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Hong Kong – Assignment, Novation Or Sub-Participation Of Loans.

April 28, 2022 by Balaram Adhikari

TRANSFERABILITY OF LOANS

The legal analysis regarding the transferability of loans can be complex.  The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and, in some cases, whether such consent may be withheld.  Other general restrictions may apply given that most banks have internal confidentiality rules and data protection requirements, the latter of which may also be subject to governmental regulations.  Certain jurisdictions may restrict the transfer of loans relating to specific types of receivables – mortgage or consumer loans being prime examples.  It is imperative to conduct proper due diligence on the documentation and underlying assets in order to be satisfied with the transferability of the relevant loans.  This may be complicated further if there are multiple projects, facility lines or debtors.  It is indeed common to see a partial transfer of loans to an incoming lender or groups of lenders.

METHODS OF TRANSFER

The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation.

A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor’s rights, such as the right to receive payment of principal and interest on the loan.  The assignor is still required to perform any obligations under the loan documentation.  Therefore, there is no need to terminate the loan documentation and, unless the loan documentation stipulates otherwise, there is no need to obtain the debtor’s consent, but notice of the assignment must be served on the debtor.  However, many debtors are in fact involved in the negotiation stage, where the parties would also take the opportunity to vary the terms of the facility and security arrangement.

Novation of a loan requires that the debtor, the existing lender (transferor) and the incoming lender (transferee) enter into new documentation which provides that the rights and obligations of the transferor will be novated to the transferee.  The transferee replaces the transferor in the loan facility and the transferor is completely discharged from all of its rights and obligations.  This method of transfer does require the prior consent of the relevant debtor.

Sub-participation is often used where a lender, whilst wishing to share the risks of certain loans, nonetheless prefers to maintain the status quo.  There is no change to the loan documentation – the lender simply sells all or part of the loan portfolio to another lender or lenders.  From the debtor’s perspective, nothing has changed and, in principle, there is no need to obtain the debtor’s consent or serve notice on the debtor.  This method of transfer is sometimes preferred if the existing lender is keen to maintain a business relationship with the debtor, or where seeking consent from the debtor or notifying the debtor of any transfer is not feasible or desirable.  In any case, there would be no change to the balance sheet treatment of the existing lender.

OFFSHORE SECURITY ARRANGEMENTS

The transfer of a loan in a cross-border transaction often involves an offshore security package.  A potential purchaser will need to conduct due diligence on the risks relating to such security.  From a legal perspective, the security documents require close scrutiny to confirm their legality, validity and enforceability, including the nature and status of the assets involved.  Apart from transferability generally, the documents would reveal whether any consent is required.  A lender should seek full analysis on the risks relating to enforcement of security, which may well be complicated by the involvement of various jurisdictions for potential enforcement actions.

A key aspect to the enforcement consideration is whether a particular jurisdiction requires that any particular steps be taken to perfect a security interest relating to the loan portfolio (if the concept of perfection applies at all) and, if so, whether any applicable filing or registration has been made to perfect the security interest and, more importantly, whether there exists any prior or subsequent competing security interest over all or part of the same assets.  For example, security interests may be registered in public records of the security provider maintained by the companies registry in Bermuda or the British Virgin Islands for the purpose of obtaining priority over competing interests under the applicable law.  The internal register of charges of the security provider registered in the Cayman Islands, Bermuda or the British Virgin Islands should also be examined as part of the due diligence process.  Particular care should be taken where the relevant assets require additional filings under the laws of the relevant jurisdictions, notable examples of such assets being real property, vessels and aircraft.  Suites of documents held in escrow pending a potential default under the loan documentation should also be checked as they would be used by the lender or security agent to facilitate enforcement of security when the debtor defaults on the loan.

DUE DILIGENCE AND BEYOND

Legal due diligence on the loan documentation and security package is an integral part of the assessment undertaken by a lender of the risks of purchasing certain loan portfolios, regardless of whether the transfer is to be made by way of an assignment, novation or sub-participation.  Whilst the choice of method of transfer is often a commercial decision, enforceability of security interests over underlying assets is the primary consideration in reviewing sufficiency of the security package in any proposed loan transfer.

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Hong Kong Law Contract Guide

Our team in Hong Kong recently developed a Hong Kong Law Contract Guide. The guide discusses relevant legal principles that inform the most common contractual clauses in Hong Kong. The guide offers practical points to consider in drafting a contract, and sample clauses that may be a useful reference when preparing or reviewing a contract. The guide also addresses Hong Kong principles related to implied terms, privity of contract, and resolution of disputes. As activity into Hong Kong grows, we hope this resource helps to facilitate the agreement process.

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Assignment, Delegation, and Commonly Used Contracts Clauses

LEARNING OBJECTIVES

• Learn about assignment and delegation.
• Examine novation.
• Explore restrictions on assignment, exculpatory clauses, noncompete clauses, mandatory arbitration clauses, acceleration clauses, and liquidated damages clauses.
• Explore the parol evidence rule.

What if you formed a contract with a rock ’n’ roll band for its services? Specifically, you wanted the band to play at your nightclub, because you thought that your customers would enjoy the band enough to pay to see it perform. You hired this specific band because you heard that it drew large crowds of paying customers. Imagine your surprise when, as you anticipate the band’s performance, you discover that another band—one you have never heard of—has come to play instead of the original contracting band. On inquiry, you learn that the original band transferred its duties to perform to a lesser known band. Can it do that?

Contract elements—the terms of the contract—are important. They may, among other things, foreclose your ability to bring a complaint in court, they may render you unable to be hired in your profession (at least within certain boundaries), or they may limit liability to a party that had a role in causing injury to you. If you are not aware of these elements, then you may face an unpleasant surprise if you act in a way contrary to the restrictions imposed by those terms. Likewise, contracts possess certain qualities that prohibit parties from acting in certain ways, unless those qualities are expressly waived. This section identifies common properties of contracts, as well as commonly used elements of contracts. If you are negotiating a contract and you do not like a term, then you should not agree to it. In law, there is a presumption that you have read, understood, and agreed to each and every term of any contract to which you are a party. Arguing that you did not understand or that you did not approve of a particular term in the contract will not be a valid excuse to performance. You should know what you can expect when you enter into a contract. Are you getting the band that you wanted to hire to play in your nightclub, or are you really getting any band that the original band happens to transfer its duties to?

As a preliminary matter, it is important to realize that contracts are, by law, assignable and delegable. This means that the rights conveyed by the contract may be transferred to another party by assignment, unless an express restriction on assignment exists within the contract, or unless an assignment would violate public policy. Likewise, the duties imposed on a party may be transferred to another party by delegation, unless the contract expressly restricts delegation, or there is a substantial interest in personal performance by the original party to the contract, or if delegation would violate public policy. In the case of a band hired to perform at a nightclub, an argument couldbe made that the original band cannot delegate its duties under the contract because there was a substantial interest in personal performance by the original band. This would render the contract nondelegable. To be on the safe side, your contract with that band should have had a clause expressly prohibiting delegation.

