REALWorld Law

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

There are no restrictions on granting security to foreign lenders.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

There are no taxes in creating a security interest. The fee for registration of mortgage or legal charge at Companies Registry is HK$340.

A legal charge over real estate may be perfected by registration at the Land Registry. There is a fee payable depending on the amount or value of the consideration. For consideration below HK$750,000, the fee charged is HK$230 while it is HK$450 for consideration above HK$750,000.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.

Financial assistance rules

Pursuant to section 275 of the Companies Ordinance (Cap. 622 of the Laws of Hong Kong), subject to certain exceptions, it is unlawful for a company to provide financial assistance for the purpose of acquiring its own shares, but a company can provide financial assistance for the purpose of acquiring shares in its holding company if the holding company is incorporated outside Hong Kong.

Corporate benefit rules

Directors must comply with both common law rules and provisions under the Companies Ordinance (Cap. 622 of the Laws of Hong Kong). To summarize, a director of a company must only act in a way that he considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. Further, a director must exercise independent judgment and reasonable skill, care and diligence and act in accordance with the company’s memorandum and articles of association.

Other rules

There are other corporate law issues which include rules relating to capital maintenance, restrictions on transactions between a company and connected parties and provisions relating to transactions which take place within certain periods before the company entering into an insolvency process. 

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

There are no restrictions on payments made to foreign lenders under a security document or loan agreement.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

A creditor can contractually agree to subordinate its security interest to that of another creditor by a priority agreement, being a Deed of Priority or an Intercreditor Deed. The agreement will regulate the priority of the competing securities and will cover matters such as rights of enforcement.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

If a choice of law is a sensible choice (ie not chosen to deliberately avoid a national law or policy), the Hong Kong courts will give effect to it. It would probably not be sensible to choose a law other than Hong Kong law to govern a security document under which a Hong Kong company creates security over a Hong Kong asset.

Where the asset that is the subject of the mortgage or charge is situated in another jurisdiction, a security document governed by the law of that jurisdiction will often be appropriate, and the choice of that law will be recognized by the local courts.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Generally, a security interest created by a company has to be registered at Companies Registry within one month after the date of creation of the security interest. If it is not so registered, it is void against a liquidator and any creditor of the company.

Mortgages of real property, if registered in the Land Registry within one month of the date of its creation, have priority from the date of creation. If a mortgage is registered outside this one-month period, it shall have priority from the date of registration with the Land Registry.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

A holder of security over land is not liable for environmental damage provided it does not take possession of the land and does not itself cause, or knowingly permit, damage to the environment.

Great care must be taken if the security is enforced because owners of land can be liable for environmental damage on that land or coming from it, even if it did not cause such damage. A mortgagee should not go into possession of land without careful consideration of the implications of potential environmental liability. 

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

If the facility is on demand, all the lender needs to do is demand repayment.

More commonly, a term loan agreement will describe events of default which must have occurred before the lender can enforce its security. Typical events of default include non-payment of interest or principal, breach of representation, breach of covenant, material adverse change and insolvency.

Once the security is enforceable, the lender can enforce its security immediately. Depending on the nature of the security, enforcement could be by way of appointment of a receiver or by way of foreclosure or taking possession.

The security assets can be disposed of by way of private agreement and there is no requirement for public auction, although the lender does have certain duties to obtain a proper price for the assets.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

The Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) enables a company to compromise or make arrangements with its creditors but requires the sanction of the court.

Where a compromise or arrangement is proposed between a company and its creditors or any class of them, the court may order a meeting of the creditors to be summoned in such manner as the court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors present and voting either in person or by proxy at the meeting agree to any compromise or arrangement, the compromise or arrangement is, if sanctioned by the court, binding on all the creditors or the class of creditors and also on the company.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Generally, the onset of a borrower's insolvency does not affect security interests.

Security can be set aside in certain circumstances including where it constitutes an unfair preference or a transaction at an undervalue. Generally, for this to happen, a court order is required and the security must have been created within a certain time period (which can be up to two years depending on the circumstances) before the commencement of the insolvency process.

A floating charge granted by a company within 12 months of commencement of winding-up is invalid unless it is proved that the company was solvent immediately after the creation of the charge or except to the amount of any cash paid to the company in consideration for the charge.

Last modified 7 Oct 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

The priority of security interests is determined by a complex set of rules that provide that the order of priorities is largely based upon the date of creation of the security. A summary of the priority order in respect of the key real estate security instruments is as follows:

Fixed charge versus floating charge?

• A fixed charge (a charge over a specific asset or assets) will have priority over a floating charge even if it is created after the floating charge where notice of the existence of the floating charge has been given in an appropriate legal way.
• Even if a floating charge (a charge over a class of assets which in the course of the borrower's business changes from time to time and which may be disposed of without consent of the lender) is crystalized into a fixed charge upon the occurrence of certain events stipulated in the agreement (eg insolvency/creation of second security) if the fixed charge has been acquired without notice of the specific crystallization clause, it still enjoys priority.

Fixed charge versus fixed charge?

• Fixed charges rank in priority according to the date of their creation and registration (although where the charge is over land, the Land Registry rules take precedence and generally provide that, subject to certain exceptions, priority is determined by the order of registration at the Land Registry.)

Floating charge versus floating charge?

• Floating charges rank in priority according to the date of their creation and registration.

The holder of a fixed charge is entitled to the whole of the proceeds of sale of that asset less the cost of realization.

There are certain prior claims which apply to proceeds of realization of a floating charge. These include:

• The costs of preserving and realising the assets
• The receiver's remuneration and the proper costs and expenses of the receivership
• The debts which are preferential in receivership

Unsecured creditors rank behind secured creditors and rank equally between themselves. However, preferential creditors, which are a special group of unsecured creditors such as employees and governmental departments, rank ahead of floating charge holders where the assets are insufficient to satisfy their claims (eg unpaid wages).

The order for distribution can be summarized as follows:

Assets subject to fixed charges (or mortgages)

1. The cost of preserving and realising the assets; and receiver's remuneration and the costs and expenses of the receivership
2. The chargee

If there is a surplus after payment of the amounts due as above, the surplus forms part of the free assets available for the general creditors.

Assets available to unsecured (general) creditors ('free assets')

1. Costs and expenses of the liquidation (including the remuneration of the liquidator as allowed under section 196 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
2. Amounts owing to employees
3. Statutory debts due to the government (eg rates and taxes)
4. If the company is a bank, then persons holding deposits (up to the amount of HK$500,000 per depositor)
5. If the company is an insurer, then amounts owing to insured persons claiming under an insurance contract against the insurer
6. A landlord who sought to take control of the debtor's goods in settlement of unpaid rent within three months before the date of the winding up order (to the extent of such goods)
7. Ordinary creditors
8. Return of capital to contributories entitled thereto
9. Payment of surplus to contributories entitled thereto

Assets subject to a floating charge

Prima facie, such assets are not available to the general creditors, however if the free assets available to the general creditors are not enough to satisfy the claims of the preferential creditors under section 265(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), then the assets subject to a floating charge would be available to meet those claims of preferential creditors in priority to the charge.

1. Costs of preserving and realising the assets; and receiver's remuneration and costs and expenses of the receivership, including costs and expenses of discharging statutory duty to pay the preferential creditors
2. Claims of preferential creditors referred to under points 2-5 above (in relation to the order for distribution of 'free assets'), in the statutory order noted above
3. Floating Chargee

If there is a surplus after payment of the amounts due to the charge, the surplus forms part of the free assets available for the general creditors.

Last modified 7 Oct 2024