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Project Finance 2020A practical cross-border insight into project finance

Ninth Edition

Featuring contributions from:

Abuka & Partners

Allen & Gledhill LLP

Allen & Gledhill (Myanmar) Co., Ltd.

Arthur Cox

ASP, Sociedade de Advogados, RL

BarentsKrans

Brigard Urrutia

Canales

Cirio Advokatbyrå AB

Criales & Urcullo Abogados

Cyril Amarchand Mangaldas

Dal Pozzo Advogados

Dentons UK and Middle East LLP

Flor & Hurtado, Abogados

GB2A AVOCATS

Global Law Office

Gorrissen Federspiel

Guilherme Daniel & Associados

Kantenwein

Lee and Li, Attorneys-at-Law

Milbank LLP

Mori Hamada & Matsumoto

N. Dowuona & Company

Oraro & Company Advocates

Prager Dreifuss Ltd.

Rahmat Lim & Partners

Sardelas Petsa Law Firm

Soemadipradja & Taher

Tesenyi & Partners

Tshisevhe Gwina Ratshimbilani Inc.

VdA

Project Finance 2020Ninth Edition

Contributing Editor:

John DewarMilbank LLP

©2020 Global Legal Group Limited. All rights reserved. Unauthorised reproduction by any means, digital or analogue, in whole or in part, is strictly forbidden.

DisclaimerThis publication is for general information purposes only. It does not purport to provide comprehen-sive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

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Table of Contents

Expert Chapters

Q&A Chapters

1

8

Why the World Needs Multi-Sourced Project Financings (and Project Finance Lawyers…)John Dewar, Milbank LLP

Project Financing in Emerging Markets: Four Pertinent Issues That Can Affect the Success of a ProjectHoward Barrie, Tom Guilfoyle & Dominic Spacie, Dentons UK and Middle East LLP

14 AngolaVdA: Manuel ProtásioASP, Sociedade de Advogados, RL: Vanusa Gomes

24 BoliviaCriales & Urcullo Abogados: Adrián Barrenechea B. & José A. Criales

149 IndonesiaSoemadipradja & Taher: Rahmat Soemadipradja, Oene Marseille, Aris Prasetiyo & Emalia Achmadi

157 IrelandArthur Cox: Matt Dunn & Charlotte Upton

33 BrazilDal Pozzo Advogados: Augusto Neves Dal Pozzo & Renan Marcondes Facchinatto

40 ChinaGlobal Law Office: Dr. Xin Zhang & Shuhui Luo

49 ColombiaBrigard Urrutia: Manuel Fernando Quinche & César Felipe Rodríguez

61 DenmarkGorrissen Federspiel: Morten Nybom Bethe & Tina Herbing

70 EcuadorFlor & Hurtado, Abogados: Mario A. Flor & Alejandro Pérez Arellano

80 England & WalesMilbank LLP: John Dewar & Munib Hussain

98 FranceGB2A AVOCATS: Grégory Berkovicz & Pascal Deniau

107 GermanyKantenwein: Marcus van Bevern & Sven Ceranowski

115 GhanaN. Dowuona & Company: NanaAma Botchway & Akosua Achiaa Akobour Debrah

124 GreeceSardelas Petsa Law Firm: Konstantina (Nantia) Kalogiannidi & Katerina Limnaiou

132 HungaryTesenyi & Partners: Gergely Brassnyó & Balázs Kálmán

169 JapanMori Hamada & Matsumoto: Yusuke Murakami & Kei Shirakawa

178 KenyaOraro & Company Advocates: Pamella Ager & James K. Kituku

189 MalaysiaRahmat Lim & Partners: Dzuhairi bin Jaafar Thani & Syed Rashid bin Rahim Alsree

201 MexicoCanales: Emilio Sáenz, Ana C. Decanini & Bernardo Canales Fausti

208 MozambiqueVdA: Teresa Empis FalcãoGuilherme Daniel & Associados: Guilherme Daniel

218 MyanmarAllen & Gledhill (Myanmar) Co., Ltd.: Minn Naing Oo & Lee Jun Yee

226 NetherlandsBarentsKrans: Jason van de Pol

236 NigeriaAbuka & Partners: Patrick C. Abuka & Sunday Edward, Esq.

246 PortugalVdA: Teresa Empis Falcão & Ana Luís de Sousa

256 SingaporeAllen & Gledhill LLP: Kok Chee Wai & Kelvin Wong

266 South AfricaTshisevhe Gwina Ratshimbilani Inc.: Eduan Kapp

139 IndiaCyril Amarchand Mangaldas: Santosh Janakiram & Surya Sreenivasan

278 SwedenCirio Advokatbyrå AB: Jesper Johansson & Fredrik Eliasson

286 SwitzerlandPrager Dreifuss Ltd.: Daniel Hayek & Mark Meili

294 TaiwanLee and Li, Attorneys-at-Law: Hsin-Lan Hsu & Pauline Wang

304 USAMilbank LLP: Daniel J. Michalchuk & Richard M. Hillman

Welcome

From the PublisherDear Reader,

Welcome to the ninth edition of The International Comparative Legal Guide to: Project Finance, published by Global Legal Group.

This publication provides corporate counsel and international practitioners with comprehensive jurisdiction-by-jurisdiction guidance to project finance laws and regula-tions around the world, and is also available at www.iclg.com.

Two expert chapters provide insight into why the world needs multi-sourced project financings; and four issues that can affect the success of a project in emerging markets.

The question and answer chapters, which in this edition cover 31 jurisdictions, provide detailed answers to common questions raised by professionals dealing with project finance laws and regulations.

As always, this publication has been written by leading project finance lawyers and industry specialists, for whose invaluable contributions the editors and publishers are extremely grateful.

Global Legal Group would also like to extend special thanks to contributing editor John Dewar of Milbank LLP for his leadership, support and expertise in bringing this project to fruition.

Rory SmithGroup PublisherGlobal Legal Group

Project Finance 2020

Chapter 1 1

Why the World Needs Multi-Sourced Project Financings (and Project Finance Lawyers…)

Milbank LLP John Dewar

© Published and reproduced with kind permission by Global Legal Group Ltd, London

The Importance of Multi-Sourced Financing SolutionsA sponsor’s ability to procure financing on acceptable economic terms will have a significant impact on the profitability (and in some cases viability) of a project. The primary goal of a sponsor will always be to identify the cheapest source of financing avail-able and, from the outset of a project, a sponsor will focus substantial effort on assessing the financial markets in order to identify the optimal sources of financing for its project. The availability and cost to a sponsor of its financing will be dependent on a number of factors, such as:■ theproject’slocation(forexample,howliquidarethelocal

commercial banks in that country and are there DFIs with a particular focus on that region?);

■ theproject’scontractors(arethepartiesconstructingtheproject able to benefit from the support of their country’s ECA?);

■ the industry sector for that project (is the project usingtried and tested technology, in which case the perceived risk to the lenders will be lower?);

■ theidentityofthesponsor(doesthesponsorhaveatrackrecord of successfully developing projects on time and on budget?); and

■ theprocuringgovernmentauthority(isthereclearpoliticalsupport for this project?).

In today’s project finance market, regardless of the identity of the sponsor or the robustness of a project’s predicted future reve-nues,large-scaleorcomplexprojectswillalmostalwaysrequirea sponsor to combine financing from a number of different sources in order to achieve a fully funded finance plan. As onemightexpect,thediversityoffinanceandfinancingstruc-tures has meant that the accompanying legal issues in multi-sourcedprojectfinancingshavebecomeincreasinglycomplex.Notwithstanding this complexity, these new structures havebeen welcomed and integrated into the project finance market, and it is today seen as normal to have such diverse funding sources form part of the financing plan for a large-scale project financing. In this innovative and creative market, project financelawyersareintheuniqueandcrucialpositionofbeingable to advise their clients, whether sponsors or lenders, as to how they can optimise the structuring of their projects so as to maximisetheiraccesstodiversepoolsoffinance.

Commercial BanksCommercial bank debt has historically been the main source of finance for projects. However, since the onset of the finan-cial crisis in 2007, commercial banks (with some notable

IntroductionProject financing has evolved significantly since it was first used to finance maritime operations and infrastructure developments in ancient Greece and Rome. Its modern incarnation in the 1980s was as a tool, used principally by commercial banks, to finance the construction of large-scale infrastructure projects in North America andEurope. Theproject financing techniquesdevel-oped in the 1980s in North America and Europe were subse-quentlyhonedinthe1990sintheemergingmarketsoftheMiddleEast, Latin America and Asia; however, despite this geograph-ical shift, project finance lenders and sponsors (the term used to describe the ultimate owner(s) of a project company) remained primarily based in (or near) Tokyo, London or New York. In recent years the concentration of project finance lenders and sponsors has been notably diluted as a far wider range of lenders and sponsors located all over the world have now become active participants in the market. Increased pressure on commercial banks (the traditional source of project finance debt) resulting from the ongoing financial crisis and the application of regulatory capitaladequacyrequirementssuchastheBaselIIIstandards,hasmade it harder of late for sponsors to raise finance for their large-scale projects without including a broad range of lending institu-tions from all over the world in their financing plans.

Notwithstanding the constraint on the availability of credit from commercial banks, the market continues to see signif-icant levels of activity on projects of ever-increasing size and complexity. That this level of activity can occur is possible,thankfully, due to a number of factors:■ the increasinglycentral role takenbyexportcreditagen-

cies (ECAs) and development finance institutions (DFIs) in financing projects in emerging markets and, increas-ingly, even in more developed countries;

■ theemergenceofcreativesolutionsbysponsorstofillthefundinggapleftbytheabsenceofliquidityinthecommer-cial bank market (such as subordinated debt/second lien and mini-perm structures);

■ where possible, accessing Islamic finance (it would nowbe rare not to find an Islamic finance tranche in multi-sourcedfinancingsofprojectsintheMiddleEast);

■ the possibility of incorporating project bonds into thecapital structure, either from the outset or as a refinancing option; and

■ theintrinsicvalueofthefirmfoundationsthatthedisci-pline of project financing imposes on the stakeholders (such as extensive due diligence, strong collateral pack-ages, transparent financial structures and bankable risk allocation), which have meant that the project finance market has remained a viable option for the financing of large infrastructure projects around the world.

2 Why the World Needs Multi-Sourced Project Financings

Project Finance 2020© Published and reproduced with kind permission by Global Legal Group Ltd, London

many of the Gulf Cooperation Council (GCC) countries in the MiddleEast),theyareoftenkeyparticipantsinprojectfinanc-ingsinthatcountry.Mostlarge-scaleprojectfinancingsintheMiddle East region have significant participations from localcommercial banks who have lower funding costs than, and do not suffer from the same regulatory constraints as, their inter-nationalcounterpartsandareconsequentlyabletooffercheaperloans with longer tenors. However, the downward pressure on global oil prices has reportedly had an effect on the liquiditylevels of commercial banks in oil-rich jurisdictions (e.g. several of the GCC members).

Mini-perm

The inability of many international commercial banks, in particular the U.S. and European banks, to provide long-term debt, has led to an increased focus on “mini-perm” structures. “Mini-perm” structures (which have long been common inNorth American project financings) enable commercial banks that are unable to offer long-term tenors to participate in financ-ings through the provision of loans with much shorter tenors. Such “mini-perm” loans will cover the construction phase of a project and, typically, a four- or five-year period after project completion. There are two types of “mini-perm”: “hard” and “soft”. A “hardmini-perm” requires sponsors to take 100%of the refinancing risk since, if a refinancing does not occur by a certain date, this triggers an event of default under the loan documentation. A “soft mini-perm” differs in that the spon-sors are incentivised to refinance because the project company becomes subject to increasingly onerous financing terms (such as an increase in the margins on the loans, cash-sweeps and/or prohibitions on dividends and other distributions to the spon-sors).Marketsentimentissplitonthelong-termviabilityofthe“mini-perm”, as both commercial banks and sponsors remain waryofrefinancingrisk.Manycommentatorstaketheviewthata “mini-perm” structure is unlikely to be successful unless there is clear evidence that the project will be able to access the capital markets once it becomes operational (which, as we discuss below,willusuallyrequiretheprojecttobeabletoobtainatleastaBBB+creditrating).Thatsaid,ifacommercialbankjudgesthat a project may be able to access the capital markets at a future stage, it may be incentivised to participate in the initial financing so as to try to position itself to be in pole position to lead a debt capital market refinancing.

Future prospects

Notwithstanding that project finance lending from interna-tional commercial banks (as a percentage of the overall project debt) may be smaller than that seen in previous years, there can benoquestionthatinternationalcommercialbanks,withtheirhugedepthofglobalprojectfinanceexperienceandknow-how,still have an important role to play in the project finance market. ECAs, now key players in any major project financing, will often prefer to finance a project alongside an international commer-cial bank (regardless of the size of that bank’s participation) so as to obtain a degree of comfort that full due diligence on the project has also been undertaken by an international commer-cial bankwith expertise in that industry sectoror geographicregion, and that the project’s risks are regarded by the private-sector debt market as “bankable”. As a result, co-financings of projects by commercial banks, ECAs and DFIs have become a standard feature of the cross-border project finance market.

exceptions) have, in recent years, found their ability to offercompetitive pricing and long-term tenors severely constrained. That said, recent commercial bank liquidity levels (fuelled bymonetarystimulussuchasquantitativeeasingbyanumberofcentral banks) have provided project sponsors with the oppor-tunity to finance and re-finance their projects at more competi-tive interest rates and on more favourable terms and conditions. Loans from commercial banks remain an attractive option for sponsors due to the commercial banks’ project finance expe-rience, their appetite for cross-border financings, the funding flexibilitytheyhaveinmanagingconstructiondrawdownsched-ules and multi-currency draws, and their capacity to be a posi-tive and responsive partner during the life of the project.

Regulatory restrictions

Even prior to the financial crisis, any commercial bank’s deci-sion to participate in a project financing would have been influ-enced by the treatment of its loans by the regulatory framework to which it is subject. One of the primary factors for recent credit constraints in the commercial bank market has been the U.S. and European regulatory response to the downturn in the global financial markets. U.S. and European commercial banks (who traditionally have been very active participants in project financings all around the world) have, in recent years, found it more challenging to participate in project financings, due to an increased regulatoryburden focusingon capital adequacy andminimumcapitalrequirements.

Commercial bank liquidity

The traditional project finance funding model developed in the 1980s saw projects being funded by international commercial banks which would often hold the loans they had originated until they were repaid. During the 1990s it became much less common for a commercial bank originating a loan to hold that exposureinthelongterm.Instead,itbecamethenormfororig-inatinglenderstoquicklydistributetheirbookedloansinorderto create space on their balance sheet, thereby enabling them to participate in further financings. Prior to the downturn in the banking market in 2007, commercial bank activity in the project finance market was high, in part because there was a wealthofoptionsforcommercialbankstodistributetheirexpo-sure, whether through syndication, secondary market sales or, to alesserextent,securitisation.

The recent lack of options for commercial banks to distribute their booked loans and create space on their balance sheet, combined with high internal funding costs and increased regu-latory constraints, hasmeant that,with the notable exceptionof Japanese commercial banks, international commercial banks have struggled to remain competitive in terms of pricing and tenor in the global project finance market. This looks set to continue for the foreseeable future.

Local commercial banks

In countries where there is a high level of commercial and polit-ical risk, local commercial banks are likely to figure promi-nently in a sponsor’s financing plan as they can play an impor-tant role in providing comfort to their co-lenders through their knowledge of the local regulatory system and political envi-ronment. In addition, in jurisdictions where local commercial bankshaveexperiencedrelativelysignificant liquidity (suchas

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■ thosethatarealsoabletolenddirectly(forexample,theExport-Import Bank of the United States (U.S. Ex-ImBank), the Japan Bank for International Cooperation( JBIC) and the Export-Import Bank of Korea (KoreaEximbank)).

Annual lending from ECAs remains well above pre-finan-cial crisis levels, and increasingly ECAs are being seen co-fi-nancing with other ECAs, including those that may tradition-ally have been viewed as competitors. An ECA’s ability to make direct loans is a particular commercial advantage to its country’s exportersas, following thefinancialcrisis, regulatorychangeshave made ECA-backed loans less attractive to commercial banks, which has had the effect of shortening the tenors and raising margins on the ECA-backed loans that commercial banks are able to provide. Unsurprisingly, a number of ECAs, including that of theUnitedKingdom (UKExportFinance),which did not have the capability to provide direct loans at the timeofthefinancialcrisis,havesubsequentlyestablisheddirectlending capabilities. Other financing vehicles, including those tied to fund investments, capital market issuances (including ECA-wrappedbonds),anddirectequityinvestments,havealsogained prominence in recent years within the ECA financing arsenals.

DFIs

DFIs play a crucial role in providing credit and assistance to projects in developing countries where the political or credit risk is such that commercial banks are unable to lend to those projects,orwhereexportcontentisnotsufficientforanECAfinancing(forexample,whereaprojectentailsasubstantialcivilworks component). DFIs differ to ECAs in that, rather than promoting the supply of goods and services from their country of origin, they are financial institutions whose purpose is to promote social and economic development. As a corollary, a DFI will seek to ensure that any project which it finances meets specific environmental and sustainability standards (as will an ECA).

DFIs can be divided into two categories – bilateral devel-opment banks and multilateral development banks. A bilat-eral development bank is created by the government of a single country and is solely funded by that government. European bilateral development banks such as the French development agency, Promotion et Participation pour la Coopération Économique (Proparco), the German development institution, Deutsche Investitions und Entwicklungsgesellschaft mbH (DEG) and the Dutch development bank, Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO)are regularparticipants in theproject finance market. Bywayofcontrast,amultilateraldevelopmentbankisabody

or agency created by international agreement among multiple countries (each a “member country”) and each member country will contribute to the funding of the multilateral development bank. Multilateral development banks are also sometimesreferred to as international finance institutions (IFIs). The principal globalmultilateral, theWorldBank, is comprisedoftwo institutions – the International Bank for ReconstructionandDevelopment(IBRD)andtheInternationalDevelopmentAssociation(IDA).EachoftheIBRDandtheIDAprincipallyextendcredittosovereignborrowers(i.e.thegovernmentofacountry).Wherecreditisnotextendeddirectlytoagovernment,theWorldBankwillusuallydirectstatesupport(i.e.agovern-mentguarantee) inrespectofsuchcredit. TheWorldBankispartoftheWorldBankGroup.

Export Credit Agencies and Development Finance InstitutionsWithprojectfinanceasmuchindemandasever,buttheliquidityof commercial banks increasingly strained, the rise of the ECA and DFI has continued apace in recent years. For a number of years, and well before the current credit constraints in the commercial bank market occurred, ECAs and DFIs have played significant roles in financing projects in commercially or polit-ically challenging jurisdictions where commercial banks would otherwise be unwilling or unable to lend without some element of political or country risk mitigation. As a result of the difficul-ties faced by the commercial bank market from 2007 onwards and the subsequent global financial crisis, the role of ECAsand DFIs in financing projects has dramatically increased as sponsors have sought to fill the funding gap left by credit-con-strained commercial banks.

The rise in the importance of ECA funding has meant that sponsors will often spend time weighing up the advantages gained on a bid from a contractor where its host country’s ECA is able to provide funding, compared to a bid from a contractor which may be less expensive but does not qualify for ECAfunding. Likewise, sponsors will undertake a cost-benefit anal-ysisoftheadditionalexpenseofsatisfyingthehostcountryforthat project’s development objectives, so as to be able to access DFI funding.

“Soft” benefits of ECAs and DFIs

As well as their ability to offer or support loans with long tenors at reasonable pricing, having an ECA or a DFI participate in a project financing is attractive to sponsors as their involvement facilitates the participation of commercial banks. The reason for this is that: ■ theparticipationofanECAoraDFIiscommonlyperceived

to increase the likelihood that the host government will be supportive of the project for fear of losing access to future financial support from ECAs and DFIs; and

■ ECAs andDFIs are regarded ashaving access todiplo-matic channels and therefore being able to act as a “soft” mitiganttoanypoliticalrisks(suchasgovernmentexpro-priation or interference with the project) entailed in projects in less developed regions of the world.

ECAs

Unlike commercial banks, ECAs are motivated by the aim of promoting the supply of goods and services from their country. ECAs are government departments, or financial institutions that benefit from government guarantees or direct funding, whichprovidefinancingasameansofsupportingexportsfromtheir countries. Most ECAs follow the rules of the OECDconsensus agreement (the “Arrangement”) which governs the terms on which they provide finance for particular sectors and countries(themostnotableexceptionsbeingRussiaandChina).The Arrangement, which is not legally binding and is akin to a gentleman’s agreement, permits ECAs to make or support loans ofupto85%oftheexportvalueoftherelevantcontract,plusup to 30%of the project’s “local” costs. There are differenttypes of ECA: ■ those that provide credit insurance to other lenders like

commercial banks (for example Bpifrance of France and Euler Hermes Kreditversicherungs (Hermes) of Germany); and



to be crucial in filling the gap left by the commercial banks for commercial projects that are important to the development of a nation’seconomybutwhich,whetherthroughinsufficientexpe-rience or capital (or both), cannot be undertaken solely by the private sector.

Capital MarketsWhile sponsors have accessed the capital markets to raise financing for projects since the 1980s, project bonds have typi-cally been a less common source of finance than commer-cial bank, ECA or DFI debt. The attractiveness of the capital markets to sponsors unsurprisingly increases when, as in recent years, the comparative cost and availability of finance from commercial banks, ECAs or DFIs makes it challenging or more expensive to construct a financingplanbased solelyon thosesources. At the time of writing, for well-structured and spon-soredprojectsthecapitalmarketsremainliquidandmorethancapable of providing long tenors and large amounts of debt. Accordingly, sponsors are increasingly looking to find ways of integrating project bonds alongside loans into their multi-sourced financing structures.

Project bonds

The U.S. has a long history of this practice (and indeed, to date, most project bonds have been issued to the U.S. market for predominantly U.S. projects). Although there is a percep-tion amongst some sponsors that issuing project bonds can be a labour and time-intensive process, and that dealing with a large pool of bondholders during the life of a project (rather than a group of lenders accustomed to the demands of a project financing) can be problematic, the pricing and tenors available in the capital markets have meant that this is a financing option that cannot be ignored by sponsors seeking to optimise their financing plans.

Whilst project bonds are certainly not uncommon in project financings, there are a number of characteristics of the capital markets which have meant that, where possible, sponsors have chosen to finance their projects using the loan markets. As such, notwithstanding the benefit of (currently) competitive debt costs and longer tenors available from the capital markets, a decision to issue project bonds is not one that is taken lightly by a sponsor.

Regulatory and rating requirements

The securities laws to which a project bond will be subject – which do not apply to loans – inevitably make the process of issuing a project bond more laborious than entering into a loan, due to the documentary and regulatory work entailed. Historically, the largest market for project bonds has been the U.S. market and therefore, generally, issuers (both U.S. and foreign) will seek to structure their bond offering so that they can make offers and sales into the U.S. market to ensure access to sufficient investor demand and competitive funding terms for their bonds.

As with any jurisdiction, raising capital from the public markets in the U.S. is heavily regulated by both state and federal law. The body which regulates these matters in the U.S. is calledtheUnitedStatesSecuritiesandExchangeCommission(SEC) and the principal legislation which applies to offerings in the U.S. is the Securities Act of 1933 and the Securities and ExchangeAct of 1934. This legislation requires all offerings

TheWorkBankGroup ismadeupof theWorldBank, theInternational Finance Corporation (IFC) and theMultilateralInvestment Guarantee Agency (MIGA). Unlike the IBRDand the IDA, the IFCandMIGAextendcreditprincipally tonon-sovereign borrowers. The IFC is a regular participant in the project finance market as it seeks to stimulate growth in the private sector of developing countries by encouraging domestic andforeigncapitalandmakingloansandequityinvestmentstoprivate-sector participants that have projects in such countries. Unlike theWorldBank, the IFCdoesnot requiredirect statesupport.MIGAprimarilyprovidesbothdebtandequityguar-antees against losses caused by non-commercial risks, including currency transfer restrictions, expropriation, war and civildisturbances and, in certain cases, breach of contract. Multilateraldevelopmentbankswhicharefocusedonspecific

regional development, such as the Inter-American Development Bank (IADB), the European Bank for Reconstruction andDevelopment(EBRD),theAfricanDevelopmentBank(AfDB)andtheAsianDevelopmentBank(ADB),havealsobeenestab-lished and are now regular participants in the project finance market.

“A/B loan” structures

In addition, DFIs have tended to facilitate commercial bank lending to projects by providing debt guarantees or fronting a loan through theuseof “A/B loan” structureswhereby theDFI acts as lender-of-record on the loan but sub-participates all oraportionoftheloanexposuretocommercialbanks.“A/Bloan” structures have traditionally been popular with DFIs and commercial banks, as the structure allows a DFI to leverage availableliquidityfromcommercialbankswhilstremainingthe“lender-of-record” in the loan agreement. This allows DFIs to commit more funds to a project in order to achieve its devel-opment priorities, and provides the participating commercial banks the ability to hold an economic interest in loans which, as they are being administered by the DFI, may enjoy “preferred creditorstatus”intheeventthatthehostcountryexperiencesaforeignexchangecrisis.Under the typical “A/B loan” structure, theDFIwill enter

into a single loan agreement (the “A loan”) with the project company for the entirety of the loan, and will enter into a form of participation agreement with the commercial banks to sell participationsintheAloan(the“Bloan”).Asfarastheprojectcompany is concerned, the DFI is its sole contractual lender and as such, under the loan agreement, the DFI is solely responsible for administering the loan and collecting payments from the project company. Under the participation agreement, the DFI is responsible for distributing the payments it receives among itself and the commercial banks on a pro rata basis.

Domestic development organisations

Manycountrieshaveestablishedfinancialinstitutionsthatwillhave a specific focus or provide support to a particular group or sector.IntheKingdomofSaudiArabia,forexample,theSaudiIndustrial Development Fund (SIDF) and Public Investment Fund (PIF) have active lending roles in the fulfilment of the country’s programmes for industrialisation and the develop-ment of its economy. In the United Kingdom, the publiclyownedGreenInvestmentBankwaslaunchedinOctober2012with a mandate to invest in a range of “green” projects in areas such as offshore wind, waste and non-domestic energy effi-ciency. Such publicly owned financial institutions may yet prove

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recent crash in commodity prices. Such scrutiny, combined withthecomplexityof large-scaleprojects,meansthatprojectfinancingsmaytakelongertoexecutethantheydidbeforethefinancial crisis. As lenders’ documentation requirements andcredit approval conditions have slowed down the timetable for the execution of transactions, the competitive edge that theloan market once enjoyed over capital markets (because of its ability to execute transactions rapidly) has therefore lessened.Arguably, if commercial banks’ ability to provide long-term debt were to be constrained, and the pricing of bank debt became expensive in comparison tobondyields, thenmore andmoresponsors would likely shift their attention to the project bond market.

Islamic FinanceThe growth in the use of Islamic finance (i.e. finance which complies with the principles of Islamic law) has, in large part, been stimulated by the increase in the economic prosperity of theMiddleEastandAsia.Thisprosperityhasfuelledboththenumberofprojectsundertakenintheseregionsandtheexpan-sion of the Islamic finance sector; indeed, the boom seen in the Middle Eastern projects market fuelled the developmentof Islamic financing structures which could be incorporated into more traditional project financing templates in the region. As the Islamic finance market has developed, sponsors have increasingly considered Islamic finance as a key funding source, and an Islamic finance tranche is now commonplace in any large-scalemulti-sourcedprojectfinancingintheMiddleEast.

Islamic finance is finance that is structured to be compliant with the principles of Islamic law (known as Shari’ah law in Arabic). The key principles of Islamic financing are that profit and loss are to be shared between the financier and the project company (as Islam perceives that the ideal relationship between contract parties should be one of equals), and conventionalinterest is not permitted to be applied to any financing. These principles mean that Islamic facilities cannot be made using conventional practices and, therefore, various financing struc-tures have been developed to create Shari’ah-compliant financing arrangements which operate in a similar manner to conventional financing structures and techniques. It should be noted thatalthough Islamic banks must ensure that any proposed funding complies with Shari’ah principles, Islamic banks are commercial entities and so will have regard to many of the same consid-erations as a conventional commercial bank when evaluating whether to participate in the financing of a project.

A relatively recent development has been the introduction of Islamic bonds (known as sukuks) into theMiddleEastprojectfinance market. The first sukuk issuance was closed by SATORP (a refinery project sponsored by Saudi Aramco and Total). The $1 billion SATORP issuance was several times oversubscribed, and was followed by another, larger sukuk, the unprecedented $2 billion issuance by the Sadara Petrochemical Project (sponsored by Saudi Aramco and Dow), which formed part of the overall $12.5 billion limited-recourse finance package.

DocumentationWhere a project is being financed by multiple sources, harmo-nising the intercreditor relationship between each lending group (who will usually rank on a pari passu basis) is not always an easy task; however, provided that each lending group is prepared to engage in intercreditor discussions in a collaborative manner, this is rarely a significant obstacle to a successful financing.

toberegisteredwiththeSECandimposesextensivedisclosureand reporting obligations on the issuer both prior to and after the offering. Project bonds issued to U.S. investors under Rule 144Arequireunderwriters toobtain so-called“10b-5”disclo-sure opinions, which will require both sponsors’ and under-writers’counseltocarryoutextensiveduediligenceinrelationto the project.Anissuerofaprojectbondwillusuallyberequiredtohave

thebondsobtainacreditratingofBBB+orbetter.Oneoftheprimary reasons for which project bonds have in the past held little appeal for sponsors as an alternative to loans, is that many project companies located in emerging jurisdictions have lacked the ability to obtain a sufficiently robust credit rating.

Content issues

One of the advantages of a project bond for sponsors is that bondholders will typically have less stringent documentation requirements,whichaffords theprojectcompanygreater flex-ibility as to how it constructs and operates the project (it should be noted that a sponsor will not benefit from this flexibilityif the project bond forms part of a multi-sourced financing). Despite the extensive documentation governing the projectparticipants’ relationships, issues that had not been contem-plated at the time of signing can (and often do) arise during the life of any financing and, when this happens, lender consent will usuallyberequiredforanamendmentorwaiveroftherelevanttermsofthefinancedocumentation.Inthecontextofprojectbonds, this process can be problematic for sponsors as it is generallymoredifficulttoobtaintheconsentrequiredtoamend(or obtain waivers of) finance documentation from a large pool of bondholders than from a group of lenders accustomed to the demands of a project financing.

Construction risk

Although it can be mitigated through completion support, one of the main obstacles to project bonds being more widely used in project finance has been the reluctance of bondholders to take construction risk on a project. This reluctance stems from the identities of the investor base for project bonds, which typically comprise insurance companies, bank treasuries, pension funds and asset managers looking for long-term assets with predict-able revenue flows. One very popular option for sponsors is therefore to hardwire into the initial finance documentation the possibility of refinancing the initial loans with project bonds (as these will likely become available on more attractive terms once the project is fully operational, since bondholders will no longer be taking a project’s construction risk into consideration when pricing the debt). Sponsors are unlikely to seek to refinance commercial bank debt for projects financed in the run-up to the financial crisis as, in comparison with the current market, the debt pricing on these projects is likely to be relatively cheap. However, using project bonds to refinance bank debt incurred since then on projects that are now operational is a very attrac-tive option for sponsors.

Future prospects

Commercial banks and their credit committees are reviewing project structures and credit risk with far greater scrutiny than they did before the financial crisis. This level of scrutiny has beenexacerbatedinmanyupstreamoilandgasprojectsbythe



for large-scale project financings to be financed by a number of different lending groups. Project finance has repeatedly proved itself to be a resilient way to fund essential infrastructure and commodity projects, and there is no reason to believe that this will cease to be the case, despite regulatory changes damp-ening the ability of commercial banks to provide long-term finance.Amodernprojectfinancelawyeristhereforerequiredto have a degree of familiarity with a range of financial instru-ments, including commercial bank loans, conventional capital market instruments, domestic government-funded loans, ECA and DFI loans and guarantees, and Islamic Shari’ah-compliant financing structures. The willingness of diverse lending groups to co-finance today’s large-scale “mega-projects”, coupled with the involvement of sponsors with proven track records, means that, notwithstanding today’s challenging global economic fore-cast, it remains possible for sponsors to finance projects of ever increasingsizeandcomplexity.

Most multi-sourced financings will be structured arounda common terms agreement which will contain the common conditions, representations, covenants and events of default that will apply to the project company. Each lending group will then provide financing under a separate loan agreement (or debt instrument) which may include terms and conditions specific to that lending group. Often one of the most complicated aspects of documenting multi-sourced loans is harmonising the differentrequirementsofeachlendinggroupandensuringthateachlendinggroup’srequirementshavebeenmetinamannerthat is satisfactory not only to the sponsors, but also to each lending group.

ConclusionAlthough it is generally accepted that structuring a project financingthatincludesmultiplefundingsourcescanbecomplex,few of the issues presented are new, and it is now commonplace

7

John Dewar is a partner in the London office of Milbank LLP and a member of the firm’s Global Projects, Energy and Infrastructure Finance Group. John is widely recognised as a leading individual in his field by a number of journals, among them: Chambers UK (which designated him among the 1st tier of Project Finance lawyers in the UK), Chambers Global, The Legal 500, and Who’s Who of Project Finance. He has built an extremely broad practice and outstanding reputation for advising on the most innovative and significant “market-first” transactions around the world. His practice focuses on advising parties in the development and financing of oil and gas, natural resources, independent power, tele-communications, satellite and other infrastructure projects. He has particular expertise in multi-sourced financings, including those involving multilateral and export credit agencies and Islamic institutions.

Milbank LLP10 Gresham StreetLondon EC2V 7JDUnited Kingdom

Tel: +44 20 7615 3004Fax: +44 20 7615 3100Email: [email protected]: www.milbank.com


Milbank LLP

Milbank LLP is a leading international law firm that provides innovative legal services to clients around the world. Founded in New York 150 years ago, Milbank has offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, São Paulo, Seoul, Singapore, Tokyo and Washington, DC. Milbank’s lawyers collaborate across practices and offices to help the world’s leading commercial, financial and industrial enterprises, as well as institutions, indi-viduals and governments, achieve their strategic objectives.Project Finance is among our firm’s core practice areas and our Project, Energy and Infrastructure Finance Group comprises more than 100 dedi-cated Project, Energy and Infrastructure Finance attorneys, including 20 partners, in our offices worldwide. We operate on an integrated basis with project finance teams in each of our offices in the US, São Paulo, London, Frankfurt, Seoul, Singapore, Hong Kong and Tokyo.From a first-of-its-kind toll road in Latin America, to a wireless telecom build-out in Southeast Asia to the largest wind and solar farms in the world,

clients recognise our Project, Energy and Infrastructure Finance Group as the leading choice for the financing and development of the most critical and pioneering infrastructure projects across the globe. Over the past three years, Milbank has closed more than 140 project financings, which raised more than US$125 billion for infrastructure projects worldwide.

www.milbank.com



Chapter 28

Project Financing in Emerging Markets: Four Pertinent Issues That Can Affect the Success of a Project


Tom Guilfoyle

Dominic Spacie

Howard Barrie


Project ProcurementGenerally, theawardofprojectsbypublicauthorities requirescompliance with a system of competitive tendering as set out in nationallawbut,incertaininstances,thiswillextendtoawardsby public corporations. Additionally, it will always be a condi-tion of finance by development finance institutions (DFIs) that the award of project contracts by a public authority is subject to a systemofcompetitivetendering.Forexample,theWorldBankGroup emphasises the importance of fair, open and well-func-tioning public procurement systems and the benefit which they bring to all stakeholders.

While it has never been easy to put together a project where the public sector is planning a construction project which is input-based (i.e. traditional procurement), PPP challenges are significantly greater when the procurement is of a long-term output-based project covering both construction and operating phases. Where sponsors propose to project finance the project, additional complications arise.

These are some of the challenges:■ Putting together an attractive PPP project that is suit-

able to be project financed takes considerable time, skill and attention to detail. As PPPs represent a significant shift from construction procurer to procurer of services based on greenfield or transformed brownfield infrastruc-ture,theskillsrequiredoftheprocurementteamarequitedifferent.Forexample,thereneedstobegreateremphasison taking account of the results of market soundings. Stages can often be rushed with political pressure to go from planning to operation within a single presidential election cycle and often market soundings may be ignored on the grounds that it is asserted that the private sector is alwaysself-serving.Consequently,aprojectthatisofferedfor tendering based on flawed assumptions of what can be accepted (to serve political-ends, or with an insufficiently compelling project pipeline), will not attract the best qualityofpotentialbidderstobid.Alternatively,therecanbe too large a project pipeline which cannot be managed by the procurement unit.

■ Competitive pressure between bidders often results inuncommercial low-balling, based on the often justified belief that the lowest priced bid will always win and on over-optimisticriskassessments.Lightbidderquestioning

Emerging markets faced with increasing population, urbanisa-tion and environmental concerns offer significant investment opportunities.AccordingtotheIMF,emergingmarketsconsti-tutearound60%ofglobalGDPandmakeup80%ofthecurrentglobal population – it is anticipated that the global population willincreasebyapproximately2.1billionpeopleby2050,with58%ofthepopulationgrowthcomingfromAfricaandafurther33% from Asia. Opportunities abound for developmentalprojects focused specifically on heavy transport and social infra-structure, agricultural production and innovative power genera-tionsolutions.ItisestimatedbytheAfricanDevelopmentBankthat Africa alone has a development financing gap of nearly USD 108 billion and an estimated need for infrastructure invest-ment of between USD 130 billion and USD 170 billion a year. Such opportunities, however, are hampered by major challenges significantly reducing the attractiveness of desperately needed projects. To successfully implement infrastructure, develop-ment sponsors, lenders, and their advisors, need to recognise and understand these challenges and how to price for, or over-come, them.

This chapter focuses on four topical issues that can affect the success of projects and project financings in the emerging markets:■ project procurement, structuring and tender processes

(including the challenges of unsolicited bids). The estab-lishment and implementation of objective procurement processes which are acceptable to international sponsors and lenders is key to achieving financial close and the long-term success of a project;

■ increasingemphasisonenvironmental,socialandgovern-ance (ESG) considerations – ensuring that when projects are developed, they are consistent with internationally reorganised ESG standards whilst demonstrating that responsible investing preserves and adds value to projects, and generates returns for stakeholders;

■ deliveryofasufficient,stableandsecurerevenuestreamfor a project – for successful project financings, cash is king. Offtake arrangements, whatever the form, can either unlock or deter investment; and

■ trends in the evolution of investment treaties and howthese tools can mitigate risks for investors and lenders alike.

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to assess the opportunity, put together a compliant proposal andtherequiredinformation,andtoengagewiththeprocess,together with the costs involved, are material and largely wasted if the bid is unsuccessful. So while a bidder is unlikely to bid if they consider their proposal will not have a strong chance of success, with the additional risk factors in play were they to be successful, it does not take much to deter a prospective bidder from bidding.

While public procurements are strongly supported, the diffi-culty of preparing and managing the process to attract acceptable bids to achieve optimum value for money from reliable bidders financed by project finance should not be underestimated.

Environment, Social and Governance ConsiderationsWith intensifying challenges across the globe and as environ-mental tensions grow, the relationship between ESG consider-ations and infrastructure investment will only strengthen and should not be ignored. Whilst also of concern across devel-oped markets, with rapid population growth and urbanisation, andoftenwithasignificantdependenceontheexploitationofnatural resources as a source of income, emerging markets are acutely exposed to these key risks. With limited funds avail-able and with traditionally weaker national and regional institu-tions, managing environmental and social concerns of projects and enforcement of regulations has been a significant challenge in emerging markets. As such, the importance of ESG factors for sponsors and international lenders is of particular concern when considering investment processes and decision-making.KeyESGrisksinemergingmarketscanbecategorisedas:

■ climate change and environmental impacts (includingwater management);

■ rightsoflocalcommunitiesimpactedbyprojects;■ gender imbalance and availability of skilled local

workforce;■ managementofsupplychains;■ corporateandnationalgovernance;and■ healthandsafetypolicies.

For sponsors, a failure to manage ESG risks across the life of a project may have significant implications such as:■ negativeimpactsontheenvironment, localcommunities

and the reputation of the project and its sponsors, inves-tors and lenders;

■ anegative impacton the riskprofileof aprojectpoten-tiallyleadingtoincreasedcapitalandoperationalexpend-iture and cost of funds, ultimately impacting on economic returns; and

■ theblockingoffunds,particularlywherelendingtermsarebased on internationally recognised terms and conditions.

In order for a project to succeed, there needs to be a healthy relationship between key stakeholders, the environment, local communities, regulators and host governments. In the past decade, there has been an evolving understanding of the signif-icance of ESG implications on infrastructure development finance, and stakeholders across the globe have become increas-ingly alert toESGfactors. Forexample, established in2006,the UN’s Principles for Responsible Investment scheme is now a thriving global initiative with over 1,600 members representing over USD 70 trillion of assets under management. Echoing this, in emerging markets particularly, project financings are embed-ding ESG factors within financing arrangements. For lenders, and sponsors, this means ensuring that:■ environmentalandsocial assessments (ESIA) have been

carried out by sponsors that meet the requirements ofinternational lenders and DFIs, not simply local law

of proposed project concession terms before the preferred bidder stage occurs for fear of being marked-out as a potentially difficult partner compared to other bidders. This culture and that “your” bidder is only one of a number of bidders, makes project finance lenders reluc-tant to commit early on, meaning any financing proposals will be “subject to due diligence and internal approvals”. This leaves the lenders having significant leverage to fully negotiate the project terms with the public authority at the later stages of the procurement process for their and their customer’s benefit. This is of course what the particular bidder always intended but it extends the procurementphase further, significantly reducing the competitive pres-sure that public procurement is supposed to achieve, and is not always successful.

■ A bid that is through a special purpose vehicle to beproject financed will be inherently weaker than one that is supported by a stronger balance sheet. There will be limitedcommittedequity,theconditionsprecedentpriorto funding being disbursed will be lengthy, the covenants to the lenders to which the project vehicle is subject will beinflexiblewithwaiversbeingsubjecttolenders’consentbeing given, and many events of default that, if triggered, would entitle lenders to require their loans tobe imme-diately repaid. On top, lenders’ due diligence and risk mitigationexerciseswillextendthedifficultyandtimetoachieve financial close, particularly in emerging markets where, typically, offtake, currency, political and legal risks will be higher.

These factors encourage governments to be more accepting of unsolicited proposals (USPs) or otherwise avoid public procure-mentbydesignatingtheprojectwithinanexceptioninthelocallaw.Theseexceptionsaretypicallyaroundtherebeinganationalemergency or urgent need, the project having national defence/security aspects or there only being one capable supplier. The SierraLeonePPPlaw,forexample,contemplatesthisbyrefer-ence to trade secrets, intellectual property or exclusive rights.In some instances, efforts are made to have other tenderers compete against a USP. This is unusual and it is difficult to achieve a level-playing field with fair compensation for the orig-inalbidderiftheirproposallosesout.AreviewofexperiencesofUSPsin2017bytheWorldBankwascritical,includingfinding“strong indications” that some public officials use USPs to avoid competition and potentially engage in corrupt practices.

A development in the structures for public procurement of PPP projects has been the introduction of funding competitions for project finance. The idea is to optimise the competition between prospective lenders and the financing terms for the selected project vehicle. This is instead of each bidder having their own selected lead arranger for their financing if they were to be awarded the project. This is of limited use in many emerging markets where, particularly since the 2008 financial crisis, commercial banks have substantially stepped back from “funding”projectsinemergingmarketsintheabsenceofexportcredit support, leaving the field for national, regional or global DFIs who are more likely to agree how the financing is to be shared between them, rather than bid against each other.

At different stages of the procurement process there remains theriskthatnobidsarecompliantwiththerequirementsofthetender, bidders withdrawing (although this is reduced through bidbond requirements), or not being able to financially closethe project financing through over-challenging or restrictive lending terms. This likely leaves the procuring unit with about 18 months, or maybe even longer, wasted effort.

The lengthy tendering period is not the only aspect that may put off bidders from bidding. The investment time it takes

10 Project Financing in Emerging Markets: Four Pertinent Issues


■ In line with the times, EP4 goes beyond EP3’s 2013recognition of climate change as “important”, intro-ducing a requirement for climate change assessment.ForcategoryAandBprojects, theseassessmentsmustconsider relevant physical risks. For all projects, when emissionsareexpectedtobeover100,000tonnesofCO2 equivalent,assessmentsmustconsiderrelevanttransitionrisks and complete an alternative analysis to evaluate less greenhouse gas emission intensive alternatives.

■ EP4has,however,potentiallymadeoneaspecteasier.EP3’s Principle 5 (Stakeholder Engagement) included an absolute requirement to obtain free, prior andinformed consent from potentially-affected indigenous peoples.EP4providesanarrowmechanismallowingdiversion from this IFC standard, where the consulta-tionrequirementshavebeenfollowedanddocumented.

The Equator Principles Association is due to publishimplementation guidance in the second quarter of 2020.

Offtake and Change in Law RiskAn important consideration for any project financier assessing bankabilityiswhetheraprojectwillgeneratetheexpectedreve-nues from the sale of the product to pay the project debt, meet ongoingoperatingexpenses,andgenerateareturnonequityforsponsors. Offtake risk is the risk of not being paid for the prod-ucts or services produced by the project vehicle.

To address this concern, prospective lenders (and their credit committees) will be influenced by the robustness of the offtake arrangements. A contractual arrangement with a committed obligation to purchase from a financially strong offtaker is pref-erable to one where there is no committed purchaser, where the projecttakes“merchantrisk”andisexposedtothevagariesofthemarket.Thepowermarketisaclassicexampleofwhereacaptive offtaker, typically in emerging markets, a national elec-tricity utility (whether through a capacity payment or take-or-pay arrangement), is preferable to a plant where merchant risk is assumed.

Factors determining robustness include:■ The creditworthiness of the offtaker – for example in

Argentina, the creditworthiness of the national utility company and administrator of the national wholesale electricity market, CAMMESA, has been, in respect ofArgentina’s RenovAR renewables programme, supported by a national trust fund for renewable energy with offtake paymentsbeingultimatelysupportedthroughWorldBankguarantees.

■ Volumes to be supplied and the commitment by theofftaker–forexample,arethecontractedvolumessuffi-cient to meet the project’s liabilities and when in the project cycle does the commitment commence? Are there any penalties, or indeed incentives, which affect the revenue received?

■ Collectionorrecoveryrisk–willtheofftakerpaypromptlyor is recovery dependent on third parties or customers paying? For example, in sub-Saharan Africa this isperceived to be a significant risk with late or non-payment by customers or theft of power from the grid as a common issue.

■ Howrobust is thepricing/tariff structureperunit? Forexample, howmuch influence does themarket have onthe tariff and are pricing adjustments free of any political influence prior to an election?

■ Thedurationoftheofftakearrangementswhichimpactsonaffordability–forexample,longertermpowerpurchase

requirements.ThismaymeanupgradinganexistingESIAwhich, without appropriate expertise or resources allo-cated to this, could delay financial close;

■ appropriate implementation plans have been developed(whererequired).Thiswillrequirelong-termengagementwith ESG consultants to enable lenders to carry out appro-priate due diligence and monitoring of the project on a long-term basis;

■ there is effective stakeholder engagementwith sufficientinternalandexternalcommunicationthroughoutthe lifeof the project; and

■ thecovenantpackagewithin loandocumentationcapturesESG-relatedmatters.Forexample,lendersfrequentlyrequirecontinued monitoring of the impact of a project on the local environment and local communities under their reporting requirements.Also,wherefinanceisprovidedbymultilat-erallenders,itiscommonforprojectvehiclestoberequiredto comply with specific provisions relating to (i) environ-mental and social health, (ii) transfer of skills, (iii) fraud and corruption, (iv) codes of conduct, and (v) sanctions.

Aligning development needs with environmental and social standardsrequiresexpertplanning,structuring,assessmentandmonitoring and considerable effort and financial investment from sponsors and lenders. Challenges are further intensified bydisparitiesbetweeninternationalrequirementsandvariedandcomplexsocialnorms,prioritiesandpracticesinhostmarkets.The challenge is then how sponsors can demonstrate that responsible investing in accordance with standards such as the UN Principles for Responsible Investment, IFC Performance Standards or the Equator Principles which preserve and addvalue to a project. Arguably, although there is the challenge for infrastructure projects to meet ESG objectives whilst ensuring a project remains profitable, in doing so effectively, this can bring visible transformational change to emerging markets as the lives of the local population increase the value of a project and on-sale revenue and, of course, prove a useful marketing tool for spon-sors, investors and lenders alike.

AnexampleofhowESGcontinuestoevolveistherecentlyupdated Equator Principles. Published by the EquatorPrinciples Association, the risk management framework voluntarily has been adopted by over 100 financial institu-tions (EPFIs) and aims to provide a common baseline for EPFIs to identify, assess and manage environmental and social riskswhen financingprojects. The revisedEquatorPrinciples (EP4) will come into effect on 1 July 2020. There are four main areas of change: ■ EP4 has a wider scope, now applying to project-re-

lated corporate loans over USD 50 million (previously USD100million). Project re-financingsandacquisi-tion financings are now also covered if: (a) the under-lying project was financed using the EPs; (b) its scale and scope have not materially changed; and (c) project completion has not occurred.

■ Principle 3 (Applicable Environmental and SocialStandards) retains different standards – for projects located in non-designated countries, IFC performance standards and World Bank EHS guidelines and, indesignated countries, relevant host country laws apply. However,forcategoryAandBprojects(projectscarryingadverse environmental and social risks), EPFIs must now confirm how each principle is met. In designated coun-tries, EPFIs must also evaluate the specific risks to deter-mine whether any IFC performance standards can also be used as guidance on how to address them.

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theutilitiesexposedtolocalcurrencyreceiptsbutwithpaymentobligations in USD. There will always be an ever-present incen-tive for PPA payments to be priced in local currency but inter-national lenders (and indeed sponsors) will strongly resist any such developments.

Turning to change in law risk, this refers to the risk of changes thatmayaffecttheprojectoutcome,impactingcapitalexpendi-ture or operating costs. Allocation of, and clarity on, the finan-cialrisksassociatedwithchangeinlaw,includingthetaxregime,is fundamental to managing the underlying economics of long-term contractual arrangements, as they may have a potential financial impact on construction, future capital expenditurerequirements and operating costs. Conventional businessespass on the impact of changes of law through increased prices to theircustomerstotheextentcommerciallypossible.Forprojectvehicles,thismaynotbepossiblewhere,forexample,thepublicsector istheofftakerandthere isafixed-pricepayablefortheservices or products being provided. Valueformoneyconsiderationsshouldalwaysbeconsidered

in deciding how to allocate risk: there is a strong argument to be made that the risk should remain entirely with the public sector, being that it is the driver for changes in law. Where the public sector is in a comparatively weak position, it is not unusual for it to agree to place the project vehicle (and sponsors) in a no better no worse position, as the debate becomes focused on the scope ofwhatthechangeinlawentails(forexample,shoulditextendto all changes or those which only affect businesses within the sector/countryandwhatregulationsshoulditextendto)andaconfident public sector could push for a mechanism to ensure the public sector benefits from the upside where a change results in lower costs (and therefore improved returns for the project vehicle). Allocating any risk to the public sector is not without itscriticshowever;forexample,shouldtheStatebepayingtheprice of its efforts to raise environmental standards throughout the lengthy period of a project, thereby protecting sponsors but leaving the government with less money to support healthcare or education in the country?

With a more traditional allocation of risk model (in particular where laws/regulations are not of a specific nature), the project vehicle often assumes general change in law risk (where the effect is likely to be additional capital expenditure) duringthe construction phase (with the risk being passed down to the construction contractor) whilst any cost implications of a change in law during the operating phase are generally shared between public and private sectors (although it is less likely for an operator sub-contractor to assume the risk through a pass down arrangement). Risks associated with specific or discrimi-natory change in law always remain with the public sector. This is a model which has generally been accepted and what discus-sions there are will be generally around the margins of the scope and materiality of the change of law’s impact.

Parties will always attempt to mitigate and minimise this risk and, depending on what is finally agreed, options to manage the risk include:■ agreeingadetailedscopeidentifyingtheallocationofrisk

with compensation provisions to ensure the project vehicle is placed in a no better no worse position where the risk arises;

■ preservingtheeconomicrobustnessoftheprojectvehicleby passing the risk (in whole or part) to either an offtaker or a sub-contractor;

■ where the public sector adopts an aggressive position,introduce a change in law facility within the financing so that extra committed financing is available to fundthe increased costs, but whether this represents value for money is debatable; and

arrangements (PPAs) are more bankable than those of a short-term nature as has been evidenced in the sub-Sa-haran power sector where a 20 to 25-year term PPA is not uncommon.

■ Towhatextentistherecurrencyriskand,byimplication,exposuretocurrencydevaluation?

■ Towhatextentisthetimingandcontinuingofthetrans-mission system a project, government or offtaker risk?

Recent developments in the electricity markets across, for example,LatinAmerica and sub-SaharanAfrica, demonstratethat these factors continue to influence new projects with the issues identified abovebeing addressed. The requirement foraffordable electricity to satisfy demand and boost economic development is common to all emerging markets. In particular, sub-Saharan Africa is no exception, but progress historicallyhas amixed recordwith tariffsbeingoften toohigh to allowa step change in economic development. That in turn has led to difficulties in forecasting demand. However, as has been seen across Latin America as well, developments in support for State-supported offtake arrangements demonstrates encour-aging signs for closing the power “gap” in future years, allowing economic growth to accelerate.

Historically, there has been a focus on one-off negotiated concessions between governments (or their State-owned utili-ties)andindependentpowerproducersunderpinnedbyexpen-sivecapacitypaymentsorfixedtariffs.However,withthedevel-opment of the renewables industry, driven in part by falling technology costs and with the support of international donors, the trend has moved towards competitive renewable procure-ment programmes rather than the reliance on the “on-off” investment model.For example, on theheels of the success of the renewables

programme in South Africa (REIPPP), Uganda, Zambia and now Ethiopia have or are pursuing a pragmatic approach to transparent, standardised and competitive programmes which address many of the offtake issues for renewable power projects, thereby reducing risk for sponsors (and lenders) and cost for governments. Certainly, a competitive environment has resulted in a virtuous circle with evidence of tariffs falling substantially – forexampleinZambiathemostrecentsolartariffshavedemon-strated substantial reductions.

However, whatever the economic and market environment, uncertainties about tariff and offtaker creditworthiness remain in,forexample,sub-SaharanAfrica,whereofftakerriskishigh.The level of the tariff has historically been problematic as only a handful of countries have moved to cost-reflective tariffs and, with evidence of utilities facing challenges in bill collection, sponsors and lenders have often looked to host governments to guarantee PPA payments. This was not sustainable. These challenges have opened an opportunity through the procure-ment programmes for development finance institutions to supportlong-termPPAarrangements,examplesbeingUganda’sGetFit programme and Ethiopia and Zambia’s partnership with the IFC scaling solar programme. In the case of Uganda, the GermaninternationaldevelopmentagencyKfW,andfourotherEuropean donors, provided support for “top up” payments to be added to the feed-in tariff, whilst in Ethiopia and Zambia, International Development Agency payments and loan guaran-tees are available.

Finally, currency devaluation will remain a potential risk in offtakearrangementsandconsequentlyinanyprojectfinancingdenominated in a comparatively hard currency. Since 2000, manysub-Saharaneconomieshaveexperiencedcurrencydepre-ciationagainstUSD,insomecasesupto40%.Historically,tocircumvent the risk of currency mismatch substantially, all of the projects with long-term PPAs have been priced in USD – with

12 Project Financing in Emerging Markets: Four Pertinent Issues


although many cases will also involve breaches of the FET and FPS provisions in the relevant investment agreement. Recent examples of claims in the project finance sector

include cases where:■ A bank succeeded in a dispute concerning rights under

a power purchase agreement between the operator of a powerplant(fromwhomthebankhadacquiredrights)anda State-owned electricity distributor. In this case, the State was found to have breached various articles (including articlesonexpropriationandFPS) inan implementationagreement entered into by the power plant operator and the State.

■ AnawardwasrenderedinfavourofaStateinNovember2019. This case concerned a road infrastructure project in Mozambique that was funded by the EuropeanDevelopment Fund and arose out of the State’s offer to compensate the investor for delays to the works. The Tribunal determined that the investor had not properly accepted the State’s offer to compensate and that the State hadthereforenotbreachedtheBITobligation toensurefairandequitabletreatment.

■ An investor which had invested in a natural gas trans-portation project successfully argued that the State had breacheditsobligationtoensurefairandequitabletreat-mentunderaBITaftertheState’s“emergencymeasures”,taken to recover from a financial crisis, resulted in the sponsor being unable to repay its project debts.

Recently there has been a rise in the number of ICSID cases in the financial services sector against South-Eastern European States.Manycasesinthefinancialsectorhavearisenasaresultof abrupt changes in legal frameworks, such as Croatia’s conver-sion of over USD 3 billion worth of bank loans which has resulted in four ICSID arbitrations against Croatia.

Over the past decade tribunals have shown a willingness to expand the definition of “investor” to banks which havefinanced the acquisition of an investment and which haveobtained substantial control of the investment. This presents a growing opportunity for sponsors to have their interests in project finance projects recognised and protected by investment agreements.

Project Financing as a Continuing Option for Emerging Market FinancingsThe prospect of off-balance sheet borrowing remains appealing to single asset sponsors, consortia and multi-billion conglom-erates alike, and there remains liquidity and appetite amonglenders to fund appropriately procured, environmentally and socially responsible projects, with stable offtake arrangements. However, the general challenges of project finance as a lending product remain: it is an expensive, time-intensive process toachieve financial close with significant effort required fromsponsors, investors, and lenders, as well as the costs associated with financial, legal, technical and environment advisor partici-pation. Restrictive covenant packages, consultation and consent rights in favour of lenders may, for some sponsors, result in too greatatransferofpowerandsayoveraprojecttoitslenders.Butclosing the infrastructure and power gap in emerging markets is necessary to propel economic growth across emerging markets. Project finance, despite its many challenges, remains a viable economic model in the 2020s and a vital tool to close this gap and support transformational change. We have focused on four topical issues which will continue to be prominent as emerging markets develop – none, however, are insurmountable and, if analysed and addressed properly, will assist in the successful implementation of viable projects.

■ where there are foreign sponsors, introduce a stabilisa-tion clause into the concession arrangements – but this can be controversial. The most common types of stabili-sation clauses are “freezing clauses”(whichfixorfreeze,forthe term of the project, applicable domestic legislation or regulations) or “economic equilibrium” clauses (which provide for changes in law following execution but require thehost government to indemnify the project vehicle for costs associated with implementing such changes). A hybrid modelcombiningbothfreezingandeconomicequilibriumclauses is also an option.

Investment Agreements and Impact on InvestorsInvestors making inward investments in foreign States are subject to numerous forms of risk, including political risk. It is essential that those investors consider what protections they have against this risk at the time of investing. As opportunities arise more often (and therefore the opportunity for disputes in the future),weexpect investors to increasingly focusonwhatprotections are available for sponsors.

Investment agreements (whether multilateral or bilateral) are agreements entered into between States in which a State agrees to protect the investments of nationals of another State. Bilateral investment treaties (BITs) are treaties entered into between just two States. However, there are also many multilat-eral investment treaties between multiple States, the most well-known of which is the Energy Charter Treaty for investments in the energy sector. Such investment agreements give rights and protections to those nationals (whether individuals or compa-nies). There are around 2,600 investment agreements in force currently. Investment agreements typically contain a number ofcoreprotections,includingprotectionagainstexpropriationof investmentswithoutadequatecompensation,obligations toprovidefairandequitabletreatment(FET), full protection and security (FPS), and treatment of sponsors that is no less favour-able than that afforded to nationals of the host State.

In order to benefit from these protections, the claimant entity needs to be an “investor” with an “investment”. An “invest-ment” is usually widely defined to include every kind of asset and may include, for example, shares, loans, bonds, projectfinancing, hedging agreements, purchases of assets, branches and promissory notes. An “investor” may include both the entity making the investment directly and entities with an indi-rect investment, such as shareholders or sponsors with a degree of control over the investment vehicle.

If the host State where the investment is made breaches the investment agreement, then an investor may be able to initiate a claim directly against that State. The forum for any such claim will depend on the wording of the investment agreement, but most investment agreements provide access to international arbitration. Many will permit an investor to bring a claimunder the auspices of the International Centre for Settlement of Investment Disputes (ICSID),aWorldBankinstitution.ICSIDarbitration awards are directly enforceable in the 163 States that have signed the ICSID Convention. ICSID arbitration is increasinglyattractivetofinancialinstitutions;in2019,15%ofnew ICSID cases registered were in the finance sector, repre-sentinga3%increasefrom2018.

In the past, sponsor-State cases in the financial sector have involved measures taken by States arising out of nationalisa-tion, economic or political crises, austerity policies, sovereign debt restructuring, regulatory intervention and bank bailouts. In the majority of these cases, the main allegation against the State has been expropriationwithout adequate compensation,

13

Howard Barrie is a partner based in London. He advises on projects and project finance, and on structured trade and commodity finance. He has advised national governments, multilateral and national development finance institutions, project developers and commercial banks on a wide range of projects including power projects, renewables, biofuels, PPPs, real estate, petrochemical plants, mine development finance, process plants, social and transport infrastructure. Africa is a particular focus and he has worked on transactions in over 16 African coun-tries. He has advised on many award-winning transactions, is rated in various professional directories and has been shortlisted by the Financial Times for its Legal Innovator of the Year award [2012]. He has spoken in Africa and the UK on public-private partnerships and project finance and edited and contributed to “Public Private Partnerships BOT Techniques and Project Finance” (Euromoney Books), and is a non-executive director of ILFA (International Lawyers for Africa).

Dentons UK and Middle East LLPOne Fleet PlaceLondon, EC4M 7WSUnited Kingdom

Tel: +44 207 246 7063Email: [email protected]: www.dentons.com

Dentons is the world’s largest law firm, delivering quality and value to clients around the globe. Dentons is a leader on the Acritas Global Elite Brand Index, a BTI Client Service 30 Award winner and recognised by prominent business and legal publications for its innovations in client service, including founding Nextlaw Labs and the Nextlaw Global Referral Network. Dentons’ polycen-tric approach and world-class talent challenge the status quo to advance client interests in the communities in which we live and work.The Dentons London team, together with colleagues across the globe, offer expertise in the project development and project financing of infrastruc-ture (roads, airports, rail and social), power (renewable and conventional), water and many other projects. Our team’s broad experience helps clients identify the types of creative financing structures and sources of finance – from commercial lenders to ECAs, DFIs and funds/private equity – needed to ensure that projects achieve financial close, in an efficient and timely manner.

www.dentons.com



Tom Guilfoyle is a Senior Associate based in London. He specialises in energy and infrastructure project financings and development. Tom has advised lenders, sponsors and contractors on the commercial, financing and regulatory aspects of a wide range of transport infra-structure, renewable and conventional power projects, PPPs, mine development finance and reserve-based lending of oil and gas assets. In addition to advising on projects in the UK and Western Europe, emerging markets are of particular focus for Tom, having worked on projects across Eastern Europe, Africa and the Middle East, Latin America and the Caribbean.

Dominic Spacie is a consultant (having been a partner for just under 20 years) whose experience primarily lies in concession-based project finance (with a specific focus on infrastructure). He has advised clients, including banks, sponsors/borrowers, investors and the public sector, on all aspects of project financing, on both project-related documentation and the finance documents (debt and capital market solutions). In recent years, he has advised on a large number of international and UK PFI/PPP sector projects. He also spent nine months on secondment to the in-house legal department of a multinational bank advising on its debt and equity investments. He has advised on infrastructure projects in Africa, Turkey and Egypt. More recently, he has been working on African infrastructure projects in Kenya (roads/power/airports), Uganda (social infrastructure), Rwanda (airport), Nigeria (power/rail), and Liberia (roads).







Chapter 314

Angola

VdA ASP, Sociedade de Advogados, RL Vanusa Gomes

Manuel Protásio

Angola


2 Security

2.1 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?

Under Angolan law, the terms and formalities for security creation vary depending on the type of the asset. The most frequentlyusedin rem guarantees are mortgages and pledges.Mortgagesentitlethecreditortoobtainrepaymentofcredit

through the sale of the mortgaged assets before and with pref-erenceoverothercreditorsofthedebtor,exceptforsomepriv-ileged credits and other credits previously guaranteed by mort-gages over the same assets. Specific authorisations may have to be obtained in order to mortgage rights (e.g. surface rights grantedbyAngolanauthorities).Amortgagemustbeexecutedby means of a notary deed with a Notary Public and registered with the relevant Registry Office.

The pledge is generally created by means of a written agree-ment and delivery of the relevant asset to the creditor or to a third party. Pledges are not subject to special formalities (other than a written document) nor to any type of public registra-tion, except in the case of pledges of certain types of securi-ties.Itshouldbeaddedthatspecificrequirementsmayapplytopledges depending on the type of asset being given as collateral. Certain specific economic sectors such as the financial, insur-ance, media, mining and petroleum sectors are subject to special restrictions or approval requirements, or both. Therefore,certainauthorisationscanberequiredfromthegovernmentorotherstateentities,orboth,inordertopledgeassetsorequityinterests in those sectors.

Under Angolan law, a pledge or mortgage over future assets is not prohibited. Alternatively, security agreements may provide forasecurityofexistingassetsandapromiseofsecurityoverfuture assets. In the latter case, a definitive pledge over the assetsissubsequentlyexecutedanddeliveredasasupplementtothe security agreement.

2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure?

The most common form of security over real estate property is themortgage.Duetotheexistingrestrictionstoforeignowner-ship of real estate property, foreign investors in Angola are granted surface rights over real estate.

1 Overview

1.1 What are the main trends/significant developments in the project finance market in your jurisdiction?

The Government of Angola is now attaching great impor-tance to Public-Private Partnerships (“PPPs”) for the purposes of attracting investment to achieve a new level of economic development and improving access to quality infrastructureand services through an efficient utilisation of public funds and increased involvement of the private sector. Thus, relevant changes were introduced to the legal framework, notably:(i) The new Law on Public-Private Partnerships (Law no.

