Legal Aspects of Financing Loans and Mortgages in Hong Kong
Overview of Hong Kong Financing Loans and Mortgages
Hong Kong financing and loans, guarantees and mortgages is one of the cross-border legal issues that our firm regularly handles. The usual situation is that enterprises with a Mainland China background use their listed companies in Hong Kong or affiliates (such as subsidiaries) of Hong Kong listed companies as the lending entity to obtain loans from one bank or several banks (syndicate) in Hong Kong, and Guarantees are provided by listed companies and their affiliated companies, with specific bank account assets, promissory notes (promissory notes) issued by affiliated companies, listed company equity, unlisted company equity, mainland company equity, real estate in Hong Kong, real estate in mainland China, etc. as a mortgage guarantee.
The biggest advantage of financing loans in Hong Kong is that the interest rates are relatively reasonable. Generally, the interest rate for bank financing is HIBOR + 1%-2%, and the actual interest rate is about 3%-4% in total. In addition, the financing procedures are relatively simple and mature. As long as the borrower can provide sufficient mortgage and guarantee, it is relatively easy to obtain financing.
Applicable Laws for Financing Loans in Hong Kong
Financing loans in Hong Kong, such as those provided by banks in Hong Kong, are generally contracted to be governed by the laws of Hong Kong and are contracted to be litigated or arbitrated in Hong Kong as a means of dispute resolution. As such, the lender and the borrower must each engage their own Hong Kong law firm to act as the representative law firm for the loan business. Under the Hong Kong legal system, the same law firm cannot represent both the lender and the borrower in a single loan business.
Legal Texts of Loan Financing in Hong Kong
The Agreement can be either a Loan Agreement or a Facility Agreement. The difference between the two is that under a Loan Agreement, the lender has a specific obligation to lend money, and if the borrower defaults, the borrower can request the lender to specifically perform its obligation to lend money. Under a Facility Agreement, the lender promises to give the borrower a loan amount, and if the lender defaults, the lender only has an obligation to pay damages, and the borrower cannot apply for specific performance relief. A Facility Agreement is generally used for bank loans, while a Loan Agreement is more commonly used for loans between private organizations or individuals.
In the case of a syndicated loan, the APLMA loan agreement template recommended by the Asia Pacific Loan Market Association (APLMA) will be used and modified according to the views of both parties. In the case of other loans, the text of the loan agreement is usually drafted and modified by the Hong Kong law firms of both parties.
Guarantee and Security for Hong Kong Financing Loans
Documentation of security and guarantees in relation to the loan is particularly important and requires the drafting of relevant security instruments and related documents according to the specific type of security.
Mortgage of Hong Kong properties
If a mortgage is taken over a property in Hong Kong, a Deed of Mortgage should be drawn up, stamped and registered. Under the common law system of Hong Kong, the legal system of mortgage is very different from the legal system of mortgage in Mainland China, so it is necessary to have a Hong Kong lawyer to draft and process the mortgage. It is important to include an ‘appointed receiver’ clause in the mortgage deed so that in the event of a default by the borrower, the mortgagee can directly appoint a receiver to enforce the mortgage without the need to initiate lengthy legal proceedings.
Mortgage of Shares of Companies in Hong Kong or BVI/Cayman etc.
If the shares of a Hong Kong listed company are pledged, depending on the degree of mutual trust between the two parties, you may choose the form of mortgage by way of a legal mortgage whereby a transfer of the pledged shares is effected or an equitable mortgage whereby a transfer of the pledged shares is not effected. For details, please refer to another article of the Firm entitled How to Apply Mortgage of Stocks for Hong Kong Listed Companies.
In the case of a mortgage over shares of an unlisted company in Hong Kong, the procedure is similar, but the manner of effecting the transfer of shares is different. If the mortgage is over the shares of a BVI or Cayman company, the procedure is similar but different in respect of the registration of the share mortgage.
If the mortgagor is a Hong Kong company, it is necessary to register a charge over the assets held by the company.
Collateralization of Funds in Bank Accounts
A common form of security is to pledge funds in a borrower’s bank account. In many cases, the bank may allow the borrower to continue to deposit or withdraw funds from the bank account in the ordinary course of business, but in the event of default, the bank has the right to freeze the account immediately and enforce the security with the funds in the account. The funds in the bank account can be pledged as fixed charge or floating charge.
Pledging the Borrower’s Claims
Another common form of security is to use the borrower’s claims against a third party (either the borrower’s affiliated company or an unaffiliated company) as a guarantee of the borrower’s repayment of the loan. In the event of a default by the borrower, the lender can directly assert its claim against the third party (the borrower’s debtor) to repay the loan. A specific legal form of debt security is a deed of assignment signed by three parties (the lender, the borrower, and the borrower’s debtor) as a guarantee of loan repayment.
Cashier’s Order (i.e. promissory note promising to pay) as a Form of Guarantee
In order to strengthen the guarantor’s guarantee, the borrower can usually ask the guarantor to sign a promissory note for forward payment as a supplement to the guarantee obligation. The promissory note may set out the conditions and period of time that the guarantor undertakes to pay.
Priority Collections as a Form of Guarantee
If the borrower has other outstanding debts (which may be intra-group or extra-group debts) at the date of the loan, the lender may require the borrower and the borrower’s debtors (the ‘secondary debtors’) to sign a deed of subordination in order to guarantee the rights and interests of the borrower’s debts under the loan. A deed of subordination may be required to be signed with the borrower and the borrower’s debtor (the ‘second debtor’), stipulating that the borrower’s debts shall have priority over the second debtor’s debts; and if the borrower makes payment to the second debtor to settle the debts before the borrower’s loans have been repaid, the second debtor will act as the borrower’s legal trustee to hold the money in the place of the borrower, and the borrower will have the right of recourse against the second debtor.
Property in Mainland China as security
Currently, the laws of Mainland China impose certain restrictions on a Hong Kong bank obtaining a mortgage on a property in Mainland China, i.e. the bank or financial institution must have a branch in Mainland China to be able to do so. As most major Hong Kong banks have branches in Mainland China, it is feasible for borrowers to use Mainland properties as collateral for Hong Kong loans, but in practice, this is mainly the case for properties in major cities such as Beijing, Shanghai and Shenzhen, etc. There are also commercial banks in Hong Kong that use mortgages of Mainland properties as collateral for Hong Kong loans as a special feature of their business.
Guarantee by Affiliated Companies
Guarantee provided by a related company of the borrower is a common form of guarantee for cross-border loans. The associated company is usually a Hong Kong company, a BVI or Caymanian offshore company, or a Mainland China company. If the guarantee is provided by a Hong Kong, BVI or Cayman offshore company, the main legal procedure is to sign a deed of guarantee.
If the guarantee is provided by an associated company in Mainland China, in addition to signing the Deed of Guarantee, it is also necessary to apply for the approval of internal guarantee and external loan from the State Administration of Foreign Exchange.
Contact and Disclaimer
For legal matters relating to loan financing and security guarantees in Hong Kong, please contact our commercial law team. Email: [email protected], Tel: +852- 31881995, Wechat (whatsapp): + 852-51039249.
The law relating to financial collateral and mortgage guarantees is a specialised area of law. The above articles are the views and opinions of our lawyers on general legal issues and should not be regarded as legal advice or recommendations by our lawyers to clients on specific issues. Clients who require legal advice on specific legal issues should contact our lawyers directly for specific legal advice.