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General structuring of financing

Choice of law

What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?

The commitment documents and finance documents are typically governed by the laws of Hong Kong where the target is a Hong Kong company. English law is also commonly used for the finance documents for an acquisition involving more than one jurisdiction. Substantial majority of high-yield bond documents are governed by New York law (with the remainder governed by English or Hong Kong law). If, the parties choose a foreign law to govern their finance documents, the courts of Hong Kong will uphold a bona fide choice of foreign law unless the choice of foreign law:

  • contravenes Hong Kong public policy or a mandatory rule of law in Hong Kong; or
  • was made in order to evade the jurisdiction with which the contract had the most substantial connection and if the contract had been governed by the law with which the contract had the most substantial connection the contract would have been invalid or unlawful.

Depending on the jurisdiction of the foreign judgment, the foreign judgment may be enforced in Hong Kong either pursuant to the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap. 319) or through an action at common law.

Restrictions on cross-border acquisitions and lending

Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?

Generally, the acquisition of Hong Kong companies by foreign entities, or cross-border lending, is not restricted under Hong Kong laws. However, if the target company is a company listed on The Stock Exchange of Hong Kong Limited (the HK Stock Exchange), the provisions of the Rules on Takeovers and Mergers (the Takeovers Code) must be complied with. Essentially, the Takeover Code obligates any person who, individually or jointly with its concert parties, acquires (whether through a series of transaction or not) 30 per cent or more of the voting rights of a listed company, unless a waiver is granted by the Securities and Futures Commission (the SFC), to make a mandatory general offer for all the outstanding issued shares of the listed company not already controlled by such person or its concert parties, and the related offer documents are subject to vetting by the SFC and the HK Stock Exchange. Further, companies engaging in particular industries with licensing requirements and of a public nature (ie, broadcasting, banking and insurance industries) are subject to certain specific restrictions on foreign ownership and control and ownership transfer.

Types of debt

What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?

The components of acquisition financing will vary depending on the amount of debt financing required and the availability of liquidity in the relevant debt markets. Acquisition facilities in Hong Kong usually comprise a senior secured term facility and a senior secured revolving facility provided by either a syndicate or a club of lenders. Recent large acquisitions have been financed using a combination of senior debt, structurally subordinated mezzanine debt, payment-in-kind debt and/or vendor financing.

A common form of mezzanine debt are lent to, or issued by, holding companies of the borrowers of the senior debt and are therefore structurally subordinated and tend to have limited security and guarantee from the obligors under the senior debt.

Certain funds

Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?

There is no requirement for certainty of funding for private mergers and acquisition transactions in Hong Kong, but if the target company is a company listed on the Hong Kong Stock Exchange, the Takeovers Code will apply. As mentioned in question 2, any person who, individually or jointly with its concert parties, acquires (whether through a series of transaction or not) 30 per cent or more of the voting rights of a listed company will, unless having obtained a waiver from the SFC, which will only be granted under very limited scenario, trigger a mandatory general offer obligation to acquire all the outstanding issued shares of the listed company not already controlled by such person or its concert parties. Under the Takeovers Code, such an offer for the acquisition of a Hong Kong listed company should only be made when the offeror has every reason to believe that it can and will continue to be able to implement the offer, and one important aspect is that there must be certainty of financing resources to fund the full acceptance of the offer. The SFC further requires a written confirmation be issued by the offeror’s financial adviser to confirm it is satisfied that the offeror has sufficient financial resource to support the general offer.

As such, before a person purports to hold 30 per cent or more of the issued shares of a listed company in Hong Kong, thereby triggering the general offer obligation, such person must ensure that it has secured committed financing for this purpose. From a financing perspective, this means the availability of financing may only be subject to conditions that the offeror is sure it can satisfy and does not include any conditions relating to representations and/or actions of the target group (ie the ‘cash confirmation’ requirement).

While, as mentioned above, there is no requirement for certainty of funding in acquisition involving private companies in Hong Kong, market practice has developed such that the financing documents include ‘certain funds’ provisions often seen in UK or other European jurisdictions are included in those transactions as well to ensure funding certainty for the buyers, especially in transactions involving private equity sponsors.

