1. Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?

Lending into Hong Kong

Any person, not being an "authorized institution" authorised by the Hong Kong Monetary Authority under the Banking Ordinance (Cap. 155) carrying on business as a money lender in Hong Kong must obtain a money lender's licence in accordance with the Money Lenders Ordinance (Cap. 163) ("MLO"), unless one of the exemptions set out in the MLO applies (including loans secured by charges registrable under the Companies Ordinance (Cap. 622) ("CO"). However, even though there is no legal authority on this point, it is arguable that the MLO does not have extra-territorial effect, so a lending business carried on outside Hong Kong does not need an MLO licence. This can be the case even if the borrower is incorporated and/or doing business in Hong Kong or the loan is disbursed in Hong Kong, if the lender otherwise operates solely from outside Hong Kong. But the law is not clear, so a cautious view is that the MLO could require a licence if any part of a money lending transaction is carried on in or from, or involves any action in, Hong Kong.

There is also a general corporate registration requirement for "carrying on business" in Hong Kong pursuant to the Business Registration Ordinance (Cap. 310). The test for carrying on business in Hong Kong is not expressly defined, other than to expressly include a company incorporated in Hong Kong or registered in Hong Kong as a registered non-Hong Kong company, and is therefore not precise. However, case law indicates that the threshold is low. Any form of commercial activity is sufficient. The existence of business premises is probably not an essential feature. A business can be carried on through an independent agent. Probably the incurrence of legal obligations within Hong Kong is necessary. As the Business Registration Office ("BRO") is an office of the Inland Revenue Department and the primary purpose of registration is to put the business on the radar of the tax authority (though it also serves to enable persons dealing with the business to find out with whom they are dealing), the test is likely to be based on whether potentially taxable activities are being carried on in Hong Kong. A lender needing to register with the BRO in fact has an obligation only to complete, sign and deliver to the BRO the required application form within 1 month after the business starts (or in the case where the lender is registered as a registered non-Hong Kong company, 1 month after such registration (see below). This is not an approval process and the BRO will later issue a business registration certificate.

Further, there is a requirement to register as a registered non-Hong Kong company where a lender has established a place of business in Hong Kong pursuant to the CO. The test for establishing a place of business in Hong Kong is not expressly defined in the CO and is therefore not entirely precise. However, case law indicates that (a) the term "establishing a place of business" is not the same as carrying on business in the jurisdiction and the expression points to the company having "a local habitation of its own", (b) the establishment of a place of business connotes a degree of permanence or recognisability as being a location of the company's business, (c) the term "business" should be interpreted in the general sense of activities, and not confined to the narrow sense of commercial transactions, and (d) the business carried on must be activities which fall within the company's paramount or subsidiary objects. A company needing to register with the Hong Kong Companies Registry in fact has an obligation only to complete, sign and deliver to the Hong Kong Companies Registry the required application form, containing the particulars prescribed by procedural regulations and details of at least one person who is proposed to be an authorized representative on registration of the non-Hong Kong company, and certain supporting documents, within 1 month after the place of business is established. The supporting documents include a certified copy of each of the company's constitutional document(s), incorporation certificate and (if publication of accounts or delivery of accounts to a person for public inspection is required under the law of the place of incorporation of the company, or the law of any other jurisdiction where the company is registered as a company, or the rules of any stock exchange or similar regulatory bodies in that jurisdiction that impose that requirement) latest published accounts. This is not an approval process and the Companies Registry will later issue a registration certificate.

Taking of security situated in Hong Kong

It is not necessary for a lender to obtain a licence / regulatory approval solely by reason of taking the benefit of security over assets located in Hong Kong.

2. Are there any laws or regulations limiting the amount of interest that can be charged by lenders?

s24 of the MLO makes it illegal for any person (whether a money lender (as defined in the MLO) or not) to lend or offer to lend money at any effective rate of interest which exceeds 60% per annum and makes any agreement for the repayment of any loan or the payment of interest on any loan and any security therefor unenforceable in any case in which the effective rate of interest exceeds such rate. s25 of the MLO provides that a Hong Kong court may, having regard to all the circumstances, "reopen the transaction so as to do justice between the parties" if the transaction is "extortionate". For this purpose, a loan in respect of which the effective rate of interest exceeds 48% per annum is presumed to be "extortionate".

3. Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?

No. There is no foreign exchange control in Hong Kong. There is also no limit or restriction on the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, Hong Kong.

4. Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction.

Security can be taken over all of the following types of assets. The type of security applicable to the relevant asset type is elaborated below.

The general rule is that the taking of security is governed by (in the case of intangible assets) the governing law of the relevant security document or (otherwise) the law of the place where the asset which is subject to security is situated (the lex situs rule) at the time of creation of the security.

