HONG KONG Law and Practice Contributed by: Vincent Sum and Sylvia Leung, Mayer Brown
SPE Requirements and Structure Hong Kong does not impose any specific requirements for an SPE in a securitisation. An SPE is typically structured as an orphan entity and a separate legal entity with limited liability, which is not part of the originator or any corporate group, and whose shares are held by a charitable trust. Depending on the transaction structure, the transaction parties often seek to incorporate the following aspects when establishing the SPE. • Restrictive covenants – the business that the SPE may undertake will normally be restricted to that connected to the purchase and hold - ing of the subject assets, the issuance of the asset-backed securities and other ancillary matters. • Independent officers – as the SPE is an orphan entity, managers and investors would want to ensure that the originator does not have absolute control over the SPE (other than on an arm’s length basis as an adminis - trator or servicer, as applicable); and so the SPE directors will usually not be affiliated with or nominated by the originator. This could also be required by auditors where the trans- action is seeking off-balance sheet treatment. • Limited recourse – transaction parties will agree in the documentation that any recourse a party may have against the SPE in the securitisation will be limited to those assets owned and held by the SPE. • Non-petition – transaction parties can agree in the documentation that they will not com - mence insolvency proceedings against the SPE, even if an event of default has occurred.
Under such structure, the originator will not normally be able to exercise influence or control over the SPE. No Substantive Consolidation Currently, “substantive consolidation” is not a concept recognised under Hong Kong law or by Hong Kong courts. Each company (includ - ing an SPE) incorporated under Hong Kong law will be treated as a separate legal entity. Where the originator becomes bankrupt, an insolvency official would not have the power to consolidate the issuer’s assets with those of the originator, unless there are exceptional circumstances, such as fraud. The insolvency law of the jurisdiction of the SPE (if not Hong Kong) would apply in the event of the insolvency of the SPE. However, insolvency courts in Hong Kong are not bound to recog - nise or enforce the laws of the SPE’s jurisdic - tion, especially if they are considered contrary to public policies, for instance. To ensure a transfer of financial assets (such as trade or loan receivables) is valid and enforcea - ble, the originator will seek to transfer the assets to the issuer by way of legal assignment. Condi - tions that will need to be satisfied to achieve an effective legal assignment, include the following: • the originator’s entire (and not partial) inter - ests in the assets are transferred to the issuer by way of an absolute and irrevocable assign - ment, rather than by an assignment by way of security; • the assignment must be in writing and signed by the originator (normally in the formality of a deed); 6.3 Transfer of Financial Assets Conditions for a Legal Assignment
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