11/19,of14May2019),whichreplacedLawno.2/11,of14January 2011, establishes the general basis applicable to the prioritisation, design, launching, modification and overall monitoring of PPP. The new legal framework is applicable to all PPP processes, even if the respective agreements have already been concluded.

(ii) The Regulation of Public-Private Partnerships Law (Presidential Decree no. 316/19, of 28 October 2019) aims to ensure that PPPs are developed withmaximum effi-ciency and under clear and objective procedures.

Unfortunately, similar to last year, Angola has not witnessed any relevant developments in the project finance area due to its economic stagnation. Despite the governmental reforms that have been carried out to stimulate the economy and create conditions for greater participation by the private sector, these reforms have so far been insufficient to attract foreign direct investment. The main business challenge in Angola remains the lackofforeignexchange.2020 is anticipated to be the fourth consecutive year of recession as a result of worldwide develop-mentsintheoilsector.GDPisexpectedtogrowby1.3%inthecurrent year, down by two percentage points from the estimated 3.3%for2019,andAngola’seconomygrowthisonlyprojectedfor2021,whenapositiverateof2.3%isexpected.

1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years?

The first deep-water port in the country, which is still under construction in Caio, Cabinda province, was the most signif-icant public-private partnership transaction in recent years. The construction of the port is valued at $831.9 million and the Angolan State bore 85%of the costs. Recently, theAngolanSovereign Fund has acquired 100% of CaioPorto, S.A., thecompanyresponsiblefortheexecutionofPortdeCaio’sproject.

15VdA / ASP, Sociedade de Advogados, RL


2.7 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?

Stamp Duty and the notary and registration costs are usually deemedextremelyhigh. As regards the filing,notificationorregistrationrequirements,theyarequitestraightforwardandareno longer time-consuming.

2.8 Are any regulatory or similar consents required with respect to the creation of security over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.?

Provided that the security interests are created over assets belongingtoprivateentities,Angolanlawdoesnotrequireanygovernmental or other consents. Securities over public domain assets are prohibited or restricted. These restrictions include governmental consent and/or approval, imposed through sector-specific regulations, the relevant concession contracts or general public administrative laws.

3 Security Trustee

3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from the security to the claims of all the lenders?

These concepts are not recognised by Angolan law.

3.2 If a security trust is not recognised in your jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately?

Seequestion3.1above.

4 Enforcement of Security

4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/liquidator), or (b) (in respect of regulated assets) regulatory consents?

Pursuant to Angolan law, no form of security can be enforced outside of court.

The enforcement of mortgages consists of a sale of the rele-vant assets through court proceedings. The sale of pledges may be made through court or through out-of-court proceedings, if the parties have so agreed. Therefore, in Angola, the appro-priation of the assets is not available to pledges and mortgages.

Securityovertheserightscanbecreated,but itrequirestheprior authorisation of the grantor (Angolan authorities). The creation of security over immovable assets, related rights or movable assets subject to registration is created through a mort-gage.Themortgagemustbeexecutedbynotarialdeedandissubject to registration with the relevant Registry Office.

2.3 Can security be taken over receivables where the chargor is free to collect the receivables in the absence of a default and the debtors are not notified of the security? Briefly, what is the procedure?

The most common form of security over receivables is a pledge of credits, which is created by a written agreement. The pledge of receivables is subject to the notification of the respective debtor. Thus, it is also possible for security to be granted over the rental income from a property. This usually takes the form of an assignment whereby the tenants are directed to pay the rental income to the lender so that the rental income does not pass through the hands of the borrower.

2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure?

A pledge over cash deposited in bank accounts is deemed as a pledge of credits (see above).

2.5 Can security be taken over shares in companies incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure?

The form of security over shares is a pledge over the company’s sharecapital(sharesorquotas).Thepledgeofsharecapitalpartici-pationsmustobservespecificrequirementstobedeemedvalidandbinding.Therequirementsvarydependingonthetypeofprojectcompany. In the case of limited liability companies by quotas,thecompanymustconsentontheexecutionofthepledge,whichmust then be formalised by means of a notary deed entered before a Notary Public and registered with the Commercial Registry Office. As for limited liability companies by (nominative) shares, thepledgeisdeemedformalisedbymeansofexecutingawrittenagreement, inscription of the pledge in the relevant share titles, and registration of the same in the company’s share registration book.

2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables and chattels)?

The calculation of notarisation and registration fees are based on variable percentages, depending on the secured amount and the number of the pages of deed, if applicable.

All guarantees and securities, irrespective of their nature or form, are subject to Stamp Duty (plus notary and land registry fees) provided that the security is granted in Angolan terri-tory or if the security is granted outside Angola but submitted therein for any legal purpose (e.g. enforcement). Further, secu-rities granted by non-resident entities to Angolan-based enti-ties, regardless of the place where the security is granted, are always subject to Stamp Duty and is due upon issuance of the security. Stamp Duty over securities is calculated over the amountsecuredandtheratesmayvarybetween0.1%to0.3%,depending on the term of the security.

16 Angola


5.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation?

Thestateandsomepublicentities(e.g.theBNA)areexcludedfrom bankruptcy proceedings.

As to the special bankruptcy proceedings, it must be noted that (i) the Financial Institutions Act foresees that the bank-ruptcy preventive measures applicable to financial institutions will be determined by the competent supervision authority, and (ii) thePublicBusinessSectorActsetsoutspecialproceduresregardingtheliquidationofpubliccompanies.

The Angolan Civil Procedural Code does not make distinc-tions between foreign or national creditors for bankruptcy purposes.

5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of the project company in an enforcement?

Pleaseseequestion5.2abovefortheretentionrights.

5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown of dissenting creditors?

Pursuant to Angolan law, there are two types of pre-emptive insolvency procedures: the Composition and the Creditors’ Agreement.

The process known as Composition is an agreement achieved within the judicial process, to be homologated by the court. The company may file for bankruptcy before the company ceases all payments to creditors or in the 10 days following this event. If the filing is performed in a timely manner, the law establishes that the bankrupt company may propose an agreement to the creditors in order to achieve the restructuring of its debts and to avoid the declaration of bankruptcy. The agreement must be approvedbycreditorsrepresenting75%ofthecredits.Incasethe Composition is not proposed or its terms are not approved, the creditors may incorporate a limited liability company to continue commercial activity, with the purpose of satisfying the existingcredits–theCreditors’Agreement.

If there is no Composition or Creditors’ Agreement, or if they are rejected by the court, the bankruptcy shall be declared thereupon.

Finally, it must be noted that the debtor who has been indicted or tried for fraudulent bankruptcy is prevented from proposing any of these rescue procedures.

5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction.

Directors of companies facing financial difficulties may continue to trade, provided they act with a special duty of care and do not violate any legal duties and legal principles appli-cable to the management of companies. In the event directors have contributed to the company’s bankruptcy, they are liable and subject to penalties. Directors may also be held criminally liable for fraudulent insolvency and negligent insolvency.

4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies?

Pursuant to Angolan law, there are no restrictions in this regard (additionally, it must be noted that no different rules on enforce-ment of security interests in Angola apply for foreign credi-tors). However, loans, guarantees and other financial contracts, depositsandtheacquisitionandsaleofshares,bondsandothersecurities involving rights or obligations between residents and non-residents, qualify as capital operations and are subject toforeign exchange requirements; notably, the Angolan CentralBank’s(“BNA”)priorapproval(seesection6below).

5 Bankruptcy and Restructuring Proceedings

5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the security?

Upon the declaration of bankruptcy, all security must be enforced within the bankruptcy proceedings.

If a company is declared bankrupt, assets and documents are, for instance, seized in order to protect the creditors’ rights. A bankruptcy declaration by a court entails the immediate maturity of all the debts of the bankrupt company and there are certain acts which are legally deemed to be detrimental to the bank-ruptcy estate (insofar as these transactions cause a depletion of the debtors’ assets). For instance, in rem guarantees granted after the underlying debt within the year that precedes the declaration of bankruptcy or granted simultaneously with the underlying debt within 90 days preceding the mentioned declaration, shall always be assumed to be detrimental to the bankruptcy estate. Therefore, the creditors may challenge the relevant transactions and claw back on those transactions.

Payments to creditors can only be made after the sale of the debtor’s assets. In the case that there are creditors benefitting from guarantees in rem, payment of such creditors will occur immediately after the sale of the secured asset. Common cred-itors shall be paid pro rataeverytimeavalueequivalentto5%of the amount in debt to common creditors is deposited in the bank for the account of the relevant bankruptcy.

5.2 Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g. tax debts, employees’ claims) with respect to the security?

The secured creditor has priority over unsecured creditors at the time of the payment of debts.

Only special privileged rights are given priority in relation to credits secured by pledges or mortgages. Angolan law provides that senior security (“Privilégios Creditórios”) in favour of the governmentand/orlocalauthorities(e.g.taxesandoutstandingcourt fees), or in favour of other third parties (e.g. employees’ credits), rank ahead of guarantees in rem.

It must be noted that retention rights (under which certain creditors are entitled to retain certain assets in their possession until their credit is paid) over a real estate asset prevail over a mortgage, even if such mortgage has been previously registered.

In case of different securities granted over the same asset, the oldest (for registration purposes) security shall be paid first. In fact, pursuant to Angolan law, the time of registration of a secu-rity is relevant for assuring the priority of the creditor.



depending on the nature of a specific project. A project may fall under the authority of a specific ministry, but in certain cases several ministries may have authority. This often occurs withlargeprojectsthatneed,forexample,toobtainanenviron-mentallicence,inwhichcasetheinterventionoftheMinistryofEnvironment(“MINAMB”)willalwaysberequiredatacertainstage.

7.2 Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

Private documents with acknowledgment of a payment of obli-gation shall only be directly enforceable before the courts if authenticated by a Notary Public or by any competent authority.Except for certain pledge arrangements which need to be

authenticated by a Notary Public or by any competent authority, project documents are valid and enforceable without any need for registration, authentication or filing with any governmental authority.

Financing agreements which involve non-resident entities are subjecttotheBNA’spriorapproval.

7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)?

Private ownership of land has been restricted in Angola and, presently, land in Angola is divided, in terms of ownership, into private land (whose property rights are held by private entities and individuals) and state land (whose property rights are held by the state of Angola). State land is further divided into state private domain land and state public domain land. Rights over state private domain land can be granted to private entities or individuals, while the use of state public domain land is limited andsubjecttospecialpubliclawrules.Pleaseseequestion2.2above for details regarding ownership of land granted to foreign entities.

All mineral and natural resources found in the country’s subsoil belong to the state, being deemed part of the latter’s “public domain”. The respective prospecting, exploration,development and production are normally carried out through a concession.Concessionrightsshouldbeexclusivelygrantedtothe national concessionaires (e.g. Sonangol and Endiama).

7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural resources?

Theexportofnaturalresourcesis,typically,subjecttospecificcustoms regimes (e.g. subject to special authorisations, formal-ities and specific fees) that may vary with regards to the type ofnatural resource. Bywayof illustration,holdersofminingrights are entitled to trade the product of the mine operations, in the terms set forth in both law and the relevant investment contract. Theexportofmineral resourcesdulyextractedandprocessed is typically not subject to customs duties and charges, exceptforfeesforservicesrenderedbycustoms. Inturn,thedirect or indirect exportation of raw (not processed) mineralresourcesissubjecttoa5%customsdutyoverthemarketvalueof the relevantmineral. TheexportationofAngolanmineralresourcesthatisnotexpresslyallowedundertheMiningCode

6 Foreign Investment and Ownership Restrictions

6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company?

Foreign investment projects, such as the incorporation of a localcompanyoracquisitionofshares inanexistingAngolancompany, are subject to the prior approval of the State Investment Agency (“AIPEX”).

The new Private Investment Law that entered into force in June 2018 introduced significant changes to the applicable legal framework. Local partnerships are no longer mandatory for investing in certain sectors of the economy, notwithstanding the localcontentrequirementsprovidedfor inregulationsspecifi-cally applicable to certain sectors, such as oil & gas. Also, there is now no minimum investment amount in order to be eligible for benefits and incentives.

6.2 Are there any bilateral investment treaties (or other international treaties) that would provide protection from such restrictions?

The Angolan State has signed bilateral investment treaties (“BITs”)withseveralcountries,suchasCapeVerde,Cuba,Italy,Germany, Namibia, Portugal, Russia, Spain and South Africa. Angola isamemberof theMultilateralInvestmentGuaranteeAgency(the“MIGA”)whichprovidesdisputesettlementassis-tance. Its past efforts to resolve foreign investment disputes haveproventobeextremelysuccessfuland,asaresult,expro-priation of private investment assets is today guaranteed to be fair. Angola also entered into a Trade Investment Framework Agreement(“TIFA”)withtheUnitedStatesinMay2009.

6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected?

The rules on nationalisation and expropriation procedures inAngola are still regulated by the Nationalization Law (Law 3/76 of 3March1976)andtheExpropriationLaw(Law2030of22June1948).Theseregulationswereactivelyenforcedinthepost-colo-nial era and led to the nationalisation of companies and seizure of significant real estate assets in Angola during this period. Although still in force, this statute is clearly outdated and inconsistent with the Angolan economic environment, the present wording of the Constitution and with the protection that is granted to private (and foreign) investors under the Private Investment Law. Thus, under the Constitution, it is only possible to temporarily seize the saidassetsorcarryout theirexpropriationforreasonsofpublicinterest, upon payment of fair and prompt compensation, which shallbeaconditionofeffectivenessoftheexpropriation.Inlightof these Constitutional provisions, the validity of the old statutes on nationalisation and seizure of assets may even be challenged.

7 Government Approvals/Restrictions

7.1 What are the relevant government agencies or departments with authority over projects in the typical project sectors?

Normally, the governmental investment entity (“AIPEX”) is the relevant government agency with authority and may vary

18 Angola


7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental practice or binding contract) on the payment of dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad?

As mentioned above (see question 7.5 above), transfers ofprofitsanddividendsabroadqualifyasinvisibleitemsoftrade.A precondition for the right to transfer profits is the relevant company having approved an investment project under the Private Investment Law. Other conditions related to timings andsubmissionofdocumentationtotheBNAwillalsoapply.

7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a project financing and which governmental authorities administer those laws or regulations?

The general principle set forth in the Angolan Constitution is that all citizens have the right to live in a healthy and unpol-luted environment and that the government must take the neces-sary measures to protect the environment. The Environmental Framework Law provides guiding principles for the prevention and control of pollution and standards to protect the environ-ment. A series of other laws and decrees provide for relatively extensiveregulationofenvironmentalprotectionandindustriallicensing. Environmental licensing is mandatory in the case of construction, installation, refurbishment, extension,modifica-tion,operationanddecommissioningofactivities that requirean environmental impact assessment study (e.g. agricultural, forestry, industrial, commercial, residential, tourism or infra-structure projects, which, by virtue of their nature, size or loca-tion, may have implications for the environmental and social equilibriumandbalanceor thoseactivities thathaveapoten-tially hazardous nature) or in the case of activities that are likely to have a considerable environmental and social impact. The MINAMBisresponsibleforimplementingandsupervisingtheprotection of environmental regulations.Crude oil exploration and production activities are subject

to a specific regime on environmental protection for the petro-leum industry. In addition to general obligations, oil compa-nies should take the necessary precautions to protect the envi-ronmentandlimittothegreatestextentpossibletheir impact;several environmentalplans are required foroperations. TheMinistry of Petroleum supervises the oil industry in Angolaand is responsible for implementing national policy and coor-dinating, supervising and controlling all petroleum-related activities.

7.10 Is there any specific legal/statutory framework for procurement by project companies?

The legal framework for public procurement in Angola applies to a wide range of public contracts, including: (i) public works; (ii) lease or purchase of movable assets; (iii) acquisition ofservices; (iv) other contracts to be entered into by public entities that are not subject to a special legal regime; (v) public-private partnership contracts; and (vi) defence and security contracts. Several amendments have been implemented with regard to the specific awarding procedures, which are now: (i) a public tender (without a qualification phase); (ii) limited bidding by

is prohibited. The exportation of crude oil is also subject toa specific customs regime and specific procedures must be followed.Theexportationofcrudeoilissubjecttoastatisticaltaxof1/100ad valorem.

7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange?

TheBNAistheforeignexchangecontrolauthority,whichhasa key role in terms of any repatriation of funds outside Angola. Under Angolan law, any entity with a registered office in Angola with local branches qualifies as resident for foreign exchangepurposes(“ForeignExchangeResidents”).Anycurrencytrans-fersbetweenaForeignExchangeResidentandaNon-ForeignExchange Resident are subject to different requirementsdepending on the nature of the underlying transaction. The transfer of profits abroad qualify as invisible items of trade.As mentioned above, a precondition and sale of shares, bonds and other securities, involving rights or obligations between residentsandnon-residentsqualifyascapitaloperations. Thefollowing rules apply:(i) capitaloperationsaresubjecttotheBNA’spriorapproval.

Theonlyexceptionisforcapitaloperationsofapersonalnature referring to donations from abroad, as well as inheritances and legaciesmade exclusively to individualsresiding in Angola;

(ii) the transfer of currency requests for a capital operationmust be made to the intermediary bank, which will then submitittotheBNA;and

(iii) the BNA’s authorisation for the transfer is valid for aperiodof180days. Theperiodcanbeextendedoneormore times in the case that the licence was not wholly or only partially used.

7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment returns or loan payments to parties in other jurisdictions?

Pleaseseequestion7.5above.

7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?

An offshore bank account can only be opened by an Angolan project company in the rare situation where authorisation from theBNAhasbeenobtained.Angolanprojectcompaniesmayfreely open a foreign currency bank account in Angola, though the operation of the said account is subject to the following limitations.

Credit operations in a foreign currency account are limited to:(i) a deposit of foreign currency arising from its activities; and(ii) a deposit of interest accrued over funds in the relevant

account. Debit operations in a foreign currency account are limited to:

(i) withdrawal or sale of foreign currency; and(ii) foreignexchangetransactionsinaccordancewithAngolan

foreignexchangeregulations.



The use of any other visa to perform work is illegal. In the event an employee works in Angolan territory without a work visa, the Angolan Visa Law stipulates fines applicable to theemployeeandtotheemployer(Kz1,000,equivalentto$5,000).In addition to this, the employee will be expelled from thecountryandtheemployerwillhavetopayallrelatedexpenses.

10 Equipment Import Restrictions

10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors?

Equipment entering Angolan territory that is to be used inthe country must be declared to the customs authorities and is subject to proper importation procedures. Only companies duly registered in Angola as importers are allowed to carry out import operations. As a rule, importations are subject to prior licensing procedureswiththeMinistryofCommerceandattractpaymentof customs duties and other customs duties (in aggregate up to a maximumof83%ofthecustomsvalue).Inaddition,dependingonthenatureoftheequipment,somespecificauthorisationsmayberequired(fromtheministrysupervisingtheuseoftherelevantequipment)andsomeadditionalproceduresmayapply.

10.2 If so, what import duties are payable and are exceptions available?

Equipment to be used directly and exclusively in petroleumexploration and production operations or inmineral explora-tion, evaluation, mining and processing operations may benefit from customs benefits.The importation of equipment under a private investment

project approved by the AIPEX may also benefit from customs exemptions.

11 Force Majeure

11.1 Are force majeure exclusions available and enforceable?

There is no legal definition for force majeure, but this concept is generally accepted and enforceable (by doctrine and the Angolan courts). It usually relates to events from which liability does not arise for those responsible for performing the obliga-tion affected by force majeure because the relevant events are by nature unpredictable, inevitable and irresistible.

12 Corrupt Practices

12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?

“Corruption” in the private sector is not a crime in Angola. In Angola, this crime may take the form of fraud, abuse of trust, forgery and other related common crimes.

Corrupt business practices and bribery targeting the public sector and public officials within the scope of the projects sector may generally constitute a crime of corruption in Angola.

Corruption offences are addressed in the Law on the CriminalisationoftheInfractionsRelatingtoMoneyLaundering

pre-qualification; (iii)a limitedtenderby invitation;and(iv)asimplified procurement. As a general rule, a public tender or a pre-qualification procedure ismandatory for contractswithanestimatedvalueequaltoorhigherthanKz182,000,000.00(approx. $1,075,126.55). The Law introduced the frameworkagreements in order to allow public contracting entities to set the terms and conditions applicable to contracts that shall be entered with one or more contractors/suppliers for a given period of time.

8 Foreign Insurance

8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?

Under the Angolan General Insurance Law and the Insurance Regulations, all insurance contracts with (i) Angolan authori-ties, (ii) activities carried out in Angola, or (iii) assets located in Angola, have to be entered into by insurance companies duly authorised to carry out insurance activity in Angola.However, theMinistry of Financemay authorise insurance

contracts to be entered into outside Angola with a foreign non-admitted insurer, subject to the favourable opinion of the Angolan Insurance Regulator (“ARSEG”) whenever the specificinsuranceinquestioncannotbeobtainedfromalocalinsurer. Theconsequenceof taking insuranceoutsideAngolawithouttheMinistryofFinance’sauthorisationisthattheobli-gations arising from such contracts, as well as foreign court or arbitration decisions regarding the said insurance contracts, will not be enforceable in Angola. The Law sets forth specific regu-lations for co-insurance for the oil & gas, mining, aviation and agriculture sectors.

8.2 Are insurance policies over project assets payable to foreign (secured) creditors?

Yes,inthecasethatalltheforeignexchangerequirementsarefulfilled.

9 Foreign Employee Restrictions

9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed by a project company?

PursuanttotheAngolanlabourrequirements,foreignnationalsmay only be hired for professional, technical or scientific job positions provided no Angolan nationals are available for such job positions.CompaniesoperatinginAngolaarerequiredtocomplywitha

statutoryratioofaminimumof70%Angolansandamaximumof 30% expatriates (the so-called “Angolanisation” policy).Failure to comply with this ratio may result in a fine of between seven and 10 times the company’s average monthly salary per eachexpatriateemployeeunlawfullyemployed.InordertoworklawfullyinAngola,anexpatriateemployee

must first obtain a work visa from the Angolan immigration authorities, which is, under Angolan law, the only visa that allows an individual to carry out paid work in the employment of a third party. Work visas depend on a local employment relationship between the relevant expatriate employee and anemployer with some sort of legal representation in the country (such as a branch or local company).

20 Angola


Protocol and Conventions. Law 3/14 implements some ofthe principles adopted under those Conventions, significantly widening the scope of the crime of corruption (including conducts thatqualifyas trading in influenceand thecriminaloffence of corruption in international business).

According to the information available, a new Criminal Code hasbeenpreparedandisexpectedtobeenactedsooninAngola.Reportedly, the Criminal Code will be aligned with the princi-ples contained in international conventions and does not differ muchfromtherulesenactedbymeansofLaw3/14.

13 Applicable Law

13.1 What law typically governs project agreements?

Pursuant to the Angolan Civil Code, the general principle is that the creation and enforcement of the contracts are governed by the law chosen by the parties. Concession contracts and other project agreements entered into with public entities are governed by Angolan law.

13.2 What law typically governs financing agreements?

Pleaseseequestion13.1above.Frequently,financingcontractsare governed by foreign laws.

13.3 What matters are typically governed by domestic law?

Angolan law shall apply whenever overriding mandatory provi-sions thereof are at stake (public order principles of the Angolan legalframework,suchasclausesexcludingorlimitingliabilityincases of wilful misconduct or gross negligence).

14 Jurisdiction and Waiver of Immunity

14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable?

Submission to a foreign jurisdiction and a waiver of immunity areeffectiveandenforceablecontractprovisions,totheextentpermitted by Angolan law.

15 International Arbitration

15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral awards recognised by local courts?

PursuanttotheAngolanVoluntaryArbitrationLaw(theprimarydomestic source of law relating to arbitration), parties enjoy full autonomy to designate the rules governing their proceed-ings and in doing so may choose to include specific procedural rules or simply refer to institutional rules, including those of the International Chamber of Commerce (“ICC”).

Hence, there should be no issues with the enforcement of an award based on the fact that it has been issued by the ICC. As to enforcement of arbitral awards per se, a domestic award is auto-matically enforceable in the country. However, awards rendered in international arbitration proceedings – determined as those where international trade interests are at stake, in particular where parties to the arbitration agreement have business domiciles in

(Law3/14of10February).Law3/14wasenactedinthecontextof the fight against money laundering, international criminal organisations and the financing of terrorism in compliance with obligations undertaken by the Angolan State under international conventions.TheLawonMoneyLaunderingandFinancingofTerrorism (Law 34/11 of 12December) sets forth the crimesof terrorism, money laundering, financing of terrorism and terrorist organisations.Amongotheroffences,Law3/14setsforthcorruption-related

criminal offences, including active and passive corruption (already provided for as criminal offences under the Criminal Code of 1886), and enacts the new criminal offences of trading in influence, receiving undue benefits and economic participation in business. PursuanttoLaw3/14,anypersonwhomakesapayment,gift,offerorpromisetoapublicemployeewiththeintentofexertinginflu-ence to obtain or retain business is criminally liable, and so is the public employee who has been bribed. Any person who gives or promises an undue pecuniary or non-pecuniary benefit to a public official carrying out the duties of his or her office, or because of those duties, commits a criminal offence of receiving undue bene-fits, and so does the public employee. Finally, provided that some conditions are met, public officials may be deemed criminally liable for the crime of economic business participation when obtaining unlawful advantages related to interests under their control or supervisionaspublicofficials.ThechapterofLaw3/14relatingtocorruption also includes the criminal offences of trading in influ-ence and corruption in international business.

Corruption practices involving customs officials are governed by a separate regime set forth in the Customs Code, approved byDecree-Law5/06of4October.However,theCustomsCodedid not fundamentally change the definition of corruption prac-tices previously contained in the Criminal Code and now in Law 3/14. TheAngolan legislator accepted that customs officialsare entitled to receive small gifts made for cultural or protocol reasons. The Customs Officials Career Statutes (approved by Presidential Decree 18/11 of 12 January) describes which gifts are permissible.APublicProbityLaw (Law3/10of29March)wasenacted

in 2010, the provisions of which have a major impact on the regulation of corruption in Angola. Among other objectives, this law aims to unify in one statute the different rules appli-cable to bribery in Angola, as well as to the actions of public officials. In brief, the mainstay of the Public Probity Law is the principle of administrative probity under which public offi-cials must perform their duties in an honest manner, and shall notrequestoracceptanythingofvaluewhichmayaffecttheirindependence or the good name of the public institution they represent. This means that, as a rule, public officials should not receive or benefit from offers, either directly or indirectly, from Angolan or foreign individuals or corporations for the perfor-mance of their duties.

At an international level, Angola ratified:(a) the Protocol Against Corruption of the Southern African

Development Community (“SADC”), as per Council of Ministers’Resolution38/05of8August2005;

(b) the United Nations Convention Against Corruption, as per National Assembly Resolution 20/06 of 23 June 2006; and

(c) the African Union Convention on Preventing and Combatting Corruption, as per National Assembly Resolution27/06of14August2006.

The provisions of the SADC Protocol and the Conventions are not directly applicable in Angola but are directed at the Angolanlegislativeentities.Theseshouldsubsequentlydeveloplegislation to implement the principles of the abovementioned



Any other interest derived from other loans or credit facilities paid by a local company to a non-resident entity is subject to a 15%InvestmentIncomeTaxwithholding(forloansgrantedbyresidententities,thetaxshouldbeassessedbythebeneficiaryofthe interest). As a rule, the mere enforcement of a security does not trigger any income subject to tax. If thepaymentof anyadditional proceeds is agreed between the parties, Investment IncomeTaxwithholdingmayapply.

17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

Foreign investment operations may benefit from tax andcustoms incentives provided that the investor’s project is submitted and duly approved by investment entities under the Private Investment Law. The key elements considered by the Angolanauthoritieswhengrantingtaxandcustomsincentivesare the location of the investment and the sector of activity (the so-called Development Zones and Priority Sectors).The taxbenefitsavailable forprivate investmentoperations

include temporary exemptions from corporate income tax onprofits, withholding tax on dividends and conveyance tax ontheacquisitionof realestateproperty. Goodsandequipmentimported under a private investment project may also benefit from exemptions from customs duties and other customscharges.

Dividends paid by an Angolan resident company to its foreign shareholder – either individuals or corporate entities – are subject to a 10% Investment Income Tax withholding whichis their final tax liability in Angola. Tax must be withheldand delivered to theAngolanTaxAuthorities by the residentcompany.Saidwithholdingtaxisalsoapplicableinthealloca-tion of profits between a permanent establishment located in Angola and its foreign head office.Additionally, there is a supplementary tax over dividends

which was created by the new Private Investment Law. The supplementary tax is applicablewhenever the amountofdivi-dendsdistributedexceeds theshareholdercontributionon thecompany’s own capital, as detailed below:(i) 15%,upto20%;(ii) 30%,between20%and50%;and(iii) 50%,whenitexceeds50%.The supplementary tax isnot applicablewhenever thedivi-

dends are reinvested in Angola.Loans and securities are subject to Stamp Duty in Angola –

ratesvaryfrombetween0.1%and0.5%dependingontheextentof the loan/guarantee – provided that one of the following requirementsismet:(i)theloan/securityisgrantedinAngolanterritory; or (ii) the loan/security is granted outside Angola but submitted therein for any legal purpose. Loans and securities granted by non-resident entities to an Angolan resident entity are always subject to Stamp Duty regardless of the place where they are signed.

Securities that are deemed materially ancillary of another contract already subject to Stamp Duty (e.g. a loan agree-ment), provided both contracts are entered simultaneously (i.e. the guarantee must be entered within 90 days after the main contract), are not subject to Stamp Duty in Angola.

differentcountries at the timeof theagreement’s execution,orthe place of performance of a substantial part of the obligations resulting from the legal relationship from which the dispute arises is situated outside the countries where companies have their busi-nessdomiciles,orwherethepartieshaveexpresslyagreedthatthescope of the arbitration agreement is connected with more than one state – are subject to prior recognition proceedings before Angolan judicial courts under the Civil Procedure Code.

15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution conventions?

Angola has been a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 12 August 2016, which is now fully applicable in national territory. However, in line with the reciprocity reservation made by Angola to the Convention’s Article I (3), international arbi-tral awards are recognisable and enforceable, so long as they are granted in the territory of another Contracting State.

It is important to add that there is still a certain level of resist-ance from local courts and practitioners in respect of arbitra-tion,althoughitisexpectedthattheaccessiontotheNewYorkConvention and its implementation will encourage courts to adopt an arbitration-friendly approach.

15.3 Are any types of disputes not arbitrable under local law?

Under Angolan law, parties are generally free to submit their disputestoarbitration,withanexceptionmadetodisputesthatfall under the state courts’ exclusive jurisdiction and disputesthat relate to inalienable or non-negotiable rights.

15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings?

This is the case, for instance, with disputes arising from private investment contracts (entered into between the Angolan State and private entities under Angola’s Private Investment Framework) that are referred to arbitration, the same applying to disputes concerning petroleum activities.

16 Change of Law / Political Risk

16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees?

Typically, those agreements do not provide any particular polit-ical risk protections and the change-in-law risk is addressed by contract in the standard and international terms for project finance agreements.

17 Tax

17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security?

Interest paid under a shareholder’s loan to a local or foreign share-holderissubjecttoa10%InvestmentIncomeTaxwithholding.

22 Angola


19.2 In what circumstances may Shari’ah law become the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector?


19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?

It is common practice in Angola to include an interest payment in a loan agreement subject to Angolan law, which is fully valid andenforceable. The law foreseesmaximumratesof interestthat should be quarterly updated due to the inflation rates inthe country.

18 Other Matters

18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction?

There are no other material considerations.

18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market instruments.

TheAngolanSecuritiesCodeisquiterecentandtheregulationscontaintheorganisationalrulesandadministrativerequirementsfor open companies and other issuers of securities admitted to tradinginregulatedmarkets.Thereislittleexperienceincapitalmarkets in Angola regarding the emission of bonds or similar capital instruments.

19 Islamic Finance

19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an Islamic project financing in your jurisdiction.

There have been no reports of the use of Islamic instruments in project finance in Angola.

23

Manuel Protásio joined VdA in 1991 and currently is the Group Executive Partner of the Infrastructure, Energy & Natural Resources group. In such capacity he has participated and/or led the teams involved in the most relevant projects carried out in Portugal to date in the power (including renewable energies), oil & gas, road, transport, water and wastes sectors. He has also been actively working on the regulation and public procurement procedures of those sectors.Academic background Law Degree, Catholic University of Lisbon, Faculty of Law.Published worksAuthor of various articles including the chapter about Portugal in The Projects and Construction Review, published by Law Business Research in 2016, 2017 and 2018.MembershipsAdmitted to the Portuguese Bar Association.Admitted to the Timor-Leste Bar Association (Conselho de Gestão e Disciplina).LanguagesEnglish and French.

VdARua Dom Luis I, 281200-151 Lisboa Portugal

Tel: +351 21 311 3400Email: [email protected]: www.vda.pt


VdA / ASP, Sociedade de Advogados, RL

Vanusa Gomes joined ASP, Sociedade de Advogados, RL in 2015. She is a Managing Associate at the M&A, Banking & Finance, Corporate & Governance, Tax and Employment & Benefits practice areas, where she has been actively involved in several transactions in Angola. She has advised several clients in diverse sectors in transactions such as mergers, spin-offs, joint ventures and group restructuring operations. She has particular and vast experience in M&A transactions within the TMT and Banking & Finance sectors. Vanusa has also provided tax assistance to groups and corporations in the international and domestic tax optimisation of banking and financial structures, real estate projects and domestic supplies of goods and services.Academic backgroundLaw Degree, University of Coimbra, Faculty of Law.Other professional backgroundBefore joining the firm she worked as a Senior Associate at Siqueira Castro & Nobre Guedes and at Miranda Alliance (Miranda Correia e Amendoeira & Associados/Fátima Freitas) in Luanda.Teaching chairsAssistant professor of Commercial Law at the Faculty of Law of the Metodista University of Angola.MembershipsAdmitted to the Angolan Bar Association.LanguagesEnglish.

ASP, Sociedade de Advogados, RLEdifício Dália Plaza – Av. de Portugal 31–35, 9.º Andar LuandaAngola

Tel: +244 226 430 291 Email: [email protected]

Vieira de Almeida (VdA) is a leading international law firm with more than 40 years of history, recognised for its impressive track record and inno-vative approach in corporate legal services. The excellence of its highly specialised legal services covering several sectors and practice areas enables VdA to overcome the increasingly complex challenges faced by its clients. VdA has successively received the industry’s most prestigious international accolades and awards, and the recognition of the firm’s excel-lence is attested by the most relevant professional organisations, legal publications and universities.Through the VdA Legal Partners network, clients have access to 13 juris-dictions, with a broad sectoral coverage in all Portuguese-speaking and several French-speaking African countries, as well as in Timor-Leste.ASP, Sociedade de Advogados, RL is VdA Legal Partners’ associated firm in Angola. The firm enjoys extensive experience in Angolan law transactions,

particularly in the finance, oil & gas and telecoms sectors. In addition to Angola, VdA Legal Partners is present in the following countries: Cabo Verde, Cameroon, Chad, Congo, Democratic Republic of the Congo, Equatorial Guinea, Gabon, Guinea-Bissau, Mozambique, Portugal, São Tomé and Príncipe and Timor-Leste.

www.vda.pt



Chapter 424

Bolivia

Criales & Urcullo Abogados José A. Criales

Adrián Barrenechea B.

Bolivia


road that connects La Paz and Oruro, 211 kilometres long, with an approximate cost ofUSD 312.3million, and theChimoréInternational Airport, located in the Chapare Province in Cochabamba, with one of the longest runways in the country andanapproximateinvestmentofUSD35million.

Following the fall in international mineral and oil prices, and realising the need to incorporate the private sector in large-scale projects, from 2015 to 2019, the National Government as well as two Regional Governments (Santa Cruz and Tarija) passed legislation that would allow State bodies as well as State-owned companies toenter intoPPPs inorder toexploreandexecutesuch large-scale projects, applying Project Finance mechanisms.

Under that scenario, two projects have been announced by theGovernment:(i)theViruViruInternationalAirportCargoHub(furtherexplainedbelow),foranestimatedvalueofUSD420million;and(ii)PuertoBush,foranestimatedvalueofUSD780 million.


During the past few years, some private initiatives were financed by applying Project Finance principles, two of them in the sugar-alcohol industry (Industria Sucroalcoholera Aguai S.A.andIngenioSucroalcoholeroISAS.A.).InbothcasesSPVswere incorporated: suchSPVs executed long-term firm intakeagreementswithsugarcaneproducers,atafixedprice(adjust-ableatafixedrate),andthenexecutedlong-termalcoholdeliveryagreementswith internationalpurchasers, also at fixedprices.Finally, with both agreements in place, both companies issued long-termbondsintheBolivianStockExchangeforUSD184million and USD 120 million, respectively. In both cases, the issuances were structured so that creditors, or bond holders, would not have any recourse over the sponsors’ balance sheet.

To our knowledge a meat producer company, with a long-term beef delivery agreement, is currently structuring a similar project(completelyprivate),whichisexpectedtolaunchin2021,andseekstoexpandsuchcompany’smeatprocessingcapabili-ties and infrastructure.In 2019, the Bolivian Government announced that it was

seeking to create a PPP for the design, construction and opera-tionofaCargoHubinViruViruInternationalAirport,locatedin Santa Cruz. In order to do that, new legislation was passed to accommodate and to allow the creation of a public-private SPV. Althoughfewdetailshavetranspired, itwasannouncedby the Government that the private partner would be in charge of procuring and securing the financing source, and that Project Finance mechanisms would be used for the project. The esti-matedvalueofthisdealisUSD420million.

1 Overview


For the past 14 years the BolivianGovernment has imposedleft-oriented policies, by which the most important economic sectors, as well as the most important economic initiatives, were reserved for the State only, acting directly or through State-owned companies, principally in the Hydrocarbons, Energy, RoadConstruction,Basic Sanitation andTelecommunicationssectors. This left very little room for private participation in large-scale projects, typically funded through Project Finance mechanisms.

The aforementioned policies, followed by a wave of nation-alisations, in the Hydrocarbons and Energy sectors, along with radicalshiftsintheMiningSector,greatlyslowedprivateinvest-ment and private participation in key projects and sectors. However, through most of that time, from 2005 through 2016, a rise in the international prices of minerals and hydrocarbons created a favourable macro-economic environment which some companies took advantage of, in spite of the Government’s rather unfriendly attitude towards private initiatives.Underthatscenario,thelargestprojectsdevelopedinBolivia

belonged to the Hydrocarbons and Energy sectors, followed by infrastructure projects.

The source of financing for the aforementioned projects was theBolivianCentralBank,whichenteredinto“ExtraordinaryLoanAgreements”withYPFB(theState-ownedHydrocarbonscompany) and ENDE (the State-owned Energy company) both foroverUSDtwobillion(combined),andtheMinistryofPublicWorks, Services and Housing (Ministerio de Obras Públicas, Servicios y Vivienda).In the Hydrocarbons sector, the “Gran Chaco” Liquids

Separation Plant was constructed, with an estimate investment of USD 609 million and began production in 2016. Its capacity is of about 2,037 t/d (tonnes per day) of LNG; Downstream, Midstream, Onshore, 1,054 b/d (barrels per day) fromRefineries; 2,030 t/d (tonnes per day) from Refineries; and 2,087 b/d(barrelsperday)fromRefineries(asreportedbyYPFB).

In the Energy sector, about USD 200 million was invested in Energy Generation Project, either directly by ENDE or its subsidiaries, principally in thermoelectric plants and combined cycle plants; some USD 65 million has been invested in Transmission infrastructure; and USD 35 million in Distribution networks.Ininfrastructure,theMinistryofPublicWorks,Servicesand

Housinghasfinancedtwoquitelargeprojects,oneofwhichisa

25Criales & Urcullo Abogados


becomes the payee in substitution of the project company (in this case) for all future payments or instalments.

In order for the lender or creditor to be able to directly collect a single (or a few) instalments directly from a paying party or, in other words, to take security over receivables and be able to enforce it, the paying party needs to be included in the corre-sponding agreement.Thebasic principle behind this is that, inBolivia, a debtor

shall only be released when payment has been made effective, in fullandexactlyasagreeduponwiththecreditor.Thismeansthat if payment is made to a third party or in a different amount orthereexistsanyvariationwhatsoeverbetweenwhatwasowedandwhatwaspaid,thensuchdebtormaybelegallyrequiredtopay again and assume, as a loss, what was wrongfully paid (not withstanding the right to collect what was paid to a third party).

The aforementioned, along with very strict and arbitrary anti-corruption legislation (as explained in section 12), is thereason why, in practice, no public entity would grant or take security over receivables.Finally,more sophisticated (andexpensive)mechanismsare

available, which include the formation of a trust, administered by a financial institution, duly authorised to that end by the BolivianFinancial SystemRegulatoryAgency (ASFI). Underthis scenario, all receivables would be assigned to the trust, and thereon the trustee would deliver funds as instructed in the incorporation documents.


Notinthiscontext.Themeanstoachievethisinpracticewouldbe through setting up a trust.

It is not uncommon for banks to take security over cash deposited in the same institution and only for credits granted by them,butitrequireswrittenauthorisationfromthedebtor(andaccount holder) for them to withdraw monies from the corre-sponding account.


Yes, security can be taken over shares, provided that the corre-spondingagreementisexecutedviapublicdeed,thesharesareendorsed and the encumbrance is registered in the company’s books.


For assets subject to registration (movable or immovable) the approximate duties and fees are as follows: (i) 4/1000 of theamount of the loan; and (ii) USD 150 for the registry before a Notary Public.

As per shares, there is no cost of registration and security takenoverreceivables(subjecttotheclarificationmadeinques-tion 2.3 above)would need to be executed via a public deed,therefore cost (ii) above would apply.

Finally, in 2018, the BolivianGovernment entered into anMOUwithagroupofBolivianprivatecompanies,representedthrough the Santa Cruz Chamber of Commerce, in order to study,develop,designand,eventually,executetheconstructionof a port terminal in the south-eastern part of Santa Cruz. The conceptualprojectrequirestheconstructionofrailwaysaswellas paved roads in order to access the port itself, which shall serve asanexportpointforcargogoingthroughParaguay,principallytotheMontevideoportintheAtlantic.Theestimatedinvest-mentrequiredisofaroundUSD780million.

2 Security


Ingeneralterms,Bolivianlawdoesnotprovideanequivalenttoa “blanket lien”; therefore asset security must be given in rela-tion to each type of asset individually.

Furthermore, it is necessary to comply with certain formali-ties in order to encumber assets subject to registration (movable or immovable). Among said formalities there is: (i) the need to executethecorrespondingagreementviaapublicdeed,grantedbefore a Notary Public; (ii) the need to clearly and precisely indi-vidualise and identify each asset; and (iii) the need to register the security before the public registry in charge of registration of each specific asset.Inordertoclarifytheconcept,itispossibletoexecuteasingle

document for various assets, but they must be individualised and the encumbrance must be registered individually for each one.


Bolivianlegislationdividesassetsinto:(i)immovable(i.e.land,pipelines, industrial plants, etc.); and (ii) movable (i.e. shares, bonds, stock – in general, vehicles, machinery, etc.) and both categories are subdivided into being: (a) subject to registration; and (b) not subject to registration.

All assets subject to registration, whether movable or immov-able, may be mortgaged and the formalities briefly described inquestion2.1 abovemustbecompliedwith inorder for thecorresponding right to be enforced and opposed to third bona fide parties. In fact, the chronological order of registration will determine the preference of each security in the event of execution.


ThereisnospecificprovisionintheBolivianlegislation,inthisregard. However, in principle, since there is no legal prohibi-tion, it would be possible for private parties to provide security over receivables, provided that the paying party is included in the agreement or duly notified with it.Inthiscontext, it is importanttonotethatBolivian legisla-

tion does provide specific means to assign receivables (by means of, precisely, assignment) but, in that case, the lender or investor

26 Bolivia




Bolivianlawrequiresallcreditorsorlenderstoenforcewhateverguaranties they hold through public auction, carried out through specific court procedures. This rule holds true even in the pres-ence of an arbitration agreement, where the creditor or lender, after obtaining a favourable award, would have to seek a court order to enforce it. This means that there are no self-help meas-ures that a creditor or lender may take upon encumbered assets. Furthermore,foreclosureagreementsareexpresslydeemednullandvoidbyBolivianlegislation.

However, the specific proceedings vary depending on a number of factors, from the specific form of security (mort-gage, pledge, etc.) to the nature of the collateral asset (movable or immovable).

Regardless of the form, any creditor or lender may seek and obtainprovisionalremediesthat,inthecontextofthisanswer,may have an impact on the timing and value of the enforcement.

Finally, in respect of regulated assets, the very granting of them as security or collateral would need the review and, in some cases, consent of the relevant regulatory entity.


As stated above, foreclosure procedures are prohibited and any agreementthereofisdeemednullandvoidperBolivianLaw.



As a general rule, the commencement bankruptcy proceedings produce immediate effects over all of the project company’s assets and fully matures all debts, regardless of whether specific terms have been reached or not. In such an event, all credi-tors are ranked in accordance with the nature of their credits, a judge conducts the proceeding, and the creditor’s ability to freely enforce its rights is therefore hindered.

Notwithstanding the foregoing, bankruptcy proceedings are veryuncommon inBoliviaand, inmostcases,directnegotia-tions between debtors and creditors take place.


There are no preference periods or clawback rights set forth by the Bolivian legislation, in the context of a bankruptcyproceeding. Asperpreferentialcreditors’rights,ingeneral,taxdebtsand

employee claims shall be paid before any other creditor. After


The registration process and time will vary depending on the specific asset and registry.

For instance, registration of a mortgage before the Real State Registry can take between 15 to 90 days and notarisation of the relevant documents may take between three to 15 days.


If the assets belong to a regulated company and provide a public service (Hydrocarbons, Electricity, Basic Sanitation,Telecommunications, Transport), then, yes, regulatory consent couldberequired,provided,however,thatsuchsecurity,aseval-uated and interpreted by the specific regulator, could put the provision of such public service at risk.

Public property may not be encumbered without a formal law expresslyauthorisingit.

Private individuals and entities may freely encumber their assets without the need for regulatory consent.

3 Security Trustee


TheroleofatrusteeisrecognisedinBolivia,providedthatsuchtrustee is a financial institution duly incorporated and author-isedassuchbytheBolivianFinancialSystemRegulatoryAgency(ASFI).Inordertoappointatrustee,alllendersmustexecuteapublic

deed with the burrower. Furthermore, in accordance with the specific provisions contained in the aforementioned public deed, lenders shall have to grant a power of attorney for the trustee, specifically stating what actions it may take upon the security, collateral and the grant.


Subject to the foregoing answer, the financial institution (many financial institutions) may grant a power of attorney to a single agent in order for such agent to enforce all claims from the lenders, as long as they grant specific and deficient mandate.

However, in such a case, the agent shall only act on behalf of the lenders and perform the specific activities set forth in the corresponding power of attorney, but shall not become a trustee or collateral agent on its own.



Finally,Directorsarealsopersonallyliablebeforethetaxauthor-ities, due to their role as administrators of third parties’ assets.



TheBolivianConstitutionprovidesthatallandanyinvestmentsmust serve a social function and shall not go against the collec-tive interest. Even though this may seem very vague, it has served the Government as an instrument to order the closing of compa-nies (special purpose vehicles) belonging to foreign investors (i.e. Supreme Decree No. 28698), thus, any foreign investor should take into account the Government’s ability to decide whether a project company’s activities serve a social function or not.As per the Bolivian Central Bank’s Board Resolution No.

063/2014,allforeigninvestmentsinBoliviaaresubjecttoregis-tration before such entity, whether such an investment is made inequity,acontractor,ingeneral,inanyotherarea.However,it is important to note that, as per Investments Law No. 516, foreign investors shall be able to exercise any and all rightsgranted to Bolivian investors, provided that their investmentserves a social function.

As it occurs in other countries in Latin America, the transfer of control in most regulated companies (providers of public services) is subject to control and prior approval by the corre-sponding regulatory entity.Finally, there is a 12.5% tax levied on the transfer of divi-

dends from any local company to a foreign investor, called the “Impuesto a las Utilidades de las Empresas – Beneficiarios en el Exterior”. Naturally, in this case, the local company is responsible for with-holdingandpayingsaidtaxonbehalfoftheforeigninvestor.


As stated in question 6.1 above, there are no real restrictionsthat would apply to foreign investors. However, it is impor-tanttonotethat,startingin2006,Boliviadenouncedallofthe21BITsithadsigned.On6May2013,Boliviadenounced13BITscollectively,amongwhichwereBITssignedwithBelgiumand Luxembourg, Ecuador, Peru, Chile, France, Romania,Germany,Argentina,China,DenmarkandGreatBritain.AsperInvestmentsLawNo.516,Boliviashallbeginnegoti-

atingnewBITsthatcomplywiththeState’s“Cosmovision”andits policies.


Article 57 of the Bolivian Constitution authorises theGovernment to expropriate private property whenever suchpropertydoesnotfulfilasocialpurposeorwhensuchexpropri-ation is needed for the public good.

Whenever determining whether a private property serves a social purpose, the definition of such is very clear regarding land (and its correlating ownership rights). However, there is no clear definition for any other type of private property, so in the event ofnationalisationsorexpropriations,theGovernmentmakesadecision on a case-by-case basis.

all such debts have been fully paid, secured creditors are given preference over unsecured creditors.

Notwithstanding the foregoing, it should be noted that the BolivianCivilCodeprovidesthatanycreditor(securedorunse-cured) may seek court intervention in order to nullify or revoke any acts, performed by its debtor, which have a negative impact on its assets and, in turn, may affect the ability of such creditor to enforce its rights and obtain payment.


In general, all regulated companies are excluded from bank-ruptcy proceedings, due to the fact that upon default they shall be subject to administrative intervention by the corresponding regulatory authorities and, should such authorities deem it necessary, begin compulsory liquidationproceedings,withnoneed of a judge intervening.

Even though the most visible case is in the financial services sector – where the applicable legislation is the Financial Services Law –, the Pensions Law, Electricity Law, Hydrocarbons Law, and Insurance Law, among others, provide the specific frame-worksforinterventionandliquidationofregulatedcompanies.


As stated in the answer toquestion4.1 above,Bolivian legis-lation does not allow self-help measures and therefore a short answertothisquestionwouldbe“no”.

However, there are processes, other than court proceed-ings, that may allow a creditor to seize the assets of the project company, provided, however, that such company accepts and expressesitsconsent.

The most straightforward of such processes would be a “dación en pago” or “datio in solutum”, which is defined as the discharging of an obligation by the giving and acceptance of something other than the thing owed (Black’s Law Dictionary, 423 (8th Edition, 2007)). In this case, both the creditor and the debtor must accept, in writing.


There are no such proceedings contemplated by Bolivianlegislation.


InBolivia,directorsarepersonally liable(civilandcriminally)for any loss or damage suffered by the company or bona fide third parties, provided that their actions were fraudulent or wilful.

In the event of financial distress undergone by the affected company, directors are expected to continue conducting suchcompany’s ordinary business within their normal managing powers, as determined by the statutes, articles of incorporation or corresponding documents.

28 Bolivia


Boliviancompanies(incorporatedinthecountry)withminorityforeign capital.

Finally, in order to operate a business in a regulated sector (i.e. Electricity, Hydrocarbons, Transport, Basic Sanitation,Telecommunications, etc.) the project company may need a concession in some cases, and a licence in other cases (a clear distinctionbetweenthetwoismadeintheBolivianlegislation),but regardless of the type of permit, it cannot be granted to a foreign entity.


Asageneralrule,onlytheBolivianState(throughaState-ownedcompany)mayextractandexportnaturalresources.

However, private companies may enter into service or associ-ation agreements in order to operate in one or more areas of the productive chain. Such agreements are subject to paying royal-ties(i.e.12%inthecaseoftheproductionofanoilandgasfield).

The aforementioned applies also to the mining sector where any mining company must first offer for sale (obligación de oferta de venta) all production, minerals and ore concentrates, first to State-owned smelters and refineries, then to private smelters and refineries(withintheBolivianterritory)andonlytheremaindermaybefreelyexportedtotheinternationalmarket.


There are no restrictions on foreign currency exchange inBolivia; currency is freely convertible at Bolivian banks andexchangehouses.However,thereisaspecifictax(ITF)leviedontransactionsmadeinforeigncurrencies,of0.3%ofthetotalamount.

Furthermore, any banking transaction above USD 10,000 (oritsequivalent)inoneoperationorintotalinthreeconsecu-tivedaysrequiresaformstatingthesourceoffunds.Inaddi-tion,anyhardcurrencycashtransferfromortoBoliviaequaltoorgreaterthanUSD10,000(oritsequivalent)mustberegis-tered with the customs office. Amounts between USD 50,000 (or itsequivalent)andUSD500,000(or itsequivalent)requireprior authorisation by the Bolivian Central Bank and quanti-ties aboveUSD 500,000 (or its equivalent) require authorisa-tionbytheMinistryoftheEconomyandPublicFinance.Thefineforunderreportinganycashtransactionisequalto30%ofthedifferencebetweenthedeclaredamountandthequantityofmoney found.


Article352oftheBolivianConstitutionrequiresthatallprofitsoriginating in the production (in general terms) of natural resourcesbereinvestedinBolivia.Todate,thereisnospecificlegislation to accompany or further regulate the aforemen-tioned Constitutional Provision; so for now, foreign investors arefreetorepatriateprofitsafterthewithholdingof12.5%tax,describedinquestion6.1above.Finally,asdescribedinquestion6.1above,allforeigninvest-

ments and loan agreements should be registered before the BolivianCentralBank.

Inanycase,foranyandallnationalisationsorexpropriationsjustpayment(asdefinedbytheGovernment)isrequired.

No form of investment is specially protected.



In general (common to any and all investments), aside from all Government and regulatory agencies involved in granting incor-poration permits and titles, any and all investments likely to have an impact on the environment must obtain an Environmental Licence.

Other than that, for each project, depending on the area where the project shall be developed, the project company may be subject to different regulations and permits, granted by different governmental agencies.

Since the most significant project financings have taken place in the Infrastructure, Hydrocarbons and Electricity sectors, the most relevant governmental agencies would be:A) MinistryofPublicWorks,ServicesandHousing(Ministerio

de Obras Públicas, Servicios y Vivienda).B) ElectricityRegulatoryAgency (Autoridad de Fiscalización y

Control Social de Electricidad ).C) Hydrocarbons Regulatory Agency (Agencia Nacional de

Hidrocarburos).


In general terms, all contracts entered into by commercial enti-ties are subject to registrationbefore theBolivianRegistryofCommerce, although non-compliance with such registration would not ultimately affect the ability of the lender or investor to enforce the document.Inadditiontothat,anyloanagreementsthatrequireforeign

capitaltobetransferredtoBoliviashouldberegisteredbeforetheBolivianCentralBank,asper theBolivianCentralBank’sBoardResolutionNo.063/2014.Theeffectofnoncompliancewith this registry is, at this point, unclear, as there is no legisla-tiontoaccompanyorfurtherregulatetheBoard’sResolution.

Finally, depending on the specific sector where the project shall be developed, some documents may need to be filed before the corresponding regulatory agency (which needs to be deter-mined on a case-by-case basis).


AspertheBolivianConstitution,allnaturalresourcesbelongtothe State and they may not be transferred at any title, whether to foreign or domestic individuals or entities, therefore, in no event may a project company hold ownership titles over natural resources.Furthermore, the Bolivian Constitution provides that no

foreigners may possess nor own land in areas located in a 50-kilometre border zone, whether directly or indirectly. The extentofthisprovisionisnotclearintermsofhowitappliesto



8 Foreign Insurance


InBolivia,both individualsand legalentitiesareforbiddentoobtain insurance coverage from insurance companies not incor-porated and duly authorised in Bolivia. However, insurancecompanies do seek and obtain reinsurance from companies located abroad.


As long as foreign (secured) creditors are defined as benefi-ciaries in the corresponding policies, insurances companies shall pay.However,paymentwillonlybemadeeffectiveinBoliviaand not abroad.



In general, any foreign worker, in order to legally work in Bolivia,needstoholdaspecialpurposevisagrantedbyBolivia’sMinistryofExternalRelationshipsand,forthattooccur,acopyof the relevant contract must be submitted, along with other administrativerequisites(i.e.passport,filledoutforms,etc.).Finally,theLabourLawdeterminesthatatleast85%ofany

company’sworkersmustbeBolivianCitizens.



There are no restrictions on importing project or construction equipment,andallimportsarechargedwithabaseVAT(13%of the commercial invoice) and a Customs Tariff that varies depending upon a number of factors that includes the specific product’scategoryinBolivia’sCustomsTariffSchedule.

There are also different forms of import, definitive import and temporary import, for a limited time (for up to two years) and for specific activities.


Asstatedinquestion10.1,therearesimplytwoduties,VATandthe Customs Tariff.Theonlyexceptionisthetemporaryimportofgoods,under

which no tax or duty needs to be paid; however, a guaranteebond(inthetotalamountofbothtaxandCustomsTariff )mustbe obtained.


There is no restriction for project companies to establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions.


There are no restrictions on the payment of dividends from a project company to its parent company. However, it should be notedthatBolivianLawprovidesthattheprojectcompany(anycompany)must pay 25%on declared profits (before distribu-tion) and, should the parent company be incorporated abroad, anadditional12.5%(calculatedonitsshareoftheprofits)shallbe withheld before remittance, by the project company.


In principle, all and any activities susceptible to having an effect on the environment (all activities, in practical terms) need an EnvironmentalLicence,grantedbythecorrespondingMinistry,before the investment phase begins (as defined by Law 1333).Asperhealthandsafetylaws,theBolivianGovernmentsets

forth minimum standards that must be met by any company.In both cases, general laws that provide the framework are

enactedbytheLegislativeBranchasformalLawsandareregu-lated by the Executive Branch by the enactment of SupremeDecrees. Since the latter provide the specific regulations and application procedures for formal Laws and can be changed at anymomentbytheExecutiveBranch,potentialinvestorsneedto take into account that rules may change at any point.

Notwithstanding the aforementioned, it is important to note that Bolivian Legislation (and Jurisprudence) recognisesrecourses for the protection of private property against sudden and arbitrary changes in legislation (certainty of law), but they are generally cumbersome and, until revoked by the competent authority, all norms remain in full force and effect.


Provided that all parties in the transaction are private parties, there is no specific framework, and the applicable legislation would be civil/commercial.

However, if any of the parties to the transaction is a public entity, then the “Normas Bássicas de Administración de Bienes y Servicios”(BasicNormsfortheAdministrationsofGoodsandServices) apply and the procedures thereof vary depending on the monetary amounts contemplated, public tender processes being the general rule.

30 Bolivia


Bolivian law specifically provides that nopublic entities shallsubmit to arbitration proceedings either local or international and, in contrast, any party that enters into an agreement with a Bolivianpublicentitymustwaiveanyformofimmunity(whichwould not be recognised nor enforceable, in any case).

As per private individuals, they may freely submit to the juris-diction of a foreign court, arbitral tribunals or law.



Yes, provided that no public entity is involved.TheBolivianCivilProceduralCodespecificallyprovidesan

“Arbitration Defence”, which may be utilised by a defendant whenever an arbitration clause or agreement has been agreed upon by such defendant and the plaintiff.


No, Bolivia is not a contracting State to the New YorkConvention and has denounced all prominent dispute resolution conventions and treaties.


In general, private parties may freely submit to arbitration of all and any disputes arising from what is considered freely disposable.


In general, private parties may freely submit to arbitration of all and any disputes arising from what is considered freely dispos-able rights.

Notwithstanding the foregoing, Constitutional rights, Labour rights, criminal cases, and the public order may not be submitted to arbitration.



During the nationalisation of all natural resources, many have raised the concern for the political stability and certainty of law and, therefore,haveurgedtheBolivianState toprovidepolit-ical risk protections.Every time the concernhas been raised, theBolivian State

has refused.As per Political Risk Insurance, we know of some investors

that have obtained it from multilateral agencies, but to the best of our knowledge, no claims have been made.

11 Force Majeure


BoththeBolivianCivilandCommercialCodesprovideexcep-tions from liability due to force majeure in general terms. For any party to claim force majeure, it is necessary to demonstrate that the specific event was not foreseeable or, when foreseeable, reason-ably impossible to stop.

Private parties may include more specific terms in private contracts.



Yes, the Bolivian Criminal Code and “Marcelo Quiroga Santa Cruz”Lawdeterminepenaltiesthatrangefromsixmonthsto10 years in prison, depending upon the specific crime and the status of the person that commits it (whether a civil servant, a contractor, etc.). In any case, for these laws to apply a public entity must be involved, whether directly or indirectly.In any event, Bolivian legislation provides that any party

found guilty of committing a corruption crime (in a broad sense) shall be liable to paying civil damages.It is important to note that Bolivian legislation does not

include private acts (between private entities) in the definition of corruption crimes (in a broad sense).

13 Applicable Law


TheBolivianConstitutionprovidesthatallindividualsandenti-tiesaresubjecttoBolivianlawandcourts.

Notwithstanding the foregoing, private parties may agree upon selecting a different governing law, but such an agreement may only be enforceable in an international arbitration proceeding.


As explained in section 1, over the last period, the BolivianGovernment has financed and developed most significant projects directly and the participation of the private sector has been, really, marginal. Therefore,subjecttothatclarification,Bolivianlawtypically

governs financing agreements.


Pleaserefertoquestions13.1and13.2above.



Per the Bolivian Constitution, all individuals and entities inBolivia are subject toBolivian law and courts. Furthermore,




There is no legal imposition beyond the compliance with the BolivianStockExchangeLaw.

However, as a Constitutional provision, no individual or entity may, at any title register, declare any rights over natural resources (even concession or licence rights). This provision has proved to be disadvantageous for companies operating in the natural resources sector, seeking financing in the stock markets, because, naturally, this does not allow them to register contracts and project cash flows.

19 Islamic Finance


This does not apply.





17 Tax


Provided that no remittance is made, there is no legal prevision thatwouldsetforthsucharequirement,foreithercase.

However, whenever payments are remitted abroad, then the 12.5%wouldhavetobewithheld.


TherearenotaxincentivesprovidedtoforeigninvestorsinBolivia.When a local individual or entity has entered into a loan

agreement(inBolivia,subject toBolivian law), theremittanceofproceeds(interest)issubjecttoa12.5%withholding.

18 Other Matters


Asdescribedinsection1,currentlytheBolivianState,throughtheBolivianCentralBankandState-ownedcompanies,isdevel-oping most projects in the country and private participation is very limited and rather shy.

All lenders and investors need to carefully follow due dili-gencebeforeinvestinginBoliviaandneedtotakeintoaccountthevolatilitywithwhichBolivianauthoritieshaveactedinthepast.

Although there seems to be an opening to more competitive rulesandtowardsforeigninvestments,theBolivianpoliticalandlegal systems remain as something to take into account.

32

Adrián Barrenechea B. is a Partner at Criales & Urcullo and his practice focuses on complex and cross-border transactions.Adrián regularly participates in and, in many cases, leads teams in charge of our largest clients, projects and transactions. His ability to break down seemingly complex matters into smaller aspects, in order to tackle them individually, makes him our go-to partner when matters get complicated and require a head-on approach to move forward.Adrián’s understanding of different aspects of a transaction, from commercial to civil law, construction requirements and permits, to taxation, negotiation and accounting principles allow him to see eye-to-eye with clients focused on the business aspects of a transaction, rather than concentrating on only its legal matters.

Criales & Urcullo AbogadosCalacoto, calle 9Entre Av. Ballivián y Av. Sánchez Bustamante #7979Piso 5, Oficina “D”La PazBolivia

Tel: +591 2 277 5656Email: [email protected]: www.bolivialaw.com

Criales & Urcullo is one of Bolivia’s leading law firms in all of its practice areas.The Firm was founded in 1996 as the result of a merger between: (i) “Bufete Urcullo”, a family law firm dating back to 1825, when the Republic of Bolivia was founded – in fact, a member of Bufete Urcullo participated in the drafting of the first Bolivian Constitution – and; (ii) “Criales y Asociados” a boutique law firm that actively participated in the profound social, economic and political reforms undertaken by the Bolivian Government during the 1990s, by advising foreign investors landing in the country and the Bolivian Government in the drafting of important legislation, ranging from the creation of the Bolivian Stock Exchange, to the Pensions System reforms, Electricity Law, Hydrocarbons Law and many others.Today, Criales & Urcullo is ranked among the top law firms in Bolivia in all of its practice areas, and many of its partners are ranked as leading individ-uals by prestigious international publications such as Chambers and Partners (www.chambersandpartners.com), The Legal 500 (www.legal500.com),

International Financial Law Review, ILFR 1000 (www.iflr1000.com), Leaders League (www.leadersleague.com) and Expert Guides (www.expertguides.com). The Firm is principally known for its multifaceted approach to all matters, which include a commercial point of view, tax implications, accounting aspects and strategic financial points of view.

www.bolivialaw.com


Bolivia

José A. Criales is a Founding Partner at Criales & Urcullo and is an attorney with over 30 years of experience.During the course of his career, José Antonio was in charge of some of the largest and most complex transactions undertaken in Bolivia, as well as the drafting of important legislation that stands today, and under which the most important economic sectors in the country currently operate, such as the Electricity Law, Hydrocarbons Law (Law No. 1689), Pensions Law, Stock Markets Law, and many others.José Antonio is well regarded as a very experienced all-round attorney, whose transversal knowledge across different sectors, as well as his outstanding negotiation skills, make him the perfect choice for complex matters.José Antonio is ranked as a leading individual, especially in the commercial field, by prestigious international publications such as Chambers and Partners (www.chambersandpartners.com), The Legal 500 (www.legal500.com), International Financial Law Review, ILFR 1000 (www.iflr1000.com), Leaders League (www.leadersleague.com) and Expert Guides (www.expertguides.com).

Criales & Urcullo AbogadosCalacoto, calle 9Entre Av. Ballivián y Av. Sánchez Bustamante #7979Piso 5, Oficina “D”La PazBolivia

Tel: +591 2 277 5656Email: [email protected]: www.bolivialaw.com



Chapter 5 33

Brazil

Dal Pozzo Advogados Renan Marcondes Facchinatto

Augusto Neves Dal Pozzo

Brazil


norms regarding being taken as security. In these cases, secu-rity has to be noted in the airplane or boat deed in the public records.But,asstated,forallgeneralcases,includingsecuritiesissued under Project Finance agreements, a specific contract or a specific provision in the Project Finance agreement has to be signed by parties.