Hence, security over real property (land), plant, machinery, equipment, inventory and receivables situated in Hong Kong and shares in Hong Kong company will typically be governed by Hong Kong law.

Real Property

The majority of land in Hong Kong is held on a leasehold tenure under leases granted by the Hong Kong Government. Government leases can (but do not necessarily) restrict dealings relating to the land granted under those leases without the Government's consent and subject to compliance of certain requirements set out therein.

Security can be taken over real property by way of a legal mortgage or equitable mortgage.

Legal mortgage: A legal mortgage over real estate is created by way of a legal charge, in writing and executed as a deed. It gives the protection, powers and remedies traditionally given to a mortgagee, including foreclosure and the equity of redemption. However, the mortgagee cannot take possession before default.

Equitable mortgage: An equitable mortgage can be created by depositing title deeds of the real estate with the mortgagee. Where an equitable mortgage is executed as a deed, the equitable mortgagee enjoys the same powers and remedies as a legal mortgagee on the mortgagor's default, except that the mortgagee has no power to sell the real estate because an equitable mortgagee cannot execute a legal assignment of the mortgaged assets.

Plant and Machinery

The common forms of security over plant and machinery are fixed charge (provided that the chargee exerts sufficient control over the secured asset and the chargor cannot deal with the secured asset without the consent of the chargee) and/or floating charge (a charge on a fluctuating body of assets which remain under the management and control of the chargor, and which the chargor has the right to withdraw from the security despite the existence of the charge).

The ability to take effective control will depend, to an extent, on the size, type and location of the assets. Hence, in practice, the security is often in the form of a floating charge, except in the case of a very large/fixed piece of machinery. In order to successfully establish control, it may be wise to affix notification plaques clearly to such assets over a certain value, and to notify third parties that such assets have been charged.

Please refer to "Plant and Machinery" sub-section of our response to Question 4 i. above.

Security can be taken over inventory by way of floating charge or fixed charge (provided the chargee exerts sufficient control over the secured asset (which rarely happens in practice)).

Security over inventory poses certain practical issues. Control is often difficult to effect if the assets are required in the chargor's day-to-day business. There are also other issues, for example where goods are stored on leased premises, a consent from the landlord to access the premises may be required. In addition, it may be difficult to enforce a charge upon goods in transit, particularly if shipped internationally.

In the event that inventory subject to a charge is mixed with (for example, stored together with) unsecured inventory, care should be taken to ensure that the inventory subject to the charge is identifiable and can be distinguished from unsecured inventory (such as physically securing the goods, placing stickers on goods and/or notifying the borrower's customers, trading partners and warehouse owners/managers of the security).

Security can be taken over receivables through assignment by way of security, fixed charge (provided the chargee exerts sufficient control over the secured asset) or floating charge. Receivables are typically secured in favour of a chargee by way of charge (as it may sometimes be difficult to obtain consent for assignment where restrictions exist in the documentation creating them) or, where no restrictions exist in the documentation creating them, security in the form of assignment would usually be coupled with a restriction on the chargor stipulating that it can only collect its receivables in the ordinary course of its business and it must pay the proceeds of such collection into a specified (blocked, segregated) collection account. Provided that the receivables are sufficiently identifiable at the time the security is entered into, there is no need to enter into updated security or submit lists of receivables on an ongoing basis prior to enforcement.

Unless the requirements for a legal assignment have been fulfilled (being (a) the assignment is in writing under the hand of the assignor; (b) the assignment is absolute; (c) the assignment is notified in writing to the person against whom the assignor could enforce the assigned rights; (d) the assignment must not purport to be by way of charge only and (e) the intention of the assignor to transfer ownership rights to the assignee must be clear), an assignment by way of security will only take effect as an equitable assignment. Absence of notification of either an assignment or charge, an underlying debtor may discharge its debt by payment to the assignor/chargor rather than to the secured party. From a practical perspective, this means that the notices will need to be served as early as possible after execution of the assignment (thus perfecting the legal assignment pursuant to s9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23)).

Following a series of cases culminating in National Westminster Bank plc v Spectrum Plus Limited and others [2005] UKHL 41 (and confirmed in Re Harmony Care Homes Limited (in administrative receivership) [2009] EWHC 1961 (Ch)) it has been held that a fixed charge may be created over receivables (and the proceeds of those receivables paid into a bank account) only if the secured party has sufficient control over those proceeds. Even though UK cases are not binding in Hong Kong, they are considered as persuasive authorities and they are treated with "great respect" as decided by the Hong Kong Court of Final Appeal in Solicitor v Law Society of Hong Kong [2008] 2 HKC 1.