Many students have seen restrictions on assignment in the form of no-sublease clauses in leases with landlords. Do you have a no-sublease clause in your lease? If so, that is a restriction on assignment. This clause is necessary to prevent you from assigning your rights under the lease—your rights to inhabit the premises—to another party. It is necessary for the landlord to include that provision expressly if she wishes to prevent you from subleasing the unit, because there is a presumption in law that assignment is permitted unless it is expressly prohibited by the contract or unless the assignment would violate public policy. Since it is unlikely that letting someone else live in your housing unit in your absence would violate public policy, then the landlord must expressly prohibit the assignment within the original contract if she wishes to prevent tenants from subleasing. A landlord may have a very good reason to wish to prevent subleasing; she may wish to ensure that each tenant is creditworthy prior to allowing the tenant to live in the property.

Note that in delegation and in assignment, the original contracting party is not “off the hook” if it transfers its duties or rights to another party. For instance, if subleasing was not prohibited, and the new tenant assumed the rights and duties imposed by the original contract, the original party to the contract is still liable for the payment of rent. If the subleasing tenant does not pay the rent, the original party to the lease is still liable. The way to excuse oneself from this liability is to form a three-way novation with the original party and the new party, thereby excusing the exiting party from future liability arising under the contract. A novation is essentially a new contract that transfers all rights and duties to the new party to the contract and releases the previous party from any further obligation arising from the original contract.

Restrictions on assignment or delegation are not the only common elements that can be found in contracts. For example, you have probably encountered exculpatory clauses. An exculpatory clause is an express limitation on potential or actual liability arising under the subject matter of the contract. In short, exculpatory clauses are often employed when risk of injury exists. They seek to limit one party’s liability to another. You most certainly have signed exculpatory agreements or contracts containing exculpatory clauses if you have participated in any potentially dangerous activity at a club or with an organized group that could incur liability from injuries suffered by its patrons or members. For example, if you join a kayaking club, you will most likely be asked to sign such an agreement to “hold harmless” the club in the event of any accident or injury. However, despite the existence of an exculpatory clause, liability will not be limited (that is, the liability limitations will be unenforceable) when the party who would benefit from the limitation on liability acted with gross negligence, committed an intentional tort, or possessed greatly unequal bargaining power, or if the limitation on liability violates public policy. Imagine that you signed an agreement to engage in kayaking activities with a kayaking group, but the leader of the group battered you with her oar because she was angry with you for mishandling your kayak. Since battery is an intentional tort, the exculpatory clause will not protect the kayaking organization from liability it incurred through the actions of its employee.

Another common contract element that you may have encountered is a noncompete clause. A noncompete clause attempts to restrict competition for a specified period of time, within a certain geographic region, and for specified activities. Noncomplete clauses are generally valid against the party who signed it if the time, place, and scope are reasonable. These are very common clauses in employment contracts, particularly where the duties involved in employment are likely to involve trade secrets or other proprietary information that the company wishes to protect.

A mandatory arbitration clause is very common in consumer contracts and employment contracts.You have certainly subjected yourself to the restrictions imposed by these clauses if you have signed a contract for a credit card. Mandatory arbitration clauses require parties to a contract that contains such a clause to submit to mandatory arbitration in the event of a dispute arising under the contract. Mandatory arbitration clauses frequently foreclose any possibility of appealing arbitration awards incourt.

An acceleration clause commonly exists in contracts where periodic payments are contemplated by the agreement. For example, if you signed a lease for your housing unit, then you most likely pay rent on a month-to-month basis. If you breached your lease, you would still owe rent for each subsequent month contemplated by the lease agreement. This means that your landlord would have new injury every month that you did not pay. An acceleration clause accelerates all payments due under the contract on breach. This allows the injured party—in this case, the landlord—to sue for all damages due for unpaid rent under that contract at once, rather than having to bring a new suit each month to seek monthly unpaid rent.

A liquidated damages clause allows parties to set the amount of damages in the event of breach. Agreeing to a damage amount before any breach occurs can save money and time spent litigating. Providing that the liquidated damages clause does not look like a penalty, the clause will be valid and enforced by a court that hears a dispute arising under the contract. For example, imagine that you entered into a contract for the sale of your car. If the liquidated damages clause provided for two thousand dollars of damages in the event of breach, that will probably be a valid liquidated damages clause, providing that your car is an “average” car. However, if the liquidated damages clause provided for one million dollars of damages payable by the breaching party, then that would not be enforceable by the court because it looks like a penalty. The proposed liquidated damages far exceed the value of the car that is the subject of the agreement.

Of course, there are additional common elements to contracts. This is not an exhaustive study of possible provisions, though it is a list of commonly encountered elements. For example, time of performance is often included as a separate provision. However, time for performance is an essential element in common-law contract formation, and without it, the contract may fail due to lack of definite and certain terms in formation.

A major assumption made about a written contract is that it is integrated, which means that it contains the entire expression of the parties’ agreement. That means that any statements made before the parties signed the contract are not part of the contract, unless those statements are memorialized in the contract itself. In fact, any statements or actions that are not captured within the four corners of the contract are considered parol evidence, and they will not be used to interpret the meaning of the contract.

KEY TAKEAWAYS

Parties to contracts must not only take care to form the agreement so that it is legally enforceable, but they must also be aware of the properties of contracts in general, as well as specific provisions contained within contracts to which they are a party. Properties of contracts include ability to assign, delegate, and exclude parol evidence. Several types of contracts clauses are commonly used to restrict rights and limit liability.

• Think of an example of an exculpatory clause that you have signed. For what type of activity would you be unwilling to sign an exculpatory clause? If your refusal to sign the exculpatory clause or agreement prevented you from participating in that activity, would you still refuse to sign it?
• Do you think that too many limitations and restrictions can be placed on parties in a contract? Should there be more government regulation and standardization of contract terms between private parties?

Why or why not?

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Factoring and Set off Rights – Some Practical Tips

Factoring is a widely used mechanism in the business world. This article discusses the law in relation to factoring and practical tips to be adopted by companies when it comes to factoring and set off rights.

What is factoring?

Factoring is a form of financing by which a company sells debts that are due to be collected from a customer to a third party (the Factor) at a discounted price, and in turn assigns its rights to collect the debts from the customer or customers to the Factor.

After the factoring arrangement is entered into between the company and the Factor, it is the usual practice for the Factor to send out to the relevant customers a letter giving notice that from the date of the letter and until further notice, all debts owed by the customers to the company are automatically assigned and become payable to the Factor. This letter is usually known as an introductory letter.

Law on factoring and its effect on set off rights

Under Hong Kong law, the assignment of debts is governed by both statute and common law principles. Section 9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) (the Ordinance) provides that:-

“ Any absolute assignment, by writing under the hand of the assignor (not purporting to be by way of charge only), of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee…) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor .”

This means that when a customer receives (and/or acknowledges) a written notice of assignment (including an introductory letter) from the Factor, the assignment of debt to the Factor becomes effective in law.

