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UK's signature of the 2019 Hague Convention – a return to asymmetric jurisdiction clauses in English law finance documents?
Accordions in syndicated facilities – 10 key commercial terms
Dealing with defaulted lending transactions involving German real estate
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IN THE NEWS
JURISDICTION SPOTLIGHT
// Edition 2, June 2024
Adam Pierce Partner D +44 20 7246 7789
Email
PRODUCT SPOTLIGHT
European public-to-private financings – understanding the jurisdictional variables
Objective, subjective and policy-based sanctions clauses in LC confirmations – Singapore and English law perspectives
Taking security in the Netherlands – six key points for lenders
Arne Klüwer Partner, Head of Banking & Finance Germany and Structured Finance Europe D +49 69 45 00 12 360
Alexander Hewitt Senior Practice Development Lawyer D +44 20 7246 7179
The Singapore Court of Appeal made some very interesting observations about the enforceability of wide and narrow, objective and subjective sanctions clauses in letters of credit in the Kuvera case. This article discusses those observations from Singaporean and English law perspectives.
Among other issues, this note briefly examines Dutch law mortgages and pledges, what obligations such security may cover (including the use of parallel debt), security over future debts, when notarisation is required, and the ranking and enforcement of Dutch security.
This note provides a detailed and comprehensive analysis of the options, best case outcomes and risks for lenders in distressed German real estate financings.
This note compares key requirements for public-to-private financings in the UK, Italy, the Netherland and France – including rules on "squeeze-out" of minority shareholdings, certain funds and financial assistance.
This note distinguishes between accordions and incremental facilities, and looks at common terms in facility agreements for the former – including on the size and use of the accordion, first refusal rights, plus fees and costs.
Will we soon see finance parties once more using asymmetric jurisdiction clauses in English law facilities with EU obligors?
Jurisdiction spotlight
Asymmetric jurisdiction clauses have been a common feature of English law finance agreements for many years. However, since Brexit, mutual exclusive, rather than asymmetric, jurisdiction clauses have become the preferred option in English law facility agreements with EU borrowers and guarantors. In January 2024, the UK signed the 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters (the 2019 Convention), which creates a broad framework for mutual recognition and enforcement of judgments between the courts of contracting states. The EU is already a contracting party. Will this signal a return to the use of asymmetric jurisdiction clauses in English law facility agreements with EU obligors?
An asymmetric jurisdiction clause is one where the parties submit to the jurisdiction of a designated court – typically the English courts where the facility agreement is governed by English law – but this submission is exclusive for some parties (typically the obligors) and non-exclusive for others (typically the finance parties). English courts have long enforced asymmetric jurisdiction clauses. However, in deciding whether to include an asymmetric jurisdiction clause in a finance document, finance parties also need to consider these questions:
Would the courts in any other relevant jurisdiction give effect to the clause and so decline jurisdiction or stay proceedings if an obligor were to attempt to start proceedings in that jurisdiction? (the Jurisdiction Question) If the finance parties began proceedings in the English courts and obtained a judgment which they then sought to enforce in another jurisdiction, would the asymmetric jurisdiction clause affect the willingness of the courts in that jurisdiction to enforce the judgment? (the Enforcement Question)
What is an asymmetric jurisdiction clause?
The recast Brussels Regulation provides a broad-ranging jurisdiction and enforcement of judgments framework between EU member states' courts. Following the end of the Brexit transition period, English jurisdiction agreements and judgments have fallen outside its scope, and the European Commission has rebuffed the UK's request for similar arrangements to continue to apply between the UK and EU by not allowing the UK to accede to the Lugano Convention.
Asymmetric jurisdiction clauses since Brexit
The 2019 Convention is intended to complement, but not overlap with, the 2005 Convention. It applies to court judgments where the court had accepted jurisdiction in a range of specified circumstances, including where the court was designated by the parties in a jurisdiction agreement "other than an exclusive choice of court agreement". The Explanatory Report on the 2019 Hague Convention states: "Asymmetrical clauses are not considered exclusive under the HCCH 2005 Choice of Court Convention and therefore fall within the scope of the Convention." Although the UK has now signed the 2019 Convention, it has not yet ratified it. The 2019 Convention will only take effect between the UK and other contracting states (currently the EU, Ukraine and Uruguay) 12 months after the UK's ratification, and will only apply to judgments in proceedings commenced after that day. In a further step towards
2019 Convention – status and impact
Despite all being bound by the recast Brussels Regulation and Lugano Convention, EU member state courts have taken different approaches to asymmetric jurisdiction clauses to date. The courts in France have taken divergent positions. The civil chamber of the French Supreme Court (Cour de Cassation) ruled against enforcing an asymmetric jurisdiction clause in one decision dated 26 September 2012. In two decisions since then (of 25 March and 7 October 2015), it accepted their enforcement where the asymmetric clause is sufficiently precise to make the identity of any "optional" court foreseeable. The commercial chamber of the French Supreme Court unconditionally ruled in favour of their enforcement in a decision dated 11 May 2017. Courts in some other member states have adopted a similar approach to the English courts, while the courts of Poland and Bulgaria have previously declined to enforce asymmetric jurisdiction clauses. Even before Brexit, this international divergence discouraged finance parties from using asymmetric clauses in some transactions. In April 2023, the civil chamber of the French Supreme Court (Cour de Cassation) referred these questions to the Court of Justice of the European Union (CJEU):
French court application to the CJEU on asymmetric jurisdiction clauses
What law governs the validity of asymmetric jurisdiction clauses – EU law or member state national law? If EU law, are asymmetric clauses valid under EU law? If member state national law, how should a court decide which member state's law should apply?
