HONG KONG Law and Practice Contributed by: Vincent Sum and Sylvia Leung, Mayer Brown
risks of the originator so that they will not form part of the originator’s assets subject to third- party creditors’ claims if the originator becomes insolvent. This is enabled by establishing a “true-sale” transaction. True Sales To achieve such insulation and bankruptcy remoteness, a “true sale” of the assets should be made by the originator (as the seller) to the issuer (as the buyer). There are a number of fundamental differences between a true sale and a transfer of rights by way of security under a secured loan. In deter - mining whether a transaction constitutes a true sale, a Hong Kong court would look at a number of factors, including the parties’ intention, and the following distinguishing features: • under the transaction documents, whether the originator has the contractual right to repurchase the subject assets and, if so, under what circumstances; • if the assets are realised by the issuer at a profit, whether the issuer is contractually required to account to the originator for any such profit and, if the assets are realised by the issuer at a loss, whether the issuer is entitled to recover from the originator for such loss; and • the intention of the parties and whether the transaction effected under the sale agree - ment also properly reflects the intention of the parties. A transaction will not be treated as a “true sale” just because it is labelled as such. If the court finds that the transaction resembles a secured
loan rather than a true sale, it may re-character - ise the transaction as a secured loan. Upon the transfer of the assets to the issuer in a true sale, the originator will cease to be the beneficial owner of the assets, which will neither form part of the originator’s estate nor be subject to any insolvency proceedings in respect of the originator. True sale opinions A true sale opinion may be requested by and delivered to the arrangers, investors and audi - tors, to provide comfort to these parties, for investing purposes and/or for accounting treat - ment. A true sale opinion normally relates to the effectiveness of the sale of the assets to the issuer and states that the assets will not form part of the originator’s assets after the sale. Claw-backs Where the originator is a Hong Kong incorpo - rated company and becomes insolvent, there is the possibility that the court may unwind the sale transaction if it finds that the sale of the receiva - bles was either: • an unfair preference or a transaction at an undervalue; or • a disposition to defraud creditors. 6.2 SPEs An SPE is typically used in securitisation trans - actions in Hong Kong, and acts as the beneficial owner of the assets transferred from the origi - nator and the issuer of the asset-backed notes. Therefore, the SPE is used to insulate the assets from the financial and credit risks of the origina - tor.
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