Amid increasing bond defaults by property developers in China, and the reportedly growing prevalence of non-performing debt due to rising interest rates across Asia, lenders have progressively been managing their risks by restructuring or divesting their bad debts. The persistent economic fallout from the pandemic and the related restrictive measures have also contributed to this trend.
In this article, the author considers the British Virgin Islands (BVI) and the Cayman Islands law aspects of the transfer by a financial institution of an existing loan portfolio and the relevant security package. The author anticipates that this is a point of interest to many lenders across the Asian market in the currently distressed environment, and expects refinancing and restructuring activity to continue growing with respect to non-performing loans that are supported by an offshore security package.
Transferability of loan portfolio
The starting point to assessing the transferability of a loan portfolio is to review the loan agreement to identify any restrictions on a lender’s ability to transfer relevant loan(s). For example, the borrower’s prior written consent may be required and the loan agreement may prescribe circumstances under which the borrower may refuse to provide that consent. There may also be restrictions on the transferability of certain types of loan portfolios – such as those including mortgages or consumer loans – and the transferor may be subject to onerous internal confidentiality rules and data protection requirements.
Although these are principally points of onshore law to be determined under the governing law of the loan agreement, to the extent that the borrower is incorporated in the BVI or Cayman Islands and is a party to the transfer agreement(s) it is customary for offshore legal counsel to the lender to issue a legal opinion to confirm (among other things) that the relevant company has the requisite capacity and power to enter into the transfer agreement(s).
Offshore security package
Most cross-border loans in Asia are supported by an offshore security package. A potential purchaser of a loan portfolio should therefore keep the following points in mind:
- Careful consideration must be given to the method by which the outgoing secured party’s security interests are transferred to the purchaser or its nominee. For example, there is generally no way to assign legal title to a chose in action or other property right under BVI law. If a party wishes to transfer legal title to a right in action under BVI law, this can normally therefore only be accomplished by way of novation. However, it is possible for choses in action to be assigned in the BVI in equity, and this is the normal mechanism by which this is done.
- Until the security provider is notified of the assignment, it may discharge any of its obligations for the benefit of (or make payment to, as the case may be) the original assignor. However, the assignment itself is valid between the assignor and the assignee, and the assignor may need to account to the assignee under the terms of the assignment. There is no requirement that notice to the security provider must be given in writing, or that the security provider acknowledges receipt of the notice, although this is customarily done for evidential reasons.
- If the security provider is a BVI company and has registered details of the security in its register of registered charges maintained by the BVI Registrar of Corporate Affairs (registrar), it must register a variation of charge with the registrar to comply with BVI law. The registrar will issue a certification of variation of charge, and stamp the particulars of the variation of security, as evidence that the variation has been duly registered.
- If the security provider is a BVI or a Cayman Islands company, its register of charges, or register of mortgages and charges, must be updated to reflect the name and address of the new secured party. Failure to do so will not invalidate the underlying security interests, but may result in the imposition of a financial penalty.
- In practice, a well-drafted assignment agreement will impose an express obligation on the relevant parties to complete all of the local law filings and register updates within a mutually acceptable timeframe. Offshore legal counsel should be retained to ensure all such filings are correctly completed and the transfer mechanics comply with BVI or Cayman Islands law.
Peter Vas is a partner at Loeb Smith Attorneys in Hong Kong. Robert Farrell also contributed to this article.
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