Section 9 of the Ordinance provides that the Factor takes the assignment of debt subject to all equities which would have been entitled to priority over the rights of the Factor.  Cases have interpreted this wording to mean that:-

(a)        the Factor takes subject to the customer’s right of set off against the assignor; but

(b)        if the set off does not arise out of or is not closely connected with the same contract or the subject-matter of the assignment, the customer can only claim a set off against the Factor if the right of set off arose before the notice of assignment is given.

Where there is a prior contractual set off agreement in place between the company and the customer, the law is not as clear cut when it comes to deciding whether such an agreement will also be effective against the Factor where the transaction out of which the cross-claim sought to be set off arose was entered into after the notice of assignment is given. There are two competing views arising from the case law on this issue:-

(a)        One view is that the assignee (i.e. the Factor) takes the same interest and is subject to the same liabilities as the assignor (i.e. the company) at the date of the notice of assignment, and the prior agreement will allow the debtor (i.e. the customer) to set off cross-claims, both present and future, including claims which arise out of new transactions.

(b)        The competing view is that when the debtor receives notice, the debtor should regulate its conduct accordingly and should not rely on debts arising out of new transactions to diminish the rights of the assignee as they stood at the time of notice: in other words, set off is not available in respect of new transactions.

A set-off agreement entered into by the company and customer after the customer has notice of the assignment will not ordinarily be effective as against the Factor.

In summary, set off rights will continue to apply after assignment where:

(a)      the relevant cross-claim arose before the assignment;

(b)      the relevant cross-claim arose out of the same contract or is closely connected with it;

(c)      the factor expressly (or, depending on the facts, by implication) agrees to the continuation of a contractual set off right.

Practical Tips

Below are various measures which can be taken by a company to strengthen its position when it comes to factoring and set off rights:-

• It is prudent for a company to include a clause in their terms and conditions with the supplier providing that the set off rights which the company has under the contract will continue to be enforceable against the supplier and their assignees regardless of (a) any existing or future agreements entered into between the supplier and a third party assigning the right to the third party to collect its receivables or (b) any future notice of assignment of debt which may be received by the company in relation to the supplier’s debt.  Again, it is also prudent to get an acknowledgement from the Factor and the supplier that they will adhere to these terms.
• Set up measures to ensure that Factors are kept up to date with the set off arrangements which the company has in place with their customers e.g. by periodically sending letters to Factors (especially if the Factor is involved in a long term trading relationship) reminding them that the company’s set off rights against the customer and Factor will continue to apply to future assigned debts of the customer; and
• In the event the company’s right to set off crystallises (e.g. default by the supplier), the company should put the supplier and Factor on immediate notice that the company will exercise their set off rights against any assigned debts which are the subject of any existing or future invoices which may be issued by the supplier.

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Asia Pacific Guide to Lending and Taking Security

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• 1. Are there any classes of unsecured and unsubordinated creditor whose claims against a debtor would rank equally with or above those of the debtor’s secured creditors?
• 2. May security given by a company rank in a specified order so as to secure liabilities owed to different creditors of the company in that order and, if that is not possible, is it viable for parties to enter into a contractual arrangement for the purposes of moderating this order?
• 3. Does this jurisdiction recognise the concept of floating security or similar equivalent (i.e., security over a changing pool of assets that the company giving the security is free to buy, sell and generally deal with)?
• 4. If so, are there any practical reasons why floating security is difficult to take, maintain or enforce?
• 5. May security be granted to a trustee to be held on trust for the lenders from time to time, in such a way that a change of lenders does not require new security to be taken?
• 6. If not, are there any techniques that can be used to achieve substantially the same effect (e.g., parallel debt structures)?
• 7. If an agent holds security for the lenders rather than a trustee, is it necessary to take new security on a change of lenders? If no, why not? If yes, are there ways to structure the transaction to avoid such a requirement?
• 8. Under the laws of this jurisdiction, is there any class of asset over which it is difficult or impossible to grant effective and perfected security, or in relation to which any security granted will be of limited effect?
• 9. Under the laws of this jurisdiction, are there any restrictions on offshore lenders taking security over any class of asset?
• 10. Must a company receive a corporate benefit in return for giving a guarantee or security? In particular, are there restrictions on the grant of upstream and cross-stream guarantees and security? If yes, briefly what is the effect of these laws?
• 11. What type of security interests does your jurisdiction recognise, e.g., pledge, charge, mortgage, hypothecation? In relation to each type of security interest, please state the formalities required to create and perfect that security.
• 12. Are there any registration, translation or notarization requirements in relation to security, guarantees, subordination or intercreditor documents?
• 13. Are there any stamp, documentary, registration, notarization or other taxes, duties or fees chargeable in respect of security, guarantees, subordination or intercreditor documents? If yes, what are the amounts and when are they payable?

Secured creditors generally stand outside the order of priority of payments because they are entitled to be paid from the proceeds of their security. The exception is a creditor secured by a floating charge (discussed in the answer to question 3 of this section). Creditors secured by a floating charge rank below preferential creditors (e.g., employees and the government).

Yes, it is possible to contractually provide for a specified order of priority among different creditors. This is usually effected by the creditors and the debtor entering into a subordination agreement or an intercreditor deed.

Yes. A floating charge allows the chargor to continue to deal with the charged assets in its ordinary course of business until the charge “crystallizes” into a fixed charge over the assets in existence at the point of crystallization, usually on a specified crystallization event.

There are certain issues that a security holder needs to be aware of when taking a floating charge as security. On the insolvency of the chargor, the security granted by a floating charge ranks behind all fixed charges and behind the rights of certain preferential creditors (see the answer to question 1 of this section). On a winding-up of the chargor, a floating charge that was created within 12 months, or, in the case of a charge that was created in favor of a person connected to the chargor, within two years, of the commencement of the winding-up is invalid except to the extent of new consideration from the chargee, if any, unless it is shown that the chargor was solvent immediately after the creation of the floating charge.

However, contractual protections can be included in security documents to control and to mitigate against these types of risks, including the ability to automatically crystallize a floating charge into a fixed charge immediately on the occurrence of certain events (e.g., where insolvency proceedings against the chargor have commenced or where the lender considers that the assets subject to the floating charge may be in danger of being seized or otherwise be in jeopardy). On crystallization, a floating charge becomes a fixed charge and ranks as a fixed charge. This means that it would rank behind an earlier fixed charge but it would have priority over subsequent fixed charges and floating charges.

Not applicable. 

In Hong Kong secured lending transactions, the security agent usually acts as a trustee for the lenders, although the security agent may not necessarily be given the title of "trustee." If the security agent acts as an agent and not as a trustee, it would be necessary to consider the terms of the security agent's appointment and the agency provisions in the transaction documents to determine whether new security would be required on a change of lenders. Therefore, the simplest and most practical approach is for the security agent to always act as a trustee in relation to the security.