As a Civil Law country, all securities are established by a specific legislative act. As a general rule, any type of asset can be named as security, but the general rule is to enforce judicially and sell theassetsothatproceedsareusedtopaythecreditor.Anexcep-tion applies to the “fiduciary cession” where banks do not need judicial proceeding for auctioning the assets taken as security.


No. In order for the chargor to collect, the debtor must incur breach of contract or default. Specifically in PPPs (including user-pays PPPs, traditionally known in Brazil as “conces-sions”), the Public Authority has to be notified. In some cases, depending on the PPP contract provisions, the Public Authority has to approve collection in case of contract breach or default by the debtor.


Yes, and according to our Civil Procedure Code it is the general rule. The creditor has to obtain a judicial warrant in order to notifytheBank.


Yes,andinBrazilallsharesareincertificateform.Accordingto our Civil Code, it is possible to do so, but it is only possible if all other forms of security have been depleted or insufficient.

1 Overview


The recent creation of the “Taxa de Longo Prazo – TLP” has broughttheNationalDevelopmentBankslendingratesclosertomarketconditions.Also,theconsistentpolicybyBancoCentral(similar to American FED) to reduce the SELIC Rate (similar toLIBOR)has shownsignsof incentive for investors to takemorerisk.BothfactsmakeamuchbetterscenarioforProjectFinance to be offered by commercial banks. Also, in 2011 the FederalActno.12.431wasenactedtofosterbondsinfinancinginfrastructure.


TheroadconcessionsintheStateofSãoPauloin2009,2014and,more recently, 2019 are all financed via Project Finance. The last is the “Piracicaba-Panorama Project” that encompasses a 1,200 km road in São Paulo countryside with an estimated CAPEX of14billionreais.ThiswasalsothefirstcaseinBrazilwhereaconsortium was formed only by financial investors, in this case, the Singapore’s Sovereign Fund and Pátria Fundo de Investimentos, a national and well-recognised fund. Public lighting projects are also being financed via Project Finance thanks to the fact that thereisaspecialtaxpayedbyelectricityconsumersthatmustbeused to operate and maintain public lighting systems. National parks are the latest development and very famous parks such as IguaçuFallsand“LençóisMaranhenses”areofficiallylistedinthe federal PPP pipeline for structuring, probably in 2020.

2 Security


Under Brazilian law, our Civil Code demands that a specificcontract is signed for each security. Depending on the secu-rity class, for instance, security provided by a specific insur-ance policy – such as the guarantee insurance – has to be issued by a regular insurance company. Insurance companies are regulated by “Comissão de Valores Mobiliários – CVM” (likethe American SEC). Assets like airplanes or boats have special

34 Brazil



Althoughsecuritytrustsexist,itispossible,especiallyforsmallcontracts, to enforce the mechanisms of parallel debt and joint and several creditor status.



(a) Except for the fiduciary cession (a specific securityonlyenforceable by banks and other financial companies), everysecurity requiresenforcementby the judiciary. Asa general rule, the assets have to be auctioned in a judi-cial proceeding and the proceeds will pay for the default. Nonetheless, as of 2015, the new Civil Procedure Code allowsfordirectexpropriationofassetstakenassecurity,butitalsohastoberequestedunderajudicialproceeding.Court blocks apply where no security has been taken.

(b) In respect to regulated assets, such as public utilities and public and governmental infrastructure, as stated previ-ouslyinquestion2.2,theassetscannot,underanycircum-stance,beexpropriatedorsoldtopayfordefaultedobliga-tions. In these cases, though, the Concessions Legislative Act provides for having the PPPs’ receivables as security as well as ensure that the Lender can step in to avoid bank-ruptcy by refinancing debt and restructuring the project’s expenses.


No,inthiscircumstance,foreigninvestorsaretreatedequallytonational investors.



In case of bankruptcy, security taken by financial agents, such as banks, can only enforce security after all tax credits havebeen paid by the bankrupt company. After the government and banks,nextinlineareemployeesandlastcomegeneralsecurityand general creditors.


Notarisation, registration, stamp duty and other fees will apply, butarecontingentonstateandlocalregulation.Asanexample,for a USD 1,000,000-worth real estate asset, property registra-tion in the Public Registry of Real Estate Deeds costs around USD 2,500; deed notarisation costs are also around USD 2,500; realestatetax inthestateofSãoPauloamountsto3%oftheasset price, so it would be around USD 30,000. Notarisation of therealestatesecuritydeedcostsapproximatelyUSD2,000plusaround USD 1,000 in registration fees due to the Public Record of Real Estate Deeds.


It depends on the asset class. Real estate tends to be the most timeconsuming,sinceitrequiresemissionofapublicdeedbyaPublicNotaryandsubsequentregistrationofthedeedinthePublic Registry of Real Estate Deeds. Securities that are not based on real estate assets tend be much faster, since, as a general rule,thecontractsarenotrequiredtobenotarised.Stampdutyis considered best practice in order to have an officially recog-nised contract.


As anticipated in question 2.2, public assets andpublic infra-structurecannotbeexpropriatedassecurity.InPPPcontracts(including user-pays PPPs, traditionally known as “conces-sions”inBrazil),securityhastobeprovidedoverthecontractreceivables and, specifically in recourse and full recourse Project Finance, provided by the sponsors. For private projects financed via Project Finance, assets can be given as security and it takes a judicialwarrant to expropriate the asset rather than sell theassetandbepaidbytheproceeds.LandandspecialequipmentsuchasaircraftsandboatsrequirenotarisingthesecurityinthePublic Record of Real Estate Deeds.

3 Security Trustee


Yes, the concept of a “trust” is recognised and is designated by a “fiduciary agent”. This concept was recently regulated by Instruction Norm no. 583/2016 enacted by “Comissão de Valores Mobiliários –CVM”(liketheAmericanSEC).

35Dal Pozzo Advogados


plus being debarred from entering public procurement bids from two to five years. Under the Anticorruption Act (Federal Act no. 12.846/2013), the Project Company and even parentcompanies may have their assets judicially frozen, their activi-ties partially suspended, debarment from eligibility for receiving public incentivesofanykindand, inseriouscases,theextinc-tion of the company by court order. If criminally convicted, the accused may be suspended from acting as director, board member and even from being responsible for LLCs according to judicial discretion.



Foreign investment is prohibited in the following activites: nuclear energy; healthcare; mail and telegraphs; and the aero-space industry. Foreign investment is restricted in the following activities: land acquisition in rural and national border areas;financial institutions; air companies; ownership and administra-tion of media channels such as printed newspaper, radio, televi-sion,magazines,etc.;andtheminingsector.Theonlytaxappli-cable upon entering Brazil is the “FinancialOperations Tax”at a0.38%rate as itwould apply tonational investors. Onceoperating,taxprovisionsapplythesamewaytheydotonationalinvestors.


No, these restrictions are enforced by national law.


According to our Constitution, nationalisation and expropri-ation of private property are forbidden. Real estate property maybe,however,expropriatedforpublicinterestreasonssuchas the building of a highway, but, in this case, the Constitution provides that the asset must be down paid in cash. Project companiesmaybetaskedtoconductexpropriationofrealestateproperty on the government’s behalf in PPP contracts, but the project companies themselves cannot be expropriated by thegovernment.



There are many, the main ones being: the National Electricity Agency (“ANEEL”); the National Terrestrial Transportation Agency (“ANTT”); the National Water Transportation Agency (“ANTAQ”); the National Oil and Gas Agency (“ANP”); the National Telecom Agency (“ANATEL”); and the National Civil Aviation Agency (“ANAC”). Intermunicipal transporta-tionandnatural liquifiedgasservicesrequireState-levelregu-lation and each State of the Federation has its own Agency.


Asstatedintheanswertoquestion5.1,theorderistaxdebts,security taken by financial agents, real estate security, general security and general creditors.


State-owned enterprises that render public utilities or explorelegalmonopoliesareexcluded frombankruptcy. Asof today,National Congress is debating voting on a new legislative act thatwillexcludespecialpurposevehicles,incorporatedinordertoexecutePPP(includinguser-paysPPPs,knownas“conces-sions”), from bankruptcy proceedings.


No, assets can only be seized by court order. Arbitration is possible, but enforcement of arbitration decisions is also made by the judiciary.


Accordingtothe“ConcessionFederalAct”,lenderscanexercisestep-in rights to restructure debts or cramdown of dissenting creditors. Lenders can also impose covenants in order to keep the project company in check.


Directors, board members and shareholders with control powers are subject to several forms of responsibility in case of distress or financial difficulty. Under the Incorporated Companies Act (FederalActno.6.404/1976),shareholderswithcontrolpowersare liable for business conducted through abuse of those powers. Directors and board members are under the duty of good governance and hence are liable for misconduct in office, abuse ofpoweror lackof informationprovisionwhen requestedbyboard members or shareholders. According to the Incorporated Companies Act, board members and directors may be sued and thusforcedtostepdownandtheywillbeobligatedtopayliqui-dated damages for harm caused to the company. Under the Bankruptcy Act (Federal Act no. 11.101/2005), shareholders,directors and board members are subject to criminal liability for practices ranging from misconduct to fraud. The highest penalty isforbankruptcyfraud,rangingfromthreetosixyearsofincar-ceration. In the infrastructure sector, since PPPs are public contracts, shareholders, directors and board members are also subject to administrative sanctions under the Administrative Probity Act (Federal Act no. 8.429/1992) that provides forpenalties such as an administrative fine ranging from twice to a hundred times the value of harm caused to public interest,

36 Brazil


maintain offshore accounts, but this fact must be fully disclosed totheIRSandtheCentralBank.


Norestrictionortaxappliestodividends,butforeign investorsmust comply with the electronic register system mentioned above.


Yes. As a general rule, every project, especially PPPs, must comply with environmental statute and regulation. Every project has to be instructed with an Environmental Impact Assessment filed with the environmental agency in order to obtain either a previous licence or, in case the previous licensing has been already obtained by the Public Authority, the construc-tion and operational licences have to be filed and obtained by the project company or sponsors.


Private companies are not subject to specific legal or statutory framework for procurement. Joint ventures between State-owned enterprises and private companies may be subject to comply with theBrazilianstatutoryframeworkforpublicprocurement.

8 Foreign Insurance


ForeigninsurancepoliciescanonlybeenforcedinBrazilintwocases: the company that hires the policy has not opened a local branchinBraziland,inanycase,nationalcompaniesincluded,the coverage is not available in the local insurance market, both according to Federal Complementary Act no. 126/2007. There are other cases provided in that act, but they generally will not apply to infrastructure contracts.


If according to the cases stated above, then yes.



According to the Brazilian Immigration Act (Federal Actno. 13.445/2017), foreignworkers are tobe treated equally tonational workers. However, a work visa must be obtained and

Local transportation, basic sanitation, waste management, other mobility issues and local assets are subject to municipal regula-tion.Therearemorethan5,500municipalitiesinBrazil.


No. Project documents, including finance documents, are subject to general contract legal provisions, except for bonds,whichrequirefilingwith“Comissão de Valores Mobiliários–CVM”.


EconomicownershipoflandinthecontextofaPPPcontractandtherestoftheassetsbeforementionedrequireaconcessionor a PPP contract or specific authorisations from the Public Authority. All mentioned assets are subject to environmental licences and other local permits that would apply to any business regardless of the investor’s origin. Ownership of private land requiresregistrationwithPublicRecordofRealEstateDeeds.


Yes, the case of extraction of natural mineral resources issubject to payment of royalties and is denominated “Financial CompensationforExploringMineralResources”.


There’s no restriction on foreign capital inflow and currency exchange, but investors must comply with our Central Banksproceedings for declaration and registration according to Central BankDirectiveno.3.844/2010,whichrequiresfilinganelectronicform for that purpose that will be kept in the databank designated “Electronic Register of Declaration”. Direct foreign investment in financial agents, suchas commercialbanks, requires authori-sationfromtheCentralBank.CurrencyoperationsaresubjecttoFinancialOperationsTax(“IOF”)atarateof1.1%forcurrencyand6.36%forcreditcardandotherelectronicpaymentmechanisms.


Incometaxappliesandrateswillvarydependingonthecountryof remittance or repatriation. Rates for repatriation or remit-tanceforregulartaxationcountriesdifferfromprivilegedtaxa-tion countries.


Onshore accounts can only be established and maintained in local currency, Brazilian reais. Companies can establish and

37Dal Pozzo Advogados


funding from the Public Authority and are traditionally known as concessions; correspondent project agreements are governed by Federal Legislative Acts nos 8.987/1995 and 9.074/1995.Government-paysPPPsanduser-paysPPPsthatrequirepartialgovernment funding are governed by Federal Legislative Act no. 11.079/2004. Thiscoversthegeneralrules. Specific industriesmust observe the corresponding sector law. Telecom is governed byFederalLegislativeActno.9.472/1997;electricity,byFederalLegislativeActno.9.427/1996;andfederalroads,federalrailwaysand ocean and inland ferries are governed by Federal Legislative Act no. 10.233/2001. Natural gas is governed by State-level regulation. Basic sanitation is governed by Federal Acts nos11.445/2007 and 12.305/2010, even though these services aremunicipal responsibility. Urban mobility is governed by Federal Act no. 12.587/2012. It is important to remember that the general legislatives acts regarding “concessions” and PPPs also apply to all industries regarding fundamental project agreements provisions.


Brazilian law, but there is no specific legislative provisionregarding project finance.


Beingacivillawcode,allmatterscanonlybegovernedbylegis-lative acts.



According to the new Civil Procedure Code, it is not possible to resign national jurisdiction and so waiving it is not binding and enforceable,exceptinthecaseofinternationalarbitration.



According to Federal Legislative Act no. 9.307/1996, foreign arbitrationjudgmentsareenforceableinBrazilaccordingtoitslegal provisions.


No. Brazil is a contracting jurisdiction to the “MERCOSULInternational Commercial Arbitration Agreement”.


Yes, disputes regarding rights that cannot be voluntarily waived cannot be arbitrated. The concept encompasses the legal owner-ship of public assets. Nonetheless, events of default by a Public Authority can be arbitrated, but public assets cannot be seized.

foreign workers must obtain their “CPF” which is similar to a social security register in the USA.



Importingequipmentthatwillnotbesuppliedorincorporatedtothe project must comply with the “Temporary Customs Admission Regime” (“Regime Aduaneiro Especial de Admissão Temporária”) underInstructionno.1600/2015issuedbytheBrazilianInternalRevenueSecretariatandissubjecttoaspecialtaxregime.


In this case, the importermust pay 1% permonth of equip-mentstayinginBrazilofalltaxapplicabletoaregular importoperation. Equipment importedforoilandgas-relatedactivi-tiesareexempt. Themaximumtermfor importedequipmentis100monthscontingentonactualprojectrequirements. Onthe other hand, equipment imported to be supplied or incor-porated in the project may benefit from government incentive programmes as stated in section 17 below.

11 Force Majeure


According to Brazil’s Civil Code (Federal Legislative Act no.10406/2002),force majeure eventsareenforceableexclusionsexceptif either party chooses to take responsibility for them. Nonetheless, it is possible to hire specific insurance for force majeure events.



Yes, it is the Federal LegislativeAct no. 12.846/2013. In PPPcontracts,thePublicAuthoritycanapplyafinerangingfrom0.1%to20%ofprioryeargrossincomeandPublicAuthoritymayalsoenforce wide publicity regarding the penalty as an additional form of “shaming” sanction. Regardless of the administrative sanctions, the civil judicial court can also seize assets obtained by corrupt practices, suspension or interruption of the company’s business, companycompulsoryliquidation,andprohibitiontoreceivesubsi-dies, incentives, donations or finance from public entities ranging from one to five years. Depending on the facts, criminal proceed-ings also apply. Courts of Accounts can also apply fines in case of corruption and values depend on each Court’s statute provision.

13 Applicable Law


ProjectagreementsareallgovernedbyBrazilian law. Thevastmajorityofprojectsareuser-paysPPPs thatdonot requireany

38 Brazil


18 Other Matters


Due to investigations in recent years regarding corrupt prac-tices, it iswidelyknownthatBrazil’s legalsysteminstability isdue to the empowerment of law enforcement. Investors should proceedwithextracautionwhenconsideringinvestinginBrazil.


No,theissuingofbondsisactuallyincentivisedinBrazilthankstorecentFederalLegislativeActno.12.431/2011thatprovidesfor incometaxexemptionfor individualsthatdecideto investin those bonds.

19 Islamic Finance


Shari’ah law is not enforceable, but private parties can arrange typical Islamic instruments under the general contractual liberty provided by our Civil Code. Istina’a is very similar to EPC Turnkey contracts in the infrastructure context; Ijarah is very similar to lease contracts.


Asstated insections13and14above,national lawcannotbewaived, nor can international law be enforced against businesses concludedinBrazilianterritory.IslamicfinanceinBrazilisonlybeginning to grow, so up until now there has been no notable case on jurisdictional issues regarding it.


UnderBrazilianlaw,theinclusionofaninterestpaymentwouldnot affect contracts’ validity or enforceability unless parties provide for that in the contract. As stated above, Shari’ah law isnot enforceable inBrazil, unless itsprovisions arewillinglyassumed by parties under a contract.


No, there are not.



UnderBrazilianlaw,directagreementswiththecentralgovern-ment, the Federal Union, are not possible, especially because of the Republicanmodel where States andMunicipalities arelegally independent in terms of their obligations, including financial ones, although they are all bound to the Federal Union as a sovereign unity.

17 Tax


(a) Interest is deductible by project company. This must be properly informed to “Receita Federal” (similar to the IRS) according to its regulation. This is a regular obligation to which any company is due to comply.

(b) Proceeds of a claim under guarantee or enforcing security cannot be deducted.


Besidestheincentivisedissuingofbondsreferredtoinsection18 below, there are several governmental programmes that provide incentive for infrastructure investment, both for national and foreign investors. The “Special Incentive Regime for Infrastructure Development” (“REIDI”) provides for partialincometaxexemptionwhenprocuringgoodsorservices,both national or foreign, to be used in the PPP contract and applies to multiple industries such as roads, mobility, basic sani-tation, etc. A similar programme is aimed at the oil industry infrastructure development in Northern and North-eastern regions (“REPENEC”): it provides for special tax exemptionfor imported equipment. The port industry also has its ownincentive programme – “REPORTO” – that aims at granting partial income tax and importation tax exemptions for theimportingofportequipmentthathasnosimilarcompetitorofnationalmakinginBrazil.Finally,theaircraftindustryalsohasits incentive programme – “RETAERO” – aimed at granting specialtaxincentivesforcompanies,bothnationalandforeign,that create its R&D sector – the purpose is to foster R&D and thus increase competition levels.

39

Augusto Neves Dal Pozzo is a specialist from the Management Program for Lawyers and Corporate Governance at Yale School of Management. He has an Executive Post-Graduation in Infrastructure in a Market Economy from Harvard Kennedy School. Augusto has a Master’s Degree in Administrative Law and a Ph.D. (on-going) from Pontifícia Universidade Católica de São Paulo (“PUC-SP”), and will be a Professor at graduation at the same university. He is a Professor at Universidade de La Coruña, Spain and a visiting scholar at Universidad de Belgrano, Argentina. Augusto is a Member of the Special Commission of Infrastructure, Logistics and Sustainable Development of Ordem dos Advogados do Brasil Seccional de São Paulo (OAB-SP, Brazilian Bar Association São Paulo Section). He is the President of Instituto Brasileiro Jurídicos da Infraestrutura (“IBEJI” – Brazilian Institute for Legal Studies in Infrastructure). Augusto is also the coordinator of several reviews, including the Revista de Direito Administrativo e Infraestrutura (“RDAI”) issued by Thomson Reuters. He is a Member of Red Iberoamericana de Contratacion Publica, Spain and of Asociación Argentina de Derecho Administrativo (“AADA”) and associate founder of Instituto Brasileiro de Direito e Ética Empresarial (“IBDEE” – Brazilian Institute for Law and Ethics). He is the author of many books and articles about administrative law.

Dal Pozzo Advogados1510, Gomes de Carvalho Street, 9th floorSão Paulo, 04547-005Brazil

Tel: +55 11 3058 7800Email: [email protected]: www.dalpozzo.com.br

Dal Pozzo Law Firm was founded in 1996 and is a boutique firm focused on infrastructure and administrative law. We were responsible for struc-turing the first PPP contract under the Brazilian PPP Act in the State of São Paulo. We provide legal services regarding PPP structuring and PPP contract management including project finance and security matters.

www.dalpozzo.com.br


Dal Pozzo Advogados

Renan Marcondes Facchinatto is a certified PPP Professional – Preparation Level by “APMG International/World Bank” (“CP3P-P”) and is one of the two Accredited Trainers in Brazil for the CP3P-Foundation Level Exam. Renan has a Master’s Degree in Administrative Law from Pontifícia Universidade Católica de São Paulo (“PUC-SP”). He is a specialist in Infrastructure Law from the Law School of the Getúlio Vargas Foundation – GVLaw SP. He is also a specialist in Civil Procedural Law from Pontifícia Universidade Católica de São Paulo (“PUC-SP”). Renan is a member of the Special Commission of Infrastructure Law of OAB, a member of Instituto Brasileiro de Estudos Jurídicos da Infraestrutura (“IBEJI” – Brazilian Institute for Legal Studies in Infrastructure), of the Instituto Brasileiro de Direito de Ética Empresarial (“IBDEE” – Brazilian Institute for Law and Ethics), and is a Founding Member of the Instituto Brasileiro de Direito Administrativo Sancionador (“IDASAN” – Brazilian Institute for Studies in Administrative Penalties Law).

Dal Pozzo Advogados1510, Gomes de Carvalho Street, 9th floorSão Paulo, 04547-005Brazil

Tel: +55 11 3058 7800Email: [email protected]: www.dalpozzo.com.br



Chapter 640

China

Global Law Office Shuhui Luo

Dr. Xin Zhang

China


2 Security


Different types of security are generally documented separately. Therelevantregistrarsgenerallyrequiretoseeaseparatesecu-rity document for each type of security (sometimes each type of asset) falling within their respective jurisdiction. Therefore, a general security agreement, although possible in theory, is impractical and makes the security registration process more difficult, if not impossible.


Security over real property and plant (i.e. land use rights and buildingsinthecontextofPRClaw)maybegrantedbymeansof a real property mortgage, and security over machinery and equipmentisnormallytakenthroughamortgageovermovableassets.

Mortgage over real property and plantIn China, all land is owned by the state. A mortgage can only be granted over land use rights, not over the ownership of the land itself. The land use rights to a parcel of land and all buildings and plants erected over the land must be mortgaged simultaneously.

To create and perfect a mortgage over real property, the mort-gagee and the mortgagor need to sign a written mortgage agree-ment and register such agreement at the relevant land and real estate registrar, depending on the location of the real property. In addition, construction-in-progress is considered quasi-

real estate for the purpose of security interests. A construc-tion-in-progress has no title document but can still be subject to a mortgage similar to a real property.

Mortgage over machinery and equipmentThe most common form of security granted over machinery and equipment(includingundergroundorovergroundpipelines)isa mortgage over movable assets. A mortgage over machinery and equipment is validly createdon themortgagee andmort-gagor upon signing the mortgage agreement, but will only be

1 Overview


Sincethepublic-privatepartnership(PPP)reformin2014,thePPP model has achieved fast development across the country and has become a main trend in the project finance market inthePRC.BasedonthedatadisclosedintheNationalPPPInformation Platform (a PPP project information database setupbytheMinistryofFinanceof thePRC),asof9March2020, there were 9,458 PPP projects in the database nation-widewithatotalinvestmentofRMB14.39trillion,covering19sectors (including energy, transportation, water resources, envi-ronmental protection, municipal engineering, area develop-ment, agriculture, forestry, science and technology, affordable housing, tourism, medical care and public health, elderly care, education, culture, sports, social security, government infra-structure and others). Looking back over the past few years, with tightening PPP rules and the rectification and clean-up of PPPs to control government implicit debt risk, the PPP project market has become increasingly standardised and transparent, with more value attached to the project quality and projectmanagement.

In recent years, the number of participants in the project finance market has notably increased. Social security funds, insurance funds and other public funds are permitted to support theprojectfinancingthroughdebt,equityinvestmentandotherways. Compared to traditional bank loans, large infrastructure projects have now been financed using more sophisticated and complex financial and legal instruments. Theproject compa-nies are encouraged to conduct structural financing and issue, among others, project revenue bonds, asset-backed notes and asset-backed securities.


The most significant project financings in recent years include, for instance, the Sinopec Green Energy Geothermal District Heating Project in 2017 (US$250 million loans), Jinyidong UrbanRailTransitProjectin2018(RMB20.7billionsyndicatedloans,whichwas voted 2018 best deal by theChinaBankingAssociation),andtheissuanceofGreenABSbackedbysubwayfarescollectionrightsbyGuangzhouMetroGroupin2019(firstdeal of asset-backed securities backed by the subway fares collec-tionrights,withasizeofRMB3.158billion).

41Global Law Office



Notaries’ feesSecuritydocumentsdonotrequirenotarisationasageneralrule.

Documentary taxesSecurity documents are not subject to stamp duty or other docu-mentarytaxesinthePRC.

Registration feesDepending on the type of a security interest, some registrars may charge a registration fee, either based on the value of the collateral or in a lump sum. Generally, the registration fee is not substantial.


Registration of the pledge over receivables can be completed online on the same day it is registered. For securities that must be registered with the local registrars, the registration time varies depending on their local practices. For registration fees, pleaserefertotheanswertoquestion2.6above.


There is no such regulatory or similar consent in this regard.

3 Security Trustee


The PRC recognises the concept of a trust. However, a security trustee or agent is not commonly used due to the absence of legal rules on this matter.

The court will normally recognise a foreign security trustee, provided that this is permissible under the governing law of the agreement. A security trustee under a foreign trust can imitate litigation before a PRC court to enforce its rights under the rele-vant finance documents.


There is no such alternative mechanism available in the PRC to date.

perfected against third parties after the mortgage agreement is registeredwiththeStateAdministrationforMarketRegulationofthePRC(SAMR)oritslocalbranches.

Generally, security cannot be created over the following types of asset:■ Land ownership.■ Landuse rightsof collectively-owned land (for example,

land for farming or farmers’ residential use), unless other-wiseallowedbylaw(forexample, contractual management rights to rural land can be mortgaged).

■ Facilitiesusedforeducation,hygieneandmedical purposes andforothersocialbenefits(forexample,schools,hospi-tals, kindergartens or museums).

■ Assetswithunidentifiedordisputableownershiporusagerights.

■ Assetsownedbyagovernmental authority (for example,the authority’s office building, facilities and equipment).

■ Illegalconstructions.■ Assets subject to any warrant of seizure, or freezing or

attachment order.


Yes. To create a pledge over receivables, the pledgor and the pledgee must enter into a written pledge agreement. The pledge is perfected by registration of the pledge agreement at the Credit Reference Centre of the PRC.


Yes. Security interests may be granted over deposits in a bank account in the form of a special account, seal deposits or a secu-rity deposit. In other words, the pledge over a blocked account (i.e.onlymoney flow-in,noflow-out)orovera fixedamountof deposit is acceptable under PRC law. To create a pledge over cash deposited in bank accounts, the pledgee and the pledgor need to sign a written pledge agreement.


Yes. UnderPRClaw,securitycanbegrantedover: theequityinterests in a limited liability company; shares in a company limited by shares; and stocks and portions of funds that can be transferred according to law. Shares can be in certificated form or uncertificated form. To create a pledge over shares, the pledgor and the pledgee need to sign a written pledge agreement.

Depending on the type of shares, the pledge agreement is requiredtoberegisteredattherelevantregistryforthepurposeofperfectingsuchsecurity interests(forexample,forapledgeoverequityinterestsinalimitedliabilitycompanyorsharesinan unlisted company limited by shares, registration of the pledge atthelocalbranchoftheSAMR;forregistrationofsharesinalistedcompanyorfundunitstradedonstockexchanges,regis-tration of the pledge at the China Securities Depository and Clearing Company Limited (CSDCC)).

42 China



Aliquidatormayexerciseclawbackrights.Withrespecttothesecurity, if a debtor grants security to an unsecured debt or repays debts before maturity, in either case within one year prior to the court acceptance of a bankruptcy application, then such actmaybeavoidedbytheliquidator.

A creditor secured by the specific property of the bank-rupt shall enjoy the priority in being repaid with the specific property. After the secured creditors have been paid and after deductionsofbankruptcyexpensesanddebtsofcommonbene-fits from the bankruptcy property, repayment shall be made in the following order: (1) employees’ claims; (2) social security expensesandinsuranceclaims;and(3)unsecuredclaims.


The PRC Enterprise Bankruptcy Law applies to corporate entities, financial institutions, or other organisations. Natural persons whodonotqualify fororganisationstatuscannotavail them-selves of the Bankruptcy Law’s protections.


Asdiscussedintheanswertoquestion5.1above,asecuredcred-itor can enforce its security interests at the end of the bankruptcy proceeding.Insomecases,aliquidatormayconsiderallowinga secured creditor to realise the security interests before the end of such proceeding, but this is subject to the specific facts of the relevant case.


The PRC Enterprise Bankruptcy Law provides for restructuring and reconciliation procedures, in addition to formal insolvency proceedings.

RestructuringThe application for restructuring can be filed either inde-pendently or during the liquidation proceeding. On restruc-turing, secured creditors are categorised as one group for the purpose of voting on the restructuring plan. If more than 50%ofthesecuredcreditorspresentatthemeetingapprovearestructuring plan, which covers over two-thirds of the secured debts, the restructuring plan is considered approved by the secured creditors. However, even if the secured creditors refuse approval,thebankruptdebtor(ortheliquidator)canapplytothecourt for an approval of the restructuring plan provided that:■ thesecureddebtswillbefullyrepaid(togetherwithafair

compensation for loss resulting from a delay in repay-ment); and

■ thesecurityinterestisnotsubstantiallyprejudiced.



Mortgage The mortgagee and the mortgagor can agree on the sale or foreclo-sure of the mortgage property on the mortgagor’s default. If their agreement prejudices other creditors’ interests, the other creditors can, within one year from the day they discovered, or should have discovered, the agreement, apply to the court for revocation.

When the mortgagee and the mortgagor fail to agree on the realisation method of the mortgage, the mortgagee can apply to the court to sell or auction the mortgaged property (a fast-track approach).

PledgeWhere the debtor defaults on the underlying debt, or any event for enforcing a pledge agreed by the parties is triggered, either: ■ Thepledgeeandthepledgorcanreachanagreementon

the foreclosure of the pledged asset.■ The pledgee can sell, either by auction or private sale

(which must be conducted through a court action), the pledged asset to repay the secured debt in priority.

Forbankruptcysituations,pleaserefertotheanswertoques-tion 5.1 below.


Therearenorestrictionsthatexclusivelyapplytoforeigninves-tors or creditors in foreclosure events, provided that the loan agreement or the security agreement (as the case may be) has been duly registered at the State Administration of Foreign ExchangeofthePRC(SAFE).



The PRC Enterprise Bankruptcy Law establishes an automatic stay regime regarding all ongoing claims against the debtor, following the opening of an insolvency proceeding. On the acceptance by a court of a bankruptcy application, any litigation or arbi-tration proceedings brought by a creditor against the bankrupt debtormustbestayeduntiltheliquidatortakesoverthebank-rupt debtor’s assets. If a creditor has applied to the court for an attachment order and the enforcement of a judgment or arbitral award, the attachment order will be lifted and the enforcement is stayed on the court’s acceptance of a bankruptcy application. As a general rule, the secured creditor’s claim will be satisfied at the end of the bankruptcy proceeding from the proceeds of therealisedsecurityassets,but insomecasesa liquidatormayconsider allowing a secured creditor to realise the security inter-ests before the end of such proceeding.

43Global Law Office


undertaken pursuant to a legal process and with fair and reason-able compensation. This illustrates the protection of all forms of foreign investment in general under PRC law.



As a general rule, investment in a project is subject to the verifi-cation by, or filing with, the National Development and Reform Commission of the PRC (NDRC). The NDRC is the compe-tent authority in charge of project investments in the PRC. For a foreign investment, after the project investment proposal is veri-fied by, or filed with, NDRC, the establishment of the project companyneedstobefiledwiththeMinistryofCommerceofthe PRC (MOFCOM), the competent authority in charge offoreign investment and establishment of foreign-invested enter-prises. Finally, the registration of the project company at the SAMRneedstobecompleted,soastoevidencetheestablish-ment of such project company.InadditiontotheabovekeyprocessesattheNDRC,MOFCOM

andtheSAMR,aproject isnormallysubject toapprovalby theenvironmental protection authority of its environmental impact assessment report (EIA) and approval by the relevant land and planning authority of its land use and related planning. These processes generally need to be completed before the project invest-ment proposal is submitted to the NDRC for verification or filing.


Thereisnoregistration,filingorlegalformalityrequirementonthefinancingorprojectdocuments,exceptthatacross-borderloan agreement between a PRC project company and non-PRC lendersisrequiredtoberegisteredasaforeigndebtatSAFEanda security document, depending on the type of security inter-ests to be created, is required to be registered at the relevantregistry for the purpose of perfecting such security interests (for example,theregistrationofalandandbuildingmortgageattheland and building title registration authority, or the registration ofamortgageoverequipmentatthelocalbranchoftheSAMR).


The ownership of land, natural resources or a pipeline needs a licence or a title certificate, and undertaking the business of ownership or operation of such assets generally requires therelevant governmental approval, licence or filing. A foreign entity needs to establish a “local presence” (such as a project company) in the PRC to own and operate such assets.


The extraction of natural resources is subject to the approvaland licensing of the Chinese government, and the operator is

ReconciliationThereconciliationplanmustbeapprovedbymorethan50%ofcreditors that hold more than two-thirds of the unsecured debts who are present at the meeting. Secured creditors do not attend the meeting, as their claims are satisfied in priority to unsecured creditors’ claims.


Directors may continue to trade even if a company is facing financial difficulties, provided that they act with a special duty of care and a duty of loyalty and do not violate their legal duties and the articles of association of the company. The failure to act in the company’s interests may constitute a violation of the duty of care or duty of loyalty and result in personal liability.



The PRC has maintained a catalogue for industrial sectors that encourage, limit or prohibit foreign direct investment, which has been updated in 2019 with an aim of attracting more foreign investors. In general, foreign direct investment in projects and infrastructure is encouraged. However, certain types of projects (for example, the constructionof anuclearpowerplant) limitforeign ownership, in which Chinese investors must have the majority shareholding. InthePRC,nofeeortaxisimposedonforeignownershipof

a project company.


The PRC has entered into over 100 bilateral investment trea-ties to date, and is now negotiating bilateral investment trea-ties with the US and the EU which follow two key principles: the principle of national treatment for market access; and the principle of the negative list. In other words, the PRC will offer national treatment to foreign investments not only after the establishment of foreign-invested enterprises but also at the stage of investment (i.e. market access) and, unless prohibited or restricted under the negative list, foreign investment in an indus-trial sector will be allowed.


Thereisnospecificlawregardingthenationalisationorexpro-priation of project companies and assets.

Under the PRC Constitution, there is a general principle that private assetsmay be expropriatedwith compensation by thestate for the needs of public interests and in compliance with the laws. The new PRC Law on Foreign Investments (effective from1 January 2020) expresses that the statewill not expro-priateforeigninvestmentsand,ifsuchexpropriationisneededunder special situations and for social public interests, it shall be

44 China


solongasthatprojectcompanyhaspaidupthetaxdue,allocatedthe statutory reserves and prepared an audited financial report for the past year, in which case it is able to declare and distribute the past year’s dividends within the amount of its distributable profits. Theaboverequirementsondistributingdividendsalsoapply

to a foreign-invested project company when it intends to declare and distribute the dividends to the parent incorporated out of thePRC. Asexplained,distributionofdividends isa typeofcurrentaccountforeignexchangetransaction,withouttheneedof any governmental approval in the PRC.


The PRC has a complete legal regime on various aspects of envi-ronmental protection. The base is the PRC Law on Environmental Protection, setting out the basic principles of the environmental protection regime. There are a number of specific laws governing the protection and prevention of pollution of air, water, soil, sound, solid wastes and so on, as well as the EIA. The compe-tent authority in charge of environmental protection in the PRC istheMinistryofEcologyandEnvironmentofthePRC.

Similarly, there is a complete legal regime on health and safety issues, led by the PRC Law on Prevention of Occupational Diseases and related implementing rules and guidelines. Since there are different types of health and safety issues, different ministries of the Chinese government have their powers and functions in this regard. The key authority is the National Health Commission of the PRC.

Depending on the type of project to be invested, all or some of these SHE-related laws and rules will apply to a project company.


Project companies should comply with the PRC Law on Tenders and Biddings in relation to procurement issues. If a project company is state-owned or intends to use the funding of the state to construct the project, the PRC Law on Governmental Procurement will also apply.

8 Foreign Insurance


Project assets should be insured by China-incorporated insur-ance companies. Foreign insurance companies are not allowed to undertake insurance-related activities without the licensing of thePRC insurance regulator (currently theChinaBankingand Insurance Regulatory Commission of the PRC), so basically they cannot insure project assets in the PRC. It is rare to see a foreign insurance company providing a guarantee to one PRC project either, even though there isnoexpressprohibitiononthis type of business.


As a general rule, foreign (secured) creditors have no insur-able interests in the project assets, because they are only in the

requiredtopaytheexplorationandexploitationfeesapplicableto the relevant natural resources to the Chinese government. Depending on the type of natural resources to be exported,theChinesegovernmentmayimposeanexportlicenceand/orexporttariff.


ThePRChas liberalised the current account foreign exchangetransactions (such as trade in goods and in services), and a genuine current account transaction, supported by the relevant under-lying documents or information, does not need to be verified by, or registered with, SAFE. However, for capital account foreign exchangetransactions(suchasloans,bonds,equityinvestmentsandderivatives),SAFEverificationisrequiredtodate.No fee or tax is charged by the Chinese government on

foreigncurrencyexchange.


Remittance and repatriation of investment returns is a type of currentaccountforeignexchangetransaction,withouttheneedof any governmental approval in the PRC. Borrowingacross-borderloanandmakingloanpaymentsis

atypeofcapitalaccountforeignexchangetransaction,subjectto the foreign debt registration at SAFE. After registration, the borrower is able to handle, with its account bank, the loan payments to non-PRC lenders.

While there is no fee charged by the Chinese government on the remittance and repatriation of investment returns or loan repayments to parties in other jurisdictions, the PRC with-holdingtaxisapplicableondistributionofdividends(normallyattherateof10%)andpayinginterestonloans(normallyattherateof10%).


Project companies, if invested by a foreign investor, can estab-lish and maintain onshore foreign currency accounts. However, establishing and maintaining offshore accounts in other jurisdic-tions will be very difficult. In theory, SAFE can approve such offshore accounts, but in practice it is difficult to justify why a PRC project company, with assets in and revenues from the PRC and having no revenue from offshore sources, needs to establish anoffshoreaccount.Asexplainedintheanswertoquestion7.6above, there are well-established routes for the remittance and repatriation of investment returns or loan repayments by a PRC project company to parties in other jurisdictions.


If the parent is incorporated in the PRC, there is no restriction on the payment of dividends from a project company to that parent,

45Global Law Office


projects sector too. The civil and criminal penalties range from fines, penalties, confiscation of proceeds from illegal activities andsoon,toimprisonment(forafixedperiodorforlife)andeven capital punishment.

13 Applicable Law


PRC law typically governs project agreements.


This depends on the lenders. If the lenders are incorporated in the PRC, PRC law typically governs financing agreements.

If the lenders are non-PRC banks and financial institutions, they may prefer to choose a non-PRC law with which they are the most familiar to govern the financing agreements (typically, EnglishlaworHongKonglawinthePRCmarket).Thatsaid,security documents are typically governed by lex situs, i.e. PRC law.


The capacity and authority issues of the project company or other PRC guarantors or security providers, as well as the crea-tion and perfection of security interests in the assets located within the PRC, are typically governed by PRC law.



If the relevant contract has a “foreign element” (for example,one party to that contract is a non-PRC entity or individual, or the subject matter of that contract is out of the PRC, or the legal relationship created by that contract and so performed arises out of the PRC), PRC law generally recognises the submission to a foreign jurisdiction. The waiver of immunity by a project company, whether or not state-owned, will be legally binding and enforceable under PRC law.



So long as the relevant contract has a “foreign element” as described above, its submission of disputes to international arbi-tration is recognised by Chinese courts. That said, if purely a domestic contract without any foreign element, the parties to such domestic contract cannot submit the dispute to a non-PRC arbitration route.

The PRC is a New York Convention country, so the courts will recognise and enforce an arbitral award rendered in another New York Convention country pursuant to the New York Convention. If rendered in a non-New York Convention country, the courts will apply the relevant rules under the PRC Civil Procedure Law with respect to recognition and enforcement of foreign arbitral awards (whicharequitesimilartotheNewYorkConventionrules).

capacity of creditors, rather than owners, of such assets. From the perspective of transaction documentation, it is possible to requireoneChina-incorporatedinsurancecompanytoaddalosspayee clause in the insurance policy and undertake to pay the insurance proceeds to foreign (secured) creditors, supported by an assignment of insurance in favour of foreign (secured) credi-tors. The payment of insurance proceeds out of the PRC by the insurance company would still need to be verified by SAFE at the time of making such cross-border payment.



If a project company intends to employ a non-PRC employee, it needs to apply for, and obtain, the work permit for such non-PRC employee from the labour competent authority of the local government in the city where that project company is incorporated. He or she needs to apply for the Chinese work visa before entering into the PRC.



As a general rule, there is no restriction, control, fee or taxon importing equipment used by construction contractors,provided that such equipmentwill bemoved out of the PRCafter the completion of construction. If a project company needs to import project equipment,

whether there is any restriction (such as an import licence) or any tariff should dependon the type of such equipment to beimported.Therefore,thereisnouniversalanswertothisquestion.


Thisdependsonthetypeofequipmenttobeimported,sothereisnouniversalanswertothisquestion.

11 Force Majeure


PRC law recognises the concept of force majeure. As a principle, force majeureexclusionsshouldbeavailableandenforceablefroma PRC legal perspective.



There are strict rules under the PRC Criminal Law, related laws and regulations and the judicial interpretations prohibiting corrupt business practices and bribery. These rules apply to the

46 China


decision confirming this point to date. In practice, it is likely thattheChinesetaxauthoritywillnotaskforawithholdingtaxon this interest component when the guarantee claim or security enforcement proceeds are paid to a foreign lender.


ThePRChasunifiedthetaxregimeapplicabletodomesticandforeign-invested enterprises. In general, foreign investors or creditors do not enjoy amore preferential tax treatment thanthose applicable to domestic investors or creditors. It is possible thatcertaintaxincentivesmaybeenjoyediftheinvestmentisinhigh technology or infrastructure sectors, but such incentives apply to both domestic and foreign investors. Thereisnotaxapplicabletoforeigninvestments,loans,mort-

gages or other security documents for the purposes of effective-ness or registration.

18 Other Matters


There are no other material considerations in this regard.


InthePRC,corporatebondsmaybeissuedatthestockexchangemarket (governed by the rules issued by the Chinese securities regulator, the China Securities Regulatory Commission) or at the interbank bond market (governed by the rules issued by the People’sBank ofChina and subject to the self-regulationof theNational Association of FinancialMarket InstitutionalInvestors, or by the rules issued by NDRC). Ineithermarket,theapplicablerulesrequireanissuereither

to be profitable during the previous three years and/or to have a sound credit record and rating. As a result, in a real project financing scenario, it is difficult for a project company (espe-cially those in the construction stage or the early operation stage) to issue bonds.

19 Islamic Finance


PRC law has no concept of Islamic financing to date. Whether PRC law will accept the system of Shari’ah law needs to be further exploredinarealcase.Therefore,itisunlikelythatarrangingan Islamic project financing in the PRC will be possible within the foreseeable future.


The PRC is a New York Convention country.


In accordance with the PRC Arbitration Law, the following types of disputes are not arbitrable under PRC law: (a) disputes relating to marriages, adoptions, guardianship, provision for elders and inheritance; and (b) administrative disputes that shall be dealt with by administrative authorities.


There is no such mandatory domestic arbitration proceeding, exceptthatsometypesoflabourdisputes(forexample,relatingto the performance of an employment contract, unfair dismissal and severance packages) between an employer and an employee must go through the labour arbitration process first.



In theory, a foreign investor or a PRC-incorporated project company can sign a direct agreement with the Chinese central government (represented by the State Council of the PRC), but this type of direct agreement is rarely seen in the market. ChinaExport&Credit InsuranceCorporation (Sinosure) is

thesolepolicy-orientedexportcreditinsurancecompanyinthePRC. It has an Inbound Investment Insurance Policy covering politicalrisksofmakinginvestmentsinthePRC.Butweunder-stand that there are not many users for this product in the market.

If a foreign investor prefers, it may consider purchasing a polit-icalriskguaranteefromMIGAundertheWorldBanktoguaranteethe political risks of its investment in the PRC. So far as we under-stand, there are not many users for this product in recent years due to the stability of the political and social environment of the PRC.

17 Tax


Thereisnowithholdingtaxoninterestpayableonloansmadetoadomestic lender, nor on the proceeds of a claim under a guarantee or the proceeds of enforcing security payable to a domestic lender. Iftoaforeignlender,thePRCwithholdingtaxoninterestis

generallyimposedattherateof10%(whichcanbereducedto7%ifsuchinterestispayabletoaHongKongtaxresidentoraSingaporefinancialinstitutiontaxresident).

In theory, the interest component of the proceeds of a claim under a guarantee or the proceeds of enforcing security payable to a foreign lender should also be subject to the above PRC withholdingtaxoninterest.ButthereisnoChinesetaxruleor

47Global Law Office



This is not applicable in our jurisdiction.



48

Dr. Xin Zhang, qualified as a PRC lawyer (1996) and an English solicitor (2004), provides legal services for Chinese and international banks and investors in relation to banking and finance, M&A, FDI and overseas investment. He has represented most of the Chinese and interna-tional banks, international financial institutions and ECAs active in the market on syndicated loans, project financing, trade financing, vessel and aircraft financing, export credit loans and financial derivatives. He has also represented foreign investors to invest in or acquire Chinese renewable energy, power and infrastructure assets. Further, he supports Chinese investors, banks and ECAs for export of China-made capital goods and EPC services and investment in, and financing of, infrastructure, natural resources and real estate projects across the world. Dr. Zhang has been awarded as the Leading Lawyer in PRC Banking and Finance and PRC Securitisation & Derivatives by Chambers Global, Chambers Asia-Pacific and The Legal 500 Asia Pacific over the years.

Global Law Office15&20F, China Central Place Tower 181 Jianguo Road, Chaoyang DistrictBeijing 100025China

Tel: +86 10 6584 6676 Email: [email protected] URL: www.glo.com.cn

The history of Global Law Office dates back to 1984, when it became the first law firm in the PRC to take an international perspective on its business, fully embracing the outside world. Our record of legal innovation is unique in the PRC. Over three decades, our expertise has helped set the agenda for change through precedents involving many of the “firsts”, including the first power plant with overseas project financing (Shandong Rizhao Power Plant), the first nuclear power plant project (Dayawan Nuclear Power Plant) and the first Sino-USA joint venture project (Pingshuo Coal Mine). Our value is delivered to our clients through our deep knowledge and expe-rience across the full range of practice areas and industries affected by Chinese law. As one of the country’s most well-established and respected firms, we can bring our clients the legal and cultural understanding needed for long-term success in the PRC.

www.glo.com.cn


China

Shuhui Luo is a counsel of Global Law Office, specialised in banking, project financing and capital markets. She has extensive experience in corporate and commercial matters, bond offerings, project financings, syndicated loans and security matters, across a wide range of industry sectors. She provides legal services to Chinese SOEs and banks for their overseas investment and financing projects under the “One Belt and One Road” initiative. She has also assisted a number of Chinese and international issuers in their issuance of bonds within and outside the PRC, and achieved a number of “first deals” in the market, including RMB bonds (the so-called “Panda Bonds”) issued by the Republic of Korea, IBRD and HSBC. Ms. Luo holds a LL.B. from Shantou University and a Master of Laws from China University of Political Science and Law, and was admitted to the PRC Bar in 2010.

Global Law Office15&20F, China Central Place Tower 181 Jianguo Road, Chaoyang DistrictBeijing 100025China

Tel: +86 10 6584 6632 Email: [email protected] URL: www.glo.com.cn



Chapter 7 49

Colombia

Brigard Urrutia César Felipe Rodríguez

Manuel Fernando Quinche

Colombia


called El Dorado II, which ANI is currently structuring and which entails investments in the region of US$800 million, and isexpectedtohandlemorethan7.5millionpassengersperyear;and(iii)theconstructionandoperationofaliquefaction,regasi-fication and storage unit for the processing of natural gas which will be located on the Colombian Pacific Coast.Inaddition,Law1715of2014,“throughwhichthe integra-

tion of non-conventional renewable energy to the National Energy System is regulated”, and Decree 2143, published bythe Colombian government in November 2015, aim to promote research, development and investment in the generation and use of non-conventional renewable power, which translates into business opportunities in the renewable energy market. This regulatory framework is complemented by resolutions issued by the Commission for the Regulation of Energy and Gas (Comisión de Regulación de Energía y Gas) that establish, among others: (a) the rules on supply contracts for agricultural-origin fuel for a relia-bility charge; (b) the methodology to determine the firm energy of geothermal plants; (c) the methodology to determine the firm energy of wind farms; and (d) the methodology to deter-mine the firm energy of photovoltaic solar plants. Furthermore, the government is currently drafting a Decree which will regu-late the offering of non-conventional renewable energy to the National Interconnected System. The purpose of this initiative is to facilitate the access of non-conventional renewable genera-tors into the electric market. Finally,Colombianforeignexchangeregulationswererecently

reformed to allow foreign entities to grant loans to Colombian residents in Colombian Pesos. This recent development grants local borrowers access to new resources without assuming any foreignexchangerisk.Forforeignlendersandinvestors,itwillopen the loan secondary market, allowing for a more efficient and profitable use of resources. In order to perform these operations, foreign entities are required to complete all transfers throughbankaccountsheldinlocalforeignexchangeintermediaries.


The most significant project financings that have taken place in Colombia in recent years are as follows:■ CartagenaRefineryExpansion: US$3.5 billion financing

for the expansion and modernisation of the Cartagenarefinery.

■ El Dorado Airport Expansion: US$500 million refi-nancing for the construction, expansion andmodernisa-tionoftheElDoradoAirportinBogotá,Colombia,alongwith a US$130 million financing for the construction of the voluntary works (obras voluntarias) in the El Dorado Airport.

1 Overview


Duringthelastfewyears,Colombiahasexperiencedaninfra-structure and project finance boom: the infrastructure sector continues to drive Colombia’s economic growth, resulting in an estimatedeconomicgrowthof3.3%in2019.

From 2010 to 2017 the construction of roads increased by 1,400 km. In addition to the foregoing, the construction ofroads and railways, public service projects and other civil engi-neeringworksgrew10.7%in2019.Given the strategic importance of the 4G Program, the

Colombian government has implemented several actions to provide support and enhance the risk profile of investments in the4GProgram.AdecisiveactionwastheenactmentofLaw1508 of 2012 governing the legal framework for public–private partnerships (“PPPs”) in Colombia, and Law 1682 of 2013, whichaimstoofferquicksolutionstothemostcommonbottle-necksinroadconstructionrelatedtolandacquisitions,environ-mentallicencesandrelocationofpublicutilitynetworks.Morerecently, on January 2018, the President of Colombia approved Law 1882 of 2018, which amends certain provisions of the infra-structure regime regarding public procured contracts, such as: (i) the structure of the public tenders; (ii) the responsibility of advisors, auditors and consultants; (iii) the implementation of mandatory standard documents in public procurement proceed-ings; (iv) inter-administrative agreements; (v) transport infra-structure projects; and (vi) the settlement of PPP contracts in case of annulments.The4GProgramhasfacedseveralchallengesandcomplexi-

ties, but the National Government has taken actions and issued regulations to provide a solid legal framework for this ambitious plan to move forward.

The National Infrastructure Agency (“ANI”), which is the government entity in charge of structuring, tendering and supervisingtheperformanceofprojectsunderthe4GProgram,is seeking to attract foreign lenders (including capital markets financing), infrastructure funds and first-level domestic and international contractors with sufficient experience, financialstrength and technical standards.Otherthanthe4GProgram,Colombiahasahealthystream

of infrastructure projects in diverse sectors. The most impor-tant public procurement projects include: (i) the execution ofthe concession contract for the construction of the first line of theBogotámetroproject(23.9km),andentailsinvestmentsintheregionofUS$6billion;(ii)anadditionalairportforBogotá,

50 Colombia


be granted by means of either a commercial establishment pledge agreement (garantía mobiliaria sobre establecimiento de comercio) or an assets pledge agreement (garantía mobiliaria sobre activos) and shall be registered before the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias), which provides priority and enforceability against third parties.

Furthermore, it is also possible to grant security over assets by transferring these to a security trust. For this purpose, parties shouldexecuteatrustagreementwithatrusteeandregistersuchagreement before such national registry.

However, security over certain assets such as real estate, aircraft and ships must be created by means of mortgage agree-ments and cannot be part of a general security agreement.


Yes.Forrealproperty,amortgageagreementmustbeexecutedand registered before the relevant public instrument registry office (Oficina de Registro de Instrumentos Públicos). Security over movables (e.g.machineryandequipment)iscreatedthroughasecuritytrustagreement or a pledge agreement. However, if the relevant movable assets are attached to real estate and cannot be separated without deteriorating, those assets may be covered by the mortgage.


Yes, it is possible to provide security over receivables where the chargor is free to collect the receivables in the absence of an event of default. To this effect, the receivables must be described in the textofthesecurityagreement.Intheseevents,itisnotneces-sary to notify the debtor of the receivable unless the parties to the underlyingagreementhaveexplicitlyagreedtothis.Nevertheless,if the parties have agreed to issue the above-mentioned notice andthedebtorisnotnotified,thechargorisrequiredtoindem-nify the debtor for all the costs, damages or prejudices stem-ming from such breach of the agreement, and the debtor will be released of its obligation by paying the receivable to the chargor.


Yes. Law 1676 of 2013 (“Law 1676”) sets forth the possibility of entering into an accounts control agreement to secure the cash deposited in a bank account. Security over funds deposited in a bank account is perfected: (i) when the relevant bank is the securedparty,bytheexecutionofasecurityagreementinrespectof the account (in which case the secured party shall be deemed to hold possession of the secured assets); or (ii) when the bank is notasecuredparty,bytheexecutionofanaccountscontrolagree-ment between the bank, the guarantor and the secured party.


Yes. In Colombia, if the company’s shares are materialised in certificates, security may be taken over the shares by means of a

■ Pacífico 2 (4G Toll Road Project): US$250 million andCOP510,000 million (approximately US$59.7 million)financing for the construction of the Pacífico 298 km toll road project.

■ ConexiónNorte(4GTollRoadProject):US$250millionand COP540,000 million (approximately US$186.2million) financing for the construction of theConexiónNorte145kmtollroadproject.

■ Perimetral de Cundinamarca (4G Toll Road Project):US$173 million and COP864,000 million (approxi-mately US$59.7 million) financing of the Perimetral de Cundinamarca 153.8 km toll road project.

■ Transversal del Sisga (4G Toll Road Project): US$225million financing of the Transversal del Sisga 137 km toll road project which will be financed in COP.

■ Autovía Neiva Girardot (4GTollRoadProject):US$276million financing of the Autovía Neiva Girardot 196.85 km toll road project which will be financed in COP. This is the first private initiative to have achieved financial closing in Colombia.

■ Mar 1 (4G Toll Road Project): US$116 million bridgefinancing for the development, design, construction, improvement, rehabilitation, operation, and maintenance oftheConcesiónAutopistaalMar1tollroadanditsancil-lary facilities.

■ Mar2(4GTollRoadProject):US$501millionandCOP500million financing for the project “Autopistas al Mar 2Cañasgordas-Uramita-Dabeiba-Mutatá-el Tigre-Necoclí”.This transaction was one of the first investments made by Chinese companies in Colombia.

■ Bucaramanga–Barrancabermeja–Yondó: US$521 million financing of the rehabilitation, construction, and improve-ment of a toll road concession connecting the cities of Bucaramanga, Barrancabermeja and Yondó. It was thefirst local currency (Colombian Peso) financing for the IDBGroup and a multiple jurisdiction transaction thatincluded documentation under Colombian, New York and Spanish law.

■ PuertoAntioquia: US$390 million financing for the develop-ment, construction, operation and maintenance of a public use maritime terminal located in the southeastern sector of theGulfofUrabá,intheCaribbeanSeaoftheAtlanticCoastofColombia,intheDepartmentofAntioquia.

■ Aeropuerto Ernesto Cortissoz (4G Airport Project):COP173,000 million (approximately US$59.7 million)and US$50 million financing of the modernisation of the ErnestoCortissozAirportinBarranquilla,Colombia.

■ Sociedad Portuaria el Cayao: US$110 million financing of the development and operation of the first regasification terminal in Colombia, located on the Colombian Atlantic Coast.

■ Canacol Debt Refinancing: US$305 million refinancing fortherepaymentofCanacolEnergyLtd.’sexistingdebt,thereby granting financial flexibility and allowing thecompany to pursue its stated gas production goal.

2 Security


In principle, it is possible to create a blanket lien or ongoing concern pledge over a group of assets. In this case, security may

51Brigard Urrutia



Ingeneral,therearenoregulatoryorsimilarconsentsrequiredwith respect to the creation of security over real estate property, plant,machineryandequipment.Dependingontheparticularcase,regulatoryapprovalsmayberequired.

Generally, if project assets are built over public land granted by the government by means of a concession agreement, such project assets adhered to the public land and assigned to the concessionaire for their commercial use cannot be taken as security.

3 Security Trustee


Colombian law recognises the concept of a “trust” as well as the role of security trustees and agents, and allows them to act on behalf of different lenders. The role of a security trustee and the scope of its powers will depend on the particular trust agreement.


This is not applicable in Colombia.



The general restriction regarding mortgages is that the seizure ofanymortgagedcollateralrequiresajudicialproceedingandajudicial auction whereby the proceeds of the auction are deliv-ered to the creditor. If the auction is unsuccessful, the collat-eral will be delivered to the creditor. Any provision in a mort-gage agreement whereby the creditor will be entitled to claim or acquirepropertyovertheassetdirectlyisnotexpresslypermittedby law. For pledges over movable assets, pursuant to Law 1676, thecreditorwillbeentitledtodirectlyseizeandacquireowner-ship over the pledged asset through a direct payment mecha-nism, special foreclosure of the security or judicial proceedings.

share pledge agreement (garantía mobiliaria sobre acciones) or trust agreement, whereby property of the shares is transferred to the trust. In both cases, registration of the security in the compa-ny’sstockledgerisrequired.Inthisscenario,notwithstandingthe fact that the shares are represented by certificates, it is not necessary for the guarantor to deliver the share certificates to the creditor.

It is also possible to issue shares in uncertificated form (or dematerialised shares); however, Law 1676 is not applicable for security over that kind of shares. In these events, a share pledge may be granted over the dematerialised shares and the relevant share pledge agreement must be registered with the applicable registry (e.g. Depósito Centralizado de Valores).


Thecostofamortgage,notarialexpenses,registrationtaxandregistrationrightsarerequiredasfollows:(i) Notarisation fees depend on the type of mortgage.

However,ratesusuallyvarybetweenCOP20,200(approx.US$6) and0.3%of thevalueof themortgageaccordingto Resolution 6713, 2019 issued by the Superintendence of Notaries Public and Registration.

(ii) Forregistrationtax,tariffsrangebetween0.5%and1.5%of the value of the mortgage, depending on the munici-pality in which the mortgage is registered.

(iii) Registration rights tariffs depend on the value of the mort-gage, which corresponds to the value determined in the public deed. Rates vary between COP36,400 (approx.US$10)and0.91%,accordingtoResolution6713,2019ofthe Superintendence of Notaries Public and Registration.

As for trust for security purposes, if it covers real estate, it will be subject to registration, and therefore also to the regis-tration tax. Registrationandnotarisationfeesaredeterminedas follows: (i) Registration rights are determined on the value of the

contract or the immovable property, whichever is higher. RatesvarybetweenCOP36,400(approx.US$10)and0.91%according to Resolution 6713, 2019 of the Superintendence of Notaries Public and Registration.

(ii) Notarisation fees for this type of trust are the same as that determined for mortgages. Rates vary between US$6 and 0.3%.

Registry costs to complete the registry of security interests over movable assets are approximately US$15, according toResolutions834,2014,0356,2015and001,2015.


Filing,notificationsandregistrationrequirementsinrespectofsecurity over movable assets can be undertaken online at https://www.garantiasmobiliarias.com.co and therefore the amount of timeandexpenseismarginal.Mortgage filings, notifications and/or registration require-

ments may vary depending on the region. In general, the proce-dure may take from one to four months.

52 Colombia


interestduringanintermediatestageofthejudicialliquidationproceeding.Moreover,theexclusionofencumberedassetswillonly be possible when the remaining assets of the debtor are sufficient to pay off pension claims, claims accrued during the bankruptcy proceedings (reorganisation post-petition claims) and labor claims – including salaries and other claims accrued from an employment contract.


In the course of bankruptcy proceedings, any creditor, the promotorortheliquidatormayrequesttheclawbackordeclara-tionoffraudulenttransferofsomeactsexecutedbythedebtorwhen such acts adversely affect any creditor or the priority order amongcreditors. Pursuant toArticle74ofLaw1116of2006(“Law 1116”),theactsthatmayberevokedbytheBankruptcyCourt are the following:(i) Any act that results in the transfer or conveyance of prop-

erty, including but not limited to: transfer of assets to a trust for collateralisation purposes; payment of a pre-petition claim;grantingorcancellationofalien;ortheexecutionofa lease agreement that obstructs the bankruptcy proceeding, if the fraudulent transaction took place within 18 months prior to the commencement of the bankruptcy proceeding.

(ii) Any gratuitous act executed within 24 months prior tothe commencement of the bankruptcy proceeding. The Superintendence of Companies has held that the act shall be presumed to be gratuitous if: (a) the act was verbally concluded; (b) the parties did not agree on compensation for the debtor; or (c) although the parties agreed on compen-sation for the debtor, there is no evidence that such compen-sation was actually paid.

(iii) Any amendment to the by-laws executed within sixmonths prior to the commencement of the bankruptcy proceedingineitherofthefollowingcases:(a)iftheequityof the debtor was reduced; or (b) if the liability regime of the shareholders was altered.

Additionally, under Colombian law, claims are classified as follows: (1) first-class claims (judicial costs, salaries and other payments derived from employment contracts, and liabilities infavourofthetaxauthorities);(2)second-classclaims(claimssecured with a pledge); (3) third-class claims (claims secured with amortgage);(4)fourth-classclaims(obligationswithsuppliersof raw materials or services related to the core business); and (5) fifth-class claims (all other creditors). In principle, the claims of eachcategorymustbepaidinfullbeforeanyclaiminthenextcategory receives any distribution. However, pursuant to Law 1676andasmentionedinthepreviousquestion,securedcred-itors now have privileges within bankruptcy proceedings that allow the foreclosure of the security interest or the preferen-tialpaymentoftheircreditifcertainrequirementsaremetaswementionedabove.Moreover,undercertaincircumstances,thepriority order may be modified in the reorganisation plan with the approvalof the creditors representing at least 60%of thevotesrecognisedbytheBankruptcyCourt.


The general bankruptcy regulation is set forth in Law 1116, which applies to all private and semi-private entities unless a specific


No, there are no restrictions that exclusively apply to foreigninvestors or creditors in foreclosure events. The granting of loansaswellastheentryandexitofforeigncurrency,performedasaconsequenceof thedisbursementandrepaymentof loans(including the event of foreclosure), must be completed through theforeignexchangemarketandmustberegisteredbeforetheCentralBank.



Pursuant to Article 50 of Law 1676 of 2013 (“Law 1676”), secured creditors can enforce their security interests during reor-ganisation proceedings under certain circumstances. From the commencement date of a reorganisation proceeding, any collec-tion proceeding regarding assets deemed to be “necessary” to enable the debtor to carry on with the ordinary course of its busi-ness (i.e. essential assets) will be stayed. According to case law precedents, “essential” or “necessary” assets are those that are absolutely necessary for the continuation of the business of the debtor. Determinations of which assets are essential and non-es-sential are made on a case-by-case basis during the hearing to rule on the objections to the project of claims and voting rights. Notwithstanding the foregoing, secured creditors’ collection proceedings to enforce security interests over assets that are not “necessary” for conducting the debtor’s business (i.e. non-essen-tial assets), or that with the passage of time may risk deteriora-tion or loss, may be commenced or, as the case may be, moved forward,withthepriorapprovaloftheBankruptcyCourt.

As for essential assets, once the reorganisation agreement is confirmedby theBankruptcyCourt, the secured creditorhasthe right to be paid preferentially over the claims that are subject to the reorganisation agreement. However, please note that the right to receive payment “before” unsecured creditors cannot be construed as a right to receive immediate payment. The BankruptcyCourt shalldeterminehowsuchpaymentpriorityrights are implemented on a case-by-case basis with a view of preserving the debtor’s business (but based on the principle that such preferential payment has to be made before paying other unsecured debts contained in the reorganisation agreement).

