the Madrid office of Uría Menéndez. Pedro Ravina is a senior associate who joined the Madrid office He joined the firm in 1989 and became a partner in 1998. He of Uría Menéndez in 2004 and moved to the London office in acquired first-hand experience in Latin America by heading the 2010. During five months in 2008, Pedro was seconded to the Buenos Aires office of Uría Menéndez from 1998 to 2001. London office of J.P. Morgan Securities Ltd., where he focused Between 2001 and 2003, he headed the Latin America Practice on debt and securitisation EMEA transactions. Group of Uría Menéndez and coordinated the Corporate Pedro’s practice focuses on Corporate and Commercial Law, Department of the firm in Madrid from 2002 to 2006. Banking & Finance and Securities Market Law and, in particular, Ramiro focuses his practice on capital markets, banking, securitisations. corporate and commercial law and has extensive experience in In that area, he has been involved in a number of international managing and coordinating transactions throughout Latin and domestic securitisation and structured finance projects, America. advising both originators, arrangers and management In addition, Ramiro heads the firm’s Securitisation Working Group companies. Further experience includes banking and securities and devotes much of his time to securitisation and other market regulatory work. structured finance deals. His corporate and commercial practice includes M&A and general Ramiro has been recognised for his work in Capital Markets and corporate and commercial law advice. Securities by major rankings (IFLR 1000, European Legal 500, Pedro is the author or co-author in several publications related to etc.). structured finance, capital markets and banking and securities markets regulatory matters.

Uría Menéndez has been at the forefront of the design and development of securitisations in Spain and of other non-recourse structured financing transactions based on cash flows, income, or the value of assets or underlying businesses. In 1991, the firm advised one of the principal Spanish banks on the first securitisation carried out in Spain and Portugal. The firm’s experience strongly influenced the drafting of the first statute on the subject, Law 19/1992, dated 7 July, on property investment firms and funds and mortgage securitisation funds. Since then, Uría Menéndez has taken part in several other securitisation transactions for banks, savings banks and industrial and commercial companies involving a diverse range of assets including personal loans, loans granted in connection with the rental of vehicle fleets, and other commercial loans as well as in innovative transactions such as the assignment of set-off rights arising from recognition of the rate deficit affecting the electrical sector in 2000-2002. The securitisations have been structured both in Spain and internationally. Our diverse securitisation clients include originators, monoline insurers, management firms, guarantors, and rating agencies, as well as investment banks and other financial institutions. Uría Menéndez is among the firms with greatest experience in issues of securities by Mortgage Securitisation Funds and Asset Securitisation Funds in the Spanish market, in both public (listed on the Spanish AIAF market) and private transactions.

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1 Receivables Contracts of the government and government agencies. However, receivables against the government and government agencies relating to public assets (Verwaltungsvermögen) are protected against enforcement by 1.1 Formalities. In order to create an enforceable debt third parties. Receivables relating to private assets obligation of the obligor to the seller, (a) is it necessary (Finanzvermögen) of the government and government agencies, on that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone the other hand, are not immune against enforcement. sufficient; and (c) can a receivable “contract” be deemed to exist as a result of the behaviour of the parties? 2 Choice of Law – Receivables Contracts In order to create an enforceable debt obligation of the obligor, it is not required that the sales of goods or services are evidenced by a 2.1 No Law Specified. If the seller and the obligor do not formal receivables contract. Under the contract rules of the Swiss specify a choice of law in their receivables contract, what Code of Obligations (CO), a contract may not only be entered into are the main principles in Switzerland that will determine in writing, but also orally or based on implied conduct of the parties the governing law of the contract? (behaviour). By taking the parties’ conduct into account, an invoice may constitute evidence of a contract. The Swiss Statute on Private International Law (PIL) of 18 December 1987 provides that in the absence of an explicit choice of law, the contract will be governed by the law of the state with which 1.2 Consumer Protections. Do Switzerland’s laws (a) limit it is “much closely connected” (Art. 117 para. 1 PIL). rates of interest on consumer credit, loans or other kinds of receivables; (b) provide a statutory right to interest on It is presumed that the closest connection exists with the state where late payments; (c) permit consumers to cancel the party called upon to provide the ‘characteristic performance’ of receivables for a specified period of time; or (d) provide the contract has – at the time of conclusion of the contract – its other noteworthy rights to consumers with respect to ordinary residence or, if the contract was concluded in the exercise receivables owing by them? of a professional or commercial activity, where such party has its place of business. In particular, the following shall be considered The Swiss Consumer Credit Act and its implementing ordinance the characteristic obligation: provide that the maximum interest rate (including commissions and (a) the obligation of the alienator, in contracts of alienation; other costs) for consumer credits (typically loans) may not exceed (b) the obligation of the party transferring the use of a thing or a 15% per annum. Outside the applicability of the Consumer Credit right, in the case of contracts concerning the use of a thing or Act, federal case law provides for a maximum interest rate of 18% per a right; annum. (c) the service performed, in the case of mandates, work and If an obligor is in default in discharging the receivables of the seller, labour contracts, and similar service contracts; the receivables bear a default interest of 5% per annum (Art. 104 CO). (d) the obligation of the custodian, in custodial contracts; and The obligor has the right to cancel the consumer credit (loan) within (e) the obligation of the guarantor or the surety, in guaranty or 7 days after the conclusion of the consumer credit contract. surety contracts. Cancellation must be made in writing. Another noteworthy right of There are specific provisions regarding certain types of contracts the consumer is that claims for payment against consumers may that precede these rules as leges speciales. In particular the only be brought before the competent court in the country of following contracts are concerned: residence of the consumers. The sale of movable property is governed by The Hague Convention of 15 June 1955 on the Law Applicable to International 1.3 Government Receivables. Where the receivables Sales or Movable Property. However, this provision shall not apply contract has been entered into with the government or a within the scope of the United Nations Convention on the government agency, are there different requirements and International Sales of Goods (CISG) of 11 April 1980, if the laws that apply to the sale or collection of those application has not explicitly been excluded by the parties (see receivables? question 2.4 below). Contracts concerning real property (or its use) are basically There are no different requirements and laws relating to receivables governed by the law of the state in which the property is located. A

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choice of law by the parties is permitted. However, it has to be (a) First, the election of a foreign law has to relate to an noted that the form of the contract is governed by the law of the international matter. With regard to internationality, the state in which the real property is located unless that law permits the determination as to whether there is an international element application of another law. In case of real property located in or not is to be made on a case-by-case basis. However, Swiss Switzerland, the form shall be governed by Swiss law. courts are rather reluctant to disregard the parties’ conscious election of foreign law if the case at hand has at least some Contracts for a performance relating to normal consumption, which international element. is intended for a consumer’s or for his family’s personal use and not (b) The application of provisions of foreign law is precluded if it connected with his professional or commercial activities, are would produce a result which is incompatible with Swiss governed by the law of the state in which the consumer has his public policy (ordre public). Pursuant to the jurisprudence of ordinary residence if (i) the offeror has received the order in that the Swiss Federal Supreme Court, an extremely unfair result state, (ii) in that state the conclusion of the contract was preceded is required to overrule Swiss public policy. However, the Switzerland by an offer or advertisement and the consumer has carried out the escape clause of the Swiss public policy applies only if there legal acts necessary for the conclusion of the contract in that state, is a link to Switzerland in the particular case. The main areas or (iii) the offeror has prompted the consumer to go abroad and of application of this clause are in the law of persons and in deliver his order there. In such cases, a choice of law by the parties the family law. is excluded. (c) The election of foreign law is not recognised in case of mandatory provisions of Swiss law. For certain types of Employment contracts are governed by the law of the state in which contracts, the PIL contains mandatory rules regarding the the employee has his ordinary place of work. If the employee choice of the governing law. As to commercial relationships ordinarily works in several states, the employment contract is the election of foreign law can be excluded or limited in governed by the law of the state in which the employer’s business particular in the area of consumer protection, employment establishment or, in the absence of such establishment, his domicile laws and product liability (see question 2.1 above). or ordinary residence is located. However, the parties may subject Finally, the election of the governing law should not be made in bad the employment contract to the law of the state in which the faith. employee has his ordinary residence, or in which the employer has his business establishment, domicile, or ordinary residence. 2.4 CISG. Is the United Nations Convention on the Contracts concerning intellectual property are governed by the law International Sale of Goods in effect in Switzerland? of the state in which the party transferring the intellectual property right or granting the use thereof has its ordinary residence. A choice Yes. Switzerland adopted the UN Convention on Contracts for the of law is permitted. However, contracts between employers and International Sale of Goods (CISG) of 11 April 1980 as per 1 employees in the course of performance of the employment contract March 1991. Pursuant to Art. 1 para. 1 CISG, the convention shall be subject to the law governing the employment contract. applies to contracts of sale of goods between parties whose places of business are in different states: (i) when the states are contracting 2.2 Base Case. If the seller and the obligor are both resident states; or (ii) when the rules of private international law lead to the in Switzerland, and the transactions giving rise to the application of the law of a contracting state. receivables and the payment of the receivables take The CISG provides the substantive sales law for contracts regarding place in Switzerland, and the seller and the obligor the international sale of goods, insofar as it contains provisions choose the law of Switzerland to govern the receivables contract, is there any reason why a court in Switzerland settling such matters. The rules of the convention supersede the would not give effect to their choice of law? national Swiss law. However, the convention itself does not regulate procedural matters and, consequently, the CISG does not No, a court in Switzerland should give effect to their choice of law. provide for jurisdiction. The jurisdiction of the competent court is to be determined according to the rules of private international law of the forum state. 2.3 Freedom to Choose Foreign Law of Non-Resident Seller Since the requirements of the CISG (e.g. Art. 1 para. 1 lit. a) are or Obligor. If the seller is resident in Switzerland but the obligor is not, or if the obligor is resident in Switzerland met, the convention finds direct application without recourse to the but the seller is not, and the seller and the obligor choose Swiss rules on conflicts of laws. However, the parties may agree to the foreign law of the obligor/seller to govern their exclude the application of the CISG, as it is often done in practice. receivables contract, will a court in Switzerland give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law (such as public policy or 3 Choice of Law – Receivables Purchase mandatory principles of law) that would typically apply in Agreement commercial relationships such that between the seller and the obligor under the receivables contract? 3.1 Base Case. Does Switzerland’s law generally require the sale of receivables to be governed by the same law as The Swiss PIL is based on the general principle of the parties’ the law governing the receivables themselves? If so, does autonomy to contract. This principle includes the right of the that general rule apply irrespective of which law governs contracting parties to freely choose the governing law. For the the receivables (i.e., Switzerland’s laws or foreign laws)? purpose of this general principle, the Swiss PIL provides that contracts are subject to the law chosen by the parties (Art. 116 para. No. The parties to a receivables purchase agreement are free to 1 PIL). This applies also where only one of the parties is located choose which law shall govern their contract, irrespective of the law Switzerland and the parties chose the foreign law of the party governing the receivables themselves. located outside Switzerland. However, certain specifics regarding performance (e.g. transfer and However, there are several general restrictions and limitations to the perfection) of the receivables will be subject to the law of the state right to freely elect the governing law under Swiss law: in which they actually occur, irrespective of the law governing the

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receivables contract (Art. 125 PIL). In addition, the assignment of 3.4 Example 3: If (a) the seller is located in Switzerland but the receivables, however, is typically governed by the law the obligor is located in another country, (b) the governing the receivables themselves. receivable is governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose 3.2 Example 1: If (a) the seller and the obligor are located in the law of the obligor’s country to govern the receivables Switzerland, (b) the receivable is governed by the law of purchase agreement, and (e) the sale complies with the Switzerland, (c) the seller sells the receivable to a requirements of the obligor’s country, will a court in purchaser located in a third country, (d) the seller and the Switzerland recognise that sale as being effective against purchaser choose the law of Switzerland to govern the the seller and other third parties (such as creditors or receivables purchase agreement, and (e) the sale insolvency administrators of the seller) without the need complies with the requirements of Switzerland, will a court to comply with Switzerland’s own sale requirements?

in Switzerland recognise that sale as being effective Switzerland against the seller, the obligor and other third parties (such Yes. Please refer to question 3.2. A court in Switzerland will as creditors or insolvency administrators of the seller and recognise such a sale as being effective against the seller, the the obligor)? obligor and other third parties, provided no mandatory provisions of law other than those chosen by the parties would be violated. Yes. Under Swiss conflict of law provisions, the parties to a receivables contract are free to choose which law shall govern their However, certain specifics regarding performance (e.g. transfer and contract, irrespective of the law governing the receivables perfection) of the receivables will be subject to the law of the state themselves. This applies whether the purchaser, the seller or the in which they actually occur, irrespective of the law governing the obligor are in different countries or not and whether the parties receivables contract (Art. 125 PIL). choose a jurisdiction in which one of them is located or not. In particular, a court in Switzerland permits the seller, the purchaser 3.5 Example 4: If (a) the obligor is located in Switzerland but and the obligor to choose the law of Switzerland to govern the the seller is located in another country, (b) the receivable receivables sale if only one of the seller, the purchaser or the obligor is governed by the law of the seller’s country, (c) the is resident in Switzerland. seller and the purchaser choose the law of the seller’s country to govern the receivables purchase agreement, A court in Switzerland will recognise such a sale as being effective and (d) the sale complies with the requirements of the against the seller, the obligor and other third parties, provided no seller’s country, will a court in Switzerland recognise that mandatory provisions of law other than chosen by the parties would sale as being effective against the obligor and other third be violated. parties (such as creditors or insolvency administrators of However, certain specifics regarding performance (e.g. transfer and the obligor) without the need to comply with Switzerland’s perfection) of the receivables will be subject to the law of the state own sale requirements? in which they actually occur, irrespective of the law governing the receivables contract (Art. 125 PIL). In addition, the assignment of Yes. Please refer to question 3.2. A court in Switzerland will the receivables, however, is typically governed by the law recognise such a sale as being effective against the seller, the governing the receivables themselves. obligor and other third parties, provided no mandatory provisions of law other than those chosen by the parties would be violated. However, certain specifics regarding performance (e.g. transfer and 3.3 Example 2: Assuming that the facts are the same as Example 1, but either the obligor or the purchaser or both perfection) of the receivables will be subject to the law of the state are located outside Switzerland, will a court in in which they actually occur, irrespective of the law governing the Switzerland recognise that sale as being effective against receivables contract (Art. 125 PIL). the seller and other third parties (such as creditors or insolvency administrators of the seller), or must the 3.6 Example 5: If (a) the seller is located in Switzerland requirements of the obligor’s country or the purchaser’s (irrespective of the obligor’s location), (b) the receivable is country (or both) be taken into account? governed by the law of Switzerland, (c) the seller sells the receivable to a purchaser located in a third country, (d) Yes. Please refer to question 3.2. A court in Switzerland will the seller and the purchaser choose the law of the recognise such a sale as being effective against the seller, the purchaser’s country to govern the receivables purchase obligor and other third parties, provided no mandatory provisions of agreement, and (e) the sale complies with the law other than those chosen by the parties would be violated. requirements of the purchaser’s country, will a court in However, certain specifics regarding performance (e.g. transfer and Switzerland recognise that sale as being effective against the seller and other third parties (such as creditors or perfection) of the receivables will be subject to the law of the state insolvency administrators of the seller, any obligor located in which they actually occur, irrespective of the law governing the in Switzerland and any third party creditor or insolvency receivables contract (Art. 125 PIL). In addition, the assignment of administrator of any such obligor)? the receivables, however, is typically governed by the law governing the receivables themselves. Yes. Please refer to question 3.2. A court in Switzerland will recognise such a sale as being effective against the seller, the obligor and other third parties, provided no mandatory provisions of law other than those chosen by the parties would be violated. However, certain specifics regarding performance (e.g. transfer and perfection) of the receivables will be subject to the law of the state in which they actually occur, irrespective of the law governing the receivables contract (Art. 125 PIL).

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In addition, the assignment of the receivables, however, is typically and perfected without notice to the respective obligors or filings governed by the law governing the receivables themselves. with the competent land registry and will include the security over the encumbered land (which passes to the purchaser ex lege as ancillary right of the assigned receivables). Although no filings or 4 Asset Sales registrations with the land registry are necessary for the perfection of the sale and transfer of receivables, purchasers will typically 4.1 Sale Methods Generally. In Switzerland what are the wish to be registered as creditors in the creditors’ register with the customary methods for a seller to sell receivables to a effect that insurers may not validly discharge their payment purchaser? What is the customary terminology – is it obligations to the land owner without the consent of the registered called a sale, transfer, assignment or something else? creditor. In case a mortgage certificate (Schuldbrief) was provided as Switzerland The seller: security by the obligor to the lender and (i) transferred to the latter (i) enters into a purchase contract (which does not necessarily by way of security (Sicherungsübereignung), the lender/originator have to be in writing) with the purchaser; and selling the receivables (loan claims) to the special purpose vehicle (ii) assigns the receivables against the respective obligor(s) to (SPV) may transfer the security to the SPV by transferring the the purchaser. mortgage certificate to the SPV by way of security In order for an assignment to be effective, the claims must be (Sicherungsübereignung) or pledge (Pfand). In the case of bearer assignable, i.e. the assignment must not be prohibited by law, mortgage certificates, physical delivery is required and in the case contractual non-assignment clauses or the nature of the receivables. of registered mortgage certificates, physical delivery and The declaration of assignment must be made in writing and signed endorsement are necessary. If instead, (ii) the mortgage certificate by at least the assignor. It is common practice that the parties enter was pledged to the lender, the security passes to the SPV ex lege as into an assignment agreement signed by both parties. Notification ancillary right at the time of assignment of the loan claim. to the respective obligor is not required in order for the assignment The transfer of marketable debt securities requires, in case of bearer to be valid. However, until the obligor is notified of the assignment, securities (Inhaberpapiere), physical delivery of the securities and the bona fide obligor may validly discharge his obligations by in case of registered securities (Ordrepapiere), physical delivery making payments to the assignor. and endorsement to the purchaser. Special rules apply for book- The customary terminology is a sale and assignment of receivables. entry securities.

4.2 Perfection Generally. What formalities are required 4.4 Obligor Notification or Consent. Must the seller or the generally for perfecting a sale of receivables? Are there purchaser notify obligors of the sale of receivables in any additional or other formalities required for the sale of order for the sale to be effective against the obligors receivables to be perfected against any subsequent good and/or creditors of the seller? Must the seller or the faith purchasers for value of the same receivables from purchaser obtain the obligors’ consent to the sale of the seller? receivables in order for the sale to be an effective sale against the obligors? Does the answer to this question The existence of a purchase agreement and an assignment in writing vary if (a) the receivables contract does not prohibit is required for an effective sale and assignment of receivables. assignment but does not expressly permit assignment; or Perfection does not require that the obligor be notified of the (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect assignment. However, as long as the obligor is not notified of the a sale, are there any benefits to giving notice – such as assignment, he may validly discharge his obligations if he makes cutting off obligor set-off rights and other obligor payments to the assignor in good faith. defences? A good faith purchaser/assignee of receivables does not exist (exceptions apply for bills of exchange/securities). If the assignor A notification of the obligor is not required for the sale/assignment assigns the same receivables several times to different parties, the to be effective. No other formalities or filings with any first assignee acquires first rights. After the first valid assignment, administrative or governmental authority in Switzerland are the assignor loses his right to dispose of said receivables and cannot required in order to render the sale/assignment of receivables validly assign them to any other party. The first assignor becomes effective. While the validity and effectiveness of the the owner of the receivables. However, the obligor is protected if sale/assignment is not dependent on the notification to the obligor, he has been notified of the second assignment only and makes the latter may validly discharge its obligations by payment to the payment to the alleged (later) assignee. The first and rightful seller/assignor, as long as the assignment has not been notified to assignee is then entitled to raise a claim for unjust enrichment and the obligor. damages against the second assignee. In order to validly effect a sale/assignment of receivables, the obligor’s consent to the sale/assignment is not required, subject to 4.3 Perfection for Promissory Notes, etc. What additional or the following exceptions, the contract between the seller/assignor different requirements for sale and perfection apply to and the obligor: (i) contains a prohibition of assignment or sales of promissory notes, mortgage loans, consumer expressly provides for the assignment to be subject to the consent loans or marketable debt securities? of the obligor; (ii) is considered to have been entered into intuitu personam; or (iii) is subject to Swiss banking secrecy. The The perfection of promissory notes (einfacher Schuldschein) receivables contract between the seller/assignor and obligor does relating to receivables requires a valid assignment. not have to expressly permit the assignment of claims. With regard to mortgage-backed loans, the sale and transfer of When bankruptcy proceedings regarding the seller/assignor are receivables secured by a mortgage (Grundpfandverschreibung) as a opened, notification of the obligor (by the purchaser/assignee) is right in rem over the underlying encumbered land to the purchaser highly recommended. Upon notification, the obligor can only will be effected by way of assignment. Such assignment is effective validly discharge his obligations by making payments to the

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assignee. If he is not notified in due time and pays the bankrupt identified or identifiable regarding the obligor, legal ground and assignor, he is validly discharged. amount. This, in particular, holds true in case the seller sells all of his If the obligor becomes bankrupt, the obligor loses his capacity to receivables to the purchaser, including future receivables dispose of his assets. All assets form part of the bankrupt estate. (Globalzession). It is, however, advisable to identify the receivables Thus, when notified of the assignment, the obligor is not entitled to to be sold either in advance, or with respect to future receivables, make payments to the assignee. periodically to evidence the receivables that have come into existence.

