Lending to overseas borrowers July 2011 1
Lending to overseas borrowers Introduction When lending to an overseas borrower a lender will need to consider a number of matters, and should take advice from suitably experienced local lawyers. Each transaction will have its own peculiarities but set out below are some of the factors that a lender should consider in a typical cross-border financing transaction. The focus in this briefing paper is on bilateral asset backed financing rather than on big-ticket syndicated or project financing to major overseas borrowers. Instructing foreign lawyers and foreign legal opinions Foreign law firms should be chosen carefully to ensure that they have the banking and finance expertise needed to advise on the transaction. The foreign lawyers will need to check the due incorporation and powers of the borrower, and that all appropriate corporate or other necessary authorisations have been obtained to permit the borrower to enter into and perform its obligations under the loan documents. Where security over foreign assets is being provided, advice regarding priorities, registration, perfection, taxes, any potential liability of the lender as charge-holder, and enforcement should be obtained. Standard practice is to ask the foreign lawyers to provide a formal legal opinion covering the main areas that are likely to be of concern to the lender, in particular the validity and enforceability of the loan agreement and security under the relevant foreign law. In some jurisdictions the foreign lawyers will be familiar and used to providing legal opinions, but where they are not, it is best at the outset of the transaction to provide a form of opinion to show them the areas that will need to be covered. This may include some of the more common reservations and qualifications but these should usually be provided by the foreign lawyers as they will be jurisdiction-specific. The provision of a legal opinion will often flush out any matters that might be of concern to the lender, and a draft of the legal opinion should be requested at the outset of the transaction so that concerns can be dealt with at an early stage. Where the foreign lawyers are not a substantial firm, consideration should also be given to their standing and, where practicable, their level of professional indemnity insurance cover. Taking security over foreign assets In England and most common law jurisdictions that is, most US states, Canada (except Quebec), Australia and New Zealand the lender is free to take security over most types of assets whether they are tangible or intangible, moveable or immovable, existing at the time the security is taken or acquired in the future. Foreign laws outside the common law jurisdictions are often far less flexible. Some do not permit any type of nonpossessory security to be taken over assets; that is, security where the asset is left in the security provider s possession. A finance lease or retention of title might be considered as an alternative. Some do not allow all monies security. Taking security over future or fungible assets tends to be problematic in a number of jurisdictions as the local laws often require absolute certainty as to the assets 1 in question. A number of jurisdictions will not recognise security trustee arrangements, and an alternative, such as a parallel debt structure may have to be used. Taking security over certain assets can attract high levels of stamp duty or notarial fees (see further below). Advice will be needed on the effectiveness of the security and on the procedures involved in any enforcement. In particular, it should not be assumed that security in an English law form (perhaps one of the lender s standard documents) will be appropriate or effective for assets outside England and Wales. Indeed generally the law governing the security being taken over a particular asset will be the law where such asset is located. Most non-common law jurisdictions will not permit a lender to enforce its rights under its security documents without first obtaining court approval. This can be a protracted process which can be further compounded by the requirement to sell assets realised by way of a court approved sale or public auction. There are exceptions, however, an obvious one in the EU being financial collateral within the Financial Collateral Directive (Directive 2002/47/EC). While the English courts enjoy a very high reputation internationally for their impartiality and effectiveness, the same cannot be said for courts in all jurisdictions. There 2 1 Fungibles are assets consisting of two or more units which are legally interchangeable: goods in bulk are a common example. Even in England difficulties will arise unless particular assets (such as cases of wine) have been identified and allocated to the security.
