CMS Expert Guide for taking security in Hong Kong

1. Can a guarantee be granted by one entity/person to secure obligations of another entity/person?  

Yes, in principle.

2. Is guarantee treated under the law as: 

2.1 a type of security?

Yes. A personal security.

2.2 a financial service?

No. 

3. Can a corporate guarantee be granted:

3.1 Upstream?

Yes, but please see comments in Q4.

3.2 Downstream?

Yes, but please see comments in Q4.

3.3 Lateral?

Yes, but please see comments in Q4.

4. Are there any special aspects to be taken into account in relation to granting a guarantee (e.g. financial assistance, transfer pricing, corporate benefit, any other limitations)?

Financial assistance: 

Granting a guarantee or security would constitute financial assistance. Financial assistance for an acquisition of shares or for reducing or discharging a liability for the acquisition of shares is generally prohibited in Hong Kong. 

If a person is acquiring or proposing to acquire shares in a Hong Kong company, the Hong Kong company or any of its subsidiaries must not give financial assistance directly or indirectly for = the acquisition before or at the same time as the acquisition takes place, subject to certain exceptions. 

If a person has acquired shares in a Hong Kong company and any person has incurred a liability for the purpose of the acquisition, the Hong Kong company or any of its subsidiaries must not give financial assistance directly or indirectly for the purpose of reducing or discharging the liability, subject to limited exceptions. 

If a Hong Kong company contravenes these prohibitions, it and every responsible person of the company may be liable to a fine of HKD 150,000 and to imprisonment for 12 months. 

Corporate Benefit/Consideration: 

In principle, a third-party guarantor should receive some commercial benefit. There are ways to mitigate the risks if the commercial benefit is not obvious. Expert Hong Kong counsel should be consulted. 

Capacity: 

A guarantor should have capacity to grant the guarantee. For example, a corporate guarantor’s articles of association should not restrict its ability to give guarantees. A guarantor should be solvent when giving the guarantee and should not become insolvent as a result of giving or performing the guarantee.

5. Are there any formal requirements or practical recommendations for the execution, validity and/or enforceability of a guarantee?

The written form under a deed is strongly recommended (although not mandatory). For corporate guarantors, board resolutions approving the guarantee should be obtained. If there is any risk of a dispute about the corporate benefit, shareholders’ resolutions should also be obtained.

Yes, assuming there is good consideration given to the guarantor. 

Past consideration is not good consideration in law. If a guarantee is given only after the underlying primary obligation was created, it may be regarded as ‘past consideration’. 

However, where the giving of the guarantee can be regarded as substantially one single transaction together with the contract creating the underlying primary obligation, the courts may find good consideration in the context of the transaction as a whole. 

To avoid unnecessary disputes regarding the validity of a guarantee for a lack of consideration, it is preferable to execute the guarantee in the form of a deed and to state the consideration expressly (i.e. the underlying primary obligation contract) in the guarantee.

Yes, in general the validity of a guarantee is dependent on the validity of the primary/principal obligation. 

The indemnity concept is recognised at law as a primary obligation. An indemnity should be expressly provided under the contract.

Yes.

Yes.

Yes, but as there is no currency control in Hong Kong, such structures are not necessary from a Hong Kong law perspective. Hong Kong law also recognises trusts, and the benefit of a security interest can be held on trust for the beneficiaries.

Unless such transfer is prohibited or restricted in the relevant guarantee/security contract, no consent of the debtor/guarantor is required for a change of the creditor. 

Notice of transfer is recommended to be given to the debtor/guarantor.

In general, any security granted in the form of a mortgage or charge by a Hong Kong company, or a non-Hong Kong company that is registered in Hong Kong, must be registered in Hong Kong within one month of its creation. A failure to do so would result in the security becoming void and the creditor will become a simple unsecured creditor. 

If there are material changes to the mortgage/charge documents (additional secured assets being granted as security, or change of charges, etc), the security may need to be registered in Hong Kong.

Given the serious consequences of failing to register security in Hong Kong, expert Hong Kong counsel should always be consulted.

In general, there is freedom for parties to choose the governing law provided that the choice is not made with the intention of avoiding the mandatory application of the laws of another jurisdiction. 

Security over certain Hong Kong assets (e.g. Hong Kong real estate) may be subject to the mandatory application of Hong Kong law.

Submission to the jurisdiction of the foreign courts to settle disputes is recognised and permitted, provided that this was made in good faith and out of free will, and there are no reasons to avoid such submission on the grounds of public policy. 