Restrictions on use of proceeds

Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?

In Hong Kong, there are generally no statutory restrictions on the borrower’s use of proceeds from loans or debt securities. However, facilities agreements usually include a use of proceeds provision setting out the permitted uses for the loan proceeds. This will include payment of the acquisition consideration or costs and expenses incurred in connection with the acquisition and the financing.

The facilities agreement also often restricts the use of proceeds of a loan that would breach sanctions or anti-corruption laws. The Hong Kong Monetary Authority may investigate an authorised institutions’ compliance with the legal and supervisory requirements of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) and the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (for Authorized Institutions).

Licensing requirements for financing

What are the licensing requirements for financial institutions to provide financing to a company organised in your jurisdiction?

Lending business in Hong Kong is governed by the Money Lenders’ Ordinance (Cap. 163) (the MLO). Under the MLO, unless a financier is an authorised institution within the meaning of the Banking Ordinance (Cap. 155) (the Banking Ordinance), it cannot carry on the business of a money lender without a money lender’s licence and the licensing requirement apply equally whether the lender is based in Hong Kong or overseas. However, certain categories of loans are exempted from the licensing requirement under the MLO. The ‘exempted loans’ include, without limitation, intra-group lending, loans to employees, certain secured loans registered pursuant to the Companies Ordinance (Cap. 622, Laws of Hong Kong) (the CO) and loans made to a company with paid up share capital of not less than HK$1,000,000 or equivalent in an approved currency.

A person required to hold a money lender’s licence but who does not hold such a licence at the date of the loan will not be able to recover in any Hong Kong court any principal or interest or enforce any security in respect of the loan and such person may be liable to a fine of up to HK$100,000 and imprisonment for up to two years.

Withholding tax on debt repayments

Are principal or interest payments or other fees related to indebtedness subject to withholding tax? Is the borrower responsible for withholding tax? Must the borrower indemnify the lenders for such taxes?

There is no interest withholding tax in Hong Kong. A lender will, however, need to pay profits tax on any fees paid in respect of the loan. Profits tax will not be indemnified by the borrower.

Restrictions on interest

Are there usury laws or other rules limiting the amount of interest that can be charged?

Pursuant to the MLO, it is an offence for a money lender to charge an effective rate of interest exceeding 60 per cent per annum and it will be presumed to be an extortionate transaction if the effective rate of interest exceeds 48 per cent per annum.

The requirements of the MLO do not apply to authorised institutions within the meaning of the Banking Ordinance. Instead, such institutions should comply with the Hong Kong Monetary Authority’s code of banking practice that stipulates that authorised institutions should not charge customers interest rates that would be presumed to be extortionate under the MLO.

Indemnities

What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?

Facility agreements will usually include the following indemnities:

  • tax and stamp duty;
  • indemnities for costs, losses or liabilities incurred by a lender as a result of
    • the occurrence of an event of default,
    • any investigation, subpoena or litigation with respect to the borrower or with respect to any transaction contemplated or financed by the facility agreement, or
    • the lender funding or making arrangements to fund a loan requested by the borrower that is not made due to a failure of the borrower;
  • indemnities for costs, losses or liabilities incurred by the facility agent as a result of acting or relying on any notice, request or instruction of the borrower that it reasonably believes to be genuine, correct and appropriately authorised; and
  • indemnities for costs and expenses incurred by a lender in connection with:
    • the negotiation, preparation, printing, execution and syndication of the finance documents;
      • any amendment, waiver or consent requested by the borrower; or
      • enforcement of the lender’s rights under the finance documents.

Assigning debt interests among lenders

Can interests in debt be freely assigned among lenders?

In facilities agreements, restrictions on assignment are contractual and subject to negotiation by the relevant parties. Assignment provisions typically require the consent of the borrower for any assignment except for any transfer (i) to an affiliate, (ii) an existing lender or an affiliate of an existing lender, and (iii) any person on a pre-agreed white list, except that the consent of the borrower will not be required during the continuance of an event of default. Increasingly, transfers to competitors and distressed funds are prohibited without the consent of the borrower (including, after the occurrence of an event of default, especially in financing involving private equity sponsors). The consent of the borrower usually cannot be unreasonably withheld or delayed and some facilities agreements provide that the borrower shall be deemed to have provided its consent if it does not respond within an agreed period of time.