The CJEU ruling is expected to provide greater clarity on the status and approach to asymmetric jurisdiction clauses across the EU. However, even if the CJEU rules that asymmetric jurisdiction clauses are valid under EU law, there will remain risks to using asymmetric jurisdiction clauses in English law finance agreements involving EU parties. Under the recast Brussels Regulation, if an EU member state court has jurisdiction to hear a dispute on a ground other than the jurisdiction agreement (for example, because the defendant is domiciled locally), it is unclear whether the court is even permitted to stay proceedings or decline jurisdiction in favour of a non-EU court (including an English court) unless the proceedings in that non-EU court were commenced first (see Articles 33 and 34). However, if the EU member state court was first seised, it may be possible for the finance parties to seek an anti-suit injunction from the English courts in support of the English asymmetric jurisdiction clause following Brexit. Parties involved in English law finance agreements with EU obligors should keep abreast of progress on the UK's ratification of the 2019 Convention, and the CJEU's ruling on asymmetric jurisdiction clauses. However, regardless of the outcome of these developments, mutual exclusive jurisdiction clauses may remain the safest approach for English law finance documents with EU obligors.
Antonia Tjong Practice Development Lawyer D +44 20 7320 6288
Claire Picard Of Counsel D +33 1 42 68 91 30
Contacts
United Kingdom
France
Instead, the UK acceded to the 2005 Hague Convention on Choice of Court Agreements (the 2005 Convention) in its own right (the EU had already done so). The 2005 Convention is narrower in scope than the recast Brussels Regulation and the Lugano Convention. In particular, it only applies to exclusive jurisdiction clauses and judgments arising from them, which likely excludes asymmetric jurisdiction clauses. As a result, since Brexit, finance parties have usually chosen mutual exclusive, rather than asymmetric, English jurisdiction clauses on transactions with EU obligors, primarily to provide greater certainty on the Enforcement Question.
implementation, draft legislation which enables the 2019 Convention to operate within the UK's legal framework has recently been approved and will come into force on the same day that the 2019 Convention takes effect in respect of the UK. Of more long-term relevance is that the 2019 Convention says nothing about the Jurisdiction Question. In an asymmetric jurisdiction clause, as in a mutual exclusive jurisdiction clause, the finance parties are seeking to prevent the obligors from starting proceedings in a non-designated court. The 2005 Convention creates a mutual recognition framework on this point for mutual exclusive jurisdiction clauses, but there is no equivalent in the 2019 Convention. So, how confident can a finance party be that EU courts will give effect to an asymmetric English jurisdiction clause?
Accordions in syndicated facilities – 10 key commercial terms European public-to-private financings – understanding the jurisdictional variables
Dealing with defaulted lending transactions involving German real estate Taking security in the Netherlands – six key points for lenders Objective, subjective and policy-based sanctions clauses in LC confirmations – Singapore and English law perspectives
Accordions are now a common feature of syndicated facilities. However, accordion terms in facility agreements still vary significantly. In this note, we set out 10 key commercial terms that parties need to consider when negotiating an accordion.
An accordion is a mechanism in a facility agreement to increase the size of the facility during its term at the borrower's request, without the need to amend the facility agreement (or refinance with a larger facility). Accordions are uncommitted, so the borrower cannot be certain that an accordion will enable it to increase the facility size. However, borrowers will often prefer to take that risk rather than take a larger facility upfront and have to pay higher commitment fees.
What is an accordion?
What is the maximum amount by which the facility may be increased using the accordion? This is usually a fixed figure, although in the leveraged finance market it is sometimes linked to a specified multiple of the borrower's EBITDA and in the fund finance market sometimes linked to the value of additional collateral being granted by the borrower. When may the borrower exercise the accordion? In revolving facilities, the borrower can generally exercise the accordion during all or most of the availability period. In term facilities, this period is more variable, but it will commonly extend beyond the (typically short) availability period that applies to the initial term commitments. So, where a term facility has an accordion, the parties will often include a separate, longer availability period for such accordion. Accordions are sometimes used because certain lenders are unable to obtain the necessary internal approvals in time to participate in the initial facility. In those circumstances, the accordion will usually only be exercisable for three to six months following signing. How many times may the borrower exercise the accordion? It is common for borrowers to be able to exercise the accordion more than once, but the number of permitted uses is usually not more than four in general corporate lending transactions. Is there a minimum "accordion increase amount" that the borrower may request on each occasion? Typically yes, with the figure flowing from the size of the accordion and the number of times the borrower may exercise it.