Notwithstanding the above, the secured creditor may enforce its rights over the non-essential assets or request preferen-tial payment, only when the remaining assets of the debtor are sufficient to pay child support obligations and labour claims – including salaries and other claims accrued from an employment contract.AlthoughtheConstitutionalCourtdoesnotexplicitlymention pension obligations, we believe that it is reasonable to include those obligations under the concept of “claims accrued from an employment contract”.Uponthecommencementofjudicialliquidationproceedings,

according to Article 52 of Law 1676, as a general rule, the encum-bered assets will be excluded from the liquidation estate andsecured creditors will be entitled to enforce their rights by way of enforcement proceedings. To that effect, the secured cred-itors must file their proof of claim in a timely manner, which, if granted, could authorise the enforcement of the security

53Brigard Urrutia




In Colombia all lawful investments are allowed, which may be made by both Foreign or Colombian Investors, and for all purposesmustbetreatedequally,inaccordancewiththeprin-cipleof equal treatment. However, it is important to empha-sise that in Colombia there are sectors that are prohibited from foreign direct investment, these are: (i) national defence and national security activities; (ii) disposal and processing of toxic,dangerousorradioactivewaste;and(iii)TVbroadcasting(foreign investors can hold up to 40% of the shares in suchcompanies).

Since capital contributions are considered direct foreign investment, these must be registered before the Colombian CentralBank. Anyotherforeignexchangeoperationmustbecompletedthroughtheforeignexchangemarket.


No. There are no bilateral treaties that prevent an investor from havingtocompleteitsoperationsthroughtheforeignexchangemarket. However, Colombia establishes a foreign investment regimebasedonfourbasicprinciples:(i)Equalityoftreatment,through which it establishes that foreigners and nationals will enjoy the same rights and guarantees; (ii) Universality – foreign investment is allowed in all sectors of the economy; (iii) No prior authorisation – foreign capital investment in Colombia doesnotrequirepriorauthorisation,exceptintheinsuranceandfinancial, mining and hydrocarbon sectors, where, in certain cases, authorisation or prior recognition by national authori-tiesisrequired;and(iv)Stability–theconditionsforreimburse-ment of the investment and for the remittance of profits asso-ciated with it, which are in force on the date of registration of the foreign investment, may not be modified in such a way that adversely affects the foreign investor.Moreover,thefollowingtypesofclausesgrantingprotection

to foreign investors can be found in theBilateral InvestmentTreaties (“BIT”) ratified by Colombia: (i) National Treatment, which consists of the granting, by a State that is party to the treaty to investors from another State party to the treaty and to their investments, the same treatment granted to national investors;(ii)Most-Favoured-Nationtreatment,whichconsistsof the granting, by a State that is party to the treaty to inves-tors from another State party to the treaty and to their invest-ments, the same treatment granted to other trading partners; (iii) minimum Standard Treatment, which consists of granting foreign investments a minimum level of treatment in accordance with international customary law, including fair and equitabletreatment and full protection and security; and (iv) Prohibition ofExpropriationwithoutCompensation–underthisstandard,expropriationisprohibitedunlessitiscarriedoutforreasonsofpublic utility or social interest, in a non-discriminatory manner, in accordance with due process of law and through the payment ofprompt,adequateandeffectivecompensation.Within theBITs,wecanfind theagreements for therecip-

rocal promotion and protection of investments (“ARPPII”), Economic Complementation Agreement (“ECA”) as well as the free trade agreements (“FTA”) that contain investment chapters.

exceptionisapplicable.Ingeneral,State-ownedentitiesattheregional level (nivel territorial ), State-owned universities, health promotion agencies (entidades promotoras de salud ),stockexchanges,entities under surveillance of the Superintendence of Finance (Superintendencia Financiera – “SFC”) or the Superintendence of Solidary Economy (Superintendencia de la Economía Solidaria – “SES”), companies with public capital, companies that provide domiciliary public services and non-trader individuals, have a different bankruptcy regime.


Yes. Within the special foreclosure proceeding of security inter-ests over movable assets, the creditor may foreclose the secured assets before the relevant chamber of commerce or a notary public.


No. Only judicial reorganisation proceedings under Law 1116 are binding on dissenting creditors. However, according to Law 1116, business reorganisation may be carried out not only by means of a judicial proceeding, but also by means of a private agreement between the debtor and its creditors with the further approvaloftheBankruptcyCourt.OncetheBankruptcyCourthas approved the agreement, such agreement will be binding on all creditors recognised within the proceeding, including absent and dissenting creditors.


Pursuant to Law 1116, upon filing of the application to a reor-ganisation proceeding, directors are not allowed to transfer a company’s assets or make operations that are not related to the ordinary course of the debtor’s business, without previous approvalbytheBankruptcyCourt.Failingtocomplywithsuchlimitations will cause the directors to be jointly liable for the damages caused to the company, the shareholders or partners, and the company’s creditors. The directors may be removed from their office, and may be sentenced to pay successive fines of up to 200 legal minimum monthly wages (approximatelyUS$54,600)untiltheoperationisreversed.

Also, according to Article 82 of Law 1116, if the debtor’s equity is reduced due to wilful or negligent conduct attribut-able to the shareholders, directors, auditors or employees, these shall be liable for the payment of the remaining liabilities of the entity.Thisarticleexpresslyprovidesthattheshareholderswhodid not have knowledge about the action or omission, or who voted against it and did not take part in its implementation, will not be subject to this kind of liability.

In cases of breach of duties or ultra vires acts, or breach of laws or bylaws, the negligence of the persons involved will be presumed.Furthermore,anycontractualprovisionthatexoner-ates the shareholders, administrators, auditors or employees of the aforementioned liabilities or that limits such liabilities to the amountofthebondgiveninordertoexercisetheirduties,willnotbeenforceable.Theliabilitywillariseonlytotheextentthatthe assets of the company are insufficient to pay off creditors.

54 Colombia


(b) Law 1682 of 2013 gave special powers to the President of Colombia to create the Unit of Transportation Infrastructure Planning (Unidad de Planeación de Infraestructura de Transporte) and the Commission for the Regulation of Infrastructure and Transportation (Comisión de Regulación de Infraestructura y Transporte).

(iv) Oil & Gas(a) MinistryofMiningandEnergy (Ministerio de Minas y

Energía).(b) National Hydrocarbons Agency (Agencia Nacional de

Hidrocarburos).(c) National Agency of Environmental Licences

(“ANLA”).(d) MiningandEnergyPlanningUnit(“UPME”).

(v) Mining(a) MinistryofMiningandEnergy (Ministerio de Minas y

Energía).(b) NationalMiningAgency(Agencia Nacional de Minería).(c) MiningandEnergyPlanningUnit(“UPME”).

(vi) Energy(a) Ministry ofMines and Energy (Ministerio de Minas y

Energía).(b) Commission for the Regulation of Energy and Gas

(Comisión de Regulación de Energía y Gas).(c) MiningandEnergyPlanningUnit(“UPME”).(d) Superintendence of Public Utilities (Superintendencia de

Servicios Públicos).


In general, the enforceability of financing documents and project documents does not require any filing or registration(withtheexceptionoftheabovementionedregistrationrequire-ments before the national registry for security interests over movable assets, before the public instrument registry office (Oficina de Registro de Instrumentos Públicos) for security over real property, and before theCentralBank). Nevertheless, agree-ments with governmental entities must be previously authorised by the corresponding governmental authority of the national, regional or local order, and must be published in an official database.

In addition, indebtedness of public entities must fulfil certainrequirements.Generally,foreignindebtednessmustbeauthorised in advance by theMinistry of Finance and PublicCreditandrequirespublicationinpublicdatabases,suchastheSistema Electrónico para la Contratación Pública (“SECOP”). Also, local indebtedness of public entities must be author-ised in advanceby theMinistryofFinance andPublicCreditand requires theprevious issuanceof a favourableopinionofthe Colombian National Planning Department (Departamento Nacional de Planeación).


In general, licences to hold land, natural resources or a pipe-line depend on the particular case and project. Foreign enti-tiesareallowedtoholdsuchlicences.However,theexploitationof certain assets, including oil fields, mines and water sources, requiresaconcessiongrantedbythecompetentpublicauthority.

Currently,Colombiahasratified13BITs,whichincludetheaforementioned investment protection standards, with the following countries:■ FreeTradeAgreement(“FTA”)Colombia–Mexico.■ FTAColombia–NorthernTriangle.■ FTAColombia–Canada.■ ARPPIColombia–Spain.■ ARPPIColombia–Switzerland.■ ARPPIColombia–China.■ ARPPIColombia–UnitedKingdom.■ ECAColombia–Chile.■ FTAColombia–EFTA.■ FTAColombia–UnitedStatesofAmerica.■ ARPPIColombia–Japan.■ ARPPIColombia–Peru.■ ARPPIColombia–India.


Expropriationornationalisationofassetsmayonly takeplacefor previously defined reasons of public utility or social interest. The Colombian Constitution states that any expropriation bythe government must be undertaken with due process and be fairly compensated. Except in case of war, the governmentcannotexpropriatewithoutpriorpaymentofcompensationtothepersonfromwhomassetsareexpropriated.Expropriationmay be undertaken only if a judge orders so, or, exception-ally, through an administrative act which, nonetheless, may be subject to further judicial review.

In addition, FTAs ratified by Colombia include mechanisms ofprotectionagainstexpropriation,bywhichisstatedthatStatepartiesmust refrain from anydirect or indirect expropriationof the treaty covered investment, unless it is carried out for reasons of public utility or social interest, in a non-discrimina-tory manner, with due process of law and through the payment ofprompt,adequateandeffectivecompensation.Thebreachofthis investment protection standard may be brought, by inves-tors against States, before international centres for the settle-ment of investment disputes.



(i) Finance(a) MinistryofFinanceandPublicCredit.(b) National Treasury Department of the Ministry of

Finance (Dirección del Tesoro Nacional del Ministerio de Hacienda y Crédito Público).

(ii) Environment(a) Ministry of Environment and Sustainable

Development.(b) National Agency of Environmental Licences

(“ANLA”).(c) Regional Environmental Authorities (Corporaciones

Autónomas Regionales).(iii) Infrastructure

(a) National Infrastructure Agency (Agencia Nacional de Infraestructura).

55Brigard Urrutia


werenottaxedatthecompanylevel,thecompanywillapplyawithholdingtaxof32%(forfiscalyear2020)overtheamountpaidanda7.5%overtheremainder,resultinginacombinedrateof35%to38%,dependingofthecorporatetaxrateapplicabletothefiscalyear.Thewithholdingtaxratemayvaryiftherecip-ient of the dividends is located in a treaty jurisdiction.


Project companies incorporated in Colombia are not entitled to maintain onshore accounts in foreign currency.

Project companies incorporated in Colombia are entitled to maintain offshore foreign currency accounts. Such accounts are subject to special registration and reporting obligations before the Colombian Central Bank, when used for certain foreignexchangeoperations(i.e.investmentorindebtedness).

Onshore foreign currency accounts maintained by non-Co-lombian residents are subject to numerous restrictions and are permitted only for specific purposes.


In the case that the parent company of a project company is incor-porated abroad, the corresponding foreign investment must be registeredbeforetheCentralBank.Foreigninvestmentdulyregis-teredwiththeCentralBankconferstheinvestorwiththerightto:(i) transfer abroad the dividends resulting from the investment; (ii) reinvest dividends and income derived from the disposal of such investment; and (iii) transfer abroad any income derived fromthesaleoftheinvestment,theliquidationofthecompanyorportfolio or the reduction of the company’s capital. If the parent company is incorporated in Colombia, there is no restriction on the payment of dividends from the project company.


Itislikelythattherequirementforlicencesinrelationtoenviron-mental or construction matters will impact a project financing materially. However, depending on the particular project there may be additional environmental, health and/or safety laws or regulations that may impact the project financing. The main governmental authority in charge of administering the issuance of environmental licences and permits is the ANLA.


Project companies deemed to be private entities are not subject to specific procurement rules or regulations. In the case that the project company is a State-owned entity, public procure-mentlawsmaybeapplicable,withtheexceptionofspecialcasesregarding certain industries with special regulations.

Foreign entities may obtain any such concessions. A foreign entity that is a party to a concession agreement must establish a subsidiary or a branch in Colombia.


Yes. Under the Colombian National Constitution, the Colombian government must be compensated, through the payment of royal-ties,fortheexploitationofnon-renewablenaturalresources.Theamount payable depends on the type of non-renewable natural resource. Thegeneraltaxationregimewouldbeapplicable.However,

somespecialcontributionsandtaxesapplytonaturalresourcesextractioncompanies:(i) Carbon tax: levies the carbon content of all fossil fuels

used for combustion purposes.(ii) Gas and ACPM Tax: triggered on the sale, withdrawal,

importforownconsumptionorimportofgasandACPM.(iii) Gas and ACPM surcharge: is triggered on the sale of gas

andACPM.(iv) Tax on explosives: it leviesthepossessionofexplosives

and munitions. PleasenotethataspertheTaxCode,theexportofgoodsis

VAT-exempt. In thatway, the export of natural resources orfossil fuelswouldbeexemptandgive the right toask for theinputVATinreimbursement.Certaintaxbreaksareavailableforcompaniesintheextrac-

tionbusiness,suchasthepublicworkstaxbenefit,accordingtowhich,taxpayerswhoenterintoagreementswithlocalauthor-ities to undertake public works shall receive, as compensation, tradable securities to pay taxes. Still, it should be noted thatminingandextractingcompanieseligibleforthepublicworkstax benefit may not develop infrastructure projects directlyrelated to their income-generating activity.


Otherthantheobligationtocompleteforeignexchangeopera-tionsthroughtheforeignexchangemarket,therearenorestric-tionsorfeesapplicabletoforeigncurrencyexchange.

However, bear in mind that the transfer of funds and/or profitremittancetooverseasis leviedwithdebittaxata0.4%over the transfervalue. Taxoptimisation isavailable throughforeign compensation accounts.


There are no currency exchange restrictions or controls.However, it is necessary to complete the repatriation of invest-ments or loan payments to parties in other jurisdictions through theforeignexchangemarket.Additionally,withholdingtaxwillapply to the payment of any revenue arising from a Colombian source or to the payment of interest in the case of loan agree-ments(pleasegotoquestion17.1).

Regarding repatriation of profits, in accordance with Act 2010, 2019 (the “TaxReform”), if dividends from the project company were taxed at the project company level, such divi-dendswillbetaxedata7.5%rate.Meanwhile,ifsuchdividends

56 Colombia


The importation of certain goods that can be classified as “equipment for construction projects” is subject to a priorauthorisation or licence to be issued by the corresponding government authority (i.e. importation of fuels, used or refur-bished machinery, heavy-duty vehicles (yellow machinery), among others). Such authorisation must be electronically requested to the corresponding authority through the SingleWindow for Foreign Trade, and it must be presented before DIAN as part of the supporting documentation of the IR.


As a general rule, the importation of goods triggers the payment ofcustomstaxes(customsdutiesandVAT).Thespecificamountoftheseduties,andparticularexceptions,willvarydependingon: (i) the tariff classification of the goods; (ii) the origin of the goods (applicable, for example, to goods imported fromfree trade agreement countries); and (iii) the import regime. Generallycustomsdutiesrangefrom5%to15%andtheVATgeneralrateis19%.Thebenefitsregardingcustomstaxesarethe following, among others:■ TariffreliefincludedintheFTAsratifiedbyColombia.■ Inlong-termimports,thepaymentofcustomstaxeswill

be made in instalments (up to 10 instalments and payable every semester).

■ Temporary Importation under Special Import-ExportSystems, allows the Importer of Record (“IOR”) to import with total orpartial suspensionof customs taxes, goodsthatareintendedtobeexportedinwholeorinpartwithina specified period, after they have been processed, manu-factured or repaired, as well as inputs necessary to perform these operations.

■ TheTaxCodeincludesalistofproductsthatareexcludedfromVATandthereforetheirimportationdoesnottriggerthistax.

■ Thetemporaryimportofheavymachineryforbasic indus-tries, as long as such machinery is not produced in the country, underthetermsoftheTaxCodedoesnottriggerVAT.

■ The Tax Code provides for the possibility of deductingfromtheincometaxpayable,theVATpaidontheimportofrealproductivefixedassets.

11 Force Majeure


Yes. Colombian law sets forth force majeure exclusions whichare available and enforceable even if the parties do not include them in the project or financing documents. In events of force majeure, the parties will not be forced to comply with their obli-gations under the affected agreement and will not be liable for any default thereunder. Generally, force majeureexclusionsarenotavailable as a defence vis-à-vis payment obligations.



Yes. Colombia has developed several mechanisms to control and prevent corrupt business practices and bribery. Penalties

8 Foreign Insurance


Colombian residents are allowed to purchase any insurance with foreign insurance companies abroad, except for the followinginsurances which are reserved to Colombian insurance compa-nies: (i) social security-related insurances; (ii) mandatory insur-ance policies under Colombian law; (iii) insurance in which the insuredpartyisrequiredtoprovideevidenceofamandatoryinsur-ance policy prior to purchasing the relevant insurance coverage; (iv) insurance inwhichthe insuredparty isrequiredtoprovideevidence that it is up to date with its social security obligations; or (v) insurance in which the insured party is a State-owned entity.


Yes. Insurance policies over project assets are payable to foreign secured parties as long as they are named in the insurance policy as insured and loss payee. In any case, the payment of any amounts resulting from insurance policies to foreign creditors mustbereportedtotheCentralBankforstatisticalpurposes.



In general, there are no restrictions on foreign workers in Colombia. However, certain professions and activities (e.g. engineering activities) have special regulations which requireauthorisations/permits granted by certain professional coun-cils (e.g. the Engineering Professional Council). In such cases, foreign workers would need to apply for a temporary profes-sional permit before the relevant professional council or validate their professional degree or diploma.

From an immigration law standpoint, foreigners entering Colombia for the performance of business or working activities requireapropervisaoranentrypermit,dependingonthecase.The appropriate type of visa or entry permit would depend on the nationality of the applicant, the activities to be performed, the lengthof stayand/or theexistenceofa local employmentrelationship.



In order to perform an import operation it is necessary to: (i) obtain thetaxregistrationbeforeColombianNationalTaxandCustomsAuthority (“DIAN”), as well as all the necessary permits, licences or authorisations; (ii) fill and submit the Import Return (“IR”); (iii) paycustomstaxes(customsdutiesandVAT)whichwilldependonthe products tariff subheading; and (iv) obtain, submit, and keep all the supporting documents of the import operation, such as: commercial invoice; transport document; authorisation or licence; packinglist;certificateoforigin;andValueReturn.

57Brigard Urrutia


may assume jurisdiction if the specific criteria for assumption of jurisdiction listed in the Colombian General Procedural Code applies. In such an event, the parties to the litigation should request from the Colombian judge a dismissal or stay of theColombian proceedings.

Waiver of immunity will be valid and enforceable, provided that only the individual rights of the waiving party are affected.



There are contractual provisions requiring submission ofdisputes to international arbitration. If the following criteria are met, parties may agree to submit their disputes to international arbitration. According to the Colombian Arbitration Statute, parties may agree on international arbitration if at least one of thefollowingrequirementsismet:(i) the parties have their domiciles in different countries;(ii) a substantial part of the obligations will be performed

outside of the country in which the parties have their prin-cipal domicile; or

(iii) the dispute relates to international commercial interests.For the enforcement of an international or foreign award by

the Colombian authorities, a recognition proceeding must be fulfilled unless the seat of the tribunal is in Colombia.


Colombia is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as well as to the 1975 Inter-American Convention on International Commercial Arbitration, and the 1965 Washington Convention for the Settlement of Disputes between States and Nationals of Other States.


Every dispute is subject to arbitration unless such conflict is not susceptible to being transacted (a “transaction” is a specific form of private agreement whereby the parties terminate their present or potential conflicts). As a general principle, it is possible to transact over economic rights subject to any waiver (certain private economic rights are not subject to waiver, including certain labour and social security rights) that does not affect the rights of third parties.


No. The Colombian Constitutional Court has generally rejected any law or regulation that has attempted to include arbitration or other non-judicial venues as mandatory conflict resolution proceedings.

for bribery range from imprisonment to a fine of up to 200,000 times the legal monthly minimum wage (approximatelyUS$54,500,249). Additionally,theremaybetheannulmentofownership over the involved assets and civil liability for any damages caused by the criminal conduct. According to Law 1778 of 2016, individuals convicted of engaging in corrupt prac-tices cannot enter into contracts with the government, nor can the companies in which they are majority shareholders, officers or directors – this limitation can be in place for up to 20 years. Moreover, very strict compliance and anti-money launderingmechanismshavebeenadoptedbythedifferentactorsofthe4GProgram,whichgobeyondthelegalrequirements.Inmattersof corruption, following the controversial Ruta del Sol arbitral award, third parties, such as financing entities, are cautioned to be particularly diligent with respect to the integrity background check, representations and warranties, covenants and standards. The award limited the amount recoverable by the financing entities funding the project by disregarding the concessionaire’s accounting based on the involvement of its agents in alleged acts of corruption in the award and performance of the Ruta del Sol concession.

13 Applicable Law


According to the Colombian Code of Commerce, agreements to be performed in the Colombian territory are subject to Colombian law. If substantial parts of the agreement are to be performed outside Colombia, agreements may be governed by foreign law, depending on applicable conflict-of-law rules.


Financingagreements,inthecontextofcross-borderfinancingtransactions involving Colombian residents and foreign lenders, are typically governed by New York State law or English law. However, financing documents between Colombian residents and local banks must be governed by Colombian law, while trust agreements and security documents over assets in Colombia are usually governed by Colombian law. Therefore, cross-border multi-currency loans involving foreign and local banks would requirecertainfinancingagreements(e.g.localloanagreements)in order to be governed under Colombian law.


Agreements to be performed in Colombia are governed by Colombian law (e.g. concession agreements, onshore trust agree-ments and engineering, procurement and construction (“EPC”) agreements). Agreements pertaining to in rem rights over assets located in Colombia (including agreements for the transfer of property and mortgage agreements) must be governed by Colombian law.



Parties may validly submit to foreign jurisdiction. Nevertheless, if a Colombian judge has jurisdiction over a matter, such judge

58 Colombia


subject to the corresponding withholdings, they will be fully deductible.

c) Limitation to the Financial Superintendence regulations: all interest rates for all debts (both with related and unre-lated parties; local or foreign) are subject to a statutory limi-tationthatisequivalenttothehighestrateauthorisedforbanking establishments during the respective fiscal year, according to monthly certifications issued by the Financial Superintendence. Note that this is a dynamic limitation, since it directly depends on a variable factor. However, this rate is usually close to an annual effective interest rate of30%.

d) Transfer pricing regime: debt operations with foreign related parties are subject to transfer pricing provisions and, accordingly, the arm’s length principle must be observed. Among other effects, this means that interest payments in excess of market standards shall not bedeductible.

e) Thin-capitalisation rule: interest payments to related partiesfordebtsinexcessofa2:1ratiocomparedwiththecompany’snetequityasof31Decemberofthepreviousyear is deemed as non-deductible. Debts taken for this calculation are those generating interests and that have been entered into with related parties through intermedi-aries that are not related.

f ) Foreign exchange rules:overseaspaymentsmust complywithforeignexchangeprovisionsinordertobedeductible.


Currently, there are no preferential incentives for foreign inves-tors or creditors. Nonetheless,pleasenotethatfromanincometaxstandpoint,

some incentives may apply depending on the type of project that isbeingfinancedinColombia.Forexample,interestsonloansgranted to special-purpose companies engaged in public-private partnerships for infrastructure projects may be subject to a pref-erential5%withholdingifthetermoftheloanisatleasteightyears. Also, certain relief or reduced withholdings may apply if the investor or creditor is a resident of a country with which Colombia has a treaty to avoid double taxation (e.g. Canada,Chile,Mexico,Portugal,SpainandSwitzerland,amongothers).

Foreign investment and loans are typically subject to income taxtotheextentthattheyproduceColombian-sourcedincome(e.g. dividends, interests, royalties, etc.).

Further, loans granted abroad by multilateral lending organi-sations(e.g.IBD,ADC,etc.)areoftenexemptofanytaxchargedin connection with them. Such exemption is conditioned tointernational agreements entered between such entities and the Colombian Government. In the same way, payments of debts and interests related to foreign public loan operations are exemptfromalltypesoftaxes,rates,contributionsandcharges,whenthecreditorisanon-residenttaxpayer.

Additionally, thin-capitalisation rule is not applicable for public service infrastructure nor transportation projects when they are undertaken by special purpose vehicles. Accordingtodomesticlegislation,non-residenttaxpayersare

subjecttowealthtaxovertheequityhelddirectlyorindirectlyinColombia.TheTaxCodeprovidesCOP5,000,000,000(approx.US$1,472,320)asthethresholdtofileandpaywealthtax.



No. Nevertheless, the Colombian government has established a fund to cover contingent obligations of governmental enti-ties derived from contracts. The fund is called the Fondo de Contingencias and is administered by the Ministry of Finance.Inaddition,inthecontextofsome4Gprojectfinancings,thegovernment has entered into memoranda of understanding withconcessionairestoclarifycertainaspectsof4Gconcessionagreements, such as: (i) payments for availability; (ii) lenders’ step-in rights; and (iii) termination payment formulas.

17 Tax


In general, while interest payments to national creditors are subject to awithholding tax rate of 7%, interest payments toforeigncreditorsaresubjecttoawithholdingtaxof15%iftheloan’stermisgreaterthanoneyear,or20%ifotherwise.Thisrule may vary depending on any double taxation treaties inplace and any special rules for a specific project finance (e.g. long-terminfrastructureprojects,asexplainedinquestion17.2below). Inthesecases,sincewithholdingtaxmustbeappliedby the payer, gross-up clauses are used whenever parties have agreed on a specific net amount.AccordingtotheTaxCode,someloansdonottriggerwith-

holdingtaxoninterests.Namely:(i) Short-term loans originated in the importation of goods

and services and in bank overdrafts. For these purposes, ‘short-term’ isunderstood tobeamaximumtermof sixmonths.

(ii) Loansaimedatfinancingorpre-financingexports.(iii) Loans from non-residents granted to financial coopera-

tives, financing companies, banks and commercial compa-nies subject to the supervision of the Superintendence of Companies,whoseexclusivepurposeistheoriginationofcredits and whose indebtedness is destined to the develop-ment of their corporate purpose.

(iv) Loans for foreign trade operations and import of services, carried out through certain financial entities (i.e. Bancoldex,FinagroandFindeter).

Thereisnospecifictaxapplicabletotheproceedsinconnec-tionwithenforcementofasecurity interest,totheextentthatany such payment is not sourced as Colombian income. Note, however, that if a guarantee is granted by a Colombian party to a foreign related party (principal debtor), transfer pricing rules mayapplyandrequirefortheColombianguarantortochargeanarm’s length consideration for the guarantee.Regardingtherequirementstodeductinterestspaid,several

requirementsapply:a) General deductibility requirements: every expense must

be proportional, necessary and linked to an income-pro-ducingactivityinordertobedeductiblefromincometax.

b) Withholdingtax:ifnowithholdingtaxisappliedovertheinterests derived from loans, such interests will not be deductible. Conversely, if the interest payments made are

59Brigard Urrutia


three years. If the company does not have such financial infor-mation, it is advisable to present to the SFC feasibility evalua-tions of the underlying project. Usually, project finance is struc-tured through a securitisation process. Hence, the securities derived from a securitisation have an underlying asset including cash flows, economic rights, real estate property, etc. It is also necessary to establish a trust agreement with a trustee entity that would become the administrator of the securitisation, as well as the relationship between the issuer and the investors.

19 Islamic Finance


Pleaserefertoquestion13.1regardingconflictoflaws.Thereis no known precedent in Colombia regarding Islamic project financing.


That will depend on the conflict of law rules; please refer to question13.1above.TherearenoknownprecedentsofShari’ah law applicable to the Colombian financial sector.


No. It is common to include interest payment obligations in loan agreements and such obligations do not affect the validity of enforceability of these type of agreements. Such obligations mustcomplywithlegalmaximuminterestrateregulationsandother financial consumer regulations.

AcknowledgmentsThe authors would like to acknowledge the assistance of their colleagues Juan Carlos Puentes, Natalia Arango Botero andMaríaJimenaLondoñointhepreparationofthischapter.

Wealthtaxiscalculatedupontheequitypossessedasoftheclosing of 10 January 2019, 2020 and 2021. However, certain assetscanbeexcludedfromthe taxbaseamount (e.g. interestheld by non-resident legal entities in Colombian companies), whileothersmustbeincludedandtaxed(e.g.loanstoColombiandebtors).As for debit tax, the TaxCode provides that the disburse-

ments of foreign loans in Colombian Pesos, granted by non-resi-dents,shallbeexemptfromthistaxaslongasthefundsarepaiddirectly to the debtor.Finally, it isnoteworthythataregistrationtaxmayapplyon

any document that requires registrationwith theChamber ofCommerce or the Office of Public Records (e.g. public deeds or mortgages).Acase-by-caseanalysisisrequiredtodetermineifregistrationtaxeswillbeapplicable,andthetaxbaseamount.

18 Other Matters


Since the enactment of Law 1676, security structures have been modified for projects in Colombia. However, since the imple-mentation of such regulation is fairly recent, the actual enforce-ment of such security interests is yet to be tested.


The public offering of securities in Colombia is strictly regu-lated, with regard not only to the issuance of shares, but also to the processes for the offering of bonds, notes and securiti-sations. Projectcompaniesmustcomplywithcertainrequire-ments to register before the National Registry of Securities and Issuers (Registro Nacional de Valores y Emisores), managed by the SFC,andbeforetheColombianStockExchange(Bolsa de Valores de Colombia), for the purposes of issuing bonds or similar capital market instruments.

Any offering of securities addressed to the public at large or to 100 or more determined investors must be authorised by the local regulator. For such purposes, project companies must file before the Superintendence of Finance (“SFC”) the prospectus of the offering, along with the financial statements of the last

60

Manuel Fernando Quinche has been a partner at Brigard Urrutia since 2011. Mr. Quinche has more than 15 years of experience practising in the areas of Structured Finance, Project Finance and Mergers & Acquisitions. For five years, Mr. Quinche worked in Corporate Finance at a prestigious law firm in New York. He has acted as legal counsel in various national and international corporate and project finance transac-tions, including, among others, syndicated loans, financings with multilateral institutions and export credit agencies, and financings through capital markets.Mr. Quinche’s project finance experience includes advising either financiers or project developers in toll road projects, ports, oil & gas transpor-tation infrastructure, liquefied natural gas facilities, airports, power generation facilities, public transportation infrastructure, telecommunica-tions infrastructure, downstream, midstream and upstream oil & gas infrastructure and, in general, public infrastructure developed under PPP programmes. Highlights from Mr. Quinche’s recent work include the US$3.5 billion Ecopetrol Cartagena Refinery Project, the US$370 million Puerto Bahía Port Project, the US$250 million and COP510,000 million financing for the construction of the Pacífico 2 toll road project, and the US$173 million and COP864,000 million financing of the Perimetral de Cundinamarca toll road project.

Brigard UrrutiaCalle 70A #4–41BogotáColombia

Tel: +57 1 346 2011Email: [email protected]: www.bu.com.co

The Banking and Project Finance Team at Brigard Urrutia (BU) is well-known in the Latin American market in the context of high-profile, cutting-edge financial transactions, project finance and syndicated lending.Additionally, since BU provides legal advice and assistance in all relevant areas of business, BU lawyers are highly trained in management and inter-national financial dynamics in all industries, which enables them to under-stand the needs of a diverse client base.BU encourages a strong commitment to providing innovative legal solu-tions to clients and has consistently been a pioneer in the design of legal structures enabling clients to achieve their goals. BU has been present in ground-breaking, landmark transactions and has played a central role in developing the practice of law relating to infrastructure in Colombia.

BU has a unique Projects practice area comprised by two highly specialised teams: Infrastructure and Project Finance. Over the years, BU has been a pioneer and leader in providing legal advice in the development of the most complex and breakthrough infrastructure projects completed in Colombia.

www.bu.com.co


Colombia

César Felipe Rodríguez, with more than 15 years of experience, has participated in numerous financial transactions representing lenders and borrowers, private and public entities and local and international institutions. Mr. Rodríguez advised IFC, K-EXIM and HSBC as local counsel for the financing of Bogota’s bus Integrated Public Transport System. Mr. Rodríguez advised Banco Itaú and Davivienda in the refinancing of Termovalle and assisted BBVA, Helm Bank and Bancolombia with respect to a US$75 million syndicated facility provided to ATC Sitios, for the development of telecom infrastructure. Mr. Rodríguez also worked as Foreign Legal Consultant from August 2015 throughout July 2016 in Allen & Overy’s New York Office.Mr. Rodríguez obtained his law degree from Universidad de Los Andes in Colombia; he is a specialist in Financial Law and Civil Procedural Law. Mr. Rodríguez holds a Master of Laws (LL.M.) in international Business Law from the University of Liverpool, United Kingdom.

Brigard UrrutiaCalle 70A #4–41BogotáColombia

Tel: +57 1 346 2011Email: [email protected]: www.bu.com.co



Chapter 8 61

Denmark

Gorrissen Federspiel Tina Herbing

Morten Nybom Bethe

Denmark


until an enforcement event occurs, which means that it allows for disposal in the ordinary course of business and captures newassetsacquiredbythechargorfromtimetotime.Seeourdescriptioninquestion2.2below.

Apart from the floating charge, security is generally given in relation to each type of assets. No formal restrictions apply to the form of the security agreement with regards to whether more than one type of asset can be governed by one sole agreement. However,itshouldbenotedthatperfectionrequirementsvaryfromassettypetoassettype.Theperfectionrequirementsarefurtherdescribedintheremainingquestionsofsection2below.


Pledge over land and buildingsIt is possible to create a non-possessory pledge (i.e. legal mort-gage) over land and buildings. Such pledge must be regis-tered with the Danish Land Registry in order for the pledge to be effective against the pledgor’s creditors and bona fide third parties.

Registration of mortgages with the Danish Land Registry is subjecttoaregistrationfeeof1.45percentofthefacevalueofthesecuredamount,togetherwithahandlingfeeofDKK1,640(approximatelyEUR220).

In addition to a mortgage, a negative pledge/prohibition on sale is often registered over the property in the Danish Land Registry,whichissubjecttoaDKK1,660handlingfee.

Real property consists primarily of a plot of land. However, buildingsandotherfixturesbuiltonthe landbythepropertyowner automatically become an integrated part of the real prop-erty if:(i) such asset is “embedded” in the real property (building); (ii) this embedding has taken place directly or indirectly at the

cost of the property owner (i.e. not a tenant); (iii) the asset is for the use of the property; and (iv) the asset can be considered a standard fitting.

This generally includes heating plants, pipework and wiring installed in the property at the cost of the owner. Whether items such as windmills and pipelines are included in such mortgage must be evaluated on a case-by-case basis according to the above guidelines. If these are not included, they must be pledged as movables, as further described below.

Further, registered mortgages in real property fitted out as a businessalsoencompasstheplant,machineryandotherequip-ment of the business, including agricultural equipment butnot motor vehicles (rights over motor vehicles will have to be

1 Overview


The market for privately funded project financings in Denmark has generally not been very active. There have been some project financings in the renewable energy section and also projects relating to larger development projects, such as the Carlsberg-village in Copenhagen. However, many of these projects are financed via Danish mortgage bonds or have been self-financed by,forexample,thepensionfundsowningtheprojects.EKF,Danmarks Eksportkredit (the Danish ECA) continues to

beactiveintheareaofexportofgoodsandservicestoprojectsabroad (including wind farms, cement plants, biomass plants, etc.). The Danish ECA provides a variety of support, including various guarantees (e.g. buyer credit guarantees, supplier credit guarantees, project finance guarantees, operating lease guaran-tees, etc.) and direct funding.


MajorDanishproject financings are rare inDenmark. Largeprojects,suchastheGreatBeltBridge,theOresundBridgeandtheMetro in Copenhagen, were financed by public loans (orstate guaranteed loans) and the same will be applicable for the currentFehmarnBeltproject.

In recent years, there have not been any privately funded project financings in Denmark that we would consider significant.

2 Security


Danish law provides for a floating charge, which will capture the chargor’s assets in Denmark of the following main catego-ries: receivables resulting from sale of goods and services; stock; operatingmachinery; tools and equipment; fuel and ancillarymaterials; certain unregistered vehicles; livestock; and IP rights. We note that it does not cover other categories, e.g. real prop-erty,vehicles(registeredintheDanishMotorVehicleRegisteror similar register), cash and securities. The charge is floating

62 Denmark


A possessory pledge will be valid and binding on third parties if the pledgor has effectively been deprived of its physical posses-sion of the assets subject to the pledge. Therefore, this type of pledge is very rare in project financings.

A non-possessory pledge will be valid and binding on third parties upon registration of the pledge with the Danish Register ofPersons(or,ifamotorvehicle,intheDanishMotorVehiclesSecurities Register). Such registration is subject to a registration fee of 1.5 per cent of the face value of the charge and a handling feeofDKK1,660.


Receivables may generally be assigned to a third party unless the agreement establishing the receivable prohibits such assignment.

The assignment is perfected by giving notice to the debtor. Latenotification,forexampleupontheoccurrenceofadefault,would render a security interest invalid, e.g., if the assignor becomes subject to insolvency proceedings within a three-month period after notification under the Danish claw-back provision,asfurtherdescribedinquestion5.2below.An effective assignment further requires that the assignor

is restricted from disposing of, or dealing with, the receivable (forexample,bycollectingthereceivable,alteringthetermsofthe agreement or otherwise benefitting from the receivable). Ideally, any payment collected from the debtor should be made directly into a separate collection account held in the name of the assignee. The assignor can, however, be given certain rights to act as the lenders’ agent in administering and collecting the receivables, as long as the assignor cannot freely dispose of the collections and the arrangement is carefully monitored by the assignee. It is also possible for payments to be made into an account of the assignor, provided that funds are swept on a very frequentbasistoaseparatebankaccountheldinthenameoftheassignee. However, all scenarios where the assignor may collect thereceivablerequireseparatelegalanalysis.In addition, please see question 2.2 above with respect to

floating receivables charges.


Itispossibletocreateafixedsecurityinterestoverbankaccountsunder Danish law.

A pledge over a bank account is perfected by delivering notice to the bank where the account is held. Further, the pledged account must be effectively blocked at all times and, accordingly, thepledgeewillingeneralberequiredtoconsenttoeveryreleasefrom the pledged account. Therefore, we often see account pledges being made subject to late perfection in that the account is not blocked until an event of default has occurred. However, late perfection is subject to avoidance as further described in our answertoquestion5.2below.


Usually, shares in Danish companies are not in certificated form.A security interest over shares which (i) are not issued through

aCSD(inDenmark,thiswouldbeVPSecuritiesA/S(VP)),and

registered in theDanishMotorVehicleRegister). The aboverule only applies to plant, machinery and other equipmentownedbytheowneroftherealpropertyinquestionandnot,forexample,iftherealpropertyhasbeenleased.

Floating chargeThe floating charge regime under Danish law allows for a number of assets to be charged under a floating charge. Generally, a floating charge will not prevent the disposal of assets by the debtor in the ordinary course of business and new assets acquiredafterissueofthefloatingchargewillbecomesubjecttothe charge. Under a floating charge, the assets need not be iden-tified individually. The charge will crystallise, e.g. when insol-vency procedures against the chargor are commenced.

A floating charge may not be established in favour of compa-nies/persons closely connected with the chargor (e.g. if the chargee holds shares or other ownership rights (directly or indi-rectly) in the chargor).

There are two types of floating charges available: (i) a busi-ness charge (in Danish: “virksomhedspant”); and (ii) a receivable charge (in Danish: “fordringspant”). It is not possible to estab-lish a business charge and a receivable charge at the same time.

Under the business charge, one or more of the following types of assets of the chargor may be charged:(a) unsecured claims (receivables) from the sale of goods and

services;(b) stocks of raw materials, semi-manufactured goods and

finished goods;(c) cars that are not and have never been registered in the

DanishCentralRegisterofMotorVehiclesorinasimilarforeign register;

(d) operatingfixturesandequipment(providedthattheassetsare not comprised by a charge of the real property to which they are connected);

(e) propellants and other intermediary products;(f ) livestock;(g) intellectual property; and(h) cars that are registered or have been registered in the

DanishCentralRegister ofMotorVehicles or in similarforeign register, if the chargor carries on business with the purchase and sale of motor vehicles.

Theabovelistofassetsisexhaustive.The receivables charge allows for the creation of a floating

chargeoverallexistingandfuturereceivables.Theadvantageofthis type of charge is that it is not necessary to notify the debtors of the chargor in order to perfect a floating receivables charge. Thisiscontrarytoafixedreceivablescharge,wherenotificationof the charge must be given to the debtor of the chargor in order toperfectthecharge.Pleaseseequestion2.3below.Bothabusinesschargeandareceivableschargemustberegis-

tered with the Danish Register of Persons in order to become binding on the chargor’s creditors and bona fide third parties. This incurs a registration fee of 1.5 per cent of the face value of the chargeinadditiontothehandlingfeeofDKK1,660,anexpensewhich generally makes the floating charge less attractive to the chargor in large financings. A floating charge has to be renewed within 10 years of its registration.

The floating charge regime also allows for the registration of negative pledges with the Danish Register of Persons, which issubjecttoaDKK1,660handlingfee.Thismainlypreventsother charges being registered over the relevant assets.

MovablesIt is possible to create both possessory and non-possessory pledges over movables in accordance with the Danish rules on security over chattels.

63Gorrissen Federspiel


concept of security agents/trustees administering security on behalf of beneficiaries, i.e. by way of the security trustee acting as an agent on behalf of the beneficiaries, is recognised under Danishlaw.Moreover,itispossibletogranttherelevantsecu-rity for the benefit of the security trustee on behalf of each of the lenders, bondholders or other financiers in accordance with therulesintheCapitalMarketsAct.


The security can be granted in favour of a security trustee on behalf of all lenders, bondholders or other financiers as outlined above in question 3.1. In such case, the security agent canenforce the security on behalf of all other finance parties.



Any enforcement proceedings in respect of possessory rights (i.e. rights over shares, receivables, bank accounts, etc.) may only be initiated after the pledgor has been given a one-week prior writtennoticebyregisteredpost,unlessimmediatesaleisrequiredto avoidor limit losses. Thisnotice requirement ismandatory(unless it relates to assets subject to financial collateral as set out in the collateral directive) but notice may be sent without first obtaining an approval to enforce from the enforcement court.Seequestion5.1belowastotheenforcementafterbankruptcy

and restructuring proceedings having been initiated.Parties may generally agree on an alternative enforcement

process to judicial sale, including self-help remedies such as private sale or the pledgee taking full legal ownership of the pledgedassetsiftherearenootherpriororsubsequentpledgeesorpartiesthathaveleviedexecution.However,mostoftenrealproperty will be sold by way of public auction.


Generally, no such specific restrictions apply to foreign inves-tors,exceptthatforeigninvestorscannotbecometheownerofrealpropertyinDenmarkwithoutapprovalfromtheMinistryof Justice.



Provided that the specific security has been duly perfected in a timely manner and that claw-back provisions do not apply in the

(ii) in relation to which no share certificate has been issued, are protected against competing rights by providing notice of the pledge to the issuing company and having the pledge registered in the company’s share register.

A security interest over shares which have been issued through the CSD is perfected by registering the pledge in the CSD.Theperfection requirements in respectof security interests

over shares for which share certificates have been issued depend on whether or not the shares are negotiable instruments. It has to be specified in a company’s articles of association whether the shares are negotiable instruments or not. If the shares are nego-tiable instruments, security interests are perfected by taking possession of the share certificates. However, most often shares in Danish companies are in non-negotiable form. Security interest in respect of non-negotiable shares are perfected by notifying the issuing company and having the pledge registered in the company’s share register.


There are no mandatory notarisation requirements or stampduties. Registration requirements and registration fees havebeenoutlinedaboveinquestion2.2.


Assetoutinfurtherdetailaboveintheotherquestionsofsection2, certain fees apply to the registration of rights and securities in public registers which may be significant. In Denmark, a digital registration procedure has been implemented which has made the registration process less time-consuming. Often, the registrations can be made on a day-to-day basis, but the chargor must render a power of attorney to a person (usually the law firm or the financing bank) who has access to the system in order for such person to make the registration. In practice, completing, filing and regis-tering the power of attorney with the relevant registry can take five to seven business days. We note that the power of attorney can be avoided if the authorised signatories of the chargor holds a Danish NemID (electronic signature provided to persons in Denmark).


Besidesregistrationproceduresasdescribedabove,nospecificregulatoryrequirementsapplyinDenmark,exceptforprojectswhereaseparateextraction,miningorsimilarlicenceisrequired.

3 Security Trustee


Denmark does not recognise the concept of a trust and is not party to the Hague Convention on Trusts 1986. However, the

64 Denmark


authority of one or more supervisors appointed by the bank-ruptcy court. A restructuring must comprise a restructuring of the debtor or the debtor’s business by way of either:(i) a transfer of assets and activity (restructuring of the debt-

or’s business);(ii) a compulsory composition (which may aim at either a compo-

sition of the debt (debt reduction), a moratorium (postpone-ment of maturity date) or a combination of the two); or

(iii) a combination of the above.Such restructuring is subject to further procedural rules as

outlinedundertheDanishBankruptcyAct.


Prior to reconstruction/bankruptcy, any director allowing for the company to incur liabilities, which the director knows or should know that the subject company will not meet, may become liable themself for such liabilities. If a company is under reconstruction or has filed for bankruptcy, the directors can continue business under the supervision and authority of the supervisor; see question 5.5 above. Prior to the adjudicationorder, directors can be held liable if they continue trading after it is no longer financially justifiable to do so.



No specific ownership restrictions, controls and fees apply to foreign owners of a project company incorporated in Denmark.

Capital gains or losses on shares in a project company incorpo-ratedinDenmarkwillnotbesubjecttoDanishcapitalgainstaxforforeignowners.NosharetransfertaxcurrentlyexistsinDenmark.Distributions of dividends may be subject to withholding tax,depending on whether the foreign owner is a company or an indi-vidual and depending on the foreign owner’s country of residence fortaxpurposes.


Doubletaxationtreatieswillusuallylowerthewithholdingrateor the final tax rate on dividend payments to the rate in theapplicabletaxtreaty.


Pursuant to the Danish Constitution, ownership is inviolable. Accordingly,noonemaybeorderedtorelinquishhispropertyexceptwhere the commongood sodemands. Thismayonlytake place in pursuance of an act and against full compensation. This applies irrespective of the form of incorporation or type of investment.Expropriation is rare inDenmarkand ismainlycarriedout

with respect to land in connection with establishing roads and other infrastructure.

specific case, a bankruptcy proceeding will generally not affect the ability of a project lender to enforce possessory rights as a secured party. However, a secured party will, in case of insol-vency of the project company, be obliged to notify the bank-ruptcyestatepriortoanyliquidationofthesecurityandthebank-ruptcyestateisentitledtorequireavaluationofsuchcollateral.

Furthermore, the disposal of assets over which the secured parties hold a non-possessory right (i.e. mainly the floating charge, the receivables charge, mortgage over real property and assets) is conducted by the bankruptcy administrator. The security agent (or other secured parties) cannot demand enforcement of such secu-rity interestsuntil sixmonths after the referencedate. Prudentbankruptcy administrators will, however, cooperate closely with secured parties so as to arrange for the best sale of the real prop-erty and assets which is often done by way of a private sale. The bankruptcy administrator will generally take instructions from the security agent in respect of the conduct of the sale. All disposal costs including costs to the bankruptcy administrator will be deducted before paying the proceeds to the secured parties.


A lien or other security interest (i) which was not granted to the creditor when the debt was incurred, or (ii) which was not perfected without undue delay after the debt was incurred, may be declared void if the security interest was established later than three months before the petition for bankruptcy was filed (or two years if the parties are closely connected). There are certain other subjective claw-back rights applicable to security interests which willgenerallyrequireknowledgeoftheimminentbankruptcy.


Bankruptcy proceedings generally apply to all Danish enti-ties (including its foreign branches) but a Danish bankruptcy estate only has jurisdiction over assets in Denmark. Therefore, a Danish branch of a company incorporated outside of Denmark cannot be declared bankrupt in Denmark, as the branch is not a separate legal entity under Danish law.TheDanishBankruptcyActisgenerallynotconsideredappli-

cable on the Danish State. This entails that independent adminis-trative units set up under the Danish State in some cases will be so closely connected to the state that the Danish State will be liable in accordance with the relevant act regulating the set-up. In these cases, it is most likely that the entity cannot be subject to insol-vency proceedings.


If such assets are not subject to perfected security rights in favour of the relevant lenders, there are no such rights.


The project company can be made subject to the Danish in-court reconstruction scheme carried out under the supervision and



Extractionofrawmaterialssuchasstone,gravel,sand,clay,limestone, chalk, peat, top soil, etc., with a commercial purpose, requires the region’s permission. Other types of raw mate-rials such as hydrocarbons, sulphur, rock salt, potassic salt and brominebelongtotheDanishStateandmaynotbeextractedwithoutpriorconsentandlicencefromtheDanishMinistryofthe Environment and Food.


Therearenorelevantforeignexchangecontrols,feesortaxesonforeigncurrencyexchange.


Generally, no such restrictions apply. See also section 17 below.


Generally, there are no restrictions as to where Danish compa-nies can establish and maintain accounts.


Ordinary restrictions with regard to payment of dividends apply. This entails that payment of dividends may only be made out of distributable reserves, as further defined in the Danish Companies Act. Danish companies are also subject to finan-cial assistance rules.


There are several Danish acts dealing with the issue of environ-mental contamination and clean-up orders, which are generally supervised by the regions.Any Danish property is to some extent surveyed in order

to establish an overview of contaminated or possibly contam-inated properties, to minimise the risk of groundwater pollu-tion, prevent pollution expanding and to ensure that publichealth is not put at risk. If a property is mapped as contami-nated or possibly contaminated, certain restrictions to the prop-erty apply. A contamination registration does not restrict the actual use of the property, but any change of the use to sensitive useorconstructiononthemappedpropertyrequiresapermitfrom the authorities.

The “polluter pays” principle is well-established in Denmark. Clean-up orders can be issued to polluters even though they do not own the polluted property. In such case, the owner can be ordered to tolerate the clean-up.



No rawmaterials may be extracted for commercial purposeswithout prior permission from the relevant region.

Import, production and sale of chemicals are supervised by the Danish Environmental Protection Agency (EPA). The EPA also grants permissions to catchments of groundwater and surface water.

Production and distribution of energy, including oil and gas, is supervised by the Danish Energy Agency. Entering into the oil and gas market requires a concession from the Ministryof Climate, Energy and Utilities and entering into the energy marketrequiresauthorisationfromthestate-ownedcorporationEnerginet.dk which controls the top-level infrastructure.TheDanishMinistryofTransportandHousinghastheoverall

responsibility of the road sector, as well as bridge connections. The Road Directorate oversees the state roads, whereas respon-sibility for the rest of the road system lies with the local regions and municipalities.

The ports and railways are supervised by the Danish Transport, Construction and Housing Authority.The Danish Business Authority issues permissions for

entering into the telecommunications market, while the actual supervision of the telecommunications market is carried out by the Danish Energy Agency.

The issuance of ordinary construction permits generally lies with the local municipalities and regions.


Generally, no specific restrictions apply, except as set out insection2andquestion7.1aboveandquestion7.3below.


Government approvals are usually not required in projectfinance transactions. However, depending on the type of project, certain approvals may be required to implement theproject (i.e. building permits, etc.). In addition, a government concessionor licencemayberequiredinordertoconductthetype of business envisaged by the project.

As a general rule, any physical or body corporate has the righttoacquirerealproperty.However,certainrestrictionsareimposedontheacquisitionoffarmlandaswellasaforeigner’sacquisitionofrealproperty,whichwillbesubjecttoapproval.


The landowner’sownershipextendsasfardownas theownerreasonably can be expected to exploit the soil, although therightsforundergroundexploitationareheldbythestate.

66 Denmark


and may thus be imported to Denmark without any restrictions. However, with respect to certain categories of goods (e.g. chem-icals)animportpermitmayberequired.Withrespecttogoodsimportedfromnon-EU/EEAMemberStates,animportpermitisrequired.Inaddition,customsmaybeleviedontheimportedgoods.



11 Force Majeure


Force majeureexclusionsareavailableandenforceableinDenmark.



Under Danish law, both active bribery (offering bribery to) and passive bribery (accepting bribery by) involving persons exer-cising a public office or function is an offence. The applicable penaltiesarefinesandimprisonmentofuptosixyears.

Furthermore, the agreement may be declared void (depending on the specific circumstances).

13 Applicable Law


Danish contract parties are allowed to choose the law of a foreign jurisdiction and such choice will normally be recognised by a Danish court. No general trend with regards to choice of lawisestablished.Pleaseseequestion13.3below.


If the financing is provided by Danish banks, the loan agreement is often governed by Danish law although we also encounter several loan agreements which are governed by English law. The latterwilloftenbethecaseinlargerfinancingsthatareexpectedto be syndicated in the international market. Security estab-lished over assets, etc. located in Denmark will, however, almost alwaysbegovernedbyDanishlaw,butitisnotarequirement.


Danish law is usually chosen if the project solely or mainly concerns Denmark. If one of the project parties is the Danish State or another Danish public entity, the project agreement will almost always be governed by Danish law.

The environmental liabilities under Danish public law are supplemented by the general law of torts, which generally provides for liability on negligence but under some circum-stances applies a strict liability.

Rules on health and safety in the workplace, including working hours and holidays, are mainly set forth in the Danish Holiday Act, the Danish Act on Working Hours and the Danish Act onWorking Environment (and related executive orders).SuchactsarealladministeredbytheMinistryofEmployment.Further, the Danish Working Environment Authority (which is anagencyundertheMinistryofEmployment)contributestothecreation of safe working conditions at Danish workplaces, e.g. by carrying out inspections of companies.


No mandatory rules apply for private procurement. However, certain framework legislation is available and can be voluntarily applied for a procurement.

Companies controlled by public entities may be subject to publicprocurementrequirements.

8 Foreign Insurance


No, the assets related to projects may be insured by foreign insurance companies.


Insurance policies will, upon assignment, generally be payable to foreign creditors.



Residenceandworkpermitsarenormallyrequiredifaforeignnational wishes to reside and work in Denmark. However, citi-zens of EU/EEA countries can reside and work in Denmark according to special regulations.

A non-EU/EEA citizen has easy access to the Danish labour market if his profession is covered by the so-called “posi-tive list” (which is a list of highly skilled professions lacking Danishlabour)oriftheannualremunerationexceedsaspecificthreshold.



Generally speaking, goods imported from other EU/EEA MemberStateswill be subject to the ruleson freemovement



17 Tax


There is no withholding or other tax to be deducted by theborrower from any payment, whether of principal or interest or otheramountstobemadepursuanttoaloan,exceptincertaincases on payments in respect of controlled debt.


Nospecificincentivesapply.Pleaserefertosection2andques-tion 17.1 above.

18 Other Matters


Thiswill alwaysdependon thenatureof theproject inques-tion, but generally there are no further material considerations.


Generally, the issuance of bonds (and other capital market instruments) inDenmark is governed by the CapitalMarketsAct (and theexecutiveorders issuedpursuant thereto). If theissuance of bonds is to “the public”, the issue will as a main rule be subject to prospectus requirements if the bonds are to beadmitted to trading on a regulated market or the aggregate value ofthebondsexceedEUR1,000,000.However,thereisnoobli-gation to prepare a prospectus if, e.g., (i) the bonds are offered toqualifiedinvestorsonly,(ii)theissueofbondsisdirectedtofewer than 150 natural or legal persons in each country within the EU/EEA, (iii) the minimum investment per investor is EUR 100,000, or (iv) the denomination of each bond is at least EUR 100,000.Ifaprospectusisrequired,itmustbeapprovedbytheDanish

Financial Supervisory Authority (the FSA).

19 Islamic Finance


There is very little Islamic financing in Denmark. In general, the Istina’a, Ijarah, Wakala and Murabaha instruments may be used in project financing under Danish law, provided that manda-tory regulation is complied with. Basically, there is freedom



A Danish company may submit to foreign jurisdiction, although a judgment obtained in a foreign jurisdiction will not be imme-diately enforceable in Denmark unless rendered in another EU/EEA state. Denmark (as part of the EU) has also acceded to the 2005 Hague Convention on Choice of Court Agreements.

Furthermore, a waiver of immunity will generally be effec-tive. However, assets which are necessary for the proper func-tioningoftheKingdomofDenmarkwillbeprotectedagainstpost-judgment measures of constraint such as attachment, arrest orexecutioninDenmark.



Such provisions would generally be recognised in Denmark.


Denmark is a member of the ICSID Convention and signatory to the New York Convention. Foreign arbitration agreements and awards are thus recognised and enforced. Disputes that the parties may settle by agreement are arbitrable.


Certaindisputesconcerningmattersofpublicinterest(e.g.ques-tions of the validity of rights obtained by registration or licence issued by government authorities) are not arbitrable. Arbitrators may only determine the civil law effects of criminal offences and competition law infringements between the parties whereas consumer disputes are arbitrable only if the arbitration agree-ment is entered into after the dispute arose.


Automatic arbitration is not a common phenomenon in Denmark; however, labour disputes within the scope of collec-tive agreements may be subject to obligatory arbitration.

It can be noted that some sector-specific framework agreements (e.g. standard construction and construction advisory agreements) include arbitration clauses, but such submission is not mandatory for the parties.



There has been no call for political risk protections in Denmark.

68 Denmark



No, it could not.

of contract in Denmark. In cases where it is not obvious that considerationexists,theremaybeariskoftaximplications.


Generally,choicesoflawwillbeupheldinDenmark.Moreover,if the closest connection under an agreement without choice of law leads to a jurisdiction in which Shari’ah law applies, such would, in general, be applied by the Danish courts (subject to the parties evidencing the contents of the applicable law).

69

Morten Nybom Bethe works in the Banking and Finance practice group. He advises banks and financial institutions on all aspects of financial law, securities, structured products, securitisations, project financing and regulatory matters including netting, collateral and clearing. Morten has extensive experience in establishing, buying and selling financial institutions.

Gorrissen FederspielAxeltowersAxeltorv 21609 Copenhagen VDenmark

Tel: +45 3341 4141Email: [email protected]: www.gorrissenfederspiel.com

Gorrissen Federspiel is among the leading Danish law firms with distin-guished international relations due to our close cooperation over many years with a number of the world’s leading law firms.We have a total staff of 425 employees of whom 260 are lawyers. We are a full-service law firm covering all relevant aspects of Danish and EU commercial law.Gorrissen Federspiel provides value-adding advice to our clients. Our high ethical standards contribute to ensuring the highest quality in all phases of the services we provide. While our team spirit makes us stronger, our international outlook continues to make us wiser, and enables us to provide value-adding advice.Our philosophy is that great work attracts great clients and we are proud that our clients include many of the most prestigious and respected companies and organisations in Denmark and abroad.

Over the years, we have acted on behalf of our clients in many of Denmark’s largest and most complex transactions. Furthermore, we have litigated in some of the most high-profile and complex lawsuits in recent years.

www.gorrissenfederspiel.com


Gorrissen Federspiel

Tina Herbing works in the Banking and Finance practice group. She is specialised in banking and finance law and advises on all aspects of debt capital financing, including in particular acquisition, asset and general banking finance, composition of security packages and bond issues; Tina also has extensive experience in matters relating to refinancing and financial restructurings. In addition, she advises on buyer credit and project financings, including loans, guarantees and other products offered by the Danish export credit agency (EKF, Danmarks Eksportkredit).Tina also advises on all aspects regarding derivatives, including advice on standard framework agreements and Danish regulation on netting and financial collateral.

Gorrissen FederspielAxeltowersAxeltorv 21609 Copenhagen VDenmark

Tel: +45 3341 4141Email: [email protected]: www.gorrissenfederspiel.com



Chapter 970

Ecuador

Flor & Hurtado, Abogados Alejandro Pérez Arellano

Mario A. Flor

Ecuador


the year 2010, which states that domestic and foreign investors, companies, firms or entities, and their legally established invest-ments, shall be treated as domestic investors, which translates into equal conditions with respect to themanagement, oper-ation, expansion and transfer of their investments, and who,in addition, shall not be subject to arbitrary or discriminatory measures.

The last relevant aspect was the enactment of the Regulation to the Public Service of Electric Energy Act. This document partially enables the bankability of energy projects (traditional and renewable). Most of the common step-in-rights mecha-nisms, however, were not included.


The most significant projects implemented in Ecuador in recent years have mainly been in the transportation area. In the year 2005, the first genuine project finance took place in Ecuador: a group of sponsors from Canada and the U.S. assumed the devel-opment, construction and operation of the Quito International airport project requiring a US$376million financing grantedby Overseas Private Investment Corporation, Export-ImportBankoftheUnitedStates,ExportDevelopmentCanadaandtheInter-AmericanDevelopmentBank.Theproject’scostsreachedapproximatelyUS$500million, the construction contractwassigned in 2005 and the new airport officially began opera-tions in 2013, following renegotiations that took place between 2009–2011. Intheyear2014,thenationalgovernmentbegantheprocess

ofchangingtheenergymatrix–currentlyfossil fuel intensive– with a main focus on renewable non-conventional energy projects. During said process, several permits were granted in favour of private operators for the development and construc-tion of power stations. Bytheendof2018,Interagua,thecompanyinchargeofmain-

tainingandbuildingupgradesfor theGuayaquilwater,sewer,anddrainagesystems,servingapproximately2.6millionpeople,received long term financing from a multilateral institution to cover a portion the current 10-year-investment programme.

In 2019, the transportation infrastructure of Ecuador incor-porated the largest deep-water port of the country (Posorja port,locatedinGuayas)withaninvestmentexceedingUS$700million. This was the first PPP project structured under a project finance scheme.

In 2019, the largest mining project in Ecuador (Fruta del Norte gold project) developed by the Canadian company Lundin

1 Overview


In recent years, Ecuador has undertaken a series of actions to modernise its economy based on a scheme defined by interna-tional trends, the globalisation of the economy, and the opening of markets. Ecuador is improving its legal structures to facili-tate options for private investors being delegated or becoming concessionaires in the “strategic sectors” which include telecom-munication, non-renewable natural resources, transport, hydro-carbons refining, biodiversity, water and telecommunications.

The Constitution, enacted in 2008, promotes private investment, guarantees freedom for companies, and guarantees free competition and competitive markets. Moreover, theConstitution contains rules for protecting private property. In the interest of promoting investment, in December 2015 the Ecuadorian legislative branch enacted the Public-Private Partnerships Act which establishes the guidelines and incentives for project implementation in the form of public-private partnerships, as well as the institutional framework governing their implementation. Public-private partnership contracts are aimed at projects in areas of general interest – usually strategic sectors and public services managed by the Central Government or autonomous governments, determined in the law, such as: infrastructure; urban development; real estate projects; and those related to roads, ports and airport infrastructure.

The PPP Law applies to public-private partnerships for the provision of goods, works or services to be provided by the Central Government and the autonomous governments. The PPPLawcreates a seriesof taxbenefits available forprojectsimplemented under such a structure. Furthermore, Ecuadorian legislation does not impose legal requirements for externalfinancing; it provides a non-discriminatory treatment to foreign investors, guarantees private property and allows the free movement of capital. These elements are usually considered as fundamental for the successful implementation of project finance in Ecuador.

In terms of foreign investment regulations, the last relevant law regarding foreign investments (Law of Productive Development, Attraction of Investment, Employment Generation and Fiscal Stability (Investment Law)) was enacted on 21 August 2018. On 31December2019,anothersetoflegalreformstotaxnormswasintroducedwith certain tax incentives and changes related tocertainincometaxrulesregardingpaymentofdividendsabroad,among other aspects. Nevertheless, the biggest changes in legis-lation occurred with the enactment of the Production Code in

71Flor & Hurtado, Abogados



Yes, there are two ways to create security over receivables:i) Bycreatingaguaranteetrusttowhichtheprojectcompany

assigns receivables so that funds are collected by the trust (anautonomousequity) in a separatebankaccountmanaged by the trustee in accordance with the instruc-tions given by the parties in the trust agreement. Such instructions are subject to conditions, therefore, in the event of default, creditors can take control over all funds without notification or objection from the debtor since the title of such receivables is already transferred to the trust.

ii) Bycreatingafiduciarymandate(encargo fiducario). In such case the receivables are collected in the debtor’s accounts but it gives irrevocable instructions to a local trustee by means of a fiduciary mandate, such instructions involve the administration of the funds on an ordinary basis and the enforcement of the security in case of default. It should be noted that this security does not isolate the funds from thedebtor’sequity,sothirdparties’claimscanbeimposedover these assets.


TheFinancialandMonetaryResolutionsestablishthatsecurityover cash deposited in bank accounts constitutes a valid guar-antee; the procedure for its creation follows the general rules of security included in the Civil Code and is often instrumented in a contract by which the bank acts as depositary of the funds until security is enforced or terminated. This security usually goes hand-in-hand with a fiduciary engagement for a trustee, acting for the benefit of a financing party which manages the borrower/debtor’s bank account.


Yes, the way to create security over shares in companies incorpo-rated in Ecuador is by means of a pledge agreement or transfer to a guarantee trust.

Pledges over shares in a limited liability company (compañía de responsabilidad limitada) are created by means of a public deed duly registeredat theMercantileRegistrar andnotified to theSuperintendence of Companies. Pledges of shares of a stock company (sociedad anónima) are created when signing an endorse-ment of the share certificate by way of security and perfected once it has been registered in the company’s Shares and ShareholdersBook.Itisrecommendedthatthelegalrepresent-ative of the company makes the corresponding pledge notifica-tion to the Superintendence of Companies.

The creation and registration of security by transferring title of the shares to a guarantee trust is slightly similar to the pledge. This type of security allows lenders to have full control of the shares and, in terms of enforcement, is a better security for lenders. Nevertheless, if the project company has signed and maintains in force contracts with public entities, a prior author-isation must be obtained from each entity.

Gold,whichreceivedfinancingofUS$450millionfromprivatefinancing groups and US$350 million from a senior secured debt facility provided by a syndicate of seven senior lenders, completed its construction phase and entered into operation.

In 2019, in order to increase the country’s power generation capacity and the supply of the electricity system, the national government called an international bidding process to grant concessions for a solar farmof200Mw located inElAromo(Manabí Province) and a wind project of 110Mw located inVillonaco(LojaProvince).Withtheseprojects,Ecuadorisalsoassisting its carbon footprint reduction.