Security may be conferred over most assets that are likely to be of interest to lenders as security for a financing transaction. However, lenders should note the following:

• Future assets (i.e., those not in existence at the time of entering into the security document) may only be made the subject of equitable security, such as a charge, and not legal security, such as a legal mortgage. In practice, the distinction is unlikely to be significant.
• For a charge to be fixed (rather than floating), it is advisable for  a lender to ensure that it exercises actual control over the charged assets so that the chargor is not permitted to freely deal with the assets as though they were not subject to the fixed charge. Otherwise, the security may be recharacterized as a floating charge. In practice, it is often difficult to take a fixed charge over inventory or trade receivables if they are trading assets of the chargor because the taking of a fixed charge is likely to be strongly resisted by a chargor.
• Where security is taken over contractual rights, the underlying contract giving rise to the assigned rights must be examined to ensure that those contractual rights can be made the subject of security. Prohibitions on the assignment of those rights will invalidate any purported security over them. In addition, rights under contracts that are "personal" to the contracting parties (e.g., an employment contract) are not assignable.
• In some cases, the involvement of a third party may be required before effective security can be granted. For example, it may be necessary to obtain a waiver or consent to the creation of the security from a contract counterparty.
• In the case of land in Hong Kong, it is necessary to consider the land grant conditions to determine whether the grant of security over land is permitted or subject to any restrictions. The land grant conditions may prohibit the creation of security over the land (even where security is granted to finance the land acquisition cost) or may otherwise limit the persons to whom security may be granted.  In addition, the land grant conditions in respect of certain Hong Kong real property may contain restrictions on alienation that require, for example, specific consents to be obtained from the Hong Kong government or a government-linked entity prior to security being created in favor of a lender. In those cases, the consent may limit the maximum amount that may be secured by the relevant security.
• In the case of shares in a Hong Kong company, it is necessary to consider whether the articles of association of the company impose any restrictions on the grant of security over, or on the transfer of, those shares. The effectiveness of the security or a lender's rights to enforce that security may be compromised if the restrictions in relation to the transfer contained in the articles of association are not first altered or disapplied, or if any required consents are not obtained.
• As a matter of public policy, generally, it is not possible to assign (by way of security) a bare right to sue or litigate.

Directors of a Hong Kong company have a common law duty to act in the best interests of the company and to exercise powers and to take actions that benefit the company commercially. The Companies Registry of Hong Kong (" Companies Registry ") has issued nonstatutory guidelines that outline general principles for directors in the performance of their functions that embody the requirement for directors to act in the best interests of the company.

When considering whether a company should provide a guarantee or security, the directors must therefore consider whether any commercial benefit will accrue to the company from the provision of that guarantee or security.

Generally, Hong Kong law does not recognize the concept of a group benefit. When a parent company gives a guarantee or grants security in respect of a subsidiary's obligations, the commercial benefit to the parent can be clearly established. However, when a subsidiary company gives a guarantee or grants security in respect of its parent's obligations or the obligations of another subsidiary of its parent (i.e., a "sister" company), it is often more difficult to establish what the commercial benefit is to the subsidiary.

Whether a company derives a commercial benefit from providing a guarantee or security is a factual matter for consideration in each particular case however, practical steps can be taken to reduce the risk of commercial benefit arguments being successfully raised by the most likely objectors (the company's shareholders and creditors). Assuming a guarantee or security is proposed to be granted by a solvent company, two key steps are obtaining the unanimous approval of the company's shareholders to the giving of the guarantee or the granting of the security and obtaining a statement from the company's directors that the company will not be unable to pay its debts as a result of the giving of the guarantee or the granting of the security. This will also protect the guarantee or security from being subsequently challenged as unenforceable on the basis that, for example, the directors used the powers conferred on them for an improper purpose or for a purpose not authorized by the company's articles of association (i.e., not in the best interests of the company), provided that the lender/chargee does not have actual knowledge of that impropriety.

Lastly, there are general presumptions in law that allow parties to presume that the transactions undertaken by a Hong Kong company are not ultra vires acts.

Types of security interests

The types of security interests typically used in financing transactions in Hong Kong include:

• For shares, a legal or equitable mortgage or an equitable charge.
• For real property, a legal charge.
• For other immovable assets: a fixed charge over specific assets.
• For movable assets: a chattel mortgage, a floating charge, or a pledge  - note that under Hong Kong law, a "pledge" is a "possessory security" and can only be created over movable assets, but not over immovable assets or intangible assets.
• For bank accounts, book debts and contractual rights (such as rights to insurance and rights to trade receivables), an equitable or legal assignment, or a charge.
• Generally, a floating charge over all or certain classes of assets.

Formalities

Security over specified assets of a company incorporated in Hong Kong or a company registered under the CO as a "non-Hong Kong company" must be registered with the Companies Registry within one month of the creation of the relevant security. Otherwise, the security will not be enforceable against any liquidator or creditor of the security provider.

In addition, in the case of a legal charge over real property or any other security document affecting land, the security interest must also be registered within one month of its creation with the Land Registry of Hong Kong (" Land Registry ") to preserve its priority.

The registration of certain assets with other registries may also be necessary or advisable. See the answer to question 12 of this section for the registration requirements.

To perfect an assignment of debts and contractual rights, written notice of the assignment must be provided to the debtor or counterparty. For some classes of an asset (e.g., shares and other securities), it is common for lenders or security agents to hold in their possession and control any documents of title (e.g., title deeds), blank transfer forms and other ancillary documents (e.g., signed but undated resignation letters of the directors) to assist with the enforcement of the security and prevent unauthorized dealings by the chargor.

Security interests over real property must generally be made by way of deed and it is common for security over other kinds of assets to be made by deed.

If a document creates registrable security, it must be filed with the Companies Registry within one month of the date of its execution (and together with a certified translation, if the security document is not in Chinese or English). This registration requirement only applies to security created by companies incorporated in Hong Kong and any foreign company that is registered as a non-Hong Kong company (as referred to in the answer to question 11 of this section).

Where a foreign company (not a non-Hong Kong company) enters into a security document and the secured property is situated in Hong Kong, and the company subsequently becomes registered as a non-Hong Kong company under the CO, the registration of the security with the Companies Registry is required within one month of the date of the foreign company's registration as a non-Hong Kong company.

As mentioned in the answer to question 11 of this section, a legal charge over real property or any other security document affecting land must also be registered within one month of its creation with the Land Registry (and if the security document is not in Chinese or English, together with a Chinese or English translation to enable the Land Registry to determine whether the relevant registration requirements have been complied with).

Apart from the registration requirements referred to above, there may be different registration requirements in respect of certain types of assets (e.g., vessels and intellectual property) and in relation to different types of security providers (e.g., individuals).

There are no notarization requirements in relation to security, guarantee, subordination or intercreditor documents.

A registration fee of HKD 340 must be paid to the Companies Registry on the submission for the registration of each security document.

A registration fee of HKD 450 must be paid to the Land Registry on the submission for the registration of each security document (or HKD 230 if the amount or value of the consideration or value of the property or interest affected is less than HKD 750,000).