Size and use of the accordion
Must the borrower offer the existing lenders a right of first refusal to participate in a proposed accordion increase? In our experience, this is the more common position. Although this is generally seen as the more lender-friendly approach, some lenders prefer to exclude a right of first refusal, taking the view that it puts more pressure on them to accept an accordion request. Where the existing lenders have a right of first refusal, may the borrower invite non-lenders to participate in the proposed accordion increase if there is a shortfall from the existing lenders? Yes, borrowers are usually able to invite "eligible institutions" that are not already lenders to participate in the accordion. As such, accordion terms typically include mechanics for any new lender to accede to the facility agreement. For example, a new lender may need to provide a certificate of its tax status to the agent, if this is relevant for withholding tax purposes. If the borrower must offer the existing lenders a right of first refusal, what time periods should apply for the lenders to determine whether they wish to participate? The accordion terms will usually set out three stages to this process: an initial solicitation period (typically of three to four weeks) in which the existing lenders are invited to participate in the accordion pro rata to their existing commitments;
Rights of first refusal
Stuart Fitzsimmons Partner D +44 141 271 5410
James Ingham Partner D +44 20 7246 7243
Philippe Max Partner D +33 1 42 68 44 78
The LMA's leveraged finance facilities agreement contains optional "incremental facility" terms. Like an accordion, these are mechanics to make it easier for the borrower to increase the total amount it can borrow under the agreement during the facility term. However, whereas an accordion is a mechanic to increase an existing facility, an incremental facility is a new, separate facility provided within the same agreement. An incremental facility can therefore be provided on different terms to the existing facility (subject to any parameters set out in the facility agreement) whereas the terms of any facility increased under an accordion will be the same as those applying to the existing facility.
Key commercial terms
an initial solicitation period (typically of three to four weeks) in which the existing lenders are invited to participate in the accordion pro rata to their existing commitments; a shorter period (perhaps of a week) in which the participating lenders are invited to pick up any shortfall arising because one or more existing lenders has chosen not to participate; if there remains a shortfall, a final period in which the borrower can invite other "eligible institutions" to participate, during which time the existing lenders remain bound by any commitments to participate that they made during the first two stages. Strong borrowers sometimes argue that if the shortfall is too low to generate interest from new "eligible institutions", they should have a right to reduce the increased commitments of the existing lenders.
Should the agent receive an accordion fee? There are two common types of fee to which an agent may be entitled if the facility is increased using an accordion:
If the borrower proposes to pay a fee to participating lenders, must it disclose the fee to all lenders? Where existing lenders have a right of first refusal, it will be difficult for them to make an informed decision on whether to participate in a proposed accordion increase if it is unclear what fee, if any, they will receive for doing so. So, in such circumstances, we would expect any fee proposal to be shared with all lenders. Participating lender fees are sometimes agreed at the outset of the transaction, although in general corporate lending transactions it is more common for the borrower to propose the fees at the point of exercising the accordion. Must the borrower reimburse the agent for any costs and expenses reasonably incurred by the agent on an accordion increase? Agents do not usually engage external counsel when a borrower exercises an accordion. As such, accordion terms often do not include a reimbursement obligation on the borrower.
Fees and costs
a fee payable by the borrower, which may be set out in the facility agreement or a fee letter (less common with stronger borrowers); a fee – equivalent to the fee payable on a transfer of a lender commitment – from any new lender joining the syndicate on an accordion increase.
The two are not necessarily mutually exclusive but it is more usual for the accordion terms to include one or the other. Any fees payable to the agent in connection with an accordion should generally be agreed at signing – the agent will have limited leverage to negotiate a fee when the borrower exercises the accordion.
Axel Schlieter Partner D +49 211 74074 311
Jacqueline Bell Partner D +31 20 795 30 56
Netherlands
Germany
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Must the borrower offer the existing lenders a right of first refusal to participate in a proposed accordion increase? In our experience, this is the more common position. Although this is generally seen as the more lender-friendly approach, some lenders prefer to exclude a right of first refusal, taking the view that it puts more pressure on them to accept an accordion request. Where the existing lenders have a right of first refusal, may the borrower invite non-lenders to participate in the proposed accordion increase if there is a shortfall from the existing lenders? Yes, borrowers are usually able to invite "eligible institutions" that are not already lenders to participate in the accordion. As such, accordion terms typically include mechanics for any new lender to accede to the facility agreement. For example, a new lender may need to provide a certificate of its tax status to the agent, if this is relevant for withholding tax purposes. If the borrower must offer the existing lenders a right of first refusal, what time periods should apply for the lenders to determine whether they wish to participate? The accordion terms will usually set out three stages to this process:
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A public-to-private transaction (or P2P) is one in which a bidder buys a public listed company, taking it into private ownership. A P2P financing often involve complexities that do not apply in other types of financing – in particular those flowing from the relevant takeover regulations, but also from company law requirements specific to public companies. Lenders active in P2P financings across Europe need to be mindful of how this underlying legal framework differs across European jurisdictions. In this article, we focus on four areas in which these jurisdictional variables can affect the position of a P2P lender.