2 Security


Ecuadorian legislation does not provide general security agree-ments nor floating charges because, as per Ecuadorian legis-lation, each type of asset/right requires a specific securitycontract, movable property is secured by a pledge, while immov-able property is secured by a mortgage. These types of secu-rity interests do not impose any transfer of title to the creditor. However, the most relatable legal figures to a general secu-rity under Ecuadorian legislation are guarantee and adminis-tration trusts; in such cases a trustee is the party in charge of controlling the security (movable and immovable) property granted by the debtor, and in this case the security trust becomes the legal owner of the assets. It is common that guarantee trusts are created separately for: i) the project’s revenues (over credit rights); ii) the company’s assets (movable and immovable); iii) the rights over contracts; and (iv) the project company’s shares.


Security over real property can be created by means of a mort-gage;movableproperty,includingmachineryandequipment,issubject to pledges, however, in the case of movable assets that arepermanentlyfixedtotheland,theyareconsideredtobepartof the mortgaged land. Pledges are divided into two categories: i) ordinary commercial pledge (applicable for any movable

asset such as shares of the project company or intellectual property); and

ii) agricultural or industrial pledge (applicable for agricultural products, equipment and machinery). By law, a pledgeimposes the transfer of possession of the pledged assets, however, the law allows that parties agree otherwise.

Both traditional security documents (mortgage and pledge)can be replaced through guarantee security trusts, which provide a stronger security in favour of lenders.

Property and assets dedicated to the provision of public services or for the exploitation of natural resources have ageneral legal encumbrance in favour of the State, i.e. at the end of the concession, delegation or PPP, the assets and property revert to the State. This means that a prior authorisation must be given for the validity of the security.

72 Ecuador


charge of administering the trust and acting for the benefit of the lenders/creditors in order to: i) comply with instructions prior to enforcement; and ii) conduct enforcement of the assets transferred as security and distribute the proceeds among the secured parties. The guarantee trust allows the possibility of isolating assets from the debtor’s estate, as well as from the trus-tee’s estate, as a consequence of the transfer of property (anautonomousequity is configured)of thoseassets to the trust,making them bankruptcy remote.


The concept of parallel debt is not recognised nor regulated in Ecuadorian legislation. In general terms, creditors can, however, coexistintermsofsecurity–theonecreatedfirstprevailsoversubsequent security. Under aFiduciaryMandate,which is anirrevocable power of attorney granted in favour of a trustee or fiduciary agent to comply with certain instructions on behalf of the principal (borrower), a creditor or a group of creditors can be beneficiaries of common enforcement instructions so secu-rity is not enforced separately.



Traditional security, such as pledges and mortgages, requiresenforcement conducted through a judicial process which neces-sarily includes a public auction. The enforcement process is ordered by the judge who establishes the public auction time and date, as well as the amount in which the asset is offered in auction – theamountisfixedinaccordancewithavaluationreportprovidedbyanexpert.Oncetheprocesshasbeeninitiated,proposalscanbefiledbyanypersonafterdepositing10%oftheofferedamount.Once the offers have been verified, the judge will award the asset to the highest bidder. Once the payment of the auctioned asset has been verified by the civil judge, the secured creditor who initi-ated enforcement will receive its owed values and the surplus will be returned to the debtor, unless a judge has ordered a retention. Regulatoryconsentsarenotrequiredforenforcementofsecurity.

For the case of guarantee trusts, enforcement is not conducted through a judicial process: the process is held privately and depends on the terms and conditions agreed in the guarantee trust agreement among the project company/debtor (trustor), lender(s), beneficiary(ies) and the trustee. Commonly, the process consists of a private sale of the assets conducted by the trustee and proceeds of the sale are then given to the benefi-ciary pursuant to the trust instructions. This process is certainly moreexpeditiousthanthetraditionalsecurityenforcement.


The costs and fees depend on the type of security and the type of asset. Security over land is created by means of a mortgage and, as per the Civil Code, mortgage agreements must be manda-torilyexecutedbeforeanotarypublic,andthecostsvaryeachyear and are established by the National Judicial Council. The fees established for the year 2020 are attached to the value of the real estate property. As mentioned above, security over movable assets is created by pledges, and the law provides that a pledge agreement can be implemented in a private document orexecutedbeforeanotarypublic.Thefeesestablishedfortheyear2020areequivalenttothe0.5%ofthevalueoftheassets.Thefinalfeeisfixedbasedonthecontract’samount.Mortgages and industrial pledges must be registered with

thePropertyRegistryandtheMercantileRegistryrespectively;registration must be performed with the registry of the munic-ipality where the asset is located; fees are established every year byeachMunicipalCouncil;andtheregistrationfeeiscalculatedover the asset’s value.

In case the chosen security is a guarantee trust, notarial fees mustbeconsidered.Thefixedfeesforcreatingaguaranteetrustare US$20 perpageandguaranteetrustsdonotrequireregistra-tion for its perfection, however, notification by the trustee to the SuperintendenceofCompaniesisrequired.

Ecuadorian legislation does not contemplate stamp duties or other additional fees besides the notarial and registration costs mentioned above.


Once the documents are filed for registration, it takes between twotothreeweekstohavethesecurityregistered.Expensesonlyinvolve notarial and registration fees which, as described above, are charged in accordance to the approved annual fees chart.


Ecuadorian legislation does not provide for approvals or authorisa-tions to be obtained prior to the creation of security. Nevertheless, in the case of goods deemed to provide a public service or used to exploitnaturalresources,creationofsecuritymayrequireconsentfrom the grantor of the concession or delegation because these assets are reverted to the State at the end of the concession or dele-gation granted by the State. Failure to obtain this prior consent may result in early termination of the licence or concession.

3 Security Trustee


Ecuadorian legislation recognises the concept of a security trust. The trustee – a corporation authorised to act as such – is in



Companies,whichareprivateandmixedeconomycompanies(companies with State participation). As a general rule, govern-mental entities and State-owned companies, banks and insur-ance companies are excluded from those proceedings andsubject to specific insolvency regulations.


Creditors, whether secured or unsecured, must initiate court proceedings in order to seize assets of the project company. The only case in which court proceedings can be avoided is by enforcing guarantee trusts. It should be noted that, in Ecuador, trusts hold title of the assets held in trust – when the trusts are established, debtors transfer ownership of assets.

Arbitral tribunals are also empowered to issue interim meas-ures,withouttheneedofanordinaryjudge,ifexpresslyauthor-ised by the parties.


Asmentionedinquestion5.1above,theConcordatLawestab-lishes a regulated debt workout process in which the distressed company can reorganise its debts and enter into agreements with creditors. The terms of the process are established by the Superintendence of Companies on a case-by-case basis; however, nodebtworkoutarrangementcanexceedsevenyears.Inaddi-tion, the Civil Code establishes the Settlement Agreement and defines it as a contract by which parties settle and terminate any claim out of court or prevent an eventual claim; these types of agreements are not regulated or supervised by any entity of court and are not tied to insolvency proceedings, therefore, a project company can restructure its debts by entering into a Settlement Agreement with its dissenting creditors.


The Concordat Law establishes that the administrators or persons who have signed or authorised any act or contract of a company under this law, without the approval of the Superintendence of Companies’ supervisor, shall be personally and financially liable.



The Constitution establishes that the State shall encourage domestic and foreign investment, and shall establish specific regulations depending on the types of investment, giving priority to domestic investment. Accordingly, certain regulated sectorsmandatorilyrequireadelegationmadefromtheStatefora private company to engage in such activities in those sectors deemed“strategic”,asmentionedinquestion1.1above,whichinclude telecommunication, non-renewable natural resources,


There isnorestrictionorspecialrequirementforforeigncred-itors when foreclosing local security. In cases of concession granted by the State or State institutions, prior consent of the concessiongrantor is required forenforcing theassignmentofthe contractual rights (and obligations) to a new project company.



Ecuadorian laws contemplate a process aimed to help distressed companies enter into debt-workout agreements with their cred-itors, with the purpose of preserving the company’s ongoing business. The process is regulated by the Concordat Law (Ley de Concurso Preventivo) and is controlled and overseen by theSuperintendenceofCompanies, andconstitutes a require-ment prior to the company’s bankruptcy declaration. Said debt-workout process suspends the effects of every claim initiated against the company by any creditor and secured creditors are therefore prevented from enforcing their security against the project company. Once bankruptcy is initiated, the only priv-ileges and preferences for credits are the ones recognised by law.Abankruptcyprocessrequiresthatall thecompany’sassets

serve to pay all debts to creditors registered in the accounts, as well as those that may appear at the time of a public call. If the assets given as collateral do not contain privileges or are not considered to have a priority level, there is a risk that the enforcement process will be affected by the bankruptcy process.


TheConcordat Law establishes a suspect period of sixmonthsprior to the admission of the workout procedure in favour of the project company. The law provides that every act or contract implying the creation of security or transfer of property without any representation constitutes an enforceable act; the law, however, does not provide for clawback effects, and nullity actions must be broughtbyanyaffectedparty– theseactionsmustbeexercisedwithin one year. As per Ecuadorian law, preferential creditors are employees, tax and social security debts. During the workoutprocess, the administrator must make special assignations to cover preferred debts first, however, when it comes to foreclosing secu-rity as a general rule, secured creditors have preference of payment in covering the value of the debt (capital, interests and costs). The companywillhavetherighttoreceiveanyexcessunlessajudgehasordered otherwise; during the enforcement process, no other party will have the right to claim any value from secured assets.


Bankruptcy and debt workout proceedings are available tocompanies subject to the control of the Superintendence of

74 Ecuador


specific project. In addition to the project contract, investors may opt to sign investment protection agreements, which have to be signed by the relevant controlling entity of the sector where the project is being implemented after the approval of the Strategic Committee for Investment Promotion.

The purpose of investment contracts is to establish the treat-ment to be granted to the investment and the corresponding contractual commitments of the investor, and they can also grant tax stability. Stability applies to investments exceedingUS$100 million and consists in:■ IncomeTaxTariff:25%.■ Legal provisions relating to the determination of the

taxablebaseandtheamountof incometax. Itdoesnotapply to provisions relating to the powers, procedures, methodsandformaldutiesof theauthority inexercisingits audit powers.

■ Capital outflow tax (ISD) and other direct taxes (tariffsandexemptionsineffectasofthedateofexecution).IncaseofISD,themaximumamountexemptedisthetotalamount of the investment.

■ Incentivesandbenefitsoncustomtariffscanberequestedand negotiated.

■ IncomeTaxonDividends.■ Taxstabilitycanbewaivedbytheinvestor.


FinancingdocumentsmustberegisteredwiththeCentralBankof Ecuador for reporting and control purposes and, in order tobe eligible for the 5%capital outflow tax exemptionwhenpayingcapitalandinterestoffshore,thisregistrationisrequiredto comply with financial regulations and does not affect the financing documents’ validity and enforceability. Asforprojectdocuments,registrationrequirementswilldepend

on the type of project and the type of document, for instance, in the mining sector, concessions- and exploitation-related agree-mentsmustbe registeredwith theNationalMiningRegistry; inothersectors,however,thistypeofformalityisnotrequired.Withregards to financing documents, Ecuadorian legislation does not contemplateanytypeofregistrationorrequirementforobligationsto be valid and enforceable. Securities created over those project documents must be registered (e.g. conditional assignment of rights of a concession agreement). In addition, security documents mustberegisteredasmentionedinquestions2.5and2.6above.


Ownership of land by foreign entities does not require anyspecific licence or permit. As for developing a project related to natural resources (including oil pipelines and hydrocarbons transportation in general), the Constitution establishes that those activitiesmandatorily require a delegationmade by theState: the delegation can occur through a concession, public private partnership, association contract or any other type estab-lished by law. Therefore, the project company must obtain the corresponding permits and authorisations to operate.

transport, hydrocarbons refining, biodiversity, water and radio spectrum frequencies. Besides the delegation of strategicsectors, Ecuadorian legislation does not contemplate any type ofrestriction,controloradditionaltaxesonforeigninvestment.The Production Code states that domestic and foreign investors, companies, firms or entities, and their legally established invest-ments, shall be treated as domestic investors which translates intoequalconditionswith respect to themanagement,opera-tion,expansionandtransferoftheirinvestments,andshallnotbe subject to arbitrary or discriminatory measures.However,theremaybecertaincredentials(experience,finan-

cial capacity, etc.) that could be required as a condition ofcarrying out a concession or licence for the project company.


Theprioradministrationconsidered that theexistingbilateralinvestment treaties opposed the Constitution (enacted in 2008), andthereforeon3May2017thelegislativebranchdecidedonEcuador’s withdrawal from 16 bilateral investment treaties; all of them, however, included grandfathering clauses which provide for a five to 15 years continuation for investments made prior to the effective termination date. The current administration, whose aim is to promote foreign investment, has announced that it has initiated the re-negotiation of new bilateral investment treaties that will replace those that were terminated last year. Currently,aBilateralInvestmentTreaty(BIT)hasbeensignedwithBrazil(pendingratificationbytheNationalAssemblyandthe President) and one is being negotiated with the Netherlands. ThereisalsotheintentiontonegotiateaBITwithSwitzerland.


The Constitution prohibits all forms of confiscation; in addition, the Production and Investment Code states that investor prop-erty is protected under the terms and conditions established in the Constitution and further relevant laws. Therefore, confisca-tion and nationalisation of domestic and foreign investments is prohibitedbylaw.However,theStatemaydeclare,underexcep-tionalcasesand inaccordancewiththe law, theexpropriationofassetswiththesolepurposeofexecutingsocialdevelopmentplansfocusedoncollectivewellbeing. Inallcases,expropria-tion shall abide by the defined legal procedure in a non-discrimi-natory manner, and owners shall receive payment pursuant to an appraisalthatwillfixafairandadequatecompensation.



The relevant government ministries and agencies regulating projects will depend on the sector in which the project is being implemented. For instance, in airport, port and road projects, themain relevant authority is theMinistry of Transport andPublic Works; in electricity, hydrocarbons and mines, the rele-vant authorityof theMinistryofEnergyandNon-RenewableResources; in addition to this, investors will have to deal with the authority with the competence to control and regulate the




After the corresponding payment of income taxes, a projectcompanycanfreelytransferdividends.Theincometaxrateforcorporationsfortheyear2020is25%;however,if50%ormoreof the company’s shareholders, partners or beneficiaries are residentsorestablishedintaxhavensorregimesoflowertaxa-tion,thenthetaxratewillincreasebythreepercentualpoints. Ecuadorian laws do not impose any type of restriction on the payment of dividends to the project company’s parent company.


As a general rule, every activity in Ecuador must obtain the corresponding environmental authorisation. Lower impact activitiesarerequiredtoobtainanenvironmentalpermit,whilelarge scale projects are obliged to obtain an environmental licence which includes several obligations, such as periodic inspections, filing of reports, guarantees and implementation of remediation plans. The authority in charge of granting the environmentallicenceistheMinistryofEnvironment.Inaddi-tion,labourlawsrequirethateveryemployermustimplementahealth and safety regulation – such regulation is approved by the MinistryofLabour.


Ecuadorian law does not establish any specific legal frame-work for procurement by project companies. In some cases, the concession contract may impose certain conditions to be met by subcontractors, as well as subcontracting thresholds, which the project company must comply with, depending on the nature or type.

8 Foreign Insurance


The Public Procurement Act states that all insurance policies over assets, as well as performance bonds, must be provided by entities established in the country for companies hired by the Stateascontractors.Inaddition,theMonetaryCodeestablishesthat insurance policies for or related to assets located within the Ecuadorian territory, or risks that may occur in Ecuador, must be provided by insurance companies duly established in the country and authorised to provide insurance services.


Yes, this could be implemented through a conditional assign-ment of rights and/or endorsement made by the insurance


Theroyaltiesandtaxesvarydependingontheindustry.Ageneralguideline stated in the Constitution mentions that the State shall share the profits obtained from the sale of natural resources at leastinequalamountwiththecompanythatexploitsthem.Inthemining industry, each mining concessionaire shall pay a royalty equivalenttoapercentageofthesalesofthemainandsecondaryminerals,whichshallbenot less than5%of thereportedsalesand,inthecaseofgold,copperandsilver,notmorethan8%.Inthe hydrocarbons industry, it will depend on the contract modality chosen by the parties. Oil Service Contracts do not establish paymentofroyalties:theyhaveafixedper barrel fee in favour of the contractor,andriskisnotsharedsincetheStateowns100%oftheextractedoil. IntheProductionSharingAgreements(so-calledParticipation (Profit-Sharing) Contracts), the practice is to abide by the minimum royalties established in the law for other modali-tiesnolongerused:thisis12.5%minimumofextractedcrudeoilup to 30,000 barrels perday.Ifextractionexceeds30,000barrelsper day, the royalty (or participation percentage of the State) shall increaseto14%;likewiseifextractionincreasesto60,000barrelsper day, the royalty (or participation percentage of the State) will goupto18%.Inaddition,forProductionSharingAgreements,the law establishes a “Price Royalty” by which the State will havetherighttoreceive70%ofthegrossrevenuesobtainedbythecontractoraboveacertainagreedthreshold,forexample, ifthe agreed threshold is US$70 per barrel, and the contractor is exporting its shareatUS$80per barrel, the State shall have the rightto70%oftheexcessUS$10per barrel.


Thereareno restrictions, feesor taxover currencyexchange.Ecuador uses the U.S. Dollar as the country’s official currency. The U.S. Dollar replaced the national currency (sucre) in the year2000,asaconsequenceoftherebeingnoforeignexchangecontrols.


The Constitution and further lower level laws guarantee the free remittance and repatriation of funds. Ecuadorian laws establish a 5%CapitalOutflowTax(ISD)fortransfersofmoneyoutsidethecountryexceptwhenthefundsarei)loans’payments(capitalandinterest)aslongasitisdulyregisteredwiththeCentralBank,andii) investment returns in the form of dividends of local companies.


As per theFinancial andMonetaryCode, all financial transac-tions,operationsandaccounting recordsmustbeexpressed inU.S. Dollars. Onshore foreign accounts are not allowed. There is no restriction for project companies and their subsidiaries to establish and maintain offshore accounts, however, every transfer ofmoneymadefromEcuadorissubjecttothe5%capital outflow taxunlessitfallswithintheexemptionsmentionedabove.

76 Ecuador




Yes, the Constitution states that public officers, officials and their delegates or representatives of State institutions will be subject to the sanctions established for crimes of embezzlement, bribery, concussion and illicit enrichment. The actions to pros-ecute them and the corresponding penalties are imprescriptible. The Organic Criminal Code provides that criminal penalties for the crimes of embezzlement, bribery, concussion and illicit enrichment are up to seven years of imprisonment.

13 Applicable Law


All project agreements signed with State entities are typically governed by Ecuadorian law. Other kinds of project agreements are usually governed by Ecuadorian law; however, other laws (i.e. New York or English law) are also applicable.


Financing agreements are typically governed by English or New York law; however, onshore security is often governed by Ecuadorian law.


Generally, security documents for assets located in Ecuador are governed by domestic law. Personal obligations undertaken by the company, such as promissory notes, are also governed by Ecuadorian law and/or follow the requirements provided byEcuadorian law for their enforceability.



Submission to a foreign jurisdiction is valid and enforceable, however, when one of the parties is a State entity, submission is permitted only after having the approval of the Attorney General of the State.

Under Ecuadorian law, certain assets, such as money deposited bypublicentitiesinaccountsheldbytheCentralBankofEcuador(onshore or offshore accounts), cannot be seized because they have sovereign immunity, and such immunity cannot be waived.



Ecuadorian legislation allows the inclusion of international arbitration clauses. In case of contracts with State entities, the

beneficiary in favour of foreign creditors. The assignment of rights must be approved by the insurance company.



The hydrocarbons and the mining sectors establish specific restrictions on foreign workers: the Hydrocarbons Law states that companies involved in the exploration, exploitation,refining, transport and commercialisation of oil must hire a minimumof95%nationalsforworkersandadministrativeposi-tions,and75%fortechnicalpositions. Moreover,theMiningLaw establishes that mining companies are obliged to hire at least80%nationalsforitsactivities.Thereisnootherrestric-tion on foreign employees besides the two mentioned cases. As a general rule, foreign workers are free to work in any company after complying with the migratory requirements. If theforeigner is to carry out the practice of his profession (i.e. archi-tect, engineer, doctor, attorney), it is necessary that his profes-sional title is registered with the competent public authority.



General customs duties are imposed on goods imported for the project, either if importation is made by the project company or by subcontractors. The Production Code provides for a special import regime available for entities in charge of the construction or provision of public services; said regime is known as the tempo-raryadmissionforre-exportationinthecondition.Thetermforwhich the goods can remain in the country is the same term of the delegation contract. This regime is available for contractors; only subcontractors are not eligible. Some tariffs, surcharges and quotasmaybeapplicabledependingonthetypeofitem.


Import duties will be determined based on the official tariff schedule in force at the time of import of goods. The ProductionCodeestablishesanexemptionofdutiesforimportsdirectly allocated for the executionofpublicprojects under apublic-private partnership modality. For this purpose, the dele-gating public entity shall issue a certificate stating i) the destina-tionofthegoodstobeimported,andii)thequantityandqualityof goods to be imported for the project.

11 Force Majeure


Yes, they are available and enforceable. Force majeure is regulated by the Civil Code, which defines force majeure as any unforeseen eventthatisnotpossibletoavoid,likeashipwreck,earthquake,thecaptureofenemies,theactsofauthorityexercisedbyapublicofficial, etc. Judicial decisions have concluded that any case of force majeure is formed by two elements, which are: i) the unpre-dictability; and ii) the event cannot be avoided or resisted against.



transfer of the project contract. It is also agreed in direct agree-ments the terms of payment of non-amortised loans – consid-ered as an indemnification payment – when a concession of dele-gation agreement is terminated by the State.

Usually, the concessions agreements, as well as delegation agreementsunderthePPPscheme,containexpressprovisionsthat allow this type of direct agreement. Also PPP Law allows the inclusion of stability clauses.

17 Tax


TheInternalTaxRegimeCodeprovidesthatinterestsareexemptfromincometax(andthereforenotsubjecttoanydeductionandwithholding)totheextentthattheloanexceeds365days,itisregisteredwiththeCentralBankofEcuador,andisprovidedbya financial institution or by a specialised non-financial institu-tionregisteredwiththeSuperintendenceofBanksinEcuador.Proceeds resulting from a claim under a guarantee or enforcing securityarenotsubjecttoincometaxasperEcuadoriantaxlaws.


Themain tax incentive for foreign creditors is the exemptionof the5%capital outflow tax forpaymentof capital of inter-ests. The registration of loans, mortgages and security docu-ments have the same costs for domestic and foreign investors.

18 Other Matters


It is important to note that Ecuador allows the execution ofInvestment Protection Agreements (IPAs). The Production and Investment Code establishes that the Ecuadorian State and a private investor may sign an investment contract, which can contain the contractual commitments that are necessary for the development of the new investment project. IPAs may confer stability on tax incentives and regulatory framework over thelifetime of the project.


Capital market instruments may be issued by legal entities (corpo-rations), branches of foreign companies domiciled in Ecuador, andbythoseestablishedbytheMonetaryandFinancialPolicyandRegulationBoard.Theissuanceofbonds(couldbeshortterm, less than 360 days; or long term, more than 361 days) is implemented through a contract granted by the issuer which

clause must be approved by the State Attorney General for it to be valid and enforceable. Only regional (Latam region) arbitra-tion centres are allowed for disputes with the State or any public entity. Arbitral awards are recognised by local courts to the extentthattheawardisfinalandconclusiveandthefollowingrequirementsaremet:(a)itdoesnotcontravenepublicorderornational laws of Ecuador and is a result of an in-person action; and (b) the documents evidencing the award are in authentic form, have been duly legalised by a Consul of Ecuador, and the award has been duly translated into Spanish. According to the amendment introduced in 2018, it is not necessary to carry out a homologation process of international arbitral awards. Only international rulings and settlement agreements derived from a mediation process are regulated by the Organic Procedural Code.


Yes, it is – Ecuador ratified the New York Convention in 1982. Ecuador is also a party of the 1928 Havana Convention on Private International Law, the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention) and the 1979 Inter-American Convention on ExtraterritorialValidityofForeignJudgmentsandArbitralAwards.


The Ecuadorian Arbitration Law establishes that arbitration is permitted for disputes on matters subject to settlement. The Civil Code establishes that matters which a person can dispose of are subject to settlement as well. Generally, non-arbitrable matters are those which cannot be settled or waived by the inter-estedpartiesorwhichaffectpublicinterestandrelatetotaxes,family law, antitrust law, criminal offences, etc.


Arbitration is possible only if parties agree to submit to it. Ecuadorian legislation does not establish mandatory domestic arbitration for any specific case.



Although direct agreements are not fully regulated, they are common as they have been implemented in several projects in Ecuador. In view of its materiality and common use, a recent regulation issued in the mining sector establishes that direct agreements can be entered into by the relevant State institution with the lenders. The terms usually employed in this kind of agreement are: i) the possibility that lenders are notified prior to the initiation of an administrative procedure for termination of the project contract; ii) the right to intervene and cure, on behalf of the project company, any obligations that may lead to the declaration of termination of the project contract; and (iii) the substitution of the borrower in case of default and/or the

78 Ecuador



There are no cases in which Shari’ah law has been the governing law of a contract or a dispute. Shari’ah law may be the governing law of a contract or a dispute if private parties so agree.


As per Ecuadorian law, the inclusion of interest payment obliga-tions is valid and enforceable. It should be noted that the Civil Code expressly prohibits compound interest provisions andlimits interest rates to theones fixedby thecompetentpublicauthority.

must contain the characteristics as well as the rights and obli-gations of the issuer, the bondholders and the representative of thelatter.Allissuanceofbondswillrequireariskrating,carriedout by risk rating companies registered in the public registry of theEcuadorianSecuritiesMarket.Duringthetermoftheissue,the issuer must maintain the rating updated in accordance with the standards established by the National Security Council. All issuance will be covered by general and specific guarantees. It is also possible for the company to sell its invoices in the Stock Exchange.

19 Islamic Finance


Istina’a, Ijarah, Wakala and Murabahaarenotinstrumentsexpresslyrecognised under Ecuadorian law. However, their elements can be implemented in Ecuador as long as they do not contravene existinglaws.

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Mario A. Flor is a partner at Flor & Hurtado. He was admitted for professional practice as Juris Doctor in 1995 from the Pontificia Universidad Católica del Ecuador.His experience includes multiple project and corporate finance, cross-border acquisitions and cross-border commercial transactions. Mario has acted as counsel of the Inter-American Development Bank, Inter-American Investment Corporation, Corporacion Andina de Fomento (CAF), Proparco, DEG Deutsche Investitions, Agence Française de Développement, Export Development Canada, Export-Import Bank of the United States, Overseas Private Investment Corporation, China Development Bank, Japan Bank if International Cooperation, FMO, as well as commercial banks in projects implemented in Ecuador. Mario acted as local counsel for the financing of the new international airport of Quito and the new deep-water port in Posorja. Furthermore, Mario provided legal services to EOLICSA S.A., a company in charge of the construction and operation of the first wind project in Ecuador (located in the Galapagos Islands), among others.

Flor & Hurtado, AbogadosAv. 12 de Octubre N26-48 y OrellanaEdificio Mirage, Piso 8QuitoEcuador

Tel: +593 2394 1050 ext. 108Email: [email protected]: www.fhlegal.ec

We are a dynamic and innovative firm, whose members have extensive experience in assisting corporate and individual clients who do business and develop projects in Ecuador. Our main concern is to add value to our clients’ activities. Our daily work is characterised by a friendly and respectful environment and we are part of an equitable, flexible and inter-disciplinary team.

www.fhlegal.ec


Flor & Hurtado, Abogados

Alejandro Pérez Arellano is an associate at Flor & Hurtado. He is an attorney by the Universidad de las Américas. He also has a postgrad-uate degree in public management by the Instituto de Altos Estudios Nacionales. He has a Master’s in Finance, specialising in securities and banking by the Universidad de las Américas.Alejandro Pérez has experience regarding financing operations granted by multilateral and international public bodies and financing opera-tions with and without sovereign guarantee granted to the Republic of Ecuador, its state-owned enterprises and public entities, as well as to corporations. Such financing operations include: the expansion of the national electrical grid, in an operation valued at US$100 million; the expansion of the water supply service in Quito in an operation valued at US$70 million; the financing granted to one of the largest local steel companies for the construction of a new plant, in an operation valued at US$37 million; the financing granted to the private concessionaire of the biggest city in an operation valued at US$70 million; legal advice to a syndicate of lenders in the financing of the first port under the PPP scheme in a transaction valued at more than US$300 million; and legal advice to a syndicate of lenders in the financing of the biggest underground gold mine, in a transaction valued at more than US$350 million.

Flor & Hurtado, AbogadosAv. 12 de Octubre N26-48 y OrellanaEdificio Mirage, Piso 8QuitoEcuador

Tel: +593 2394 1050 ext. 112Email: [email protected]: www.fhlegal.ec



Chapter 1080

England & Wales

Milbank LLP Munib Hussain

John Dewar

England & W

ales


in the 2018 pipeline, relating to the transport, energy, util-ities, digital infrastructure and flood and coastal, science and research and social infrastructure sectors, stood at over £600 billion (combined public and private investment) up to 2027/28, of which around £190 billion will be invested by 2020/21 and a further £225 billion invested from 2021. Through these invest-ments and projects, the government aims at increasing living standards, driving economic growth and boosting productivity.

Already, public and private infrastructure investment has gradually increased over the past three decades (since 2010, 4,500 infrastructure projects have been delivered). The twolargest sectors, energy (which boasts investment of £51.7 billion from 2018/19 to 2020/21) and transport (£54.9 billion from2018/19 to 2020/21), account for over half of the infrastructure pipeline’s total value. IntheUK,thedividebetweenconventionalprojectfinance

and the bond and leveraged finance markets continues to narrow. The market saw a continuation of diversification of both sources and types of project-related debt. As with the project bonds market, the trend comes in part from the US, where a growing (from 2016 to date) prevalence of greater infrastructure and energysponsorfocusonTermLoanBstructures–usedasrefi-nancing tools, or sitting alongside conventional financings and/or less conventional financings (for example, inventory andreceivables financings) – is spreading to the European market. Here, commentators are predicting that such a TermLoanBmarket will see increased use of forward purchase agreements, cash sweeps and power hedges in transactions. Multilateral and bilateral institutions have continued to

participateinthemarket,andexistinginstitutions(re-brandedwith additional products to help fill debt financing gaps) have continued to invest in the UK’s energy and infrastructuresectors(especiallyinlightoftheUK’sexitfromtheEuropeanUnion, which has, seemingly, buoyed governmental commit-menttoinvestinginUKinfrastructure,andtheavailabilityoffunds for UK bilateral and multilateral institutions investingabroad – this is particularly the case in the government’s treat-mentofUKEF’sDirectLendingFacility,seebelow).Bywayofexample:

■ theEuropeanInvestmentBankcontinuestomaintainitsEurope2020ProjectBondInitiative;

■ the UK Green Investment Group, with a mandate tofinance “green” projects, saw its £250 million energy-to-waste project (Rookery South Energy Recovery Facility) reachfinancialcloseinMarch2019;and

■ UKExportFinance’s(“UKEF”)DirectLendingFacilitywasgranteda£2billiondirectlendingcapacityexpansion,which is expected to come on stream in two £1 billionamounts in 2020/21 and 2021/22.

1 Overview


In 2020, the UK’s exit from the European Union wasconfirmed by Parliament, following the formation of a deci-sive Conservative majority in the December 2019 general elec-tion. However, a comprehensive trade deal with the European Unionhasyettobesignedandtheprospectofa“NoDeal”exiton 1 January 2021 remains. This uncertainty has affected the amount of activity in the country’s project finance market. The upcomingtransitionfromLIBORisalsoworthnoting,fortheissues it raises for theproject financemarket in theUKmoregenerally.

Nevertheless, the Conservative government has recently announced a boost in energy and infrastructure investment, with new projects (such as five new hydrogen schemes located nearAberdeen,Mersey, andnearGrimsby) and the revivalofold ones, such as the renewed engagement with the HS2 project. Such announcements are consistent with their manifesto prom-ises (published November 2019) of a ‘revolution’ in infrastruc-ture, if re-elected. The manifesto further confirmed the Party’s commitment to projects such as the Northern Powerhouse Rail, flooddefences(pledging£4billioninfunding),andinvestmentinroadssuchastheM4(pledging£28.8billioninstrategicandlocal roads). Therehasalsobeenexternal investment into theUKenergy

and infrastructure market, most recently with the announcement by Japan’s Itochu Corp (through its European subsidiary) of its investmentinWinchEnergy,aUKoff-gridrenewablesdeveloper.The UK market breaks (broadly speaking) into two quite

distinct halves – a UK-oriented market where local (as inUK-sited)dealsarestructuredandfinanced,andamuchlargerand more geographically diverse finance market where (for one reason or another) international finance is structured, negotiated anddocumentedintheUK(inpractice,London),buttheunder-lying project is located elsewhere. The two markets are both rela-tivelylargeintermsofcapitalanddebtrequirementsandflows,but the international English-law finance market far outstrips the domesticUKmarketinbothvolumeandsizeofdeals.AstheUKemergesfromtheeconomicslowdownandmoves

into a period of economic growth, there is considerable demand forupgradingexistinginfrastructureorinvestinginnew,green-field projects. Each year, the UK Government publishes a“National Infrastructure and Construction Pipeline” (the “NIP”).Aspartofthe2019updatetotheexisting2018NIP,the government stated that the current value of UK projects

81Milbank LLP


Facility aims to boost trade by ensuring that long-term funding is available to overseas buyers of British exports supported byUKEF. UKEFhas also introduced aLocalCurrencyFinanceScheme.Underthisscheme,UKEFcanguaranteeacreditloangiven to an overseas borrower in a local currency (it supports around 40 different currencies), provided the loan is used topurchasecapitalgoods/servicesfromanexporteroperatingintheUK.LocalCurrencyFinancingisparticularlyusefulforreducingforeign currency risk and variable debt costs where a project does not generate revenues in a foreign currency. As already touched upon, the 2016Referendum result and theUK’s exit from theEUhasalso precipitatedachange inUKEF’swork. Inaddi-tion to increased funds for investment, the way UKEF part-ners with other institutions has been widened and made more flexible. WhereaspreviouslyUKEFwouldestablishapanelofinvitedlendingpartnerstoassistitsinvestments,UKEFnowhasthe freedom to partner with any bank or institution to deliver its direct lending support, provided certain criteria are met. The Spring Statement (14 March 2019) delivered further

arrows to UKEF’s bow. A new “General Export Facility”was announced, with the stated aim of allowing a wider range of exporters to access UKEF support. It will allow “UKEFto support exporters’ overall working capital requirements,rather than linking support to specific export contracts” (HMGovernment Press release: New measures to enhance UKEFsupportforUKexportersannouncedinSpringStatement).Thisfacilityisexpectedtobelaunchedin2020.

The energy marketsTheUK’senergysectorcontinuestoundergosignificantchange.The2009RenewableEnergyDirectivesetatargetfortheUKtoachieve15%ofitsenergyconsumptionfromrenewablesourcesby2020.In2018,11.0%offinalenergyconsumptionwasfromrenewablesources,upfrom9.9%in2017.To bolster the UK’s efforts in achieving this, the Energy

Act2013implementskeyaspectsofElectricityMarketReform(“EMR”)–apolicyinitiativepioneeredbytheUKGovernmentto mobilise £110 billion (approximately US$175 billion) ofcapital investment required by 2020 to ensure a reliable anddiverse supply of low-carbon electricity. Such reforms are vital, as theUKhas seen significantpowerplant closures in recentyears – the Act was aimed at ensuring both investment in infra-structure, alongside decarbonisation as more power plants are decommissioned in theUK. Around a fifth of capacity thatwas available in 2011 will close by the end of this decade, and demand for electricity is set to increase as major sectors such as transport and heat are electrified.The subsequent Energy Act 2016 furthers the 2013 Act’s

work. It focuses on the oil and gas sector and works to imple-ment recommendations intoUKoffshoreoil andgas recoveryand its regulation. The Act formally established the Oil and Gas Authority (“OGA”) as an independent regulator and enabled a more comprehensive charging of the offshore oil and gas industry for licences for environmental and decommissioning activity. This allows the government to continue to recover costs of its environmental and decommissioning activity in line with the “polluter pays” principle. Inbroaderterms,theUKprojectfinancemarketintheoiland

gas sector has not been immune to the effects of global trends. The “new normal” of low commodity prices since 2016, for example,hasdepressedcapitalinvestmentinoilandgasprojectsintheUK.Explorationandproductioncompaniesarekeepingtight budgets, and pressures on margins persist (according to Oil &Gas UK’s 2019 Business Outlook). However, there is alsocautious optimism in the market. Total production (including both oil and gas production) levels are now at their highest levels

TheUKGreenInvestmentGroupwaslaunchedinOctober2012 (at the time, as a non-departmental public body of the Department for Business, Energy & Industrial Strategy(“BEIS”),butitwassoldtoMacquarieGroupLimitedinAugust2017) and has since committed over £20 billion of financing to 100 green infrastructure projects, committing £3.4 billiontotheUK’sgreeneconomy.FromApril2018toMarch2019,for example, the UK Green Investment Group invested andarrangedover£2.4billionglobally.Thisisasignificantincreasefrom the £1.6 billion figure reported for the period of August 2017toAugust2018.Inpracticalterms,subsequenttotheUKGreenInvestmentGroup’sacquisitioninAugust2019ofa40%stake in East Anglia One, the Green Investment Group has now supported nearly 50% of total UK offshore wind capacity inoperationorconstruction,andtheirMarch2019GreenImpactReport notes that investments during 2018 amounted to the equivalentofremoving165,000carsfromtheroad.Itisthefirstinvestment bank worldwide to invest solely in green infrastruc-ture (on 25 September 2019 as part of the commitments made attheUnitedNationsClimateActionSummit,TheUKGreenInvestment Group’s intention to develop a 20GW pipeline of new renewable energy projects was announced). The funds have been used to leverage private-sector capital to fund projects in priority sectors from offshore wind to waste and non-do-mestic energy efficiency, with notable success stories over 2018 and 2019. For example, in December 2018, the UK GreenInvestment Group’s Galloper offshore wind farm (in which it holds a25%stake)was successfully refinanced to the tuneof£1.2billion.TheUKGreenInvestmentGroupalsohadabusy2019 Q1: in addition to the financial close reached on Rookery SouthEnergy, outlined above, inMarch 2019 theUKGreenInvestment Group also announced that it was set to buy Savion, the solar and energy storage unit owned by Tradewind Energy, a subsidiary of Enel Green Power North America (financial close is expectedmid-2019). Such robustmarket activity is apromising sign for the growing strength ofUKgreen energyinvestment. The UK Green Investment Group additionally,andsubsequentto2019Q1,contributedtotheconstructionofthe first waste-to-energy project in Scotland to supply industrial heatfromthenewEarlsGateEnergyCentre.TheUKGreenInvestment Group has also recently looked beyond the UKfor its investments. Forexample, theacquisitionofa43MWSwedish onshore wind farm at Hornasmossen (Sweden), and the acquisitionoftheGroup’sfirstprojectsinNorwayandPoland.UKEF has also shown a significant shift in approach and

appetiteforinternationalprojectfinancerisk.In2019,UKEFsupported its largest ever transaction, providing a £5 billion package to support BAE Systems’ andMBDAUK’s contractwiththegovernmentofQatar.UKEFalsoprovidedover£600millioninsupportforprojects insub-SaharanAfrica. UKEFhas three additional funding-related facilities: the Direct Lending Scheme;theExportRefinancingFacility;andtheLocalCurrencyFinance Scheme. Under the Direct Lending Scheme, UKEFprovidesexportcreditloansupto£3billion(asthefundcurrentlystands,thoughasexplainedabove,thisfigureisexpectedtoriseto £5 billion by 2022) in aggregate to overseas buyers to finance the purchase of capital goods and/or services, from exporterscarryingonbusinessintheUK.Theresultsfor2018–2019sawUKEFdeploy£587million inDirect Lending to supportUKexports,whilemakinganadditional£2billionincapacityavail-able in 2020–21 and 2021–22.

Loans can be made in sterling, US dollars, euros or Japanese yen.TheExportRefinancingFacilityisavailabletobanksfundingnon-sterling buyer credit loans, typically with values above £50 million that are intended to be refinanced through the debt capital markets or other commercial loans. The Export Refinancing

82 England & Wales


healthy market in which plants can come online, whilst also fostering the development of new nuclear technologies. The government has announced that funding would be available until 2020 to support research and development into innovative advanced and small modular reactors, as well as to assess their feasibility and accelerate the development of promising designs. In fact, asof July2018, theUKmarketwasdominatedby thefollowing developments in the nuclear sector: ■ Hinkley Point C is under construction and planned to

comeonlinein2025(EDFandCGN(asNNBGenerationCompany (“NNBG”)) are currently constructing twoEPRs (a type of reactor) at Hinkley Point C (3.2 GW));

■ EDFandCGNalsointendtoconstructtwofurtherEPRsat Sizewell (3.2 GW);

■ HorizonNuclear Power, owned byHitachi-GENuclearEnergy Ltd, intends to build two advanced boiling water reactors (“ABWRs”) at each of its sites in Wylfa andOldbury (2.7 GW each); and

■ NuGen has proposed to build up to 3.8GW of nuclearpowergenerationatMoorside,Sellafield.

It should be noted, however, that both the NuGen project and the Horizon Nuclear Power plant have been stalled: in late 2018, Toshiba announced it was withdrawing from the project and winding up its NuGeneration subsidiary, and in January 2019 Hitachi decided not to pursue its plans for the Wylfa and Olbury plants. Inaddition,theUK’sdeparturefromtheEuratomCommunity

upon “Brexit”,means that theUKmust establish appropriatemeasures to ensure continued cooperation with, and adher-enceto,Europeannuclearstandardsandagencies.Exactlywhat“Brexit”willmeanfortheeverydayrunningandoperationofthesector (and the plants that make it up) remains to be seen.WindprojectsintheUnitedKingdomareexpectedtomake

up for the shortfall in low-carbon energy production resulting from the stalled nuclear projects. Recent notable wind projects include the Dogger Bank OffshoreWind Farm Projects andHornsea III Offshore Wind Farm. Offshore wind is anticipated togenerateoverathirdoftheUK’selectricityneeds,attracting$48billion in investment,andemploying27,000people. TheBritish government has put a fund of £557million aside forsubsidies for renewable energy, of which a sizeable amount is expectedtobegrantedtooffshorewindfarms.TheUKhas15reactorsgenerating21%ofthecountry’selectricitysupply,butalmost half of this capacity is to be retired by 2025.

Transformation of the UK electricity marketFrom a policy perspective, in the Infrastructure Act 2015 the UKGovernmentintroducedtheUKGuaranteeScheme,whichis amechanism that aims to enhance liquidity to ensure thatinvestment in nationally significant and financially credible infrastructure projects does not stall due to adverse credit condi-tions. It works by offering a government-backed guarantee to help infrastructure projects access debt finance where they have beenunable to raise finance in themarkets. TheUKGScanissueupto£40billionofguaranteesandisopentoatleast2026.To date, it has issued nine guarantees totalling £1.8 billion of Treasury-backed infrastructure bonds and loans, supporting over$4billionworthofinvestment.

In addition, the Energy Act 2013 was aimed at bringing about a “once-in-a-generation transformation” of theUK electricitymarket, and has had significant implications for the economics ofinvestinginlow-carbongeneratingtechnologies.EMRistheUKGovernment’skeypolicymechanismforensuringsecurityof energy supply through the development of low-carbon tech-nology. The key policy measure to incentivise new low-carbon electricity generation is the provision of the contract for

since2011(up4%in2018comparedto2017and20%higherthan2014levels),competitioniscreatingcostsavingsand,despitetightbudgets,explorationisgainingtraction–particularlywithregardtotheUKContinentalShelf.In2017and2018,twelveandfive(respectively) new field start-ups were approved, ensuring solid (albeit not spectacular) opportunities for future investment.TheUK’s current electricitymix has changed substantially,

and rapidly, over thepast coupleof years. Mostnotable is anincrease in renewable-generated electricity (a trend in line with globalpatterns).In2018,33%ofUKelectricitygenerationcamefromrenewablesources.InJune2019,theUKelectricitysystemoperated for 18 days without using coal, the longest period since the1800s.SuchachievementsweretoasubstantialextentreliantontheespeciallywindyconditionstheUKhasexperiencedoverthe past year; wind provides the highest percentage (52%) ofrenewableenergy. Biomassfuel (32%)andsolarpanels (12%)also make a significant contribution to renewable energy gener-ation. In the past 10 years, electricity generated from wind has increasedfrom1.3%of thetotal to18.8%,whilecoalhasdroppedfrom30.4%to2.5%.TheUKGovernment’senergyandclimatechangegoalsareto

deliver secure energy and a sustainable low-carbon future. This isdrivenbytheneed,by2050,foran80%reductionincarbonemissions (across the economy) as against 1990 levels and, by 2020,toachievethelegallybindingEUtargetofsourcing15%oftheUK’senergyfromrenewablesources(notincludingnuclearpower).ToallayfearsthatthistargetwouldbelostontheUK’sexitfromtheEU,inJune2016,theConservativeGovernmentannounced the ambitious (but legally binding) target of reducing carbon emissions by 57%by 2030. In 2019, theUKbecamethe first major economy to target net-zero greenhouse gas emis-sionsby2050.SuchtargetsareinformedbytheUK’sneedofdevelopingapproximately59GWnewnetcapacityby2025,withas much as 33GW coming from renewables and the remaining 26GW coming from conventional thermal power. In an effort to promote private investment in the development of large-scale infrastructure projects (and in particular, the development of low-carbon technology) in theUK, theUKGovernment hasinstituted a series of programmes that are specifically designed to stabilise the economics of financing for such projects.The UK Government has, however, continued investment

in new nuclear, and displayed a firm commitment to the role it shouldplayintheUK’sfutureenergymix.InQ2of2018,nucleargeneration accounted for 21.7% of total electricity generated inthatquarter. This isbasedonnuclearpowerbeing low-carbon,affordable, dependable, safe and capable of increasing the diver-sity of energy supply. The UK Government’s support echoessimilar pro-nuclear political decisions in other jurisdictions, notably the UAE and Turkey. The events at Fukushima, Japan (March2011)didnotresultinareversalofthispolicy,unlikethenuclear phase-out announced by Germany and the cancellation of a new-build nuclear programme in Italy. Although theUKGovernment emphasises that it will be for energy companies to fund,developandbuildnewnuclearpowerstations in theUK,including meeting the full costs of decommissioning and their full share of waste management and disposal costs, the Office forNuclearDevelopment (within theDepartment forBusiness,Energy and Industrial Strategy) is taking active steps to establish and cement the right framework and conditions in theUK forinvestment in new nuclear power stations, with the aim of having new nuclear projects generating electricity this year. TheUKGovernment’sstrongsupportfornuclearpowerwas

showninDecember2017,whenitannouncedthattheUKhadthepotential tobecome aworld leader indeveloping thenextgeneration of nuclear technologies, with a suite of policy focuses published as well. Current policy emphasises establishing a

83Milbank LLP


The BEIS announced a new round of CfD auctions forrenewableenergyprojectstotakeplaceasof29May2019.Theupcoming auctions will include remote island wind schemes off the coast of Scotland. These results and plans are consistent with the UK’s new

“Clean Growth Strategy”, announced in October 2017 and based on the Climate Change Act 2008. This strategy confirms a commitment to cut greenhouse gas emissions, achieve clean growth, but also ensure that businesses and consumers have affordable energy. Practical measures under the Strategy include providing £20 million to support a new clean technology early stage investment fund.AmongstotherEMRpolicieswastheestablishmentofacarbon

price floor introduced on 1 April 2013, with the aim of encour-aging additional investment in low-carbon power generation by providing greater support and certainty to the carbon price. Supplies of fossil fuels used in most forms of electricity genera-tion became subject to either the climate change levy (“CCL”) or fuel duty from that date. Such supplies are charged at the relevant carbon price support rate, depending on the type of fossil fuel used, which will be determined by the average carbon content of each fossil fuel. The carbon price support rates would reflect the differential between the future market price of carbon and the floorpricedeterminedbytheUKGovernment.Until2021,theCPF is frozen at £18 per tonne of CO2. There have been repeated calls for longer-term clarity on carbon pricing and the CPF. In the2017AutumnBudget,theGovernmentstateditwas“confi-dent” that the Total Carbon Price is set at the right level, and will continue to target a similar total carbon price until unabated coal is no longer used. The European Commission considered, but ultimately rejected, a similar system to reform the EU ETS.In the 2018 budget, the UK Government announced the

removal of Enhanced Capital Allowances (“ECAs”) and First Year Tax Credits for technologies on the Energy TechnologyList as of April 2020. Savings generated from this will be rein-vested in a newly-established Industrial Energy Transformation Fund, which, backed by £315 million of investment, aims to aid businesses with high energy use to decrease their energy bills and transitionUK industry intoa low-carbon, energy-efficientfuture. In November 2019, a consultation on the final design of the fund was completed.

Regulatory frameworkThe Office of Nuclear Development has focused on taking actions which are aimed at reducing regulatory and planning risks for investors. A planning regime has been proposed to aid the installation of nuclear reactors, including – following public consultation – identifying sites for new nuclear power stations tobebuiltbytheendof2025.TheUKGovernmentlegislatedin the Energy Act 2008 to ensure that operators of new nuclear power stations will have secure financing arrangements in place to meet the full costs of decommissioning and their full share of waste management and disposal. The Energy Act 2013 also intro-duced measures to create a new independent statutory body, the Office for Nuclear Regulation (“ONR”), to regulate the nuclear power industry. The ONR and the Environment Agency are together undertaking a process of Generic Design Assessment (“GDA”) of new nuclear designs, which allows the safety, secu-rity and environmental implications of new nuclear reactor designs to be assessed before an application is made for a licence and permissions are granted to a particular design of reactor on aparticular site. In lateDecember 2017, theHitachi-GEUKAdvancedBoilingWater Reactor (“UKABWR”)was grantedapproval,andconfirmedassuitableforconstructionintheUK.The completion of this step is a significant one in the overall processtoconstructanewtypeofreactorintheUK.

difference (“CfD”) instrument, where a low carbon electricity generator and the Low Carbon Contracts Company (“LCCC” – a government owned limited company) enter into a contract that ultimately protects consumers from high costs and gives greater certainty of revenues to electricity generators.

The provision of CfDs is intended to stabilise revenues for investors in low-carbon electricity generation projects such as nuclear (and renewables) by helping developers secure the large upfront capital costs for low-carbon infrastructure. However, the long planning horizon for nuclear new-build projects and massivecapitalrequirementsposesubstantialfinancialriskstonuclear power sponsors and investors. In the US, it was deter-mined that US Government guarantees were necessary in order for new-build nuclear projects to be commercially viable. In October 2016, the UK Government confirmed that it hadprovided a government guarantee to EDF (France) to assist in bringing forward their investment in Hinkley Point C, the Somerset nuclear power plant. It has provided a guarantee for up to £2 billion that will be available from 2018 to 2020, if necessary conditions are met. TheCfDisaquasi-powerpurchaseagreement:generatorswith

a CfD will sell their electricity into the market in the normal way, and remain active participants in the wholesale electricity market. The CfD then pays the difference between an estimate of the market price for electricity and an estimate of the long-term price needed to bring forward investment in a given technology (the strike price). This means that when a generator sells its power, if the market price is lower than needed to reward investment, the CfD pays a “top-up”. However, if the market price is higher than needed to reward investment, the contract obliges the generator to pay back the difference. In this way, CfDs stabilise returns for generatorsatafixedlevel,overthedurationofthecontract.Thismitigates thegenerator’s long-termexposure toelectricitypricevolatility, substantially reducing the commercial risks faced by these projects. The Energy Act 2013 includes a provision whereby the LCCC will act as the counterparty to eligible generators under the CfD. This mechanism was in direct response to concerns about the “credit” behind the CfD economics. Although a CfD is a private law contract between a low-carbon electricity gener-ator and the LCCC, the cost of CfDs will ultimately be met by consumers via a levy on electricity suppliers.

The first CfD auction in January 2015 was a success, with a competitive allocation process, and the cost was £105 million less than the original strike prices published for the same technologies. ItwasasimilarstoryfortheCapacityMarketauction,wherethefirstauctionprocuredcapacityatalmosthalftheexpectedclearingprice.However,followingtheMay2015GeneralElection,therehas been a decrease in pace in implementing the CfD and Capacity Marketmeasures,which, in turn, createduncertainty forEMR.In July 2015, the Department of Energy and Climate Change (nowtheDepartmentforBusiness,Energy&IndustrialStrategy)confirmedthepostponementofthenextCfDauctionround,and,subsequently,inNovember2015,theSecretaryofStateforEnergyand Climate Change confirmed that the delayed October 2015 CfD auction would not take place until the end of 2016. This post-ponementwaspartlycausedby theUKGovernment’sattemptsto rein in the costs of supporting low-carbon electricity genera-tion. Recently, however, the UK Government’s commitmentto the CfD auction programme has been renewed. There was a successful round in 2017 (where two offshore wind projects were awardedCfDsat£57.50/MWh),andathirdroundranfromMayto September 2019, resulting in the government securing 5.8GW of new capacity. The auction cleared at the record low price of £39.650/MWhforDeliveryYear2023/24and£41.611/MWhin2024/25.

84 England & Wales


to the EU-imposed deadline. A general election was called in December 2019 to secure a parliamentary majority that could solvethedeadlock. AConservativeMajoritywasachievedonapro-Brexitplatform,andtheUnitedKingdomceasedmembershipof the European Union on the 31 January 2020. As before, legis-lation derived from the EU and adopted or implemented by the UKremainsinforcewhilstchangesareslowlymade.Therefore,manyoftheconsequencesofthewithdrawalareyettoberealised,andcanonlybespeculateduponwhilsttheUK’spositionremainsunder negotiation with the EU. TheeffectsofBrexitontheprojectfinancemarketthusfar,

from vote to withdrawal, are both general and specific. In generalterms,currencyexchangevolatility(thepoundsubstan-tially weakened following the vote and has hit new lows in the subsequentyearssincethevote),andarestrictiontothecreditmarkets both negatively impacted the UK project financemarket. In particular, the vote created uncertainty over the continued access of the UK to European Investment BankFunding, which up to the vote had been an important source of fundingforsmaller-scaleUKprojects(in2015,forexample,theEIBprovided£5.6billionfor40differentprojects,amountingtoapproximatelyone-thirdoftotalinvestmentinUKinfrastruc-ture).Athighlevel,thepositionappearstobethattheUKcannolongerbeamemberoftheEIBifitisnotalsoanEUmemberstate.ThismeansthatanyfuturerelationshiptheUKhaswiththeEIBwill likelybewiththeUKasa thirdcountry. In lateJanuary 2019, the European Union Committee in the House of Lordspublishedapaperanalysing the impactofBrexiton theUK’srelationshipwiththeEuropeanInvestmentBank,inwhichthey criticise the Government’s silence on the issue. The report alsohighlightsthemonetarycostofleavingtheEIB:itisenvis-agedthatdespitetheUKreceivingits€3.5billioncapitalinvest-mentintheEIBbackover12years,theUKwillnotreceiveanyshareoftheprofits,interestordividendsthattheEIBhasaccu-mulated. Additionally, the Committee worried that losing access to theEIBtranslates into losingaccess tocheaperand longer-term loans than those commercial lenders can provide. The GovernmentresponsetothisreportstatedthattheUK’sfuturerelationship with EIBGroupwould be explored in the widernegotiations relating to withdrawal.

In late January 2020, the EU Financial Affairs Sub-Committee published a follow-up letter to this report and response. This letter restated key points made in the report which remain in issue, and called on the Government to seek to negotiate an ongoingrelationshipwithEIB.TheCommitteealsoproposedconsidering the establishment of a UK infrastructure bankto help avoid a funding gap, as was also recommended by the National Infrastructure Commission. It is as yet unclear whether this guidance will be taken into account and pursued by the Government.

During the transition period, which is set to end on 31 December 2020, the UK will continue to be subject to EUprocurement directives (such as the Public Contracts Regulations 2015 SI 2015/102). This means that organisations under the rules must continue advertising and awarding public contracts inaccordancewiththeEUdirectives.IftheUKseekstoretainmembershipoftheEuropeanSingleMarket,whichnowappearsunlikely, it would have to continue to apply all EU public procure-ment directives.

It has been suggested in the legal press that there are reasons for optimism regarding government liquidity support forprojects post-Brexit, such as the adoption of a looser mone-tary policy in the UK or potential policies to stimulate theeconomy via investment in infrastructure. Standard and Poors have commented that private finance initiatives should main-tain their credit strength. They have also noticed that in the

Shale gasShale gas fracking has long been an area of great interest and potential within theUK – the BritishGeological Survey esti-mates that there could be up to 1,300 billion cubic feet of shale gas inthenorthofEngland(primarilyintheBowlandshalebeneathManchester,LiverpoolandBlackpool)–equivalenttoapproxi-mately50yearsofUKgasconsumption. Furtherreservesarelikely to exist in central and southernEngland. InDecember2013,theUKGovernment’sDepartmentofEnergyandClimateChange(nowtheDepartmentforBusiness,Energy&IndustrialStrategy) reported thatup tohalfof theUK’s landareamightbe suitable for fracking, including as yet unexplored depositsthroughout much of eastern and southern England. US energy costs (partly as a result of significant investment by oil and gas buyers in US shale gas development) are currently one-third of thoseofWesternEurope–amajorissueforEuropeanexporters.WhenUK shale oilwas still in the early stages of explora-

tion in the UK, the industry won an important early victoryin 2016 when the government overturned local council objec-tions to a fracking scheme in Lancashire. Scientists from the British Geological Survey (“BGS”) have estimated that thetotalvolumeofgas in theBowland-Hodder shale innorthernEnglandisapproximately1,300trillioncubicfeet.

In April 2015 and following the introduction of the Energy Act 2016, certain functions passed from the Department of EnergyandClimateChange(nowtheDepartmentforBusiness,Energy&IndustrialStrategy)totheOGA,anewlycreatedexec-utive agency. Following this change, the process of obtaining consent to drill a well is the same irrespective of whether the well drills for conventional or unconventional gas: operators bidforexclusiverightstoanareaincompetitivelicencerounds.The operator then needs landowner and planning permission, whichmayrequireanenvironmentalimpactassessment.On16July2015,theUKGovernmentlaiddraftregulations

that defined the protected areas in which hydraulic fracturing will be prohibited. The draft regulations ensure that the process of hydraulic fracturing can only take place below 1,200 metres in specified groundwater areas outside National Parks, Areas of OutstandingNaturalBeautyandWorldHeritageSites.However,frackingremainedacontroversialissueintheUK.In

March2018,theapplicationbyIneostoexploreforshalegasinSouth Yorkshire was rejected by local councillors, raising the cumu-lative total of planning rejections against fracking companies to sevenin2018alone(mainlyfocusedaroundtheMidlandsandthenorth of England). Interestingly, some of the rejections came from Conservative councils, despite the Conservative Government’s ManifestopromiseofdevelopingashalegasindustryintheUK(the Labour Party, on the other hand, is anti-fracking). The United KingdomOnshore Oil & Gas industry group

forecasts that fracking has the capacity to eliminate Britain’sneed to import gas by the early 2030’s. Inwhatwas seenby somecommentators as anunexpected

U-turn, in November 2019 the government halted fracking in Englandwith immediate effect. Ministers also announced toshale gas companies that they would no longer support future fracking projects. The reason given for the moratorium was that the Oil and Gas Authority published a report into recent seismic activityatPrestonNewRoad(theUK’sonlyactivefrackingsitein Lancashire), in which it was clear that the Government would be unable to rule out future unacceptable impacts on the local community.

Brexit Negotiations and the EU Withdrawal BillInJune2016,theUKvotedtoleavetheEuropeanUnion.

A period of uncertainty has followed, consisting of multiple drafts of withdrawal legislation, and requests for extensions

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Security is normally granted by way of a general security agree-ment,suchasadebenture,whichcoversalltheSPV’srightsandassets(bothpre-existingandafter-acquired)or(lesscommonly)by way of separate security agreements for each type of asset.More often than not, lenders will look to achieve “going

concern”securityonaUK-basedprojectorasset.Thisisaimedat putting them in a position of default, stepping in if necessary and operating (or selling) the relevant asset as a going concern. Basic legal security is normally insufficient to achieve this typeof outcome; conventional legal security is often supplemented by bespoke contractual arrangements providing lenders with specific notice, “cure” and “step-in” rights.

Where (as is very often the case) the viability of a project as a going concern is dependent upon the continuing availa-bility to an operator or owner of permits and licences, special attentionwillneedtobepaidtotheconsequencesofdefaultinthewidersense–bywayofexample,breachof licencecondi-tions or change of control can result in permits and licences being breached and/or becoming terminable. Certain types of licences and permits are, in effect, personal to the initial licence-holder;contractualrightscanbeexpressedtobenon-assignablein the absence of consents. A careful analysis of the regulatory and practical conditions applicable to the application for, and maintenance of, permits, licences and key contracts is necessary and will differ on a case-by-case basis.

The main types of securities under English law are mortgages (equitableand legal),charges(fixedandfloating),assignments(broadlyequivalenttocharges),pledgesandliens. Mortgages,chargesandassignmentsarethemostfrequentlyusedformsofsecurity. Assignmentsmay be legal or equitable; the processfor enforcement of the two types of security differs. A deben-ture will include a range of mortgages, charges and assignments depending on the nature of the security assets.Englishlawdifferentiatesbetweenlegalandequitableinter-

ests in assets (including security interests) and, in particular, as regards land and shares.

It is possible, in theory, to create security orally (unless it relates to land) but, in practice, security is always documented. There is noprescribedprocedureorformofdocumentrequiredtocreatesecurity(butseequestion2.2belowregardingregistration).

A legal assignment of an asset must comply with section 136 of the Law of Property Act 1925. If the secured lender wishes to implement a legal assignment of rights by way of security, then section 136 sets out the procedure. A legal assignment must be in writing and signed by the assignor, be absolute (meaning that the assignee has the entire right to the benefit in the action) and not be set out to be by way of charge only, and any third parties against whom the assignor could enforce the assigned rights need to be notified in writing. If the assignment has been perfected, the assignee has the right to sue the third party in its own name. It is often not possible in project financing to comply with section 136; the vast majority of assignments of receivables, accounts and contracts used for the purposes of project financing are equitable assignments. If the require-mentsundersection136arenotmet,theassigneehasanequi-table assignment, which does not grant the right to sue the third party in its own name. Assignments of future contracts can only bebywayofequitableassignment.Other securities, such as a charge and amortgage, require

evidence in writing, which can be effected by means of a deben-ture. Debentures can create legal mortgages and fixed andfloating charges over all the borrower’s assets, if agreed, and as setoutinthedebenture.Thedebentureisexecutedasadeed.

short term, projects have benefitted from the higher inflationary environment. On the other hand, five project financings have beendowngradedfromstable tonegative (forexample,AlphaSchools (Highland) Project, Aspire Defence Finance PLC and Consort Healthcare (Salford) PLC).


Notable recent project finance deals include the Hinkley Point C ProjectinSomerset,theMorayEastOffshoreWindFarmproject,the Beatrice Offshore Wind Farm project, the Triton KnollOffshore Wind Farm project, the £2.2 million Thames Tideway Tunnel project, the Galloper Offshore Wind Farm, the £6.5 billionThameslinkProject,andtheIntercityExpressProgrammePhase 1 public-private partnership (“PPP”) refinancing.TheBritishgovernmentseekstoencouragelow-carbonenergy

generation – particularly via the construction of offshore wind farms – through Contracts for Difference, for which up to £557 million of government funding is available. One such wind farm istheWalneyExtension,a659MWoffshorewindfarmownedby Ørsted,PKAandPFAadjacenttothe367MWWalneyprojectoffthecoastofCumbria.TheWalneyExtensionbecameoper-ational in 2018 and received government funding through a ContractforDifferenceawardedin2014.Itishopedthatsuchgovernment support will enable the private sector to produce up to 2GW of new offshore wind capacity each year as of 2020.

As part of the National Grid’s £750 million investment in London’s electricity networks, London Power Tunnels is building a new network of cable tunnels in and around the capital. Phase 1 of the project sought to replace dated energy circuits and make maintenance more efficient and less disruptive to road users and was completed in February 2018. Construction of Phase 2willbegininMarch2020andisprojectedtobecompleteby2026, and will entail adding over 30km of tunnels between Wimbledon and Crayford.

The Thames Tideway Tunnel is a major infrastructure project aiming to upgrade London’s sewerage system in order to meet the future needs of the city. Construction began in 2017, and tunnel-lingiscurrentlyunderway,withallworksexpectedtobecompletedby2024.TheTunnelconstructionwillemployover4,000peopledirectly with several thousand more jobs in the supply chain and wider economy. It will also bring other regeneration benefits such as lifting constraints on future housing and other developments.

Of additional importance is the green light for HS2 that the Governmentgranted inFebruary2020. PrimeMinisterBorisJohnson announced to the House of Commons that an HS2 Ministerwouldbeappointed,whosefulltimejobwouldbetomanage the project. The first phase of the project is due to open between 2028 and 2031, and the second phase was due to open in2032–33,butthishasbeenpushedbackto2035–40.

2 Security


IndomesticUKprojectfinancings,theintentionoftheparties(and theusual requirementofall typesof lenders) is tocreatesecurity over all, or substantially all, of a project company’s assets. Project finance borrowing vehicles are normally special purpose vehicles or “SPVs” with no pre-existing businesses,rights or liabilities beyond those associated with the project.

86 England & Wales


business, by dealing pre-default with its receivables as if no secu-rity had been created. The formalities for this form of security arefewerbutfloatingchargesrankbehindfixedchargesintermsof priority, and the proceeds of floating charge enforcement are subject to certain other prior ranking claims.


Project financings will invariably establish a strict regime in relationtotheproject’scashflows–thiswillrequirerevenuesto be paid into dedicated accounts held by pre-agreed account banks and will set out clear rules on the priority of application of available cash (the Cash Flow Waterfall). A typical project account or account bank agreement will establish strict rules as to permitted withdrawals from those accounts.