The "sufficiency" of control will be determined by the courts on a case by case basis, but the current view is that sufficient control will be achieved by blocking the account into which the proceeds of the receivables are paid from day one so that the chargor will not have the authority to withdraw funds from the account without first obtaining the chargee's consent for withdrawal. The secured party will be the sole authorised signatory with rights to direct activities in relation to the account and the account bank should agree to only take instructions from the secured party with respect to the account.

Directly held shares/securities, where a chargor (or its nominee) is the registered holder: Security can be taken over such shares by way of a fixed charge (provided the chargee exerts sufficient control over the secured asset) and/or floating charge. Legal mortgages (whereby the title to the shares is transferred to the mortgagee) over shares may also be taken, but due to certain responsibilities and commercial implications linked with the mortgagee becoming the owner of such shares, this form of security is not often used.

In practice, chargees take an equitable mortgage and reserve the ability to perfect their share charge by (a) holding the original share certificate(s), (b) obtaining pre-executed blank instrument(s) of transfer and contract notes from the shareholder and (c) (if required) amending the constitutional documents of the company whose shares are being charged to: (i) remove any right that the directors of the relevant company have to refuse to register a transfer in an enforcement scenario; (ii) remove any rights of pre-emption on a sale/transfer of the shares; and (iii) (less commonly) disapply any liens over fully paid shares. The pre-executed blank instrument(s) of transfer and contract notes and original share certificate(s) would be retained by the chargee who could, on enforcement, complete the transferee section of the instrument(s) of transfer and contract notes and deliver these to the company for registration.

Indirectly held shares/securities: shares/securities listed in Hong Kong can be held in the Central Clearing and Settlement System ("CCASS"), administered by the Hong Kong Securities Clearing Company Limited ("HKSCC"). Shares held with CCASS are registered in the name of a HKSCC nominee company and recorded by the HKSCC as being held in a CCASS participant's account.

For shares/securities listed in Hong Kong, a depositor has proprietary rights over securities held by a CCASS participant within CCASS. As such, the security interest most commonly granted over securities held within CCASS will be an equitable mortgage/charge over the security collateral provider's proprietary interest in those securities. In addition, the mortgage/charge usually includes an assignment by way of security of its rights against CCASS or the CCASS participant (including the rights in respect of the underlying securities account) and a charge over the related securities account. To perfect the assignment/charge, notice of the assignment/charge must be given to the CCASS participant.

5. Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?

A Hong Kong incorporated company may grant security over future assets, provided that it is sufficiently identified. A legal mortgage cannot be granted over future assets as the security provider does not possess a proprietary interest in those assets. However, it is possible to take equitable security over future assets, provided that those future assets are clearly identified.

Future obligations may be secured, provided they fall within the contemplation of the chargor at the time of the chargee taking the security (and all future obligations contemplated in the underlying document will be secured). Care would need to be taken at the time of any future amendments to the underlying obligations to ensure any obligations arising after such amendments fall within the scope of the security. Otherwise, it would be necessary for the security provider to further charge/mortgage/assign the underlying assets to cover such future obligations when they come into effect.

6. Can a single security agreement be used to take security over all of a company's assets or are separate agreements required in relation to each type of asset?

Subject to the lex situs rule (see our response to Question 4 above) and our comments below, it is possible to use a single Hong Kong law security agreement to take security over all of a Hong Kong company's assets situated in Hong Kong. However, under Hong Kong law, a Hong Kong ship mortgage must be in the prescribed form, and it is common to supplement the form (which only contains some basic details of the parties of the underlying vessel) with a separate security deed. Similarly, it is necessary for the relevant party to execute a separate mortgage over real property after acquiring such real property to facilitate registration of it at the Hong Kong Land Registry.

7. Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?

In general, it is not necessary for the security documents to be notarised, legalised and/or apostilled. However, in certain circumstances, it may be necessary to provide certain notarised supporting document to facilitate registration of the security document with the registry of relevant foreign jurisdictions.

8. Are there any security registration requirements in your jurisdiction?

If the security provider is incorporated as a Hong Kong company or registered in Hong Kong as a registered nonHong Kong company, and the asset falls into one of the registrable categories (covering any floating charge and fixed security over most, but not all, asset types), a certified copy of the instrument creating or evidencing the security over that asset, together with a statement of the particulars of that security, must be registered within one month after the date of creation against the company at the Hong Kong Companies Registry. Such obligation on the registered non-Hong Kong company to register the particulars of the charge at the Companies Registry does not apply if the underlying property was not in Hong Kong when the charge was created by the registered non-Hong Kong company.

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Originally Published by Legal 500 on March 2021.

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