Requirements to act as agent or trustee

Do rules in your jurisdiction govern whether an entity can act as an administrative agent, trustee or collateral agent?

Trust and agency concepts are recognised in Hong Kong. In a typical syndicated facilities agreement, security interest will be granted in favour of a bank or a financial institution acting as security trustee on behalf of all lenders and the security trust provisions will provide that the security trustee is the only party entitled to enforce the security interest (and not individual lenders).

Debt buy-backs

May a borrower or financial sponsor conduct a debt buy-back?

The buy-back provisions in facilities agreements vary depending on the transactions. In transactions involving sophisticated investors and international financial sponsors, both the borrower and the financial sponsors are permitted to conduct a debt buy-back subject to restrictions in the facilities agreement Debt purchases of term loans at less than par by borrowers when no default is continuing are permitted so long as such purchases are conducted pursuant to a solicitation process or open order process and with the proceeds of excess cash flow, and such term loans are extinguished thereafter. Debt purchases by financial sponsors are subject to disenfranchisement of the financial sponsor’s voting rights and the right to attend lender-only meetings or receive lender-only report.

Exit consents

Is it permissible in a buy-back to solicit a majority of lenders to agree to amend covenants in the outstanding debt agreements?

Subject to compliance with the US tender offer rules under section 14 of the US Securities Exchange Act of 1934, ‘exit consent’ (involving a tender offer coupled with a consent solicitation to amend the terms of an existing bond) arrangement may be made for bonds issued by a Hong Kong company pursuant to an indenture governed by New York law.

For bonds issued pursuant to an English or Hong Kong law governed trust deeds, launching a consent solicitation often involves convening a meeting of bondholders to vote on the proposal for amendments to the terms of existing bonds (including covenants). An exchange offer or a tender offer may also be combined with such consent solicitation in order to permit early redemption of existing bonds. The legality of an exit consent arrangement has not yet been tested in Hong Kong courts. However, in light of the decision of the English High Court in the case of Assenagon Asset Management SA v Irish Bank Resolution Corporation Ltd (2012) (where it was held that an exit consent approved by an extraordinary resolution of the bondholders was oppressive and unfair to the minority bondholders), coercive exit consent arrangements for Hong Kong law governed bonds where the dissenting or non-participating bondholders would be left with bonds with substantially diminished value may also be challengeable in Hong Kong.

Guarantees and collateral

Related company guarantees

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 (see question 15), 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.

Assistance by the target

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.

Types of security

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 (see question 34) 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.

Requirements for perfecting a security interest

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. See question 30.

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).

Renewing a security interest

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.

Stakeholder consent for guarantees

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.

Granting collateral through an agent

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.

Creditor protection before collateral release

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.

Fraudulent transfer

Describe the fraudulent transfer laws in your jurisdiction.

See question 33.

Debt commitment letters and acquisition agreements

Types of documentation

What documentation is typically used in your jurisdiction for acquisition financing? Are short-form or long-form debt commitment letters used and when is full documentation required?

For acquisitions of private companies, the commitment papers will typically include a commitment letter attaching a detailed long-form term sheet and a fee letter. Full form documentation is usually not required upon signing of the acquisition agreement and are finalised prior to closing of the acquisition.

For acquisitions of public companies, a fundable facility agreement will be required by the time the offer for the acquisition is made to satisfy the cash confirmation requirement under the Takeovers Code (see question 4).

Level of commitment

What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?

Commitment letters provided for acquisition financing for purchasers requiring debt financing at closing typically include fully underwritten commitments (provided on a ‘certain funds’ basis), especially in a competitive bid process.

Conditions precedent for funding

What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?