Withdrawals will cease to be permitted upon the occurrence of an actual or potential Event of Default. Any withdrawal which is not permitted under the relevant accounts or account bank agreement will trigger default; default will permit the lenders to enforce security. In the context of receivables and bankaccounts, this will include transferring to the lenders full control over receivables and accounts.

As it may be impractical to serve notice or to impose a high degreeofcontrolon thisassetclass,anequitableassignmentorfloating charge is often used as an alternative form of security. This form of security enables the chargee to take security without unduly restricting or affecting the chargor’s ability to carry on its business by dealing pre-default with its receivables as if no secu-rity had been created. The formalities for this form of security arefewerbutfloatingchargesrankbehindfixedchargesintermsof priority, and the proceeds of floating charge enforcement are subject to certain other prior ranking claims.The new law, theBusinessContractTerms (Assignment of

Receivables) Regulations 2017, applies to contracts governed by English law and invalidates a clause which purports to prohibit the assignment of a receivable.


Security over shares in companies incorporated in England and Wales can either be taken by way of legal mortgage, or by way of charge over the shares (an equitable mortgage or charge).The governing law of the mortgage should always be English law. The convention in English law financings for security over shares in the contextofprojects is for security tobe effectedbywayofequitablecharge;lenderswillalways(subjecttoverylimitedexceptions)resistbecomingshareholdersofrecordinanSPVor project vehicle for awide rangeof reasons, includingincurringshareholderliabilitiesandreputationalrisk.Equitableshare charges are normally protected by means of a power of attorney in favour of an agent or trustee for the lenders, enabling the lenders to take a legal transfer of shares if default occurs, where absolutely necessary.

In the ordinary course of events, secured lenders will normally be happy for the sponsors/relevant chargors to retain legal title to shares until an Event of Default and/or enforcement event occurs.

A legal mortgage of shares involves the transfer of the rele-vant shares in the company to the lender from the outset, subject to an agreement for their re-transfer once the secured debt is repaid. The lender will be registered in the company’s register of


Security is usually taken over real estate by way of a legal mortgage over (ideally) a freehold title, or by the creation (or assignment) of a leasehold interest. Security over moveables is normally effected bywayofafixedchargeoverplant,machineryandequipment.Plantandmachinerywhichisfixedtolandisnormallydeemedto be part of that land; pipes and cables can in certain circum-stancesalsoconstitutefixtures.Thedepreciationpositiondiffersbetween“fixtures” (which effectivelybecomepartof the landorpropertytowhichtheyareaffixed)andmoveablesor“chat-tels” – so fully analysing the legal standing of an asset is impor-tant. Complications arise over the creation of security over assets located on the foreshore or in international waters.The followingare themain typesof securitywhich require

registration:■ companycharges;■ mortgagesandchargesoverinterestsinland;■ securityovercertainIPrights;and■ securityovershipsandaircraft.

Registration is important for the chargee to secure its priority rights and ranking in case of the chargor’s insolvency.

The procedure is the same as set out above, namely by agreeing the terms and conditions and setting these out in a debenture. Inordertoperfectalegalmortgageandafixedchargefollowingtheexecutionofthedebenture,thesecurityhastoberegistered.

Under the Companies Act 2006, a company must register details of any security it grants (subject to some exceptions)at Companies House within 21 days of the date of crea-tion of the security. Failure to register will result in the secu-rity becoming void against an insolvency officer, appointed in respect of the chargor and against any creditor. Separate regis-trations regarding security over land and real estate interests will be required at theLandRegistry or at theLandChargesDepartment. Note that security over intellectual property may alsobesubjecttoseparateregistrationprocedures(forexample,attheTradeMarksRegistry).


Security over receivables is normally taken by way of assign-ment.Fixedchargesoverreceivablesorbankaccountsrequirethe secured lender to control both the receivables and the account into which they are paid when collected; this is almost alwaysimpossibleasapracticalmatterinthecontextofatypicalproject. Security over receivables can also be taken by way of a floating charge, but the practical value of a floating charge (which“fixes”ontheassetsitcoversonlyontheoccurrenceofacrystallisation event) to a lender in terms of asset security may be limited. If the benefit of the receivables is assigned to the lender, then, in order to achieve a legal assignment under section 136 of the Law of Property Act 1925, notice in writing of the assign-ment must be served on the account debtors – often impracti-cable where there are a wide range of debtors.

As it may be impractical to serve notice or to impose a high degreeofcontrolon thisassetclass,anequitableassignmentorfloating charge is often used as an alternative form of security. This form of security enables the chargee to take security without unduly restricting or affecting the chargor’s ability to carry on its

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On 6 April 2013, a new regime for the registration of secu-rity came into force via the Companies Act (Amendment of Part 25) Regulations 2013 No. 600. This regime is intended to streamlineexistingproceduresandtoreduceuncertaintyoverregistration.

Principal features of the new registration regime include:■ Scope of charges covered: All charges created by a

company are registrable except for a narrow range ofexcluded items. The company and anyperson “with aninterest in the charge” is entitled to register the charge.

■ “Voluntary” registration: Failure to register security is no longer a criminal offence. However, commercial sanc-tions for non-registration (whereby non-registered security becomesvoidagainsta liquidator,administratororcred-itor and any secured debt becomes immediately re-pay-able) continue to apply. Security should still be registered within the 21-day window.

■ Filing, e-filing and statements of particulars: Persons wishing to register security have the option of registering via an electronic filing system. Under this system, a state-ment of particulars must be filed online together with a certified copy of the charging document. The entire charging document is available to view online, although certain personal information (such as bank account details) can be redacted. There is no longer any need to send an original charging document to Companies House.


SubjecttolimitedexceptionsinrelationtocertaintypesofUKGovernment-owned, strategic and regulated assets, no regula-toryorsimilarconsentsarerequiredinrelationtomostlandandreal estate rights or in relation to most types of privately held assets. Specific legal regimes apply, however, to different types ofregulatedassets–forexample,certaintypesofgovernmentalassets (in particular, those associated with defence), nuclear generation, nuclear fuel production and reprocessing plants and related sites and certain assets vested in specific types of privatisedbusinesses(forexample,waterandtransmissionbusi-nesses). In addition, licences granted by Ofgem (the gas and electricity regulator in England and Wales), regulatory author-ities in relation to exploration for anddevelopmentofhydro-carbon assets or the Financial Conduct Authority, may affect the granting of any mortgage, charge or other form of security over an asset. The consent of Ofwat (the regulator of the water andsewageindustryinEnglandandWales)mayalsoberequiredunder the instruments of appointment by the Secretary of State for the Environment for water and sewerage, undertaken under the Water Act 1989.

3 Security Trustee


England and Wales fully recognise the concept of trusts. Trusts are normally used to create beneficial interests in assets which

members as a fully entitled shareholder of the company, and not just as a mortgagee. As a result, the transfer will operate so as to give the lender all the rights of a shareholder. While the lender is registered as a shareholder, it will receive all dividends and any other money or assets paid in relation to the shares, and will be entitled to vote as a shareholder.Withanequitablemortgageorchargeofshares,thechargor

remains as a registered shareholder and retains legal title to the shares, transferring only its beneficial interest to the lender. The chargorwillnormallyberequiredtolodgeitssharecertificatesand stock transfer forms with the lender, on the basis that the stock transfer forms can be completed by the lender (in favour of itself or a nominee) if an Event of Default or enforcement eventoccurs. Votingrightsandtherighttoreceivedividendswill normally remain with the chargor until an Event of Default occurs.

The CREST system allows CREST members to grant legal andequitablemortgagesovertheirsharesheldinCREST.


A nominal fee is payable to Companies House on registration of security by a company. The fee does not vary according to the classofassetortypeofsecurity.Separateregistrationisrequiredfor each security document. The fee is currently £23 for regis-tering a security document using the paper filing process, and £15 for using the electronic filing process.

Additional fees are also payable for registration to the Land Registry or Land Charges Department as regards security over land. These fees are registration fees and will not usually be significantinthecontextoftheoveralltransaction.Nostampduty is payable on the registration of security.


Registration with Companies House requires the completionof a specified form and must be undertaken within 21 days of the creation of the security, or it will be void on insolvency and against other creditors.

Companies House is not responsible for inaccuracies in the registered particulars (acceptance of the particulars does not guar-antee their accuracy). Inaccuracies in the registered particulars canhave seriousconsequences as regardspriority andeffectiveregistration. Responsibility for ensuring the accuracy of the regis-tered particulars lies with the presenter (in practice, the chargee or its advisors). The 21-day period includes bank holidays and week-ends and does not stop running if the Companies House registrar identifies a defect and returns the registration form for correc-tion. As a result, in the contextof complicated securitydocu-ments, it is essential to draft and agree the registration particulars in advance of financial close. If necessary, these particulars can be pre-agreed with Companies House to reduce the risk of rejec-tion and the loss of time (and priority).

Charges over certain assets, such as land, intellectual property rights, ships and aircraft, need to be registered at other specialist registriesrelatedtotheassetinquestion,aswellasatCompaniesHouse.

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“Foreclosure” has a narrower meaning under English law than it does in the US. Foreclosure in the context of security over an asset is the

process by which the mortgagor’s rights in the secured asset are extinguished (the mortgagor’s equity of redemption is extin-guished), and that asset becomes bested in the mortgagee.

The mortgagee could obtain a court order under which it becomes the owner of the property. A mortgagee’s right to fore-close arises once the liabilities secured by the mortgage have become repayable.

Even in these circumstances, a mortgagee normally has certain obligations to the mortgagor – including an obligation to obtain a reasonable price on sale of a mortgaged asset, and (pursuant to the“equityofredemption”)toreturnanyexcessproceedsoverthe secured debt finalised by it to the mortgagor. In general, under English law, foreign investors are treated differently from businesses established in England and Wales in relation to the enforcement of security.



There are different types of insolvency proceedings under English law:■ administration;■ receivership/administrativereceivership;■ compulsoryliquidation;■ companyvoluntaryarrangements(“CVAs”);and■ schemesofarrangement.

From a lender’s perspective, administration and administra-tive receivership are the most important regimes.

Lenders to a project normally insist on taking security over all, or substantially all, of the Project SPV’s rights and assets.Special rules apply to security created by “Project Companies” (prior to the Enterprise Act 2002, these rules were capable of applying to all businesses). An administrative receiver is gener-ally appointed over the whole of the company’s assets by, or on behalf of, the holders of any of the company’s charges which, as created, were floating charges. Since the coming into force of the Enterprise Act 2002, only lenders holding security created before 15 September 2003 are able to appoint an administrative receiver,subjecttocertainexceptions.Thekeyexceptioninthecase of project finance is that set out under section 72E of the Insolvency Act 1986. Section 72E states that the appointment of an administrative receiver by a project company is not prevented if the project is a “financed” project and is subject to step-in rights. A project is “financed” if, under an agreement relating to the project, a project company incurs (or, when the agreement is enteredinto,isexpectedtoincur)adebtofatleast£50millionfor the purposes of carrying out the project. The administrative receiver’s primary duty is to the secured lender who appointed him, but he is also an agent of the company. If the secured lender hasthehighest-priorityfixedchargeoverthecompany’sassets,thelendermayappointoneormorefixed-chargereceiversoverthe secured assets. Appointing its own receiver offers the lender more control over the realisation of the assets.

may differ from the strict legal ownership of those assets. Trust deeds are often used alongside debentures in England and Wales to create and regulate the holding of security over assets.

The creation of a trust by a borrower will normally involve the conveyance by the borrower to a trustee (usually a trust corpora-tion – either an eligible financial institution or a specialist trust companysuchasanyLawDebentureorBanker’sTrust)whomayhold the security for the benefit of itself, the other secured lenders in the transaction and (on a residual basis) for the borrower itself. English law trusts are normally long-term arrangements; beneficial ownership remains with the secured party so the trust assets do not fall within the trustee’s estate if the trustee becomes insolvent.


Thisisnotapplicableinourjurisdiction.Seequestion3.1above.



In general, no. In relation to unregulated assets, there is no requirementforapublicauctionfollowingenforcementofsecu-rity. It is impossibletoexcludethepossibilityofthirdpartiesseeking injunctive relief to prevent enforcement of security or the sale of secured assets following enforcement, but generally English courts will oppose any such proceedings where secu-ritywasvalidlygivenand(whererequired)properlyregistered.

The Financial Collateral Arrangements (No. 2) Regulations (“FCA”) came into force in England and Wales in December 2003 in order to implement the Financial Collateral Directive (2002/47/EC), with the aim of simplifying the enforcementof security over cash, financial instruments (including shares, bonds and warrants) and credit claims.

The FCA Regulations 2003 were amended by the Financial Collateral Arrangements (No. 2) Regulations 2003 (Amendment) Regulations 2009 (SI 2009/2462) which came into force inOctober 2009. These amendments provided for changes in the Companies Act.

The FCA Regulations 2003 were further amended by the Financial Markets and Insolvency (Settlement Finality andFinancial Collateral Arrangements) (Amendment) Regulations 2010 (SI 2010/2993) (FCA Amendment Regulations 2010). These came into force on 6 April 2011 and included credit claims as financial collateral.Following theFCA,paragraph43(2)of ScheduleB1 to the

Insolvency Act 1986 will not apply to any security interest created or otherwise arising under a financial collateral arrange-ment. This means that neither the consent of the administrator, nor thepermissionof thecourt, is required toenforcesuchasecurity interest, which would otherwise be applicable when a company is in administration or the subject of a company volun-tary arrangement.

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in relation to the preservation of certain types of strategically important assets (for example, certainpipelines and transmis-sion assets).


Part 26 of the Companies Act 2006 provides a procedure for companies to make a compromise or arrangement with its cred-itors (or any class of them), which will be binding on all cred-itors in the relevant class(es) if the requisite majorities voteto approve the scheme. A scheme requires the approval of amajority innumberofcreditorsholding75% invalueofeachaffected class, and the sanction of the High Court of England and Wales. The court will consider any objections from cred-itors, which commonly relate to the provision of insufficient information or notice of the scheme and/or the fairness of class composition. There is no statutory moratorium attached to the scheme, although lock-up agreements, whereby creditors commit in advance to vote in favour of the scheme and agree not to take enforcement action, are common in practice. Since the legislation does not prescribe the subject matter of a scheme, it is a highly flexible device and is available to any companywhich can be wound up under the Insolvency Act 1986. This includes UK-registered companies, unregistered companiesand foreign companies, provided a sufficient connection with England is established. This is a determination on the facts, but the presence of English law governed debt, often together with English creditors or bank accounts, will typically be considered sufficient.


Under English law, a director will potentially be liable for wrongful trading if “at some time before the commencement of the winding up of the company, that [director] knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation orentering insolvent liquidation” (section214(2), InsolvencyAct1986). A director will have a defence if, after that director knew or should have concluded that there was no reasonable pros-pect of avoiding an insolvent winding-up or entering insolvent administration, the director took every step with a view to mini-mising the potential loss to the company’s creditors which he oughttohavetaken(section214(3),InsolvencyAct1986).Thiswill generally give conscientious directors facing financial diffi-culties sufficient time to organise a restructuring while contin-uing to trade, provided there continues to be a reasonable pros-pect that restructuring negotiations will successfully conclude (even if in fact they do not). Liability for fraudulent trading (that is, knowingly carrying on the business of the company with the intent to defraud creditors) can also extend to directors,whomay be personally liable in an action brought by a liquidator.Directors could also face criminal liability for fraud, miscon-duct, falsification of the company’s books, material omissions from statements and false representations under sections 206 to 211,InsolvencyAct1986andareliabletodisqualificationfrombeing a director of any company for up to 15 years under the CompanyDirectorsDisqualificationAct1986.

Out of court, an administrator can be appointed by the holder of a “qualifying” floating charge, provided that the chargerelates to the whole or substantially the whole of the compa-ny’s assets, and the company has triggered an Event of Default under the financing documentation. A company need not be insolvent in order for administration to occur. Once appointed, the administrator owes his duties to all creditors, not only to the project lenders. His primary objective is to rescue the company as a going concern. If a lender has the right to appoint an admin-istrative receiver (as described above), that lender may veto the appointment of the administrator.


Following the formal insolvency of a company, an administrator or liquidator may challenge transactions entered into by thecompany before the start of the relevant insolvency procedure. The period when such transactions are vulnerable to being challenged is known as a “hardening period”. Such transac-tionsincludetransactionsatanundervalue,preferences,extor-tionate credit transactions, avoidance of floating charges and transactions defrauding creditors. The hardening period ranges from two years (transactions at an undervalue) to sixmonths(preferences).

A creditor with a claim that ranks in priority to other unse-cured creditors and (in corporate insolvencies) to floating charge holders and the prescribed part (Schedule 6 and sections 175,176,328,347and386,InsolvencyAct1986)isapreferen-tial creditor. Employees are usually the only preferential credi-tors following the introduction of the Enterprise Act 2002 (they will receive wages, holiday pay and contributions to pensions). Inorderofpriority,apartysecuredbywayofmortgageorfixedcharge will rank ahead of any preferential creditors. Preferential creditors are paid from the proceeds of floating charges, which arerankedbelowthefixed-chargecreditorsbutaboveallotherunsecured creditors.


Private-sector entities incorporated in England and Wales are generallynotexcludedfrombankruptcyproceedingsinEnglandand Wales.


Injunctive relief may be available from the English courts in unusual and/or extreme circumstances. As described in theresponsestoquestions2.1to2.5above,typicalprojectsecurityarrangements will include:■ detailedcontractualcontrolsoverprojectreceivables,cash

and bank accounts; and■ “step-in”andrelatedcontractualarrangementswithcoun-

terparties to key project documents providing protection against borrower non-performance, insolvency and other matters.

There are specific insolvency regimes relating to the insol-vency of PPP and public finance initiative (“PFI”) projects and

90 England & Wales


as natural gas and chemicals. Local authorities, and the London Mayor,introducedtheCommunityInfrastructureLevyinApril2010, which is a charge attached to development once it has been granted planning permission, to fund and pay for the mainte-nance of local infrastructure.

National Infrastructure PlanningWhere a proposed development in England is classed as a Nationally Significant Infrastructure Project (e.g. power plants, airports and major road schemes), planning permission/devel-opment consent for these will be dealt with by the Planning Inspectorate (specifically the Major Infrastructure PlanningUnit). The ultimate decision-maker for such projects will be the relevant Secretary of State, e.g. the Secretary of State for Energy and Climate Change in the case of energy projects.

Welsh Assembly GovernmentPlanning decisions which would be taken by the relevant Secretary of State in England will be made by the Welsh MinisterswhentheseprojectsareinWales.

Environment Agency (“EA”)The EA is the main environmental regulator in England and is responsible for the environmental permitting regime, which covers a variety of areas including waste management, water pollution and air pollution. There is a separate Welsh Environment Agency which, on 1 April 2013, was merged into a new environmental body for Wales alongside the Countryside Council for Wales and Forestry Commission Wales.

Health and Safety Executive (“HSE”)The HSE is the principal regulator for all health and safety issuesinGreatBritain.

Marine Management Organisation (“MMO”)TheMMO implements and regulates the UK’s marine plan-ning and licensing system in respect of all offshore construc-tion works.

A number of other public, private or semi-public regulators mayalsohaveauthorityoverprojects,dependingontheirexactnature. These may include Natural England, the Crown Estate, theOfficeofGasandElectricityMarkets(“Ofgem”),theWaterServices Regulation Authority (“Ofwat”) and the Office of Communications (“Ofcom”).


In general, no. Registration of prescribed particulars at Companies House and/or other applicable registrars must, however, comply withtherelevantregistrationrequirements.


LandToownlandinEnglandandWalesthereisnorequirementfora licence, nor is there any general bar on foreign ownership of private-sector land.



There are no restrictions on foreign investors investing in UKcompanies as a general ruleunderEnglish law,but thereare specific statutory regimes in place for certain industries. Authorisation is required for investment in specific regulatedareas including the nuclear industry, banking, media, financial services and defence.UK and EU competition rules may impact ownership by

companieswithUK,EUorglobalbusinessturnoversexceedingspecific thresholds. Compliance with EU directives may impact an entity’s ability to invest in or own certain assets. The outcome of the deal negotiations with the EU in the coming months should clarify whether this position will change in 2021 when theUKexitstheEU.


The UK has signed bilateral investment treaties, protectinginvestor rights, with around 120 countries.


ExpropriationofassetsorcompaniesisgenerallyrareintheUKin the absence of hostilities, breach of international sanctions or financial market turmoil. Certain public-private assets are subject to compulsory purchase powers; compulsory purchase is also possible (subject to public processes and appeal rights, and to the payment of “market value” compensation) for the development of infrastructure and other assets (such as new railway lines). Subject to limitedexceptions (for example, theState’sabilitytoacquireshareholdings infinancial institutionsin certain circumstances), the State has no special legal right to expropriateprivate-sectorassets.



Theexactnatureoftheprojectwilldeterminewhichregulatorybodies and/or UK Government agencies will have authorityover the project. However, there are a number of bodies which have an overarching function in respect of development related to the typical project sectors.

Local AuthoritiesThemajorityofonshoreprojectswillrequireplanningpermis-sion, and the identity of the body granting planning permis-sion depends on the nature of the project. Planning permis-sions are usually granted by the local authority of the relevant area. Local authorities are also responsible for granting consent forthestorageoflargequantitiesofhazardoussubstances,such

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Therearenogeneralrestrictionsonforeigncurrencyexchange.TheMoneyLaunderingRegulations could be relevant, and

apply to all categories of businesses, including those active in theUKfinancialsector.Feesmaybe imposedbybanks in theUKwhendealing in

foreign currencies. Corporation taxesmay arise on exchangegainsandlosses,dependingontheassetorliabilityinquestion.


TheUKisbusiness-friendly(atthetimeofwriting,stillagatewayto the European Union, and has relatively low levels of bureau-cracy). Thereisnoexchangecontrolregulation,whichmeansthat repatriation of funds is straightforward subject to interna-tionalsanctionsthatmaybeinplace(forexample,againstNorthKorea).ThereisnodiscriminationinfavouroflocalcompaniesandthereisnorequirementtoreinvestprofitsintheUK.Remittance applies on an individual basis when a non-UK

domiciledUK resident can choose to pay tax on the “arisingbasis” or on the “remittance basis”. The latter is when the indi-vidual pays tax onUK income and gains and on any foreignincomeorgainsthatarebroughtinto(remittedto)theUK.


Subject toUKandEUsanctions (the future impactofwhichwill become clear once negotiations with the EU regarding theUK’sexithavebecomeclearer)andtheMoneyLaunderingRegulations, project companies in England and Wales can estab-lish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions.


No; only as agreed contractually amongst the shareholders of a projectcompany,itslendersandtheparent.ThereareUK-andEU-specifictaximplications,however.


Legislation and regulations, in addition to the permits and licences already mentioned above, that may affect a project include:

WaterIn order to impound or abstract groundwater and surface water, a licence must be obtained from the Environment Agency.

Wind, wave, tidal and solar energyNolicencesarerequiredtouseanyrenewableenergyresources,althoughtheusualplanningpermissionsandconsentsrequiredtocarryoutconstructionandengineeringworkswillberequired.Alicencetogenerateelectricity(oranexemptionfromobtainingsuch a licence) must also be obtained from the Department for Business,EnergyandIndustrialStrategy.

Minerals (other than oil and gas, coal, gold and silver)Ownership rights of minerals located in privately owned land (exceptoil and gas, coal, gold and silver)will generally residein the owner of the surface land, although these rights may be retained by a previous landowner.The Crown Estate generally holds the right to exploit all

mineralson theUKforeshoreandcontinental shelf,with theexceptionofgas,oilandcoal.

Oil and gasOwnership of all onshore and offshore oil and gas in Great Britain (to the limitsof thecontinental shelf ) isvested in theCrown.TheOGAgrantsexclusiverightsto“searchandboreforandget”petroleumwithinGreatBritain.Therightsgrantedby onshore licences do not include any rights of access, which must be obtained from the relevant landowner, and the licen-seesmustalsoobtainanyconsentsrequiredunderotherlegisla-tion, such as planning permissions and environmental permits. Licensees wishing to enter or drill through coal seams for coal-bed methane and coal mine gas must also seek the permis-sionof theCoalAuthority (seebelow). WithinUKterritorialwaters, consent for placing installations and laying pipelines on the seabed must be obtained from the Crown Estate.

CoalFollowing the privatisation of the coal industry in 1994, theownership of almost all coal now resides with the Coal Authority, whichgrantslicencesforcoalexplorationandextraction.

Gold and silverRights to gold and silver in most of England and Wales are owned by the Crown, and a licence for the exploration anddevelopment of these metals must be obtained from the Crown EstateCommissionersthroughtheCrownMineralAgent.


Owners of minerals may receive royalties in relation to the extractionofminerals.SuchroyaltieswouldbesubjecttoUKtax. FromApril2013,allmineralroyaltiesaretaxed100%toincometaxratherthan50/50to incomeandcapitalgainstax,as before. There may be restrictions in place in relation to the extractionandexploitationofnaturalresources.Forexample,the Environment Agency has discretion to refuse to grant water abstraction licences if it believes there will be a detrimental envi-ronmental effect.

Customs procedures and/or duties may apply on certain exports.

92 England & Wales


water, or risks to human health from contamination of land, and require those responsible to take immediate action topreventdamage occurring or remediate damage where it does occur.WenotethatthedetailoftheUK’sfuturerelationshipwith

the EU is yet to be made clear.

Nature conservation legislationThe Environment Agency and Natural England are responsible forenforcinglaws implementingtheEUWildBirdsDirective(2009/147/EC) and the EU Habitats Directive (92/43/EC),which protect certain species and habitats.WenotethatthedetailoftheUK’sfuturerelationshipwith


Health and safety legislationTheHealthandSafetyatWork,etc.Act1974providestheframe-work for health and safety regulation in England and Wales. TheAct is enforced by theHealth and Safety Executive andlocal authorities, although in general the HSE will be the regu-lator for major projects. Other legislation such as the Control of MajorAccidentHazardsRegulations2015/483mayalsoapplyto major projects.


The EU procurement laws (as implemented in England and Wales) are applicable to project companies developing public-sector projects, if the public contracts fall within the scope of therulesandexceedcertainfinancialvalues.Therulesensurethat the award process is transparent, non-discriminatory and respectstheprinciplesofequaltreatment.

EU procurement laws apply to contracts awarded by central governments, local authorities or other public-sector bodies.WenotethatthedetailoftheUK’sfuturerelationshipwith


8 Foreign Insurance


There are no restrictions on insurance policies over project assets provided by foreign insurance companies, unless the foreign insurance company is carrying out and effecting the insuranceintheUK.

If the foreign insurance company is carrying out and effecting the insurance in theUK, itmay require authorisation by thePrudential Regulation Authority (“PRA”), and may there-fore have to comply with the PRA rules, unless it can rely on European Economic Area (“EEA”) “passporting” rights or other exclusions. The PRA was created by the FinancialServicesAct2012andispartoftheBankofEngland.WenotethatthedetailoftheUK’sfuturerelationshipwiththeEUisyetto be made clear.


Foreign banks, and other foreign creditors, can be co-insured by the insurance company over the project assets.

Environmental impact assessmentWhere a development may have adverse impacts on the envi-ronment,thedeveloperwillberequiredtosubmitanenviron-mental impact assessment to the relevant planning authority when applying for planning permission/development consent.

Contaminated land regimeThe contaminated land regime contained in Part 2A of the Environmental Protection Act 1990 may apply to any project that either pollutes land and/or water or is located on previously contaminated land. Under the regime, liability for the clean-up of contaminated land falls on any person who causes or know-ingly permits contamination in, on or under land. If such people cannot be found, then liability passes to the current owners and/or occupiers, regardless of their awareness of the contamination. However, if a project involves redevelopment of a site, then it is likely that the planning regime will govern clean-up rather than the contaminated land regime.

Common lawA person (including a company) who has suffered loss as a result of environmental or health and safety issues such as noise, odour or other pollution, may in some cases be entitled to bring a civil claim under the common law of nuisance, negligence, or tres-pass and/or the rule in Rylands v Fletcher against those who have caused the loss.

Statutory nuisanceCertain nuisances such as noise and dust are regulated by local authorities as “statutory nuisances”.

EU Industrial Emissions Directive (2010/75/EU)At the time of writing, the Industrial Emissions Directive is the main EU instrument, aiming to prevent or reduce emissions to air, land and water from industrial installations. The Directive requiresinstallationswithinitsscopetooperateunderapermitandstreamlinespermitting,reportingandmonitoringrequire-ments to simplify and reduce the administrative burden on operators.Most installations will have to comply with the Industrial

EmissionsDirectivefrom7January2014,butthisdependsonthe type of installation.WenotethatthedetailoftheUK’sfuturerelationshipwith


Environmental Permitting regimeThe Environmental Permitting regime is an integrated permit-ting regime which regulates a range of activities which may give rise to pollution, including those covered by the EU Industrial Emissions Directive, such as waste management, air pollution and water pollution.WenotethatthedetailoftheUK’sfuturerelationshipwith


Climate changeThe Climate Change Act 2008 established a framework to develop an economically credible emissions reduction path. TheDepartment forBusiness,Energyand IndustrialStrategyfocuses on climate change and energy supply.

Environmental Damage (Prevention and Remediation) (England) Regulations 2015These Regulations implement the EU Environmental Liability Directive(2004/35/EC)inEngland.Thereareequivalentregu-lations in Wales. They apply to damage to species, habitats or

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TheBriberyAct2010receivedRoyalAssent inApril2010andcame into force on 1 July 2011. It repeals previous statutes in rela-tiontobribery,includingthePublicBodiesCorruptPracticesAct1889, the Prevention of Corruption Act 1906 and the Prevention ofCorruptionAct1916(the“BriberyAct”orthe“Act”). Thelegislation arms prosecutors with a range of criminal offences which will cover a wide range of conduct that they may employ toprosecuteanypotentiallycorruptactivity.TheBriberyAct’sarrival coincideswith a significant shift in theUK’s approachto fighting corruption which has seen prosecutors bring compa-nies into the criminal courts for corruption on numerous occa-sions in recent years. The Act reflects a general tightening of anti-bribery laws globally in line with the OECD Convention on theCombattingofBribery,aswellasanincreasedlevelofinter-national cooperation to enforce such legislation; however, the Actraisesthebarevenhigherthanequivalentlegislationinotherjurisdictions, such as the US Foreign Corrupt Practices Act.The Act affects all UK businesses and those incorporated

abroad who do business in the UK, and creates four newoffences related to bribery (the offering or receipt of financial or other advantages) of a person with the intent of bringing about improper performance of that person’s duties. These are:(1) Offering (or promising or giving) a bribe, intending

that another person perform their duties improperly (or rewarding them for having done so).

(2) Accepting (or requesting or agreeing to accept) a bribe,intending that duties will be performed improperly.

(3) Bribingaforeignpublicofficialinordertoretainbusinessor to gain an advantage in the conduct of business.

(4) Failureofcommercialorganisationstopreventbriberyonbehalf of the organisation. If any person associated with an organisation is found guilty of bribery, then the organi-sation is deemed guilty of an offence, unless it can show it hadadequateproceduresinplacetopreventthosepeoplefrom committing bribery.

Individuals found guilty of certain of these offences can be imprisoned for up to 10 years and/or receive an uncapped fine. Commercial organisations found guilty of any of the above offences can receive an uncapped fine. Directors and senior officers of commercial organisations may also be convicted if they are deemed to have given their consent or connivance to the offence.

For natural resources companies operating in countries where government offices are seen by some in positions of influence as an opportunity to accumulate personal wealth and as involving tasks which justify small additional financial incentives, the Bribery Act presents a significant compliance challenge, notleastbecausethelistofthosewhocanexposethecompanyandriskacriminalconvictionextendswellbeyonditsemployees.

The corporate offence of failing to prevent bribery means that senior management may be held accountable for the actions of persons associated with the organisation. A company’s only defenceistoshowthatithadadequatebriberypreventionproce-dures in place. These would include establishing policies which define acceptable behavioural limits, procedures to record all related events with a means of seeking approval in uncertain cases, and training and briefing for all staff likely to be affected by the provisions of the Act.



The general position is that EEA nationals have the automatic righttoworkintheUKbyvirtueofbeinganEUcitizen. Inaddition, Swiss citizens and Commonwealth nationals who have agrandparentbornintheUKortheBritishIslandshavebeengrantedpermission towork in theUK. Unless an individualfalls into one of these categories, they must obtain immigration permissiontoworkintheUKunderthePoints-BasedSystem(“PBS”)byfallingintooneofthenewtiers(employersmustbeawaretherearefivedistincttiers)ofthePBSorbeadependantofamigrantcomingtotheUKunderoneofthetiers.WiththeexceptionofTier1,migrantsmustbe“sponsored”beforetheycanapply toenteror remain in theUK. UKemployersneedto obtain a sponsor licence fromUKVisas and Immigration(“UKVI”) before they can employmigrants underTiers 2–5.Tier1 categories requiremigrants tomake theirownapplica-tionstoenterandstayintheUKtowork.Brexit will impact the immigration system, but what the

immigration system will look like in meaningful terms is yet to be seen as negotiations continue.



As theEU is a customs union,UK companies can buymostgoods from other member countries without restrictions – althoughVATandexcisedutywillnormallystillapply.IfaUKcompany imports from outside the EU, it may have to comply withimportlicensingrequirementsandwithcommoncustomstariffs that apply across the EU. Apart from the general restric-tions concerning materials that are deleterious to health and safety and the environment, there are no legal restrictions or controls which apply exclusively to importing constructionequipment.WenotethatthedetailoftheUK’sfuturerelation-ship with the EU is yet to be made clear.


Thisisnotapplicable.Pleaseseetheresponsetoquestion10.1.

11 Force Majeure


Force majeure provisions and exclusions are set out in virtuallyall project documents, and although the term “force majeure” is derived from French law with no recognised meaning under English law, such provisions and exclusions are enforceableunder English law provided that they are properly defined in the agreement. Normally force majeureexclusionsdonotapplytopayment obligations.

94 England & Wales


public policy or natural justice, or is contrary to the Protection of Trading Interests Act 1980 (e.g. for multiple damages).

Sovereign immunity is governed by the State Immunity Act 1978. The starting point is that a State or State entity will enjoy sovereign immunity from both suit and attachment. However, the Act contains several ways in which a court can disregard this immunity, such as a consensual waiver. If the usual conditions for recognition and enforcement of a judgment are fulfilled, a State will not benefit from immunity if it would not have been able to claim immunity had the proceedings been brought in the UK.Ordinarily,whereasovereignentityisactinginaprivateor commercial capacity, it will not be entitled to claim sovereign immunity from suit or attachment.



Contractual provisions in project documents governed by the lawsofEnglandandWalesrequiringsubmissionofdisputestointernational arbitration are generally recognised, and supported by the courts of England and Wales. Provided the arbitra-tion agreement is in writing, the English courts will stay any proceedings brought in breach of that agreement unless the court is satisfied that the arbitration agreement itself is null and void(ArbitrationAct1996).TheUKisasignatorytotheNewYork Convention, under which arbitral awards may be recog-nised and enforced.


The UK has been a Contracting State to the New YorkConvention since December 1975.


Whether or not a matter can be subject to arbitration is deter-mined on a case-by-case basis, although arbitration is, in general, limited to civil proceedings. Criminal or family law matters, or matters relating to status, are not capable of being submitted to arbitration.DisputesinwhichtheUKGovernmenthasadirectinterest, such as criminality, cannot be submitted to arbitration. However, a claim for compensation arising out of a criminal act maywellbearbitrated(forexample,inrespectofaclaimfortres-pass to the person or property, as these would be civil actions). Divorce also cannot be arbitrated and can only be granted by the courts in England and Wales, though the division of prop-erty might be subject to arbitration proceedings, provided that the arbitrator was not involved in the initial divorce proceed-ings. Similarly, succession issues do not lend themselves to arbi-tration and wills are usually only contested in court, though certain matters involving trusts might well be arbitrated. Again, the beneficiaries of a will can agree to a different method of sharing out the estate and could enlist the help of an arbitrator in reaching a settlement. Arbitration of issues involving minors and the insane is sometimes possible, but enforcement will be subject to the same constraints as apply to the courts in respect of enforcement of claims against minors and the insane for public policy reasons.

The Act has forced natural resources companies which do businessintheUK,andUKcompanieswhichdobusinessover-seas, to re-examine their approach toassessingandmanagingbriberyriskthroughouttheiroperationsintheUKandabroadtoensurethatadequateanti-corruptionproceduresareinplaceinternally. Such procedures also need to address the risk that third-partyserviceproviderswillexposethecompanytocrim-inal liability by bribing in connection with the company’s business.

13 Applicable Law


Project agreements relating to projects located in England and Wales are generally governed by the laws of England and Wales. Scottish law is substantially different to English law and normally applies to some or all project documents relating to projects located in Scotland. Northern Irish law is broadly similartoEnglishlaw,subjecttoanumberofqualifications.


Financing agreements for English projects are generally governed by English law. Financing agreements for a broad range of projects located throughout the world are often subject to English law.


Land-related agreements, concessions and the like, and permits and consents, are normally governed by the law of the location of the project.



Judgments obtained through a party’s submission to a foreign jurisdiction may be legally binding and enforceable, provided the conditions for recognition and enforcement of those judgments are fulfilled. Judgments, relating to civil and commercial matters, ofEUMemberStatecourts (exceptDenmark),dated from10January 2015 onwards, will be enforceable in England and Wales pursuant to the Recast Brussels Regulation (EU 1215/2012).Similar rules apply to Iceland, Norway and Switzerland pursuant to the 2007 Lugano Convention. Judgments of courts of some non-EU States (mainly Commonwealth members) with which reciprocal conventions exist will be enforced by a differentprocess of registration under the Administration of Justice Act 1920 or the Foreign Judgments (Reciprocal Enforcement) Act 1933. Wenote that thedetailof theUK’s future relationshipwith the EU is yet to be made clear.

Judgments of courts of all other States will usually be enforced through new English proceedings and the English courts must recognise the basis on which jurisdiction was accepted by the rulingcourt;namely, territorialorsubmission. Typicalexcep-tions to these regimes include: judgments obtained following fundamental procedural irregularities; proceedings brought in breach of statutory or international convention obligations; or where the judgment is based upon fraud, is contrary to English

95Milbank LLP



There are no UK tax incentives provided preferentially orspecifically to foreign investors or creditors. Specific incentives are afforded to foreign investors in relation to the construction and operation of projects and businesses in specified locations.

18 Other Matters


Currency exchange risk will always be a consideration forforeign investors in UK-based projects, where revenues arealmost always sterling-based.

Change of law remains (as in all other jurisdictions) a risk for investors in theUK (albeit a risk of very lowmagnitude, butexamplesincludetheearlyclosureoftheRenewableObligationregimeintheUK),giventheinabilityofanyadministrationtotie the legislative hands of its successors. EU,US,UKandUNsanctionscanbeanissueifaprojector

business might involve dealing with sanctioned persons, enti-ties or assets.


Therearenolegalrequirementsthatapplyexclusivelytoprojectcompanies seeking to issue bonds or similar capital market instruments.

Any project company seeking to issue debt instruments (secu-rities) on the London Stock Exchange (“LSE”)must complywith the UK Listing Authority (“UKLA”)’s Listing Rules(the“ListingRules”).TheUKLA,adivisionoftheFinancialConduct Authority, is the body responsible for regulating all securities listed on the LSE. The Listing Rules contain (i) the rules and regulations for listing debt securities, and (ii) the continuing obligations that apply to issuers and bondholders for the duration of the listing. The Listing Rules cover principles rangingfromcorporategovernanceandexecutiveremunerationto accounting standards and full disclosure of information to prospective investors.DebtsecuritiesadmittedtotheMainMarketoftheLSEmust

be listed in accordance with Chapters 2 and 17 of the Listing Rules. Debt securities admitted to the Professional Securities MarketmustbelistedinaccordancewithChapter4. Alldebtsecurities admitted to trading must comply with the LSE’s Admission and Disclosure Standards and the relevant Disclosure and Transparency Rules.

Rules may differ according to the issuer’s market sector. For example, mineral, oil and natural gas companies are subject tothe additional disclosure requirements set out in Chapter 6 ofthe Listing Rules. Rules may also differ according to the issuer’s investorbase.Forexample,anissuerwillbesubjecttomorestrin-gent obligations if marketing its securities to retail investors as opposed to solely professional investors.

In some disputes, parts of claims may be arbitrable and other partsnot.Forexample,inadisputeoverpatentinfringement,a determination of whether a patent has been infringed could be adjudicated upon by an arbitration tribunal. However, the validity of a patent would not ordinarily be arbitrated, as patents are subject to a system of public registration. Therefore, an arbi-tral panel would have no power to order the relevant body to rectify any patent registration based upon its determination. It is relevant to note that, although the English courts at one point suggested that an arbitration agreement would be considered “null,voidandinoperative”insofarasitpurportstorequirethesubmission to arbitration of issues relating to mandatory EU law (see Accentuate Ltd v ASIGRA Inc. [2009] EWHC 2655), this approachhasnotbeenfollowed insubsequentcases(seeFern Computer Consultancy Ltd v Intergraph Cadworx & Analysis Solutions Inc [2014] EWHC 2908 (Ch)). This case has subsequentlyreceived positive judicial treatment. However, there has not yet been any ruling by an appellate court in relation to this issue and, therefore, some ambiguity remains.


As a general principle, arbitration is consensual rather than mandatory. If a matter is arbitrable pursuant to agreement by the parties, then it is subject to the relevant dispute resolution and jurisdiction clause in a contract.



There have not been any calls for political risk guarantees in EnglandandWalesinrecentyears.Lenderswilltypicallyrequiredirect agreements with governmental authorities if the project is a PPP or PFI project. Direct agreements are commonly entered into by lenders with key project contract counterpar-ties in all types ofUK-based projects. Following retroactivechanges to regulatory support regimes for renewable energy projects in countries such as Spain,Greece, Bulgaria and theCzech Republic, investors in renewable energy are understand-ably wary of “change in law” risk in the renewables sector and the damaging effect that such retroactive changes can have on aproject’seconomics.Forthisreason,boththeCfDandIUKGuarantee contain provisions safeguarding the generator/guar-anteedbeneficiaryagainstUK“changeinlaw”risk.

17 Tax


TheUKimposesawithholdingtaxatthebasicrateofincometax(currently20%)onanypaymentofyearlyinterestarisingintheUK.Consequently,aUKcompanypayingyearlyinterestonadebtsecuritywillgenerallyhaveanobligationtodeduct20%ofsuch interest payment and account for this withheld amount to theUKtaxauthorities.Doubletaxtreatiesexistwithmanyotherjurisdictions,whichinmanycaseswillreducewithholdingtax.

96 England & Wales


the agreement with Shari’ah (see Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd [2003] 2 All ER (Comm) 84). This approach was reaffirmed in a recent English High Court case, Dana Gas PJSC v Dana Gas Sukuk Ltd & Ors [2017] EWHC 2928, where Dana Gas (an issuer based in the UAE) was attempting to render its mudarabah sukuk unenforceable on a number of grounds, one of which was that its sukuk was not Shari’ah-compliant.

Parties may still elect to have a dispute in relation to a contract determined and resolved in accordance with Shari’ah principles bysubmittingtoarbitration.Undersection46oftheArbitrationAct 1996, arbitral tribunals are obliged to decide disputes with reference to either the national law chosen by the parties or any other agreed considerations (including Shari’ah considerations).


Generally, the inclusion of an interest payment obligation in a loan agreement would not affect its validity and/or enforcea-bility in England and Wales, unless that interest payment obliga-tion is deemed a penalty offending the rules laid down in Dunlop Pneumatic Tyre Co Ltd v New Garages & Motor Co Ltd [1915] AC 79 and Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67 (Cavendish). Note that a contractual provision for payment of a higher rate of interest after a default in payment by a borrower could be deemed to be a penalty; however, this will be difficult to establish in view of the new test set out in Cavendishwhichrequiresthattheclauseinques-tion impose a detriment on the contract breaker “out of all propor-tion to any legitimate interest of the innocent party”. In determining this, an English court will now consider the wider commercial contextofatransactionand,wherethepartieshavenegotiateda contract, on a level playing field and with the assistance of professional advisors, it will now be much harder for the party paying the higher rate of interest to challenge the validity of such a provision on the basis that it is a penalty. Furthermore, a provision that provides for interest to increase on default is not likely to be held to give rise to a penalty if: (i) the increase is levied only from the date of default (and not before); (ii) the main purpose of the clause is not to deter default; and (iii) the increase is modest and commercially justifiable by reason of the increased credit risk represented by a debtor in default.

AcknowledgmentsThe authors would like to acknowledge the invaluable assistance of Olivia Anderson (Associate) and Sophie Lawrence (Trainee) in the preparation of this chapter.

19 Islamic Finance


Although these instruments have been used in other financing contexts in England and Wales (such as acquisition finance,corporate finance and capital markets), they have not yet been used in the project financing context in England andWales.Were they to be employed, then it would be likely that an Istina’a or Wakala arrangement would be used for the purposes of financing the construction of the assets during the pre-comple-tion period, and such assets would then be leased by the finan-cier (as direct or indirect owner of the assets) to the project company, pursuant to the Ijarah. The Ijarah is the mechanism by which the principal and the profit margin are returned to the financier during the post-construction period of a project financing as rental consideration comprising the purchase price oftheassetaswellasafixedand/orfloatingprofitmargincalcu-latedbyreferencetoLIBOR.AMurabaha instrument could be used to make available either a working capital facility to the projectcompanyorequitybridgeloanstotheprojectcompany,with full recourse to the sponsors.


Shari’ahisnotappliedintheUK,andEnglishlawdoesnotrecog-nise Shari’ah as a system of law capable of governing a contract, on the basis that English law does not provide for the choice or application of a system of law other than a system of national law. This is based on the Convention on the Law Applicable to Contractual Obligations 1980 (the Rome Convention), which requiresthatthegoverninglawofanagreementmustbelongtoa country, and Shari’ah does not belong to a particular country (albeit that Shari’ah has been adopted, through legislation, by countries such as Saudi Arabia).

The approach of the English courts, in the main, has been to distinguish between the Shari’ah and the contractual governing law of an Islamic finance agreement by ruling that Shari’ah issues are not justiciable in the English courts. That element of the agreement is deemed as forming part of the commercial agree-ment (which English courts will rarely interfere with) and not the legal agreement. Instead, the dispute will be dealt with by applying the ordinary principles of English law, and an English court will avoid ruling or commenting on the compliance of

97

John Dewar is a partner in the London office of Milbank LLP and a member of the firm’s Global Projects, Energy and Infrastructure Finance Group. John is widely recognised as a leading individual in his field by a number of journals, among them: Chambers UK (which designated him among the 1st tier of Project Finance lawyers in the UK), Chambers Global, The Legal 500, and Who’s Who of Project Finance. He has built an extremely broad practice and outstanding reputation for advising on the most innovative and significant “market-first” transactions around the world. His practice focuses on advising parties in the development and financing of oil and gas, natural resources, independent power, tele-communications, satellite and other infrastructure projects. He has particular expertise in multi-sourced financings, including those involving multilateral and export credit agencies and Islamic institutions.



Milbank LLP is a leading international law firm that provides innovative legal services to clients around the world. Founded in New York 150 years ago, Milbank has offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, São Paulo, Seoul, Singapore, Tokyo and Washington, DC. Milbank’s lawyers collaborate across practices and offices to help the world’s leading commercial, financial and industrial enterprises, as well as institutions, indi-viduals and governments, achieve their strategic objectives.Project Finance is among our firm’s core practice areas and our Project, Energy and Infrastructure Finance Group comprises more than 100 dedi-cated Project, Energy and Infrastructure Finance attorneys, including 20 partners, in our offices worldwide. We operate on an integrated basis with project finance teams in each of our offices in the US, São Paulo, London, Frankfurt, Seoul, Singapore, Hong Kong and Tokyo.From a first-of-its-kind toll road in Latin America, to a wireless telecom build-out in Southeast Asia to the largest wind and solar farms in the world,

clients recognise our Project, Energy and Infrastructure Finance Group as the leading choice for the financing and development of the most critical and pioneering infrastructure projects across the globe. Over the past three years, Milbank has closed more than 140 project financings, which raised more than US$125 billion for infrastructure projects worldwide.

www.milbank.com


Milbank LLP

Munib Hussain is a senior associate in the London office of Milbank, Tweed, Hadley & McCloy LLP and a member of the firm’s Global Project, Energy and Infrastructure Finance Group. Munib has significant expertise in advising lenders, sponsors and sovereigns on “first-of-a-kind” international projects, energy and infrastructure financings in the oil and gas, power, and mining sectors, and in particular specialises in multi-sourced financings involving ECAs, multi-laterals, commercial and Islamic banks. He is also a member of the firm’s Islamic Finance Business Unit and is recognised as an expert for Islamic Finance in Who’s Who Legal 100.





Chapter 1198

France

GB2A AVOCATS Pascal Deniau

Grégory Berkovicz

France


2 Security


Under French law, there is no universal corporate security. Even if the nantissement de fonds de commerce (pledge over a business as a going concern) may present a few similarities to the English-based universal floating charge, and the French security trust ( fiducie sûreté ) enables a creditor to have one security over all company assets, they are rarely used in project finance.

Project finance transactions typically include a full security package incorporating a set of specific security agreements, each subject to specific legal provisions, such as: (i) a simplified transfer deed for cash flows and receivables; (ii) a pledge over bank accounts; (iii) non-possessory pledges over movable assets; (iv) afirstrankingchargeoverthesharesoftheSPV;and(v) mortgages over land, buildings and other real property

assets. With the exception of security over real property which

requiresanotariseddeed,othersecurityagreementsmentionedabove are private agreements (actes sous seing privé ) and may be concluded by the parties at the same time and place as the financing documentation.


Mortgages are taken over real property and certainmovablesassets located on the same real property such as big machinery or panels of ground-mounted solar plants, which are considered ancillarytoandinseparablefromtherealproperty.Mortgagestaketheformofnotariseddeedsandrequireregistrationattheland registry. Pledges are taken over othermovable assets of the SPV in

separate agreements typically providing for non-possessory pledges. Suchagreements requirenonotarisationbutmaybesubject to registration.

1 Overview


There is a decline of classic bank-based financings, growing popularity of bonds being issued by project companies and, on a lesser scale, of recourse to crowd-funding. We are also observing a rise of small- and mid-cap projects as investors are favouring smaller investments in larger numbers.

Concerning investor profile, local authorities are particu-larity active in project finance, whereas the State has been more active in the refinancing phase through the Caisse des Dépôts et Consignations. Also, investments funds are being specifically set up to finance energy transition-related investments.

As to market practices, an interesting one has been gaining popularitysincetheBalardPentagonProject:aPPPintheformofaDCOMcontractfortheDefenceMinistry’snewheadquar-tersona420,000m²site. ThisPPPintroducedtheeconomi-cally driven practice of creating a land value programme for the surrounding land and is now being replicated in other big scale projects.


(i) The new Paris Palace of Justice (€725 million): one of themost significant PPPs since the Balard PentagonProject.

(ii) Gare du Nord (€600 million): the renovation of this central railway station in Paris is financed through a new type of PPP, a single-operation semi-public company (Semop).

(iii) The Grand Paris Express (€35 billion): this automated transit network with 200 km of additional tracks will take the form of a ring route around Paris. The project company is fully state-owned. The financing is secured through the Caisse des Dépôts et Consignations, the European InvestmentBankandseveralbondissues.

(iv) The Archade Project (€200 million): the first European centre for cancer treatment and research using hadrontherapy technology was created in Normandy in the form of a public-private joint venture.

(v) The Saint-Nazaire offshore wind farm (€2.3 billion): this is thefirstoffshorewindfarminFrancewitha480MWofinstalledcapacity.

99GB2A AVOCATS


Security trusts with real property assets are not commonly used in project finance in France as they imply paying a security trustee annual fees as well as registration fees upon the transfer of ownership to the secured creditors.

Other security registration fees are not significant and do not exceed€150atmostpersecuredamount.

There are no applicable stamp duties on security agreements, however,somesecurityinterestsrequireataxregistrationpriorto the commercial registry registration, such as pledges over equipment.


Exceptformortgageregistrationfees,othernotificationorregis-trationcostsarenotsignificantandusuallydonotrequireconsid-erable time. However, these requirements and the applicableregimes may vary significantly depending on the asset and security interestathand,whichisviewedbysomeasacomplexityfactor.Forexample,forapledgeoverabusinessasagoingconcern,

registration requirementshave tobe fulfilledwithin a certaintime-frame otherwise the security will not be valid.

With the enactment of the Loi PACTE in 2019, the govern-ment has been given the mission to amend and reform security law; one of its key objectives is to harmonise registration rules for security interests.


Generally,therearenoregulatoryconsentsrequiredwithrespectto the creation of security over real property unless such asset is owned by the State or a state entity. Some of the exceptions include security over real property

interests in relation to an administrative law long-term lease (bail emphythéotique administrative), in which case security interests over the land, buildings, infrastructure and big machinery may only be given by the project companywith the express consent ofthe lessor.

3 Security Trustee


Since 2007, a security agent under French law may hold title to security interests in an independent and separate estate from their own, and act in their own name for the benefit of the cred-itors. However, security agents have not yet gained much popu-larity in domestic project financings where lenders continue to operate under the traditional mandat.

In fact, to operate as a security agent, banks and financial institutions have to implement internal procedures to create and operate a distinct estate in their books, which usually involves substantial cost and dedicated staff, whereas the economic advantage of acting as a security agent remains marginal. Also, practitioners have raised substantial doubts when a security


Security over receivables is assigned either by way of a classic assignment agreement (nantissement de créances) or a specific assignment agreement (cession Dailly). The latter may only be used by credit institutions.

In both cases, the chargor is free to collect the receivables in the event of default and the debtors are not notified of the security.

The security is enforceable against third parties upon the signing date of the nantissement de créances agreement, and in the case of Dailly assignment on the date of the deed.


Security over cash deposits may take the form of: ■ apledgeovercash(gage-espèces) which transfers the owner-

shipof the cash to the secured creditor and requiresnoregistration or notification; or

■ a pledge agreement over the balance of a bank account(nantissement de solde créditeur du compte) which must be noti-fied to the bank account holder. This security is typically used in project finance.


Shares in companies incorporated in France are not issued in certified form, and security may be taken over them.

For stock companies (SA and SAS) shares are dematerialised and represented by a book entry. Security is taken over such shares by pledging the securities account (nantissement de compt-es-titres) of each shareholder and transferring the shares to a separate account held in the name of the pledgor. Since 2017, joint stock companies may choose to register their securities on a distributed ledger, which then can be validly pledged by way of a typical securities account pledge.

For non-stock companies, such as limited liability compa-nies (SARL), partnerships (SNC) and real estate companies (SCI), shares can be pledged by means of a share pledge agree-ment (nantissement de parts sociales). Registration at the commer-cialcourtregistryisrequiredforthesecuritytobeenforceableagainst third parties, as well as additional formalities depending on the type of company.


For mortgages, registration fees include the land registry contri-bution (0.1% of the secured amount) and the land registry tax (7.15% of the secured amount). As fornotarisation fees, aprogressivescaleisapplied(0.799%forasecuredamountofmore than €60,000). To reduce the cost of a mortgage, it is common practice to use the mortgage to secure an amount that is less than the total amount of the loan, and cover the rest with other security.

100 France


security interests until their conclusion. Proceedings are initi-ated with an opening judgment appointing a court representative and setting out the term of the suspect period ( période suspecte), which may go back to 18 months prior to the opening judgment, as well as a renewable standstill period ( période d’observation)ofsixmonths starting on the date of the opening judgment.

Creditors must file their claims to the court assigned repre-sentative within a period of two months extended to fourmonths for creditors incorporated outside of France. Generally, secured lenders may not enforce their security during the stand-still period and must file their claims unless they benefit from a retention of title which is the case for any security over receiv-ables. Security over real estate properties usually offer better protection for secured creditors.


Preferential creditors’ rights include in the following order: ■ general preferential rights of the Public Treasury, the

Customs Administration and Social Security Institutions, which are paid from the proceeds of all company assets;

■ employees’ claimswhich are coveredby theproceedsofsale of secured or incurred movable assets, then of real property assets; and

■ securedcreditorswhose interestsare thenpaid fromtheproceeds of the relevant secured assets.

Clawback claims may be made during the suspect period which could go back as far as 18 months. The court appointed representative, having received those claims, may annul trans-actions made during the suspect period if they are not econom-ically viable for the company. Secured creditors are usually not affectedby clawback claims,but there are exceptions; forinstance, if the security agreement was concluded in relation to existingliabilityduringthesuspectperiod.Also,Daillyassign-ments may be enforced after the opening judgment.


Legalentitiesgovernedbypubliclawareexcludedfromthescopeof bankruptcy proceedings set out by the French Commercial Code, which only apply to legal entities governed by private law.

Public law entities’ budgets are governed by special provi-sions (law n°2001-692 of 1 August 2001 and the General Code of Local Authorities). Creditors may seek enforcement by means of a requestmade to the prefectwhomay issue amandatory payment order or to the administrative judge.


Other processes available to creditors are the security trust, the pacte commissoire or forfeiture clause, and the retention of title clause.

A pacte commissoire clause enables the secured lender in case of default to take ownership of the pledged asset without court proceedings,exceptinthecaseofbankruptcyproceedings.

agent holds security over receivables in the form of Dailly assignments as applicable legal provisions provide that only the facility provider may be the security beneficiary.


SecuritytrustsandsecurityagentsexisttodayunderFrenchlaw,therefore alternative mechanisms, such as parallel debt which was validated by French courts, are no longer relevant.



The Civil Code entitles a French court under certain conditions to reschedule a debtor’s payments for a period up to two years, to allocate payments to the repayment of the principal amount, to lower the interest rate, to suspend enforcement measures, or to postpone interest payment or penalties.

The second obstacle to enforcement results from the appli-cable procedure to a court-ordered public auction as opposed to a private sale. However, since 2006, security interests may be enforced through private foreclosure ( pacte commissoire) subject toa fewexceptions forcertain specific security interests suchas a pledge over the business as a going concern. A pacte commis-soire clause in a mortgage deed typically stipulates that the cred-itor is to become the owner of the mortgaged property, in which case the value of the property is determined on the day of the transfer. Such clause is systematically provided for in project finance security agreements.

Also, enforcing security interests against a company undergoing bankruptcy is suspended during the standstill period (please refer toquestion5.1),subjecttospecificexceptionsessentiallycoveringset-off of related debts and court-authorised payments.


In that event, restrictions may apply to foreign creditors if the project falls within one of the State’s strategic sectors, as detailed in section 6.



Bankruptcy proceedings (safeguard, rehabilitation and liqui-dation) usually suspend the creditors’ rights to enforce their

101GB2A AVOCATS



Franceispartyto115BITsandanumberofmultilateralagree-ments containing provisions on investment protection and dispute resolution, including the Energy Charter Treaty.


Nationalisation is usually made by way of a specific law (like the law of 1981). Expropriationforpublicutilitycausesismorelikelytotake

place and is regulated by the Expropriation Code which setsout specific requirements and provisions for adequate andpromptly paid compensation, in accordance with the Universal Declaration of Human Rights.

There is no specific protection against such measures for a specific form of investment.



Relevant government agencies include: local and regional authorities and government agencies which deliver administra-tive authorisations, building permits, licences and approvals for projects; regulators in specific sectors such as the CRE in the energy sector or the ARCEP in the telecommunication sector which deliver some authorisations and exercise control overrelatedtransactionsandprocurementprocesses;andtheMinistryof Finance which supports tendering authorities and other actors involved in PPPs through its agencies, the APE and FinInfra.


Financing documents do not usually require registration.Securityagreementsdependingontheirnaturemayrequirelegalformalities and registration.

Also, in some transactions, credit agreements may be drawn up in notarised form (typically if a mortgage is involved) in order to ensure enforceability without having to obtain a court order – this is not common practice in project finance.

As for project documents, one must keep in mind that any administrative law contract such as concession or delegation of public service agreements, are subject to specific legal formali-ties and registration.


Asageneralrule,ownershipoflanddoesnotrequirealicence.Yet, in some projects, the ownership title of the land where the project is to be conducted is held by a local authority, in which


The mandat ad hoc is a confidential procedure that enables the company’s management, only if the company is still solvent, to negotiate with its main creditors with the help of an independent court-appointed expert, all while keeping themanagement ofthe company.

A conciliation procedure is also available to companies with predictable financial difficulties or which have been insolvent forlessthan45days.Thecourtappointedconciliator’smissionis to negotiate with the company’s creditors in order to conclude an amicable agreement, which is then presented to the court for approval.


Directors may face sanctions such as: ■ Personal bankruptcy: a director may be prohibited

from directing or managing a company for a period not exceeding15years, forhavingcontinued to tradewhilstthe company was in financial difficulty; dissimulated company assets; fraudulently increased company liabili-ties; or for not having suspended company payments in due time.

■ Liability for shortfall of company assets in the contextof liquidationproceedings: directorsmaybeheld jointlyor separately liable if they have committed management errors and contributed to the shortfall in assets. Amounts paid by the directors are allocated to the company.

■ Bankruptcy (banqueroute) as a criminal sanction: directors mayincuruptoa€75,000fineandfiveyearsofimprison-ment in the same events as for personal bankruptcy.



Therearenolimitationsonforeignownershipexceptinspecificstrategicsectorsforwhichpriorministerialapprovalisrequired(sectionL.151-3oftheMonetaryandFinancialCode),suchasthe energy sector, national defence, telecommunication, water supply, transportation, artificial intelligence and robotics.

The Loi PACTEof20May2019hasclarifiedtheapplicableprocedure but has also strengthened the control process put in placeforapprovalrequestsfiledasof1April2020.

Also, foreign investors may benefit from incentives depending on the investment and the concerned sector which are closely monitored by the European Commission, and may sometimes be obtained through negotiations and on precedent basis.

Dividends of a French company benefitting to legal persons whoarenotFrenchtaxresidentsaresubjecttoawithholdingtaxatarateinlinewiththecorporateincometaxrate(28%to31%),exceptfornon-cooperativecountries.

Lastly, it is worth mentioning that France was the fourth country worldwide to receive foreign direct investment flows during the first half of 2019 (UNCTAD source).

102 France



Dividends benefitting a French parent company, an EU parent company or a non-EU parent company holding at least 5%of thesharecapital forat least twoyears,are95%taxexemptandtaxableataratetobealignedwiththestandardcorporateincometaxratesetat28%to31%.

Dividends benefitting a parent company located in a non-co-operative country are taxable at a 75% rate, subject to morefavourableprovisionssetoutinanapplicabledoubletaxtreaty.


Anauthorisationordeclarationisrequiredforactivitiesinrela-tiontoassetswhicharequalifiedasanICPE(installation classée pour la protection de l’environnement). The competent authority is the Direction Régionale de l’Environnement de l’Aménagement et du Logement. Violationofsuchrulesmayleadtothesuspensionofoperation of such assets.

Also, occupational health and safety regulations must be complied with under Labour Law. The competent authorities aretheMinistryofLabour,socialsecuritybodiesandagenciessuch as the Agence Française de Sécurité Sanitaire de l’Environnement et du Travail. Non-compliance may lead to notices for employers to take certain steps, financial penalties, cessation of dangerous works, and prosecution.


Public procurement is subject to the provisions set out by the Code de la Commande Publique. Therefore, if a project company is considered as an awarding contracting authority ( pouvoir adjudi-cateur) according to the abovementioned provisions, it will have to comply with the applicable strict procedure set out by the Code de la Commande Publique.

Also, specific procurement rules are to be complied with for certain sectors, such as the renewable energy sector.

8 Foreign Insurance


Such foreign insurance companies must be authorised by the ACPR to conduct business in France in the specified insurance branch set out by the policy. If the insurance company is incor-porated in an EU State, it may conduct its business in France after having received the authorisation of the competent EU state of origin authority and notified it to the ACPR. There is no distinction between foreign and local companies in terms of feesortaxesrelatedtotheirservicesinFrance.

case an temporary occupation permit (AOT) or a long-term administrative lease (BEA) must be obtained from the localauthority through a specific procedure. The AOT and BEAconfer an ownership title to the holder or lessee that is distinct from the surface ownership title. As for mineral and fossil resources, their exploration and

extractionaresubjecttotheissueofaminingtitleandanopera-tionpermitpursuanttotheFrenchMiningCode.

Also, environmental impact assessments and authorisations arerequiredforconductingactivitiesinrelationtoassetsclassi-fied as ICPE (installations classées pour la protection de l’environnement).

A foreign company may hold such titles and licences if the relevant requirements aremet, subject to foreign investmentsapprovalsforstrategicsectors,asexplainedinsection6.


Theextractionofmineralandfossilresourcesrequirespaymentofanannualfeetothestate,propertytaxforlandoccupationtothelocalauthority,aroyaltyoneachtonofextractedresources,andotherspecialtaxesmayapply.Theexportofnatural resources is subject to the Combined

Nomenclature in accordance with the EU Common Customs Tariff.


There are no specific restrictions or taxes on foreign currencyexchangeotherthanfraud,taxevasionandanti-launderingcontrolandthereportingrequirementsofFrenchcreditinstitutions.


Capital gains of non-residents derived from the disposal of Frenchassetsaregenerallynottaxable.Someoftheexceptionsare capital gains derived from the disposal of real property assets located in France.

Dividends paid to a non-resident shareholder are subject toa28%to31%withholdingtaxsubject toanymorefavour-ableprovisionssetoutinanapplicabledoubletaxtreaty(whichfrequentlyprovide for a5%rate), andunless thenon-residentshareholderisbasedintheEUinwhichcasethereisanexemp-tionifthesetrequirementsaremet.Itshouldbenotedthatthewithholdingtaxratewillbeprogressivelyreducedin2022inlinewiththereductionofthecorporateincometaxrate.

Capital gains and dividends of non-residents located in non-cooperativecountriesaretaxedata75%rate.

As for loan payments to parties in other jurisdictions, gener-allysuchpaymentsarenottaxableinFrance.Alloftheaboveissubjecttofraud,taxevasionandanti-laun-

deringcontrolandthereportingrequirementsofFrenchbanks.


Project companies incorporated in France must have an onshore local currency bank account, and may have onshore and offshore foreign currency accounts.