4.5 Notice Mechanics. If notice is to be delivered to obligors, 4.8 Respect for Intent of Parties; Economic Effects on Sale. whether at the time of sale or later, are there any If the parties denominate their transaction as a sale and requirements regarding the form the notice must take or state their intent that it be a sale will this automatically be how it must be delivered? Is there any time limit beyond respected or will a court enquire into the economic Switzerland which notice is ineffective – for example, can a notice of characteristics of the transaction? If the latter, what sale be delivered after the sale, and can notice be economic characteristics of a sale, if any, might prevent delivered after insolvency proceedings against the obligor the sale from being perfected? Among other things, to have commenced? Does the notice apply only to specific what extent may the seller retain (a) credit risk; (b) receivables or can it apply to any and all (including future) interest rate risk; and/or (c) control of collections of receivables? Are there any other limitations or receivables without jeopardising perfection? considerations? The “true sale” principle aims to ensure that the sale of assets from the There is no requirement as to form of the notice. One should, seller to the purchaser is made on a “no recourse” basis both from a however, ensure that the obligor received the notice by sending the legal and accounting perspective. The Swiss legal framework is able notice through adequate means (registered letter, courier, etc.). to satisfy all requirements which result from this concept although it is There is no limit beyond which notice is ineffective for Swiss law not a recognised legal concept under Swiss law (but is an accounting governed receivables against obligors domiciled in Switzerland. and tax concept). The question as to whether or not the “true sale” The notice applies to all (including future) receivables. For the requirement is met or not will widely depend on the economic effects of bankruptcy proceedings on future receivables, please conditions and circumstances of each individual case. The fact that refer to questions 6.1 to 6.5. the seller retains a credit risk, or an interest rate risk, or the control of the collection of the receivables is as such not a factor which may jeopardise perfection. The factor which may put a true sale at risk 4.6 Restrictions on Assignment; Liability to Obligor. Are would be circumstances where the price is not determined at arm’s restrictions in receivables contracts prohibiting sale or length so that there is a risk of challenge by third party creditors assignment generally enforceable in Switzerland? Are there exceptions to this rule (e.g., for contracts between requesting a “revocation” in the event of insolvency of the seller on the commercial entities)? If Switzerland recognises grounds that they have been defrauded by the sale of the receivables. prohibitions on sale or assignment and the seller The risk of such a claim is generally considered to be excluded if the nevertheless sells receivables to the purchaser, will either sale of the receivables is made at market value. the seller or the purchaser be liable to the obligor for breach of contract or on any other basis? 4.9 Continuous Sales of Receivables. Can the seller agree in an enforceable manner (at least prior to its insolvency) to A contract containing a prohibition to assign receivables is continuous sales of receivables (i.e., sales of receivables enforceable in Switzerland. There is one exception to this rule – as and when they arise)? which is, however, of little practical relevance: the obligor cannot raise against the assignee, who has acquired the claim in reliance Swiss law provides for the assignment of claims on a revolving upon a written acknowledgment of indebtedness basis (as and when they arise). The question as to whether or not (Schuldbekenntnis), which does not contain a prohibition of receivables that come into existence after the date of the seller’s assignment, the defence that the assignment has been precluded by bankruptcy can be validly assigned to the assignee, is not settled agreement (Art. 164 para. 2 CO). under Swiss law (please refer to question 4.10). If the seller assigns receivables despite a contractually stipulated prohibition to assign clause, the seller will be liable towards the obligor 4.10 Future Receivables. Can the seller commit in an for any damages suffered as a result of the unauthorised assignment. enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables 4.7 Identification. Must the sale document specifically identify purchase agreement (e.g., “future flow” securitisation)? If each of the receivables to be sold? If so, what specific so, how must the sale of future receivables be structured information is required (e.g., obligor name, invoice to be valid and enforceable? Is there a distinction number, invoice date, payment date, etc.)? Do the between future receivables that arise prior to or after the receivables being sold have to share objective seller’s insolvency? characteristics? Alternatively, if the seller sells all of its receivables to the purchaser, is this sufficient It is possible under Swiss law to sell/assign future claims (i.e. identification of receivables? claims that come into existence after the date of the receivables purchase/assignment agreement) provided that they are sufficiently Under generally applicable principles of the Code of Obligations, the identified or identifiable as to the obligor, legal ground and amount receivables must be identified or identifiable. Whether receivables are (also see question 4.7). There is no further requirement for the sale identifiable or not must be determined on a case-by-case basis. There and the assignment of future receivables to be valid and enforceable are no standardised objective characteristics. With regard to future under Swiss law. There is no specific Federal Supreme Court receivables (receivables which come into existence after the decision regarding the enforceability of future receivables that have assignment), the Federal Supreme Court held that they must be arisen (rather than matured only) after the commencement of Swiss

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bankruptcy proceedings with regard to the seller/assignor. unless the assignment is prohibited by law, contractual non- Since the assignor loses his capacity to dispose of the assigned assignment stipulations or due to the nature of the receivables. The claims upon the adjudication of bankruptcy/insolvency only formal requirement is that the pledge agreement be in writing. proceedings, receivables that arise after the seller’s insolvency may Neither the validity nor the perfection of the pledge depend on the not be validly assigned and the competent insolvency official may notification of the debtor. challenge the validity of the transfer of future claims. 5.3 Purchaser Security. If the purchaser grants security over 4.11 Related Security. Must any additional formalities be all of its assets (including purchased receivables) in fulfilled in order for the related security to be transferred favour of the providers of its funding, what formalities concurrently with the sale of receivables? If not all must the purchaser comply with in Switzerland to grant related security can be enforceably transferred, what and perfect a security interest in purchased receivables Switzerland methods are customarily adopted to provide the governed by the laws of Switzerland and the related purchaser the benefits of such related security? security?

The assignment of receivables includes so-called ancillary rights. Please refer to question 5.2. Some security interests constitute such ancillary rights, e.g. a pledge. Hence, when receivables that are secured by a pledge are 5.4 Recognition. If the purchaser grants a security interest in transferred, the pledge – automatically – passes to the assignee ex receivables governed by the laws of Switzerland, and that lege. However, other security interests such as mortgage security interest is valid and perfected under the laws of certificates (Schuldbriefe) do not constitute ancillary rights and do the purchaser’s country, will it be treated as valid and not pass ex lege. Hence, when the receivables secured by a perfected in Switzerland or must additional steps be taken mortgage certificate are assigned to the purchaser/assignee, specific in Switzerland? action is required in order for the security interest to pass to the assignee. Bearer mortgage certificates must be transferred by Under the Swiss conflicts of laws rules, the purchaser/parties is/are physical delivery and registered mortgage certificates by physical free to choose the law under which the purchaser grants a security delivery and endorsement. Please also refer to question 4.3. interest. If the security interest is validly perfected under the relevant foreign law, the security interest will generally be treated as valid and perfected under Swiss law. Pursuant to the Swiss 5 Security Issues conflicts of laws rules, the following special rules apply to the debtors or third parties, respectively, in relation to the assigned or pledged receivables: 5.1 Back-up Security. Is it customary in Switzerland to take a “back-up” security interest over the seller’s ownership Assigned receivables: the assignor and the assignee’s choice of a interest in the receivables and the related security, in the foreign law may not be asserted against, and will not be binding event that the sale is deemed by a court not to have been upon, the debtor without his consent if the law governing the perfected? receivables is different from the chosen law. In other words, the validity and perfection of the foreign law-governed assignment It is not customary to provide for a ‘back-up’ security interest. cannot be asserted against the debtor, unless the debtor consents to However, the parties are at liberty to choose a back-up security. the foreign law, or the requirements for a valid and perfected assignment under the laws governing the receivables are met. 5.2 Seller Security. If so, what are the formalities for the Pledged receivables: the pledgor and the pledgee’s choice of seller granting a security interest in receivables and foreign law may not be asserted against, and will not be binding related security under the laws of Switzerland, and for upon: (i) the debtor if the law governing the receivables is different such security interest to be perfected? from the chosen law; and (ii) bona fide third parties, such as third party creditors. Security interest in receivables may be established by: Instead, the law governing the receivables will apply to the debtor (i) assignment by way of security (Sicherungszession); or (unless the debtor consents to the law chosen by the pledgor and (ii) pledge (Verpfändung). pledgee) and the law of the jurisdiction where the pledgee is Assignment by way of security is the more commonly used form to resident will apply to bona fide third parties. create security and is preferable for the assignee. In particular, it leaves more flexibility in terms of available foreclosure proceedings 5.5 Additional Formalities. What additional or different (when the purchaser/assignor becomes bankrupt) and will de facto requirements apply to security interests in or connected to lead to the earlier completion of foreclosure proceedings. The two insurance policies, promissory notes, mortgage loans, forms of security are briefly described below. consumer loans or marketable debt securities? Assignment by way of security (Art. 164 CO): when receivables are assigned, the assignee becomes the owner of the receivables. A security interest in marketable debt instruments can be created by Even if, technically, the assignee could dispose of the assigned way of pledge. The establishment of a pledge in respect of marketable receivables freely due to his full ownership interest in the debt securities requires physical delivery of the certificates (in the case receivables, his right to dispose of the receivables is contractually of bearer instruments) together with an endorsement (in the case of limited; he is only allowed to dispose of the receivables in instruments drawn to the order of a person) or assignment. A security accordance with the underlying security assignment agreement and interest can also be established by transfer by way of security to realise the security for the secured obligations. (Sicherungsübereignung). The same rules apply. Pledge (Art. 899 et seqq. Civil Code (CC)): claims and other Under Swiss law, neither notification of the debtor (or owner of the rights can be pledged if they are assignable. Claims are assignable encumbered land in case of mortgages) nor registration or filing with a governmental authority is required for the perfection of the pledge.

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5.6 Trusts. Does Switzerland recognise trusts? If not, is In general, existing receivables validly assigned are bankruptcy there a mechanism whereby collections received by the remote. This means, in the event of bankruptcy or similar seller in respect of sold receivables can be held or be insolvency proceedings against the seller, the existing receivables deemed to be held separate and apart from the seller’s will not fall within its bankrupt estate. Moreover, the openings of own assets until turned over to the purchaser? bankruptcy or similar proceedings do not cause an “automatic stay” of such receivables under Swiss law. Accordingly, the purchaser is Substantive Swiss trust law does not exist. Therefore, a trust in its free to collect, transfer or otherwise exercise his ownership rights literal sense cannot be set up under Swiss law. Since July 2007, the over the assigned receivables. Hague Convention on the Law Applicable to Trusts and on their Future receivables are defined as assigned receivables that have not Recognition 1985 (Hague Trust Convention) is applicable in yet come into existence. Such receivables may be assigned under Switzerland. The conflict of laws Act has incorporated the Hague Swiss law if the future claims can be defined with sufficient Trust Convention into national law and allows for full and complete Switzerland specificity, whereas the assignment becomes effective upon recognition of foreign trusts in Switzerland. existence of the assigned receivable. However, a valid assignment Collections received by the seller in respect of sold receivables can of future receivables will cease to be valid if bankruptcy be held in a separate account of the seller apart from his own assets proceedings are opened against the originator of the receivables. until the collection proceeds are turned over to the purchaser. After The opening of bankruptcy proceedings causes all obligations to the assignment of receivables, the assignee is the rightful owner of fall due, according to Art. 208 para.1 Federal Statute on Debt the receivable. Therefore, the assignee has to authorise the assignor Enforcement and Bankruptcy (Bankruptcy Act) of 11 April 1889. to collect the receivables (in his own name) on behalf of the Pursuant to the current jurisprudence of the Swiss Federal Supreme assignee. To ensure that the debtors transfer the funds to a separate Court, future receivables are not deemed to have been validly account of the seller, the receivables contract between the seller and assigned and therefore fall within the bankruptcy estate of the seller the debtors has to specify such separate account. in the event of bankruptcy or similar insolvency proceedings against the seller (Durchgangstheorie). Regarding the assigned 5.7 Bank Accounts. Does Switzerland recognise escrow future receivables, the purchaser will be treated as an unsecured accounts? Can security be taken over a bank account creditor ranking equal to all the other unsecured creditors of the located in Switzerland? If so, what is the typical method? bankruptcy seller (mainly in the third class). Although no Would courts in Switzerland recognise a foreign-law grant “automatic stay” applies under Swiss law with respect to future of security (for example, an English law debenture) taken receivables, the purchaser is not entitled to collect, transfer or over a bank account located in Switzerland? otherwise exercise ownership rights. According to the prevailing opinion in Switzerland, the assignment Switzerland recognises escrow accounts. It is also possible to of receivables is linked to the underlying transaction (e.g. the create a security interest over bank accounts located in Switzerland. assignment agreement) and therefore only valuable if the sale is There are two possibilities: bank account assets and claims against perfected. With the opening of bankruptcy proceedings all seizable the bank relating to the bank account assets can either be (i) assets owned by the debtor at this time, irrespective of where they pledged, or (ii) assigned by way of security. A pledge is preferable are situated, form part of the bankruptcy estate. This applies also to for the security provider/pledgor since he remains the owner of the controversial receivables. bank account assets, whereas an assignment is preferable for the security taker/assignee because he becomes the owner of the bank Immediately upon receipt of the bankruptcy order, the insolvency account assets. He is also in a better position in foreclosure official raises up an inventory of the assets belonging to the proceedings. For further reference, please see question 5.3. bankruptcy estate. If the insolvency official doubts the sale of certain (existing) receivables to be perfected, he lists the receivables Pursuant to the Swiss conflicts of laws rules, the parties are free to in the inventory. Further, the insolvency official has the ability to choose the law under which they create a security interest. If the take all necessary measures for their safeguarding (Art. 221 security interest over a Swiss bank account is validly perfected Bankruptcy Act), e.g. stay collection and enforcement actions until under the relevant foreign law, the security interest will generally be it is determined that the sale is perfected. treated as valid and perfected under Swiss law between the parties (security provider and security taker). However, limitations apply According to Swiss law, it makes no difference whether or not the in relation to the account bank. The foreign law may not be binding receivables have been assigned for security purposes for the account bank. Please refer to question 5.4. (Sicherungszession) in connection with a secured financing.

6 Insolvency Laws 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 6.1 Stay of Action. If, after a sale of receivables that is exercise of rights (by means of injunction, stay order or otherwise perfected, the seller becomes subject to an other action)? insolvency proceeding, will Switzerland’s insolvency laws automatically prohibit the purchaser from collecting, Once bankruptcy proceedings have been opened, claims forming transferring or otherwise exercising ownership rights over part of the bankruptcy estate can no longer be validly discharged by the purchased receivables (a “stay of action”)? Does the payment to the debtor (Art. 205 Bankruptcy Act). With regard to insolvency official have the ability to stay collection and future receivables (which fall into the bankruptcy estate of the enforcement actions until he determines that the sale is seller), the competent insolvency official will notify the debtors of perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather the opening of bankruptcy proceedings and inform them that the than the owner of the receivables? sole legally valid way of discharging their obligation is by payment to the bankruptcy office. Payment made to the purchaser will not Swiss law distinguishes between the sale of existing receivables and relieve the debtor from its payment obligations, unless it is the sale of future receivables: otherwise received by the bankrupt estate. As to the already ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 349 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pestalozzi Attorneys at Law Ltd Switzerland

existing receivables, the competent insolvency official will not 6.5 Effect of Proceedings on Future Receivables. What is the interfere with the exercise of rights, provided that the sale is effect of the initiation of insolvency proceedings on (a) effective and perfected (see question 6.1 above). sales of receivables that have not yet occurred or (b) on sales of receivables that have not yet come into existence? 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or Pursuant to the current jurisprudence of the Swiss Federal Supreme reverse transactions that took place during a “suspect” or Court, the sale of future receivables by way of assignment is not “preference” period before the commencement of the bankruptcy remote (see question 6.1 above). After the opening of insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in Switzerland for (a) bankruptcy proceedings, such receivables fall within the bankruptcy transactions between unrelated parties and (b) estate of the seller on which the bankruptcy administration

Switzerland transactions between related parties? (Konkursverwaltung) has the exclusive power to dispose. The debtor himself is no longer allowed to dispose of the assets within the The insolvency official can avoid a transaction (action pauliana) bankruptcy estate. Acts by the debtor concerning such assets deem to under the following circumstances: be invalid as against his creditors (Art. 204 para. 1 Bankruptcy Act). (a) Any relevant transaction which the debtor made during a suspect period of one year before the seizure of assets or the 7 Special Rules opening of bankruptcy proceedings is voidable. Relevant transactions are gifts and voluntary settlements, as well as transactions equivalent to a gift, e.g. transactions in which 7.1 Securitisation Law. Is there a special securitisation law the debtor accepted a counter-performance out of proportion (and/or special provisions in other laws) in Switzerland to his own or transactions through which the debtor obtained establishing a legal framework for securitisation for himself or a third party a life annuity, an endowment, a transactions? If so, what are the basics? usufruct or a right of habitation (Art. 286 Bankruptcy Act). (b) The insolvency official may avoid the granting of collateral There is no special securitisation law in Switzerland. Regarding the for existing obligations without the obligation to do so, the transfer of assets from the originator to the SPV, the provisions of settlement of a debt of money by unusual means and the the Code of Obligations are applicable (in particular the provisions payment of an obligation not yet due for payment may, regarding sale and assignment). provided that (i) the debtor carried them out during a suspect period of one year before the seizure of assets or the opening of bankruptcy proceedings, and (ii) the debtor was at that 7.2 Securitisation Entities. Does Switzerland have laws time already insolvent. The transaction is not avoided, specifically providing for establishment of special purpose however, if the recipient proves that he was unaware, and entities for securitisation? If so, what does the law need not have been aware, of the debtor’s insolvency (Art. provide as to: (a) requirements for establishment and 287 Bankruptcy Act). management of such an entity; (b) legal attributes and (c) Finally, all transactions are voidable which the debtor carried benefits of the entity; and (c) any specific requirements as out during a suspect period of five years prior to the seizure to the status of directors or shareholders? of assets or the opening of bankruptcy proceedings with the intention, apparent to the other party, of disadvantaging his Switzerland does not have any such special laws for SPVs. Stock creditors or of favourising certain of his creditors to the corporations and limited liability companies are available for the disadvantage of others (Art. 288 Bankruptcy Act). establishment of a SPV. The requirements for the establishment and As to the length of the suspect period, Swiss law does not management of an SPV as well as the status of directors and distinguish between transactions between related and unrelated shareholders are set forth in the respective statutory provisions parties. applicable to stock corporations and limited liability companies.

6.4 Substantive Consolidation. Under what facts or 7.3 Non-Recourse Clause. Will a court in Switzerland give circumstances, if any, could the insolvency official effect to a contractual provision (even if the contract’s consolidate the assets and liabilities of the purchaser with governing law is the law of another country) limiting the those of the seller or its affiliates in the insolvency recourse of parties to available funds? proceeding? A court in Switzerland might not give effect to a contractual As long as the purchaser is legally independent from the seller and provision alone limiting the recourse of parties to available funds. is acting in arm’s length terms, the risk of consolidation is quite The whole transaction as a whole must be structured in way that the remote from a Swiss law perspective. The legal concept of a “true no recourse is possible (please refer to question 4.8). sale” is not established in Switzerland (see question 3.4 above). Therefore, no distinction is made between “true sale” and secured 7.4 Non-Petition Clause. Will a court in Switzerland give financing under Swiss law. However, in a secured financing, the effect to a contractual provision (even if the contract’s seller may reserve the right to repurchase the assigned receivables governing law is the law of another country) prohibiting from the purchaser. In such case the insolvency official may the parties from: (a) taking legal action against the assume that there is no valid assignment of the receivables, which purchaser or another person; or (b) commencing an would lead to a de facto consolidation. However, such risks can be insolvency proceeding against the purchaser or another prevented by a proper wording and structure of the assignment person? agreement. The principle of liberty of contracts governs Swiss law. The parties are thus at liberty to enter into an agreement waiving the right to take legal action against the SPV. Such non-petition clauses are enforceable,

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subject to the following limitations: a party may not validly waive its the Federal Act on Data Protection (Data Protection Act) of 19 June rights under compulsory provisions of Swiss law or in a way that 1992. The Data Protection Act applies to the processing of data would be against “bonos mores” (Art. 27 CC). Further, such a waiver pertaining to natural persons and corporations by private persons may be subject to challenge in the case of bankruptcy of one of the and federal bodies. However, it does not apply to personal data that parties who has waived his rights against the SPV, in accordance with is processed by a natural person exclusively for personal use and the limitations which result generally from Swiss bankruptcy law. which is not disclosed to outsiders. Data that doesn’t qualify as ‘sensitive personal data’ or ‘personality profiles’ under the Swiss Data Protection Act can be communicated without the consent of 7.5 Independent Director. Will a court in Switzerland give effect to a contractual provision (even if the contract’s the debtor (Art. 4 para. 5 e contrario Data Protection Act). governing law is the law of another country) or a provision The Data Protection Act contains a special regulation relating cross- in a party’s organisational documents prohibiting the border disclosure. Thus, personal data may not be disclosed abroad Switzerland directors from taking specified actions (including if the privacy of the data subjects would be seriously endangered commencing an insolvency proceeding) without the thereby, in particular due to the absence of legislation that affirmative vote of an independent director? guarantees adequate protection. In the absence of such legislation, disclosure of personal data abroad is subject to various restrictions, Such contractual provisions are enforceable unless there is an event including the following: (i) sufficient safeguards (in particular triggering the (statutory) duty of the directors to take action. The contractual clauses) shall ensure an adequate level of protection Code of Obligations defines when the directors must commence abroad; (ii) the data subject must have consented in the specific insolvency proceedings. If the SPV is organised as a stock case; and (iii) the processing shall be directly connected with the corporation, the directors must make the relevant filings in the conclusion or the performance of a contract and the personal data event of qualified financial distress (Art. 725 et seqq. CO). Failure shall be that of a contractual party (Art. 6 Data Protection Act). to do so may subject the directors to personal liability due to The use or dissemination of data by Swiss banks requires special violation of their (statutory) duty of care. precautions due to the Swiss banking secrecy. Swiss banking secrecy is based on the contractual relationship between the bank 8 Regulatory Issues and its clients, e.g. the bank’s loyalty as an agent to the client as principal, the bank’s obligation not to contravene the client’s privacy rights and Art. 47 of the Swiss Federal Act on Banks and 8.1 Required Authorisations, etc. Assuming that the Savings Institutions (Banking Act) of 8 November 1934 which purchaser does no other business in Switzerland, will its purchase and ownership or its collection and enforcement makes the violation of banking secrecy a criminal offense. of receivables result in its being required to qualify to do Swiss banking secrecy imposes an obligation upon the bank, their business or to obtain any licence or its being subject to executive bodies and their employees to treat any client-related regulation as a financial institution in Switzerland? Does information confidentially so as to avoid any disclosure of the answer to the preceding question change if the information potentially harmful to a client’s interest. However, purchaser does business with other sellers in client’s right to privacy does not mean that Swiss banks do not need Switzerland? to know the identity of their clients. Moreover, Swiss banks are obliged to identify each of their contractual partners and The mere purchasing, ownership or collecting of receivables will specifically the beneficial owner of the assets involved in any neither require a foreign purchaser to do business or obtain any business relationship. Thus, it has to be noted that there are no licence in Switzerland nor is such a purchaser qualified as a ‘anonymous accounts’ in Switzerland as regards the bank’s duty to financial institution (e.g. securities dealer, financial intermediary, identify their clients. This banking secrecy has never been absolute, investment fund, bank, insurer) under Swiss law. and the obligation to secure their client’s privacy does not dispense This analysis changes only if the purchaser conducts a business in banks from federal and cantonal disclosure obligations. In Switzerland that requires a licence. The mere fact that the particular, legal assistance is granted in the event of tax fraud. purchaser does business with other sellers in Switzerland does not The Data Protection Act and the bank secrecy rules apply both to change this analysis. individuals and enterprises.