is a perception that in some jurisdictions the courts cannot always be relied upon to apply the law impartially. They are not always separate from the government and can be coerced or encouraged by the local authorities to apply the law or the judicial procedure in a particular way. This may not always be readily apparent and may simply take the form of delaying decisions or hearings. Foreign lawyers should be asked to advise on these matters and on whether there is any precedent for enforcement against assets of the type that the lender is taking security over, and whether the borrower enjoys any special status or privilege (formalised or not) in the jurisdiction. Security over foreign assets will usually need to be registered at one or more local public registry, depending on the type of asset. Failure to do so might invalidate the security, at least in the relevant jurisdiction. Notices may have to be given to perfect the security. There may be a local law requirement for the borrower to register any security granted in its own company records: failure to do so may or may not affect the priority or enforceability of the security. It is not just the security provider s jurisdiction of incorporation that may be relevant. Advice may be required on the governing law of any security document, and for any jurisdiction where the secured asset is located or, in the case of intangible assets, and in respect of the law applicable to those assets. When secured assets are situated in particular jurisdictions, the lender may require a security agreement governed by the relevant local law. It may also decide to take one governed by English law, or another law with which it is more familiar and comfortable. Notaries, notarisation and stamp duty Notarisation is often required in foreign jurisdictions in relation to documents that might be brought before the local courts. A notary is a lawyer who performs certain public duties on behalf of the relevant state. His main function is to authenticate the execution of documents which applicable law requires to be authenticated. A mortgage or other security over a local asset may require notarisation. The borrower or chargor (or its representative or attorneyin-fact) will need to execute the document before a notary public who will authenticate the signatory s signature (or its representative s authority to sign on its behalf). The notary will add a statement to the authenticated document to the effect that it has been duly executed in his presence and will affix his official seal. Sometimes an Apostille certificate is added to the notarial certificate to certify the genuineness of the notary s seal. Whether or not an Apostille or other legalisation requirement is needed will depend on where the document has been executed and on the agreements (if any) between the state where the document has been executed and the state where the document is to be registered or might need to be enforced. Foreign notaries are usually required to charge a fee set by the state, and the cost of notarisation can be very high because it is often linked to the value of the charged assets or the amount of the debt which is secured (this is the case in Switzerland). Taking security over certain assets in some foreign jurisdictions attracts stamp duty. Like the fees for notarisation, stamp duty can be very high because it is often calculated by reference to the value of the charged assets or the amount of the debt that is secured. The level of notarisation fees and stamp duty should be ascertained at the outset of the transaction. They may be unacceptable. If so, the options may include restructuring the transaction, capping the amount secured (possibly with the right to take additional security in certain circumstances), and having the security document executed and held outside the relevant jurisdiction (but it will usually have to be brought into the jurisdiction and the taxes and fees paid if it is to be enforced). Sovereign or state immunity If the borrower is a sovereign, a government body or a state-owned or state-controlled entity, it may be able to claim immunity before the foreign courts under local law or before the UK courts under bilateral agreements between the UK and the foreign state. In this situation a full waiver of sovereign immunity will need to be included in the loan and security documents, but the extent to which the foreign courts will give effect to this will need to be checked with local counsel. Withholding Tax An important issue is whether or not an overseas borrower is required to withhold tax in respect of any payments to the lender under the loan documents (in particular from interest) and whether the lender and the 3
Lending to overseas borrowers borrower can take the benefit of a double-tax treaty between the UK and the foreign state. Typically a loan agreement will contain provisions requiring the overseas borrower to gross-up any payments to bring the level of receipts by the lender up to the level they would have been at had no withholding tax been payable. A well advised borrower will require the lender to account for any related tax credit where the result is to leave the lender in the same after-tax position. In some jurisdictions compliance with gross-up provisions by the borrower is not lawful, in which case a different approach may be necessary to ensure that the lender receives the expected net return; for example by increasing the margin to take into account the reduction caused by the withholding. In practice, however, an actual requirement to withhold and gross-up from the outset may make the loan commercially unacceptable to the borrower, so it is important that the lender and the borrower make appropriate arrangements to avoid withholding tax if at all possible. There may also be wider tax and accounting implications in taking cross-border security, which should be considered where necessary. Can the lender lend in the foreign state? Some jurisdictions require the lender to register locally to do business. This can be onerous and can result in a requirement for the lender to fulfil on-going filing and disclosure obligations, or it can be as simple as the purchase of a licence for a small fee. The foreign lawyer instructed to advise the lender should flag this at an early stage of the transaction and this should also be covered in the legal opinion. Sanctions and illegality The loan and security documents should contain detailed provisions dealing with the situation in which it becomes illegal for the lender to continue to provide the loan or to make or receive payments from the overseas borrower. Illegality does happen, in particular when the borrower is based in or operates out of a jurisdiction that becomes subject to United Nations economic sanctions. US and EU sanctions should also be considered. US legislation may penalise foreign companies that have branches or subsidiaries in the US if they conduct business with countries that are the subject of certain types of US economic sanctions. Most payments in US dollars will, technically, be routed through the US, and may be subject to US sanctions. Default and enforcement insolvency/moratoria