Even where the board of the target recommends the bidder's offer, some shareholders may be unwilling to accept it. The bidder will usually only wish to make an offer if it is confident it will be able to obtain full ownership of the target. The mechanisms available to bind minority shareholders vary across different jurisdictions. Where the bidder has made a direct offer to shareholders, the key variable is the proportion of shares the bidder needs to acquire to be able to "squeeze out" minority shareholders. In the UK, this is 90% (excluding any shares already owned by the bidder). The same 90% of capital and voting rights applies in France (taking into account any person acting in concert with the bidder). In Italy, the bidder must grant to all the remaining minority shareholders a right to "sell out" their remaining shares if it acquires 90% or more of the target company's voting shares and does not reinstate sufficient floating stock to ensure the regular trading of shares within 90 days. Furthermore, if, due to a global takeover bid, the bidder becomes holder of at least 95% of the share capital in an Italian company listed in a regulated market, the bidder acquires the right to squeeze out the remaining securities, enabling it to acquire 100% of the target's share capital. Where more than one class of securities is issued, the ability to squeeze out only applies for those classes of securities for which the 95% threshold is reached. In the UK, it is common for a P2P to be effected by way of a scheme of arrangement, rather than by a direct offer to shareholders. This is primarily to make it easier to bind unsupportive shareholders.
How will the bidder bind all shareholders?
Catherine Astruc Partner D +44 20 7246 7394
Simon Middleton Partner D +44 20 7246 7005
Fosco Fagotto Partner, Head of Banking and Finance Europe D +39 02 726 268 21
Franco Gialloreti Managing Counsel D +39 02 726 268 54
Jean-Marc Allix Partner D +33 1 42 68 91 10
In the case of a cash offer, the bidder will typically be subject to a "certain funds" obligation to ensure that it will have access to the required funds. The nature of this obligation can impact both the nature of the required P2P financing product, and its terms. In the UK, a bidder may only announce an intention to make an offer once it has "every reason to believe" that it will be able to implement the offer. In the case of a cash offer, the bidder's financial adviser must also confirm the availability of funds in a cash confirmation letter. To accommodate this, the facility agreement under which the bidder will finance the acquisition typically provides for a "certain funds period" during which any request to use the facility in connection with the financing of the acquisition is subject to only very limited draw stop conditions. The certain funds period will reflect the longest period that the offer could take to complete. By contrast, in Italy, the certain funds obligation requires the bidder to procure an irrevocable and unconditional "cash confirmation letter" from a bank or other financial institution that confirms availability of the funds necessary to ensure payment by the bidder of an amount equal the maximum cash consideration to be paid in the context of the tender
What certain funds requirement applies?
The target company may be subject to financial assistance rules that restrict the guarantees and security available to the lenders for the acquisition debt. Lenders also need to be mindful of financial assistance on acquisitions of private companies. However, in some jurisdictions, tighter financial assistance rules apply to public companies. In the UK, on the acquisition of a public company, neither the public company itself nor its subsidiaries (whether public or private) may provide financial assistance for the acquisition, subject to very limited exceptions. As such, the facility agreement will usually require the target to re-register as a private company, and for the target group to then provide guarantees and security, within a specified period. In Italy, financial assistance includes grant loans or giving guarantees/security, directly or indirectly, by a company to any of its shareholders or any third parties, to purchase or subscribe for the company's shares. Only limited exceptions apply to the general rule which forbids financial assistance. Financial supporters of the tender
Do financial assistance rules limit the credit support the target can provide?
Marcel Janssen Partner D +31 20 795 34 23
The European loan markets are generally private, with no obligation on borrowers to publicly disclose copies of their facility agreements or summaries of their terms. In most jurisdictions, the position is different on a P2P financing. In the UK, copies of any documents relating to the financing of the offer must be published on a website – usually the target's – promptly following the bidder's announcement of a firm intention to make an offer, and must remain there during the offer period. This could include
To what extent do the financing terms need to be publicly disclosed?
Italy
A scheme involves a court-convened shareholder meeting to consider the proposed acquisition. The scheme can bind all shareholders with only the approval of a majority in number, representing 75% in value, of the shareholders present at that meeting, though it does also require the sanction of the court. In Italy, before launching a tender offer (which can either be voluntary or mandatory by law), typically the bidder will enter into sale and purchase agreements with shareholder(s) representing the majority of the issued share capital of the target company. The effectiveness of those agreements will be conditional upon reaching a minimum level of acceptances, expressed as a percentage of the voting rights of the target company. In the Netherlands, the percentage for a "squeeze-out" following a public offer is 95%, where the bidder must own 95% of the issued capital and 95% of the voting rights. If the offer is approved, the minority shareholders must transfer their shares against payment of an equitable price (billijke prijs) in cash. The equitable price in a voluntary public offer is the price offered by the bidder, provided that 90% of the shares are acquired, otherwise a Dutch court will determine the value of the shares. In certain circumstances, an asset purchase transaction offers an attractive alternative to the statutory scheme as a tool to achieve a quick and effective exit of remaining minority shareholders after a public offer. The facility terms will need to take these variables into account. For example, the length of the certain funds period (see below) will need to reflect the anticipated time period for completing the relevant acquisition process.
offer (or, to deposit cash or readily disposable securities for an equivalent amount). As such, in Italy, the initial P2P financing product is typically a bank guarantee facility rather than a term loan facility. In France, a similar approach applies, as a presenting bank is required to guarantee that the offeror has the available finance to pay the cash consideration payable under the offer in full. Presenting banks typically require a cash guarantee or another form of back-to-back guarantee from the offeror. Only financial intermediaries authorised to offer underwriting services in France can act as presenting banks. In the Netherlands, the bidder must make a public announcement about "certain funds" at or directly after the announcement of the public offer. The "certain funds" announcement must include the ability to raise the bid price in cash or to have taken all reasonable steps to provide some other form of funding. In other jurisdictions, the certain funds obligation is less onerous. For example, in Sweden there is no obligation for a financial adviser to provide a cash confirmation letter, and the financing can be subject to certain conditionality, provided it is publicly disclosed.