8.2 Servicing. Does the seller require any licences, etc., in 8.4 Consumer Protection. If the obligors are consumers, will order to continue to enforce and collect receivables the purchaser (including a bank acting as purchaser) be following their sale to the purchaser, including to appear required to comply with any consumer protection law of before a court? Does a third party replacement servicer Switzerland? Briefly, what is required? require any licences, etc., in order to enforce and collect sold receivables? The Federal Act on Consumer Credit of 23 March 2001 (Consumer The mere purchasing, enforcing or collecting of the sold receivables Credit Act) applies only to certain agreements between lenders and by the seller (servicing) does not require the seller to obtain any consumers, such as loans not secured by mortgages or usual licence in Switzerland. The same applies to a third party guarantees, loans for amounts between CHF 500 and CHF 80,000 replacement servicer. or short-term loans (Art. 7 para. 1 lit. e e contrario Consumer Credit Act). Agreements under the Consumer Credit Act must be concluded in 8.3 Data Protection. Does Switzerland have laws restricting writing. It has to be noted that the Consumer Credit Act basically the use or dissemination of data about or provided by allows the consumer to terminate his loan at any time by repaying obligors? If so, do these laws apply only to consumer obligors or also to enterprises? the outstanding amount. Such an early termination allows the consumer to retrieve a part of the costs of his loan (Art. 17 para. 2 In Switzerland, the processing of information is mainly regulated in Consumer Credit Act).

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8.5 Currency Restrictions. Does Switzerland have laws 9.4 Value Added Taxes. Does Switzerland impose value restricting the exchange of Switzerland’s currency for added tax, sales tax or other similar taxes on sales of other currencies or the making of payments in goods or services, on sales of receivables or on fees for Switzerland’s currency to persons outside the country? collection agent services?

Swiss law does not generally restrict the exchange of Swiss The sale of goods and the provision of services, including those of currency (Swiss Francs) for other currencies or payments in Swiss a collecting agent (“servicing”), are, in general, subject to Swiss Francs to persons outside of Switzerland. value added tax (VAT) at the current standard rate of 8.0%. The sale of receivables is exempt from VAT as a financial 9 Taxation transaction but the purchaser may become liable for the VAT included in the assigned receivables. Switzerland 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser 9.5 Purchaser Liability. If the seller is required to pay value be subject to withholding taxes in Switzerland? Does the added tax, stamp duty or other taxes upon the sale of answer depend on the nature of the receivables, whether receivables (or on the sale of goods or services that give they bear interest, their term to maturity, or where the rise to the receivables) and the seller does not pay, then seller or the purchaser is located? will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold receivables or collections? Payments by a Swiss debtor are, in general, not subject to Swiss withholding tax. However, interest payments may be subject to In general, the taxing authority will not be able to make such claims Swiss withholding tax at a rate of 35% if made under a banking regarding VAT, stamp duty or income and profit taxes. account, bond, debenture or money market paper, or if a Swiss debtor’s overall financing activities are regarded, for tax purposes, However, Switzerland has introduced a completely revised VAT Act as so-called “collective fund raising”. In addition, interest as from January 1, 2010. The new Act includes under certain payments made to non-Swiss lenders are subject to a withholding conditions a secondary liability of the purchaser with respect to tax at source if the debt is secured by mortgages in Swiss real estate. VAT included in receivables sold/ assigned and remaining unpaid in the insolvency of the seller.

9.2 Seller Tax Accounting. Does Switzerland require that a specific accounting policy is adopted for tax purposes by 9.6 Doing Business. Assuming that the purchaser conducts the seller or purchaser in the context of a securitisation? no other business in Switzerland, would the purchaser’s purchase of the receivables, its appointment of the seller No. Under Swiss law, there is to date no specific accounting policy as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax which must be adopted for tax purposes by the seller or purchaser in Switzerland? in the context of a securitisation transaction. The mere purchase of receivables, appointment of the seller as its 9.3 Stamp Duty, etc. Does Switzerland impose stamp duty or servicer or collecting agent, or the enforcement of receivables other documentary taxes on sales of receivables? against the debtors does not make the purchaser subject to Swiss income tax under Swiss national income tax laws. No stamp duty is payable on sales of receivables unless such receivables are regarded as bonds, debentures or money market papers and are transferred by or via a securities dealer under Swiss stamp tax law. The statutory stamp duty rate amounts to 0.15% on the transfer of Swiss bonds, debentures or money market papers, and to 0.3% on bonds, debentures or money market papers issued by a non-Swiss person.

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Oliver Widmer Urs Kloeti

Pestalozzi Attorneys at Law Ltd Pestalozzi Attorneys at Law Ltd Loewenstrasse 1 Loewenstrasse 1 8001 Zurich 8001 Zurich Switzerland Switzerland

Tel: +41 44 217 91 11 Tel: +41 44 217 91 11 Fax: +41 44 217 92 17 Fax: +41 44 217 92 17 Email: [email protected] Email: [email protected] URL: www.pestalozzilaw.com URL: www.pestalozzilaw.com

Oliver Widmer is a partner and member of Pestalozzi’s Financial Urs Kloeti is a partner and member of Pestalozzi’s Financial

Services group. He primarily advises domestic and international Services group in Zurich. His practice is focused on banking and Switzerland banks, financial institutions, wealth management service capital markets, corporate finance, securities and corporate law. providers on banking, (structured) finance and capital markets Urs Kloeti, born 1965, graduated in economics from the matters. University of St. Gall in 1990. In 1991/1992, he worked for a He graduated from the University of Zurich (lic. iur., 1998) and the Swiss firm in Indonesia. In 1994, he graduated in law from the London School of Economics and Political Science (M.Sc., Law University of St. Gall and joined Pestalozzi in 1995. In 1998, he and Accounting, 2002). He was admitted to the bar in was admitted to the bar in Switzerland. From 2000 to 2003, Urs Switzerland in 2000 and as a solicitor (not practicing) of England Kloeti was Head of Law and Compliance of the Swiss institutional and Wales in 2003, is an authorised issuer’s representative at the client bank in Zurich of one of the world’s leading US investment SIX Swiss Exchange and is recognised as trust and estate banks. Urs Kloeti’s professional languages are German and practitioner (TEP) by STEP. Oliver Widmer joined Pestalozzi in English and he also speaks some Spanish. 2001. In 2003/2004, he was seconded to head the Swiss law and compliance department of one major US investment bank.

Pestalozzi’s roots go back to 1911; of the major and most respected Swiss law firms, Pestalozzi has the longest tradition. Supporting our international and domestic clients from our offices in Zurich and Geneva to reach their goals is our paramount ambition. With the extensive know-how, experience and the strong commitment of our staff of about 150 people, we help our clients achieve their goals quickly and efficiently. We are known for our integrity, our high quality, as well as for our efficacy. For each project, we form a customised team to accommodate your specific needs. We have direct access to an international network of lawyers and can introduce you to an appropriate law firm in jurisdictions worldwide. Three distinctive values guide us:

We care for our clients: we provide them with result-oriented, effective and realisable solutions. We act responsibly: both competence and integrity are at the core of our services. We are committed to attracting and retaining dedicated and skilled people.

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Taiwan Abe Sung

Lee and Li, Attorneys-at-Law Hsin-Lan Hsu

1 Receivables Contracts 1.3 Government Receivables. Where the receivables contract has been entered into with the government or a government agency, are there different requirements and 1.1 Formalities. In order to create an enforceable debt laws that apply to the sale or collection of those obligation of the obligor to the seller, (a) is it necessary receivables? that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone Essentially, the same requirements and laws apply to the sale or sufficient; and (c) can a receivable “contract” be deemed collection of receivables where the receivables contract has been to exist as a result of the behaviour of the parties? entered into with the government or a government agency. Generally, it is unnecessary for the sales of goods or services to be evidenced by a formal receivables contract. An agreement between 2 Choice of Law – Receivables Contracts the parties to the transaction, either orally or in writing, would suffice, unless the law requires otherwise. For instance, an 2.1 No Law Specified. If the seller and the obligor do not agreement in writing is required for an instalment sale between specify a choice of law in their receivables contract, what enterprises and the consumer according to the Consumer Protection are the main principles in Taiwan that will determine the Act. Whether invoices of the sale of goods or services alone are governing law of the contract? sufficient to prove the sale will be determined by a court on a case- by-case basis. If invoices contain the elements necessary for the Assuming that no “foreign element” is involved (i.e., all parties to constitution of a contract, normally the court would accept invoices the contract are Taiwanese entities/persons; the conclusion and alone as being sufficient. A contract may be presumed to exist performance of the contract are within Taiwan; and the subject based on evidence including but not limited to the behaviour of the matter of contract is within Taiwan), the court would generally use parties, communications between the parties and customary Taiwan law as the governing law. practices. By contrast, if a foreign element is involved, the Law Governing the Application of Laws to Civil Matters Involving Foreign Elements 1.2 Consumer Protections. Do Taiwanese laws (a) limit rates (“Application of Laws”) provides that the law of jurisdiction having of interest on consumer credit, loans or other kinds of the closest relevance with the contract will govern the contract. receivables; (b) provide a statutory right to interest on late However, the relevant provisions of the foreign law would not be payments; (c) permit consumers to cancel receivables for applied to the extent the courts of Taiwan hold that (i) the a specified period of time; or (d) provide other noteworthy application of such provisions would be contrary to the public order rights to consumers with respect to receivables owing by them? or good morals of Taiwan, or (ii) such provisions would have the effect of circumventing mandatory and/or prohibitive provisions of The Civil Law provides that if the agreed rate of interest exceeds Taiwan law. twenty percent (20%) p.a., the creditor shall not be entitled to claim any interest over twenty percent (20%) p.a. In the case of a debt 2.2 Base Case. If the seller and the obligor are both resident bearing interest, if no rate has been agreed under the contract or by in Taiwan, and the transactions giving rise to the law, the rate shall be five percent (5%) p.a. (“Statutory Interest receivables and the payment of the receivables take Rate”). With respect to late payments, a creditor is entitled to place in Taiwan, and the seller and the obligor choose the charge interest on late payments calculated at the agreed rate or law of Taiwan to govern the receivables contract, is there Statutory Interest Rate, whichever is higher. Generally, consumers any reason why a court in Taiwan would not give effect to their choice of law? may not cancel receivables for a specified period of time unless specifically permitted by law. For instance, the Consumer In this situation, it is very unlikely that a Taiwan court would not Protection Act entitles consumers of a mail order sale or door-to- give effect to the parties’ choice of law. door sale to cancel the transaction without cause within 7 days from receipt of the goods/services.

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2.3 Freedom to Choose Foreign Law of Non-Resident Seller 3.3 Example 2: Assuming that the facts are the same as or Obligor. If the seller is resident in Taiwan but the Example 1, but either the obligor or the purchaser or both obligor is not, or if the obligor is resident in Taiwan but the are located outside Taiwan, will a court in Taiwan seller is not, and the seller and the obligor choose the recognise that sale as being effective against the seller foreign law of the obligor/seller to govern their receivables and other third parties (such as creditors or insolvency contract, will a court in Taiwan give effect to the choice of administrators of the seller), or must the requirements of foreign law? Are there any limitations to the recognition the obligor’s country or the purchaser’s country (or both) of foreign law (such as public policy or mandatory be taken into account? principles of law) that would typically apply in commercial relationships such that between the seller and the obligor Generally, a Taiwan court would recognise that sale as being under the receivables contract?

effective against the seller and other third parties. However, since Taiwan the seller is located in Taiwan, the sale of receivables by the seller Generally, the choice of a foreign law to govern a receivable remains subject to any bankruptcy, insolvency, reorganisation or contract would be recognised as a valid choice of law and given other similar laws affecting the rights of creditors generally. effect by the courts of Taiwan; provided that the relevant provisions of the foreign law would not be applied to the extent such courts hold that (i) the application of such provisions would be contrary to 3.4 Example 3: If (a) the seller is located in Taiwan but the the public order or good morals of Taiwan, or (ii) such provisions obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, (c) the seller would have the effect of circumventing mandatory and/or sells the receivable to a purchaser located in a third prohibitive provisions of Taiwan law. country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables 2.4 CISG. Is the United Nations Convention on the purchase agreement, and (e) the sale complies with the International Sale of Goods in effect in Taiwan? requirements of the obligor’s country, will a court in Taiwan recognise that sale as being effective against the seller and other third parties (such as creditors or No. Taiwan is not a member of the United Nations Convention on insolvency administrators of the seller) without the need the International Sale of Goods. to comply with Taiwanese own sale requirements?

3 Choice of Law – Receivables Purchase Assuming that both the contract of receivables and the sale and Agreement purchase are legal, valid and binding under the law of the obligor’s country, generally, a Taiwan court would recognise that sale as being effective against the seller and other third parties based on the law of 3.1 Base Case. Does Taiwanese law generally require the the obligor’s country. However, since the seller is located in Taiwan, sale of receivables to be governed by the same law as the sale of receivables by the seller remains subject to any bankruptcy, the law governing the receivables themselves? If so, does insolvency, reorganisation or other similar laws affecting the rights of that general rule apply irrespective of which law governs creditors generally. In addition, the relevant provisions of the foreign the receivables (i.e., Taiwanese laws or foreign laws)? law governing the sale of receivables would not be applied to the extent the courts of Taiwan hold that (i) the application of such The Application of Laws provides that the effect on the assignment provisions would be contrary to the public order or good morals of of the receivables against the obligor shall be governed by the law Taiwan, or (ii) such provisions would have the effect of circumventing governing the receivables. For instance, under Taiwan law, if the mandatory and/or prohibitive provisions of Taiwan law. contract is governed by Taiwan law, a notice should be served with the obligor in order for the assignment to take effect against the obligor. Therefore, the seller or the purchaser should give a notice 3.5 Example 4: If (a) the obligor is located in Taiwan but the to the obligor upon the assignment of the receivables in order for seller is located in another country, (b) the receivable is the assignment to take effect against the obligor. governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country to govern the receivables purchase agreement, and (d) 3.2 Example 1: If (a) the seller and the obligor are located in the sale complies with the requirements of the seller’s Taiwan, (b) the receivable is governed by the law of country, will a court in Taiwan recognise that sale as Taiwan, (c) the seller sells the receivable to a purchaser being effective against the obligor and other third parties located in a third country, (d) the seller and the purchaser (such as creditors or insolvency administrators of the choose the law of Taiwan to govern the receivables obligor) without the need to comply with Taiwanese own purchase agreement, and (e) the sale complies with the sale requirements? requirements of Taiwan, will a court in Taiwan recognise that sale as being effective against the seller, the obligor Assuming that both the contract of receivables and the sale and and other third parties (such as creditors or insolvency purchase are legal, valid and binding under the law of seller’s administrators of the seller and the obligor)? country, generally, a Taiwan court would recognise that sale as being effective against the obligor and other third parties based on Generally, a Taiwan court would recognise that sale as being the law of the seller’s country. However, since the seller is located effective against the seller and other third parties, and upon in Taiwan, the sale of receivables by the seller remains subject to notification to the obligor, the obligor. However, since the seller is any bankruptcy, insolvency, reorganisation or other similar laws located in Taiwan, the sale of receivables by the seller remains affecting the rights of creditors generally. In addition, the relevant subject to any bankruptcy, insolvency, reorganisation or other provisions of the foreign law governing the sale of receivables similar laws affecting the rights of creditors generally. would not be applied to the extent the courts of Taiwan hold that (i) the application of such provisions would be contrary to the public order or good morals of Taiwan, or (ii) such provisions would have

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the effect of circumventing mandatory and/or prohibitive provisions 4.2 Perfection Generally. What formalities are required of Taiwan law. generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of receivables to be perfected against any subsequent good 3.6 Example 5: If (a) the seller is located in Taiwan faith purchasers for value of the same receivables from (irrespective of the obligor’s location), (b) the receivable is the seller? governed by the law of Taiwan, (c) the seller sells the receivable to a purchaser located in a third country, (d) No particular formalities are required for perfecting a sale of the seller and the purchaser choose the law of the receivables except for a notice to the obligor of such transfer. purchaser’s country to govern the receivables purchase agreement, and (e) the sale complies with the Taiwan requirements of the purchaser’s country, will a court in 4.3 Perfection for Promissory Notes, etc. What additional or Taiwan recognise that sale as being effective against the different requirements for sale and perfection apply to seller and other third parties (such as creditors or sales of promissory notes, mortgage loans, consumer insolvency administrators of the seller, any obligor located loans or marketable debt securities? in Taiwan and any third party creditor or insolvency administrator of any such obligor)? 1. Promissory Notes Under Taiwan law, transfer of promissory notes issued by the Since the receivable is governed by Taiwan law, whether the sale is obligor requires: (i) endorsement made by the seller on the effective against the obligor and third party creditors or insolvency promissory notes to the purchaser; and (ii) delivery of the administrator of the obligor should be governed by Taiwan law. promissory notes to the purchaser. However, if the promissory note Generally, the Taiwan court will recognise the sale as being is prohibited by the note issuer (such as the obligor) from transfer effective against the obligor and third party creditors or insolvency by way of the endorsement, the promissory note cannot be administrator of the obligor if the obligor is served with a notice of transferred to the purchaser. the assignment of the receivables to the purchaser. 2. Mortgage Loans In addition, because the receivables purchase agreement is governed by the law of the purchaser’s country, whether the sale is The transfer of the mortgage loan from the seller to the purchaser effective against the seller and third party creditors or insolvency requires a notice to the obligor. administrator of the seller should be governed by the law of the There are two types of mortgages: a general mortgage; and a purchaser’s country. Generally, the Taiwan court will recognise the mortgage with a maximum secured amount. A general mortgage is sale as being effective against the seller and third party creditors or to secure a specific debt owed by the debtor to the creditor, while a insolvency administrator of the seller based on the law of the mortgage with a maximum secured amount is to secure a variety of purchaser’s country if such sale complies with the law of the debts owed by the debtor to the creditor up to a specified maximum purchaser’s country. However, since the seller is located in Taiwan, amount. In case of a general mortgage, the mortgage securing the the sale of receivables by the seller remains subject to any loan generally will be transferred simultaneously to the person (e.g., bankruptcy, insolvency, reorganisation or other similar laws the purchaser) to whom the secured loan is transferred, while the affecting the rights of creditors generally. In addition, the relevant aforesaid person can foreclose the mortgage only upon duly provisions of the foreign law governing the sale of receivables registering itself as the mortgagee with local authorities. would not be applied to the extent the courts of Taiwan hold that (i) In case of a mortgage with a maximum secured amount, before the the application of such provisions would be contrary to the public underlying debts are crystallised and confirmed, the mortgage will order or good morals of Taiwan, or (ii) such provisions would have not tag along with the transfer of the loan. After the underlying the effect of circumventing mandatory and/or prohibitive provisions debts are crystallised and confirmed, the mortgage securing the loan of Taiwan law. will be transferred simultaneously to the person to whom the secured loan is transferred. 4 Asset Sales 3. Consumer Loans The perfection of transferring consumer loans is generally the same as that of receivables. There are no additional or different 4.1 Sale Methods Generally. In Taiwan what are the customary methods for a seller to sell receivables to a requirements for sale and perfection of consumer loans. purchaser? What is the customary terminology – is it Nevertheless, when the seller is a financial institution in Taiwan, the called a sale, transfer, assignment or something else? sale by the financial institution of the consumer loans to the purchaser are subject to regulations primarily promulgated by the In Taiwan, a seller generally sells receivables to a purchaser by way Banking Bureau, Financial Supervisor Commission, the regulator of executing a receivables purchase agreement through which the of financial intuitions in Taiwan. seller sells and transfers its claim against the obligor and the 4. Marketable Debt Securities purchaser pays the agreed consideration. The transfer is Sale and perfection of marketable debt securities is subject to impermissible if: (i) the nature of the claim does not permit the different requirements depending on the types of securities. For transfer; (ii) the parties have agreed that the claim shall not be example, corporate bonds may be issued in bearer form or transferred (although the agreement shall not be treated as being registered form. For registered corporate bonds, sale and perfection effective against any bona fide third party); or (iii) the claim is not of such bonds between the seller and the purchaser requires subject to attachment. In addition, as mentioned above, the transfer endorsement made by the bond holder on the bond certificate to the of a claim is effective against the obligor only when a notice of the purchaser and delivery of the bond certificate to the purchaser. transfer has been given to the obligor. In Taiwan, there is no unified Further, in order for the transfer to take effect against the issuing terminology used to describe selling receivables to a purchaser. company, the name and residence of the transferee should be Sale, transfer and assignment are commonly used in the recorded in the counterfoil of the corporate bonds. By contrast, if transactions and exchangeable. the corporate bonds are in bearer form, delivery of the corporate