The overseas lawyer should be asked to advise on the procedure for enforcing a UK judgment against a foreign borrower following a default. Advice should also be obtained on the procedures involved in enforcing against foreign assets which are subject to foreign law security documents. If the borrower is insolvent can a moratorium be imposed on any enforcement action against its assets and how long can this remain in place? Some foreign jurisdictions do not have clear or tested legislation governing insolvency procedures. The local lawyer should advise on these matters at the outset of the transaction. Service of Process Under the loan documents the foreign borrower should be required to appoint and maintain an agent in the United Kingdom to accept service of process issued in the English courts in any proceedings arising out of the documents or in connection with the transaction. This will prevent the lender from being required to apply to court to serve process outside the United Kingdom and to comply with any local foreign laws to ensure effective service. The agent appointed by the foreign borrower should be asked to confirm its appointment directly to the lender. Data Protection If the transaction involves the transfer of personal data overseas, this may not be permissible under UK data protection legislation. Generally speaking, transfers within the European Economic Area and to certain other states that are considered to have adequate data protection legislation are permissible. The prohibition can often be overcome by obtaining the relevant party s consent to the transfer of data. Money laundering The jurisdiction of the overseas borrower may have money laundering procedures and legislation that are 4
considered to be broadly equivalent to those of the United Kingdom, but many do not, and conducting business with persons in those jurisdictions may necessitate more extensive and thorough money laundering checks. These should be conducted at the very outset of the transaction. Choice of law/conflict of laws The transaction might involve a number of jurisdictions and this will increase the potential for conflict between the laws of the jurisdictions involved. The lender will be keen to have certainty on such issues. Many jurisdictions have bilateral agreements with the United Kingdom or are parties to conventions concerning the application of laws where a conflict arises. Two EU regulations are particularly important, being the Rome I Regulation on the law applicable to contractual obligations, and the Rome II Regulation relating to non-contractual obligations. Equally significant are the Insolvency Regulation 2000, which is concerned with insolvency proceedings within the Community, and the 1997 UNCITRAL Model Law on Cross-Border Insolvency, which a relevant state may have enacted into its domestic legislation. The best way to avoid conflicts of laws arising is to ensure that the documents make an express choice as to which law will govern them. The lender should consult lawyers in each relevant jurisdiction to ensure that the choice of law under a document will be recognised by the courts that may be asked to enforce or consider the document, or to enforce an overseas judgment obtained in respect of that document. However, it is not always possible to choose the governing law of the security documents, and the governing law will most usually have to be the law of the jurisdiction in which the asset is situated or (as, for example, in the case of a ship) the jurisdiction in which the asset is registered. Even where a choice of law is recognised by a local court certain provisions of the documents that are enforceable under, say, English law, may not be enforceable by an overseas court for pubic policy reasons. These may include, for example, provisions requiring judgments to be awarded in a currency other than the local currency, or provisions permitting one party to assign its rights and obligations under an agreement without the consent of the other. The foreign lawyers should be asked to review the loan documents to advise on whether any of the provisions might not be enforceable. Such advice will typically be included among the reservations in the foreign lawyer s legal opinion. Registration of security created by foreign companies at the UK Companies Registry For many years it was common to seek to register security created by a foreign company at the UK Companies Registry. This was known as a Slavenburg registration. The concern was that such registration was necessary because the company had an established place of business in Great Britain, even though it had not registered here (as it should have done) as an overseas company. This ceased to be necessary from 1 October 2009, and was replaced with a requirement for non-uk companies that security must be registered if, broadly speaking, on the date of creation of the security the chargor was registered in the UK as an overseas company, and the property subject to the charge was situated in the UK. There are currently proposals to drop this requirement for overseas companies. Insolvency and security This is not the place for detailed comments on the lender s position on the insolvency of a non-uk borrower, or on cross-border insolvency issues, but something should be said about the lender s ability to enforce its security by the appointment of an administrator or receiver in the UK. Briefly, a lender with a qualifying floating charge may appoint an administrator in respect of an overseas borrower if the borrower is a company incorporated in an EEA State, or if its centre of main interests is in an EU member state (other than Denmark). A lender may also enforce its security over a particular asset in England and Wales by the appointment of a receiver. As the law stands, a receiver and manager over all the assets of a foreign company may be appointed without the risk that it will amount to the unlawful appointment of an administrative receiver, as would be the case for most UK borrowers. In some limited cases, however, it is still possible to appoint an administrative receiver for a UK company. The inability to do this for an overseas company is significant for various forms of financing, and there have been calls for the law to be changed. 5
Lending to overseas borrowers Contact For further information, please speak to your usual contact at FFW. 6
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Lending to overseas borrowers This publication is not a substitute for detailed advice on specific transactions and should not be taken as providing legal advice on any of the topics discussed. Copyright Field Fisher Waterhouse LLP 2011. All rights reserved. Field Fisher Waterhouse LLP is a limited liability partnership registered in England and Wales with registered number OC318472, which is regulated by the Solicitors Regulation Authority. A list of members and their professional qualifications is available for inspection at its registered office, 35 Vine Street London EC3N 2AA. We use the word partner to refer to a member of Field Fisher Waterhouse LLP, or an employee or consultant with equivalent standing and qualifications. 8