Commitment letters provided on a ‘certain funds’ basis will have limited condition precedent requirements and such conditions are some of the most negotiated provisions in the commitment letters for acquisition financing. Some of the more typical conditions precedent include delivery of:

  • constitutional documents and other corporate authorisation documents of the obligors;
  • executed finance documents;
  • copies of the executed acquisition documents;
  • evidence that the condition precedent requirements under the acquisition documents (other than payment of the purchase price and other conditions to be satisfied on the closing date) have been met;
  • group structure chart;
  • original financial statements;
  • evidence of payment of fees and expenses; and
  • legal opinions.

Flex provisions

Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?

Market flex provisions for financing obtained in Hong Kong are more limited and will typically only permit the lenders to:

  • increase the margin subject to an agreed cap and/or reallocate a portion of the upfront fees to margin; and/or
  • reallocate a portion of the facility commitments between different tranches.

Market flex provisions are usually included in the fee letters for confidentiality reasons.

Securities demands

Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.

Securities demands is not a key feature in acquisition financing documents in Hong Kong.

Key terms for lenders

What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?

The key elements in the acquisition agreement that are most relevant to the lenders providing acquisition financing to a purchaser include the following:

  • the conditions precedent to the closing of the acquisition;
  • the purchaser’s right to adjust the purchase price and its termination rights under the acquisition agreement;
  • the definition of ‘material adverse change’ to the target’s business (or any analogous term);
  • the ‘drop-dead date’ or the ‘long stop date’, which is often the date on which the commitments under the acquisition financing will expire;
  • the seller’s covenant to provide financing assistance for the purchaser’s acquisition financing (including delivery of financial statements and any other information relating to the business and giving access to the key personnel of the target company); and
  • any indemnity provided by the seller to the purchaser.

Xerox provisions limiting the liability of lenders (or allowing lenders to be third-party beneficiaries under certain provision of the acquisition agreement) are not common in Hong Kong acquisition agreements.

Public filing of commitment papers

Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?

There is generally no requirement to make public the acquisition agreement, commitment papers and finance documents in respect of acquisitions of companies in Hong Kong. However, if one of the parties to the transaction is a company listed on the HK Stock Exchange (eg, the listed company group is acquiring an asset), and if the transaction constitutes a ‘discloseable’, ‘major’ or ‘very substantial’ transaction under the Listing Rules on the part of the listed company (which is so classified depending on the size of the transaction relative to the size of the listed company group), then the listed company will need to issue a public announcement (and in addition, a shareholders’ circular for ‘major’ or ‘very substantial’ transaction) containing salient terms of the underlying transaction. Generally, the financing documents or the terms of the underlying transaction are not disclosed in the public announcement and the shareholders’ circular (as applicable) as financing is typically viewed as being carried out in the ordinary course of business and hence not a reportable transaction. However, if the listed company considers a particular financing to be very material (eg, the loan amount is significant), it may decide to make a public announcement to set out a high-level summary (such as the name of the financier, the loan amount, maturity date and interest rate) of the financing terms.

If the acquisition (and the related financing) is in respect of the shares of a listed company that triggers the mandatory general offer obligation on the part of the acquirer offeror under the Takeovers Code, then the offer document issued by the offeror pursuant to the Takeovers Code must contain a description of how the offer will be financed and the source of such financing (including the name of the principal lenders or arrangers of the financing).

 

Enforcement of claims and insolvency

Restrictions on lenders’ enforcement

What restrictions are there on the ability of lenders to enforce against collateral?

A secured creditor’s rights are generally not affected by the commencement of a winding-up in Hong Kong and a secured creditor maintains its contractual right to realise or otherwise deal with its security without the liquidator’s consent or an approval of the court. An exception to this principle may arise if a secured creditor proves for its claim in the liquidation of the debtor company. Secured creditors need not prove or participate in such liquidation. However, they may prove any residual, unsecured balance of their claim in the winding-up. While a secured creditor is entitled to prove for any unsecured component of its claim, it must disclose the existence and particulars (including estimated value) of its security. A secured creditor that fails to disclose its status as a secured creditor in its proof of debt, or that proves for the full value of its claim (rather than only the unsecured component of its claim), shall be taken to have surrendered its security for the general benefit of unsecured creditors, unless the failure to disclose or claim for the secured portion of its debt can be shown to have resulted from inadvertence.