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bonds would suffice. Where the corporate bonds are registered and prohibitions in the contracts, the seller will be liable to the obligor deposited with the securities depository and clearing institution in for breach of contract and the obligor may claim damages caused Taiwan (i.e., Taiwan Depository & Clearing Corporation, “TDCC”) thereby against the seller and argue that the sale cannot take effect or in global form or in scripless form, the sale and perfection of the against the obligor. corporate bonds should be made by way of book-entry. 4.7 Identification. Must the sale document specifically identify 4.4 Obligor Notification or Consent. Must the seller or the each of the receivables to be sold? If so, what specific purchaser notify obligors of the sale of receivables in information is required (e.g., obligor name, invoice order for the sale to be effective against the obligors number, invoice date, payment date, etc.)? Do the and/or creditors of the seller? Must the seller or the receivables being sold have to share objective Taiwan purchaser obtain the obligors’ consent to the sale of characteristics? Alternatively, if the seller sells all of its receivables in order for the sale to be an effective sale receivables to the purchaser, is this sufficient against the obligors? Does the answer to this question identification of receivables? vary if (a) the receivables contract does not prohibit assignment but does not expressly permit assignment; or It is not necessary to specifically identify each of the receivables to (b) the receivables contract expressly prohibits be sold in the sale document in order to perfect the sale of assignment? Whether or not notice is required to perfect receivables so long as such receivables are reasonably identifiable a sale, are there any benefits to giving notice – such as (e.g., names of obligors or the date of receivables contract). The cutting off obligor set-off rights and other obligor receivables being sold need not share objective characteristics. defences? Nonetheless, if the seller only states that all of its receivables are sold to the purchaser, it may not be sufficient to identify Under the Civil Law, if the receivable contract is silent on the receivables. transferability of receivables, the seller may transfer the receivables against the obligor to the purchaser. Notice is required in order for the sale of the receivables to be effective against the obligor. If the 4.8 Respect for Intent of Parties; Economic Effects on Sale. receivable contract prohibits such transfer, the receivable cannot be If the parties denominate their transaction as a sale and transferred unless obtaining the obligor’s consent to the sale of state their intent that it be a sale will this automatically be receivables. respected or will a court enquire into the economic characteristics of the transaction? If the latter, what economic characteristics of a sale, if any, might prevent 4.5 Notice Mechanics. If notice is to be delivered to obligors, the sale from being perfected? Among other things, to whether at the time of sale or later, are there any what extent may the seller retain (a) credit risk; (b) requirements regarding the form the notice must take or interest rate risk; and/or (c) control of collections of how it must be delivered? Is there any time limit beyond receivables without jeopardising perfection? which notice is ineffective – for example, can a notice of sale be delivered after the sale, and can notice be The parties’ intent is one of the aspects that the court will take into delivered after insolvency proceedings against the obligor account when determining whether the transaction at issue is a sale have commenced? Does the notice apply only to specific or, for instance, a loan. In addition to the parties’ intent, it is receivables or can it apply to any and all (including future) possible that the court looks into the economic effects of the receivables? Are there any other limitations or considerations? transaction to determine its nature. From Taiwan law perspective, a sale is defined as occurring when a seller agrees to sell chattel, There is no special requirement on the form of notice or how it must property or right (such as a claim against the obligor) to a purchaser be delivered. In addition, there is no time limit beyond which and the purchaser agrees to pay the consideration for such chattel, notice is ineffective, and therefore notice of a sale may be delivered property or right. In order for the seller to transfer the claim against to the obligor even after insolvency proceedings against the obligor the obligor, a notice to the obligor is required. For instance, if the have commenced; however, the sale will take effect against the seller keeps the title to the claim against obligor without obligor only when the obligor is notified. Further, according to transferring the same to the purchaser and giving a notice to the precedents of Taiwan courts, in order for the sale of future obligor, it is possible that the court may consider it as a credit receivables to be effective against the obligor, the notice for transfer transaction other than a sale. of future receivables should be delivered to the obligor again when Subject to the court test, so long as the title to the receivables is such future receivables come into existence. transferred to the purchaser, the purchaser pays a fair consideration and the obligor has been duly notified, the transfer of the receivables would be considered as a sale under the Civil Law. 4.6 Restrictions on Assignment; Liability to Obligor. Are restrictions in receivables contracts prohibiting sale or As for the interest rate risk, generally, interest payment is not a legal assignment generally enforceable in Taiwan? Are there feature of a sale except for the circumstances where, for example, exceptions to this rule (e.g., for contracts between late payment of the purchase price or delay of delivering the goods commercial entities)? If Taiwan recognises prohibitions is involved. If the sale contains arrangement regarding interest rate on sale or assignment and the seller nevertheless sells risk, the court may challenge the nature of the transaction. receivables to the purchaser, will either the seller or the Concerning control of collection of receivables, it is not purchaser be liable to the obligor for breach of contract or on any other basis? determinative of a sale. For instance, even if the seller sells and transfers the receivables to the purchaser, the purchaser may Restrictions in receivables contracts prohibiting sale or assignment delegate the seller for collecting the receivables. are generally enforceable in Taiwan. For contracts between commercial entities, we are not aware of exceptions to this rule. If the seller sells receivables to the purchaser without regard to the

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4.9 Continuous Sales of Receivables. Can the seller agree in the sale is deemed by a court not to have been perfected. However, an enforceable manner (at least prior to its insolvency) to as promissory notes are deemed as an instrument upon which the continuous sales of receivables (i.e., sales of receivables noteholder may rely to take an enforcement action against the issuer as and when they arise)? without going through the lengthy legal proceeding to obtain a judgment, in some cases the bank as the purchaser will require the Yes. However, as mentioned in our response to question 4.7, the seller to issue a promissory note which entitles the purchaser to receivables should be reasonably identifiable. In addition, if future exercise the rights of the promissory note against the seller for fear receivables are involved, a notice for transfer of future receivables that the transfer of the receivables is not effective or revoked and should be delivered to the obligor again when such future the seller fails to reimburse the purchaser. receivables come into existence. Taiwan 5.2 Seller Security. If so, what are the formalities for the 4.10 Future Receivables. Can the seller commit in an seller granting a security interest in receivables and enforceable manner to sell receivables to the purchaser related security under the laws of Taiwan, and for such that come into existence after the date of the receivables security interest to be perfected? purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured Please refer to our response to question 5.1. to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the seller’s insolvency? 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in Taiwan courts once held that the seller may sell to the purchaser the favour of the providers of its funding, what formalities receivables that come into existence after the date of the receivables must the purchaser comply with in Taiwan to grant and purchase agreement so long as such receivables are identifiable. In perfect a security interest in purchased receivables addition, if future receivables are involved, a notice for the transfer governed by the laws of Taiwan and the related security? of future receivables should be delivered to the obligor again when such future receivables come into existence. However, once the In Taiwan, a security interest in a receivable is generally granted in bankruptcy status of the seller is declared, the sale of future the form of a pledge of rights. receivables may be challenged by the insolvency officials because Under the Civil Law, in order to effectively pledge receivables, under the Bankruptcy Law, the receivables arising after the seller’s execution of a pledge agreement is required. In addition, in order insolvency will be considered as part of bankruptcy estate and the for the pledge of the receivables to take effect against the obligor, a seller has no capacity to dispose of the bankruptcy estate. notice to the obligor is required. Furthermore, the pledgor should deliver the instruments (such as receivable contracts) evidencing the receivables to pledgee; however, this is merely an obligation of 4.11 Related Security. Must any additional formalities be the pledgor but not a requirement on the perfection of the pledge. fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all The pledge of receivables is not required to be registered with local related security can be enforceably transferred, what government authorities. methods are customarily adopted to provide the purchaser the benefits of such related security? 5.4 Recognition. If the purchaser grants a security interest in receivables governed by the laws of Taiwan, and that Under the Civil Law, as a general principle, the security interest will security interest is valid and perfected under the laws of be transferred concurrently with the transfer of secured receivables the purchaser’s country, will it be treated as valid and with a few exceptions, such as the mortgage with a maximum perfected in Taiwan or must additional steps be taken in secured amount as mentioned in our response to question 4.3. Taiwan? However, in order for the purchaser to foreclose the security, certain formalities are required to be completed based on different types of According to the Application of Laws, the governing law of the security interest involved. For instance, where the security interest pledge of rights shall be determined based on the law governing the is mortgage, the transfer is not effective against third parties unless creation of rights. Since the receivable is governed by Taiwan law, the purchaser registers itself with the local authorities as the the creation and perfection of the pledge over the receivable should mortgagee. To give another example, if the security interest is a be governed by Taiwan law as well. If the pledgor and the pledgee pledge over personal property, the transfer is not effective against choose a law other than Taiwan law as the governing law of the the pledgor and third parties unless the possession of the pledged pledge, the creation and perfection of the pledge should still comply personal property is delivered to the purchaser. with Taiwan law, i.e., execution of a pledge agreement and notice to the obligor. In the event that the creation and perfection of the pledge is governed by a foreign law and inconsistent with the 5 Security Issues Taiwan law, such pledge would not be recognised by the Taiwan court. 5.1 Back-up Security. Is it customary in Taiwan to take a “back-up” security interest over the seller’s ownership 5.5 Additional Formalities. What additional or different interest in the receivables and the related security, in the requirements apply to security interests in or connected to event that the sale is deemed by a court not to have been insurance policies, promissory notes, mortgage loans, perfected? consumer loans or marketable debt securities?

To our knowledge, it is not customary in Taiwan for the purchaser 1. Insurance Policies to take a “back-up” security interest over the seller’s ownership Generally, the requirements on the pledge of receivable apply to interest in the receivables and the related security, in the event that pledges by the insured of its rights against the insurance company

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under the insurance policy. However, according to the Insurance 6 Insolvency Laws Law, if the proposer enters into a life insurance with the insurance company and the proposer is not the insured, the pledge of the rights 6.1 Stay of Action. If, after a sale of receivables that is in the insurance policy is subject to a written consent from the otherwise perfected, the seller becomes subject to an insured. insolvency proceeding, will Taiwanese insolvency laws 2. Promissory Notes automatically prohibit the purchaser from collecting, The Law of Negotiable Instruments does not explicitly provide the transferring or otherwise exercising ownership rights over method to create a pledge over promissory notes and it is not the purchased receivables (a “stay of action”)? Does the common to create a pledge over a promissory note in Taiwan. insolvency official have the ability to stay collection and

enforcement actions until he determines that the sale is Taiwan Nonetheless, most of the scholars argue that the note holders may perfected? Would the answer be different if the pledge the promissory note by following the general provisions in purchaser is deemed to only be a secured party rather connection with a pledge over securities under the Civil Law. In than the owner of the receivables? other words, (i) endorsement (including a notation as to the purpose for which the pledge is created) made by the grantor on the If the receivables have been validly transferred from the seller to the promissory notes (not applicable in the case where the payee is not purchaser prior to the seller’s bankruptcy, it is the obligor instead of named), and (ii) delivery of the same to the grantee are required to the seller who is responsible for repaying the receivables. Thus, the perfect the creation of pledge over the promissory notes. purchaser may collect the receivables from the obligor without 3. Mortgage Loans being affected by the court’s stay order imposed on the seller. Essentially, the requirements on a pledge of receivables apply to a Nonetheless, since the future receivables cannot be transferred to pledge of mortgage loans. the purchaser until such receivables come into existence, once the 4. Consumer Loans bankruptcy status of the seller is declared by the court, the receivables arising after the seller’s insolvency will be considered Essentially, the requirements on a pledge of receivables apply to a as part of the bankruptcy estate and therefore the purchaser may not pledge of consumer loans. collect, transfer or otherwise exercise rights over such future 5. Marketable Debt Securities receivables. Further, the bankruptcy administrator may file with the As to creating a pledge over marketable debt securities, in general, the court to rescind the transaction which the seller made with or method to perfect pledge over debt securities is identical to that applied without consideration before the declaration of the seller’s to securities as stated in “2. Promissory Notes” above unless otherwise insolvency if such transaction is deemed being detrimental to rights provided by laws or regulations. In addition, for debt securities of the sellers’ creditors. That is, if the transfer by the seller of the registered with the TDCC without physical certificates, creation of a receivables to the purchaser is rescinded by the seller’s bankruptcy pledge over such securities should be made through the TDCC and administrator, the purchaser will not be able to collect the debt from with relevant documents submitted as required by the TDCC. the obligor. The answer above would apply to the purchaser being only a secured party if the security interest, such as pledge over the receivable, has been validly created prior to the bankruptcy of the 5.6 Trusts. Does Taiwan recognise trusts? If not, is there a mechanism whereby collections received by the seller in seller. respect of sold receivables can be held or be deemed to be held separate and apart from the seller’s own assets 6.2 Insolvency Official’s Powers. If there is no stay of action until turned over to the purchaser? under what circumstances, if any, does the insolvency official have the power to prohibit the purchaser’s Yes. Trusts are recognised under Taiwan law. exercise of rights (by means of injunction, stay order or other action)?

5.7 Bank Accounts. Does Taiwan recognise escrow accounts? Can security be taken over a bank account Please refer to our response to question 6.1. located in Taiwan? If so, what is the typical method? Would courts in Taiwan recognise a foreign-law grant of 6.3 Suspect Period (Clawback). Under what facts or security (for example, an English law debenture) taken circumstances could the insolvency official rescind or over a bank account located in Taiwan? reverse transactions that took place during a “suspect” or “preference” period before the commencement of the Escrow arrangements may take several forms depending on the insolvency proceeding? What are the lengths of the agreement between the parties concerned. While there is no legal “suspect” or “preference” periods in Taiwan for (a) concept of “escrow account” under Taiwan law, Taiwan recognises transactions between unrelated parties and (b) pledges over a bank account. Under Taiwan law, a pledge over a transactions between related parties? bank account requires a written agreement between the pledgor and the pledgee and a notice to the bank. However, there is no such Under the Bankruptcy Law, within two (2) years from declaration concept of a floating charge under Taiwan law. In practice, in the of the bankruptcy of insolvent, the bankruptcy administrator has the case of a pledge over a current account, the pledgor normally would right to rescind the insolvent’s following legal acts done within six deliver, on a monthly basis, the statement of credit balance of its (6) months prior to declaration of bankruptcy (“Suspect Period”): bank accounts on which a pledge is created to the pledgee, and the (i) providing a collateral for outstanding debt obligations, except accounts receivable represented by the number shown in the where the insolvent has committed to provide collateral for such aforesaid statement would be the subject receivables of pledge. debt obligations before the commencement of the Suspect Period; Taiwan court’s recognition of a foreign-law grant of security taken and (ii) performing the debt obligations undue and not yet payable. over a bank account (for instance, pledge over the bank account) The Suspect Period is the same irrespective of whether transactions located in Taiwan depends on whether the creation and perfection are made between unrelated parties or related parties. of such security complies with Taiwan law.

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6.4 Substantive Consolidation. Under what facts or collection of loan interest and principal from debtors, or circumstances, if any, could the insolvency official engage a servicer to carry out these functions. The originator consolidate the assets and liabilities of the purchaser with may act as the servicer. The cash flow generated from the those of the seller or its affiliates in the insolvency financial assets, after deduction of administration fees, proceeding? trustee’s remuneration, credit enhancement fees, and hedging transaction costs, will be used to pay out principal, interest, Essentially, if the purchaser and the seller are separate legal entities or other benefits to beneficiary certificate holders. under Taiwan law, there is no legal mechanism available to the (ii) Special Purpose Companies (“SPC”): The Financial Assets bankruptcy administrator under the Bankruptcy Law to consolidate Securitisation Statute provides that an SPC must be set up by the assets and liabilities of the purchaser with those of the seller or a financial institution which should not be the originator or

Taiwan its affiliates. the affiliates of the originator, and must have only one single shareholder. The originator transfers its financial assets to the SPC, which raises funds by issuing and offering asset- 6.5 Effect of Proceedings on Future Receivables. What is the backed securities to investors. Regarding the administration effect of the initiation of insolvency proceedings on (a) of the transferred assets, as a principle, the Financial Assets sales of receivables that have not yet occurred or (b) on Securitisation Statute forbids an SPC to pledge, transfer, sales of receivables that have not yet come into barter, provide as collateral, or otherwise dispose of them. It existence? also requires the SPC to engage a servicer to act as the administrator of the assets, or to place the assets in trust with As stated in our response to question 6.1, once the bankruptcy status the servicer. The originator may act as the servicer. of the seller is declared by the court, the receivables arising after the An SPC is established to exclusively conduct asset securitisation seller’s insolvency, including the receivables that have not yet business. Therefore, the Financial Assets Securitisation Statute occurred or that have not yet come into existence, will be considered closely restricts SPC’s business activities, in order to prevent as part of bankruptcy estate. The seller is not able to dispose of the attachment or seizure of such financial assets by SPC’s creditors due property in the bankruptcy estate and the purchaser may not collect, to its non-performance arising out of other business activities. An SPC transfer or otherwise exercise rights over such receivables. may not act as a guarantor or an endorser, and may not engage in any business other than asset securitisation business. Considering the special nature of an SPC, the Financial Assets Securitisation Statute 7 Special Rules exempts it from many provisions of the Company Act. Also, because an SPC has only one shareholder, a shareholders’ meeting is not 7.1 Securitisation Law. Is there a special securitisation law necessary, and the provisions concerning shareholders’ meetings (and/or special provisions in other laws) in Taiwan stipulated under the Company Act thus do not apply. However, an establishing a legal framework for securitisation SPC must still have one to three directors and one to three supervisors, transactions? If so, what are the basics? while these positions may not be occupied by the originator, servicer, monitor, or their responsible persons. In Taiwan, there are two major laws relating to securitisation: (i) the Real Estate Securitisation Statute; and (ii) the Financial Assets Securitisation Statute. 7.2 Securitisation Entities. Does Taiwan have laws specifically providing for establishment of special purpose 1. Real Estate Securitisation Statute entities for securitisation? If so, what does the law Under the Real Estate Securitisation Statute, there are two provide as to: (a) requirements for establishment and mechanisms for securitisation of real estates by way of trust: management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as (i) Real Estate Investment Trust: under which a real estate to the status of directors or shareholders? investment trust fund will be created in the form of trust. The trustee will issue beneficiary certificates to the public (through public offering) or specific persons (through private Please see our response to question 7.1. placement) to raise funds. The proceeds from the issuance of beneficiary certificates are invested in real estate, real estate- 7.3 Non-Recourse Clause. Will a court in Taiwan give effect related rights, real estate-related securities, or other to a contractual provision (even if the contract’s governing investment instruments approved by the Ministry of Finance. law is the law of another country) limiting the recourse of (ii) Real Estate Asset Trust: under which a property owner parties to available funds? transfers real estates or real estate-related rights to a trustee that in turn issues beneficiary certificates representing rights Generally, such provision will be respected by a Taiwan court but to the profits, interests or other benefits accruing from the subject to the limitations on choice of governing law as mentioned entrusted real estates or real estate-related rights. These beneficiary certificates are offered to the public or are in our response to question 2.1. privately placed with specific persons. 2. Financial Assets Securitisation Statute 7.4 Non-Petition Clause. Will a court in Taiwan give effect to Under the Financial Assets Securitisation Statute, there are two a contractual provision (even if the contract’s governing law is the law of another country) prohibiting the parties mechanisms for a financial institution (the originator) to securitise from: (a) taking legal action against the purchaser or its financial assets: another person; or (b) commencing an insolvency (i) Special Purpose Trusts (“SPT”): After grouping together proceeding against the purchaser or another person? financial assets that have similar characteristics into an asset pool, the originator entrusts the asset pool to a trustee. The Generally, such provision will be respected by a Taiwan court but trustee in turn sets up an SPT and raises funds by issuing and subject to the limitations on choice of governing law as mentioned offering beneficiary certificates to the investing public or through private placement. The trustee may itself be the in our response to question 2.1. administrator of the trust property, the raised funds and

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7.5 Independent Director. Will a court in Taiwan give effect to 8.4 Consumer Protection. If the obligors are consumers, will a contractual provision (even if the contract’s governing the purchaser (including a bank acting as purchaser) be law is the law of another country) or a provision in a required to comply with any consumer protection law of party’s organisational documents prohibiting the directors Taiwan? Briefly, what is required? from taking specified actions (including commencing an insolvency proceeding) without the affirmative vote of an Regarding the purchase of consumer loans, please refer to our independent director? response to question 4.3. For example, as mentioned in our response to question 1.2, a consumer of a mail order sale can Unless otherwise provided by law, Taiwan courts generally will rescind the transaction without cause within 7 days from receipt of give effect to a provision in the articles of incorporation of a the goods/services. If the seller transfers the receivables against the company prohibiting the directors from taking specified actions consumer but the consumer rescinds the transaction within such Taiwan (including commencing an insolvency proceeding) without the period, the purchaser may not collect debt against the consumer. affirmative vote of independent directors.

8.5 Currency Restrictions. Does Taiwan have laws restricting 8 Regulatory Issues the exchange of Taiwanese currency for other currencies or the making of payments in Taiwanese currency to persons outside the country? 8.1 Required Authorisations, etc. Assuming that the purchaser does no other business in Taiwan, will its Yes, Taiwan has foreign exchange control pursuant to the Foreign purchase and ownership or its collection and enforcement of receivables result in its being required to qualify to do Exchange Control Act and relevant regulations promulgated by the business or to obtain any licence or its being subject to Central Bank of the Republic of China (Taiwan) (the “CBC”). The regulation as a financial institution in Taiwan? Does the restrictions of foreign exchange on individual and corporate are as answer to the preceding question change if the purchaser follows: does business with other sellers in Taiwan? 1. Individual A Taiwanese individual may, after filing a report with a bank which Under the Company Act, a foreign company shall not conduct has been approved by the CBC to operate foreign exchange business within the territory of Taiwan without obtaining an business, purchase or sell up to US$5 million or its equivalent in approval from Taiwan government and completing the procedure foreign currency with New Taiwan Dollars per calendar year for branch office registration. There is no definition of “conducting without obtaining the CBC’s approval. Any purchase or sale of business” under Taiwan law. If a foreign purchaser occasionally foreign currency which exceeds the annual quota of US$5 million purchases, collects, or enforces receivables and the purchase, or its equivalent requires the CBC’s special approval which is collection, or enforcement of receivables is not the business activity granted on a case-by-case basis. the purchaser regularly does, it is generally believed that such purchase would not be considered as conducting business in Taiwan In addition, for any Taiwanese individual to remit out of or into although this issue is subject to court test. Basically, the answer Taiwan an amount equivalent to or exceeding US$500,000, the would not change even if the purchaser does business with other individual must provide certain information and supporting sellers in Taiwan. documents evidencing the remittance to the bank handling the foreign exchange. 2. Corporate 8.2 Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables A Taiwanese corporation may, after filing a report with a bank following their sale to the purchaser, including to appear which has been approved by the CBC to operate foreign exchange before a court? Does a third party replacement servicer business, purchase or sell up to US$50 million or its equivalent in require any licences, etc., in order to enforce and collect foreign currency with New Taiwan Dollars per calendar year sold receivables? without obtaining the CBC’s approval. Any purchase or sale of foreign currency which exceeds the annual quota of US$50 million Basically, neither the seller nor a third party replacement servicer or its equivalent requires the CBC’s special approval which is requires a special licence from the government in order to enforce granted on a case-by-case basis. and collect receivables for and on behalf of the purchaser. In addition, for any Taiwanese corporation to remit out of or into Nevertheless, if the provision of the services by the seller or the Taiwan an amount equivalent to or exceeding US$1 million, the servicer is considered as conducting business in Taiwan, the corporation must provide certain information and supporting establishment of a company or branch office in Taiwan may be documents evidencing the remittance to the bank handling the required. foreign exchange.

