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.