Submission to arbitration is also recognised. Hong Kong has one of the most arbitration-friendly regimes in the world. Hong Kong has adopted the UNCITRAL Model Law on International Arbitration (in the form of the Arbitration Ordinance (Cap. 609)).

No.

Acts relating to property made or done by or against a company within six months before the commencement of its winding-up which, as a matter of Hong Kong law, are an “unfair preference”, will be invalid in the event of the company being wound up. A debtor gives an unfair preference to a person if it does anything which has the effect of putting another person into a position which, in the event of the debtor’s bankruptcy, will be better than the position it would have been without that act being done. An unfair preference to the company’s associate extends the period from six months to two years. 

A company enters into a transaction with a person at an undervalue if the company makes a gift to that person or enters into a transaction with that person for no consideration or a consideration the value of which is significantly less than the value of the consideration provided by the company. If a company in liquidation has, within five years ending with the commencement of its winding up, entered into a transaction with a person at an undervalue, the court may, on an application by the liquidator of the company, make an order to set aside that undervalue transaction.

Yes. 

Yes, subject to the same considerations as discussed in Q4 above.20. In order to be enforceable against third parties, must a security/security agreement be:

No. 

Yes. In general, any security granted in the form of a mortgage or charge by a Hong Kong company or a non-Hong Kong company that is registered in Hong Kong must be registered at the Companies Registry in Hong Kong within one month of its creation. A failure to do so will result in the security becoming void and the creditor will become a simple unsecured creditor.

Any security document that needs to be registered in Hong Kong must be in English or Chinese. A certified translation is required if the security document is not in English or Chinese.

In general, if a notice of the security is not given to relevant third parties, the security holder will have an equitable interest (instead of a legal interest). 

An equitable security interest is subordinated to any subsequent purchasers or mortgagees who purchase or grant a mortgage over the security asset acting in good faith and without notice of the pre-existing security interest. Subject to this, an equitable security interest will still be a valid security interest under Hong Kong law (subject to the registration requirements discussed in Q20.2 above).

See above.

A fixed charge earliest in time will have priority over any later charges. 

A floating charge ranks behind a fixed charge.

Establishment of security and level of security regulation is generally:

Security is easily established and encumbrances are easily checked.  

No, not recommended.

Guarantees should be executed as deeds with wet-ink signatures, and in the case of Hong Kong companies, with the common seal of the company affixed.

Expert Hong Kong counsel advice should always be sought on due execution. 

Mortgages and charges (granted by Hong Kong companies or non-Hong Kong companies that are registered in Hong Kong) are publicly available; but not guarantees. 

Security granted over real estate or land in Hong Kong, and aircraft and ships registered in Hong Kong, is also publicly available.

The security provider and the security holder (or persons duly authorised by them).

Mortgages and charges. See Q20.2.  

Time: Quick - normally within several hours.

Cost: Low.

Time: Medium - normally 1-2 weeks. 

Cost: Low.

Time: Depends on the notarisation requirements/objectives. Contact our Hong Kong notary public, Kingsley Ong, at www.kingsleyong.com for further information on fees and timing. 

Cost: Low.

See Q20.2 above.

Yes, if the parties agreed so in the security document.

Yes, if the parties agreed so in the security document.

Yes, if the parties agreed so in the security document.

Yes, if the parties agreed so in the security document.

Yes, if the parties agreed so in the security document.

Where there is a mortgage over real property, certain powers of a mortgagee are not exercisable unless (among other things) a notice requiring payment has been served on the mortgagor and default has been made in the payment of the mortgage money (or part of it) for one month after such service (Conveyancing and Property Ordinance (Cap. 219), Schedule 4, paragraph 11). 

Expert Hong Kong counsel advice should always be sought in an enforcement situation.

Yes. It can be done by a consent order endorsed by the court. 

Yes, if the parties agreed so in a security document or separate agreement. 

Collateral value is determined at the time of sale enforcement, assuming the secured creditor acts expeditiously after the breach/default.

Yes, if the parties agreed so in a security document or separate agreement. 

Collateral value is determined at the time of sale enforcement, assuming the secured creditor acts expeditiously after the breach/default.

Not applicable in Hong Kong.

Expert Hong Kong counsel advice should always be sought. There are various remedies for creditors available under Hong Kong law.

Yes. Irrevocable security powers of attorney are strongly recommended. The power of attorney must be expressed to be irrevocable.

Expert Hong Kong counsel advice should always be sought in a default/enforcement situation. 

Fairly easy. Hong Kong is a creditor-friendly jurisdiction. 

There are no anticipated changes on the main legal framework outlined above.