Lending and taking security in Gibraltar: Overview 2015

MULTI-JURISDICTIONAL GUIDE 2015/16 FINANCE

© This article was first published in the Finance Multi-Jurisdictional Guide 2015/16 and is reproduced with the permission of the publisher, Thomson Reuters. The law is stated as at 1 March 2015.

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Lending and taking security in Gibraltar: overview William Rawley and David Borge Ramparts

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OVERVIEW OF THE LENDING MARKET

1. What have been the main trends and important developments in the lending market in your jurisdiction in the last 12 months?

Unlike other European Union countries, Gibraltar has experienced continued positive growth during the period following the financial crisis. The improving global situation is also having a positive impact on the territory.

The new Companies Act 2014 and the Insolvency Act 2011 came into effect on 1 November 2014, see Question 29. Both are seen as very important steps towards modernisation and will increase the attractiveness of Gibraltar as a financial centre.

FORMS OF SECURITY OVER ASSETS Real estate

2. What is considered real estate in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)?

Real estate

Real estate can be land, buildings, or structures fixed to land.

Real estate can be held:

• Freehold (that is, with absolute ownership).

• Leasehold (that is, with ownership for a finite period of time).

The government does not tend to grant freeholds. Freeholds that do exist are historical. Crown lands and property are usually made available on long leasehold terms, usually for 99 or 150 years.

Title to real estate is registered with Land Property Services Limited, a private company contracted by the government to register titles to property.

Common forms of security

The most common forms of security for real estate are:

• Legal mortgage. A mortgage is a charge over property given by a debtor to a creditor as security for a loan. A legal mortgage is the most secure and comprehensive form of security interest. A legal mortgage:

- transfers legal title to the lender;

- prevents the borrower from dealing with the mortgaged asset while it is subject to the mortgage.

Although the borrower enjoys the right to possession of the property, the lender has a right to possession of the property if the borrower defaults on the loan.

• Equitable mortgage. An equitable mortgage arises if some of the formalities required to create a legal mortgage are absent. For example, an equitable mortgage is created:

- by a document that is an agreement to create a mortgage, rather than a mortgage itself;

- where all the assets of a company are granted as security, but some of the formalities to create a mortgage are not complete.

• Floating charge. This can be over the whole, or a class of assets belonging to a company. Where the class of assets includes real estate, it is usual to take a legal charge and a floating charge. A company can deal with the charged assets in the ordinary course of business until the charge crystallises, for example, if the borrower defaults on the loan or is liquidated.

Formalities

A legal mortgage must be both:

• In writing.

• Executed as a deed by the borrower.

A legal mortgage must be registered at Companies House within 30 days. A creditor or liquidator of the company is not bound by a mortgage that is not registered within that time. The company is responsible for registering the charges it creates. It may be fined for failure to do so within the time limit.

The company can apply to court to make a late registration or to rectify registered details.

Equitable mortgages and fixed and floating charges must be in writing and signed by the security provider. Registration must be within 30 days.

Tangible movable property

3. What is considered tangible movable property in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected?

Tangible movable property

Tangible movable property is chattels, and includes any articles that both:

• Can be completely transferred by delivery.

• Are not permanently fixed to land.

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Examples include:

• Plant and machinery.

• Stock and inventory.

• Office equipment. • Furniture.

• Rolling stock, motor vehicles and shipping containers.

• Ships and aircraft.

Common forms of security A lender can take security over financial instruments in the form of:

• Legal mortgages.

• Fixed and floating charges.

• Pledges. Any type of security over a financial instrument may be a financial collateral arrangement if it conforms to the requirements set out in the Financial Collateral Arrangements Act 2004. That Act implemented Directive 2002/47/EC on financial collateral arrangements (Financial Collateral Arrangements Directive).

Formalities

The formalities for mortgages and fixed and floating charges are the same as for immovable property, see Question 2.

There are no registration requirements for pledges. Pledges depend on the pledgee being in possession of the pledged assets.

Financial instruments

4. What are the most common types of financial instrument over which security is granted in your jurisdiction? What are the most common forms of security granted over those instruments? How are they created and perfected?

Financial instruments

Security can be granted over all common types of financial instruments, including:

• Bonds and other debt securities. • Shares, in both certificated and dematerialised form.

• Listed options.

• Warrants.

• Futures. • Units in a collective investment scheme.


Security can be taken over financial instruments in the form of legal mortgages, fixed and floating charges and pledges (see Questions 2 and 3).

Security over a financial instrument may be a financial collateral arrangement, see Question 2.