offer therefore usually limit their security package to security and guarantees provided by the shareholders of the target and by the promoters of the offer. In France, if the target company is limited by shares (société anonyme, société par actions simplifiée and société en commandite par actions), it is prohibited from granting loans or security interests for the purposes of financing the acquisition of its own shares. In the Netherlands, similar financial assistance rules prevent indebtedness, covenants, liabilities, undertakings, security interests or guarantees created or granted by a public limited company (naamloze vennootschap) from being incurred or granted with a view to the subscription, payment of or acquisition of any of the shares in that company, or in any direct or indirect parent company of that company. Financial assistance rules do not apply to private companies with limited liability.
potentially commercially sensitive information such as any market flex terms agreed between the arranger and the borrower, although it may be possible to obtain dispensation from the obligation to publish these. By contrast, in Italy, there is no obligation to publish copies of the finance documents, though the financing terms do need to be summarised in the offer document. The same principle applies in the Netherlands.
A number of factors ended the prolonged boom in European commercial real estate lending – rising interest rates, increased development costs, supply chain disruptions, increased home working and increased capital expenditure resulting from ESG taxonomy regulations. Many transactions financed in the boom years are reaching or approaching maturity. Many cannot be refinanced at sustainable interest rates. At the same time, there is uncertainty as to how best to address this situation. This article presents an overview of available options and underlying factors to consider for lenders on defaulted lending transactions involving German real estate.
Option
While all situations differ, all have one point in common: a commercial crisis manifesting in loan-to-value or other covenant breaches and, often, an inability to repay/refinance a loan or a default termination.
The starting point of every real estate workout: a crisis
Key features of German real estate financings that affect enforcement options and outcomes include:
Relevance of different insolvency regimes
Dirk-Reiner Voss Partner, Head of Real Estate Germany D +49 30 26 47 31 51
Overview of options
whether the property owner is a German company; whether it is a German limited liability partnership (with a German or non-German general partner); and whether the owner is outside Germany with the only nexus to Germany being the German financed real estate.
Key insolvency considerations
If the property owner or its shareholder are located outside Germany, German law does not govern the insolvency treatment, unless the
Depending on the jurisdictions involved, an insolvency typically has the following effects on a real-estate financing:
Substantive insolvency law issues
An insolvency administrator takes over management of the borrower. An insolvency administrator attempts to claw back prior interest or other payments made by the borrower.
To avoid having to deal with insolvency proceedings, lenders commonly avoid accelerating the loan at all costs. This is often a dangerous strategy if financing cannot be stabilised and the borrower eventually still becomes insolvent. In such cases, lender liability to the borrower's other creditors may arise under German tort law. In addition, payments collected during, what is in effect, a failed restructuring may be clawed back by the insolvency administrator.
Standstills and extensions (with a restructuring opinion?)
German land charges are enforced through forced administration (Zwangsverwaltung) or public auction (Zwangsversteigerung), or a combination of both.
Forced administration captures all "fruits of the land" (including rental income from the property) without clawback risk. Public auction is a court-administered process in which third parties and the creditor can bid for the charged property. This can be a very time-consuming process, requiring thorough preparation.
Enforcing land charges
The enforcement of account pledges is relatively straightforward before an insolvency administration proceeding is in place. However, the lender needs to be aware that in a German insolvency proceeding an account pledge is subject to clawback/legal challenge regarding all
Enforcing account pledges
Lender options
Land charge enforcement requires the original of the land charge deed and related documents. Compulsory waiting periods and preliminary formalities usually mean it takes at least six months before the process can even begin. Depending on whether the goal is forced administration, public auction or both and on the German court district in which the property is located, full enforcement can take one or more additional years to complete. Forced administration is often combined with auction proceedings if there is sufficient cash flow to cover the costs of the proceedings before the auction is held.
Pledges over shares in German companies are enforced through public auction. An appropriation of shares is only capable of being agreed at the time that a share pledge has become enforceable, which requires that the secured claim is due and accelerated. Any earlier agreement between the borrower and the lender is invalid. This means that while the borrower and the lender can always agree a debt-for-equity swap even before a German law share pledge has become enforceable, any such arrangement in the context of the pledge or its documentation is not possible. This effectively means that an enforcement of a German law share pledge is rare and that share pledges are more a function of "defensive security" (i.e. security that is taken to ensure it is not taken by someone else). The situation is substantially different if shares of a non-German company are involved, particularly if the company is incorporated in Luxembourg. In contrast to the situation in Germany, shares over a Luxembourg company can be enforced relatively simply through
Enforcement of share pledges
If control over more than 90% of the shares of the company is shifted (anywhere in the borrower structure), then this triggers real estate transfer tax at the level of the borrower and can further deepen the crisis. If the lender obtains control over a borrower that ultimately becomes subject to German insolvency proceedings, this creates a risk of structural subordination of the lender to all other non-controlling creditors of the borrower.