Where a company is being wound up, a floating charge granted over collateral within the 12-month period ending on the date of commencement of the winding up, such charge may be rendered invalid unless it can be proven that the company was solvent immediately after the creation of the floating charge, or to the extent, the charge secured an advance of new moneys, property or services. A floating charge, regardless of when granted, will also be subject to postponement to certain preferential creditor claims in a winding-up. See question 34.

In addition, if a charge granted over collateral is not registered with the Companies Registry within one month of its creation, such charge may be rendered invalid as against the liquidator.A secured creditor’s security may also be challenged and set aside as an unfair preference in certain circumstances. See question 33.

Debtor-in-possession financing

Does your jurisdiction allow for debtor-in-possession (DIP) financing?

No, but a liquidator does have the power to borrow money and grant security over the assets of the company without the approval of the court. Such borrowings, if secured, are afforded the priority that a secured creditor would ordinarily enjoy in a liquidation, or, if unsecured, are otherwise treated as expenses of the liquidation and afforded the priority that a liquidator’s costs and expenses are given in a winding-up.

A provisional liquidator may have the power to borrow and grant security, depending on the powers conferred on it upon appointment by the court, and will similarly be treated as a secured claim or as an expense of the provisional liquidator, with the priority that affords in the winding-up.

A privately appointed receiver may, subject to the powers conferred on it by the relevant charge and appointment documents, also borrow money and grant security on the company’s behalf.

A scheme of arrangement that is proposed and implemented without the appointment of a provisional liquidator could be described as a ‘debtor-in-possession’ process insofar as the company’s existing management and owners may remain in place and as a general matter of law, a company in liquidation is not prohibited from obtaining additional finance.

Stays and adequate protection against creditors

During an insolvency proceeding is there a general stay enforceable against creditors? Is there a concept of adequate protection for existing lien holders who become subject to superior claims?

Upon the court making a winding-up order or appointing a provisional liquidator, an automatic stay comes into effect such that no action or proceeding may be commenced or maintained against the company, except with the leave of the court. After the presentation of a winding-up petition but before the making of the winding-up order, there is no automatic stay in place, but the court may order otherwise. Further, any attachment, sequestration, distress or execution against the assets of the company after the commencement of a winding-up will be void.

However, there is no stay that affects the rights of secured creditors to enforce their security out of court. The circumstances in which a secured creditor’s security may be surrendered after the commencement of a winding-up are discussed in question 30.

Clawbacks

In the course of an insolvency, describe preference periods or other reasons for which a court or other authority could claw back previous payments to lenders? What are the rules for such clawbacks and what period is covered?

A liquidator may apply to the court for an order to unwind transactions that constitute unfair preferences or transactions at an undervalue.

An unfair preference is given by a company to a person if that person is a creditor, surety or guarantor, and, during the six-month period before the commencement of the winding-up (or two years in the case of a connected person) the company does anything, or suffers anything to be done, which has the effect of putting the creditor, surety or guarantor in a better position in an insolvent winding-up than that person otherwise would have been. Before making an order to restore the parties to the position the parties would have been in but for the preference, the court must be satisfied that the company was influenced by a desire to produce the effect of putting the counterparty in a better position.

Transactions at an undervalue are transactions between the company and another person, entered into during the five year period from the time when the transaction at an undervalue was entered into and the commencement of the winding-up, wherein the company receives no consideration or consideration that is significantly less than the value of consideration provided by the company. The court may make an order restoring the parties to the positions they would have been in but for the transaction at an undervalue unless: (i) it is satisfied that the company entered into the transaction in good faith and for the purpose of carrying its business; and (ii) at the time the company did so, there were reasonable grounds for believing that the transaction would benefit the company.

A transaction will only be a transaction at an undervalue or an unfair preference if, at the time the transaction at undervalue was entered into or the unfair preference given, the company was either unable to pay its debts, or became unable to pay its debts in consequence of the transaction or unfair preference.