8.3 Data Protection. Does Taiwan have laws restricting the use or dissemination of data about or provided by 9 Taxation obligors? If so, do these laws apply only to consumer obligors or also to enterprises? 9.1 Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser Yes. Use or dissemination of data about or provided by obligors be subject to withholding taxes in Taiwan? Does the would be subject to the Taiwan Computer-processed Personal Data answer depend on the nature of the receivables, whether Protection Law (“CPDP Law”). The CPDP Law was amended and they bear interest, their term to maturity, or where the renamed as the Personal Data Protection Act (the “PDPA”) in May seller or the purchaser is located? 2010. The PDPA applies to personal data of individuals only. Basically, data of an enterprise is not protected by the PDPA. Under the Income Tax Act, the payments on receivables by the obligors to the seller or the purchaser will not be subject to

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withholding tax. Nonetheless, if there is any interest incurred on 9.4 Value Added Taxes. Does Taiwan impose value added the payment on receivables, such interest will be subject to tax, sales tax or other similar taxes on sales of goods or withholding tax in the case where the obligor is a corporate entity. services, on sales of receivables or on fees for collection The payment obligation of withholding tax is irrelevant to term of agent services? receivables to the maturity, or where the seller or the purchaser is located. Yes. According to the Taiwan Value-added and Non-value-added Business Tax Act, sales of goods and services within Taiwan and importation of goods into Taiwan are subject to value-added tax 9.2 Seller Tax Accounting. Does Taiwan require that a (“VAT”), which is payable by sellers. Sale of receivables is specific accounting policy is adopted for tax purposes by generally considered as sale of services. In the event that the the seller or purchaser in the context of a securitisation? Taiwan purchaser (e.g., an asset management company) gains any profit from the sale of the receivables to the third party or the money The Business Entity Accounting Act provides that the accounting collected from the obligors is higher than its purchase price of the processes standards for the business entity for items including but receivables, the purchaser will be subject to VAT for such profit. If not limited to names, format, method of preparation for financial the services rendered by the collection agent are considered as sales statements and other provisions involving accounting slips, account of services under Taiwan taxes laws, fees for such services will be titles, account books and financial statements commonly used by subject to VAT as well. businesses must be promulgated by the competent authority. Taiwan Regulations Governing Accounting Processing Standards for the Business Entity further provides that business accounting 9.5 Purchaser Liability. If the seller is required to pay value affairs shall be handled in accordance with the generally accepted added tax, stamp duty or other taxes upon the sale of accounting principles in the absence of explicit provisions in the receivables (or on the sale of goods or services that give Business Entity Accounting Act, Regulations Governing rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the Accounting Processing Standards for the Business Entity and all unpaid tax against the purchaser or against the sold other relevant regulations. Since account receivables are receivables or collections? considered as financial assets under Taiwan Statement of Financial Accounting Standards introduced by Financial Accounting Under Taiwan taxes laws, if the seller is the tax payer and is Standards Committee, Statement of Financial Accounting Standards required to pay value added tax, stamp duty or other taxes upon the No. 34 and No. 36 (both are relating to accounting policies of sale of receivables (or on the sales of goods or services that give rise financial products) will be applicable. to the receivables) but fails to pay relevant taxes, the tax authorities cannot make claims against the purchaser or the sold receivables for 9.3 Stamp Duty, etc. Does Taiwan impose stamp duty or the unpaid tax. other documentary taxes on sales of receivables?

9.6 Doing Business. Assuming that the purchaser conducts Under the Stamp Duty Act, stamp duty will only be levied on a no other business in Taiwan, would the purchaser’s contract executed within the territory of Taiwan. If the receivables purchase of the receivables, its appointment of the seller purchase agreement is executed in Taiwan, such receivables as its servicer and collection agent, or its enforcement of purchase agreement will be deemed as agreement for sale of the receivables against the obligors, make it liable to tax movable property and therefore be subject to stamp duty of NT$12. in Taiwan? In addition, under the Financial Assets Securitisation Statute, for the asset transfer made in accordance with the asset trust securitisation Under the Income Tax Act, the purchaser will be subject to income plan approved by the competent authority, the stamp duty and tax on any profit made within the territory of Taiwan from sale of business tax imposed on the asset transfer shall be exempted. receivables to third parties or if the amount collected from obligors is higher than its purchase price of the receivables, even if the purchaser conducts no other business in Taiwan. With respect to the purchaser’s appointing the seller to be its servicer and collection agent, it would not lead to the seller being deemed as the “business agent” of the purchaser as defined under the Income Tax Act to subject the purchaser to tax liabilities in Taiwan.

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Abe Sung Hsin-Lan Hsu

Lee and Li Lee and Li 7F, 201 Tun Hua N. Road 7F, 201 Tun Hua N. Road Taipei Taipei Taiwan 10508, R.O.C. Taiwan 10508, R.O.C.

Tel: +886 2 2715 3300 ext. 2232 Tel: +886 2 2715 3300 ext. 2551 Fax: +886 2 2514 9841 Fax: +886 2 2514 9841 Email: [email protected] Email: [email protected] URL: www.leeandli.com URL: www.leeandli.com Taiwan Abe Sung is a partner in the Banking and Capital Markets Hsin-Lan Hsu graduated from National Taiwan University (LLB). Department. His main practice areas are banking and structured She served as a notary public at Keelung and Taipei District finance. He has been actively involved in many securitisation Courts for almost two years. Then she obtained a scholarship deals in Taiwan and led his colleagues in several pioneer cases, from the Ministry of Education to study International Economic including the first cross-border securitisation deal ever done by a Law in France, where she obtained the DEA at Paris I University. Taiwanese issuer. He also contributed to the enactment of Hsin-Lan Hsu is a partner in the Banking and Capital Markets Taiwan’s Real Properties Securitisation Law and participated in a Department. Hsin-Lan’s major practice areas are banking, capital number of REITs issuing. According to Chambers Asia’s survey, markets and corporate law and she is specialised in securities, clients commend him for combining “commercial sense with an banking, financial, M&A and corporate related laws and open mind” and consider him as “the first choice” for structured regulations. Hsin-Lan has been involved in many: (1) offshore finance. and onshore funds raising cases, such as ADR issued by Abe Sung has also advised several foreign companies and Chunghwa Telecom, ECB issued by Taiwan High Speed Rail and underwriters in their IPO and offerings of TDR in Taiwan, EEB issued by Yuen Foong Yu Paper MFG. Co., Ltd. and Asia including the IPO of Integrated Memory Logic and TDR offerings Cement, as well as several TDR offerings and IPO in Taiwan; (2) of Wang Wang Holding and Super Coffee. mergers and acquisitions of financial institutions, such as the Abe Sung advised, in 2002, First Commercial Bank in an open bid tender offer of Grand Cathay Securities by China Development for the sale of non-performing loans, which marked the inception Bank and acquisition of Hsinchu Commercial Bank by Standard of the NPLs market in Taiwan and since then has advised in more Chartered Bank; and (3) asset sales and purchases and general than 30 distressed assets deals. He also advised Taiwan’s corporate deals. Central Depository Insurance Corporation to dispose of banks in Education crisis. University of Paris I Pantheon-Sorbonne (Diplôme d’études Abe Sung also provide legal services in relation to real properties approfondies, 1998). investment and general corporate matters. University of Paris II Pantheon-Assas (Diplôme supérieur Education d’université, 1996). Boston University Law School (LL.M., 1992). National Taiwan University (LL.B., 1992). Fu-Jen Catholic University (LL.B., 1987).

Lee and Li is now the largest law firm in Taiwan and its services are performed by over 100 lawyers admitted in Taiwan, patent agents, patent attorneys, trademark attorneys, more than 100 technology experts, and specialists in other fields. With expertise covering all professional areas and building on the foundations laid down over decades, the firm has been steadfast in its commitment to the quality of services to clients and the country and is highly sought after by clients and consistently recognised as the preeminent law firm in Taiwan. Lee and Li is often named as one of the best law firms in evaluations of international law firms/intellectual property right firms. For instance, it was selected as the best pro bono law firm in Asia and the best law firm in Taiwan many years in a row by the International Financial Law Review (the IFLR); it was also named the National Deal Firm of the Year for Taiwan and awarded the Super Deal of the Year by Asian Legal Business.

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United Arab Rizwan H. Kanji Emirates

King & Spalding LLP Martin P. Forster-Jones

1 Receivables Contracts to interest in circumstances where the creditor suffered loss or damages due to a debtor’s gross negligence or wilful misconduct.

1.1 Formalities. In order to create an enforceable debt Currently there are no consumer protections of this nature in place. obligation of the obligor to the seller, (a) is it necessary that the sales of goods or services are evidenced by a 1.3 Government Receivables. Where the receivables contract formal receivables contract; (b) are invoices alone has been entered into with the government or a sufficient; and (c) can a receivable “contract” be deemed government agency, are there different requirements and to exist as a result of the behaviour of the parties? laws that apply to the sale or collection of those receivables? Under Article 130 of the Civil Code, a contract is formed upon the acceptance of an offer by the offeree, and so, on this basis, an Although local legislation does not differentiate between private enforceable debt obligation can be deemed to exist if offer and and government related receivables, there are certain specific acceptance can be established. According to Article 132 of the Civil regulatory risks which apply in relation to dealing with sovereign Transactions Law (5/1985), expressions of will can also be made assets. The sale of any Governmental receivables will always be both verbally or in writing. subject to a Royal decree. This being said, according to the Civil Code, some kinds of contract must be in writing in order to be valid and enforceable. This is certainly the case in respect of any contract for the sale or purchase 2 Choice of Law – Receivables Contracts of a ship or the sale of land. In the UAE, the evidential burden in this respect will be governed by the Law of Evidence (10/1992), 2.1 No Law Specified. If the seller and the obligor do not which requires that both official and unofficial documents must be specify a choice of law in their receivables contract, what signed, stamped and in their original form. are the main principles in the UAE that will determine the governing law of the contract? In light of the above, and in order to have an enforceable debt obligation in the UAE, a contract should be executed and witnessed In the UAE, when no law is specified, and it is possible to create a appropriately. link between the UAE and the receivables contract, whether by virtue of the place of contract performance or the residence of the 1.2 Consumer Protections. Do the UAE’s laws (a) limit rates contracting parties for example, then the UAE courts will determine of interest on consumer credit, loans or other kinds of the contract from a UAE perspective. receivables; (b) provide a statutory right to interest on late payments; (c) permit consumers to cancel receivables for It should also be noted, however, that the UAE is also party to the a specified period of time; or (d) provide other noteworthy New York Convention, which recognises foreign law and rights to consumers with respect to receivables owing by arbitration awards from other countries. On this basis, such awards them? should be enforceable in the UAE.

Under the Shari’ah, which is the paramount body of law in the 2.2 Base Case. If the seller and the obligor are both resident UAE, the charging and payment of interest, whether simple or in the UAE, and the transactions giving rise to the compound, is prohibited. This is also the case under Article 714 of receivables and the payment of the receivables take the UAE Civil Code. place in the UAE, and the seller and the obligor choose However, interest is permitted under Article 88 of the Commercial the law of the UAE to govern the receivables contract, is Code, which allows for the charging of interest in late payment there any reason why a court in the UAE would not give effect to their choice of law? circumstances and under Article 76 of the Commercial Code which states that a creditor may include interest provisions in a In the aforementioned circumstances, generally the UAE courts commercial loan agreement. If the creditor fails to do so, the would apply UAE law exclusively. However, on 31 October 2011, current market interest rate will apply to the contract although this Law No. 16 of 2011, amending Law No. 12 of 2004, was enacted, cannot exceed 12%. which grants exclusive jurisdiction to the DIFC Court of First Article 91 of the Commercial Code also provides for circumstances Instance to hear and determine civil or commercial claims and where a creditor can claim a supplementary indemnity in addition actions to which the DIFC or any DIFC Body, DIFC Establishment

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or Licensed DIFC Establishment is a party. In light of this, if any 3.2 Example 1: If (a) the seller and the obligor are located in aspect of the transaction involves the DIFC, DIFC Laws and DIFC the UAE, (b) the receivable is governed by the law of the Regulations would potentially have effect. UAE, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the UAE to govern the receivables 2.3 Freedom to Choose Foreign Law of Non-Resident Seller purchase agreement, and (e) the sale complies with the or Obligor. If the seller is resident in the UAE but the requirements of the UAE, will a court in the UAE obligor is not, or if the obligor is resident in the UAE but recognise that sale as being effective against the seller, the seller is not, and the seller and the obligor choose the the obligor and other third parties (such as creditors or foreign law of the obligor/seller to govern their receivables insolvency administrators of the seller and the obligor)? contract, will a court in the UAE give effect to the choice of foreign law? Are there any limitations to the recognition If both the receivables and the purchase agreement are governed by of foreign law (such as public policy or mandatory the laws of the UAE, then the UAE courts will recognise the choice principles of law) that would typically apply in commercial of law and apply UAE law. If all formalities have been adhered to relationships such that between the seller and the obligor

under the receivables contract? and the sale complies with local law requirements then the sale, in United Arab Emirates theory, should be recognised as being effective against the seller, In theory, parties are free to choose foreign law and the governing the obligor and other third parties. jurisdiction to govern their receivables contracts pursuant to the provisions of the UAE Civil Code; however, in practice, this may 3.3 Example 2: Assuming that the facts are the same as be more difficult. Example 1, but either the obligor or the purchaser or both In circumstances where there is a link with the UAE (in this case the are located outside the UAE, will a court in the UAE recognise that sale as being effective against the seller seller), but the receivables contract is subject to foreign law and, and other third parties (such as creditors or insolvency following overseas litigation, a party is seeking to enforce an administrators of the seller), or must the requirements of overseas judgment in the UAE, recognition of the judgment by the the obligor’s country or the purchaser’s country (or both) courts in the UAE is not definite. It is possible that the UAE courts be taken into account? will not give credence to the judgment and will interpret the contract from a UAE perspective. If the receivables and the purchase contract are governed by the As previously mentioned, due to the UAE’s ratification of the New laws of the UAE, then the location of one of the parties outside of York Convention, the UAE should recognise foreign law and the UAE is only relevant in so far as the party based outside of the arbitration awards from other countries that are party to the convention UAE can try to pursue an action in that non-UAE jurisdiction. and, on this basis, such awards should be enforceable in the UAE. The UAE courts and other adjudicatory authorities will interpret the Article 235 of Federal Law 11 of 1992 governs the enforcement of sale from a UAE law perspective and apply UAE law. Adherence foreign judgments in the UAE and outlines the pre-requisites for to foreign law requirements of the parties based outside the UAE enforcement. The most relevant of these are that (i) a foreign court will not necessarily be taken into account unless such requirements would recognise a ruling of a UAE court in similar circumstances are compatible with the laws of the UAE. This is usually evidenced to the request made to the UAE court (Article 235(1)); (ii) the by a legal expert witness from that jurisdiction testifying to the courts of the UAE did not have jurisdiction in the dispute that gave compatibility. rise to the foreign courts award (Article 235(2)(b)); (iii) the foreign If all formalities have been adhered to and the sale complies with ruling is a final award (Article 235(2)(d)); and (iv) the award does local law requirements then the sale, in theory, should be recognised not conflict with a ruling issued by a UAE court or contravene local as being effective against the seller and other third parties. public order (Article 235(2)(e)).

3.4 Example 3: If (a) the seller is located in the UAE but the 2.4 CISG. Is the United Nations Convention on the obligor is located in another country, (b) the receivable is International Sale of Goods in effect in the UAE? governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third At the time of writing this chapter, the UAE have not yet ratified the country, (d) the seller and the purchaser choose the law United Nations Convention on the International Sale of Goods. of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in the 3 Choice of Law – Receivables Purchase UAE recognise that sale as being effective against the Agreement seller and other third parties (such as creditors or insolvency administrators of the seller) without the need to comply with the UAE’s own sale requirements? 3.1 Base Case. Does the UAE’s law generally require the sale of receivables to be governed by the same law as As previously mentioned, the UAE courts do recognise the choice the law governing the receivables themselves? If so, does of foreign law, however this will often be interpreted in the context that general rule apply irrespective of which law governs of UAE legislation. If the sale complies with the requirements of the receivables (i.e., the UAE’s laws or foreign laws)? the obligor’s country, there is no guarantee that such sale will be recognised as being effective under the laws of the UAE. The UAE The laws of the UAE do not require the sale of receivables to be courts will consider the sale from a UAE law perspective. governed by the same law as the law governing the receivables themselves. However, in reality, if either the sale of the receivables In circumstances where a judgment has been enforced in the obligor or the receivables themselves are governed by the laws of the UAE, and purchaser’s country in respect of the sale, the ability of the the UAE courts will claim jurisdiction unless there is a connection obligor to enforce a foreign judgment will be subject to the to the DIFC. discretion of the UAE courts. The parameters as to how they exercise their discretion are outlined above in question 2.3.

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3.5 Example 4: If (a) the obligor is located in the UAE but the 4 Asset Sales seller is located in another country, (b) the receivable is governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country 4.1 Sale Methods Generally. In the UAE what are the to govern the receivables purchase agreement, and (d) customary methods for a seller to sell receivables to a the sale complies with the requirements of the seller’s purchaser? What is the customary terminology – is it country, will a court in the UAE recognise that sale as called a sale, transfer, assignment or something else? being effective against the obligor and other third parties (such as creditors or insolvency administrators of the In the UAE, the most common form of sale is an assignment of obligor) without the need to comply with the UAE’s own receivables which allows for the transfer of all rights, title, interests, sale requirements? benefit and entitlement from the seller to the purchaser.

The UAE courts do recognise the choice of foreign law, however this will often be interpreted in the context of UAE legislation. If 4.2 Perfection Generally. What formalities are required generally for perfecting a sale of receivables? Are there United Arab Emirates the sale complies with the requirements of the seller’s country, there any additional or other formalities required for the sale of is no guarantee that such sale will be recognised as being effective receivables to be perfected against any subsequent good under the laws of the UAE. The UAE courts will consider the sale faith purchasers for value of the same receivables from from a UAE law perspective. the seller? In circumstances where a judgment has been enforced in the seller’s country in respect of the sale, the ability of the obligor to enforce a For perfection to take place in the UAE, actual possession and foreign judgment will be subject to the discretion of the UAE control is required as a prerequisite. Traditionally, loans in the UAE courts. The parameters as to how they exercise their discretion are are repaid by the borrower through the provision of post-dated outlined above in question 2.3. Needless to say, if an arbitral award cheques. Following the sale of receivables, these post-dated is issued by a New York Convention signatory, then the UAE courts cheques are then transferred to the purchaser of the receivables. will enforce the arbitrational award pursuant to the terms of the New York Convention in recognition of arbitral standards. 4.3 Perfection for Promissory Notes, etc. What additional or different requirements for sale and perfection apply to 3.6 Example 5: If (a) the seller is located in the UAE sales of promissory notes, mortgage loans, consumer (irrespective of the obligor’s location), (b) the receivable is loans or marketable debt securities? governed by the law of the UAE, (c) the seller sells the receivable to a purchaser located in a third country, (d) In the UAE, promissory notes should contain the promissory the seller and the purchaser choose the law of the condition with the undertaking for payment of a certain amount of purchaser’s country to govern the receivables purchase money written in figures and words. The document should also agreement, and (e) the sale complies with the contain the date of maturity, the place where the promissory note requirements of the purchaser’s country, will a court in the will be effected, the names of the relevant parties and the date and UAE recognise that sale as being effective against the place of issue of the note itself. The note should also be signed by seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located the person issuing the note. The failure to adhere to these principals in the UAE and any third party creditor or insolvency means that the note is in violation of Article 591 of The Commercial administrator of any such obligor)? Transactions Law, Federal Law No. 18 of 1993. Under the Civil Code, a mortgage loan must be registered. The date In this instance, the seller’s country is the UAE and the receivables and time of this registration will determine the priority in respect of are governed by the laws of the UAE, as such the receivables will creditors. Mortgages over real property must also be in writing. be interpreted in line with the laws of the UAE and so would have to comply with the requirements of the UAE. 4.4 Obligor Notification or Consent. Must the seller or the The UAE courts do recognise the choice of foreign law, however purchaser notify obligors of the sale of receivables in this will often be interpreted in the context of UAE legislation. As order for the sale to be effective against the obligors a result of this the purchase contract itself would be interpreted in and/or creditors of the seller? Must the seller or the line with the laws of the UAE. purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale If the sale complied with the requirements of the purchaser’s against the obligors? Does the answer to this question country, this would be relevant in so far as such sale was consistent vary if (a) the receivables contract does not prohibit with the UAE’s own sale requirements. This would also be the case assignment but does not expressly permit assignment; or when determining if the sale is effective against the seller. (b) the receivables contract expressly prohibits In circumstances where the purchaser, based in another jurisdiction, assignment? Whether or not notice is required to perfect is able to demonstrate that the sale is effective in his/her own a sale, are there any benefits to giving notice – such as jurisdiction and is awarded a judgment to that effect. It will be up cutting off obligor set-off rights and other obligor defences? to the purchaser to demonstrate in front of the UAE courts that such judgement is transferable and should be awarded in the UAE. In order to give effect to a sale of receivables and for such sale to be effective, the obligor must be issued with notice and provide the seller and/or purchaser with an acknowledgment of such notice accepting the terms and conditions of the sale. This acknowledgment must then be returned to the purchaser. The answer is also dependant upon the underlying agreement in respect of the receivables. If the receivables contract is silent then

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it is customary for notice to be provided as a means to achieve 4.8 Respect for Intent of Parties; Economic Effects on Sale. If assumed compliance, enforceability and good customer relations. the parties denominate their transaction as a sale and If the receivables contract expressly prohibits an assignment, then state their intent that it be a sale will this automatically be such a prohibition can only be circumvented with the express respected or will a court enquire into the economic permission of the obligors. characteristics of the transaction? If the latter, what economic characteristics of a sale, if any, might prevent In circumstances where the underlying contract expressly provides the sale from being perfected? Among other things, to for assignment, then consent from the obligors will not be required. what extent may the seller retain (a) credit risk; (b) interest rate risk; and/or (c) control of collections of receivables without jeopardising perfection? 4.5 Notice Mechanics. If notice is to be delivered to obligors, whether at the time of sale or later, are there any requirements regarding the form the notice must take or To the extent that the parties have denominated the transaction as a how it must be delivered? Is there any time limit beyond sale and clearly stated their intentions in the agreement, the only which notice is ineffective – for example, can a notice of determination of the UAE court would be as to whether the contract

sale be delivered after the sale, and can notice be adheres to local law requirements. United Arab Emirates delivered after insolvency proceedings against the obligor If elements of the contract are unclear or the contract has not have commenced? Does the notice apply only to specific adhered to the requirements of the UAE, it is more likely that the receivables or can it apply to any and all (including future) economic characteristics of the transaction will be examined more receivables? Are there any other limitations or considerations? closely. In respect to the retention of control, this is not possible for the This will depend entirely upon the notice provisions of the seller as, under the laws of the UAE, the sale must constitute a true underlying contracts in relation to the receivables as there is no sale and a divestment of the seller’s interest. legislation pertaining to notice mechanics in the UAE. 4.9 Continuous Sales of Receivables. Can the seller agree in 4.6 Restrictions on Assignment; Liability to Obligor. Are an enforceable manner (at least prior to its insolvency) to restrictions in receivables contracts prohibiting sale or continuous sales of receivables (i.e., sales of receivables assignment generally enforceable in the UAE? Are there as and when they arise)? exceptions to this rule (e.g., for contracts between commercial entities)? If the UAE recognises prohibitions If the receivables which are subject to the sale are identifiable, both on sale or assignment and the seller nevertheless sells the receivables and the sale agreement itself are in existence at the receivables to the purchaser, will either the seller or the time the sale is entered into and there are no existing prohibitions purchaser be liable to the obligor for breach of contract or for the sale or assignment of those receivables, then a continuous on any other basis? sale of receivables should be possible.

