How to join all the dots in collection and enforcement
By Crystal Au-Yeung, Oldham Li & Nie
The continued increasing popularity of offshore vehicles being used as a tool for asset protection has made debt collection and asset recovery more challenging for lenders. The enforcement process would often come to a halt when the subject asset is found to be held by an offshore entity, most likely a BVI company if the borrower is a Hong Kong or PRC entity. This bulletin seeks to provide practical guidance on how lenders could plan their cross-broader actions to maximize recovery.
In the preferred scenario where the indebtedness is secured, for instance by a share mortgage, upon default the lender should promptly take steps to enforce the secured interest pursuant to the mortgage document.
Most share mortgages are equitable mortgages with the beneficial title being transferred to the lender, and a set of pre-executed documents to facility the transfer of legal title at the lender’s disposal. However, the execution and filing of the transfer documents would not by itself give the lender a free and clear title, as the ownership would be subject to the borrower’s equitable interest to redeem the shares once the indebtedness is repaid.
To extinguish the said equitable interest, the mortgagee would have to, subject to the provisions in the mortgage, sell the shares by either 1) itself being the mortgagee in possession; 2) a power of attorney; or 3) appointing a receiver. As simple as it seems, in exercising his power of sale there is a general duty owed to the mortgagor to take due care to obtain the best price reasonably obtainable; there is also a rule against self-dealing (i.e. the mortgagee could not purchase the interest itself). With these restrictions it is often advisable for a mortgagee to delegate the duty to sell to a professional receiver.
1) What is the governing law of the security document?
2) Is there a mechanism in place for the transfer of legal title?
3) What are the contractual options for enforcing the secured interest?
4) What is the best way to exercise the right to sell?
Where the indebtedness is not secured, assistance from the Court is necessary to recover debt through assets owned by the borrower. If the indebtedness is governed by Hong Kong or PRC law, many lenders understand that as a first step a judgment should be sought from the Court to confirm the validity of the debt. If the subject asset is held offshore, an extra step should be taken to domesticate the judgment for the debt to be recognised by the Court where the asset is located.
Although there is no reciprocal recognition arrangement between Hong Kong and the BVI, a recent decision is notable as being the first case where the BVI Court has recognised and enforced judgments from the PRC Courts (and may assist future applicants seeking reciprocal relief from the PRC Courts for recognition of BVI Court orders). The application arose out of judgments against the debtor in the PRC, which were subsequently recognised in the BVI. The debtor is the sole shareholder of a BVI company, which in turns own shares in a Hong Kong listed company. Following proceedings to domesticate the PRC judgments, judgment was entered in the BVI, and a final charging order was made with respect to the shares.
This put the bank in the position as a secured lender. However, as it was practically difficult for the bank to sell the shares with virtually no books and records, it then decided to apply for the appointment of receivers, who can exercise shareholder voting powers to take control of the company, for the purpose of liquidating its assets to ultimately repay the bank.
In granting the application, the Court confirmed that a receiver can be appointed over the shares in a BVI company and can then use those powers to realise value from the shares by appointing directors over the company and selling assets down the chain in order to satisfy the judgment debt. The Court determined that it would be expedient to appoint a receiver rather than order a sale of the shares where the value of the underlying assets was unknown.
The practical approach adopted by the BVI Court to assist foreign lenders is welcomed.
1. What is the governing law of the indebtedness?
2. Will the indebtedness be disputed?
3. Where are the assets located?
4. Is there sufficient information regarding the value of the assets which would assist disposition of the same?
The key takeaway is that lenders should be encouraged to seek integrated advice covering both onshore and offshore aspects of a defaulted indebtedness, which would enable effective recovery of assets.
About the author:
Crystal Au-Yeung, Consultant, Litigation, Oldham Li & Nie
Crystal is a Hong Kong, UK and BVI qualified litigator with over 10 years’ experience. She is equally experienced in both onshore and offshore matters, ranging from cross-border commercial/shareholders disputes, trust disputes, insolvency, restructuring, and the enforcement of debts. Crystal counsels on potential disputes, mitigation litigation risks, and corporate governance issues, and is able to provide inclusive and integrated advice on the onshore and offshore aspects of each matter. Trilingual in Cantonese, Mandarin and English, Crystal advises clients in mainland China, Hong Kong, Macau, and Taiwan.