Other than the registration requirements and fees set out above and in the answer to question 12 of this section, no stamp duty or similar taxes or charges are payable in respect of security documents. However, in respect of a mortgage of shares in a Hong Kong company, nominal stamp duty of HKD 5 is payable on the execution of an instrument of transfer signed "in blank" (which lenders normally require). The execution enables the shares to be registered in the name of the lender (or its nominee) by converting an equitable share mortgage into a legal share mortgage. Stamp duty at a rate of 0.26% of the value of shares being transferred will be payable on the enforcement of the security. After the execution of an agreement for the transfer of shares, the parties should submit the relevant documents for stamping, if that agreement is executed in Hong Kong, within two days of signing; if it is executed outside Hong Kong, within 30 days of signing.

The Contracts (Rights of Third Parties) Ordinance – the Impact on Hong Kong Contracts

Introduction

The Contracts (Rights of Third Parties) Ordinance (Cap. 623) (the Ordinance ) came into force on 1 January 2016. It amends the doctrine of privity of contract, according to which “only a person who is a party to a contract can sue on it”. 1 The doctrine had long been criticised as unfair since it applied even when the contracting parties intended to benefit a third party. Under the Ordinance, a person who is not party to a Hong Kong contract (a third party ) now has the right to enforce a term of a contract if: (i) this is expressly provided for in the contract; or (ii) on a proper construction of the contract, the term purports to confer a benefit on the third party.

It is however possible to contract out of the effect of the Ordinance and this may be desirable in many cases given the potentially broad scope of “purports to confer a benefit” under the second limb of the enforceability test. In England, where similar legislation has been in place since 1999, contracts commonly include clauses excluding its operation and it is expected that this practice will be followed in Hong Kong. However, a blanket exclusion clause will not be appropriate where the contracting parties wish to give a third party the right to enforce a term of the contract, e.g. giving the benefit of an indemnity to a group company. In these cases, the contract should expressly identify the third party and the specific term(s) that it may enforce. The operation of the Ordinance can then be excluded with respect to all other third parties. It will therefore be important to identify at the drafting stage whether the operation of the Ordinance should be excluded completely or preserved in relation to specific terms for specified third parties.

Scope of Application

The Ordinance applies to contracts that are entered into on or after 1 January 2016. It does not affect contracts entered into prior to that date.

Certain contracts are excluded from the operation of the Ordinance, including bills of exchange, promissory notes and other negotiable instruments, letters of credit, covenants relating to land, contracts for the carriage of goods by air or sea, and a company’s articles of association having effect as a contract under seal (Section 3). The Ordinance does not confer a right on a third party to enforce a term of an employment contract against an employee, but is silent on whether a third party may enforce an employment contract against an employer.

Rights of Third Parties

Under the Ordinance, a third party may enforce a term of a contract (including a term which excludes or limits liability) if:

the contract expressly provides that the third party may do so; or

the term purports to confer a benefit on the third party, unless on a proper construction of the contract, the term is not intended to be enforceable by the third party (Section 4).

The Ordinance only confers the benefit of contractual terms on third parties – it does not impose any burden on the third party. Thus while the third party can enforce a contractual term which confers a benefit on it – a party to the contract cannot enforce a contractual term against a third party.

The third party must be expressly identified in the contract by name, as a member of a class (e.g. subsequent owners) or as answering a particular description (e.g. A’s nominee). 2 The third party does not have to be in existence when the contract is entered into (e.g. a company not yet incorporated). A third party does not need to have given consideration in order to enforce its rights.

A third party may seek any remedy that would have been available to the third party in an action for breach of contract if the third party had been a party to the contract. The Ordinance explicitly provides that this includes a remedy under the rules of equity, which would include injunctions and specific performance.

The enforcement of the term by a third party is subject to any other term of the contract relevant to the term. It is therefore possible to contract out of the effect of the Ordinance and this is discussed further below.

Rescission and Variation of Contracts

Where a third party has the right to enforce a term of a contract, the parties to the contract may not, without the third party’s consent, agree to rescind the contract or vary it so that the third party’s right under the term is altered or extinguished. This restriction on variation and rescission applies only once the third party’s rights have “crystallised”, which occurs when:

the third party has assented to the term and the promisor has received notice of the assent; or

the third party has relied on the term and the promisor is aware of the reliance, or can reasonably be expected to have foreseen that the third party would rely on the term.

The above requirement can be overridden by an express term in the contract which:

provides for the contract to be rescinded or varied without the third party’s consent; or

specifies circumstances in which the third party’s consent is required for the rescission or variation of the contract.

For the express term to prevail, before the third party’s rights are “crystallised”, either (a) the third party should be aware of the express term; or (b) one or more parties to the contract should take reasonable steps to make the third party aware of the term.

Where third parties are to be given a right to enforce specified terms of a contract, consideration needs to be given to whether the contracting parties wish to retain their right to rescind or vary the agreement without the consent of the third parties.

On application by a party to the contract, the court may make an order dispensing with the third party’s consent if: (a) the other party agrees to rescind or vary the contract; and (b) the court thinks it just and practicable to make the order.

The relevant section of the Ordinance (Section 6) applies to acts carried out “by agreement” between the parties, but it is uncertain as to its application to acts which are not carried out “by agreement” and affect the interests of a third party, for example termination by breach.

Rights of Defence and Set-Off

In proceedings brought by a third party, a party to a contract can raise a defence or set-off which would have been available to him:

if the proceedings had been brought by the other party to the contract, and:

the matter raised by way of defence or set-off arises from or in connection with the contract, and is relevant to the term to be enforced; or

an express term of the contract provides for the defence or set-off to be available to him in proceedings brought by the third party; or

if the third party had been a party to the contract.

A contracting party will have a counterclaim against a third party if that counterclaim would have been available if the third party had been a party to the contract.

An express term can be included in the contract to restrict the defences, rights of set-off or counterclaims available to the parties in an action brought by a third party.

Protection against Double Liability

The Ordinance protects a party to the contract from double liability in certain circumstances. If a party to the contract has wholly or partly performed its obligations to the third party, it is discharged from the obligations it owes to the other party to the contract to the extent of having performed the same obligations to the third party.

If one party to a contract has recovered from the other a sum for: (i) the third party’s loss in relation to the term; or (ii) the expense of making good to the third party the default of the other contracting party, then a court or arbitral tribunal must reduce any award to the third party to the extent it thinks appropriate to take account of the sum recovered.

Clauses Excluding or Limiting Liability

A contractual term excluding or limiting the liability of the contracting parties may expressly extend the benefit of the term to third parties such as group companies, employees, agents or sub-contractors. The third party’s right to enforce the term is subject to the Control of Exemption Clauses Ordinance (Cap. 71) under which liability for death or personal injury cannot be excluded and other types of exemption clauses are subject to a reasonableness test.

Assignment of Third Party Rights

A third party may assign its right to enforce a term of a contract to another person, unless: (a) the contract expressly provides otherwise; or (b) on a proper construction of the contract, the right is personal to the third party and is not assignable. In most cases, contracting parties will probably exclude a third party’s right to assign such rights. If they do not, the contract should require a third party to give notice to the contracting parties of any assignment.

