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Trends and regulatory climate

Trends

What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?

Lending activity is reasonably strong, largely as a result of a stable economy and low interest rates. No new trends have emerged.

Regulatory activity

Is secured lending a regulated activity in your jurisdiction?

Lending is regulated generally, but not secured lending specifically.

Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?

No.

Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?

Yes. Lending in New Zealand is primarily regulated by the Credit Contracts and Consumer Finance Act 2003. This creates two tiers of regulation:

  • regulation of consumer credit contracts, which is very prescriptive; and
  • regulation of credit contracts that are not consumer credit contracts, which is very light handed.

Consumer credit contracts are contracts where the debtor is a natural person and the credit is to be used, or intended to be used, wholly or predominantly for personal, domestic or household purposes. If a secured loan is a consumer credit contract, the terms provided by the lender will, to some degree, be regulated. For example, in some cases an early repayment right must be provided and the fees that can be charged are regulated. In addition, prescribed disclosure must be provided to creditors, there are various requirements on the lender to behave responsibly and there are miscellaneous requirements, such as a requirement that standard loan terms be publicly available.

Lenders are not permitted to act oppressively or include oppressive terms in their contracts. This applies to all credit contracts, not just consumer credit contracts. 

Being a creditor under a credit contract is considered a financial service under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. This means that the creditor must, if it is in the business of being such a creditor, register with New Zealand's financial services register. It must also join a dispute resolution scheme if the loans are made to retail customers. Registration is a straightforward process that simply involves providing information. There is no test of qualifications or expertise, or anything of that nature. However, there is a territorial scope section whereby the requirements to register and join a dispute resolution scheme do not apply if the creditor does not have a place of business in New Zealand. This territorial scope is subject to legislative review and change.

Under the Fair Trading Act 1986, unfair contract terms are prohibited in all standard form consumer contracts entered into after 17 March 2015 and contracts (except insurance contracts) that are renewed or varied after that date. The court may declare a term unfair if it is satisfied that the term would cause:

A significant imbalance in the parties’ rights and obligations; and is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and would cause some detriment (whether financial or otherwise) to the other party if applied, enforced or relied on. 

Although this regulation applies to contracts other than loans, it affects many lenders that have standard form contracts and lend to consumers.

Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?

No.

Structuring a lending transaction

General

Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

The main providers of secured finance are:

  • locally incorporated banks (many of which are subsidiaries of international banks);
  • local branches of international banks;
  • finance companies; and
  • certain incorporated societies and similar entities. 

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

No. There are fairly well-established commercial approaches to many terms, but no real standardisation of documentation. Some reference is had to forms of loans published by the Asia Pacific Loan Market Association, but each lender generally has its own form of documentation.

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Syndicated secured loan facilities are not uncommon. However, most secured lending is to entities that do not have enough debt to justify a banking syndicate and some entities that have enough debt prefer to have a number of separate bilateral arrangements, rather than a syndicated arrangement.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

Syndicated facilities are usually structured using:

  • a security trustee to hold the security (if any) on behalf of the syndicate; and
  • a facility agent to manage the loan administration for the syndicate.

New Zealand law allows for the appointment of agents. Accordingly, a facility agent, with the ability to contractually bind the members of the syndicate, is possible.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

New Zealand law allows for security and guarantees to be held on trust for the benefit of a banking syndicate.

Special purpose vehicle financing

Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

SPVs are commonly used only for transactions where limited recourse is needed for some reason (eg, a securitisation transaction or some project finance transactions). In general secured lending, the assets are not usually held by an SPV. Where SPVs hold the assets being financed, security is typically taken over the assets and the SPV's shares.

Interest

Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

Reference rates are usually bank base rates for individuals and smaller corporates and a market standard variable rate for larger borrowers. Where a market standard variable reference rate is used, it is the Bank Bill Reference Rate (BKBM), unless the borrowing is not in New Zealand dollars, in which case it will be the prevailing rate used in the relevant jurisdiction (eg, LIBOR for UK pounds sterling). The BKBM rate is published on Reuters and is set by the New Zealand Financial Markets Association based on a mix of data from actual trades and bids.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

No.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes.

What is the procedure for their creation?

Guarantees are created by contract. These are usually bilateral contracts, but can be created by a deed poll (ie, without the beneficiary of the guarantee being a party). They must be in writing, but there are otherwise no specific formalities required. 

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

No specific types of guarantee are unenforceable. There is no restriction on a guarantor granting an upstream guarantee, provided there is a corporate benefit for the guarantor in doing so.