Formalities The formalities for security over financial instruments are usually the same as for security over other types of asset. Security agreements must be in writing. Mortgages and charges that contain a power of attorney should be executed as deeds and signed by the giver of the security. Executed documents should be registered at Companies House within 30 days.

Security arrangements benefit from the provisions of the Financial Collateral Arrangements Act 2014 if they fall within its criteria. In summary, the criteria are:

• The counterparties must be any one of the following:

- a public authority;

- a central bank, or the European Central Bank for International Settlements;

- an applicable bank or credit institution;

- an investment firm licenced under the Financial Services (Markets in Financial Instruments) Act 2006 or EEA service equivalent;

- a financial institution;

- an insurance company licensed and having its head office in Gibraltar;

- UCITS;

- a fund management company;

- a central counterparty, settlement agent or clearing house; or

- any other person other than a natural person. A person includes an unincorporated firm or partnership, but in this case, the other party must fall under one of the bullets above.

• The collateral must be financial in nature and consist of either:

- cash;

- instruments; or - credit claims, for example, loans made by a credit institution.

Collateral must be evidenced in writing. It is also vital that the financial collateral is provided. This means that the collateral must be delivered, transferred, held, registered or otherwise designated so that it is in the possession or under the control of the collateral-taker or a person acting on its behalf.

There are no formal requirements for documenting the security, except that it must be in writing. There is no requirement to register the security.

A security arrangement that qualifies as a financial collateral arrangement is always valid and enforceable in accordance with its terms. Financial collateral arrangements are unaffected by conflicting legislation, winding-up proceedings and reorganisation measures affecting the collateral provider or collateral taker.

In contrast, enforcement of other forms of security arrangements may be stayed if either:

• 75% of the creditors vote in favour of a stay on a reorganisation.

• The court grants a winding-up order.

However, in the event of a default, a valid financial collateral arrangement is not subject to either of these bars to enforcing a sale of security.

Claims and receivables

5. What are the most common types of claims and receivables over which security is granted in your jurisdiction? What are the most common forms of security granted over claims and receivables? How are they created and perfected?

Claims and receivables

Examples of claims and receivables include:

• Debts.

• Rights under contracts, for the payment of money or the performance of a non-financial obligation.

• Claims under insurance contracts.


Security assignments and charges are common forms of security.


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Formalities

A legal assignment of a chose in action, or other asset, including a charge must comply with all of the following (Contract and Tort Act):

• Be in writing and signed by the assignor (or borrower).

• Give express notice of the assignment to the debtor.

• Be absolute and unconditional.

• Not purport to be by way of charge only.

To perfect the assignment:

• Where possible, notice should be given to the party owing the debt.

• Companies must ensure that any charges created are registered at Companies House within 30 days. Failure to register a charge at Companies House means it will be void on an insolvency and not bind other creditors.

Cash deposits

6. What are the most common forms of security over cash deposits? How are they created and perfected?


Security interests over cash deposits are usually in the form of a charge over the account.

Formalities

A charge over an account is likely be a fixed charge if both the following apply:

• It prohibits and prevents withdrawals.

• It generally restricts the account holder from having any control over the account.

A charge over an account where the accountholder retains the ability to withdraw money is likely to be a floating charge.

Charges must be in writing and signed by the borrower. Most charges are executed as deeds and must be registered within 30 days at Companies House.

Intellectual property

7. What are the most common types of intellectual property over which security is granted in your jurisdiction? What are the most common forms of security granted over intellectual property? How are they created and perfected?

Intellectual property

Security can be granted over:

• Trade marks.

• Design rights.

• Copyright.

• Patents.


Security can be in the form of a:

• Mortgage (usually as an assignment).

• Fixed or floating charge.

As the grant of a mortgage requires the right to be transferred to the lender, the lender normally gives an exclusive licence to the borrower so that the borrower can enjoy the right.

Formalities Security over most intellectual property rights must be:

• In writing.

• Signed by, or on behalf of, the assignor.

Security agreements over intellectual property are commonly executed as a deed.

Registration must take place within 30 days at Companies House.

Problem assets

8. Are there types of assets over which security cannot be granted or can only be granted with difficulty? Which assets are difficult or problematic when security is granted over them?

Future assets

Security can be granted over future assets, but almost certainly as a floating charge as:

• It would be impossible to put a mortgage in place, as there would be no assets to transfer.

• A fixed charge would be precluded by the requirement for control.

Fungible assets

Security is usually granted over fungible assets by securing the account in which the assets are held. The account can be secured either by a mortgage, or a fixed charge. Security over other fungible assets that are mixed with assets that are not secured will generally give rise to a floating charge.

