Taking effective security is the cornerstone of secured lending. Across Asia, there are wide variations when it comes to local law and how security can be taken, perfected and enforced.
For Australian lenders or borrowers new to these countries, it is important to structure a security package that is sensitive to the different systems of law and practice.
Here are our seven steps that, if taken, will boost your chances of a successful completion.
STEP 1. IDENTIFY WHICH ASSETS ARE WORTH TAKING A SECURITY INTEREST OVER
The first step is determining which assets of a company can and are worth taking security over.
In some cases it may not be possible to take security over certain assets. In others, the legal hurdles may be so high that it is simply not worth pursuing.
An obvious example is real property.
While Singapore and several other Asian countries permit the taking of security over land by way of a mortgage, this is severely restricted in other countries.
In China it is only possible to take security over land use rights (and not the land itself). Vietnam takes this a step further and specifically forbids foreign lenders from taking security interests in land at all.
Another example is a floating charge over all of the company's assets. The general security agreement is a beautifully simple legal construct. A single document that – once duly stamped and registered – charges all assets and undertaking of a company.
However, not all jurisdictions are blessed with such legal convenience. In the Philippines, the concept of a "floating charge" is not recognised under local law. Accordingly, parties need to consider whether a combination of other security interests can replicate the effect of a general security agreement/fixed and floating charge.
STEP 2. KNOW THE REGISTRATION REQUIREMENTS OF SECURITY INTERESTS
It is essential to know which security interests need to be registered, and with whom? What prior consents are required (from central banks, finance ministries or other authorities)?
Timing is important too. Being late to register a security interest (or failing to register at all) can compromise a lender's ability to enforce at a later date.
Under Singaporean law, certain charges created by a company incorporated in Singapore must be registered with the Accounting and Corporate Regulatory Authority within 30 days of creation or the security interest will be void.
STEP 3. CONSIDER THE IMPACT OF INDIRECT TAXES AND STAMP DUTY
Stamp duty is payable across several Asian jurisdictions. However, the way in which duty is calculated can often be prohibitively expensive.
Few Asian jurisdictions have a concept like Australia's multi-jurisdictional mortgage statement, whereby if mortgage duty is payable in NSW,1 it is based on a proportion of assets with a nexus to NSW.
In the Philippines the creation of pledges and mortgages give rise to documentary stamp tax comprising 0.2% of the secured amount: regardless of the value of assets with a nexus to the Philippines. Not only that, a late payment of documentary stamp tax will incur a penalty of 25% of the documentary stamp tax payable.
Some countries have practical solutions available that can significantly reduce the amount of documentary stamp duty payable. In Thailand the parties can elect to stamp a loan agreement, where stamp duty is capped, instead of the document creating the security interest where no maximum amount is stipulated.
STEP 4. DON'T FORGET GOVERNMENT APPROVALS!
Many Asian countries require the taking and granting of security to be approved by a government body or central bank.
In China, foreign lenders need several approvals to take security over assets located in China (such as registrations with the State Administration of Foreign Exchange) which can be difficult and time-consuming to obtain.
The Central Bank of Malaysia (Bank Negara Malaysia) imposes strict control requirements in respect of foreign credit facilities obtained by Malaysian companies and the granting by those companies of guarantees or securities.
STEP 5. BEWARE FINANCIAL ASSISTANCE LAWS
Financial assistance laws are an important consideration, especially if the financing is related to an acquisition of shares, as laws vary greatly across Asian jurisdictions.
Malaysia imposes criminal sanctions on officers of a company involved in providing unlawful financial assistance. Other countries, such as Singapore, permit financial assistance if certain "whitewash" procedures are complied with (much like the position in Australia).
You need to allow adequate time in the transaction timeline to obtain such approvals as they can take weeks to finalise.
STEP 6. BOARD MEETINGS AND OTHER PRACTICAL MATTERS
Practical considerations, such as how board meetings are held and how documents are signed are often sidelined in the grand scheme of a transaction. However, Asian jurisdictions can have very specific requirements when it comes to these matters.
To avoid any last minute hiccups, be clear on what the requirements are and, once again, ensure there is adequate time in the transaction timeline to complete.
Several Asian countries still utilise a company's common seal on deeds executed overseas. Other countries require documents that are executed overseas to be notarised and consularised – a process that can take up to a week.
In certain jurisdictions, board meetings must be held within the sovereign borders of the country of company registration unless the company's constituent documents specifically permit board meetings to be held elsewhere. In other countries, board meetings must be held in person or, if by teleconference, the meeting must be recorded.
STEP 7. ENGAGE LOCAL COUNSEL EARLY
Successfully prosecuting a secured financing transaction with an Asian nexus requires careful planning and good knowledge of the potential pitfalls.
Engaging local counsel with the right expertise at the structuring stage can be invaluable. Knowing who to call though can be challenging: this is where Australian legal advisers with experience in Asia can help identify the right local resources and effectively manage them throughout the transaction.
Ultimately, with more lucrative opportunities emerging in Asia, Australian based borrowers and lenders are finding themselves having to navigate secured lending transactions in Asia on a far more regular basis – having the right navigation tools at the ready is critical to ensure they don't get lost along the way.
1The last remaining State or Territory to retain ad valorem mortgage duty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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