Various equitable defences can be raised against the enforcement of a guarantee. For example, a guarantee obtained by a lender by duress is unenforceable. The most common concern for lenders is that of undue influence. If a guarantee is procured by undue influence to which the lender is a party, it is unenforceable. Whether undue influence has been exercised will be determined on a case-by-case basis and may be presumed in circumstances where a lender is aware of the vulnerability of the guarantor (eg, where the guarantor is an elderly grandparent) and has not ensured that the guarantor has independent legal advice.

In addition, guarantees may be unenforceable on the grounds on which any contract can be unenforceable. For example, a contract is unenforceable under New Zealand law if it is not supported by consideration. This can be an issue for guarantees and often leads to the guarantee being entered into as a deed, rather than an ordinary contract, because a deed need not be supported by consideration. 

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

In almost all cases, a bank will take a first priority position. If there are multiple banks in a transaction, the banks will generally rank first and equally among themselves. Other lenders will often take a second-ranking position behind a bank, but this is not always the case – they may lend in circumstances in which there is no bank or may rank first equal with the bank.

There are priority rules in relation to all security, but lenders usually supplement or alter these with a contractual arrangement between themselves. This is typically done using deeds of priority and subordination, but if there is shared security (eg, in a syndicated facility), it will typically be incorporated into the security trust deed or other deed under which the security trustee holds the security.

Documentary taxes and stamp duty

Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

No.

Cross-border lending

Governing law

Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?

New Zealand law is almost always the governing law.

Restrictions

Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?

No. However, if a foreign lender has a place of business in New Zealand it must, if it is in the business of being such a creditor, register with New Zealand's financial services register. It must also join a dispute resolution scheme if the loans are made to retail customers. There are various consequences if a foreign lender does not register (including committing an offence and risking their costs of borrowing not being enforceable). In addition, there are circumstances where a foreign lender taking security may require consent from the Overseas Investment Office.

Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

No.

Security – general

Security agreements

Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?

Yes, it is possible. This can be achieved using a single security agreement (a ‘general security agreement/deed’). However, a different form of security document is desirable as a supplement for a general security agreement for some asset types. In particular, for a lender to best protect itself in relation to land, it should take a mortgage, which is a type of security agreement that has special recognition under land law in New Zealand. In many cases a lender will rely solely on a general security agreement, but if, for example, the land of a borrower is significant, the lender will typically take the additional step of putting a mortgage in place in relation to that land.

Release of security

What are the formalities for releasing security over the most common forms of assets?

In most cases security is released by the lender executing a deed poll of release. This is a simple document, usually less than one page long. In relation to land, there is an online procedure for releasing a mortgage. Where the security has been the subject of registration of a financing statement on the Personal Property Securities Register, this financing statement is customarily amended (including by discharge where it is a full release) to reflect the release.

Asset classes used as collateral for security

Real estate

Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Yes. Where real estate is a significant asset, security will almost always be taken using a mortgage. Mortgages are put in place through an online registration system (Landonline). Parcels of land in New Zealand are assigned a title reference. When a mortgage is registered against such a parcel, the mortgage is noted against the title reference in the online register. Various memoranda of mortgages (essentially sets of terms and conditions) lodged in that system can be referred to in the registration, which are then incorporated into, and provide the detailed conditions for, the mortgage.

Machinery and equipment

Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. In New Zealand, security over personal property (essentially all property other than land and ships) is governed by the Personal Property Securities Act 1999. Machinery and equipment are personal property, so are governed by this act.

Security is usually created through a general or specific security agreement (an agreement that expressly creates a security interest in the relevant property under the Personal Property Securities Act). In some cases an instrument such as a finance lease is used, under which the secured party retains ownership of the property. In New Zealand, despite the secured party retaining ownership, for the purposes of security law, the secured party is deemed to have a security interest only.

To improve the priority of the security, the secured party will almost invariably register a financing statement on an online register (the Personal Property Securities Register). The register entry describes the debtor, secured party and collateral.

Receivables

Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Receivables are personal property, so are governed by the Personal Property Securities Act. Security is often created through a general or specific security agreement (an agreement that expressly creates a security interest in the relevant property under the Personal Property Securities Act). However, in many cases the receivables are assigned to the secured party instead. In New Zealand, despite the secured party becoming an owner under the assignment, for the purposes of security law, the secured party is deemed to have a security interest only. To improve the priority of the security, the secured party will almost invariably register a financing statement on the Personal Property Securities Register. The register entry describes the debtor, secured party and collateral.