Other assets

Security may be contractually barred in some cases. For example, a party who has agreed to a lock-in obligation is not permitted to sell, transfer, or charge an asset. The effectiveness of lock-in provisions depends largely on the drafting.

RELEASE OF SECURITY OVER ASSETS

9. How are common forms of security released? Are any formalities required?

Security interests are usually released by deed. The deed of release should be filed at Companies House. The company's register of charges should also be amended to reflect the release.

SPECIAL PURPOSE VEHICLES (SPVS) IN SECURED LENDING

10. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the borrower's assets, rather than to take direct security over those assets?

Financing structures where security is given over the shares of an SPV borrower are used.


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QUASI-SECURITY

11. What types of quasi-security structures are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest?

Sale and leaseback

Sale and leaseback is commonly used in property transactions and also in relation to plant and machinery.

Factoring Debt factoring is not common. English law usually governs contracts where debt factors do offer financing.

Hire purchase

Hire purchase contracts (HPCs) provide the lessee with a right to buy the leased goods or equipment at the end of the contractual term. A risk of an HPC is that a bona fide buyer without notice of the HPC could theoretically acquire title to the leased goods before title has transferred to the lessee.

The Hire Purchase Act 1957 applies to hire purchase contracts that do not exceed GB£300 in value.

Retention of title

A retention of title provision in a contract for the sale of goods means that the seller retains legal ownership of the goods until the buyer fulfils certain obligations. The obligation is usually the payment of the purchase price.

Other structures

Contractual set-off is permissible if it does not conflict with insolvency law. Set-off on insolvency is permitted provided there is mutuality of debts.

Close-out netting arrangements are specifically contemplated in the Financial Collateral Arrangements Act, see Question 4.

GUARANTEES

12. Are guarantees commonly used in your jurisdiction? How are they created?

Guarantees are common. Guarantees must be in writing and signed by the guarantor.

The beneficiary of the guarantee should give consideration for the guarantee, unless the guarantee is executed as a deed.

RISK AREAS FOR LENDERS

13. Do any laws affect the validity of a loan, security or guarantee (or the terms on which they are made or agreed)?

Financial assistance

It is generally prohibited to buy a target company using bank financing that is secured and guaranteed by the target company itself. However, there are a number of exceptions that allow greater flexibility than, for example, in the UK.

Corporate benefit UK common law and equitable principles apply as far as they are applicable to the circumstances of Gibraltar. Accordingly, company directors:

• Have duties of care, skill and diligence. • Have fiduciary duties to act in good faith, in the company's

interests.

• Have duties to avoid conflicts of interest.

• Must not misapply the company's property.

A company may apply to have a transaction set aside if both:

• The directors of the company, in breach of their fiduciary obligations, approve a transaction that is of no corporate benefit.

• The transacting third party is aware of the breach of duty.

Loans to directors A company can make a loan to one of its directors, provided the loan is not used to buy shares in the company.

14. Can a lender be liable under environmental laws for the actions of a borrower, security provider or guarantor?

A lender is not liable for breaching environmental law by holding security or advancing a loan. However, a lender may be liable for a breach if both of the following apply:

• The lender becomes a mortgagee in possession and so takes title to a property.

• A breach occurs at the time the lender is in possession.

STRUCTURING THE PRIORITY OF DEBTS

15. What methods of subordination are there?

Contractual subordination

Contractual subordination can be achieved either by:

• A creditor or creditors entering into a subordination deed and agreeing to subordinate their interests to creditors.

• Creditors entering into an inter-creditor agreement in which they agree the terms of subordination.

Structural subordination A senior creditor, who lends to an operating subsidiary of a holding company, structurally subordinates the junior creditors who have lent to the holding company. In an insolvency event, creditors of the holding company are subordinated to the creditors of the subsidiary.

Inter-creditor arrangements

This is a form of contractual subordination.

DEBT TRADING AND TRANSFER MECHANISMS

16. Is debt traded in your jurisdiction and what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt?

The most common way of trading debt is by:

• Assignment, where a lender assigns its rights under a loan to a new lender. The original lender only transfers its rights, for example, to receive loan repayment and interest payments. The lender is still liable for any obligations under the loan. The borrower may need to be notified of the assignment or consent to it.

• Novation, which is a legal transfer of the all the rights and obligations of a contract. The transferee steps into the shoes of the transferor. Most syndicated loans provide for novation. A security trustee generally holds the security for a syndicated loan for the benefit of lenders from time to time.