Ranking of creditors and voting on reorganisation

In an insolvency, are creditors ranked? What votes are required to approve a plan of reorganisation?

Secured creditors with fixed charges (or mortgages) may enforce and be paid out of the proceeds of realisation of their security, and need not prove or participate in a winding-up. They may, however, prove any residual, unsecured balance of their claim in the winding up. See question 30.

In a winding-up, a liquidator will realise and distribute the company’s assets according to the following order of payments: (i) the remuneration, fees, and expenses of the liquidator and (if applicable) the Official Receiver, the costs of the petitioner, the expenses of the committee of inspection, and other expenses relating to the liquidation; (ii) certain claims of preferential creditors, including employees, the Hong Kong government, bank depositors and insured persons; and (iii) the claims of unsecured creditors.

If the company’s unsecured assets are insufficient to satisfy the claims of the preferential creditors, then those claims will take priority over those of floating charge holders. Fixed charge holders may enforce and be paid out of their security, and need not prove in the winding-up.

A restructuring may be effected through a scheme of arrangement, which is a creditor-approved, court-sanctioned compromise or arrangement between the company and its creditors, or certain classes of creditors. A scheme of arrangement is binding on the company and its creditors if: (i) approved by a majority in number, representing at least 75 per cent in value, of each class of creditors present and voting, in person or by proxy; (ii) the court makes an order sanctioning the scheme; and (iii) an official copy of the court order sanctioning the scheme is delivered to, and registered by, the Companies Registry.

Intercreditor agreements on liens

Will courts recognise contractual agreements between creditors providing for lien subordination or otherwise addressing lien priorities?

Any alteration of the statutory priority of payments by agreement between creditors, or between the company and creditors, prior to a liquidation will generally be recognised on liquidation, provided such agreement does not put the general body of unsecured creditors who were not party to the agreement in a worse position in the liquidation than they would otherwise have been.

Discounted securities in insolvencies

How is the claim of an original issue discount (OID) or discount debt instrument treated in an insolvency proceeding in your jurisdiction?

Creditors who acquire a debt of the company at a discount to face value may submit a proof of debt for the full face value of the claim. However, the admissibility of claims in respect of OIDs or discounted debt instruments is not expressly dealt with under Hong Kong insolvency law.

A creditor may generally prove for interest accrued before the date of the order or resolution for winding-up (the ‘appropriate date’). In respect of a debt with a rate of interest specified in the agreement, that amount of interest, up to the appropriate date, is provable. Otherwise, the rate specified in the High Court Ordinance (Cap. 4) will apply. Interest accruing after the appropriate date is not payable to creditors unless all other admitted claims are paid in full. If an OID were treated as unaccrued interest as at the appropriate date, then it would not be recoverable unless all other admitted claims were paid in full. However, there is no authority under Hong Kong law for the proposition that an OID should be treated as interest in a winding-up.

Liability of secured creditors after enforcement

Discuss potential liabilities for a secured creditor that enforces against collateral.

A mortgagee entering into possession of secured assets owes a number of duties to the mortgagor and those with an interest in the equity of redemption, the breach of which may give rise to potential liabilities. These include, amongst others, the duty to account for rent, to keep the premises in repair, and, if the mortgagee decides to sell the property, to take reasonable precautions to obtain the true market value of the mortgaged property at the date of the sale. Discharging this duty will generally require a proper public sale or auction process to be run, possibly supported by an independent valuation.

However, a charge creating the security will usually confer upon the secured creditor a power to appoint a receiver over the secured assets to enforce the security as the agent of the debtor company. Despite being the agent of the chargor, the receiver does not act on the instructions of the chargor, and his or her role is to realise the secured assets for the benefit of the secured creditor. This relationship of agency between the receiver and the chargor minimises the potential liability of the secured creditor, as it means that the chargor, as principal, is liable for the acts and omissions, and remuneration, costs and expenses, of the receiver.

Upon the appointment of a liquidator to the debtor company, the receiver’s agency is terminated, although his or her powers to enforce the security for the benefit of the secured creditor will continue.