The most common forms of security over real estate are:
A legal mortgage and an equitable mortgage are fixed charges and both create a similar type of security. The mortgagor is allowed to remain in possession of the asset though the ownership right passes to the mortgagee. In addition, the mortgagor retains an 'equity of redemption' which is a right to have the asset transferred back to it upon repayment. If there is a default in making mortgage payments, both legal and equitable mortgages entitle the mortgagee to take possession of the asset and dispose of it with priority over unsecured creditors.
Most borrowing is secured by a legal mortgage. The difference between a legal mortgage and an equitable mortgage lies largely in the extent to which the mortgage is perfected by registration at the Land Registry, and legal and equitable mortgages are treated differently in terms of the rules of priority as against other creditors. A legal mortgage created subsequent to an equitable mortgage has priority if it is acquired without notice of the pre-existing security.
It is also common for security to be granted over the rental income from a property. This usually takes the form of an assignment whereby the tenants are directed to pay the rental income to the lender (usually via a managing agent) so that the rental income does not pass through the hands of the borrower. This assignment can be created by a separate security document but it is more usually contained within the mortgage (or a debenture if one is granted).
A corporate borrower can also create a floating charge. This is 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. This type of charge is sometimes taken with very large and complicated property portfolios where the borrower requires maximum flexibility and the lender is not too concerned over control. While a floating charge allows greater flexibility, it has lower priority than a fixed charge because in the event of insolvency where assets are insufficient to satisfy all claims, the claim of a floating charge holder will be postponed to that of the preferential creditors (eg employees). However, it is more normal for a lender to take both a floating charge and a legal or equitable mortgage.
A fixed charge over property can be granted by anyone, including companies, limited liability partnerships, traditional partnerships and individuals. A floating charge cannot be granted by an individual.
Last modified 7 Oct 2024
Real estate includes the land, buildings erected on it and fixtures which form part of those buildings.
It is also possible to take security over fittings, furniture and moveable objects.
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Yes. The key characteristic of a trust is that it allows legal ownership and beneficial interest to be separated. The trustees become the legal owners of the trust property as far as third parties are concerned and they are legally entitled to contract on behalf of the trust. On the other hand, the beneficiaries can expect the trustees to manage the trust property for their sole benefit. This is well recognised under Hong Kong law.
Last modified 7 Oct 2024
Debt is commonly traded between lenders. Syndicated lending documentation is becoming standardized on the terms of the Asia Pacific Loan Market Association and this allows for free transferability of debt between lenders with the security being held on their behalf by a security trustee and the debt being administered by an agent.
In addition, there are several ways of transferring debt being:
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There are no restrictions on granting security to foreign lenders.
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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.
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Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.
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.
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.
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.
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There are no restrictions on payments made to foreign lenders under a security document or loan agreement.
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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
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.
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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
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.
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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.
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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.
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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.
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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:
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:
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:
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.
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.
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.
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Is the concept of a trust or a split between legal ownership and beneficial ownership recognized?
Yes. The key characteristic of a trust is that it allows legal ownership and beneficial interest to be separated. The trustees become the legal owners of the trust property as far as third parties are concerned and they are legally entitled to contract on behalf of the trust. On the other hand, the beneficiaries can expect the trustees to manage the trust property for their sole benefit. This is well recognised under Hong Kong law.
Last modified 7 Oct 2024