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• Sub-participation, where the lender sub-contracts some or all of its risk. The lender of record does not change in sub-participation arrangements. The contractual relationship is between the buyer of the risk and the lender of record. There is no contractual relationship between the borrower and the buyer. The lender of record continues to manage the relationship with the borrower.

The sub-participation agreement sets out the amount of loan that is traded and the remuneration for the participation. The sub-participant can fund or partially fund the lender of record. The arrangement can also be unfunded. It is usual for sub-participation agreements to follow the Loan Markets Association standard form, although bespoke credit swap style documents are increasingly seen.

The main risks associated with participation are credit risks between the parties to the sub-participation. The lender of record bears a credit risk if the sub-participant defaults and the arrangement is not fully funded. Typically, if sub-participants provide any funding, they bear a credit risk on the lender.

AGENT AND TRUST CONCEPTS

17. Is the agent concept (such as a facility agent under a syndicated loan) recognised in your jurisdiction?

The concept of agency is recognised.

18. Is the trust concept recognised in your jurisdiction?

Trusts are recognised and used.

ENFORCEMENT OF SECURITY INTERESTS AND BORROWER INSOLVENCY

19. What are the circumstances in which a lender can enforce its loan, guarantee or security interest? What requirements must the lender comply with?

Loan agreements typically set out the circumstances in which lenders can demand repayment. Although some loans are repayable on demand, most require an event of default before they can be accelerated and enforced.

Security documents typically set out when security can be enforced, for example on loan default or acceleration.

Guarantees are usually enforceable if the borrower defaults on a guaranteed obligation.

Methods of enforcement

20. How are the main types of security interest usually enforced? What requirements must a lender comply with?

The method of enforcement depends on the type of secured asset. Generally, security over real estate, movable assets or intellectual property rights is realised by way of forced private sale.

Rescue, reorganisation and insolvency

21. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? How do they affect a lender's rights to enforce its loan, guarantee or security?

Creditors and members of a company can enter into an arrangement with the company's creditors to rehabilitate the company.

An arrangement can:

• Cancel all or any part of, or vary, the liability of the company.

• Vary the rights of the company's creditors or the terms of a debt.

• Include any other provision that may be prescribed by the Insolvency Rules.

The company must appoint a suitable insolvency practitioner to become the "Interim Supervisor", who must then prepare a report for the creditors that details the proposed arrangement. The arrangement must be sanctioned if at least 75% of the creditors agree to it.

The control of the company remains with the company's directors unless the company goes into liquidation. If liquidation occurs, control is transferred to a liquidator or provisional liquidator.

There is no statutory time frame for arrangement procedures. The arrangement or compromise ends when all of its terms have been satisfied. The debtor company continues to exist, unless it is wound up.

22. How does the start of insolvency procedures affect a lender's rights to enforce its loan, guarantee or security?

A winding-up order or appointment of a provisional liquidator results in a mandatory stay of proceedings being brought against the company. However, the court can grant leave to bring proceedings, on terms that it may impose.

23. What transactions involving loans, guarantees, or security interests can be made void if the borrower, guarantor or security provider becomes insolvent?

If a company has entered liquidation or administration, the following voidable transactions can be set aside (Insolvency Act 2011):

• Unfair preferences: a transaction entered into by a company two years prior to the onset of insolvency that has the effect and dominant intention of preferring one creditor over other creditors of the company.

• Undervalue transactions: a transaction entered into by a company two years prior to the onset of insolvency where no or inadequate consideration is given to the company.

• Voidable floating charges: certain floating charges created two years prior to the onset of insolvency.

• Extortionate credit transactions: a transaction involving the provision of credit to the company entered into two years prior to the onset of insolvency that involve grossly exorbitant payments or otherwise grossly contravene ordinary principles of fair trading.


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24. In what order are creditors paid on the borrower's insolvency?

On a debtor's insolvency, creditors and contributories rank as follows:

• Fixed charge holders.

• Remuneration of liquidator.

• Preferred creditors.

• Floating charge holders.

• Unsecured creditors.

• Shareholders.

Any electronic money safeguarded by an authorised or small e-money lender must, in the event of insolvency, be paid to the relevant e-money holders in priority to all other creditors. There is an exception for any fixed charges and the liquidator's costs of distributing the asset pool.

The Insolvency Rules 2014 sets out the priority for payment of preferred creditors. In summary these are:

• Certain specified taxes due to the Gibraltar Government not exceeding GB£5000.

• Wages or salary due to employees not exceeding GB£10,000.

• Certain employee pension and medical insurance contributions not exceeding GB£5000 per employee.