103GB2A AVOCATS




Corrupt practices by individuals are punishable by up to 10 years of imprisonment and a €1million fine, and for compa-niesthefinecangoasfar€5millionortheequivalentoftwicethe assessed value of the proceeds derived from the offence. Moreover,companieschargedwithcorruptionareautomaticallyexcluded from entering into public procurement procedureswithin the EU for a five-year period.

Public procurement is one of the government’s activities most at risk of corrupt practices with an obvious impact on the proj-ects sector. Therefore, full dematerialisation of almost all public procurement procedures became mandatory in France.

13 Applicable Law


Typically, French law governs project agreements, but the partiesmay elect to choose a foreign law,with the exceptionof contracts governed by French administrative law. One must also bear in mind that if the governing law is a foreign law, a French court may refuse to apply it if the court finds that it contravenes French public policy.


For financing agreements, the governing law will generally be French law, but English law and US law may be used if the majority of the lenders are foreign entities. This choice may not always be possible for security agreements.


Administrative law agreements and certain security agree-ments (such as those in relation to real property assets located in France, assets registered in France, or chattels located in France) must be governed by French law.



Waiver of jurisdictional immunity and enforcement immunity byforeignstatesisbindingandenforceableifclearlyexpressed(such as in an arbitration clause).

As for enforcement immunity of the French State and local authorities, the law is silent on whether such immunity may be waived and case law has not taken a direct position on the matter. However, the prohibition of taking security interests over state-ownedassets,whichisoftenpresentedasaconsequenceoftheabsolute principle of the State’s enforcement immunity, demon-strates that waiver of such enforcement immunity may not be possible.


Foreign secured creditors may be named co-beneficiaries of an insurance policy over project assets.



Non-French nationals from EU countries, the EEA or the Swiss Confederation may engage in employed activities under the sameconditionsasFrenchnationalswithveryfewexceptions.

Foreign non-EU workers must apply for and hold a work permit or a residence visa.



There are no trade barriers within the EU single market. As an illustration, in 2013, France enacted a decree providing

foranincreasefrom5%to10%ofphotovoltaicfeed-intariffsfor solar panels whose components originated from the EEA, which was considered to be in violation of EU law by The European Commission. Importedgoodsfromnon-EUMemberStatesaresubjectto

the applicable customs tariffs pursuant to the EU customs law.


The EU Common Customs Tariff applies to goods origi-nating from outside the EU in accordance with the Combined Nomenclature of the European Community. Duties are rela-tively low, especially for industrial products.

11 Force Majeure


Partiesmayfreelyagreetoexcludesomeforce majeure events from an agreement subject to private law. As for administrative law contracts, the partiesmay not completely exclude force majeure events, yet they can agree on the amount of monetary compen-sationfortheincurredlosses,whichcannotexceedtheamountof losses directly suffered due to the force majeure event.

One could argue that the current health crisis related to the COVID-19 pandemic is a force majeure event. However, for administrative law contracts, the rule entails that perfor-mance may not be suspended due to force majeure events, only if definitive impediment of performance is possible. This poten-tially dangerous situation led the French government to adopt adecreeproviding forexceptionalmeasures in relation to theperformance of administrative law contracts which may be takenduringtheconfinementperiodofCOVID-19.

104 France


non-cooperativecountrieswherea75%withholdingtaxapplies(subject to any more favourable provisions set out in an appli-cabledoubletaxtreaty).

Also, payments made to a foreign lender under a security agreement, guarantee or loan agreement are not subject to a specificwithholdingtaxorto exchangecontrol.


Bothdomestic and foreign investors are eligible for the sameincentives,suchastheR&Dtaxcreditregime.Foreigninvest-mentsarenotsubjecttospecifictaxesforthesolepurposesofeffectiveness or registration.

18 Other Matters


Our answers in this chapter provide a full view on such key material considerations.


There are no specific legal impositions to project companies issuing bonds other than the applicable regime. All French stock companies (SA and SAS) may issue bonds and other marketable instruments, and limited liability companies (SARL) may issuebonds subject to certain requirements. For a stockcompany to issue bonds, its capital has to be entirely paid-up and the company must have at least two approved balance-sheets.A2017reformsetnew(andmorebusiness-oriented)require-

ments for bonds issues, such as in relation to bondholders representation, and in relation to issues by simplified stock companies(SAS),whichisacommonlyusedformforSPVs.Moregenerally,bondsandotherfinancialinstrumentstraded

onthestockexchangemustcomplywithsecuritiesregulationsandaresubjecttotheFinancialMarketAuthority’sprioradmis-sion to trade and to its control.

19 Islamic Finance


The most popular Islamic instrument in projects in France is Sukuk, due to its the asset-based and profit and loss sharing mechanisms.

Other Islamic instruments that may be used in the structuring of a project financing in France include: (i) Istisna’a (vente à terme); (ii) Ijara (contrat de location-vente) where the project asset is leased bytheIslamicbanktotheSPVinconsiderationofrent,andwithformalmutualcommitmentsfortheSPVtobuytheassetand



International arbitration clauses and awards are recognised by French courts, who play an active role in interpreting interna-tional arbitration provisions of the Civil Procedure Code. These mandatory provisions provide a general framework, governing the international arbitration agreement, proceedings, award, enforcement of awards and post-award remedies.


France is party to the New York Convention, the European Convention on International Commercial Arbitration, the ICSIDConvention,andthe1994EnergyCharterTreaty,amongothers.


Disputes which are not arbitrable under French law include family and succession law disputes, criminal law disputes and certain aspects of public law and fiscal law disputes.


Certain disputes lacking a cross-border or multi-national component may be subject to mandatory domestic arbitration.



During the performance of an administrative law agreement, the public entity may unilaterally amend contractual provisions, inwhichcasetheprivatepartymustbeprovidedwithadequateand prompt compensation.

Common practice within PPP transactions dictates that the lendersrequestpoliticalriskguaranteesintheformofadirectagreement with the central government in order to mitigate potentialpoliticalrisk,orto insertachangeof lawortaxandaccounting stability provisions in finance agreements to antici-patetheconsequencesofsuchevents.Moreover,insurancepoli-cies may sometimes cover some of those risks.

17 Tax


Interest paid by a French company to any lender is not subject to withholding tax, with the exception of lenders in

105GB2A AVOCATS


most Islamic financial transactions include an arbitration clause, which is why there have been no recent notable cases related to these topics in France.


Interest payment provisions are typically found in financing agreements governed by French law and do not affect their validity or enforceability, subject to meeting certain require-ments applicable to consumer and business loans.

The TEG, or overall effective rate, is a mandatory rate which measures all costs incurred when taking out a loan, to be provided for in any loan agreement according to a normalised calculation method.

Also, the capitalisation of interest must be no less than on a yearly basis. Practitioners developed techniques in projectfinance as a result of such thin capitalisation rules, for instance, during the construction phase of a project where there are not enough proceeds to cover interest payments and the payment period is less than a year, interest payment is drawn down from the credit line.

for the Islamic bank to sell it at the end of the leasing period; and (iii) Murabaha where the investor or the bank purchases an asset and resells it to the project company at a higher price, enabling theSPVtoavoidhavinganinterest-bearingloanandthebankto make a profit from the sale of the asset and not from lending a sum of money with interest. Withthesoleexceptionofaspecifictaxregimeandfinancial

guidelines (such as for Sukuk, Murabaha, Ijara and Istisna’a), such instrumentsdidnotrequirespecificlegalreforms.


It is possible to have a dispute brought before the French courts in relation to a financing agreement governed by Shari’ah law, but such dispute would also be subject to French public policy (ordre public).

In practice, most Islamic financing agreements are subject to State law which presents greater certainty for investors; in that case, Shari’ah law is applicable in the sense that the financial operation must be compliant to it and a Shari’ah board typically has to validate its compliance with Shari’ah law. That being said,

106

Grégory Berkovicz is chairman of the GB2A Group and managing partner of GB2A AVOCATS where he heads the Project Finance and Public Law departments. He holds a Ph.D. in Public Law, has published several books in relation to Public Business Law and regularly conducts Project Finance-related courses. He has been representing both private and public entities for more than 15 years, as his practice focuses on public-private projects, particularly in the infrastructure sector. Highly invested in local activities, he takes a particular interest in social housing, commercial urbanism and energy transition projects.

GB2A AVOCATS29, Friedland avenue75008 ParisFrance

Tel: +33 2 31 29 19 80Email: [email protected]: www.gb2a.fr

GB2A AVOCATS regularly advise lenders and sponsors in project develop-ment and finance transactions in France and internationally, particularly in Africa. Our deep and up to date knowledge of the legal framework and most recent project finance practices in France have enabled us to become one of the most recognised firms in the field. GB2A AVOCATS is part of the GB2A Group, a synergy of legal, financial and technical expertise at the service of both private companies and actors of the public sector. Our specificity and strength as a Group lies in our ability to manage a project in all its components (strategic, legal, technical and financial) and all its phases (strategic assessment, legal and financial structuring, securing investors, financing, operation, and follow-up). We are keen on securing a safe and tailored decision-making framework for our clients, advising them each step of the way.

www.gb2a.fr


France

Pascal Deniau is a partner at GB2A AVOCATS and head of the Banking and Finance department. He holds a Ph.D. in Private Law and a degree in International Law from City of London Polytechnic. He was the general counsel for Crédit Agricole Leasing & Factoring for many years. With more than 30 years of experience, he specialises in Banking and Project Finance, particularly in the infrastructure and energy sectors, with a focus on sustainable development and renewable energy.Both Grégory and Pascal regularly work on project development and finance transactions with associate Rola SHABAYEK, a trilingual (Arabic, English and French) lawyer with experience in French, English and Egyptian law, as well as OHADA law.

GB2A AVOCATS29, Friedland avenue75008 ParisFrance

Tel: +33 1 56 88 44 22Email: [email protected]: www.gb2a.fr



Chapter 12 107

Germany

Kantenwein Sven Ceranowski

Marcus van Bevern

Germ

any


also be a multitude of similar assets (e.g. receivables or chattels) provided they can be specified unambiguously. In the absence ofafloatingcharge,creditorsoftenrequesttheassumptionofpersonal liability by a debtor and its submission to immediate foreclosure in a notarial deed. On the basis of such a deed, a creditor could apply for an attachment order and foreclose into the borrower’s entire assets. However, as long as foreclosure has not taken place, the deed as such does not grant a preceding right of the creditor.


Real property can be encumbered with a land charge (Grundschuld ) or a mortgage (Hypothek), the latter being an acces-sorytothesecuredclaimandrarelyused.Bothinstrumentsmaybe granted in certificated or uncertificated form and need to be notarised and registered in the land registry. Plants, machinery andequipmentformpartoftheplotandaresubjecttothelandcharge/mortgage if firmly attached to the land or serving its economic purpose. If the connection is for temporary purpose onlyorresultsfromexercisingarightoverthatland(e.g.incaseofpipelinesorpowersupplylines),plants,machineryandequip-ment are not part of the plot and can be separately conveyed by a security assignment. Such a security assignment can be in written form and does not need to be notarised or registered.


Receivables can be assigned by security assignment without notification of the third-party debtor, provided that the debtor remains entitled to settle the claim by payment towards the assignor. The security assignment usually provides that the assignee may disclose the assignment either in its discretion at any time or in case of default of the assignor.


Bank accounts can be pledged by agreement between theaccount holder as pledger and the creditor as pledgee. The pledge has to be notified to the account holding bank (unless iden-tical with the pledgee). A consent by the bank is not necessary.

1 Overview


2019 marked the 30thanniversaryofthefalloftheBerlinwall.Within this period, reconstruction and development of former East Germany was paramount. In the meantime, an invest-ment backlog in Western Germany’s infrastructure has become evident. The German government has therefore decided to increase its investments and to accelerate infrastructure projects, in particular with respect to refurbishment and modernisation of the traffic infrastructure including water routes, railway and road networks. Inaddition,itistobeexpectedthattherewillstillbeagreat

deal of activity around the “Energiewende”, i.e. the exit fromnuclear and fossil-fuel energy which shall be implemented until 2030. Inthiscontext, itcanalsobeexpectedthatsustainablefinance, though currently still a niche product, will gain more importance.

Although the real estate markets have been boosted since 2010andhaveseenhugeamountsofinvestments,itisexpectedthat growth rates will cool down in the foreseeable future.


There have been several infrastructure financings in a total volume of several billion Euros. In January 2020, the German GovernmentandDeutscheBahn,theGermanrailwaycompany,enteredintoaninvestmentagreementwithatotalof€86bnforthe preservation and modernisation of the German railway networkswithinthenext10years.

In February 2020, a tender for the biggest PPP-project concerning the modernisation of the Autobahn A3 in northern Bavariawithatotalof€2.4bnwasaccepted.

2 Security


There is no floating charge or comparable general security agreement covering all assets of a debtor. Rather, each type of asset has to be assigned or pledged separately – which may

108 Germany


3 Security Trustee


Though German law does not recognise a general concept of a “trust”, it is possible to implement a security pool for various lenders which may be administered by a security agent. For structures,pleaseseetheanswertoquestion3.2below.


To avoid legal problems with the security pool, the pool would either provide for several creditor status, i.e. direct rights of all lenders in the collateral granted and the lenders being represented by the agent in administering such collateral. Alternatively, a parallel debt structure could be implemented whereby the secu-rity granted to the security agent would also secure the parallel debt owed to the agent.



Land charges and mortgages are enforced by public auction of the encumbered property. In the first auction a tender may be rejected if it does notmeet at least 70%of themarket value.Lower tenders may be accepted in a second auction not taking place earlier than three months after the first auction. Share pledges and chattels are also enforced by public auction provided that the parties may contractually agree to a private sale. With the exception of gold and silver, the first tender has tomeetatleast50%ofthemarketvalue.Goldandsilvermustnotbeauctioned under their market value.


There are no general restrictions, provided that, if the foreclo-sure shall be based on foreign judgments or enforcement orders, itwouldrequireaseparateenforcementjudgmentbyaGermancourt unless the enforcement is allowed in accordance with bilateraltreatiesor internationalconventions,e.g. theBrusselsI Regulation or the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters,tobothofwhichGermanyisaparty.

However, account holding banks usually have a senior pledge undertheirgeneralbusinessterms,andpledgeesusuallyrequestawaiverorrestrictionofsuchseniorpledgewhichrequirestheconsent of the bank.


Shares in private limited companies (GmbH ) are not in certifi-cated form and can be pledged by a notarised pledge agreement, unless the pledge is prohibited in the articles of association. It is not necessary, but common, that the pledge is notified to the company. Shares in public limited companies (AG) are in certif-icated form and can be pledged by written agreement plus hand-over of the share certificate to the pledgee. In case of listed companies, the shares are usually certificated in multiple share documents kept by a custodian. In this case, a written pledge of the co-ownership in the documents plus notification to the custodian are sufficient.


Where notarisation is necessary (e.g. land charges and share pledges), notary fees are calculated in accordance with a statu-tory fee schedule depending on the value of the security. The same applies for fees for registration in the land register. There is no stamp duty or other fees.


The duration of the registration of a land charge depends on the local land register and may take up to a few weeks. Registration can last longer in case of comprehensive land charges encum-bering a multitude of plots because such a land charge has to be registeredineachconcernedregister.Expensesdependontheamount of the land charge. Notifications to third parties can be effected by a simple letter in writing.


Thereisnogeneralconsentrequirement,buttheencumbranceof real property with a land charge ormortgagemay requirethe consent of the competent municipality if the plot is located within a formally designated redevelopment area. As pipelines and power supply lines (it does not matter if they are under-groundoroverground)areusuallyerected intheexerciseofapublic right demanding forbearance by the owner, they are not considered part of the plot. Therefore, the encumbrance of the plotdoesnotrequiretheconsentoftheentityrunningthelines.

109Kantenwein



The Insolvency Code provides for the possibility of the insol-vency creditors to agree to a settlement of their claims in an insolvency plan deviating from statutory distribution provi-sions.Theplanrequiresaqualifiedmajorityofboththecred-itors’ headcount and amount of claims. Further, bearer bonds may be changed or amended by majority decision of the credi-tors, if the bonds’ terms and conditions provide for a majority decision.


The directors are obliged to file for insolvency within three weeks after the company became illiquid or over-indebted.A violation of such duty is a criminal offence. Directors are personally liable for delayed filing of insolvency towards credi-tors of the company.



The Federal Department of Economics and Technology can prohibit acquisitions of a domestic company by non-EU resi-dents in case the public order or security is endangered, including acquisitionsof a direct or indirect participationofmore than10% in certain security relevant domestic companies ormorethan25%inothercompanies.Thedepartmentmayalsorestricttheexerciseofvoting rightsor appoint a trustee tounwindacompletedacquisition.Therearenoparticularfeesand/ortaxeson foreign ownership.


Germany has concluded more than 130 bilateral investment treaties (BITs) providing various standards for, inter alia, fair andequitabletreatment,protectionandsecurity,andprotectionagainst discrimination. Protection may also result from other BITsundermost-favourednationtreatment. ThecompetenceforBITshasbeentransferredtotheEUundertheLisbontreaty,providedthattheexistingtreatiesremaininexistenceaslongastheEUhasnotenteredintoBITs.Inrenderingitsdecisionona restriction, the Federal Government would have to pay atten-tion to such treaties.


TheGermanconstitutionguaranteesproperty;expropriationisonly permissible in cases of public interest and against compen-sation which has to be provided for in statutory law. The various Federal states have issued a number of laws regulating

Further, restrictions could apply in cases of international sanc-tions, e.g. the EU restrictive measures against Russia according to Council regulationNo. 833/2014. Sanctions can result inasset freezes including a freeze of proceeds resulting from the foreclosure of assets.



Upon the opening of insolvency proceedings, the company’s right to manage and transfer its assets expires and is vestedin the insolvency administrator. Insolvency creditors may no longerindividuallyexecuteintothecompany’sassetsduringtheinsolvency proceedings provided that creditors having a right in rem in an asset may demand separation of such asset from the insolvency asset. Land charges/mortgages, pledges and secu-rity assignments give a right of separate satisfaction prior to the remaining creditors of the insolvency estate.


Any security granted within the last month prior to the opening of the insolvency proceedings becomes legally invalid when the insolvency proceedings are opened. Transactions made prior to the opening of the proceedings to the disadvantage of the other insolvency creditors may be contested and clawed back. The preference period depends on the nature and circum-stance of the contested transaction and may last between three months, in cases of congruent coverage, and 10 years, in case of acts committed intentionally to the disadvantage of other creditors.Taxdebtsandemployees’claimswhichhaveaccruedprior to the opening of the proceedings are not preferred. Debts which have accrued after the opening of the proceedings (Masseverbindlichkeiten) are preferred to other creditors, but not to creditors having a right in rem or a right of separate satisfaction.


The Federation (i.e. the German state) and the single Federal states cannot go insolvent. Further, insolvency proceedings areexcludedforpubliclawentitieswhicharesupervisedbytheFederation or the single Federal states, if the public law entity is exemptedfrominsolvencyproceedingsthroughtheapplicablestate law.


If the debtor has submitted itself to immediate foreclosure in a notarial deed, such deed is enforceable without court proceedings, provided that the debtor is entitled to raise objec-tions against enforcement in a foreclosure counter-claim (Vollstreckungsgegenklage).

110 Germany



The mere repayment of a loan is not subject to German with-holding tax. Except for dividend payments (see below), theremittance and repatriation of investment returns or loan payments are subject to the general freedom on the movement ofcapital(pleaseseetheanswertoquestion7.5above)andarethusnotrestricted. Exemptionsmayapply incaseof interna-tional embargos or financial sanctions. Payers have to comply with certain notification duties to Deutsche Bundesbank for statis-tical purposes.

Profit repatriation by way of dividend payments is subject to Germanwithholdingtaxatarateof26.375%.Incaseofdivi-dend payments to foreign entities resident in a country having a double tax treaty with Germany, treaty protection may beavailable.Insuchcases,thewithholdingtaxcanbereducedorevenbeexcluded.IftheparentcompanyisresidentinanEUMemberState,theparent-subsidiarydirectivemaybeapplicable,reducing the rate tozero. Pleasenote that, in anycase, a taxexemptioncertificateissuedbytheFederalGermanTaxOfficeis necessary. RegardingGerman tax issues related to interestpayments,pleaseseetheanswertoquestion17.1below.


Yes, subject to compliance with the general fiscal code (Abgabenordnung), inparticulartherequirementforauthenticityof accounts, and anti-money laundering rules (Geldwäschegesetz ).


Under the German Commercial Code (HGB), dividend payments are restricted in certain cases of activations on the assets side, resulting in mere accounting profits, e.g. activation of latent taxes.Therearenoparticularrestrictionsfortrans-borderdivi-dend payments as such payments fall within the freedom on the movement of capital.


The establishment and operation of installations which could cause harmful environmental effects or otherwise endanger the public are subject to licensing. The competent authority is deter-mined by the Federal states and is usually the local community or county. The licence includes any other licence which has to be issued under the law by other authorities.Safety requirements are determined by theBundesnetzagentur

(pleaseseetheanswertoquestion7.1above),wherenecessaryincoordination with the Federal Office for Information Security and Technology and the Federal Data Protection Officer. The

thepreconditionsofexpropriationandthecompensationtobepaid. BITs also usually contain provisions for the protectionagainst appropriation without compensation.



In case of pipelines or power supply lines the “Bundesnetzagentur für Elektrizität, Gas, Telekommunikation, Post und Eisenbahnen” is the competent national agency. The Federal states have imple-mented state agencies competent for various issues; inter alia, approval of certain prices and fees as well as technical issues.


There is no general filing or registration duty but certain secu-rityagreementsrequirenotarisation,e.g.sharepledgesinpubliclimited companies and land charges. In addition, land charges have to be registered in the land register.


The ownership of land is not licensed. Natural resources gener-ally belong to the owner of the land. This does not apply to certain resources free for mining including various metals (e.g. iron, aluminium and lead), salts and coal. Mining of theseresourcesrequiresapprovalbytheminingauthority.Thestartof operation of a public power supply (including pipelines or powersupplylines)requiresapprovalbythecompetentauthorityof the relevant Federal state. Apart from the Department of Economics’ prohibition right in case the public order or secu-rityisendangered(pleaseseetheanswertoquestion6.1above),there is no other restriction prohibiting approvals from being granted to foreign entities.


Miningcompanieshavetopayannualfeesfor(i)theuseoftheland (Feldesabgabe),and(ii)theexploitedresource(Förderabgabe).


No. According to Art. 63 of the Treaty on European Union, all restrictionsonthemovementofcapitalbetweenMemberStatesand between Member States and third countries are gener-ally prohibited. Restrictions may apply in case of international embargos or financial sanctions.

111Kantenwein




The import of goods from a state outside the European Union is to be notifiedwith the customs authority and requires thepayment of customs duties. In addition, consumption taxeshave to be paid on imported goods, in particular food (e.g. coffee, beer and alcohol). There are no additional fees for the operations of the customs authority.


The amount of customs duties depends on the TARIC Code orcodenumberofthespecificproduct/equipment.Onappli-cation,energyproductsmaybeexemptedfromthepaymentofconsumptiontaxes.

11 Force Majeure


German statutory law provides for a suspension of limitation in case of force majeure. Also, a debtor is generally not liable in case of force majeure due to missing responsibility. Force majeure is definedasanexternalaccidentaloccurrencewhichcouldreason-ably not have been prevented even when applying utmost dili-gence (e.g. natural catastrophes). Further force majeure rules apply to specific contracts, e.g. the official contracting terms for the award of construction performance contracts (VOB/B) provide for a prolongation of the contractual time limits for carrying out the works in case of force majeure.

Individual contractual clauses for force majeureexclusionscanbe validly incorporated in a contract. However, if such clauses form general terms of business, they could be held invalid if they unreasonably disadvantage the other party.



The taking and giving of bribes to public officials or persons entrusted with special public service functions is a criminal offence under the German Criminal Code which, depending on whether the bribe is meant as an incentive for the violation of official duties or not, may result in imprisonment of up to five – in aggravated cases 10 – years, or a fine. Contracts resulting from bribery are invalid.

13 Applicable Law


Project agreements are usually governed by German or English law.

operators of telecommunications, electricity and gas have to observe certain information duties vis-à-vis the Bundesnetzagentur withrespecttosafetyrequirements.


Procurement law applies to public principals or awarding authori-ties with respect to public orders, including private law companies founded for the purpose of serving non-commercial tasks in the public interest. Statutory law is based on European law and differ-entiatesbetweenvariousquantitativethresholdsdependingontheordering body, the applicable subject matter of the contract and the branch concerned. As of 1 January 2020, applicable thresh-oldshavebeenfixedat€139,000forsupplyandserviceordersbyhigherFederalauthorities,€214,000forordersbylowerauthoritieswhichdonotconcernnationaldefenceandsecurity,€428,000forordersconcerningnationaldefenceandsecurity,and€5,350,000for construction orders (regulations EEC 2019/1827, 2019/1828, 2019/1829and2019/1830).Ifanorderexceedsthesethresholds,ithas to be put out to tender Europe-wide. If it falls below the thresh-olds, contracting authorities may freely choose between the open procedure and the restricted procedure. In the open procedure, the contracting authority publicly invites an unlimited number of undertakings to submit tenders. In the restricted procedure, the contracting authority, after a previous public invitation to partici-pate, selects a limited number of undertakings in accordance with objective, transparent and non-discriminatory criteria (competi-tive tender) and invites these to submit tenders.

8 Foreign Insurance


Foreign insurance companies having their seat within the European Economic Area (EEA) may offer insurance poli-cies through domestic branches in Germany two months after thecompetentsupervisoryagencyoftheirhomeMemberStatehas provided information pursuant to the Solvency II Directive (2009/138/EC) to the German supervisory authority (BaFin). With the exception of certain reinsurances, foreign insurancecompanies having their seat outside the EEA need to apply for a permitbyBaFintoofferpoliciesinGermany.


There are no restrictions or differentiations whether the insur-ance holder is a foreign or domestic creditor.



Nationals from EUMember States or Member States of theEEA or Switzerland need no work permit. Nationals from third countries outside the EEA or Switzerland must have a visa or a residence and work permit. The permit will be granted by the local aliens department.

112 Germany



Any proprietary claim is arbitrable. Non-pecuniary claims are arbitrable if the parties are entitled to settle the matter in dispute. Not arbitrable are rental agreements concerning domestic resi-dential space and matters under family and marriage law as well as insolvency law.


No. If disputes are arbitrable, they may be subject to domestic or international arbitration proceedings, as the case may be.



No. In general, investments are protected under the German constitution. Inaddition,BITscanapplyandprovideprotec-tion for international investors.

17 Tax


Interest payments from German borrowers to foreign lenders on term loans having fixed interest rates not being securedby German real estate should, in principle, not be subject to Germanwithholdingtax.Withholdingtaxmaybeapplicableifthe loan is secured by German real estate or in case the interest is related to the income of the borrower, e.g. in case of a profit participating loan. The tax rateamounts to26.375%. In thecase that the lender is resident in a country which has a double taxtreatywithGermany,treatyprotectionmaybeavailable.

Interest payments from German borrowers to German lendersare,inprinciple,notsubjecttoGermanwithholdingtax.


Therearenotaxorother incentivesfordirect investmentsbyforeigninvestors.Therearealsonotaxeswhichapplytoforeigninvestments, loans or security documents for the mere purposes of effectiveness or registration.

18 Other Matters


There are no particular legal considerations. Economically, parties might consider protecting their investment against currencyexchangerisksandotherpotentiallosses.


Depending on the financing bank or creditor, credit and loan agreements would usually be governed by either German or English law. Security agreements are usually governed by the law applicable at the place where the security is located or which otherwise applies to the security.


Usually, most security agreements are governed by German law unless the collateral concerned is located outside Germany. It is mandatory that any right in rem in assets located in Germany or governed by German law has to be governed by German law.



German law acknowledges the principle of state immunity as part of the general rules of international law which form an integral part of Federal law under the German constitution, provided that a state can only claim immunity if acting as a sovereign (acta iure imperii ) and not if acting merely commer-cially (acta iure gestionis). The differentiation between sovereign and non-sovereign acts is to be made in accordance with the rules of the place of jurisdiction (lex forum) and on the basis of the spirit and purpose of the act in dispute. If a sovereign act is concerned, a state can waive immunity and such waiver would be upheld by German courts.

Submissions to foreign jurisdictions are binding in accord-ancewiththeBrusselsIaRegulationandtheHagueConventionof 30 June 2005 on Choice of Court Agreements. Absent the application of these rules, a choice of forum is binding if made byexpressor tacitagreementbetweenmerchantsorpublicorprivate legal persons.



In general yes, provided the claim in dispute is (i) eligible for arbitration, and (ii) the arbitration agreement is set out either in a signed document or in other forms of transmitting messages exchangedbythepartieswhichensureproofoftheagreementby supporting documents. If a consumer is involved, an arbi-tration agreement must be contained in a separate document signed by the parties in their own hands.


Germany is a contracting state to the New York Convention and hasimplementedtheUNCITRALModelLawonInternationalCommercial Arbitration in the German Civil Procedure Code toalargeextent.

113Kantenwein



The freedom of choice of law by the parties is generally acknowl-edged in accordance with the Rome I Convention, provided that the law chosen by the parties may only be the law of a state. There is therefore an opportunity to choose the law of a state which, in its entirety, complies with Shari’ah law. This, however, would cause various problems, one being the difficulty of deter-mining the content of such state’s law by a German court in case of dispute, the other resulting from potential objections based on public policy (ordre public). Parties would therefore rather choose German law and agree to contractual provisions and instruments which comply with the prerequisites underShari’ah law. Apart from cases under family law, there have been no private law cases decided by German courts concerning the compliance of Shari’ah law with German law principles and ordre public. Though there are banks offering Islamic banking in Germany, Islamic financing remains a niche product. This is alsoduetotaxproblems,e.g.realestatetransfertax.


No. German law allows loan agreements and interest payment obligations as the typical contractual duty of the borrower. German law also imposes statutory interest payment obligations on debtors in case of default. Restrictions may only apply in case of usury.


Bonds or other securities which shall be traded on a stockexchange require an admission to trade. The application hasto be accompanied by a financial institution and supported by further documents. The issuer has to exist for at least threeyearsandtheexpectedemissionvolumemustbeatleast€1.25mil. The bond has to comply with law on securities, must be freely tradable and in sufficient free float. In addition, the issuer has to publish an information paper and a prospectus containing all relevant information about the issuer and the offering in compliancewithminimuminformationrequirementssetforthintheSecuritiesProspectusAct.Both,theinformationpaperandthedraftprospectushavetobesubmittedtoBaFinandtheprospectushastobeapprovedbyBaFinbeforebeingpublished.

19 Islamic Finance


Istina’a could be structured as a contract for work and labour (Werkvertrag) with payment after delivery. To comply with Ijarah, a leasing contract could be used, whereby the lessee leases the leased assets and the lessor transfers them to the lessee at the end of the lease. This could also include a financial lease providing for a transfer of ownership of usufructs of some assets for a particular period. To comply with Wakala, the principal (Muwakkil ) could appoint another person as agent or trustee or otherwise delegate authority under German law to carry out specific tasks on the principal’s behalf. The agent could then enter into the respective contracts for the principal, provided that he has to comply with anti-money laundering laws and disclose that he is acting for a third person. Murabaha could be a simple sales contract (Kaufvertrag) combined with a future resales contract which would include the cost and the margin of the purchaser/reseller.

114

Marcus van Bevern is an attorney-at-law specialised in banking and capital markets. He advises in banking- and capital market-related litiga-tion and arbitration as well as in financing transactions. He is also regularly appointed as arbitrator in arbitration proceedings. Until 2006 he worked in the Litigation & Arbitration department of an international law firm, where he represented, amongst others, national and international financial institutions in complex litigation and arbitration matters. Later he became in-house counsel and Head of Transaction Management in an internationally active German finance group. By the end of 2009 he had joined Kantenwein.

KantenweinTheatinerstraße 880333 MunichGermany

Tel: +49 8996 86 0Email: [email protected]: www.kantenwein.de

Kantenwein is a multidisciplinary law firm consisting of lawyers, tax consultants and auditors. The firm provides advisory services to entrepre-neurs and businesses facing legal and tax-related decision-making situa-tions. The firm’s practice areas cover the entire spectrum ranging from law and taxes (including tax crime) to auditing.Kantenwein was founded at the beginning of the year 2003. However, the founders’ professional experience dates back as far as 1985. When founding the law firm, the idea was to create a multidisciplinary entity consisting of lawyers, tax consultants and auditors. This setup allows the firm to assemble interdisciplinary teams in order to assess economic issues efficiently from different angles. Among the firm’s clients are companies and entrepreneurs operating in Germany and abroad.

www.kantenwein.de


Germany

Sven Ceranowski is a partner in the tax department of Kantenwein. He advises in complex national and international transactions. Sven is also specialised in the representation of German and international clients in tax litigation procedures.Before joining Kantenwein in 2015 he worked for UK and US law firms.

KantenweinTheatinerstraße 880333 MunichGermany

Tel: +49 8996 86 0Email: [email protected]: www.kantenwein.de



Chapter 13 115

Ghana

N. Dowuona & Company Akosua Achiaa Akobour Debrah

NanaAma Botchway

Ghana


Project Name/Description Project CostAmandi Energy Independent Power Project – This is a 192 MW combinedcycle, dual-fuel power project developed in Aboadze, Ghana, as part of the US Power Africa Initiative, by Endeavor Energy (an Africa-focused independent power company), Aldwych International, (a subsidiary of Harith General Partners), Pan African Infrastructure Development Fund 2 (PAIDF2, managed by Harith General Partners) and ARM-HarithInfrastructure Fund. It became operational in 2019.

$550 million

Cenpower Kpone Independent Power Project – Another US Power Africa Initiative, this 350MW combined cycle gas turbine(CCGT) power project was jointly devel-oped by Cenpower Holdings, Africa Finance Corporation, Sumitomo Corporation of Japan, African Infrastructure Investment Fund II and FMO,theNetherlandsDevelopmentFinanceCompany. It became operational in 2019.

$900 million

Eastern Railway Line Project – This project involves the construction of a 340-kilometrestandard gauge railway line, running from the TemaPort toKumasi. It isbeingdevelopedby the Ghana European Railway Consortium onaBuild,OperateandTransfer(BOT)basis.

$2.2 billion

2 Security


Borrowers are permitted to give asset security bymeans of ageneralsecurityagreement.Thereisnorequirementforasepa-rateagreementtobeexecutedforeachtypeofassetusedassecu-rity; however, each security is assessable to stamp duty separately, as though each were set out in a separate agreement. Security is normally created by written agreement, containing charging clauses. Afterexecution,theagreementmustbestampedand,depending on the type of asset and whether the borrower is a company,itmayrequireregistrationwiththeCollateralRegistry,Lands Commission and/or the Registrar of Companies in order tobeenforceable.UndertheBorrowersandLendersAct,2008(Act 773), charges created by borrowers to secure credit facilities

1 Overview


In recent years, the Ghanaian project finance market has recordedan interestingmixofprojects inthepower,maritimeand rail sectors. These projects have involved both private and public actors, and there is a growing reliance on public-private partnership mechanisms for delivering long-term infrastructure projects.Largeprojectsareusuallyfinancedbyexternalsourcessuch as multilateral development banks, international develop-ment finance institutions, private equity funds, internationalcommercialbanksandexportcreditagencies.However,perhapsas a result of recent banking reforms in the country, some local banks have demonstrated their capability to participate in financ-ings for large-scale projects. Due to the non-availability of government guarantees, the use of alternative credit enhance-ment facilities, such as partial risk guarantees, are also common.


Project Name/Description Project CostTema Port Expansion Project – This project is being undertaken by the Meridian PortServicesLtd (MPS), a joint venture betweenthe Ghana Ports and Harbours Authority (GPHA)andMeridianPortHoldings (whichhasBolloréTransport&Logistics andAPMTerminals as the two main shareholders). The project which began in 2016 is currently in its second phase, and upon completion, will treble the Tema Port’s current traffic of about one milliontwenty-footequivalentunits(TEUs).

$1.5 billion

Takoradi Port Expansion Project – This projectisbeingexecutedbyAtlanticTerminalServices Ltd, a joint venture between the Ghana Ports and Harbours Authority (GPHA), Ibistek Ltd (an indigenous Ghanaian company) and the African Finance Corporation. Construction of the multipurpose on-dock container terminal began in December 2019, and when completed, will scale up the cargo holding space of the Takoradi Port from the current 55,000 twen-ty-footequivalentunits (TEUs)ayear toonemillion TEUs a year.

$475million

116 Ghana


chargecreatedoverthesharesofacompanyusuallyrequiresthecertificates to be deposited with the lender. Upon the creation of a share charge, the lender may file a stop notice at the high courtrequiringthecompanysecretaryoranyotherpersontobenotified of the lender’s interest in the charged shares. Where a stop notice is filed, the company secretary cannot register any transfer of the charged shares without serving a notice on the lender regarding the request for registration of the transfer.The lender must then take the necessary steps within eight days of the notification to obtain a court order, directed at the company secretary, blocking the registration of the transfer of the charged shares. Shares in listed companies are held in dema-terialised form with the Central Securities Depositary (CSD). Shareholders of listed companies may charge their shares as security by depositing prescribed forms with the CSD to enable the details of the charged shares to be entered in a register of charges maintained by the CSD. Upon discharge of the secu-rity, the shares are transferred by the CSD from the register of charges back into the securities account of the chargor.


Onceexecuted,mortgagesarerequiredtobeprovedtohavebeenduly signed by the mortgagor by the oath of the mortgagor, the mortgagee or any attesting witness. The oath of proof must be certifiedbytheregistraroflands(orbyanotarypublic,ifexecutedoutsideGhana).Stampdutyisrequiredtobepaidonallsecuritydocuments. Where more than one security is created in respect ofthesamefinancingtransaction,arateof0.5%ofthesecuredfacility must be paid on the principal or primary security as stamp duty. Auxiliary, collateral, substituted or additional securitiesarechargedwithstampdutyatarateof0.25%each. Nominalregistration fees are payable for registration with the Collateral Registry, Registrar of Companies and the Lands Commission.


Registration of security affecting real property at the Lands Commission may involve a significant amount of time. It usually takes between three to six months after stamping toregister a mortgage with the Lands Commission. On the other hand, registering a security interest at the Collateral Registry can be done within a day, whereas registration with the Registrar of Companies typically takes between two to three weeks to complete. Other than stamp duty, there are no significant filing/registrationexpenses.


Other than the consent of the Lands Commission which is requiredforthemortgagingofstatelandsandstool/skinlands(lands collectively owned by communities which are held in trust by chiefs of such communities on their behalf ), no regula-toryorsimilarconsentsarerequiredwithrespecttothecreationofsecurityoverrealproperty,plant,machineryorequipment.

granted by lenders must be registered with the Collateral Registry within 28 days of the creation of the charge. If the security affects land or a company’s assets, it must additionally be registered with the Lands Commission and/or the Registrar of Companies. Under the Companies Act, 2019 (Act 992), any security created over a company’s assets shall be void unless registered with the Registrar of Companies within 45 days of the creation of thecharge;however,anextensionoftimetoregisterachargemaybegranted by a court. Similarly, any security affecting land, unless registered at the Lands Commission, is ineffective in creating any interest in the chargee in respect of the land.


Security can be taken over real property, plant, machinery and equipment.Thisistypicallydonethroughthecreationofafixedcharge over movable assets or a mortgage over real property. UnderGhanaianlaw,amortgageonlyoperatesasafixedchargeon real property and does not automatically convey ownership or possessionintheassettothemortgagee.Amortgageisrequiredtobeinwriting,unlessexcludedfromsuchrequirementbyoper-ationoflaworbyaspecificstatute.Mortgagesandfixedchargesaresubjecttotheperfectionrequirementssetoutabove.


Security may be taken over receivables, with the chargor being permitted to freely collect the receivables in the absence of a default. Security over receivables are usually created through an assignment of the receivables to the lender. The security agree-ment must be stamped, and if the assignor is a company, it must be registered with the Registrar of Companies. Debtors need not be notified of the creation of the security in order for it to be valid; however, an assignment of a debt shall not prejudice a debtor who has not been notified of it in writing. Further, where a debtor is not notified of the assignment of a debt and the samedebtissubsequentlyassignedtoanotherperson,thelaterassignee shall take priority over the earlier assignee.


Cash deposited in bank accounts may be used as security for a transaction. This is normally done through the creation of a fixedchargeovertheaccountinfavourofthelender.Anoticeof the charge is usually sent to the bank with which the account is held. The charge will specify what transactions can be made and limits on withdrawals from the account will be specified. A charge that is created over cash in a bank account is subject to theperfectionrequirementssetoutintheanswertoquestion2.1.


Security can be taken over shares in Ghanaian companies. Shares in non-listed companies are in certificated form and a share

117N. Dowuona & Company


company may be prevented from disposing of any of its prop-ertypriortothecommencementoftheliquidationprocess.Asecured lender may, however, institute proceedings in court to realise its security.


The Bodies Corporate (Official Liquidations) Act, 1963 (Act180) permits a liquidator, during thewinding-up of an insol-vent company, to give notice to a person or company to return property that the insolvent company transferred to the said person or company to settle a debt, 21 days before the petition for winding-up was filed. The company would, upon receiving suchnotice,be required to return thepropertyor itsvalue totheliquidator.Additionally,wherealiquidatordeterminesthatthe insolvent company disposed of any of its property for less than its full value two years prior to the making of the order to wind up the company, or more than two years but less than 10 years prior to the making of the winding-up order and at a time that thecompanywas insolvent, the liquidator shallgivenotice to the person or company to whom the property was disposed of, or who benefitted from its disposal, to return the propertyortheexcessvaluetotheliquidator.Further,intermsof the rankingofdebts forpaymentduring the liquidationofan insolvent company, debts comprising the unpaid remuner-ation (not exceeding GHS 6,000) of employees for the fourmonthsprecedingtheliquidationandunpaidtaxesowedtotheRepublicor a local authority as at thedateof the liquidation,have priority over debts secured by a floating charge that are owed to creditors.


Noentitiesareexcludedfrombankruptcyproceedings.


TheBorrowersandLendersAct,2008(Act773)(whichappliesto credit transactions involving lenders who advance loans or other credit facilities as part of their business) provides that, upon the occurrence of an enforcement event, a lender need not institute proceedings in court to enforce any security that has been registered with the Collateral Registry. Where possible, the lender may peaceably take possession of the secured assets upon 30 days’ notice to the borrower and a further 30 days’ notice to the Collateral Registry. In practice, however, securities are seldom realised without a court order.


Yes, a company may enter into a compromise with its creditors to restructure its debts. Where a majority of the members of acompanyand itscreditors (eachrepresentingat least75%invalue of the class of members or creditors concerned) approve

3 Security Trustee


The concept of a trust is recognised in Ghana and the role of the security trustee or agent is also recognised. The security trustee is permitted to enforce security on behalf of the lenders and apply the proceeds from the security to each of their claims.


This is not applicable; security trusts, although not common, are recognised.



Upon the occurrence of an enforcement event, a lender is permitted to take possession of a charged asset registered with the Collateral Registry if this can be done peaceably, or institute a court action toenforcethesecurity.Beforeattemptingtotakepossession,thelender must give 30 days’ notice to the borrower and a further 30 days’ notice to the Collateral Registry. Where a lender is unable to peaceably take possession of a charged asset (which in practice is often the case), an action must be instituted in court to enforce the security. The court may order sale of the asset or the appoint-ment of a receiver/manager upon the hearing of the application. A court-ordered sale of an asset used as security shall be by public auction, unless the court orders otherwise. Generally, there are no regulatoryconsentsrequiredfortheenforcementofsecurity.


There are no restrictions especially applicable to foreign inves-tors or creditors.



Upon the commencement of bankruptcy proceedings and onapplicationto thecourtbyacreditoror the liquidator, the

118 Ghana



We are not aware of any bilateral investment treaties that provide protection from such restrictions.


The Ghana Investment Promotion Centre, 2013 (Act 865) protects companies from nationalisation or expropriation,subject to the 1992 Constitution. Under Act 865, a foreigner would not be forced to cede its shares in a company to another person.Further,intheeventthatthegovernmenthastoacquirea project company in the national interest or for public purposes, just compensation must be paid to the shareholders.



Theseinclude:Cabinet;Parliament;MinistryofFinance;Ministryof Energy and Petroleum; National Petroleum Agency; Petroleum Commission; Ministry for Roads and Highways; Ministry ofRailways Development; Ministry of Food and Agriculture;Ghana Ports andHarbours Authority;Ministry of Lands andNaturalResources;LandsCommission;MineralsCommission;Registrar General’s Department; Ghana Investment Promotion Centre; and Public Procurement Authority.


Under the Stamp Duty Act, 2005 (Act 689), all agreements mustbestampedbytheLandValuationDivisionoftheLandsCommission. Security agreements must also be registered with the Collateral Registry, the Registrar of Companies and/or the Lands Commission.


Land is conveyed by a lease for a leasehold interest or by a conveyance for a freehold interest. A foreign entity does not require a special licence to own land inGhana. Article 267of the 1992 Constitution, however, precludes a foreigner from owning an interest in land for more than 50 years at a time. Someindustrieshavespecificrequirements. Forexample, theEnergyCommissionAct,1997(Act541)requiresaforeignertoincorporate in Ghana to obtain a licence to transmit, wholesale supply, distribute, or sell electricity or natural gas.

a compromise, a court may, upon application by the company, a member, creditor or other interested person, order an inves-tigation into the fairness of the compromise and confirm the compromise (with any necessary modifications) upon receipt of the investigator’s report. The compromise shall, upon confirma-tion by the court, be binding on the company and all members and creditors concerned, including any dissenters.


Under theBodiesCorporate (OfficialLiquidations)Act, 1963(Act 180), whenever the business of a company is carried on at a time when, to the knowledge of the directors of the company, the company had no reasonable prospect of paying its debts as and when they fall due, any such business shall be deemed to have been carried on with the intent to defraud the creditors of the company, and the directors or any persons who were know-ingly parties to the carrying on of such business shall be held personally liable, without any limitation, for all or any of the debts or other liabilities of the company, as a court, on the appli-cationoftheliquidatororofanycreditor,memberorcontribu-tory of the company, may direct.



The Ghana Investment Promotion Centre Act, 2013 (Act 865) provides a limited number of activities in which foreigners cannot engage in. With respect to businesses in which foreign participation is allowed, the foreign shareholder of the company hastosatisfythefollowingminimumcapitalrequirements:a. a minimum of $200,000 for a joint venture between a

foreign and Ghanaian shareholder;b. a minimum of $500,000 for a wholly foreign-owned enter-

prise; and c. a minimum of $1 million for a trading company. BasedontheSupremeCourt’sdecisioninAttorney General v.

Balkan Energ y Ghana Limited [2012] 2 SCGLR 998, and other cases on the interpretation of Article 181(5) of the 1992 Constitution, a foreign company or a Ghanaian company with foreign share-holdersmayberequiredtoobtainParliamentaryapprovalforacontract with the Government of Ghana.

There are different local content and local participation requirements forvarious regulated industries.For instance, inthe upstream petroleum sector, the Petroleum Local Content &LocalParticipationRegulations,2013(L.I.2204)requireanycontractor, subcontractor, licensee or allied entity engaged in petroleum activities to have a local content plan and comply with the relevant local content regulation. Local content refers to the quantum of locally produced materials, personnel, financing,goods and services rendered. In the energy sector, the Energy Commission (Local Content and Local Participation) Electricity Supply Industry Regulations, 2017 (L.I. 2354), aimed atachievingaminimumlocalcontentof60%andlocalparticipa-tionof51%intheelectricitysupplyindustry,requiresacompanythat intends to engage in wholesale power supply activities to have an initial local equity participation of at least 15% by aGhanaian partner which must be progressively increased to at least51%withinaperiodof10years.




Project companies in Ghana may establish and maintain onshore and offshore foreign currency accounts, subject to the laws of Ghana, as well as the laws of the relevant offshore jurisdictions.


Otherthantherequirementthatacompanyshallnotpayadivi-dend to its shareholders unless it is able, after the payment, to pay its debts as they fall due and that the value of the payment doesnotexceedtheretainedearningsofthecompanyimmedi-ately before the payment of the dividend, there are no restric-tions on the payment of dividends, regardless of whether the parent company is incorporated in Ghana.


The Environmental Protection Act, 1994 (Act 490) containssignificant requirements for undertakings whose activi-ties impact the environment. Additionally, there are various health and safety laws and regulations for different industries. TheLabourAct,2003(Act651)hashealthandsafetyrequire-mentsforemploymentconditions,suchasprovisionofrequisitetrainingtomaintainasafeworkingenvironment,andadequatetoiletfacilities.Somemorespecificrequirementsarebuiltintoindustrypractices, lawsandregulations. Forexample,miningcompanies are subject to specific Environmental Protection Agency rules.


The Public Procurement Act, 2003 (Act 663), as amended, governs the public procurement process in Ghana. Where the project involves a partnership with the Government of Ghana or a public institution, the National Policy on Public-Private Partnership (the PPP Policy) will apply. The Public-Private PartnershipBill,whichiscurrentlygoingthroughthelegislativeprocess, will replace the PPP Policy when passed by Parliament.

8 Foreign Insurance


Under the InsuranceAct,2006 (Act724), a foreign insurancecompany must register and obtain a licence in Ghana to provide insurance. Also, a foreign insurance company may not provide insurance for properties located in Ghana, liabilities arising


A company must obtain a concession or right from the regu-latory body in the relevant industry. Article 268 of the 1992 ConstitutionrequiresanycontractorundertakingthatgrantsarightorconcessionfortheexploitationofanynaturalresourcetoberatifiedbyParliament,unlessexpresslyexempted.Inaddi-tion to income taxes required to be paid by companies oper-atingintheextractiveindustries,theremayberoyaltiespayablefortheextractionofnaturalresources.Forexample,amininglease is subject to a royalty of 5%of the total revenue of themining operations, subject to any fiscal stabilisation clause in such agreement.


Under the ForeignExchangeAct, 2006 (Act 723), theGhanaCedi is the sole legal tender in Ghana, and thus residents of Ghana cannot price, advertise, receive or make payments in foreign currency for goods and/or services, unless author-ised by the Bank of Ghana. Residents and non-residents arepermittedtomaintainForeignExchangeAccounts(FEAs)andForeign Currency Accounts (FCAs) and foreign currency may be transferred abroad tomeet valid externalpaymentobligations.However, in relation to the operation of FEAs and FCAs, the BankofGhanarulesprovidethat,amongothers:(a)FEAsmayonly be credited with funds generated from activities in Ghana; (b)FCAsmayonlybecreditedwithunrequitedtransfersfromabroad; (c) transfers from FEAs to FCAs are not permitted; (d) exportersmayretainupto60%oftheirexportreceiptsintheirFEAs,andtheremaining40%convertedatmarketrateswithin15 working days; (e) transfers abroad of up to $50,000 may be made from FEAs without initial supporting documentation; however, any amounts above that threshold, or any other subse-quent transfers (wheredocumentationfor the initial transfer isoutstanding) must be substantiated by proper documentation; and (f) FCAs are not subject to the mandatory retention and conversion arrangements, and transfers from such accounts may be made without any restriction at the discretion of the account holder.


The Ghana Investment Promotion Centre Act, 2013 (Act 865) guarantees the transfer of funds in convertible currency for divi-dends, servicing of foreign loans, payment of fees and charges for technology transfer agreements and remittance of proceeds (net of all taxes and other obligations)where the company iswound up. Generally, dividends are subject to a final with-holdingtaxof8%.Interestpaymentsonforeignloansarealsosubject to 8%withholding tax. Transfersmust be supportedby proper documentation, such as the loan agreement, regis-teredtechnologytransferagreement,taxclearancecertificates,audited accounts, etc.

120 Ghana


11 Force Majeure


Force majeure exclusions are available and enforceable underGhanaian law and are usually included in financing agreements.



Project companies are subject to general anti-bribery and corrup-tionlaws.BriberyandcorruptionunderGhanaianlawislimitedto acts of bribery by public officers, jurors or voters. Hence, bribery or corruption committed between private persons are not recognised as criminal offences in Ghana. The Public Procurement Act, 2003 (Act 663), as amended, which regulates procurement processes for state entities, agencies and depart-ments, enjoins entities and participants involved in a procure-ment process to refrain from corrupt practices as construed under the Criminal and other Offences Act, 1960 (Act 29). Under Act 29, an act of bribery or corruption is considered to be a misdemeanour and a person convicted of such offence is liable to a maximum term of imprisonment of 25 years.Foreign persons are also subject to the provisions of the Anti-MoneyLaunderingAct,2008(Act749)andtheEconomicandOrganisedCrimeOfficeAct,2010 (Act804),whichauthoriserelevant institutions to monitor money laundering activities and empower state institutions to seize and recover the proceeds of crime and prosecute offenders.

13 Applicable Law


Parties are at liberty to choose the governing law of a contract. In practice, English law is typically selected. The Public-Private PartnershipBill2018,however,providesthatPPPagreementsshall be governed by Ghanaian law.


Parties to a financing agreement typically select the laws of the jurisdiction where the lenders are located.


Security agreements are typically governed by domestic law.



A party’s submission to a foreign jurisdiction is generally enforceableinaGhanaiancourt,exceptwherethecourtinits

in Ghana or for goods (other than personal effects) imported into Ghana. A person in Ghana, however, may apply to obtain insurance from a foreign company for specific instances such aswhere the required insurancepolicy cannotbeobtained inGhana. Also, the IncomeTaxAct,2015 (Act896) imposesa5%withholdingtaxoninsurancepremiumspaidbyresidentsofGhana to foreign insurance companies.


Yes they are, subject to any laws specific to that industry that mayrequiretheforeigncreditortoberegisteredinGhana.



In general, a foreigner must obtain a work and residence permit to work in Ghana. The project company, in its application for a work and residence permit, must provide sufficient evidence as to why it is necessary to hire a foreigner, i.e. that the skills requiredhavenotbeenfoundinaGhanaiancitizen.Companiesin some industries, such as minerals and mining industries, are grantedautomaticquotasforforeignemployees–workandresi-dentpermits,basedonthesequotas,willbegranteduponappli-cation. In addition, the Ghana Investment Promotion Centre (GIPC) provides automatic quotas upon registration. Forexample, where the project company with foreign ownershiphas a stated capital of up to $250,000, it is entitled to one auto-maticquota.Foreignemployeesworkinginareaswhereprofes-sional licencesarerequiredmayhavetoregisterwiththerele-vant licensing authority.



Generally,allimportedequipmentissubjecttocustomsduties;however, there are exemptions for specific industries, such asthe agricultural and petroleum industries. Where the company registers with the Ghana Investment Promotion Centre or the FreeZonesBoard,itwillenjoyvariousexemptionsandincen-tives.Wherethegoodisexemptedfromcustomduties,itmustbe used solely for its intended use in the project company. If the goodislatersoldinGhana,theexemptedcustomdutywillnowbe payable.


Goods imported into Ghana are classified in accordance with the ECOWAS Common External Tariff system to deter-mine the applicable taxes, which may include import dutiesof between 0–35%, Value-Added Tax of 12.5%, NHIL andGETFundleviesof2.5%each,ECOWASimportlevyof0.5%andAUimportlevyof0.2%,unlessanexemptionorconcessionexists.Exemptionsmayexistformining,oilandgasandfreezones-registered entities.



unresolved after seven working days following a strike or lockout by employees or employers. The compulsory arbitra-tion award is binding, unless set aside on appeal to the Court of Appealonquestionsoflawonly.



In PPP transactions, lenders typically insist on direct agree-ments with the governmental agencies or departments whom the borrower/private party is partnering with. Direct agreements and political risk guarantees with or from the central govern-ment are resisted by the latter, and hence, lenders typically turn to development finance institutions for partial risk guarantees for their investments. Contractual protections against change oflawandmaterialadversegovernmentalactionsarealsoquitecommon in project financing agreements.

17 Tax


UndertheIncomeTaxAct,2016(Act896),withholdingtaxof8%isdeductiblefrominterestpaymentsonloans,exceptwherethe lender is a resident financial institution. Interest payments to individuals are also subject to a reduced rate of 1% with-holdingtax.


There are no preferential tax incentives for foreign inves-tors or creditors. Foreign investors, however, may take advan-tageofgeneral tax incentivesgranted to freezonecompaniesand sector-specific businesses or businesses sited in specific locations.

18 Other Matters


The main issues to consider when structuring a project finance transactionincludeforeignexchangerisk(especiallyforforeigncurrency financed-projects whose income is expected to begenerated in Ghana Cedis), and local participation and local content laws for certain regulated industries.

discretion determines otherwise given the specific facts of a particular case. For instance, where the court determines that a contract is so intricately connected with Ghana that it does not make sense to subject disputes arising thereunder to deter-mination by a foreign jurisdiction. This is, however, rare and generally the courts would uphold the parties’ choice of forum for resolving disputes. Contractual waivers of immunity are binding and enforceable.



Generally, Ghanaian courts will not assume jurisdiction over matters which the parties have agreed to resolve by arbitration. If the court is satisfied that the matter is one in respect of which there is a valid arbitration agreement and that the contract does not fall outside the scope of matters that are arbitrable under Ghanaian law, a submission to arbitration will be enforced. Arbitral awards are recognised by Ghanaian courts and may be enforced through an application to the court. Leave to enforce a local arbitral award shall be granted by a court unless it is shown that the arbitral tribunal lacked jurisdiction to render the award. Theenforcementof foreignarbitral awards requires the satis-factionofadditionalrequirementsincludingshowingthecourtthat: (a) the award was made by a competent authority and under the laws of the country in which the award was made; (b) a recip-rocal arrangement exists between theRepublic ofGhana andthe country in which the award was made or the award was made under the New York Convention or under any other interna-tional convention on arbitration ratified by the Parliament of Ghana; (c) the original award and the agreement pursuant to which the award was made or duly authenticated copies of both have been produced to the court; (d) there is no appeal pending against the award in any court under the law applicable to the arbitration; and (e) no grounds for invalidating the award as providedundertheCourtsActexist.


Ghana is a contracting state to the New York Convention.


Under Ghanaian law, matters involving the national or public interest, the environment, the enforcement and interpretation of the Constitution, or any other matter that by law cannot be settled by an alternative dispute resolution method, are not arbitrable.


Under the Labour Act, 2003 (Act 651) and its regulations, the Labour Commission is mandated to resolve, by reference to compulsory arbitration, any labour dispute which remains

122 Ghana


services, and a few banks and micro-finance institutions do provide such services, the regulatory framework and opera-tional structures to support Islamic financing (such as the estab-lishment of a Shari’ah board) have not yet been developed or operationalised.


Ghanaian courts would generally respect the choice of governing law by parties to a contract. Therefore, unless any circumstancesexist(forexample,inrespectofmattersdeemedcontrary to public policy) that necessitate that the parties’ choice be disregarded, the courts would uphold the chosen law of the parties. Under the rules of court and the Evidence Act, 1975 (NRCD 323), the party seeking to rely on the law is obliged to prove it. We are not aware of any cases on jurisdictional issues on Shari’ah law relevant to the finance sector.


The inclusion of interest payment obligations in a contract would not affect its validity and enforceability, unless such payments are penal in nature.


The issuance of capital market instruments by project compa-nies are subject to the general requirements prescribed bythe Ghana Stock Exchange (GSE) for listed companies setout in the Listing Rules and the Securities and ExchangeCommission’s (SEC) applicable laws and regulations. To list on the GSE, a company must be a public limited liability company incorporated under the Companies Act of Ghana. For an orig-inal listing application, the company must submit an applica-tion to the GSE, together with the draft prospectus, which also needs to be submitted to the SEC for approval. The company must appoint a licensed dealing member of the GSE to act as its sponsor, and provide the GSE with information regarding its business, capital structure, directors and key management personnel, details of long-term and funded debt, investments and assets, profit and loss accounts, and any other relevant infor-mation. The company should also have passed a shareholders’ resolution approving the issuance of the securities, the number of securities to be issued and the price per security on offer. Debt securities, other than government securities, for which listing is sought, must be created and issued pursuant to a trust deed. Once regulatory approval for the prospectus is granted and the application is approved by the GSE, a date is set for the launchof thepublicoffer. Listedcompaniesarerequiredto comply with the GSE Listing Rules, which set out initial and continuing listing obligations for companies.

19 Islamic Finance


AlthoughtheBanksandSpecialisedDeposit-TakingInstitutionsAct, 2016 (Act 930) states that a licensed bank or specialised deposit-taking institution may provide non-interest banking

123

NanaAma Botchway is the Managing Partner of N. Dowuona & Company. She has advised on numerous investments in Ghana and other parts of Africa and has significant experience in advising on construction projects including planning, permitting and project finance. She has advised on several projects such as the Kingdom Hotel Investments acquisition and the development of the $100 million multipurpose property development in Ghana, and Volta Lake Transport Company’s $300 million Eastern Corridor Multi-Modal Transport Project. Before returning to Ghana, NanaAma was an Associate in the mergers and acquisitions and corporate tax departments of the New York office of the international law firm Simpson Thatcher & Bartlett. NanaAma received her Juris Doctor from Columbia University School of Law. She is licensed to practise law in Ghana.

N. Dowuona & CompanySolis HouseGL-056-7567Adembra RoadEast CantonmentsAccraGhana

Tel: +233 244 319 936Email: [email protected]: www.dowuonalaw.com

We are a dynamic legal and strategic advisory firm. Our areas of focus include corporate and commercial law, property and construction law, energy and infrastructure law and banking and finance law. Our team of creative and dedicated professionals has excellent local and international experience in law and business. We combine this knowledge and expe-rience with a collaborative approach to all our assignments to provide comprehensive, concise and commercial advice. We make it a priority to understand and anticipate our clients’ specific needs and to structure our services to meet them. We strive to stay abreast of innovations in business as well as local and global political and economic developments and to understand and take into consideration their impact on our clients’ busi-nesses in formulating our advice. We are proactive in avoiding conflicts of interest and aim to forge strong and enduring relationships with our clients.

www.dowuonalaw.com


N. Dowuona & Company

Akosua Achiaa Akobour Debrah is a Senior Associate at N. Dowuona & Company. Her areas of focus are corporate and commercial law, banking and finance and energy and infrastructure projects. Her recent work with the firm includes advising on the structuring of an asset purchase acquisition of a multi-national manufacturing and distribution chain, and advising an international consortium of contractors on the structuring of an investment vehicle for tendering for certain public infrastructure works in Ghana. Achiaa obtained her LL.B. from the Kwame Nkrumah University of Science and Technology and also holds an LL.M. (with distinction) in International Corporate Governance and Financial Regulation from the University of Warwick. She is licensed to practise law in Ghana.

N. Dowuona & CompanySolis HouseGL-056-7567Adembra RoadEast CantonmentsAccraGhana

Tel: +233 244 319 936Email: [email protected]: www.dowuonalaw.com



Chapter 14124

Greece

Sardelas Petsa Law Firm Katerina Limnaiou

Konstantina (Nantia) Kalogiannidi

Greece


project financing in Greece. Currently, in this field a large-scale investmentisintheworksbyGEKTERNAGroup.Namely,the project involves the development, construction and oper-ation of nine wind farms, located in the area of Evia, Greece, withprojectedtotalinstalledcapacityof121MW.Thissignif-icant project is in line with Greece’s newly finalised National Energy and Climate Plan, which aims to increase electricity production from RES, minimise production from lignite-fired power stations and, thus, achieve European objectives for a major reduction of greenhouse gas emissions by 2030 and their elimination by 2050.

2 Security


Asset security by means of a general security agreement is possible. Nevertheless, since each type of asset and each type of security is perfected by different procedures and registration requirements,aseparateagreementiscommonlyused. Asfaras the procedure is concerned, see our answers below regarding different types of assets and different types of security.


Security over real property (land) and plant is created by mort-gage (by virtue of a notarial mortgage deed) or by mortgage prenotation (by virtue of a county court decision) and perfected by registration in the public books of the competent land registry or cadastre, where the land and plant are located. Prenotation of mortgage provides its beneficiary with the pre-emptive right to obtain a mortgage perfected as of the date of registration of the prenotation of mortgage, once its claim becomes final. Such securityextendstoallcomponentpartsandaccessoriesoftherealestate(i.e.machineryandequipment).As farasmachineryandequipmentareconcerned, security

can be created by a non-possessory pledge agreement by virtue ofarticle1ofLawno.2844/2000andperfectedbyregistrationtothepublicbookofLawno.2844/2000keptbythecompetentpublic registry where the borrower has its corporate seat.

1 Overview


Some of the most recent and noteworthy developments in the Greek project finance market concern the booming field of renewable energy and were brought about by virtue of Law 4643/2019“on the liberalisation of the Greek energ y market, the modern-isation of the Public Power Corporation (PPC), the privatisation of the Public Natural Gas Company (DEPA) and the support of the renewable energy sector (RES)”, which was published on 3 December 2019 in the Government Gazette Issue A’/193.

The new law introduces an important amendment to the existing legal framework regulating the operation of RESprojects, by allowing RES project owners, which have not received state aid, to participate directly in the electricity spot market and receive the respective market prices for the elec-tricity produced (without receiving operating aid).

Also, pursuant to the provisions of the new law, regarding the remunerationofRESplantswithacapacityexceeding250MWor conglomerates of RES plants connected to the grid at the same connection point with a combined capacity exceeding250MW, suchRESprojectsmay be excluded from the oblig-atory auction procedures and receive state aid individually approvedbytheMinistryofEnvironmentandEnergy,ifcertainrequirementsaremetandtheEuropeanCommissionhasprevi-ously approved the respective state aid.

Following a similar approach, the new law includes certain provisions regarding the licensing procedure and remuneration of hybrid power plants on non-interconnected islands, by virtue ofwhichtheMinistryofEnvironmentandEnergyisauthorisedto decide, inter alia, on the conditions and procedures according to which such plants will receive state aid.

Further, the new law allows for the construction of solar photovoltaic plants with maximum installed capacity 1MWon land of high agricultural productivity, with certain restric-tions on the total area covered by solar photovoltaic plants per Regional Unit.


Over recent years the RES market has become an essential pillar of Greece’s economy. Thus, the construction and development ofRESprojectsconstitutesoneof themost frequentcasesof

125Sardelas Petsa Law Firm


subject to registration to the public books of the competent land registry and/or cadastre. Registration fees for the land registry amountto0.775%ofthesecuredamount.Registrationfeesforthecadastreamountto0.875%ofthesecuredamount.Incaseofmortgages,notarialfeesrangefrom0.2%to1%of

the secured amount. In case of prenotation of mortgages, court feesdonotexceed€300.