Arbitration and Jurisdiction

If a third party’s right to enforce a term of a contract is subject to an arbitration agreement, the third party is treated as a party to the arbitration agreement for the purposes of the Arbitration Ordinance (Cap. 609) unless, on a proper construction of the contract, the third party is not intended to be so treated (Section 12).

If the contract contains an exclusive jurisdiction clause, the third party is bound by the exclusive jurisdiction clause in any dispute between the third party and a party to the contract relating to the enforcement of the term, unless on a proper construction of the contract, the third party is not intended to be so bound (Section 13).

Other Jurisdictions

The Ordinance aligns Hong Kong with other common law jurisdictions which have undertaken similar reform to the privity doctrine, including England and Wales, Canada (New Brunswick), Australia (Western Australia, Northern Territory and Queensland), New Zealand and Singapore. The Ordinance is modelled on the Contracts (Rights of Third Parties) Act 1999 of England and Wales. The English statute has not had a significant impact due to the use of contracting out provisions, which are discussed below.

The Benefit Test

The Ordinance gives a third party the right to enforce a contractual term if either the contract expressly provides for this, or the term purports to confer a benefit on the third party. Although there is uncertainty as to what classifies as purporting to confer a benefit, English case law may provide some guidance. Justice Christopher Clarke in Dolphin Maritime & Aviation Services Ltd stated that a “contract does not purport to confer a benefit on a third party simply because the position of that third party will be improved if the contract is performed”. Justice Clarke further stated that “purporting to ‘confer’ a benefit [benefit test] seems to me to connote that the language used by the parties shows that one of the purposes of their bargain (rather than one of its incidental effects if performed) was to benefit the third party”. In Prudential Assurance Co. Ltd , Justice Lindsay stated that the benefit test is “satisfied if on a true construction of the term in question its sense has the effect of conferring a benefit on the third party in question”, but there is “no requirement that the benefit on the third party shall be the predominant purpose or intent behind the term”.

Given the potentially broad application of the concept of purporting to confer a benefit, contracts should be carefully drafted to ensure that rights are not unwittingly conferred upon third parties. Where the intention is to confer a benefit on third parties, this should be explicit – the contract should name the third parties and state which terms they can enforce. The contract can then exclude the operation of the Ordinance in respect of all other third parties. If no third party rights are intended, the safest course is to contract out of the effects of the Ordinance completely.

Third Party Rights – Examples

Express terms as to the enforceability of contractual terms by third parties will be required whenever it is intended that a third party should benefit from the terms of a contract. Examples include:

Contracts conferring the benefit of an indemnity on a third party such as an indemnity which is given in favour of a company and its group companies (e.g. in relation to a share or business acquisition);

Contracts containing a confidentiality obligation which confers the benefit of non-disclosure on a third party, such as companies of a corporate group or other parties;

Contracts with restrictive covenants, such as service agreements, which confer the benefits of the restrictive covenant on companies in a corporate group; and

Contracts which confer the benefit of clauses limiting or excluding liability on third parties such as companies in the same corporate group or employees of the contracting party.

Assignees and successors in title are not usually parties to contracts, but under the Ordinance, they may acquire rights to enforce contractual terms. Contracts may expressly state that assignees and successors in title have the same rights as parties to the contract.

Negotiating Hong Kong Contracts

The Ordinance needs to be considered when negotiating contracts governed by Hong Kong law. Parties should examine the terms of the contract to determine whether the Ordinance will apply and to identify potential benefits conferred implicitly or explicitly on a third party. This is important to ensure that there are no rights that a party may want to protect before including a standard clause excluding the Ordinance.

In circumstances where parties wish to preserve the doctrine of privity and limit their liability to third parties, they should clearly and expressly exclude all provisions of the Ordinance in the contract and related contracts.

Where parties wish a third party to have the right to enforce a term of the contract, they should expressly identify the third party and state that the third party may enforce a specific term(s). The contract can also exclude the provisions of the Ordinance in relation to all other third parties.

Parties should also have regard to the following matters:

The third parties must be expressly identified. If only certain third parties to the contract are to be able to enforce a contractual term, this should be made clear.

The terms of the contract that are to be enforceable by the third parties should be clear. The Ordinance refers to enforcement of “a term of the contract”, rather than the contract as a whole.

Whether the benefit or right to enforce the contractual term is conditional. Although a contract cannot impose an obligation on a third party, a condition to enforcement by a third party is permitted.

Whether the parties should limit their liability to a third party and/or limit available remedies.

Whether the contracting parties should include a provision maintaining their right to vary or rescind the contract without the third party’s consent, or whether there are specified circumstances in which the consent of the third party is required before rescission or variation of the contract.

Whether the third party may assign their rights under the Ordinance. Contracting parties may wish for any assignment rights to be excluded.

Whether to include an express term specifying (or restricting) the defences, rights of set-off or counterclaim to be available to the contracting party in proceedings brought by a third party.

Whether to make the third party rights subject to an arbitration agreement or any other method for dealing with a dispute, such as mediation.

Whether the third party is to be bound by an exclusive jurisdiction clause. Under the Ordinance, the third party will be bound by an exclusive jurisdiction clause unless, on a proper construction of the contract, this is not intended.

B + B Construction Ltd v Sun Alliance and London Insurance Plc [2000] 2 HKC 295 at [301B]-[301F] quoting Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 at [853]. ↩

Examples taken from Department of Justice < http://www.doj.gov.hk/eng/public/rightsofThirdParties.html >. ↩

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Contracts (Rights of Third Parties) Ordinance Hong Kong

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The Government restricts bans on assignment

United Kingdom |  Publication |  November 2018

Legislation now in force preventing parties from prohibiting the assignment of receivables under certain contracts.

At the moment, a contract can prohibit or restrict the parties’ ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned. If one of the parties to the contract attempts to assign the benefit of the contract in breach of the restriction, the purported assignment is ineffective.

One of the key assets of any business is its receivables, and restrictions on assignment can prevent the parties from factoring receivables or otherwise raising finance on them. The Government has decided that it should be easier for businesses to raise finance on their receivables. Accordingly the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. The regulations have now been made. They are contained in The Business Contract Terms (Assignment of Receivables) Regulations 2018. Draft regulations published in July, have been approved by both Houses of Parliament and are now in force.

What types of contracts do the Regulations apply to?

The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:

• They only apply to contracts entered into on or after 31 December 2018.
• They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
• Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
• There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
• There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
• As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
• The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.

What is the effect of the Regulations?

The Regulations provide that “a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction , on the assignment of a receivable arising under that contract or any other contract between the same parties.”

A receivable is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Regulations do not prevent the parties from restricting the assignment of other contract rights.

More difficult is to establish what is meant by assignment. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance by way of sale); and sometimes it is by way of security (for instance to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. “Assignment” is not defined in the Regulations, and so there is some doubt as to which of these transactions are covered.