The lender and the borrower can agree on a private sale of the property either to the lender or, ideally, to a third party. This is a process that is relatively straightforward, but it should be ensured that the purchase price is sufficiently high and can be proven to at least equal the market-value of the property to reduce risks of subsequent legal challenge by an insolvency administrator. Especially, should it not be possible to liquidate the borrower subsequent to a sale and transfer of the property,
Forced property sale
It is also possible to agree on a debt-for-equity swap with the borrower in the process of which the lender, or a person designated by the lender, acquires the shares in the borrower or its parent. However, here the risks that are outlined above regarding real estate transfer tax and structured subordination also apply. While structural subordination may be commercially acceptable if the property and the borrower are stabilised as a result of the debt-for-equity swap, real estate transfer tax applies as a direct cost to the transaction and may or may not be acceptable.
Debt-for-equity swap
A simple option is the sale of the loan to a third party. However, this usually involves substantial write-offs, making this an unattractive option for many lenders.
Loan sale
While insolvency is often time-consuming and costly, it can also prove helpful from a lender perspective. This is because it provides certainty when dealing with a co-operative insolvency administrator who is interested in finding a solution with the lender. Such solutions can be any of the consensual solutions explained above. The most important of these solutions is a sale of the property on the basis of a resolution agreement, also known as "cold administration" (kalte Zwangsverwaltung). The key feature of this approach is that any sale of the property by the borrower cannot later be challenged by an insolvency administrator. The downside of this approach is the insolvency administrator is usually unwilling to give any representations or warranties on the property,
Insolvency
which may reduce the price. Alternatively, the insolvency administrator may consider a transfer of the property to the lender in return for a debt release and a contribution to the insolvency estate (Massebeitrag) towards payment of other insolvency debt and the insolvency administrator's own fees. The lender can then subsequently market and sell the property itself. However, such a process triggers real estate transfer tax on each such transfer, meaning the lender's transfer costs need to be outweighed by the benefits of a later re-marketing (possibly following investments) by the lender. Where the insolvency administrator is not cooperative, the lender still has the option to enforce into its real estate and other available security.
Best outcome
Risks to consider
Standstill and reservation of rights letters Enforcement of account pledges Land charge enforcement through forced administration (Zwangsverwaltung) or court-driven auction (Zwangsversteigerung) Enforcement of share pledges Forced sale of property/debt-to-equity swap Loan sale Insolvency
Insolvency averted; borrower and property stabilised
Subsequent insolvency, with all payments after the standstill letter clawed back In German insolvencies, account pledges may be challenged for all credits to a pledged account made after the insolvency filing (or even after the standstill) Forced administration is expensive, so sale proceeds must be high to justify this Auction results in fire-sale, destroying value, especially in a real estate crisis. Acquisition by lender may be preferable Requires acceleration of secured loan, meaning enforcement usually occurs in a corporate insolvency context with an insolvency administrator involved Only makes sense outside Germany where share appropriation is possible in an insolvency (e.g. in Luxembourg) Clawback risk in any later insolvency, unless sale price demonstrably at market value Sale at a heavy discount often inevitable Insolvency administrator obstructs sale, forcing lender to enforce land charge
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Insolvency administrator co-operates with lenders facilitating property sale via cold administration (kalte Zwangsverwaltung)
Loan sold at a minimal discount
Property value realised outside insolvency without enforcement costs
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Forced administration: enables rent collection without insolvency clawback risks Auction: safe method to either obtain direct control of property or liquidate value
Realisation of credit balance on pledged account
An insolvency administrator takes over management of the borrower. An insolvency administrator attempts to claw back prior interest or other payments made by the borrower. Insolvency moratoria delay security enforcement. A sale of the property is only possible with the insolvency administrator's co-operation, absent which a court-administered auction is the only way to gain control of the property.
As security enforcement usually requires the secured loan to have been accelerated, enforcement usually takes place within a technical insolvency of the borrower. Accordingly, most options have to be considered against the background of a severe crisis or an insolvency of the borrower and/or its shareholders.
"centre of main interest" or an "establishment" under the Recast European Insolvency Regulation (Regulation (EU) 2015/848) 2015 is in Germany. While a "centre of main interest" is not necessarily created by holding German real estate as this requires a "place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties", an "establishment" exists where "any place of operations where a debtor carries out or has carried out in the 3-month period prior to the request to open main insolvency proceedings a non-transitory economic activity with human means and assets". Accordingly, it is likely German insolvency law will be relevant even if the holding structure is not entirely situated in Germany.
Insolvency moratoria delay security enforcement. A sale of the property is only possible with the insolvency administrator's co-operation, absent which a court-administered auction is the only way to gain control of the property.
The only protection against subsequent clawback or lender liability claim is to require the borrower to obtain a restructuring opinion that complies with German accounting standards (IDW S6/S11) and the German Federal Court of Justice's requirements (Bundesgerichtshof) for restructuring opinions. These opinions are expensive, and distressed debtors usually lack the funds to commission them. Accordingly, lenders and borrowers often attempt to proceed without a restructuring opinion, or have to fund it.
money which is credited to the account following the earlier of the borrower's insolvency and the time at which the lender became aware of the borrower's inability to pay.
appropriation and the lender or a trustee acting on its behalf can take the shares and control the company without an administratively burdensome court process. However, in the context of an enforcement of share pledges, additional points should be taken into consideration:
it is important to mitigate clawback and legal challenge risks by ensuring that the transaction falls within the safe-haven of a so called "cash and value equivalent" transaction (Bargeschäft). This requires that the borrower receives immediate (within two weeks of its transfer) and equivalent consideration for the property. Such equivalent consideration can also be a release of a debt obligation, but risks need to be ascertained on an individual basis.