In order to give effect to an assignment of contract receivables, an assignment agreement must be put in place. The standard approach 4.10 Future Receivables. Can the seller commit in an in the UAE is to have a three-party agreement or a fairly basic enforceable manner to sell receivables to the purchaser assignment agreement executed and a notice then sent to the third that come into existence after the date of the receivables purchase agreement (e.g., “future flow” securitisation)? If party, requesting that a fairly detailed written acknowledgment so, how must the sale of future receivables be structured accepting the terms and conditions of the assignment be returned to be valid and enforceable? Is there a distinction addressed to the new beneficiary. The notice requirements will be between future receivables that arise prior to or after the subject to the terms of the underlying receivables contract. seller’s insolvency? An assignment implemented along these lines would give rise to a contractual obligation requiring the third party to fulfil his/her In the absence of express legislation in the UAE, there are differing contractual obligations. In the event that the third party does not schools of thought in relation to the sale of future receivables. One honour his/her agreement and pays the previous beneficiary rather school of thought is of the opinion that the sale of future receivables than the assignee, the assignee should have a claim against the third is possible in circumstances where such receivables can be clearly party. identified. The other school of thought is that any sale of future receivables is not possible.

4.7 Identification. Must the sale document specifically identify According to the second school of thought, the receivables which each of the receivables to be sold? If so, what specific are to be sold, as well as the agreement creating the sale, must both information is required (e.g., obligor name, invoice be in existence at the time the sale is entered into. If the sale number, invoice date, payment date, etc.)? Do the agreement has not yet been executed, or pertains to unidentifiable receivables being sold have to share objective or non-existent receivables, the sale will not be valid under UAE characteristics? Alternatively, if the seller sells all of its law. receivables to the purchaser, is this sufficient identification of receivables? 4.11 Related Security. Must any additional formalities be Each receivable being sold should be documented with all available fulfilled in order for the related security to be transferred information pertaining to the relevant receivable. Needless to say, concurrently with the sale of receivables? If not all related security can be enforceably transferred, what methods this will largely depend upon the nature of the receivables contract are customarily adopted to provide the purchaser the itself. For a sale to be effected, it must be possible to definitively benefits of such related security? determine the assets which are being sold. Both the security and the receivables must pass concurrently, however it should be noted that this will depend on the nature of the

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underlying receivables. The transfer of any security relating to real security interests generally, question 4.3 in respect of promissory estate must be registered with the appropriate real estate authority notes and question 5.2 in respect of real estate, vehicles, vessels and in each Emirate. A vehicle mortgage has to be registered with the aircraft. local traffic police, with a notation on the vehicle’s title deed. In respect of marketable debt securities, in order for a security Security over a vessel has to be registered with the register of ships interest to be validly created, a document pledging the specific and security over an aircraft with the UAE General Civil Aviation securities has to be created, executed and delivered to the pledgee. Authority.

5.6 Trusts. Does the UAE recognise trusts? If not, is there a 5 Security Issues mechanism whereby collections received by the seller in respect of sold receivables can be held or be deemed to be held separate and apart from the seller’s own assets 5.1 Back-up Security. Is it customary in the UAE to take a until turned over to the purchaser? “back-up” security interest over the seller’s ownership interest in the receivables and the related security, in the United Arab Emirates The UAE does not recognise common law trusts and the concept of event that the sale is deemed by a court not to have been perfected? a security trustee, as such, does not exist in the UAE. Under the Shari’ah however, the concept of an “adl” (a trustee-arbitrator) or This will be transaction-specific and dependent upon the credit agency does exist, and there is some overlap between the concept of analysis of the transaction as well as the legal opinion, if or where a “security trustee” and that of an “adl”. relevant. In light of the above, an “adl” can be used as a security agent in certain Shari’ah-compliant structured transactions in the UAE rather than using a security trustee. 5.2 Seller Security. If so, what are the formalities for the seller granting a security interest in receivables and related security under the laws of the UAE, and for such security 5.7 Bank Accounts. Does the UAE recognise escrow interest to be perfected? accounts? Can security be taken over a bank account located in the UAE? If so, what is the typical method? Under the Commercial Code, a commercial pledge can be granted Would courts in the UAE recognise a foreign-law grant of over receivables. In order for a security interest to be perfected, it security (for example, an English law debenture) taken must pledge the receivables in a written document, with notice of over a bank account located in the UAE? the pledge provided to the underlying debtor. In the UAE, the concept of a floating charge is not recognised. Please see the answer contained in question 4.11 for the formalities There is also non-binding case law which states that if a pledge is in respect of the granting of security interests over related security made over funds in a bank account, these funds must not fluctuate in real estate, vehicles, vessels and aircraft. and must remain at a fixed amount. To the extent that the amounts in the account fluctuate, this will cancel the validity of the pledge. 5.3 Purchaser Security. If the purchaser grants security over Fixed charges do exist and so a pledge over funds in a bank account all of its assets (including purchased receivables) in can be granted but only to the account-holding bank. It is for this favour of the providers of its funding, what formalities reason, that those who are not resident but seeking a pledge over must the purchaser comply with in the UAE to grant and funds contained in an account normally appoint a UAE based perfect a security interest in purchased receivables governed by the laws of the UAE and the related security agent to hold the security on their behalf. security? 6 Insolvency Laws Please see question 5.2 above.

6.1 Stay of Action. If, after a sale of receivables that is 5.4 Recognition. If the purchaser grants a security interest in otherwise perfected, the seller becomes subject to an receivables governed by the laws of the UAE, and that insolvency proceeding, will the UAE’s insolvency laws security interest is valid and perfected under the laws of automatically prohibit the purchaser from collecting, the purchaser’s country, will it be treated as valid and transferring or otherwise exercising ownership rights over perfected in the UAE or must additional steps be taken in the purchased receivables (a “stay of action”)? Does the the UAE? insolvency official have the ability to stay collection and enforcement actions until he determines that the sale is If a security interest is governed by the laws of the UAE, then it perfected? Would the answer be different if the purchaser must also be perfected and validated in line with the laws of the is deemed to only be a secured party rather than the UAE in order to ensure that the courts view the security as being owner of the receivables? correctly perfected and enforceable. Please refer to question 2.3 in relation to the interpretation of If, after the sale of receivables, the seller becomes subject to foreign law in the UAE. insolvency proceedings, the transaction can be set aside by the insolvency official if the transaction was deemed to have been entered into by the seller during the suspect period. The suspect 5.5 Additional Formalities. What additional or different period will run from the suspension of payments date until the requirements apply to security interests in or connected to declaration of the seller’s bankruptcy. insurance policies, promissory notes, mortgage loans, consumer loans or marketable debt securities?

Please refer to the answer provided at question 4.11 in respect of

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6.2 Insolvency Official’s Powers. If there is no stay of action 7.2 Securitisation Entities. Does the UAE have laws under what circumstances, if any, does the insolvency specifically providing for establishment of special purpose official have the power to prohibit the purchaser’s entities for securitisation? If so, what does the law provide exercise of rights (by means of injunction, stay order or as to: (a) requirements for establishment and other action)? management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as Please see 6.1 above. to the status of directors or shareholders?

Traditionally this would not be facilitated in the UAE but rather 6.3 Suspect Period (Clawback). Under what facts or through the DIFC which has offshore capacity. In the DIFC, special circumstances could the insolvency official rescind or purpose companies can be easily established and benefit from the reverse transactions that took place during a “suspect” or “preference” period before the commencement of the DIFC’s security enforcement regime and court system. insolvency proceeding? What are the lengths of the “suspect” or “preference” periods in the UAE for (a) 7.3 Non-Recourse Clause. Will a court in the UAE give effect transactions between unrelated parties and (b) to a contractual provision (even if the contract’s governing United Arab Emirates transactions between related parties? law is the law of another country) limiting the recourse of parties to available funds? There is no defined length of the “suspect” or “preference” periods in the UAE whether it is between related or unrelated parties. In the absence of a common law equivalent of precedents, it is If there is no obvious date from which payments became impossible to determine the court’s interpretation of a non-recourse suspended, the court will determine the “suspect” or “preference” clause in the UAE. periods on the basis of the date of the court’s judgment, the date of death, the date of loss of legal capacity, the date of closure of the 7.4 Non-Petition Clause. Will a court in the UAE give effect to relevant business or the date following 10 days after the list of a contractual provision (even if the contract’s governing verified debts is presented to the court clerk’s office. law is the law of another country) prohibiting the parties A “suspect” or “preference” period cannot be longer than 2 years. from: (a) taking legal action against the purchaser or another person; or (b) commencing an insolvency proceeding against the purchaser or another person? 6.4 Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official In the absence of a common law equivalent of precedents, it is consolidate the assets and liabilities of the purchaser with impossible to determine the court’s interpretation of a non-petition those of the seller or its affiliates in the insolvency clause in the UAE. proceeding?

Insolvency proceedings are not yet well developed in the UAE and 7.5 Independent Director. Will a court in the UAE give effect so remain indeterminable in respect of substantive consolidation. to a contractual provision (even if the contract’s governing law is the law of another country) or a provision in a party’s organisational documents prohibiting the directors 6.5 Effect of Proceedings on Future Receivables. What is the from taking specified actions (including commencing an effect of the initiation of insolvency proceedings on (a) insolvency proceeding) without the affirmative vote of an sales of receivables that have not yet occurred or (b) on independent director? sales of receivables that have not yet come into existence? Subject to the general corporate rules and provided neither the articles nor memorandum of association contravene UAE law, this Insolvency proceedings are not yet well developed in the UAE and may be given effect. so remain indeterminable in respect of future receivables.

8 Regulatory Issues 7 Special Rules

8.1 Required Authorisations, etc. Assuming that the 7.1 Securitisation Law. Is there a special securitisation law purchaser does no other business in the UAE, will its (and/or special provisions in other laws) in the UAE purchase and ownership or its collection and enforcement establishing a legal framework for securitisation of receivables result in its being required to qualify to do transactions? If so, what are the basics? business or to obtain any licence or its being subject to regulation as a financial institution in the UAE? Does the The securitisations market in the UAE is in its very early stages, as answer to the preceding question change if the purchaser a result of this most securitisations are facilitated via the DIFC. The does business with other sellers in the UAE? applicable DIFC laws to safeguard security and the securitisation structure would be the Law of Security (DIFC Law 8 of 2005, as The usual formalities of establishing a company in the UAE will amended), the Real Property Law (DIFC Law 4 of 2007), which need to be adhered to. specifically covers mortgages over land, and the DIFC Security Regulations.

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8.2 Servicing. Does the seller require any licences, etc., in 9.2 Seller Tax Accounting. Does the UAE require that a order to continue to enforce and collect receivables specific accounting policy is adopted for tax purposes by following their sale to the purchaser, including to appear the seller or purchaser in the context of a securitisation? before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect All accounting matters in the UAE are in accordance with GAAP sold receivables? principles. All companies in the UAE are required to comply with GAAP standards. The usual formalities of establishing a company in the UAE will need to be adhered to. 9.3 Stamp Duty, etc. Does the UAE impose stamp duty or other documentary taxes on sales of receivables? 8.3 Data Protection. Does the UAE have laws restricting the use or dissemination of data about or provided by There is no stamp duty in the UAE but if there is a sale of obligors? If so, do these laws apply only to consumer receivables, payments by a company or individual from a source in obligors or also to enterprises?

United Arab Emirates the UAE to a non-resident of the UAE will be subject to withholding tax. There are no data protection laws in the UAE restricting the use or dissemination of data by obligors. 9.4 Value Added Taxes. Does the UAE impose value added tax, sales tax or other similar taxes on sales of goods or 8.4 Consumer Protection. If the obligors are consumers, will services, on sales of receivables or on fees for collection the purchaser (including a bank acting as purchaser) be agent services? required to comply with any consumer protection law of the UAE? Briefly, what is required? There are no value added taxes in the UAE. The Consumer Code of Rights was issued under UAE Federal Law (24) 2006 by the Ministry of Economy and sets out a list of sellers’ 9.5 Purchaser Liability. If the seller is required to pay value responsibilities, such as avoiding misleading advertising, providing added tax, stamp duty or other taxes upon the sale of consumers with accurate information about goods and services and receivables (or on the sale of goods or services that give service quality with due care. rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold 8.5 Currency Restrictions. Does the UAE have laws receivables or collections? restricting the exchange of the UAE’s currency for other currencies or the making of payments in Saudi currency There are no value added taxes or stamp duties in the UAE. to persons outside the country?

There are no currency restrictions in the UAE restricting the 9.6 Doing Business. Assuming that the purchaser conducts no other business in the UAE, would the purchaser’s exchange of currency for other currencies. purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of 9 Taxation the receivables against the obligors, make it liable to tax in the UAE?

9.1 Withholding Taxes. Will any part of payments on There are no taxes in the UAE. receivables by the obligors to the seller or the purchaser be subject to withholding taxes in the UAE? Does the answer depend on the nature of the receivables, whether Note they bear interest, their term to maturity, or where the This chapter does not address Free Zones as Free Zones are not seller or the purchaser is located? subject to the laws of the United Arab Emirates.

Payments by a company or individual from a source in the UAE to a non-resident of the UAE are subject to withholding tax.

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Rizwan H. Kanji Martin P. Forster-Jones

King & Spalding LLP King & Spalding LLP Al Fattan Currency House, Tower 2, Level 24 Kingdom Centre, 20th Floor, King Fahad Road Dubai International Financial Centre PO Box 14702 P.O. Box 506547 Riyadh, 11434 Dubai, UAE Saudi Arabia Tel: +971 4 377 9905 Tel: +966 1 466 9451 Fax: +971 4 377 9955 Fax: +966 1 211 0033 Email: [email protected] Email: [email protected] URL: www.kslaw.com URL: www.kslaw.com

Rizwan Kanji is a partner with King & Spalding, specialising in Martin Forster-Jones is an Associate in King & Spalding’s debt capital markets and securitisations, both conventional and affiliated Riyadh office and a member of the firm’s Global Islamic Islamic, including Islamic finance structures. Finance and Investment Group. Mr. Forster-Jones has Mr Kanji has been active in the Middle East six four years and experience in Structured Finance, Equity and Debt Capital

frequently advises a variety of global investment banks, Markets, Asset Finance and Derivatives and Structured Products. United Arab Emirates sovereign states and multinational regional corporates. Prior to joining the firm, Mr. Forster-Jones worked for another Chambers and Partners 2010, recognises Mr Kanji as a “leading global firm’s structured finance practice in London, Hong Kong name in debt work both conventional and Islamic”. and Moscow.

Abu Dhabi ● Atlanta ● Austin ● Charlotte ● Dubai ● Frankfurt ●Geneva ● Houston ● London ● New York ● Paris ● Riyadh ● San Francisco ● Silicon Valley ● Singapore ● Washington, D.C. King & Spalding is a leader in Islamic finance and investment. Our work in the Middle East and our experience with Islamic finance date back to the early 1980s. In 1995, we were the first law firm to establish a dedicated Islamic finance and investment practice group. Our award-winning group has been successful in developing the legal architecture needed by our clients to break new ground in this specialised field. We are the only law firm with recognised experience and the depth to structure and implement sophisticated Shari’ah-compliant investment and financing transactions in the Middle East, Europe and the United States. Our offices in these jurisdictions are staffed with an integrated group of 30 professionals who are dedicated to Islamic finance and investment, and they are supported by an international law firm with more than 800 lawyers located in 17 offices.

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USA Lawrence Safran

Latham & Watkins LLP Kevin T. Fingeret

Note (c) Certain jurisdictions provide consumers with a period of time to cancel certain types of transactions after entering into Answers to the questions in sections 1 and 2 generally describe the a contract, in some cases these rights only apply when the rules provided by the Uniform Commercial Code (“UCC”), a model contract was entered into in a specified context (e.g., when a statute enacted with some variations in each state, and answers to contract is entered into with a merchant other than at a question 4.10 and the questions in section 6 generally describe the merchant’s regular place of business). rules provided by the U.S. Bankruptcy Code, in each case unless (d) Consumers benefit from a number of protections. For otherwise specified. The United States is a signatory to, but has not example, restrictions on assignment of consumer loans are yet ratified, the United Nations Convention on the Assignment of generally enforceable. In addition, personally-identifiable Receivables in International Trade (the “UNCITRAL consumer information cannot be disclosed or used other than Convention”). It is anticipated that the United States may ratify the in specified manners. UNCITRAL Convention in the near future. Upon the effectiveness Federal and state consumer protection laws and regulations regulate thereof, the UNCITRAL Convention would override the UCC and the relationships among credit card members, credit card issuers change many of the answers set forth herein. and sellers of merchandise and services in transactions financed by the extension of credit under credit accounts. These laws and 1 Receivables Contracts regulations include the Credit Card Accountability and Disclosure Act, the Federal Truth-in-Lending Act and Fair Credit Billing Act, and the provisions of the Federal Reserve Board’s Regulation Z 1.1 Formalities. In order to create an enforceable debt issued under each of them, the Equal Credit Opportunity Act and obligation of the obligor to the seller, (a) is it necessary the provisions of the Federal Reserve Board’s Regulation B issued that the sales of goods or services are evidenced by a under it, the Fair Credit Reporting Act and the Fair Debt Collection formal receivables contract; (b) are invoices alone Practices Act. These statutes and regulations require credit sufficient; and (c) can a receivable “contract” be deemed disclosures on credit card applications and solicitations, on an to exist as a result of the behaviour of the parties? initial disclosure statement required to be provided when a credit card account is first opened, and with each monthly billing With respect to a contract for the sale of goods for $500 or more, statement. They also prohibit certain discriminatory practices in some writing sufficient to indicate that a contract for sale has been extending credit, impose certain limitations on the charges that may made is required. A contract for services is generally required to be imposed and regulate collection practices. In addition, these be in writing if, by its terms, it is not to be completed within one laws and regulations entitle card members to have payments and year. However, with respect to contracts for sales of goods, a credits promptly applied on credit accounts and to require billing formal sales contract is not required but rather a contract may be on errors to be promptly resolved. The Credit Card Accountability and the basis of exchanged purchase orders, general terms, and Disclosure Act and the provisions of the regulations that invoices, or by a combination of writings which are themselves implemented it limit the ability of credit card issuers to increase the insufficient to establish a contract coupled with the conduct by both interest rates on existing credit card balances, regulate how interest parties which recognises the existence of a contact. is calculated for each billing cycle, and regulate how payments must be allocated to outstanding balances with different interest 1.2 Consumer Protections. Do the USA’s laws (a) limit rates rates. A card member may be entitled to assert violations of certain of interest on consumer credit, loans or other kinds of of these consumer protection laws and, in certain cases, claims receivables; (b) provide a statutory right to interest on late against the lender or seller, by way of set-off against his or her payments; (c) permit consumers to cancel receivables for obligation to pay amounts owing on his account. For example, a specified period of time; or (d) provide other noteworthy under the Federal Truth-in-Lending Act, a credit card issuer is rights to consumers with respect to receivables owing by them? subject to all claims, other than tort claims, and all defences arising out of transactions in which a credit card is used to purchase (a) Each state has different limitations on the permissible rate of merchandise or services, if certain conditions are met. These interest; however, U.S. federal law permits banks and some conditions include requirements that the card member make a good other depository institutions to use a uniform nationwide faith attempt to obtain satisfactory resolution of the dispute from the rate, determined by the law of the state where the principal person honouring the credit card and meet certain jurisdictional office of the institution is located. requirements. These jurisdictional requirements do not apply (b) Not to our knowledge. where the seller of the goods or services is the same party as the 372 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Latham & Watkins LLP USA