Although charges are not expressly referred to, they might be covered by the expression “assignment” if it is given a broad interpretation. But because of the uncertainty, the best course is to take an assignment by way of security over a receivable where there is, or might be, a restriction. That way, it is clear that the Regulations do apply.

Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition , or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Whether or not the Regulations apply in any particular case will require an analysis of the precise terms of the restriction.

The Regulations will be of particular importance to businesses involved in the financing of receivables. And they will also be of concern to buyers because they will override their contractual protections.

• Financial institutions

Practice area:

• Banking and finance

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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

• Construction Contracts
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• Technology, Science & Industry
• United Kingdom

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More Blog Popular Who's Who Legal Instruct Counsel My newsfeed Save & file View original Follow Please login to follow content. add to folder: My saved (default) Register now for your free, tailored, daily legal newsfeed service. Find out more about Lexology or get in touch by visiting our About page. In brief: guarantees and collateral for acquisition financing in Hong Kong Guarantees and collateral Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees? Subject to the financial assistance prohibitions, a Hong Kong company may guarantee the obligations of a group company provided that: its articles of association does not prohibit the provision of related company guarantees; and the Hong Kong company derives some corporate benefit from the provision of such related company guarantee. Where there is uncertainty as to the existence of corporate benefit, parties will require a shareholders resolution confirming that the shareholders consider the provision of such related company guarantee to be in the best interests of the company and its shareholders as a whole. Hong Kong law does not restrict foreign-registered related companies from providing guarantees to support the debts of a Hong Kong incorporated company. Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions? Section 275 of the CO makes it an offence for a Hong Kong company or any of its subsidiaries to provide financial assistance for acquisition of the shares of the Hong Kong company unless the financial assistance is authorised in accordance with the CO. If a company unlawfully gives financial assistance, the company and its responsible persons may become the subject of criminal sanctions. ‘Financial assistance’ may be given by way of ‘guarantee, security or indemnity’ and this restriction often prohibits the target company and its subsidiaries organised in Hong Kong from providing guarantees or collateral in favour of the purchaser’s acquisition financing sources. However, certain exceptions to such prohibition exist and a target company may provide financial assistance pursuant to one of the following authorisation procedures if the directors of the company (who vote in favour of giving the financial assistance) are able to make a solvency statement and subject to approval by the board of the company. The authorisation procedures allow: directors to approve financial assistance not exceeding 5 per cent of the paid-up capital of the company without approval from its shareholders; the giving of financial assistance if it is approved by unanimous written resolution of all of its shareholders; and the giving of financial assistance if it is approved by an ordinary resolution of its shareholders (subject to prior notice given to all of the shareholders and the dissenting shareholders’ right to make an application to the court for an order restraining the giving of the financial assistance). Any financial assistance approved through one of the above authorisation procedure must be provided within 12 months of the date of the relevant solvency statement. What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant? A Hong Kong company can grant security over all of its assets pursuant to an all asset debenture. Under Hong Kong law, a fixed charge provides stronger protection to a creditor than a floating charge and therefore many debentures will purport to create a fixed charge over specified assets (such as bank accounts, shares, equipment, book debts, intellectual property rights) and, as a fall back, floating charges over all other remaining assets of the company. However, even if an asset is expressed to be subject to a fixed charge, the court may recharacterise the charge as a floating charge if the chargee fails to exert sufficient control over the charged asset (such as where a chargor continues to freely use the asset in the ordinary course of its business). For a material real property, a separate legal charge (commonly referred to as a mortgage) is often entered into to create security over the real property. The mortgage should be executed as a deed and specified to be a statutory legal charge. Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral? A specified charge created by a Hong Kong company (or a non-Hong Kong company registered under Part 16 of the CO), together with a certified copy of the instrument of charge, must be registered with the Companies Registry within one month of its creation. Failure to register the specified charge may result in the charge being void against the liquidator and certain creditors of the company. In addition to registration with the Companies Registry, certain assets require additional registration with the specific asset registry. For example, security over real property must also be registered with the Land Registry within one month of the execution of the mortgage. Failure to register would result in the real property security being null and void as against any subsequent bona fide purchaser or mortgagee for value. Intellectual property, aircraft and ships are also subject to asset-specific registers and perfection requirements. Certain security interests also require notice to be given to affected third parties in order to establish the priority of the security interest (such as notice to account banks, debtors and counterparties to key contracts). Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded? There is no need to renew the registration with the Companies Registry in order to keep a perfected security interest valid. Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company? No. The concept of works council, trade union or other similar body is uncommon in Hong Kong. In the absence of any express agreement between a Hong Kong incorporated company and its works council, trade union or other similar body that consents are required before the company may provide guarantees or securities, the company is not required to obtain consents from such works council, trade union or other similar body before providing guarantees or securities. Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment? Yes. A security agent may hold a security interest over charged assets on trust for the benefit of multiple lenders. If a lender assigns or transfers its interest under the facility agreement to another entity, the new lender will benefit from the existing security without amendment to or reregistration of existing security instruments, or grant of new security. What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection? Outside of security enforcement or winding-up, release of security is usually documented in a deed of release, which a creditor will execute after repayment of all moneys that are or may become payable under the relevant finance documents, or if it otherwise consents to such release. Contractual protections, such as reinstatement of guarantor liability for the repayment of a debt that is subsequently avoided or restored upon an insolvency event or liquidation, can be drafted into the deed of release or guarantee for the protection of the creditor, or both. A release of security may be effected through a scheme of arrangement. However, this would require (among other things) the approval of the majority of creditors in each class, representing 75 per cent in value present and voting at each creditors’ meeting. The possibility of a secured creditor having its rights compromised in a scheme may depend on the level of support the scheme has among secured creditors as a group. Describe the fraudulent transfer laws in your jurisdiction. See question 33. Ropes & Gray is a preeminent, global law firm that has consistently been recognized for its leading practices in many areas, including asset management, private equity, M&A, finance, real estate, tax, antitrust, life sciences, health care, intellectual property, litigation & enforcement, privacy & cybersecurity, and business restructuring. Click  here  to learn more about Ropes & Gray. 