In this note we answer six questions that lenders commonly ask us about Dutch law security. The note focuses on in rem security rights. Under Dutch law, lenders can also take "personal" security in the form of a surety (borgstelling) or a guarantee (garantie).
Under Dutch law, there are two types of in rem security rights: (i) a right of mortgage; and (ii) a right of pledge. A right of mortgage can be created over registered assets such as real estate and related rights to real estate, including a right of superficies, but also over publicly registered aircraft and vessels. A right of pledge can be created over all other assets, such as receivables, title documents and movable assets (usually in a single omnibus deed that covers all relevant collateral). The right of pledge can be either disclosed or undisclosed in the case of receivables, and possessory or non-possessory in the case of movable assets. In principle, all assets capable of being transferred can be made subject to security.
1. What types of security rights are there?
2. What obligations can be secured?
Karsten Hovinga Associate D +31 20 795 31 42
Security interests can only be created to secure monetary payment obligations. It is possible to create third-party security, which can be upstream, cross-stream or downstream. Under Dutch law, security can only be granted to the creditor of the secured claim. In the event security is created in favour of a security agent, or where there are various secured parties, it is common practice to use the so-called "parallel debt" mechanism. A parallel debt is created in the relevant finance document or security agreement, which is equal to and mirrors at all times the principal obligations to be secured. It is important that the parallel debt qualifies as an independent and separate debt and not as a joint creditorship.
A right of mortgage requires a notarial deed, which must be publicly registered. A notarial deed is also required for pledges over shares, while a private deed suffices for pledges over most other types of assets. Powers of attorney are usually issued in connection with a notarial deed, allowing the notary to execute the deed on behalf of the parties involved (as independent third party). Notary (related) fees are typically not significant in relation to the preparation of the documentation itself.
3. Are notarial deeds required?
Future receivables can only be pledged to the extent that they derive from a legal relationship existing at the time of execution of the deed of pledge. To ensure that future receivables are collateralised when they arise, supplemental deeds must be regularly executed and registered with the Dutch Tax Authorities.
4. Can security be granted over future receivables?
In principle, a security right’s ranking is determined by the time of execution of the deed of pledge, or, in the case of a deed of mortgage, the time of its registration with the public land registry (Kadaster). It is possible to change this ranking if both secured parties agree. This agreement must be made in a document executed using the same formalities as the documents under which the security rights themselves were created.
5. How are security interests ranked?
A mortgagee or pledgee is only allowed to enforce its security interests upon the occurrence of a payment default. Rights of mortgage and pledge can be enforced by: (i) a public sale (auction); or (ii) a private sale. A public sale must be conducted in accordance with local practices and applicable standard terms and conditions and takes place before a civil law notary. The competent Dutch court must authorise a private sale. Rights of pledge can also be enforced by collection of the receivables.
6. How can security be enforced?
For more information on taking security in the Netherlands, and in more than 40 other jurisdictions, please see the Dentons Global Taking Security Guide.
Negative attention from US federal authorities can turn a banker's hair white overnight. For this, and other obvious reasons, sanctions clauses in letters of credit (LCs) have been increasingly common over the last 15 years – of late, particularly in confirmations added to LCs. This note compares English and Singapore law on sanctions clauses in LCs by discussing the Singapore Court of Appeal's decision in the Kuvera Resources case [2023] SGCA 28. That case looked at the validity of:
The Singapore Court of Appeal (the SCA) allowed Kuvera's appeal as the confirming bank had not shown, as its objective sanctions clause required, the evidence was that the Omnia was Syrian-owned and thus
The Singapore Court of Appeal's rulings and non-binding statements
Rulings
Ian Clements Partner D +44 20 7246 7093
An LC confirmation could validly contain a sanctions clause that was not in the LC as originally issued and which was not offered to, and accepted by, the beneficiary of the LC confirmation. Implicit in the above ruling, was that the SCA agreed with the High Court that sanctions clauses added to LCs by confirmations could be enforceable even if not given for consideration. Given the article 2 UCP 600 requirement that an LC be "irrevocable", no LC bank could confirm an LC subject to UCP 600 in terms that were not irrevocable (in the sense that term is used in UCP 600).
sanctions clauses included in LC confirmations which did not appear in the LC as issued; and clauses LC banks may seek to invoke if they have:
objective evidence of a sanctions breach (objective clauses); (with or without evidence that would trigger an objective clause) only formed the subjective opinion that a sanctions breach may have occurred or may likely occur (subjective clauses); and decided their internal risk-based/red-flag-based policy means they do not want to take the risk of a possible sanctions breach which may or may not have occurred or be in prospect (policy-based clauses).
