Extract taken from 'The Lending and Secured Finance Review' – edition 5

Credit support and subordination

i Security

Under Taiwan law, different types of assets are subject to different formal requirements for perfection of a security interest created over them. Below is a brief introduction to the formal requirements on the most commonly seen security interests. Taiwanese law does not permit the taking of security over 'all assets' of an entity by way of a floating charge. As a general rule, the security provider and the security interest holder should enter into an agreement to identify the specific asset subject to the security interest. A general security agreement that does not identify the specific asset, such as a floating charge, is not enforceable under Taiwan law.


The security to be created over machinery or equipment may be a pledge or a chattel mortgage. Both security interests give the security interest holder first priority over the machinery and equipment. To create a pledge, the pledgor and the pledgee have to enter into a written agreement, and the pledgor should deliver the possession of the machinery and equipment to the pledgee, but a registration with the competent authority is not required. To create a chattel mortgage, the mortgagor does not need to deliver the possession thereof to the mortgagee; however, a registration with the competent authority will be necessary for the mortgagee to claim the chattel mortgage against a bona fide third party.

Real properties

A security interest over a real property is taken by way of a mortgage registered with the relevant land registration offices. A security interest over a real property will not be validly created if registration is not duly completed. To create a valid mortgage over land, a building or a plant, the mortgagor and the mortgagee should enter into a written agreement and complete the registration.

Bank accounts

A deposit in a bank account can be pledged by way of a written agreement executed by the depositor and the lender, and a notice of the creation of the pledge served on the account bank. The pledge will only be perfected when a notice has been served on the account bank. Nevertheless, as described above, the concept of a floating charge is not recognised under Taiwanese law. In other words, the pledge covers only the cash in the bank account when the pledge is created and notified to the account bank. The pledge will not cover the cash deposited in the bank account after the account bank is notified of the creation of the pledge. To deal with this issue, the pledgor in practice will be required to periodically confirm with the account bank and agree on the creation of a pledge over the most current balance in the bank account to ensure that the pledge also covers the cash deposited after the creation of the pledge.


When a receivable or a contractual right is transferable, security over the receivables or contractual rights is taken normally by way of a secured assignment in favour of the lender. A service of notice of the assignment to the obligor of the receivable or the contractual right is required for perfection. To create a pledge over receivables, the pledgee and the pledgor must enter into a written agreement. In addition, the receivables must be identifiable according to the content of the pledge agreement. Further, the obligor should be notified of the creation of the pledge for the pledgee to be able to claim the pledge against the obligor.


According to the new amendments to the Company Act, a public company should issue share certificates, whereas a private company may determine whether to issue share certificates. In addition, a company issuing share certificates may issue them in scripless form or in certificated form. To create a pledge over shares in certificated form, a written agreement is required. The certificates of the pledged shares shall be duly endorsed and delivered by the pledgor to the pledgee. Furthermore, the company issuing the shares shall be notified of the creation of a pledge to register the pledge on the shareholders' roster. The creation of a pledge is valid between the pledgee and the pledgor when the certificates of the shares have been endorsed and delivered to the pledgee. Without a notice to the issuing company, the creation of the pledge cannot be claimed against the company.

To create a pledge over listed shares in scripless form, which are traded and transferred through the book-entry system of the Taiwan Depository & Clearing Corporation, the pledgor and the pledgee have to sign a form prescribed by the Taiwan Depository & Clearing Corporation and have the pledge registered with it.

ii Guarantees and other forms of credit supportGuarantor

A guarantor may refuse to perform the guaranteed obligations until the compulsory execution against the property of the borrower proves to be futile (i.e., the lender must seek payment from the principal debtor first); provided, however, that the guarantor may waive (and in practice must waive as required by a lender) this defence (i.e., beneficium ordinis) in advance. In practice, a guarantor is normally required to act as a joint guarantor (i.e., jointly and severally liable with the borrower for the loan), so the lender may commence concurrent legal action against both the borrower and the guarantor.

If the guarantor is not a joint guarantor or waives the defence of beneficium ordinis, the lender must seek payment from the borrower first and the guarantor later. The legal proceeding for the lender to seek payment from the borrower may take months or years. Therefore, there is a risk that before the lender seeks payment from the guarantor, the guarantor may attempt to transfer its assets to others to avoid enforcement by the lender.

Negative pledge

In addition to a general negative pledge in the loan agreement, the lender may seek a specific negative pledge from the borrower (that is, a company limited by shares) as provided under the Banking Act. When no collateral is provided to a lender under a financing transaction, the lender may require the board of directors of the borrower to pass a resolution providing a negative pledge undertaking that the borrower will pledge or mortgage its assets in favour of the lender and, before that is done, the borrower shall not pledge or mortgage the same to any third party. If the borrower breaches the undertaking, the borrower's directors or officers who make the decision to breach the negative pledge shall be jointly and severally liable for compensating the lender, and shall be subject to imprisonment for not more than three years, detention or a criminal fine of not more than NT$1.8 million (or both).

iii Priorities and subordinationGeneral principle

Security interests, such as a pledge and a mortgage, will have priority over other claims or rights of the borrower's creditor unless otherwise provided by mandatory provisions of laws. The sale proceeds of the mortgaged or pledged property in a court compulsory execution proceeding will be allocated and distributed in accordance with the following order:

  1. expenses paid by the pledgee or the mortgagee for the compulsory execution proceedings;
  2. applicable taxes having priority over the security interest under mandatory provisions of laws;
  3. statutory security interest;
  4. the mortgagee or pledgee of the property;
  5. certain labour claims if the employer winds up or liquidates its business or has been adjudicated bankrupt;
  6. applicable taxes, if any, having no priority over the security interest; and
  7. unsecured creditors.
Subordination agreement

In the case of unsecured financing, the lender in practice would require that the borrower enter into a subordination agreement with the borrower's shareholders or affiliates so that the unsecured loans provided by these persons to the borrower will be subordinate to the loan provided by the lender. Unlike a security interest having priority over unsecured debts of the borrower, the subordination agreement is merely a contractual undertaking from the borrower and its shareholder or affiliate, and does not have the effect of priority preferred by law.