card issuer, or controls or is controlled by the card issuer directly or select the law of a particular U.S. state (rather than federal law) as indirectly. These laws also provide that in certain cases a card the governing law. The choice of the law of a particular state of the member’s liability may not exceed $50 with respect to charges to United States to govern a contract may not be given effect if it does the credit card account that resulted from unauthorised use of the not bear a reasonable relationship with the transaction or parties. A credit card. In addition, the Dodd-Frank Act became federal law in few states, such as New York, permit the choice of their law to 2010 and contains numerous regulations relating to the financial govern a contract even in the absence of any contacts if the contract industry and provides for the establishment of the Bureau of satisfies certain dollar thresholds; however another U.S. state may Consumer Financial Protection. It is not yet clear how implantation not respect this choice of law if litigated in the other U.S. state in of the Dodd-Frank Act will affect consumer receivables. the absence of a reasonable relationship. Of course, on the facts The Servicemembers Civil Relief Act allows individuals on active specified above, there is no reason that an effective choice of a U.S. USA duty in the military to cap the interest rate and fees on debts state law cannot be made. incurred before the call to active duty at 6%. In addition, subject to judicial discretion, any action or court proceeding in which an 2.3 Freedom to Choose Foreign Law of Non-Resident Seller individual in military service is involved may be stayed if the or Obligor. If the seller is resident in the USA but the individual’s rights would be prejudiced by denial of such a stay. obligor is not, or if the obligor is resident in the USA but Currently, some accountholders with outstanding balances have the seller is not, and the seller and the obligor choose the been placed on active duty in the military, and more may be placed foreign law of the obligor/seller to govern their receivables on active duty in the future. contract, will a court in the USA give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law (such as public policy or 1.3 Government Receivables. Where the receivables mandatory principles of law) that would typically apply in contract has been entered into with the government or a commercial relationships such that between the seller and government agency, are there different requirements and the obligor under the receivables contract? laws that apply to the sale or collection of those receivables? In general, the choice of law of the parties will be given effect in the circumstances described above. However, each state has somewhat Yes, if the debtor is the U.S. government or one of its agencies or different considerations in determining whether to give effect to a instrumentalities. In such a case the Federal Assignment of Claims choice of non-U.S. law. Typically such a choice of non-U.S. law Act will apply to an assignment of receivables and the right of the will be given effect if: (i) the chosen law has a reasonable and federal government to exercise set-off. A minority of states have substantial relationship and sufficient contacts with the contract or similar laws that apply to obligations of the state or agencies or the transaction contemplated thereby; (ii) the chosen law does not departments thereof and a few states extend such rules to violate or contravene, nor is contrary or offensive to, a public or municipalities and other local governmental entities. fundamental policy of the U.S. state determining such issue; and (iii) the chosen law was not induced or procured by fraud. Under 2 Choice of Law – Receivables Contracts the Restatement 2nd of Conflicts of Law, a court may decline to apply the law of a jurisdiction chosen by the parties to a contract (which may be another U.S. state or a foreign jurisdiction) when (1) 2.1 No Law Specified. If the seller and the obligor do not it is necessary to protect the fundamental policies of the state, the specify a choice of law in their receivables contract, what law of which would otherwise apply, and (2) such state has a are the main principles in the USA that will determine the materially greater interest in the determination of a particular issue governing law of the contract? than the state of the chosen law. It is not possible to make a definitive statement of when the fundamental policy exception Courts generally apply the choice of law rules of the state in which would apply since each U.S. state and each court will reach its own the court is located, and thus answers to choice of law questions determinations on a case-by-case basis. may differ depending on the state in which the litigation is prosecuted. Under the Restatement 2nd of Conflicts of Law, the rights and duties of the parties with respect to an issue in contract 2.4 CISG. Is the United Nations Convention on the are determined by the local law of the state which, with respect to International Sale of Goods in effect in the USA? that issue, has the most significant relationship to the transaction and the parties. In the absence of an effective choice of law by the Yes, it is. parties, the contacts to be taken into account in determining the law applicable to an issue include: (a) the place of contracting; (b) the 3 Choice of Law – Receivables Purchase place of negotiation of the contract; (c) the place of performance; Agreement (d) the location of the subject matter of the contract; and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. 3.1 Base Case. Does the USA’s law generally require the sale of receivables to be governed by the same law as the law governing the receivables themselves? If so, does 2.2 Base Case. If the seller and the obligor are both resident that general rule apply irrespective of which law governs in the USA, and the transactions giving rise to the the receivables (i.e., the USA’s laws or foreign laws)? receivables and the payment of the receivables take place in the USA, and the seller and the obligor choose Generally, there is no reason that the law of the state governing the the law of the USA to govern the receivables contract, is contract giving rise to the receivables needs to be the same as the there any reason why a court in the USA would not give effect to their choice of law? law of the state governing the sale of the receivables. However, as noted below in response to question 3.4, the sale of the receivables The U.S. is a multi-jurisdictional country and the contract needs to will need to be perfected under the Uniform Commercial Code and

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the law governing perfection cannot be selected by the parties but, priority over a judgment lien creditor. Although there are some instead, is subject to mandatory choice of law rules. exceptions, for most corporations and limited liability companies that are organised under the laws of any state of the United States, their “location” for purposes of the UCC (and hence the law 3.2 Example 1: If (a) the seller and the obligor are located in the USA, (b) the receivable is governed by the law of the governing perfection by filing) will be their state of incorporation. USA, (c) the seller sells the receivable to a purchaser Where perfection is obtained by possession of the original located in a third country, (d) the seller and the purchaser promissory note or tangible “chattel paper” evidencing the choose the law of the USA to govern the receivables receivable, the law of the jurisdiction where the promissory note or purchase agreement, and (e) the sale complies with the tangible chattel paper is physically located will govern perfection of USA requirements of the USA, will a court in the USA a possessory security interest. Examples of chattel paper include recognise that sale as being effective against the seller, leases of office equipment; retail auto leases; and many retail the obligor and other third parties (such as creditors or instalment sales contracts. insolvency administrators of the seller and the obligor)?

Generally yes, subject to the same considerations referenced in the 3.5 Example 4: If (a) the obligor is located in the USA but the response to question 2.3 above. seller is located in another country, (b) the receivable is governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country 3.3 Example 2: Assuming that the facts are the same as to govern the receivables purchase agreement, and (d) Example 1, but either the obligor or the purchaser or both the sale complies with the requirements of the seller’s are located outside the USA, will a court in the USA country, will a court in the USA recognise that sale as recognise that sale as being effective against the seller being effective against the obligor and other third parties and other third parties (such as creditors or insolvency (such as creditors or insolvency administrators of the administrators of the seller), or must the requirements of obligor) without the need to comply with the USA’s own the obligor’s country or the purchaser’s country (or both) sale requirements? be taken into account? Generally, yes. Generally yes, subject to the same considerations referenced in the response to question 2.3 above. 3.6 Example 5: If (a) the seller is located in the USA (irrespective of the obligor’s location), (b) the receivable is 3.4 Example 3: If (a) the seller is located in the USA but the governed by the law of the USA, (c) the seller sells the obligor is located in another country, (b) the receivable is receivable to a purchaser located in a third country, (d) governed by the law of the obligor’s country, (c) the seller the seller and the purchaser choose the law of the sells the receivable to a purchaser located in a third purchaser’s country to govern the receivables purchase country, (d) the seller and the purchaser choose the law agreement, and (e) the sale complies with the of the obligor’s country to govern the receivables requirements of the purchaser’s country, will a court in the purchase agreement, and (e) the sale complies with the USA recognise that sale as being effective against the requirements of the obligor’s country, will a court in the seller and other third parties (such as creditors or USA recognise that sale as being effective against the insolvency administrators of the seller, any obligor located seller and other third parties (such as creditors or in the USA and any third party creditor or insolvency insolvency administrators of the seller) without the need administrator of any such obligor)? to comply with the USA’s own sale requirements? The answer to this question will generally be the same as the answer Subject to the considerations discussed in the response to question to question 3.4 above. 2.3 above, a court in a United States jurisdiction will generally recognise the foreign law determination of whether a “true” sale has occurred as between the parties to the transaction pursuant to which 4 Asset Sales the receivables were sold. However, any transfer of receivables, whether characterised as an outright sale or as a conditional transfer 4.1 Sale Methods Generally. In the USA what are the for security is classified under the UCC as a “security interest” and customary methods for a seller to sell receivables to a such security interest would need to be “perfected” in order to be purchaser? What is the customary terminology – is it enforceable against other creditors of the seller and any bankruptcy called a sale, transfer, assignment or something else? trustee of the seller. The methods of perfecting this security interest are detailed in the response to question 4.3 below. However, the Sales of receivables in securitisation transactions are generally law governing perfection may not be selected by the parties but structured as outright sales of all of the seller’s right, title and rather is subject to mandatory choice of law rules. Where interest in, to and under the receivables and the related assets, and perfection is obtained by the filing of UCC financing statements, all proceeds of the foregoing. The transfer is valid and enforceable the law of the seller’s “location” generally governs perfection of a if the purchaser gives value, the seller owns or has the power to sell non-possessory security interest in receivables. A seller’s location the accounts receivable and the sale is evidenced by an otherwise is determined according to a number of factors, including: (a) the binding and enforceable contact. However, whether the transfer type of organisation (e.g. corporation, limited partnership or general will be respected as a “true sale” or re-characterised as a security partnership); (b) whether it is formed under the laws of a foreign interest will depend on a number of factors discussed below in country; (c) the location of its chief executive office; and (d) question 4.7. Sale terminology is customarily used to refer to these whether the law of the jurisdiction in which its chief executive transactions, although governing documents will often use a office is located provides a system of public filing of notices of non- combination of terms as a precaution. possessory liens on personal property as a condition for having

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4.2 Perfection Generally. What formalities are required Marketable Debt Securities generally for perfecting a sale of receivables? Are there Sales of marketable debt securities are governed by Article 8 of the any additional or other formalities required for the sale of UCC rather than as a “secured transaction” under Article 9 of the receivables to be perfected against any subsequent good UCC. A purchaser that gives value and obtains “control” of the faith purchasers for value of the same receivables from the seller? securities, without notice of any adverse claim, is a “protected purchaser” of the securities. A protected purchaser’s ownership For sales of types of receivables not covered by the answer to interest will be free from attack by any other person claiming a question 4.3, the sale is perfected by the filing of a UCC financing security interest or other property interest in the securities. The necessary steps to achieving “control” over marketable debt

statement that identifies the seller, the purchaser and the receivables USA being sold. The financing statement must be filed in the appropriate securities involve (a) in the case of certificated securities, taking filing office of the jurisdiction in which the seller is “located” – possession of such securities together with a written assignment determined as provided in the answer to question 3.4. executed by the seller, (b) in the case of uncertificated securities, either (i) having the securities transferred on the books and records of the issuer into the name of the purchaser, or (ii) having the issuer 4.3 Perfection for Promissory Notes, etc. What additional or agree that it will follow the purchaser’s instructions regarding different requirements for sale and perfection apply to disposition or redemption of the securities being sold without the sales of promissory notes, mortgage loans, consumer further consent of the seller, and (c) in the case of securities loans or marketable debt securities? maintained in a securities account, either (i) having the securities transferred and credited to the purchaser’s own securities account, Receivables evidenced by promissory notes or negotiable or (ii) having a securities intermediary that maintains the securities instrument, or that constitute “payment intangibles”, “chattel account to which the securities are credited agree that it will follow paper”, or “marketable securities”, all have different perfection the purchaser’s instructions regarding disposition or redemption of rules. the securities being sold without the further consent of the seller. Promissory Notes A sale of “promissory notes” (most residential and commercial 4.4 Obligor Notification or Consent. Must the seller or the mortgage loans are evidenced by promissory notes) is automatically purchaser notify obligors of the sale of receivables in perfected, and no UCC financing statement needs to be filed or order for the sale to be effective against the obligors other action needs to be taken to perfect the sale. However, and/or creditors of the seller? Must the seller or the automatic perfection would not be applicable in the event that the purchaser obtain the obligors’ consent to the sale of sale was re-characterised as a security interest rather than a true sale receivables in order for the sale to be an effective sale and, accordingly, to protect against this risk, it is customary for a against the obligors? Does the answer to this question buyer to either take possession of the promissory notes or file a vary if (a) the receivables contract does not prohibit UCC financing statement to ensure that the buyer is perfected in the assignment but does not expressly permit assignment; or event of such a re-characterisation. In addition, if the purchaser (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect fails to take possession of promissory notes it may be possible for a sale, are there any benefits to giving notice – such as another party who takes possession to obtain superior rights in the cutting off obligor set-off rights and other obligor promissory notes. In the United States, most mortgage loans are defences? evidenced by promissory notes. Payment Intangibles Obligor notification is not required in order for a sale of the sellers’ Mortgage loans that are not evidenced by promissory notes or other rights in respect of the receivable to be effective as between the instruments are classified under the UCC as “payment intangibles” seller and the purchaser. However, the general rule under the UCC and are also automatically perfected. Again, it is customary to is that only once the obligor receives notice that the receivable has perfect by filing of a financing statement to protect against the risk been sold: (i) can the purchaser enforce the payment obligation of re-characterisation of the sale as a security interest rather than a directly against the obligor; and (ii) must the obligor pay the true sale. A “payment intangible” is a type of “general intangible” purchaser in order to be relieved of its payment obligation. In under the UCC, and perfection of security interests in other types of addition, notifying the underlying obligor of the assignment has the general intangibles can be perfected only by filing a UCC financing advantage of preventing such obligor from exercising against the statement. purchaser a right of set-off or defence that the obligor might have Chattel Paper had against the seller and that accrues after the obligor receives notice of the assignment (although an obligor always retains the In contrast to promissory notes and payment intangibles, a sale of right of recoupment arising from the transaction that gave rise to the chattel paper must be perfected regardless of whether characterised receivable) and, in those cases where the receivable has been fully as a sale or a more traditional security interest. A sale of “tangible” earned by performance, prevents any amendment to the receivables chattel paper (i.e., evidence by traditional, hard copy writing) may contract without the consent of the purchaser. If, alternatively, the be perfected either by filing a UCC financing statement or by the receivables are evidenced by a “negotiable instrument”, a purchaser purchaser (or its agent) taking possession of the chattel paper. A who becomes a holder in due course may enforce directly against sale of “electronic” chattel paper may be perfected either by filing the obligor and takes free and clear of defences arising from the a UCC financing statement or by the purchaser taking control of the seller’s conduct, subject to a few exceptions under consumer chattel paper. In the case of conflicting security interests, a protection laws. Similar rights are available to protected purchasers purchaser that gives new value and takes possession (or control in of debt securities. the case of electronic chattel paper) of the chattel paper in good faith, in the ordinary course of the purchaser’s business, and Generally, a seller or obligor insolvency will not limit the ability of without knowledge that doing so violates the rights of another party, the purchaser of receivables to give notice to the obligors of the will have priority over a purchaser that perfects by filing. assignment of those receivables. The purpose of the notification requirement is to avoid the obligor being required to pay twice.

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Unless the contract expressly requires such consent, obligor consent 4.7 Identification. Must the sale document specifically identify is generally not required under U.S. common law in order for a sale each of the receivables to be sold? If so, what specific of the sellers’ rights in respect of the receivable to be effective as information is required (e.g., obligor name, invoice between the seller and the purchaser. The answer to the question of number, invoice date, payment date, etc.)? Do the whether the language of the receivables contract changes the receivables being sold have to share objective characteristics? Alternatively, if the seller sells all of its general rule depends upon the type of receivables involved. receivables to the purchaser, is this sufficient Generally, under the UCC, a provision in a non-consumer account identification of receivables? receivable and certain other types of receivable which prohibits or restricts its sale, or which provides that a sale may give rise to a No, the sale document need not specifically identify each receivable USA default, breach, right of recoupment, claim, defence, termination or to be sold, but it must nonetheless provide a means for identifying remedy, is ineffective. However, the UCC provides that if a objectively receivables that have been sold. Under the UCC, a receivable containing such a prohibition is evidenced by a security interest can be created in a broad category of assets (such “promissory note” or is classified under the UCC as a “payment as accounts receivable). If all receivables have been sold, no further intangible”, although the sale is effective as between the purchaser identification should be required. and the seller the purchaser cannot enforce the receivable against the obligor and the sale does not impose any duty or obligation on the obligor. 4.8 Respect for Intent of Parties; Economic Effects on Sale. If the parties denominate their transaction as a sale and state their intent that it be a sale will this automatically be 4.5 Notice Mechanics. If notice is to be delivered to obligors, respected or will a court enquire into the economic whether at the time of sale or later, are there any characteristics of the transaction? If the latter, what requirements regarding the form the notice must take or economic characteristics of a sale, if any, might prevent how it must be delivered? Is there any time limit beyond the sale from being perfected? Among other things, to which notice is ineffective – for example, can a notice of what extent may the seller retain (a) credit risk; (b) sale be delivered after the sale, and can notice be interest rate risk; and/or (c) control of collections of delivered after insolvency proceedings against the obligor receivables without jeopardising perfection? have commenced? Does the notice apply only to specific receivables or can it apply to any and all (including future) Whether a receivables transfer will be recognised as a “true sale” receivables? Are there any other limitations or (and not as a secured loan), in most states it is determined by judge- considerations? made common law. As a result, judicial authority analysing transfers as true sales is not always consistent. Several courts have As noted in the response to question 4.4 above, notice to the obligor given presumptive weight to the intent of the parties. Other courts, is required only to the extent of imposing certain obligations on the seeking the “true nature” of a transaction, have regarded the parties’ obligor. There is no specific form specified for delivery of notice intent as only one attribute of a transaction and have balanced those other than that the notice must be an “authenticated record”, i.e., in attributes of a transaction indicative of a secured loan against those a signed writing or the electronic equivalent thereof. Generally, attributes indicative of a sale in order to determine whether the there is no time limit for the delivery of such a notice, though, as transaction more closely resembles a sale or a secured loan. Where noted above, there are advantages in giving the notice sooner rather commercially sophisticated parties have characterised transactions than later and a seller or obligor insolvency should not limit the as sales, and acted consistently with that characterisation, courts ability of the purchaser of receivables to give notice to the obligors have generally been unwilling to disturb that characterisation even of the assignment of those receivables, so long as the assignment though the transactions may also bear certain attributes of secured was fully consummated before the commencement of the loans. Upon a showing by “clear and convincing evidence”, insolvency proceeding. The purpose of the notification requirement however, that the transaction had the economic substance of a is to avoid the obligor being required to pay twice. A notice to an “disguised financing”, courts may invoke their equitable power to obligor need not be limited to a specific set of receivables and can re-characterise the transaction accordingly. cover future receivables as long as those receivables are identifiable. Generally, a key element to finding that a sale took place, as opposed to a loan, is that recourse to the seller is limited or non- existent. Recourse to the seller can take several forms. Recourse 4.6 Restrictions on Assignment; Liability to Obligor. Are for the uncollectibility of the receivables and recourse to provide a restrictions in receivables contracts prohibiting sale or contracted rate of return are often cited in cases re-characterising assignment generally enforceable in the USA? Are there transactions as loans. exceptions to this rule (e.g., for contracts between commercial entities)? If the USA recognises prohibitions on sale or assignment and the seller nevertheless sells 4.9 Continuous Sales of Receivables. Can the seller agree in receivables to the purchaser, will either the seller or the an enforceable manner (at least prior to its insolvency) to purchaser be liable to the obligor for breach of contract or continuous sales of receivables (i.e., sales of receivables on any other basis? as and when they arise)?

Generally, such restrictions will not be effective to prevent the Yes, a seller can agree to continuous sales of receivables in the U.S.; granting of the security interest, though, as noted in the answer to however, the bankruptcy code will generally cut-off the purchaser’s question 4.4, in some cases such security interest will be interest in any receivables that are generated after the seller files for unenforceable against the underlying obligor. bankruptcy.

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4.10 Future Receivables. Can the seller commit in an agreement permits the filing of an “all assets” financing statement enforceable manner to sell receivables to the purchaser and the purchaser has appropriately filed such a statement, no that come into existence after the date of the receivables additional UCC filing will be required in order for the providers of purchase agreement (e.g., “future flow” securitisation)? If such purchaser’s funding to have a security interest in such so, how must the sale of future receivables be structured receivables. to be valid and enforceable? Is there a distinction between future receivables that arise prior to or after the seller’s insolvency? 5.4 Recognition. If the purchaser grants a security interest in receivables governed by the laws of the USA, and that Prior to insolvency, yes, as long as the receivables in question are security interest is valid and perfected under the laws of USA sufficiently specified by the sale agreement. The effectiveness of the purchaser’s country, will it be treated as valid and sales of receivables arising after the bankruptcy of the seller could perfected in the USA or must additional steps be taken in be uncertain. If both the seller and the purchaser have continuing the USA? duties to perform, the agreement could constitute an “executory contract” which may be rejected by the seller’s bankruptcy trustee. Generally, yes.

4.11 Related Security. Must any additional formalities be 5.5 Additional Formalities. What additional or different fulfilled in order for the related security to be transferred requirements apply to security interests in or connected to concurrently with the sale of receivables? If not all insurance policies, promissory notes, mortgage loans, related security can be enforceably transferred, what consumer loans or marketable debt securities? methods are customarily adopted to provide the purchaser the benefits of such related security? See the answer to question 4.3.

Generally, attachment and perfection of a security interest or sale of 5.6 Trusts. Does the USA recognise trusts? If not, is there a receivables in accordance with the formalities described in the mechanism whereby collections received by the seller in answers to questions 4.1, 4.2 and 4.3 will result in automatic respect of sold receivables can be held or be deemed to attachment and perfection of a security interest in a security interest be held separate and apart from the seller’s own assets securing the receivable, the related security or any letter of credit until turned over to the purchaser? supporting payment of such receivable. Yes, trusts of various forms are generally recognised in United States jurisdictions; however, if the transaction is classified as a 5 Security Issues security interest under the UCC (as discussed above, this includes the purchase of most receivables) then simply having the seller 5.1 Back-up Security. Is it customary in the USA to take a agree to hold the assets in trust for the purchaser will not be “back-up” security interest over the seller’s ownership sufficient to avoid the perfection and other requirements of the interest in the receivables and the related security, in the UCC. event that the sale is deemed by a court not to have been perfected? 5.7 Bank Accounts. Does the USA recognise escrow accounts? Can security be taken over a bank account Yes, it is customary. located in the USA? If so, what is the typical method? Would courts in the USA recognise a foreign-law grant of 5.2 Seller Security. If so, what are the formalities for the security (for example, an English law debenture) taken seller granting a security interest in receivables and over a bank account located in the USA? related security under the laws of the USA, and for such security interest to be perfected? Generally, jurisdictions in the United States will recognise escrow accounts, although the specific elements required for an escrow As described in the answers to questions 4.2 and 4.3, the grant of a account and the specific legal status of an escrow account will vary security interest in a receivable is generally perfected by the filing by state. Generally, security can be taken over a deposit account in of a UCC financing statement. For instruments and chattel paper, United States jurisdictions. Typically this is accomplished through possession of the original is also available as a method of an account control agreement whereby the depositary bank, the perfection. obligor and the secured party agree that the bank will follow the directions of the secured party rather than the account holder upon the occurrence of certain events. A court in the United States should 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in recognise a foreign law grant of security taken over a bank account favour of the providers of its funding, what formalities located in the United States as long as the form of security and must the purchaser comply with in the USA to grant and perfection satisfied the requirement of control under the UCC, perfect a security interest in purchased receivables notwithstanding the law governing the instrument of control, governed by the laws of the USA and the related subject to the choice of law, consideration addressed by the answers security? to the questions in section 2.