The confirming bank under a documentary LC governed by UCP 600 (the LC) included the sanctions clause extracted below (the sanctions clause) in its confirmation. This clause was not in the LC as issued:
The Kuvera case
As the LC's beneficiary, Kuvera presented complying documents to the confirming bank. The confirming bank declined to honour that presentation, stating the transaction did not comply with applicable restrictions or its internal policies designed to ensure sanctions compliance. This was because the confirming bank considered a coal-carrying ship named in the presented documents (the Omnia) was probably owned by a sanctioned entity. Kuvera sued the confirming bank in the High Court of Singapore and lost. Kuvera then appealed to the Singaporean Court of Appeal.
"[The confirming bank] must comply with all sanctions, embargo and other laws and regulations of the U.S. … (“applicable restrictions”). Should documents be presented involving any country, entity, vessel or individual listed in or otherwise subject to any applicable restriction, we shall not be liable for any delay or failure to pay, process or return such documents …".
The SCA had heard arguments over whether the width of the sanctions clause was inconsistent with the confirmation's commercial purpose and thus unenforceable under Singapore law. While the SCA did not need to rule on that issue, because it found that the sanctions clause was an objective clause, it still gave its "provisional" (and non-binding) views. It restricted those views to where the allegedly sanctioned entity was the owner of a vessel named in documents presented under a documentary LC. This was because, in the SCA's view, the beneficiary of the LC and its confirmation would not be involved in the nomination of that vessel, nor able to predict which vessel would be nominated to carry goods to which the LC related.
The SCA's non-binding views on wide sanctions clauses
allowed a confirming bank to dishonour a complying presentation by using a risk-based assessment (rather than an objective assessment) of the evidence; and this enabled the confirming bank to invoke the sanctions clause where it preferred to be sued by the beneficiary of the LC rather than penalised by the sanctioning authorities, the sanctions clause "would most likely be incompatible with the commercial purpose" of the LC confirmation and thus unenforceable.
English law would be likely to take the same or a similar line to the SCA on many issues in this case. However, some differences of approach are likely on the following issues. Construction of sanctions clauses in LCs – the SCA said the sanctions clause had to be strictly construed (and implied it had to be strictly construed against the confirming bank). An English court would be more likely to say that, to be effective, the clause would have to be clear – particularly if the clause were a subjective or policy-based sanctions clause. Clauses rendering an LC confirmation revocable – under article 2 UCP 600 an LC "… is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation". On this basis, the SCA (in effect) held a sanctions clause in a confirmation cannot validly allow the confirming bank to cancel or refuse to honour its obligations under its confirmation unless the clause is triggered by evidence of a relevant sanctions breach, rather than by the confirming bank's subjective views of the likely existence of a breach, or its internal policies for avoiding penalisation by sanctions authorities where there is only a risk of a possible sanctions. The English courts have enforced at least one documentary LC which was expressed to be revocable – though not under a sanctions clause.
An English law perspective
Many involved in trade finance, including the International Chamber of Commerce, strongly oppose subjective and policy-based sanctions clauses. There is a concern these clauses could prevent LCs from fulfilling their vital role as the "lifeblood of international commerce" (as the English courts put it) if LC banks can refuse to honour a complying presentation in highly unpredictable circumstances. By contrast, some LC banks do not see their role as facilitating global trade at the expense of their balance sheets, shareholder value or criminal liability.
Comment
Janice Ngeow Senior Partner D +65 6885 3704
Lee Min Lau Senior Associate D +65 6885 3710
Singapore
subject to US sanctions. Of wider significance, however, were the SCA's rulings and views about the validity of subjective or policy-based sanctions clauses.
The sanctions clause needed to be objectively and strictly construed against the confirming bank, who had the burden of proving the sanctions clause had been triggered. As the sanctions clause was an objective clause, to discharge that burden, the confirming bank needed to show, by admissible evidence, that the Omnia was more likely than not owned by a sanctioned entity. To do this, it was not enough to take a risk or red flag-based approach to the possible ownership of that vessel.
Regarding that situation, the SCA said that, if a sanctions clause:
As to an LC being revocable under a wide sanctions clause, an English court would be more likely to say that, given that article 1 UCP 600 allows parties to an LC or confirmation to modify or exclude any aspect of UCP 600, and that LCs and their confirmations are ultimately commercial contracts, parties who used very clear, unambiguous and prominent language could validly agree a subjective or policy-based sanctions clause even if this produced an LC or confirmation that was (in effect) revocable. Subjective or policy-based clauses unenforceable as inconsistent with the confirmation's commercial purpose – we think it unlikely an English court would rule the commercial purpose of an LC or confirmation meant that parties could not use clear, unambiguous and prominent language to agree subjective or policy-based sanctions clauses. However, where a clause was both subjective or policy-based and unclear or ambiguous, it is arguable an English court could consider, by analogy with the law on exemption clauses, whether the clause was unenforceable as repugnant to the main purpose of the LC or confirmation. This may be a particular risk for bank policy-based clauses. In practice, drafting a wide subjective or policy-based clause that is clear and unambiguous is not an easy task. Nor is use of such clauses guaranteed to maintain or expand an LC bank's market share.
These are market and policy questions which it is not for the civil courts unilaterally to resolve. However, it is interesting that Singapore law appears to take a marginally more "lifeblood of international commerce" approach than English law, which seems to be more aligned with freedom of contract and transparent risk allocation, where the LC uses clear words.
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Stuart Fitzsimmons