• Social security contributions payable by a company up to an amount not exceeding GB£10,000.

The debts owed to preferred creditors rank equally and must be paid in full unless there are insufficient assets to meet them. In that case, the debts are reduced in the proportions set out in the Companies Act.

A security interest must be registered within 30 days at Companies House, or it will be void against the liquidator and any creditor of the company.

CROSS-BORDER ISSUES ON LOANS

25. Are there restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders?

There are no restrictions.

26. Are there exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

There are no exchange controls.

TAXES AND FEES ON LOANS, GUARANTEES AND SECURITY INTERESTS

27. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security interest?

Documentary taxes

Stamp duty is payable on real estate transactions as follows:

• Property value of up to GB£200,000 (GB£250,000 for first or second-time buyers): Nil.

• Property value of GB£200,000 (GB£250,000 for first or second-time buyers) to GB£350,000: 2% on the first GB£250,000 and 5.5% on the balance.

• Property value exceeding GB£350,000: 3% on the first GB£350,000 and 3.5% on the balance.

If a company creates or increases share capital, or issues loan capital, it must pay stamp duty at a flat rate of GB£10.

Registration fees

A fee of GB£75 must be paid at Companies House to register or submit details relating to a charge or any other forms of security.

28. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security interest?

As the cost of taxes and fees is low, there is little need for mitigation strategies.

REFORM

29. Are there any proposals for reform?

The Insolvency Act 2011 came into force on 1 November 2014. The new act modernises Gibraltar's out-dated insolvency and bankruptcy laws. The key features of the new legislation are:

• Greater protection for creditors of insolvent companies.

• More options for companies in financial distress, for example the company voluntary arrangement.

• Creditors are able to provide a receiver and company administrator. The procedures set out in the Insolvency Act will encourage companies to grant floating charges over their assets to creditors. This reduces the risk of an administration order being made against the company if they default on any borrowing.

• A liquidator can challenge a wider variety of defined voidable transactions over a longer period.

• The court has additional power to disqualify directors, liquidators, receivers and insolvency practitioners.

• Directors can be pursued for their personal assets if found liable for continuing to trade when they either knew, or ought to have known, that there was no reasonable prospect of the company avoiding going into liquidation.

• Companies who wish to borrow will be required to provide a "worst case" plan to potential creditors for repayment of funds.

The Companies Act 2014 also came into effect on 1 November 2014. As with the Insolvency Act, the new Companies Act represents a major change to company law and implements changes and improvements in a wide variety of areas, including:

• The provision of updated model articles.

• The protection of shareholders against unfair prejudice. • Charge registration requirements and formalities.

• Electronic communications (including via the web).

• Derivative actions.

• Arrangements and reconstructions. • Mergers.

• Corporate liquidation.


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ONLINE RESOURCES

Finance Centre Department

W www.gibraltar.gov.gi/finance-centre

Description. The Finance Centre Department is responsible for:

• Advising the Finance Minister on all financial services policy matters.

• Liaising with the private sector and regulator in Gibraltar.

• Financial services legislation.

• Co-ordination of communication relating to strategic initiatives involving the IMF, OECD, EU.

• Other financial services-related matters.

Financial Services Commission

W www.fsc.gi

Description. The Financial Services Commission is the statutory body responsible for financial services in Gibraltar.

Gibraltar legislation

W www.gibraltarlaws.gov.gi

Description. This official website contains all Gibraltar primary and secondary legislation consolidated to date.

EU legislation

W http://eur-lex.europa.eu

Description. This official website has all EU legislation and other public documentation in the 23 official languages of the EU.

Practical Law Contributor profiles

William Rawley, Solicitor

Ramparts T +350 200 68454 F +350 200 68453 E [email protected] W www.ramparts.eu

Professional qualifications. England and Wales, Solicitor, 1996; Hong Kong, Solicitor, 1997; Gibraltar, Solicitor, 2015

Areas of practice. Finance and capital markets; derivatives; commercial; corporate.

Non-professional qualifications. FSA Unit 1 exam; Legal Practice Course, 1993

Languages English, French, Spanish

David Borge, Associate

Ramparts T +350 200 68450 F +350 200 68453 E [email protected] W www.ramparts.eu

Professional qualifications. England and Wales, Solicitor, 2012; Gibraltar, Solicitor, 2013

Areas of practice. Tax; gaming; payment services.

Non-professional qualifications. Pharmacy MPharm (Hons), Cardiff University, 2002; Legal Practice Course, 2010

Languages. English and Spanish

Lending and taking security in Gibraltar: Overview 2015

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