The purchaser would be required to comply with the same formalities as did the seller, as provided in the answers to questions 4.2 and 4.3, although different locations of the purchaser and seller may result in the laws of a different jurisdiction being applicable to questions of perfection. Generally, if the relevant security

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6 Insolvency Laws 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or 6.1 Stay of Action. If, after a sale of receivables that is “preference” period before the commencement of the otherwise perfected, the seller becomes subject to an insolvency proceeding? What are the lengths of the insolvency proceeding, will the USA’s insolvency laws “suspect” or “preference” periods in the USA for (a) automatically prohibit the purchaser from collecting, transactions between unrelated parties and (b) transferring or otherwise exercising ownership rights over transactions between related parties? the purchased receivables (a “stay of action”)? Does the insolvency official have the ability to stay collection and USA The debtor-in-possession, bankruptcy trustee or other party with enforcement actions until he determines that the sale is requisite standing can avoid a transaction that took place within two perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather years before the commencement of the insolvency proceeding, if than the owner of the receivables? the transaction was a fraudulent transfer pursuant to section 548 of the Bankruptcy Code. The look-back period for fraudulent transfers If the sale of receivables was a true sale that occurred prior to the is two years both for transactions between unrelated parties and for commencement of the seller’s insolvency proceeding, then the transactions between related parties and, as discussed below, the receivables involved in such a sale would not constitute property of look-back period for “preferences” is generally 90 days. Under the seller’s bankruptcy estate. Accordingly, the automatic stay section 548, a transaction constitutes a fraudulent transfer if the imposed by section 362 of the Bankruptcy Code would not prohibit debtor (a) made a transfer or incurred an obligation with an actual the purchaser from exercising ownership rights over the purchased intent to hinder, delay or defraud any entity to which the debtor was receivables. No insolvency official (such as a debtor-in-possession, or became indebted, or (b) received less than a reasonably bankruptcy trustee, creditors’ committee or bankruptcy court) equivalent value in exchange for the transfer or obligation, and the would have the right to stay or otherwise affect the purchaser’s debtor (i) was insolvent when the transfer was made or the rights regarding the receivables while that insolvency official obligation was incurred, or became insolvent as a result thereof, (ii) determines whether the sale was perfected. However, the was engaged (or was about to engage) in a business or transaction insolvency official can allege during the insolvency proceeding that for which any property remaining with the debtor was an the sale in fact was a secured loan, rather than a true sale. unreasonably small capital, or (iii) intended to incur (or believed that it would incur) debts beyond its ability to pay as such debts The answer would be different if the purchaser is deemed only to be matured. If a transaction is avoided as a fraudulent transfer, then a a secured party, rather than the owner of the receivables. transferee that takes for value and in good faith would have a lien Specifically, if either (a) the transaction was in fact a secured loan, on, or may retain, any property the debtor transferred to it, but only or (b) the purchaser was still required (as of the commencement of to the extent that the transferee gave value to the debtor in exchange the seller’s insolvency proceeding) to take some action under the for the transfer. sale agreement vis-à-vis the seller before it was contractually entitled to collect the receivables, then the receivables would Pursuant to section 544 of the Bankruptcy Code, the debtor-in- remain property of the seller’s bankruptcy estate. Accordingly, the possession, bankruptcy trustee or other party with requisite standing automatic stay would prohibit actions by the purchaser to obtain can avoid a transaction under applicable non-bankruptcy law. For possession of, or otherwise exercise control over, the receivables. example, a transaction could be avoided under state fraudulent The purchaser could file a motion with the bankruptcy court for transfer law. Most state fraudulent transfer statutes are based on the relief from the automatic stay to allow it to collect or otherwise Uniform Fraudulent Transfer Act, and others are based on the older exercise control over the receivables. However, any party in Uniform Fraudulent Conveyance Act. These statutes contain interest in the insolvency proceeding could object to the motion, elements that are similar to those set forth in section 548 of the and the bankruptcy court could deny the motion. Bankruptcy Code, though the look-back period under state fraudulent transfer statutes generally is longer than that under section 548. For example, the statute of limitations under the 6.2 Insolvency Official’s Powers. If there is no stay of action Uniform Fraudulent Transfer Act is four years after the transfer was under what circumstances, if any, does the insolvency made. official have the power to prohibit the purchaser’s exercise of rights (by means of injunction, stay order or If the transaction is deemed to be a secured loan by the special other action)? purpose vehicle to the originator, then the debtor-in-possession, bankruptcy trustee or other party with requisite standing can avoid If the transaction was a true sale, then the insolvency official transfers made by the debtor-originator in connection with the normally does not have the power to prohibit the purchaser from transaction as preferential transfers, pursuant to section 547 of the exercising its rights as to the receivables purchased. However, the Bankruptcy Code. Preferential transfers are those made (a) to a insolvency official conceivably could still request that the creditor, (b) on account of an antecedent debt owed by the debtor bankruptcy court issue an injunction or stay order (particularly if before the transfer was made, (c) while the debtor was insolvent and there is a question about whether the transaction was a true sale or (d) that enables the creditor to receive more than it would have if there was an infirmity in the transaction), and the bankruptcy received in a Chapter 7 (liquidation) case. Generally, only transfers court would have discretion in determining whether or not to grant made within 90 days before the commencement of the insolvency such a request. The bankruptcy court has some leeway to fashion proceeding are subject to avoidance as preferential transfers. equitable relief. However, transfers made to a special purpose vehicle within one year before the commencement of the insolvency proceeding may be subject to avoidance, because such transfers may be deemed to have been made to an “insider” (i.e., a related party). Courts typically recognise payments to fully-secured creditors as not being preferential. Even if the plaintiff can establish all of the elements of a preference claim, there are a number of statutory affirmative

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defences available to creditors, including defences for transfers legal existence of the special purpose vehicle and the originator are made in the ordinary course of business and transfers in which the disclosed to third parties, and (d) the special purpose vehicle is creditors provided contemporaneous or subsequent new value to the appropriately limited in its investments, indebtedness, business and debtor. ownership. If this is the case and the originator were to become a debtor in an insolvency proceeding, then it is unlikely that a court would order substantive consolidation of the originator and the 6.4 Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official special purpose vehicle if a party objects. consolidate the assets and liabilities of the purchaser with those of the seller or its affiliates in the insolvency 6.5 Effect of Proceedings on Future Receivables. What is the USA proceeding? effect of the initiation of insolvency proceedings on (a) sales of receivables that have not yet occurred or (b) on Courts have the equitable power to order substantive consolidation sales of receivables that have not yet come into under section 105(a) of the Bankruptcy Code. Substantive existence? consolidation has the effect of consolidating the assets and liabilities of multiple legal entities and treating them as if the The commencement of an insolvency proceeding of the originator liabilities were owed by, and the assets held by, a single legal entity. would create uncertainties as to sales of receivables that have not Inter-company claims and guarantees by consolidated entities are yet occurred and sales of receivables that have not yet come into disregarded. Substantive consolidation may be ordered with existence. respect to related entities that are all the subject of an insolvency First, many future flow securitisations are structured such that there proceeding, and also may be ordered with respect to related entities is recourse back to the originator (which may take the form of a where some are the subject of an insolvency proceeding and the guarantee from the originator). The existence of such recourse others are not. could cause a court to conclude that the future flow securitisation Courts in the United States do not apply a uniform standard in was not a true sale, but rather was a secured loan. determining whether to order substantive consolidation. However, Second, the receivables generated after the commencement of the a number of influential courts have stated that substantive originator’s insolvency proceeding could be deemed to be included consolidation is an extraordinary remedy that typically is reserved in the originator’s bankruptcy estate, thus triggering the automatic for circumstances in which (a) creditors had dealt with the various stay as to those receivables. In addition, receivables generated after legal entities as a single economic unit and did not rely on their the commencement of the originator’s insolvency proceeding separate identity in extending credit, or (b) the affairs of the entities generally would not be subject to a lien resulting from the security were so entangled that substantive consolidation would benefit agreement entered into by the originator and the special purpose creditors. Courts are more likely to order substantive consolidation vehicle before the bankruptcy filing (unless such receivables are the when principal parties consent. proceeds, products, offspring or profits of assets acquired prior to In the past, courts have relied on a consideration of the following the bankruptcy filing and subject to a security agreement). factors (among others) to guide their analysis of whether the Third, if the assets securitised are receivables that arise under relationships between multiple legal entities are so obscured that executory contracts, there is a risk that in an insolvency proceeding they could not be disentangled: involving a party to the contract, that party would “reject” the (1) the presence or absence of consolidated financial statements; executory contract and no further receivables would be generated. (2) the unity of interests and ownership between various The term “executory contract” is not defined in the Bankruptcy corporate entities; Code, but numerous courts have described it as a contract under (3) the existence of parent and inter-corporate guarantees on which the obligations of both the debtor and the non-debtor are so loans; far unperformed that the failure of either party to complete (4) the degree of difficulty in segregating and ascertaining performance would constitute a material breach that excuses the individual assets and liabilities; performance of the other party. A debtor’s decision to reject an (5) the transfer of assets without observance of corporate executory contract is subject to bankruptcy court approval, and formalities; parties have an opportunity to object to a proposed rejection. (6) the commingling of assets and business functions; and However, bankruptcy courts generally will approve the rejection of executory contracts so long as the debtor demonstrates a valid (7) the profitability of consolidation at a single physical location. business justification for its decision to reject. The rejection of an Recent court decisions have adopted an open-ended, equitable executory contract is treated as a court-authorised breach by the inquiry to determine whether to substantively consolidate multiple debtor, and gives rise only to an unsecured claim by the non-debtor legal entities. These courts have focused on the need in insolvency party for damages. proceedings to protect the pre-petition expectations of creditors. Both case law and policy considerations indicate that a court primarily should base its determination on whether or not 7 Special Rules substantive consolidation would be equitable to the respective creditors of the entities for which substantive consolidation is 7.1 Securitisation Law. Is there a special securitisation law sought. (and/or special provisions in other laws) in the USA When a special purpose vehicle is used as part of a securitisation establishing a legal framework for securitisation transaction, parties rely on the separate corporate existence of that transactions? If so, what are the basics? special purpose vehicle. The special purpose vehicle should be monitored to ensure that (a) corporate formalities are observed, (b) Not as such. the assets and liabilities of the special purpose vehicle can be readily distinguished from those of the originator, (c) the separate

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7.2 Securitisation Entities. Does the USA have laws supported by adequate consideration. However, covenants specifically providing for establishment of special purpose preventing entities from filing voluntary bankruptcy petitions entities for securitisation? If so, what does the law probably are unenforceable. provide as to: (a) requirements for establishment and management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as 7.5 Independent Director. Will a court in the USA give effect to the status of directors or shareholders? to a contractual provision (even if the contract’s governing law is the law of another country) or a provision in a Not as such. Certain U.S. federal tax laws, investment company party’s organisational documents prohibiting the directors regulations and securities laws have some provisions that facilitate from taking specified actions (including commencing an USA insolvency proceeding) without the affirmative vote of an securitisation by providing special rules for special purpose entities independent director? that satisfy certain requirements. Most domestic securitisations in the United States use entities organised as corporations, limited Independent directors are often found in U.S. securitisation liability companies or statutory trusts under the laws of Delaware. transactions in order to limit the ability of the SPE to commence Trusts created under the laws of New York are also common. Some voluntary bankruptcy proceedings. However, an agreement by an types of U.S. securitisations, such as CDOs, use entities domiciled entity not to file a voluntary bankruptcy petition may be in offshore jurisdictions such as the Cayman Islands. unenforceable as against public policy. In fact, failure of a director to commence bankruptcy proceedings when he/she properly 7.3 Non-Recourse Clause. Will a court in the USA give effect concludes that it would be in the best interest of the SPE to do so to a contractual provision (even if the contract’s governing may constitute a breach of fiduciary duty. law is the law of another country) limiting the recourse of parties to available funds? 8 Regulatory Issues Courts in the United States typically will enforce non-recourse clauses and any carve-outs thereto. These courts will determine, based on the 8.1 Required Authorisations, etc. Assuming that the facts of each case, whether any of the carve-outs to the non-recourse purchaser does no other business in the USA, will its clause apply in a particular situation. In interpreting the non-recourse purchase and ownership or its collection and enforcement provision and its carve-outs, courts will analyse their language in an of receivables result in its being required to qualify to do attempt to determine the intent of the parties. Courts will enforce the business or to obtain any licence or its being subject to agreement of the parties, giving the contract language its normal and regulation as a financial institution in the USA? Does the usual meaning. If a court determines that a carve-out to the non- answer to the preceding question change if the purchaser recourse clause applies in a particular case, then recourse may not be does business with other sellers in the USA? limited. Courts generally will give effect to a non-recourse provision in a contract where the governing law is that of another country, unless Receivables purchases generally do not subject a purchaser to the enforcement of that provision would offend the public policy of licensing or other qualification requirements to do business in the the state in which the court convenes. United States, although there may be exceptions to this rule from state to state depending upon the type of receivable. Collection and Under section 1111(b) of the Bankruptcy Code, however, the enforcement activities are more likely to require an entity to obtain general rule is that a secured claim in a Chapter 11 case is treated as a licence and qualify to do business within a state especially in the a recourse claim, whether or not it is non-recourse by agreement or case of consumer receivables. applicable law. This section of the Bankruptcy Code converts non- recourse claims to recourse claims, but also permits classes of undersecured creditors to elect to waive their deficiency claims and 8.2 Servicing. Does the seller require any licences, etc., in have their entire allowed claims treated as secured claims. This order to continue to enforce and collect receivables provision does not apply if the property is to be sold. following their sale to the purchaser, including to appear before a court? Does a third party replacement servicer require any licences, etc., in order to enforce and collect 7.4 Non-Petition Clause. Will a court in the USA give effect sold receivables? to a contractual provision (even if the contract’s governing law is the law of another country) prohibiting the parties No general servicing licence is required. However, a servicer or from: (a) taking legal action against the purchaser or replacement servicer may require the same licences possessed by another person; or (b) commencing an insolvency the originator operating company depending upon the type of proceeding against the purchaser or another person? receivables and the jurisdiction involved. In addition, a servicer may need to meet certain licensing and other requirements with “Covenants not to sue” typically are governed by state law, and respect to collection and enforcement activities in limited instances. courts will interpret them in accordance with the rules governing the construction of contracts. To be enforceable, a covenant not to sue should be supported by adequate consideration by the 8.3 Data Protection. Does the USA have laws restricting the beneficiary of the covenant. Courts very rarely refuse to enforce use or dissemination of data about or provided by covenants not to sue that are negotiated in business transactions. obligors? If so, do these laws apply only to consumer However, they will not enforce covenants not to sue that violate obligors or also to enterprises? applicable law or public policy. Confidential consumer information cannot generally be disclosed to Courts typically will also enforce contractual provisions prohibiting third parties and can only be used for the purposes for which such parties from commencing an involuntary insolvency proceeding information was provided. Entities possessing consumer against a purchaser or another person. Like covenants not to sue, information are generally obligated to safeguard such information courts will interpret these provisions in accordance with the rules from unauthorised access and disclosure. governing the construction of contracts, and they should be

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8.4 Consumer Protection. If the obligors are consumers, will 9.3 Stamp Duty, etc. Does the USA impose stamp duty or the purchaser (including a bank acting as purchaser) be other documentary taxes on sales of receivables? required to comply with any consumer protection law of the USA? Briefly, what is required? There are no federal stamp duties or documentary taxes on sales of receivables, and these types of charges are unusual at the state level. Consumer protection laws exist at both the federal and state levels in the United States. A purchaser may be liable for the acts of the seller originating the receivable, as these liabilities are considered 9.4 Value Added Taxes. Does the USA impose value added tax, sales tax or other similar taxes on sales of goods or to pass to the holder of the receivable. In addition, a purchaser services, on sales of receivables or on fees for collection could be subject to debt collection laws, reporting laws and agent services? USA confidentiality laws, among other laws. There are no federal value added taxes or sales taxes on sales of 8.5 Currency Restrictions. Does the USA have laws goods or services, on sales of receivables or on fees for collection restricting the exchange of the USA’s currency for other agent services. Virtually all of the 50 states of the United States currencies or the making of payments in the USA’s have some form of state sales tax on sales of goods or services. In currency to persons outside the country? general, no value added, sales or similar taxes will apply to sales of receivables or to fees for collection agent services. Federal anti-money laundering laws require financial institutions to implement due diligence procedures with respect to their customers in order to prevent the transfer of cash to certain prohibited persons. 9.5 Purchaser Liability. If the seller is required to pay value added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give 9 Taxation rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold 9.1 Withholding Taxes. Will any part of payments on receivables or collections? receivables by the obligors to the seller or the purchaser be subject to withholding taxes in the USA? Does the As discussed above, there are no federal stamp duties or answer depend on the nature of the receivables, whether documentary taxes on sales of receivables. The ability of state they bear interest, their term to maturity, or where the taxing authorities to collect any value added tax, stamp duty or seller or the purchaser is located? other taxes, if imposed, may vary. Payments of interest to the seller or the purchaser by debtors who are United States persons on interest-bearing debt obligations with 9.6 Doing Business. Assuming that the purchaser conducts maturities in excess of 183 days generally are subject to United no other business in the USA, would the purchaser’s States withholding tax if the seller or the purchaser is a non-resident purchase of the receivables, its appointment of the seller of the United States. The statutory rate of United States as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax withholding tax generally is 30%, but this rate is often reduced to in the USA? 0% by an applicable income tax convention between the United States and the seller’s or purchaser’s country of residence. In If a non-resident purchaser is considered to be carrying on a trade addition, certain payments of interest are exempt from withholding or business in the United States, it will be required to file a U.S. tax under the “portfolio interest” exception to withholding but most federal income tax return and, absent an applicable income tax receivables are not in the registered form necessary to meet this convention between the United States and the country where the exception. Payments of interest by United States-resident debtors non-resident purchaser is resident, will be required to pay United to the seller or the purchaser may also be subject to “backup States federal income tax on any income that is effectively withholding” if the seller or the purchaser does not provide the connected with its carrying on of a trade or business in the United payer with the appropriate certification that it is exempt from States (ECT). Typically, a purchaser resident in a country with backup withholding. Backup withholding currently is imposed at a which the United States has an income tax convention will only be rate of 28%. It is not an additional tax but rather an advance subject to U.S. federal income tax on its ECT from a trade or payment of tax which may later be credited or refunded. Payments business carried on through a permanent establishment in the of interest to the seller or the purchaser by debtors who are not United States. United States persons are not generally subject to United States withholding tax unless such interest arises from a branch in the Whether or not the purchaser is carrying on a business in the United United States maintained by such debtor. States, or has a permanent establishment in the United States, is a question of fact to be considered on a case-by-case basis. Particular attention must be given to the appointment of a seller resident in the 9.2 Seller Tax Accounting. Does the USA require that a United States as servicer and collection agent for a non-resident specific accounting policy is adopted for tax purposes by purchaser, in order that such appointment does not cause the the seller or purchaser in the context of a securitisation? purchaser to be considered to be carrying on a trade or business through a permanent establishment in the United States (thus giving Most taxpayers are required to use the accrual method of rise to ECT). accounting. In certain limited cases, some securitisation vehicles may elect to mark their assets to market.

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Lawrence Safran Kevin T. Fingeret

Latham & Watkins LLP Latham & Watkins LLP 885 Third Avenue 885 Third Avenue New York, NY 10022-4834 New York, NY 10022-4834 USA USA

Tel: +1 212 906 1711 Tel: +1 212 906 1237 Fax: +1 212 751 4864 Fax: +1 212 751 4864 Email: [email protected] Email: [email protected] URL: www.lw.com URL: www.lw.com USA

Lawrence Safran leads the firm’s Uniform Commercial Code Mr. Fingeret is a partner in the New York office of Latham & practice. This area includes a wide variety of commercial law Watkins and Co-Chair of the firm’s Structured Finance and issues. Special emphasis is placed on those issues arising under Securitization Practice Group. Article 9 (secured transactions) and Article 8 (investment Mr. Fingeret has extensive experience representing banks and securities) of the Uniform Commercial Code although the practice other financial institutions, issuers, and others in a wide variety of also includes Article 2 (sales of goods), Article 3 (negotiable structured finance and securitisation transactions. Mr. Fingeret’s instruments), Article 5 (letters of credit), Article 6 (bulk sales) and experience includes securitisations of aircraft leases and debt Article 7 (documents of title). (including EETCs), rental car fleet leases, wireless cell towers, Mr. Safran has advised clients on commercial law and personal automobile loans, credit card receivables, equipment leases and property transfer issues in connection with credit facilities, music royalties. Mr. Fingeret also has substantial experience secured bond transactions, project financings, real estate representing lenders in structured loan transactions and securitisations, collateralised debt obligations, credit card and structured credit and liquidity facilities, as well as issuers, other receivables financings and other structured financing underwriters and other parties in CLO transactions. arrangements.

Latham & Watkins LLP is a global law firm with approximately 2,000 attorneys in 31 offices, including Abu Dhabi, Barcelona, Beijing, Boston, Brussels, Chicago, Doha, Dubai, Frankfurt, Hamburg, Hong Kong, Houston, London, Los Angeles, Madrid, Milan, Moscow, Munich, New Jersey, New York, Orange County, Paris, Riyadh, Rome, San Diego, San Francisco, Shanghai, Silicon Valley, Singapore, Tokyo and Washington, D.C. For more information on Latham & Watkins, please visit the Website at www.lw.com.

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