Financial instruments and cash

Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Financial instruments and cash are personal property, so are governed by the Personal Property Securities Act.

Security is usually created through a general or specific security agreement (an agreement that expressly creates a security interest in the relevant property under the Personal Property Securities Act). 

To improve the priority of the security, the secured party will almost invariably register a financing statement on the Personal Property Securities Register. The register entry describes the debtor, secured party and collateral.

In addition, where possible the secured party will obtain possession of the financial instrument, because obtaining possession provides additional priority advantages. A secured party will be deemed to take possession if it takes certain prescribed steps under the Personal Property Securities Act. For example, if there are security certificates in existence for the financial instrument, possession is deemed to be taken if the secured party takes possession of the certificates.

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Cash deposits are personal property, so are governed by the Personal Property Securities Act.

Security is usually created through a general or specific security agreement (an agreement that expressly creates a security interest in the relevant property under the Personal Property Securities Act).

To improve the priority of the security, the secured party will almost invariably register a financing statement on the Personal Property Securities Register. The register entry describes the debtor, secured party and collateral.

In addition, the relevant bank account will often be blocked until the secured party permits withdrawals from it.

Intellectual property

Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. IP rights are personal property, so are governed by the Personal Property Securities Act.

Security is usually created through a general or specific security agreement (an agreement that expressly creates a security interest in the relevant property under the Personal Property Securities Act).

To improve the priority of the security, the secured party will almost invariably register a financing statement on the Personal Property Securities Register. The register entry describes the debtor, secured party and collateral.

In addition, a memorandum can be entered on the registers for trademarks, patents and designs that notes the security interest and will prevent another party being recorded as the owner on the relevant register. This step is not mandatory and is usually done only where the trademark, patent or design is particularly valuable.

Enforcement

Criteria for enforcement

What are the common enforcement triggers for loans, guarantees and security documents?

Common enforcement triggers are:

  • insolvency (including events relating to insolvency, such as receivership);
  • failure to pay an amount under the loan;
  • breach of a transaction document (although sometimes only if a materiality threshold is passed or a remedy period has expired);
  • misrepresentation (although sometimes only if a materiality threshold is passed or a remedy period has expired);
  • in many cases, cross-default;
  • in many cases, material adverse change in the borrower’s circumstances; and
  • in many cases, change of control.

Process for enforcement

What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?

Where a lender has security over all of the borrower’s property, it is most common for a receiver to be appointed to realise security and repay the secured party. A receiver can be appointed if there is a contractual right to do so. Certain aspects of the receiver's conduct are regulated by the Receiverships Act 1993 (eg, the receiver's obligations in relation to other secured creditors).

In other cases, the secured party commonly takes possession of the secured property and sells it to realise its debt. This procedure is generally regulated by the Personal Property Securities Act 1999 and there are certain procedural requirements. Notice of intention to sell must usually be given to the debtor and other secured creditors and the secured party is obliged to get the best price reasonably obtainable. 

In some situations, the secured party can simply exercise other contractual rights that are equivalent to enforcing security. For example, a lessor that is deemed to have a security interest can repossess under its lease. 

In the case of land, a process for carrying out a mortgagee sale of the land is prescribed in the Property Law Act 2007. In particular, notice must be given to the mortgagor with prescribed particulars and there is a duty to obtain the best price reasonably obtainable for the property.

Ranking in insolvency

In what order do creditors rank in case of the insolvency of a borrower?

The general rule is that:

  • secured creditors rank first;
  • certain preferential creditors (eg, the Inland Revenue Department) rank second; and
  • unsecured creditors rank third.

In relation to some types of property (eg, accounts receivable and inventory), the preferential creditors can rank ahead of secured creditors. However, the secured creditor will still usually rank ahead if it is a transferee of an account receivable for new value or holds a purchase money security interest (PMSI), which is essentially a security interest granted in property to secure amounts advanced to finance the purchase of that property. If that property has been sold in exchange for an account receivable, the secured party will generally have a PMSI in the account receivable as well.

As between secured creditors where the secured property is land, the general rule is that the first person to have registered a mortgage against that land has first priority, the second has second priority and so on.

As between secured creditors where the secured property is personal property, the rules are more complex. Priority will generally depend on which secured creditor was first to either take possession of the collateral or register a financing statement in relation to it on the Personal Property Securities Register, but there are other rules as well. The most significant of these is that a PMSI will usually have higher priority than other security interests in the same collateral.