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An assignment has to be in the form of a deed and is prepared by the purchaser's solicitors for the approval of the vendor's solicitors. The date of execution of an assignment is the same as the date of completion for the sale and purchase of the property. LICENCE LIST Ascertain if the person concerned is currently licensed and the details of the licence LICENSEE CORNER Useful quick links for Licensees CANDIDATE CORNER Useful information before becoming an estate agent CONSUMER EDUCATION WEBSITE Useful information and advice for consumers Practical Law Contract Formation and Enforcement in Hong Kong: Overview Get full access to this document with a free trial. Try free and see for yourself how Practical Law resources can improve productivity, efficiency and response times. About Practical Law This document is from Thomson Reuters Practical Law, the legal know-how that goes beyond primary law and traditional legal research to give lawyers a better starting point. 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General Contract and Boilerplate 285 IMAGES Lecture 1 Handout Legal system assignment Land Law Assignment Instruction Law Assignment 1 The Hong Kong Legal System, 2nd Edition introduction of legal system (assignment) VIDEO PFD Ladder 249 Responding Class 11 Physics NBF IMPORTANT QUESTIONS OF OPERATIONAL RESEARCH #gametheory#assignment #transportation#bcom#mcom #hindi Managing a Project, The Main Sections Skip List Insertion Minsan Parang Tanga lang COMMENTS PDF Securing and Assigning Claims in Hong Kong Assignments of receivables such as the blanket assignment are generally possi-ble and are regulated under the broader term "charges". In Hong Kong and many other common law jurisdictions a distinction is made between "fixed" and "floating" charges. fixed charge is a charge over assets which are specified (e.g. a machine or a ... Assignment of Contract Rights Recognize the effect of the assignment. Know when assignments are not allowed. Understand the concept of assignor's warranties. The Concept of a Contract Assignment. Method of Assignment. Effect of Assignment. When Assignments Are Not Allowed. Partial Assignments. Successive Assignments. Back to Basics Where a document is a Hong Kong law deed, additional formalities are required. A Hong Kong company should execute such deed by: executing it in accordance with section 127 of the CO as mentioned above. having it expressed (in whatever words) to be executed by that Hong Kong company as a deed, and. delivering it as a deed. Assignment, Novation Or Sub-Participation Of Loans. Hong Kong - Assignment, Novation Or Sub-Participation Of Loans. April 28, 2022 by Balaram Adhikari. The legal analysis regarding the transferability of loans can be complex. The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and ... PDF A guide to Hong Kong Security and Receivership normally charged by assignment with provision for re-assignment on repayment. Security over receivables is usually created by either legal or equitable assignment. In a legal ... Banking Practice and Guidance of the Law Society of Hong Kong are complied with in relation to personal guarantors so as to reduce the risk of challenge later, for ... Hong Kong Law Contract Guide Hong Kong Law Contract Guide Contents Introduction Formation of contract Terms, representations, and warranties Best endeavours/ reasonable endeavours Limitation and exclusion of liability clauses ... Assignment, Delegation, and Commonly Used Contracts Clauses Restrictions on assignment or delegation are not the only common elements that can be found in contracts. For example, you have probably encountered exculpatory clauses. An exculpatory clause is an express limitation on potential or actual liability arising under the subject matter of the contract. In short, exculpatory clauses are often ... Factoring and Set off Rights Law on factoring and its effect on set off rights. Under Hong Kong law, the assignment of debts is governed by both statute and common law principles. Section 9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) (the Ordinance) provides that:-. " Any absolute assignment, by writing under the hand of the assignor (not ... PDF What you need to know Key Points to Note. The Ordinance applies to all contracts governed by Hong Kong law entered into on or after 1 January 2016 save for certain types of contracts which are expressly excluded. The parties to a contract may agree in that contract that a third party (identified specifically or as a class) can have the benefit of, and can enforce, a ... Lending and Taking Security in Hong Kong: Overview A Q&A guide to finance in Hong Kong. The Q&A gives a high-level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the ... PDF Contract Law in Hong Kong Chapter 2 Sources of Hong Kong Contract Law 26 Overview 26 2.1 Hong Kong Contract Law before 1997 27 2.2 The Effect of the "Handover" and the Basic Law: Hong Kong's Present System 31 2.3 The Declaratory Theory of Judicial Precedent 38 2.4 The Continuing Influence of English Law in Practice 40 Chapter 3 Agreement 43 Overview 43 Back to Basics For example, an agreement for sale and purchase, an assignment, a charge or a receipt on discharge of a charge, in each case, in respect of immovable property in Hong Kong. ... Application of ... If taking security Generally, Hong Kong law does not recognize the concept of a group benefit. When a parent company gives a guarantee or grants security in respect of a subsidiary's obligations, the commercial benefit to the parent can be clearly established. ... To perfect an assignment of debts and contractual rights, written notice of the assignment must be ... The Contracts (Rights of Third Parties) Ordinance The Ordinance needs to be considered when negotiating contracts governed by Hong Kong law. Parties should examine the terms of the contract to determine whether the Ordinance will apply and to identify potential benefits conferred implicitly or explicitly on a third party. ... Contracting parties may wish for any assignment rights to be ... PDF Law Amendment and Reform (Consolidation) Ordinance To consolidate Ordinances relating to interests in land, assignments, contract, tort, breach of promise and foreign corporations; and to amend the law relating to the defence of tender before action. (Amended 3 of 2008 s. 7) [1 July 1901] 1. Short title This Ordinance may be cited as the Law Amendment and Reform (Consolidation) Ordinance. The Government restricts bans on assignment Publication. Hong Kong courts uphold summary dismissal case under the Employment Ordinance. In the recent decision of Baldoo Dharamdav Parbanath v The Incorporated Management Committee of Aberdeen Technical School [2024] HKCFI 1276, the Hong Kong courts considered the legality of the summary dismissal of a teacher who failed to return to Hong Kong during the pandemic. Assignment and novation Legal and equitable assignment. The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment. Cap. 23 Law Amendment and Reform (Consolidation) Ordinance Cap. 23 Law Amendment and Reform (Consolidation) Ordinance. Timeline. Match case. Enable word stemming. Search: e.g. "Apple is good" means to find documents having the exact phrase "Apple is good". e.g. Apple AND Lemon means to find documents having both words. e.g. Apple OR Lemon means to find documents having either words. In brief: guarantees and collateral for acquisition financing in Hong Kong Under Hong Kong law, a fixed charge provides stronger protection to a creditor than a floating charge and therefore many debentures will purport to create a fixed charge over specified assets ... ASSIGNMENT IN HONG KONG Sample Clauses Related to ASSIGNMENT IN HONG KONG. ASSIGNMENT AND TRANSFER SIGNATURE LINES FOR VALUE RECEIVED, the undersigned Holder hereby sell(s), assign(s) and transfer(s) unto _____ whose taxpayer identification number is _____ and whose address including postal zip code is _____, the within Receipt and all rights thereunder, hereby irrevocably constituting and appointing _____ attorney-in-fact to ... (5) Assignment An assignment is a document through which title to a property is legally assigned by the vendor to the purchaser. An assignment has to be in the form of a deed and is prepared by the purchaser's solicitors for the approval of the vendor's solicitors. The date of execution of an assignment is the same as the date of completion for the sale and ... Contract Formation and Enforcement in Hong Kong: Overview by Paul Starr, Felicity Ng, and Sian Knight, King & Wood Mallesons. A Q&A guide to general contract formation and enforcement in Hong Kong. The Q&A gives a high-level overview of key concepts of contract law, including contract formation with general information on authority and capacity, formal legal requirements, preliminary agreements and ... PDF Hong Kong Commercial Law The term includes emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. We hope you have enjoyed this short preview of the Hong Kong Commercial Law Notes & Model Exam Answers. assignment essay homework paper phd report resume review speech thesis