Pledge over shares is not subject to any costs and fees. Security over receivables, if created by virtue of legislative decree 17.7.1923, is subject to court bailiff’s costs in order for the debtor to be notified and, if created by virtue of articles 11–15 ofLawno.2844/2000,issubjecttothecostsdescribedaboveinorder for the security agreement to be registered to the compe-tent public books.

Under the legal framework for bond loans, registration fees arefixedat€100perregistration,whichminimisesthecostsofsecurity granted, under bonds loans.


The filing, notification and registration process usually does not involve a significant amount of time in order for it to be completed. However, the time needed may vary depending on the efficiency of the competent authority/registry office in each individual case. As for the expenses, please refer toquestion2.6 above.


Inprinciple,noconsentsarerequired.

3 Security Trustee


The role of the agent/trustee is provided by the bond loan legal framework, under which any security granted by the borrower is granted in the name of the bondholders’ agent, for the benefit of the bondholders. The bondholders’ agent is responsible for enforcing loan documentation and collateral securities and applying the proceeds from the collateral to the claims of all the lenders pro rata, unless otherwise agreed.

Furthermore, Article 73 §3 of the Company Law provides that in case a bond loan is governed by foreign law, collateral secu-rity and guarantees are granted in the name of the person who, under the law governing the bond loan, may hold securities and guarantees on his/her account on behalf of the bondholders. The registration shall be made in the name of the agent, with explicitindicationthattheguaranteeisgrantedtosecuredebtsfrom a bond loan.


Security over receivables (trade receivables and insurance proceeds) is created by a private agreement and perfected by noti-fication to the debtor of the relevant claims. In banking practice, such security is granted in the form of pledge and assignment of the receivables due to such pledge, by virtue of legislative decree 17.7.1923. Security over business receivables may also be granted under articles 11–15 of Law no. 2844/2000 and perfected byregistrationtothepublicbookofLawno.2844/2000keptbythecompetent public registry where the borrower has its corporate seat (in addition to notification to the debtor).Securitymayextendtofuturereceivables,providedthatthey

are specifically defined in the security agreement and fall within the scope of the pledge. The chargor would be free to collect the receivables if no default is outstanding, if such agreement is provided to the security agreement.


Collateral security over cash deposited in bank accounts is created by a private agreement and perfected by notification to the bank holding such accounts. Standard practice provides for such collateral in cash to be governed by legislative decree 17.7.1923 and/orLawno.3301/2004onfinancialcollateralagreements.


Unless otherwise provided by the Articles of Association of the company incorporated under Greek law, collateral secu-rity (pledge) over the company’s shares is created by a private agreement and perfected by physical delivery of the shares to the pledgee or a third-party custodian.

It should further be noted that according to the provisions of the Company Law, Greek companies cannot issue bearer shares.SecurityovershareslistedontheAthensStockExchangeis

created by private agreement and perfected by notification and registration to the Dematerialised Securities System, pursuant to the regulation of the Hellenic Central Securities Depositary.Securitymayextendtonewsharesissuedbythecompanyand

dividends or other benefits, such as voting rights, but not to preference the rights of the shareholders, since such rights do notexistatthetimethesecurityagreementisperfected(underGreek law, preference rights of the shareholders are consid-eredasrightsofexpectationandarecreatedwhentheGeneralAssembly decides on a share capital increase).

The law governing the pledge over shares issued by Greek companies is subject to the rule of lex rei sitae; i.e. the law of the place where the property is situated. Therefore, such security may only be governed by Greek law.


Mortgages and prenotation of mortgages over real estate,non-possessory pledges and floating charges over chattels are

126 Greece


It should be noted that legislative decree 17.7.1923 introduces anexceptiontotheaforementionedrule,accordingtowhichtheliquidationoftheattachedassetsiseffectuatedthroughpublicelectronicauction.Morespecifically,thelegaleffectofapledgeof claims under the provisions of legislative decree 17.7.1923 is thatthepledgee-creditinstitutionarguablyacquiresfullowner-shipoftheclaimandisentitledtoliquidatetheclaim,withtheobligationtoreturntothepledgor-debtoranyamountexceedingthe secured claim. Another exception to the above rule is introduced by Law

no.3301/2004onfinancialcollateralagreements,underwhichprovisions the satisfaction of the pledgee-creditor is effectuated through sale, set off or application of the financial instruments and/or cash in discharge of the relevant obligations.Noregulatoryconsentsarerequired.


No restrictions apply. However, it has been argued that foreign lenders do not enjoy the benefits of legislative decree 17.7.1923.



Pursuant to the provisions of Law no. 3588/2007 (i.e. the Greek BankruptcyCode), in thecaseofdeclarationofbankruptcy,asuspension of all individual enforcement actions is imposed on all unsecured creditors and/or all priority creditors (i.e. credi-tors whose claims have a general privilege for satisfaction from the whole of the debtor’s estate). As for the secured creditors (i.e. creditors whose claims are secured by special privilege or real security on a specific asset of the debtor’s estate), they may undertake enforcement action against the specific secured asset, unless such secured assets are functionally and directly linked to the debtor’s business. The aforementioned moratorium may last up to 10 months starting from the issuing date of the court deci-sion which declares the bankruptcy. As far as pre-insolvency proceedings are concerned, under the relevant provisions of theGreekBankruptcyCode,whichprovidefortheconclusionof an agreement between the debtor and a certain percentage of its creditors (60% of the total claims including 40% ofsecured claims) (hereinafter referred to as the “Rehabilitation Agreement”)andthesubsequentratificationfromtheCourtofsuch agreement, from the filing of the Rehabilitation Agreement for ratification until the issuance of the decision of the Court, all individual and collective enforcement action is automatically suspended. This moratorium may not normally exceed fourmonthsandmaybeextended,followingapplication,foraslongas the decision for ratification remains pending. It is also noted that the Rehabilitation Agreement may include more specific provisions concerning such moratorium. However, it should be mentioned that agreements on financial collateral under Law 3301/2004donotfallunderthescopeofanykindofmorato-rium on enforcement in the abovementioned cases, namely the case of declaration of bankruptcy and pre-insolvency proceed-ings, etc.


Since Greek law recognises only the notion of a bondhold-er’s agent, an alternative mechanism to achieve such an effect is a contractual agreement between the lenders of a syndicated credit facility (intercreditors’ agreement) providing that the collateral security is granted in the name of the security trustee, who is also a joint and several creditor with the other secured lenders. However, lenders are not protected in case of insol-vency proceedings of the security agent.



Under applicable law, that is, pursuant to the provisions of the relevant articles of the Greek Code of Civil Procedure, the indi-vidual stages of the enforcement procedure are described in detail and specific timeframes are set, within which enforcement proceedings shall be effectuated. As a general rule, in order for the enforcement procedure to commence, the creditor-bene-ficiary of the collateral security (i.e. the mortgagee/pledgee of mortgaged/pledged immovable/movable assets) must obtain an enforceable title (i.e. mainly non-appealable judgments, arbitral awards,paymentorders,notarialdeeds,etc.).Subsequently,asfar as pecuniary claims are concerned, the enforcement proce-dure involves the following main stages: (a) the attachment of the debtor’s assets; (b) the intervention of other creditors; (c) theliquidationoftheattachedassetsthroughpublicelectronicauction; and (d) the distribution of proceeds. In particular, regarding the liquidation process, it is noted that liquidationis effected by electronic auction, which is administered by a notary public who is certified to conduct electronic auctions (wealsorefertoouranswertoquestion7.3below).Astothedistribution of proceeds from the public electronic auction of a specific asset, it is noted that, in principle, the proceeds are distributedtoallthecreditorswhoparticipatedintheliquida-tion process. In the case the electronic auction proceeds (after deductingthecostsandexpensesoftheenforcementproceed-ings) are less than the total claims of the creditors who partici-pated in the respective proceedings, then they are proportion-ally distributed. However, certain categories of creditors have priority over the proportional distribution as follows: (a) claims provided with a general privilege (i.e. claims of the State and of other public entities, claims for wages and personal main-tenance, etc.) have a minimum priority of 25% of the totalproceeds; (b) claims provided with a special privilege, that is, secured claims (i.e. collateral security on the specific asset on which enforcement takes place) as well as claims regarding the maintenance of the property and the production and harvest of itsfruits,haveaminimumpriorityof65%ofthetotalproceeds;and(c)unsecuredclaimshaveaminimumpriorityof10%ofthetotal proceeds.




Greek law provides fast-track injunction procedures in case of urgency.


Pleaserefertoouranswertoquestion5.1above,regardingtheRehabilitation Agreement.


In the case of seizure of payments, over-indebtedness or insol-vency, directors are instantly obliged to apply for insolvency proceedings. In the case of continuation of trading, the direc-tors may face criminal liabilities on (simple or fraudulent) bank-ruptcy. Furthermore, the directors may be considered person-ally liable for damages caused from their actions or omissions.



In general there are no restrictions on foreign ownership of a project company. However, there are several restrictions on real estate situated in forest, coastal or archaeological areas. Furthermore,theacquisitionbynon-EUcitizensandcontractsrelatedtorealestatelocatedinborderareasrequirestateapproval.


Greece has entered into several bilateral investor treaties, which offerprotectionforinvestorrightswithmorethan47countries.


The Greek Constitution recognises and protects private prop-erty. It may only be expropriated for the public good andupon payment of just compensation. No form of investment is speciallyprotectedfromnationalisationorexpropriation.Suchcompensation, in case of conflict, is determined by the courts.



For a number of typical project business sectors there will be competence at the level of the relevantMinistry (i.e. Energy,

Moreover, please note that the Greek Bankruptcy Codeprovides that transactions carried out during the so-called “suspect period” (i.e. the period specified in the court decision declaring the bankruptcy, which may not precede the date of issuance of the said decision by more than two years and during which it is assumed that the bankrupt debtor has discontinued its payments), including transactions concerning the establish-ment of in rem securities (including the pre-notation of mort-gage)orprovisionofguaranteesforpre-existingobligations,aresubject to clawback upon request of the bankruptcy adminis-trator or a creditor, and thus rescinded and made null and void. It should also be noted that security agreements established byvirtueoftheprovisionsofLawno.3301/2004onfinancialcollateral agreements are, in principle, not subject to the claw-backprovisionsof theGreekBankruptcyCode and generallyremain unaffected by bankruptcy proceedings. The same holds true for the security agreements which were carried out pursuant to the provisions of the Rehabilitation Agreement.


Asmentionedaboveunderquestion5.1,pursuanttotherelevantprovisionsoftheGreekBankruptcyCode,certaintypesoftrans-actions, that is (a) donations or other transactions in which the consideration received by the bankrupt person or entity from its counterparty are disproportionately small in relation to its own obligations, (b) payments of non-outstanding debt, (c) non-cash payments of outstanding debts, or (d) establishment of in rem securities (including the pre-notation of mortgage) or provision ofguarantees,forpre-existingobligations,ifcarriedoutduringthe“suspectperiod”,aresubject toclawback,uponrequestofthe bankruptcy administrator or a creditor. Please note that the legalconsequencesoftheclawbackarethattransactionsinques-tion are null and void and are rescinded. Further, transactions involving the bankrupt debtor and entered into during a period of five years preceding the declaration of bankruptcy are subject to clawback if the bankrupt person has acted intentionally to damage its creditors or discriminate against some of them and the counterparty was aware of the bankrupt person’s intention.Asfarastheprocedureregardingtheliquidationofthebank-

rupt debtor’s estate is concerned, it is noted that the liquida-tion proceeds in the context of the bankruptcy proceedingsare distributed in accordance with the relevant provisions of theGreekCodeofCivilProcedure,whichregulatetheliquida-tionprocess inthecontextoftheenforcementproceedings ingeneral, and also the same system of privileges applies.


Under applicable law, that is, pursuant to the relevant provisions oftheGreekBankruptcyCode,merchants(eitherindividualsorlegal entities) as well as associations with legal personality that pursue economic purposes, are subject to bankruptcy proceed-ings. Legal entities governed by public law, public authorities in general, as well as local authorities, are not subject to bankruptcy proceedings and cannot be declared bankrupt.

Please also note that there are separate laws providing and regulating a special liquidation process for certain categoriesoflegalentities,thatis:(a)Lawno.4261/2014regardingcreditinstitutions;(b)Lawno.4514/2018regardinginvestmentfirms;and(c)Lawno.4364/2016regardinginsuranceundertakings.

128 Greece



Project companies established under Greek law may estab-lish and maintain foreign currency accounts in and outside of Greece.


There are no restrictions on dividend payments to non-Greek resident parent companies, other than the general company and accounting applicable rules on distribution of dividends.


On 18 June 2018, the Hellenic Energy Exchange S.A. wasfounded as part of the EU’s TargetModel to create a singleenergymarket.Lawno.4425/2016(“UrgentregulationsoftheMinistriesofFinance,EnvironmentandEnergy,Infrastructure,Transport and Networks and Labour, Social Security and Social Solidarity for the implementation of the agreement on budgetary objectives and structural reforms and others provi-sions”), as amended by Law no. 4512/2018 (“Regulations forthe implementation of the structural reforms of the Economic Adjustment Program and other provisions”), includes provi-sions related to the establishment and operation of the Energy Exchange.Itsestablishmentaimsatachievingfurthertranspar-ency in transactions involving energy goods.


There is no specific legal framework for procurement by project companies. State or state-owned companies shall comply with the public procurement rules transposing EU legislation. The Single Public Procurement Authority monitors public procure-ment procedures and compliance with EU legislation.

8 Foreign Insurance


There are no restrictions on insurance policies over project assets provided or guaranteed by foreign insurance companies.


Insurance policies may be payable to foreign (secured) creditors.

Environment, Transport) and the relevant regulatory authori-ties. The Hellenic Republic Asset Development Fund (HRADF) leverages the State private property assigned to it by the Hellenic Republic.


Ingeneral,therearenoformalregistrationrequirementsinrela-tion to financing or project documents, save for certain secu-rity and collateral documents (such as pledge agreements, mort-gages) and also licensing documentation related to the project.


Actual ownership of land and natural resources does not, in general, require a licence. However, operation business and developmentofprojectsrelatedtoexploitationoforconstruc-tionsonsuchlandrequirescertainpermits,authorisationsandlicences granted by national or regional authorities, depending on the location, the size, the nature of relevant industry and its environmental impact.


Such issues are examined on a case-by-case basis. However,typically concessions are against royalty.


In principle, no. However, certain capital controls restrictions are still in place and prohibit or limit the free transfer of monies andforeignexchangetransactions.Ingeneralsuchrestrictionsare gradually phasing out.


Undistributed income (i.e. dividends, interest, etc.) of foreign legalentitiesparticipatingby50%ormoreinthesharecapitaloftheprojectentityinGreece,andbeingtaxresidentinanon-co-operative jurisdiction or with a beneficial tax regime outsidetheEU, is considered as taxable income. Furthermore, thereisa10%taxwithholdingondividendspaidouttonon-Greekparent companies of Greek project companies (unless other-wiseprovidedbyadoubletaxationtreatyorinthecasethatEUparent-subsidiary directive applies). Interest payments by Greek legal entities are, inprinciple, subject to15%withholding tax(unlessotherwiseprovidedbydouble taxation treatyor in thecase that the EU interest-royalties directive applies).



Civil liabilities are related to compensation rights and annul-ment of contracts and agreements that have been concluded under bribery.

13 Applicable Law


Project agreements are typically governed under Greek law. However, the parties may agree to apply foreign law, such as the proper law of the contract, subject to compliance of private international rules of the countries related to the contracting parties and/or the project.


Financing agreements are generally governed by Greek law, espe-cially when financing is provided by Greek banks. However, in international financing projects, the facility agreements are often governed by English or German law.


In any case, security documentation regarding assets located in Greece, mortgages, and registration matters shall be governed by Greek law.



Yes, a party’s submission to a foreign jurisdiction is legally binding and enforceable under Greek law. EU courts’ deci-sions may also be directly enforceable in Greece. Under several circumstances enforceability depends on bilateral international treaties.



Greece participates in the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. Foreign arbitra-tion agreements and awards can be recognised by Greek Courts. However, for recognition of enforceability of arbitration awards, certain national procedure should be followed.


Greece is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards as ratifiedbyLawno.4220/1961.



As a member of the European Union, Greece is bound by and respects the European Union law principle of free movement of labourwithintheEuropeanUnion.Nevertheless,totheextentemployees are working in Greece, Greek labour law applies. Workers from outside the European Union must apply for a work permit.



There are no relevant restrictions on the importation of project equipment or equipment used by construction contractors,other than tariffs applying on goods imported from outside the European Union. Within the European Union, no tariffs apply owing to the European Union law principle of the freedom of movement of goods.


Pleaserefertoouranswertoquestion10.1above.

11 Force Majeure


Force majeureexclusionsaregenerallyavailableaccordingtoGreek law. In some cases, liability for force majeureisalreadyexplicitlyexcludedbylaw.Itshallbeexaminedonaprojectbasisifcertainconditionsmayleadtonon-enforceabilityofsuchexclusions.



Corrupt business practices and bribery are considered criminal offences. The Greek Criminal Code provides special provisions in relation to passive and active bribery of public officials. The term of “public official” (i) relates to a person who is appointed, permanently or temporarily, to render public services, and (ii) encompasses any and all other categories of foreign public offi-cials as determined by international instruments already rati-fied and integrated into Greek legislation. The criminal penal-ties imposed relate to imprisonment of at least five years and a finebetween€15,000and€150,000. Furthermore,asentenceof imprisonment may be imposed to business managers (or any person with decision-making or supervisory authority) in the event that they negligently did not prevent any of their employees from committing active bribery to public officials.

130 Greece


(i.e. share capital financing). In the case of public offering of bonds or share capital, the issuer shall mainly issue a prospectus, subjecttoapprovalbythecompetentauthority(HCMCand/orAthensExchange).Incaseoflistingandadmissiontotrading,additionallegalrequirementsandproceduresshallbefollowed.Issuers of listed bonds/shares have increased reporting, publica-tion and notification obligations.


In general there are no special legal impositions to project companies issuing bonds or similar capital market instruments (i.e. share capital financing). In case of public offering of bonds or share capital, the issuer shall mainly issue a prospectus, subjecttoapprovalbythecompetentauthority(HCMCand/orAthensExchange).Incaseoflistingandadmissiontotrading,additionallegalrequirementsandproceduresshallbefollowed.Issuers of listed bonds/shares have increased reporting, publica-tion and notification obligations.

19 Islamic Finance


The relevant instruments are not currently used in Greece.


Although Shari’ah law may be agreed by the parties to become the governing law of a contract or a dispute, it is highly unusual to apply in project financing in Greece, and also there are no known cases concerning applicability of Shari’ah law and conflict between Shari’ah and local law to the finance sector in Greece. Furthermore, any applicable legislation shall not contradict the Greek public order policies.


The inclusion of an interest payment obligation in a loan agree-ment would not initially affect validity and/or enforceability unless the interest payment rate is considered to be illegal and/orexcessiveunderGreeklaw.


Public interest, criminal matters and labour disputes are not arbitrable.


In general there are no types of disputes subject to mandatory domestic arbitration proceedings. However, Law no. 3389 on PPPsstatesthateverydisputearisingfromtheexecution,inter-pretation or validity of a PPP Agreement is mandatorily subject to arbitration proceedings.



It is common in project finance deals to have direct agreements with the government, which usually are designated to provide step-in rights of financial institutions and do not include particular political risk protections. In international projects, change of law protection provisions are also usually addressed in contractual terms.

17 Tax


The current tax rate for tax withholding on interest frombond loans is 15%. Notably, interest payable on credit facili-ties concerning either domestic or foreign lenders is not subject towithholdingtax.Asforforeignlendersinparticular,pleaserefertoquestion17.2below.


Interest payments to lenders that are tax-resident outside ofGreece and without a permanent establishment in Greece are subjecttoGreekwithholdingtax,currentlyattherateof15%,ifnototherwiseprovidedforinthetaxtreaty(ifany)betweenGreece and the jurisdiction of tax-residence of the foreignlender.

18 Other Matters


In general, there are no special legal impositions to project companies issuing bonds or similar capital market instruments

131

Konstantina (Nantia) Kalogiannidi is a Court of Appeals lawyer and has been admitted to the Athens Bar Association since 2012. She graduated from the National and Capodistrian University of Athens (Faculty of Law) and holds an LL.M. in Public Law from the National and Capodistrian University of Athens, as well as an M.Sc. in Business for Lawyers from Alba Graduate Business School. Nantia joined our firm in 2012 and specialises in the areas of banking and finance. Nantia mainly advises banks acting as lenders on syndicated loans, bond loans – both on project and corporate finance – and restructurings (including voluntary restructuring under article 99 of the Greek Bankruptcy Code) and has been involved in most transactions of this type in the Greek market. Nantia also has experience in banking regulatory issues. She is a regular contributor to legal publications.

Sardelas Petsa Law Firm8 Papadiamantopoulou Street115 28, AthensGreece

Tel: +30 210 72 96 550Email: [email protected]

Sardelas Petsa Law Firm has established a leading position in Greek legal services as a business law firm with a strong international dimension, and is well known in Greece and abroad for its top-drawer specialised profes-sional service in complex cross-border and domestic transactions, as well as commercial litigation. The firm is recognised by international legal directories and is considered by clients and peers alike as a legal practice with high expertise and experience, which comes up with innovative, prac-tical and legally sage solutions in relation to complex transactions, some of which are considered to be innovative not only by Greek but also by inter-national market standards. Its highest quality and innovative brand has been internationally recognised by experts and peers as it is consistently recommended in prestigious legal directories, such as the IFLR 1000, The Legal 500 and Chambers & Partners, while in 2009 it has been selected on the IFLR Awards shortlist for the most innovative debt and equity-linked transaction in Europe.


Sardelas Petsa Law Firm

Katerina Limnaiou is an Athens-based lawyer, admitted to the Athens Bar Association in 2016. She graduated from the National and Kapodistrian University of Athens (Faculty of Law) and holds an LL.M. in Civil Law from the National and Kapodistrian University of Athens. Katerina joined our firm in 2019 and is a member of our banking & finance team. Katerina has experience in corporate finance and project finance transactions. She has been involved in the financing of many Renewable Energy Sources (RES) projects and conducted legal due diligence for such projects. Katerina also has experience in Energy Law, Pharmaceutical Law and Data Protection issues.

Sardelas Petsa Law Firm8 Papadiamantopoulou Street115 28, AthensGreece

Tel: +30 210 72 96 550Email: [email protected]



Chapter 15132

Hungary

Tesenyi & Partners Balázs Kálmán

Gergely Brassnyó

Hungary



Rights and receivables may be the subjects of a pledge; in order to create the pledge, a written agreement is needed and the pledge needs to be registered with the security register. The receiva-bles pledge may be ‘silent’ (where the debtors are not notified about theexistenceof thepledgeuntil aneventofdefault)or‘open’(wherethedebtorsarenotifiedabouttheexistenceofthepledge until an event of default); regardless of the type of pledge, the chargor will be able to collect the receivables in the absence (until the occurrence of an event) of default.


Cash deposited in bank accounts may be the subject of a receiv-ablespledgeor securitydeposit. Both typesof securitieswillrequire a written agreement; however, only the receivablespledge needs to be registered with the security register. Security deposit has a preferential treatment in case of insolvency of the debtor/security provider.


Shares may be the subject of a security deposit, regardless of whether the shares are in ‘printed form’ or ‘dematerialised form’. In order to create the security deposit, a written agreement is needed; further, the security deposit may be registered in the share register of the company that issued the shares.


The notarisation of security agreements is typically based on the value of the assets encumbered (the notarisation fee will be usuallyaroundHUF82,000plus0.25%ofthevalueexceeding

1 Overview


Bothindustrialandresidentialrealestatemarketsareinsignif-icant boom. Photovoltaic (and other renewable energy) plant manufacturing is another area of significant growth. From a project financing standpoint, these developments are mainly financed by Hungarian banks, sometimes from IFI funds.


The refinancing of Pannonia Ethanol debts in 2016, the restruc-turingofBudapestAirport’sbalancesheet in2017, thedevel-opmentof theMETDunaiSolarPark in2018and thedevel-opment by Photon Energy of photovoltaic plants in 2017–2019.

2 Security


It is possible to create a floating asset charge (where the encum-bered assets are specified broadly). In order to create such a charge,awrittenagreementisrequiredandthechargeneedstobe registered with the Hungarian security register maintained by the Hungarian Chamber of Notaries Public.


Realpropertycanbemortgaged,whichrequiresawrittenagree-ment and the registration of the mortgage with the Hungarian landregister.Chattelsmaybesubjecttoafixedcharge(encum-bering single assets) or floating charge (where the assets encum-bered are specified broadly), which need a written agreement and the registration of the charge with the security register.

133Tesenyi & Partners


agriculturallandmayimplyextradelay.Therearealsolimita-tionsregardingtheacquisitionofland.


Foreign investors are granted fair and equal treatment; there-fore,therearenorestrictions,orspecialfeesortaxesinrespectof foreign investments in, or ownership of, project and related companies (see also answers in section 7).



Hungarian law recognises two types of insolvency proceedings: bankruptcy (aimed to re-establish solvency by arrangements withcreditors)andliquidationproceedings(aimedtodistributethe assets of the debtor between the creditors). During bank-ruptcy proceedings the debtor is granted bankruptcy protection (i.e. the debtor is granted a moratorium on the payment of debts and the assets of the debtor cannot be subject to enforcement). With certain exceptions, secured creditors may not directlyenforce their claims against the secured asset but must report theirclaimtotheliquidatorandwillreceivetheproceedsofthesalebytheliquidatorofthesecuredassets(afterthedeductionof enforcement costs and the payment of preferential claims).


The debtor’s assets (or the proceeds from the sale of the assets) will be distributed among the creditors according to the ranking ofthecreditorsasdeterminedintheBankruptcyAct.Taxdebtsand employee claims are preferred claims.


Bankruptcy proceedings are not available, e.g. for financialinstitutions(buttheNationalBankofHungaryassupervisoryauthority may adopt special measures in order for the financial institutions to avoid insolvency).


As a general rule, satisfaction from the secured asset may take placeonthebasisofacourtorderorwritofexecution.However,certain securities (e.g. receivables pledge, security deposit) may be enforced without court proceedings. Further, if there is an agreement between the security provider and the security bene-ficiary, court enforcement may be avoided in some cases.

HUF 10,000,000). Mortgage over real property needs to beregistered with the land register which costs HUF 12,600 per property mortgaged. In order to register securities (such as asset charges or receivables pledges) in the security register, a fee of HUF 18,000 per security needs to be paid. All other fees, costs andexpenseswillbeundercommercialterms.


Apart from notarial fees, no significant amount of time or expenseisrequiredforthefiling,notificationorregistrationofsecurities; however, this depends on the particulars of the trans-action (e.g. type of security, type and number of assets encum-bered, etc.).


Unless state or local municipality assets are concerned, no specialconsentsarerequired.

3 Security Trustee


It is possible to appoint a security agent (usually banks) who will be authorised to enforce the security and apply the proceeds from the security to the claims of all the lenders.


Parallel debt used to be a typical alternative mechanism in Hungary before the entry into force of the new Civil Code in 2014.



Generally, public auction is required for the enforcement ofpledges/mortgages. The possibility of judicial appeal is avail-able in the court enforcement procedure. Enforcement over

134 Hungary



Apart from the registration duties mentioned in our answer in section2,therearenogeneralformalityrequirementsorfilingor registration duties.


Minerals,oilandgeothermicenergyareownedexclusivelybythestate,althoughtheownershipofmineralsthatareexploitedorgeothermic energy that is produced by a company under relevant licences may be transferred to the company, subject to govern-ment concession/permit. The transportation of oil, oil-related productsandnaturalgasthroughpipesisanactivityexclusivelyperformed by the Hungarian state. The creation and operation ofwindandsolarplantsrequirepriorgovernmentauthorisation.Citizens of Hungary and EU Member States may acquire

ownership title to agricultural land; however, third-country nationalsor legalpersonsmaynotacquireagricultural land inHungary(otherthanaveryshortlistofexceptionalentities(suchas registered churches) subject to state consent). Real proper-ties that are not agricultural landsmay be acquired by third-country nationals and legal entities subject to regional govern-mental authority authorisation.


Licensees of natural resources need to pay concession fees. Internal gas system management companies need to pay a fee fortheuseoftheinternalgassystems.Miningcompaniesmustpay a mining contribution. Wind and solar plants may be oper-ated under agreements with the system operator and subject to the payment of fees.


As a general rule, there are no restrictions on currency trans-fersorexchangesapartfromreportingandcontroldutiesunderanti-money laundering regulations.


As a general rule, there are no such restrictions.


Hungarian companies can have onshore and offshore accounts in other jurisdictions, but they must have a domestic bank account.


Nosuchofficialprocessexists.


The directors can continue to trade after the company falls into financial difficulties; however, after the company is threatened by insolvency, the directors must also take into consideration creditors’ interests when doing so.



Non-EEA-based entities (including where an EEA-based enti-ty’s ultimate beneficial owner is not based in the EEA) may only acquire (or increase) interestsover 25% inHungarian compa-niesoperatinginarms,intelligenceequipment,financial,publicutilities (electricity, gas and water), telecommunication and certain IT security system industries, subject to prior govern-ment consent.


If there is such a treaty, it usually provides some protection.


Theexpropriationactgoverns theexpropriationof realprop-erties, which may take place under special circumstances and rules.



The Hungarian Energy and Public Utility Regulatory Authority is the regulatory body of energy and public utility markets; the National Transport Authority supervises the road transport, aviation,railwayandshippingmarkets;theNationalMediaandTelecommunication Authority is the regulatory body for the tele-communication sector; theHungarianOffice forMining andGeology is competent in mining projects; whilst the National Bank of Hungary supervises the financial and the insurancesectors.





Imports from outside the EU/EEA are subject to restrictions, controls and customs/fees, according to the EU-level customs tariffschemeand localrules. Bilateral treatiesmayalsograntexemptions.


The EU-level customs tariff scheme and local rules determine thedutiessubjecttothetypeofequipmentandcountryoforigin.

11 Force Majeure


Even though force majeure isnot expresslydefinedby theCivilCode, the concept is applied in legal practice and is recognised by Hungarian courts. Financing agreements include a force majeure clause to mitigate the risk arising from the lack of statu-tory definition.



Bribery(bothinactiveandpassiveform)isacriminaloffencein the private sector and in respect of public officials or official procedures. Further, the law also recognises trading in influ-ence as a criminal offence. These offences are generally punish-able by imprisonment and the court may also impose fines, seize assetsanddisqualifytheperpetratorfromexercisingprofessionsor holding positions.

From a civil law perspective, bribery may result in liability for lossesandmayhavecompanylawimplications(e.g.disqualifica-tion from holding positions).

13 Applicable Law


Project agreements may be governed by foreign law (typically English law), but mandatory provisions of Hungarian law apply regardless of the choice of law (e.g. mandatory corporate rules applicable to Hungarian companies, and mandatory civil law rules).


Providing financial services in Hungary is a regulated activity; accordingly, most financing deals are financed by Hungarian


As a general rule, there are no such restrictions applicable to Hungarian or foreign-based parent companies; however, divi-dend payments may be limited by financing agreements (e.g. subject to lender approval).


Environmental (including nature conservation, air protection or water management) and health and safety laws apply, which may haveanimpactonprojectfinancingdeals.Bothenvironmentaland health and safety matters are supervised by authorities.


Procurement of private projects is generally not regulated by the law, but financing agreements may include restrictions. Public procurements (such as construction works) are highly regulated by the public procurement act.

8 Foreign Insurance


EU-based insurance companies may provide insurance services in Hungary through a European Passport. Non-EU-based insurance companies need to establish a subsidiary or a branch in Hungary in order to provide insurance services in Hungary.


As a general rule, insurance proceeds will be paid to the benefi-ciaries indicated in the policy.



Employment of foreign nationals on an EU/EEA scale is not subject to restrictions irrespective of the profession or sector (only reporting duties prevail). Certain non-EU/EEA global players(e.g.UK,USA)as‘thirdcountries’weregivenexceptionsorleniencies(keystaff,executives,etc.)whenapplyingforworkpermits and work-purposed visas. Nationals from the rest of the worldgenerallyarerequiredtoholdworkpermitsorwork-pur-posed visas to stay in Hungary for work.

136 Hungary


17 Tax


(a) Hungarydoesnotapplywithholdingtaxesoninterestanddividend payments to companies (including where interest and dividend are paid to offshore companies). In the case ofinterest,withholdingtaxappliesonlyifthelenderisaHungariantaxresidentindividual.

(b) Hungary does not apply withholding taxes on thesepayments.


The Hungarian corporate income tax (CIT) system is veryfavourable for foreign investors or creditors. The CIT rate is a flat9%.Interestpaidtolenderswhoarenotconsideredfinan-cialinstitutionsisdeductibleforCITpurposesupto30%oftheEBITDAorEUR3million(whicheverishigher).Seealsoouranswertoquestion17.1.

Investment costs may be deductible in case of investments exceedingEUR3million(EUR9million incertaincases)upto70%ofthepayableCIT.Investmentcostsmaybedeductedupto50%,dependingontheregionofthecountrywheretheinvestment is made.Generally foreign investor’s capital gains are only taxed in

Hungary, if the investment relates to real estate or real estate holdingcompanies.Buteveninthiscase,capitalgainsmaybeexemptedfromCITbothunderHungarian laworunderrele-vantdoubletaxtreaties.

18 Other Matters


See our previous answers.


Capital and securities markets are heavily regulated in Hungary andrequireregulatorypermits.

19 Islamic Finance


To the best of our knowledge, these instruments have not been used in Hungary. Theoretically, they could be used, but

banks which are governed by Hungarian laws. Where IFIs are also involved, financing agreements may be governed by foreign law (typically English law), but mandatory provisions of Hungarian law will apply.


As a general rule, real property, security and corporate matters are typically governed by Hungarian law, where Hungarian real properties, assets and companies are concerned.



As a general rule, yes. However, international and bilateral trea-ties,EUregulationsandlocalrulesincludecertainexceptions.



Yes, they are.


Hungary is a contracting state to the New York Convention.


Yes, e.g. in consumer and employment disputes, certain personal and family disputes, disputes regarding Hungarian enforcement and trespass procedures.


No, but certain disputes may only be subject to ordinary domestic court proceedings.



No, to the best of our knowledge. Foreign investors are granted the same rights as Hungarian entities from the moment they establish a company in Hungary.



mandatory provisions of Hungarian law will still apply (see our previous answers).


Seeouranswersinsection13andquestion19.1above.


No, interest payment is an essential part of a loan transaction according to the statutory definition of loans.

138

Gergely Brassnyó, after graduating from Hungarian law school, completed the postgraduate diploma programme of the University of Cambridge in English law. He started his career at an international law firm being a leader in M&A and PE transactions. Later, he was in-house counsel of a Hungarian bank which was a member of an international banking group, and later on became an international legal expert at the Italian HQ of the banking group where he was involved in group-level refinancing deals, market entry and business development projects and creating innovative business structures in the CEE region. He has been assisting a major Hungarian banking group and other financial institutions. He also provides all round legal support to several Hungarian companies in various industries (e.g. IT, technical engineering).

Tesenyi & PartnersAndrássy út 1251062 Budapest Hungary

Tel: +36 1 220 1474Email: [email protected]: www.tesenyipartners.com

We are a Hungarian boutique partnership assisting both multinational and local companies. Our partners have in-depth local legal knowledge gained in local and multinational environments (including in-house and private practice), including solid transaction experience and experience with in-court proceedings and out-of-court arrangements.

www.tesenyipartners.com


Hungary

Balázs Kálmán, after graduating from Hungarian law school, supported the building construction division of one of the leading Hungarian construction companies and was involved in German and Austrian real property investments and developments for over a decade. Afterwards, he joined a major Hungarian financial institution where he provided support in financing matters. He has been assisting several major Hungarian banks and banking groups in various matters, including representation in debt collection procedures and in litigation matters. His experience also includes all round legal support to several major Hungarian companies in various industries (e.g. medical products and IT). He is also regularly involved in the activities of professional organisations (e.g. financial lease association, banking association) and in the professional preparation of legislation.

Tesenyi & PartnersAndrássy út 1251062 Budapest Hungary

Tel: +36 1 220 1474Email: [email protected]: www.tesenyipartners.com



Chapter 16 139

India

Cyril Amarchand Mangaldas Surya Sreenivasan

Santosh Janakiram

India


2 Security


Generally in India, security is created over the following asset types:immovableproperty;movablefixedassets;currentassets;shares; assignment of rights in project and insurance contracts; and a charge over the project bank accounts. The charge over immovablepropertyistypicallycreatedbyexecutinganinden-ture of mortgage or by undertaking a deposit of title deeds for the property. On the other hand, security over movable assets (both fixed andcurrent) is createdby executing adeedof hypothecation. Security over shares is created via a pledge, whichrequirespossessiontobetransferredbywayofdepositofthe share certificates, or if the shares are in dematerialised form, by recording the same with the depository of shares. An assign-ment of rights (such as rent receivables) arising out of project contracts is done via a deed of assignment. The charge over immovable property, movable property and an assignment of rights can be clubbed together under a single indenture.


Yes, lenders typically have security over real property, plant, machinery and equipment. If the land is leasehold property,permissionmayberequiredfromthelessorforthecreationofcharge. If the security is created via an indenture of mortgage, it is necessary to register the same with the local registrar of assur-ances. Further, if security has been created by a company, it is mandatory to register the charge with the registrar of compa-nies (RoC). The charge created over movable/immovable prop-ertiesisalsorequiredtoberegisteredwiththeCentralRegistryof Securitisation Asset Reconstruction and Security Interest of India (CERSAI).


Yes,securitymaybetakenoverreceivableswithouttheexpressconsent of the debtors. However, such charge over receivables

1 Overview


Project finance in India has traditionally been associated with “core” sectors such as roads, highways, power projects, ports and airports. Recently, there has been increased government focus on urban development (which is expected to increaseby75%by2030). Weexpect thathealthandsanitation,masstransit and waste-to-energy will be focus sectors for project finance in thenext fewyears. Traditional lenders (banksandnon-banking financial companies or NBFCs) are facing aliquiditycrisissincetheircapitalis tied up in risk allocation and weightage for stressed debt. Lenders are also taking more calcu-lated and nuanced risk calls, based on industry-wide issues faced by project developers (for instance, the tariff renegotiation for renewable projects in Andhra Pradesh). Funding structures and newsourcesoflendingarebeingexplored(suchasInvITs,alter-native investment funds and so on). The government has looked to significantly liberalise offshore lending to encourage Indian developerstoreducedependenceonIndianbanksandNBFCs.


This past year has seen significant project finance transactions. The Firm advised Adani Power ( Jharkhand) Limited on its US$ 1.2 billion borrowing from REC Limited and Power Finance Corporation Limited for part-financing the cost of setting up a 1600 MW imported coal-based ultra-super critical thermalpower project in the Godda district of Jharkhand, and its 110 km dedicated transmission line up to the Indian side of the Indo-BangladeshBorder. This isthefirst-of-its-kindprojectthat isbeingsetupasadedicatedexportfacilityinaSpecialEconomicZone(SEZ)tosupplyallofitspowertoBangladesh.NagpurMumbaiSuperCommunicationExpresswayLimitedborrowedINR28,000crores(approx.US$4billion)fromvariousbanksto finance the 701.5 km-long 6-lane access controlled super communicationexpresswayfromMumbaitoNagpur.Thiswasone of the largest project financings in the road sector in India. Several subsidiaries of ReNew Power also borrowed approx.US$ 700 million from lenders in a co-obligation structure, in an exampleoftheevolvingprojectfinancestructures.High-yieldbonds continue to find a market, with Greenko Group issuing bonds of US$ 950 million.

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specific purpose (such as forest land, coastal land) by the govern-ment. If the land over which the security is created is lease-hold in nature, typically prior consent of the lessor would be required. However,withrespecttopipelines(onceembeddedin the earth), the land over which pipelines for the transport of petroleum, minerals or gas are laid are not transferred to the borrower,whomerelyacquirestherightsofauserovertheland.Such right of way may also be assigned to the lenders.

3 Security Trustee


Yes, the trust structure is recognised and the rights and obliga-tions of the security trustee are typically recorded in a security trustee agreement. Such security trustee agreements grant the trustee the right to sue, on behalf of all the lenders cumulatively, for the enforcement of the security and to apply the proceeds to the claims of all lenders.


A security trust is recognised in India, so the security trustee can sue for the enforcement of the security and can apply the proceeds to the claims of all lenders. There is also no bar on any lender suing for enforcement independently.



The timelines for enforcing security may depend on the nature of security held by the lender. To illustrate, enforcement of a pledge created over shares, which are in dematerialised form, isrelativelysimpleanddoesnotrequireadecreeofacourtofcompetentjurisdiction.Enforcementofamortgagemayrequirea decree of the court under the Civil Procedure Code, 1908 or enforcement action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. In a scenario where an insolvent company is subject to proceedings under the IBC, a publicly solicited bid processis undertaken wherein bidders are required to submit reso-lutionplans thatare required tobe, inter alia, approved by the committee of creditors. In assets in regulated sectors (e.g. airports, telecommunications, roads) the enforcement process is done through a “substitution” of the defaulting company by an entity nominated by the lenders, with the consent of the relevant regulatory authority.

or other current assets (which is a floating charge) crystallises intoafixedchargeonlyuponoccurrenceofaneventofdefault.


Yes, a typical project financing security package involves the creation of security over the project-specific bank accounts. The procedure to be followed in this case mirrors that of any other movable asset. A notice of such a charge is given to the bank.


Yes, security over shares is a prevalent form of security crea-tion in India. Typically, a pledge agreement is entered into with apowerofattorneytoenforcethepledgewhichisalsoexecutedby the pledger upfront. If the shares are in certified form, the share certificates are physically deposited along with a share transfer form. If the shares are in dematerialised form, certain forms (indicating the agreement number, closure date of the pledge,quantumofsharespledged,etc.)willberequiredtobesubmitted at the relevant share depository.


In India, stamp duty on security documents varies from state to state. In some states, stamp duty is uncapped, whereas in others the liability is capped. Additionally, all indentures of a mort-gage must be registered with the local registrar of assurances. In some states, a mortgage created via a deposit of title deeds is also compulsorily registrable; however, in most states such regis-tration is optional. The charge creation is also filed/registered with the RoC and CERSAI. Certain types of documents (viz., powersofattorneyandaffidavits)arerequiredtobenotarisedbya notary public, at a nominal charge.


The time taken to register a mortgage with the local registrar of assurances may vary drastically, depending on the efficiency of the local bureaucracy. Similar to stamp duty, registration fees payable also vary from state to state, as some states have ad valorem charges whereas others have capped limits. Filing/regis-tration with the RoC and CERSAI must be done online and is neithertime-consumingnorexpensive.


For the creation of security over freehold land, no consents or regulatoryapprovalisrequiredunlessithasbeenreservedfora

141Cyril Amarchand Mangaldas


insolvency commencementdate). Suchprovisions are equallyapplicable to transactions relating to security interests created over the assets of the company as well.Under the IBC, these include transactions that are “prefer-

ential” in nature (and pertain to an antecedent liability owed to a creditor, surety or guarantor), those that are “undervalued” (including gifts), those that defraud creditors (which must neces-sarily pertain to undervalued transactions, which were entered into with the deliberate intention to defraud creditors), and such credit transactions that are“extortionate” innature. Further,the Income Tax Act, 1961 provides for transfers or chargestobevoidagainstanytaxclaimwhereit iscreatedduringthependency of any tax proceeding or outstanding tax demand,withoutpriorpermissionofthetaxdepartment.


WhiletheIBCprovidesforandgovernsbankruptcyofindivid-uals, partnership firms, limited liability partnerships and corpo-rate entities in India, the provisions pertaining to bankruptcy of individuals have not yet been made operational. The regime, however,doesnotextendtothebankruptcyoffinancialserviceproviders, which continue to be governed under the Companies Act, 2013. The Banking Regulation Act, 1949 governs thewinding up of banking companies.


Asnoted inquestion5.1above,after the initiationofaCIRPunder the terms of the IBC, creditors are prohibited fromenforcing their security interests and seizing the assets of a company. However, outside the IBC framework, there areseveral ways in which a creditor can enforce its security and seize the assets of a project company out of court. To illus-trate, a creditor having security by way of an English mortgage has the right to sell such mortgaged property by way of private sale. Similarly, in respect of security by way of pledge, a creditor is entitled to enforce such a pledge without resorting to court proceedings, and to effect the sale of the pledged goods, after having given due notice to the pledgor.

Please also note that under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, banks, notified financial institu-tions, asset reconstruction companies, debenture trustees and certainnotifiedNBFCsareconferredwithprivateenforcementrights in respect of their security interests, other than in respect of pledges and liens. However, such rights do not extend toforeign creditors.


There are certain mechanisms that are available to companies to achieve a restructuring of its debts, outside of the formal insol-vencyregimeprovidedforundertheIBC,includingthecram-down of its dissenting financial creditors. On 12 February 2018, theRBIhadissuedacirculartitled“Resolution of Stressed Assets – Revised Framework” (which resulted in an overhaul of all previous


Under Indian law, a foreclosure suit in respect of a mortgage may be filed by a mortgagee to debar the mortgagor of his right to redeem the mortgaged property in the event that the mort-gagor is unable to pay the amounts due to the mortgagee. While foreclosure proceedings may be initiated under the provisions of the Civil Procedure Code, 1908, an overseas lender, i.e. a non-residententity,isprohibited,undertheForeignExchangeManagement (Acquisition and transfer of immovable prop-erty in India) Regulations, 2018, from transferring any immov-ablepropertyinIndia,unlesspermittedbytheReserveBankofIndia (RBI). Additionally, foreclosuresuitsmayonlybe filedunder the Transfer of Property Act, 1882 by a mortgagee by conditional sale or a mortgagee under an anomalous mortgage. However, if the mortgage creation is by way of an English mort-gage, foreclosure suits may not be filed.



The IBC is the primary legislation governing insolvency ofcorporate entities today. The initiation of a corporate insolvency resolution process (CIRP) against the project company under thetermsoftheIBCwouldresultintheinstitutionofamora-torium prohibiting, inter alia, the initiation/continuation of any suits/proceedings (including recovery proceedings) against the project company or the enforcement/foreclosure of any secu-rity interests created by the project company in respect of any of its creditors. This moratorium would remain in place until the completion of the CIRP against the project company (which wouldordinarilylastatleast180days,extendablebyanother90days,exclusiveofanytimespentinlitigation).Accordingly,theprojectlenderwillbeunabletoenforceorexerciseanyrightsinrespect of its security during this period.IntheeventofasuccessfulCIRP,theIBCpermitsthereso-

lution plan to provide for, inter alia, the modification and release ofpre-existingsecurityinterestscreatedbythecorporatedebtor.Incaseasuccessfulresolutionplan(approvedbyatleast66%ofthe voting share of the committee of creditors and the National Company Law Tribunal (NCLT)) provides for any such modi-fication/release, the project lender will lose its right to enforce its security-related rights post approval of the resolution plan.


Under the IBC, “insolvency resolution process costs” and“liquidation costs” are accorded the highest priority. Besidesthis,thepaymentofworkmen’sduesfortheperiodof24monthspreceding the liquidation commencement date is ranked pari passuwiththeduesofsecuredcreditorsthathaverelinquishedtheir security interests to the liquidation estate. The IBCalso contains protections in favour of creditors against ante-cedent transactions entered into by the corporate debtor during specified look-back periods (calculated backwards from the

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various sectors, which may be either automatic or with prior governmentapproval. FEMARegulations,2017also listsoutthe prohibited activities, which include real estate, agricultural activities, atomic energy and railway operations. Further,fromataxperspective,whereanytaxpayer,including

a foreign company, acquires anyproperty, i.e. shares or otherinstruments which are characterised as security, then it must acquiresuchshareorsecurityata“fairmarketvalue”asdeter-mined in accordance with a prescribed rule for valuation. If the consideration paid is less than such fair market value, then thedifferencewouldbesubjecttotaxinthehandsofaforeigncompany as “income from other sources” at the rate of 40%(plus applicable surcharge and cess) or 30% (plus applicablesurcharge and cess) in case of any other non-resident investor.


There are several bilateral and multilateral investment treaties entered into by India with various countries in order to promote trade and commerce within the country. India also has compre-hensive Double Taxation Avoidance Agreements (DTAA)withmorethan90countries/territories.TheIncomeTaxAct,1961,providesforrelieffortwotypesoftaxpayers.OneisfortaxpayerswhohavepaidthetaxtoacountrywithwhichIndiahassignedaDTAA,whiletheotherisfortaxpayerswhohavepaidtaxtoacountrywithwhichIndiahasnotsignedaDTAA.Where there is aDTAA, Indiawould tax the residentof thatcountry at the rates prescribed in the treaty. The person should thengetcreditfortaxespaidinIndiaandvice versa in the case of anIndiantaxpayer.WherethereisnoDTAA,thetaxratesasperIncomeTaxActarechargedtothenon-resident.Therearenotreatiesprovidingexplicitprotectiontoaforeignentityfromtherestrictionsonexchangecontrol.

Eligibility to claim benefits under a relevant DTAA is subject to certain conditions prescribed therein, like the limitation of benefits clause, substance test, principal purpose test, beneficial ownership, etc. It is also vital to take note of the changes under theMultilateral Instrument (MLI) issuedby theOrganisationfor Economic Co-operation Development. India is a signa-torytotheMLIandhence,India’sDTAAswithothersignatorycountries will need to be read in line with the changes proposed undertheMLI.Inthisrespect,IndiahasratifiedMLIandnoti-fied its final position and reservations onMLI provisions inAugust 2019.


The provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation andResettlementAct,2013applies in relation to landacquisitionsby the government for public purpose and compensation paid thereof. The Indian Constitution also grants the government the right to compulsorily acquire any property for a publicpurpose upon payment of compensation. The rights on the projects undertaken through public–private partnerships are automatically transferred to the concessioning authority at the end of the concession period.

restructuringschemesissuedbytheRBI),underwhichlenderswere obligated (either singly or jointly) to formulate a resolution plan which may provide for the change in ownership or restruc-turing of the corporate debtor, the moment there is a default in the company’s account. However, the said circular was struck downbytheSupremeCourtofIndiaon2April2019.TheRBIGovernorhas,on4April2019,issuedastatementstatingthattheRBIwilltakenecessarysteps,includingissuanceofarevisedcircular,asmaybenecessary,forexpeditiousandeffectivereso-lution of stressed assets. In July 2018, a large majority of Indian banks have also entered into the Inter-Creditor Agreement for Resolution of Stressed Assets as part of Project Sashakt upon recommendations of the SunilMehtaCommittee. Under theframework, the lead lender shall be authorised to formulate the resolution plan, which will be presented to the other lenders for their approval. The decision-making will be by way of approval ofmajority lenders, that is, the lenderswith66%share in theaggregateexposure.Oncearesolutionplanisapprovedbythemajority, it is binding on all the lenders who are party to the inter-creditor agreement.


Under the IBC, upon the initiation of the CIRP against thecorporate debtor, it is the resolution professional that takes on the role of the management of the company, and the powers of the board of directors remain suspended during this period. In termsofSection66(2)oftheIBC,directorsmaybeheldperson-ally liable to make contributions to the assets of the corporate debtor (on an application made by the resolution professional to the NCLT), if such director knew or ought to have known that “there was no reasonable prospect” of avoiding the commence-ment of a CIRP against the corporate debtor under the terms of theIBC,anddidnotexercisetheduediligenceinminimisingthe potential loss to the creditors during this period. Separately, under Section 66(1) of the IBC, suchpersonswho are know-ingly party to the carrying on of the business of the company duringitsCIRPorliquidation, inamannerthatdemonstratestheir intent to defraud the creditors of the company, or for any other fraudulent purpose, may be held liable to make contribu-tions to the assets of the corporate debtor (on an application made by the resolution professional to the NCLT).



The foreign ownership of an Indian project company is subject to the Foreign Exchange Management Act, 1999 (FEMA)and the rules and regulationsmade thereunder. TheMasterDirection on Foreign Investment in India read with the Foreign ExchangeManagement (Transfer or Issue of a Security by aPerson Resident Outside India) Regulations, 2017 (FEMARegulations, 2017) empowers the RBI to prohibit, restrict orregulate the transfer or issue of any security by a person resi-dentoutsideIndia.FEMARegulations,2017provides:(i)thelimit of foreign investment in each sector in India which cannot beexceeded;and(ii)theentryroutesforforeigninvestmentin




Yes,taxisleviedonremittanceandrepatriationofinvestmentreturns,bywayof income taxor capital gains tax,dependingonthenatureofthereturn.Notaxisleviedontheshareholderin the Indian project company for distribution of dividends under the law currently in force. However, the Indian company distributing dividends is subject to additional dividend distri-bution tax (DDT) at the rateof 20.56% (including applicablesurchargeandcess).TheFinanceBill,2020(BillNo26/2020as tabled before the lower house on 1 February 2020) (Finance Bill)proposestoabolishthelevyofDDTandtaxthedividendincome directly in the hands of the shareholder at the applicable rates. Under the proposed provision the company distributing thedividendswouldbe required towithhold taxon thedivi-dends paid by it, at applicable rates. The withholding rate for residentswouldbe10%andfornon-residents20%ortherateprescribed in the applicable DTAA.Capital gains would be taxed as short-term or long-term

depending on the period of holding the asset. Long-term capital gains arising on the sale of shares is generally taxable in thehandsofaforeign investorattherateof10%(plusapplicablesurchargeandcess).Short-termcapitalgainswouldbetaxedattherateof40%(plusapplicablesurchargeandcess).However,alowerrateof30%isapplicableonshort-termcapitalgainsinthe case of a foreign portfolio investor. Further, the short-term capitalgainsmaybetaxedat15%only,ifthegainsarerealiseduponsaleofthesecurityonthestockexchangeandthesecuri-tiestransactiontaxispaid,asprescribed.


Onshore and offshore foreign currency accounts are not permittedunderapplicablelaw,exceptinlimitedcircumstances,as set out in the Foreign Exchange Management (foreigncurrency accounts by a person resident in India) Regulations, 2015. For instance, an Indian project company receiving foreign investment under the foreign direct investment route is permitted to open and maintain a foreign currency account with an authorised dealer in India, provided that the Indian project companyhasimpendingforeigncurrencyexpenditure.Intheinstancereferredtohereinabove,theaccountisrequiredtobeclosedimmediatelyaftertherequirementsarecompletedandisnotpermittedtobeoperationalformorethansixmonthsfromthe date of opening such an account.


In addition to the restrictions on declaration of dividends under the financing documents, the Companies Act, 2013 permits declaration of dividends only out of the profits of the Indian company and after maintaining reserves for depreciation. The paymentofsuchdividendswillbesubjecttothetaxessetoutintheresponsetoquestion7.6above.



Each infrastructure sector in India has one or more regulators thatexercisejurisdictionovertheparticularsector.Forexample,the Airports Authority of India and the Directorate General of Civil Aviation regulate the airports/aviation sector, while the roads sector is regulated by the National Highways Authority of India(NHAI)ortheMinistryofAviationandMinistryofRoadTransport and Highways, amongst others. Concession agree-mentsorpowerpurchaseagreements,forexample,mayalsobeentered into with state-specific utilities/agencies.


Securitydocumentsarerequiredtobefiledandregisteredwithcertain authorities, as set out in the response to question 2.6above.


The government retains sovereign rights over ownership of natural resources, and the right to use such natural resources shall be subject to the terms of the licences granted by the government. Land and licences in respect of natural resources cannot be directly held by a foreign entity; however, it may be held by an Indian entity owned and/or controlled by such foreign entity, subject to the foreign investment thresholds spec-ifiedintheresponsetoquestion6.1above.


Yes.Royaltiesarepayablefortheextractionorexportofnaturalresources, the amount for which will depend on the manner in which such concession was obtained and in accordance with the stipulations set out under the applicable law. Further, income taxispayableonincomefromtheextractionorexportofnaturalresources.Additionally,taxpayershaveanoptiontopaytaxonincome from the business of certain services in connection with extractionorexportofnaturalresources.


Whiletheactualtransactionofforeigncurrencyexchangeisnotsubject to GST being a transaction in money, it may be levied on the supply of services provided in relation to purchase and sale of foreign currency, including money changing at the rates noti-fied under the GST laws.

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with the Foreigners Regional Registration Officer/Foreigners RegistrationOfficerwithin14daysoftheirarrival.



Under the FTP, all goods are freely importable except whenregulated byway of prohibition, restriction or exclusive tradingthrough State Trading Enterprises as laid down in the Indian Trade Classification (Harmonised System) of Exports andImports. Import of goods that are restricted can be imported only in accordance with an authorisation/permission or in accordance with the procedures prescribed in the notification/public notice issued in this regard. Additionally, import of some goods is free from payment of customs duties, subject to conditions stipulated under the Customs Act, 1962 (Customs Act) or any other statutes or law currently in force. Further, the Customs Act states that the government may restrict or prohibit importation of goods or services if it is necessary to do so for the purposes stated therein.


There are various taxes/duties/surcharge/cesses levied on theimport of goods into the country. The Customs Act empowers the government to levy duties of customs at such rates as may be specified under the Customs Tariff Act, 1975 (Customs Tariff Act) or under any other law that, for the time being, is enforced. Import of goods are typically subject to the levy of the following taxes/duties/surcharge/cesses:(i) BasicCustomDuty:It isapplicable toall thegoodsthat

are imported, unless specifically exempted. The dutieslevied are as per the rates prescribed in the First Schedule of the Customs Tariff Act. The levied rates may either be standard or preferential as per the country of import.

(ii) Surcharge: In addition to the levy of customs duty, a social welfaresurchargeatarateof10%isimposedonspecifiedgoods imported into India. Such surcharge is calculated ontheaggregateofduties,taxesandcessesapplicableonsuch goods.

(iii) Integrated Goods and Service Tax: It is applicable to allgoodsthatareimported,unlessspecificallyexempted.Theduties levied are as per the rates notified under the GST laws.

(iv) Safeguard Duty: The government is empowered to impose a safeguard duty on an article imported into India if it is satisfied that the article imported is in such increased quantities and under such conditions thatmay cause orthreaten to cause serious injury to the domestic industry.

(v) Anti-dumping Duty: The government may also impose anti-dumping duty on an article imported into India if it is satisfied that the article is imported into India at a price less than its normal value and the same may cause or threaten to cause serious injury to the domestic industry.

11 Force Majeure


Yes, typically all project contracts contain force majeure clauses, theextentofwhichisdefinedthereunder.Thenatureandrelief


Depending on the nature and size of the project, project developerswill be required to seek environmental clearances,approval of the resettlement and rehabilitation plan, consent to establish and operate, forest clearances, and wildlife clearances, amongst others.


Any procurement by project companies may be governed by thetermsofthebiddocumentsandthesubsequentconcessionagreements that may be signed by such a project company. That beingsaid, incertain instances,additional taxesordutiesmayalso be levied (for instance, the recently introduced safeguard duty on the import of solar panels from certain countries).

8 Foreign Insurance


Investment by foreign insurance companies are subject to regu-latory restrictions on ownership by foreign players. Goods and ServicesTaxwillbeapplicableonsuchpolicies,basedon thenatureandquantumofsuchpolicies.


As noted above, creation of security pursuant to an externalcommercialborrowingwouldrequiretheconsentoftheauthor-ised dealer bank. As part of the enforcement proceedings that may be undertaken by or on behalf of the foreign creditors, the foreign creditor may enforce security created over the insurance policies and obtain the benefit of the same.



Typically,nospecificrestrictionsexistunderIndianlabourandemployment laws but a foreign worker is required to complywiththerelevantimmigrationlawsandvisarequirementstobeemployedinIndia.Aforeignemployeewillberequiredtogetanemployment visa which may be granted subject to fulfilment of certain conditions, including, inter alia: (a) the applicant should beahighlyskilledand/orqualifiedprofessional,who isbeingengaged or appointed by a company/organisation/industry/undertaking in India on a contract or employment basis; (b) the employmentvisawillnotbegrantedfor jobsforwhichquali-fied Indians are available and also for routine, ordinary or secre-tarial/clerical jobs; and (c) the applicant’s salary should be in excessofUS$25,000perannum(subjecttocertainexceptions).Further, foreign nationals visiting India on long-term visas (morethan180days)arerequiredtogetthemselvesregistered



44AoftheCivilProcedureCode,1908(CPC)permitstheCentralGovernment to deem a judgment by a foreign court as enforce-able in India. However, the scope of the section is limited to monetarydecreesnotinthenatureoftaxes,fines,levies,penaltiesor payments of such nature. Further, in terms of Order XIIIA of the CPC, introduced recently through the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015, a party is permitted to seek a summary judgment in any commercial dispute if it is able to convince the court that the plaintiff has no real prospect of succeeding on the claim under consideration or the defendant has no real prospect of successfully defending the claim, as the case may be. Waiver of immunity is generally recognised by courts in India. However, the voluntary submission to the jurisdiction of a foreign court as a contractual choice may be disregarded by Indian courts if the court believes that such a submission is “unjust” in nature.



Yes, subject to the disputes that are not arbitrable, as set out intheresponsetoquestion15.3below,internationalarbitrationclauses (i.e. where a foreign party is involved) are recognised by Indian courts.


India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention) and the Geneva Convention on the Executionof Foreign Arbitral Awards, 1958 (Geneva Convention). An award made in a country which is a signatory to the New York Convention or Geneva Convention can be enforced in India. However, such award should have become final in the territory of such country, i.e. either the period for challenging the award shouldhaveexpired,or,iftheawardwaschallenged,suchchal-lenge should have been rejected by the courts in the country where the award has been made. Further, in order to enforce the award, the country where the award is made should have been notifiedasaconventioncountrybyIndiabywayofanexecu-tive notification.


While commercial disputes between parties are arbitrable, disputes pertaining to criminal matters, matrimonial disputes, tenancy matters, guardianship disputes, insolvency and wind-ing-up, and real property, amongst others, cannot be settled by arbitration. Indian courts have stated that disputes that involve in rem issues (i.e. affecting the world at large) are not arbitrable but in personam disputes (i.e. purely between two parties) are arbitrable.


There are no specific categories of disputes which are subject to mandatory domestic arbitration proceedings. However, most

available upon occurrence of a force majeure event shall depend on the commercial agreement between the parties. Such clauses may also be present in financing arrangements.



The principal legislation dealing with corruption in India is the Prevention of Corruption Act, 1988. The act imposes strict penal-ties on public officials accepting any form of illegal gratification. While the definition of public servants was enlarged in 1988 to include such public functionaries as Members of Parliament,corruption in the private sector still falls outside the ambit of the Prevention of Corruption Act, 1988. For corruption occurring in the private sector, the charging provisions which will apply can be found in the Indian Penal Code, 1960 in sections dealing with fraud, cheating, misrepresentation and criminal breach of trust. Furthermore, in terms of Section 212 of the Companies Act, 2013, the Serious Fraud Investigation Office has been granted wide-ranging powers to investigate frauds relating to companies, including on the grounds of public interest. From a corporate governance standpoint, the Companies Act, 2013 mandates the formationofauditcommittees,whicharerequiredtoreportanyinconsistencies with regards to a company’s finances. Additionally, the Companies Act, 2013 imposes penalties for fraud up to three times harsher than under the earlier regime. Lastly, various other statutes,suchasthePreventionofMoneyLaunderingAct,2002,theBlackMoney(UndisclosedForeignIncomeandAssets)andImpositionofTaxAct,2015andtheWhistleBlowersProtectionAct, 2011, seek to prohibit corrupt practices.

13 Applicable Law


Project contracts entered into between two or more Indian parties are governed by Indian law. Where there is one (or more) foreign counterparty, contracts may be governed by foreign law and such governing law choice is recognised by Indian courts.


Where a borrower avails of a loan from a domestic lender, Indian law is the governing law. However, in foreign currency borrow-ings or borrowings from foreign lenders, typically English law is the preferred governing law.


Typically, creation and enforcement of security is governed by Indian law.



India is not a signatory to any international treaties for recog-nition or enforcement of foreign judgments. However, Section

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Please see our response to question 17.1 above. A lower rateof5%(plusapplicablesurchargeandcess)wouldbeapplicablewhen payments relate to certain specified borrowings in foreign currency and interest rates are within a specified limit. Such a lowerwithholdingtaxrateisalsoapplicabletointerestpaymentsreceived by Foreign Portfolio Investors (FPI) on investments made by them in rupee-denominated bonds of Indian compa-nies or a government security, provided such interest is paid on or before 30 June 2020. TheFinanceBillproposes toextendthis benefit to interest paid to FPIs until 30 June 2023.

Certain other benefits may be available to banks and other financial institutions due to specific notifications issued by the CentralBoardofDirectTaxeswithrespectto immunityfromtaxesorduetoalowerrateavailableundertherelevantDTAA.Further, the Finance Bill proposes to exempt income in the nature of dividend, interest or long-term capital gains in the hands of certain sovereign wealth funds investing in companies engaged in infrastructure facility, subject to certain conditions.Therearenospecifictaxincentivesprovidedtoforeigninves-

torsorcreditors.However,therearecertaintax-savingbenefitsthat may apply depending upon the nature of the investment. Further, as already mentioned above, due to the applicability of DTAAs, if the foreign creditors are eligible to any DTAAs in force between their country of residence and India, they can avail benefits in accordance with the provisions of such DTAAs. As discussed in section 6 above, eligibility to claim benefit of any DTAA must be tested on the touchstone of the PPT containedunderMLI,andtheprovisionsoftheGeneralAnti-AvoidanceRuleswhichdeniestaxbenefitifthemainpurposeofanarrangement/transactionistoobtaintaxbenefitandsucharrangement, inter alia, lacks commercial substance.

18 Other Matters


India has detailed transfer pricing regulations under the domestictaxlawswhichrequireallpaymentstorelatedpartiesto be made on an arm’s-length basis. Certain relationships and certain transactions are deemed “related party” and deemed “international transaction”, attracting transfer pricing regula-tions. This advice must be sought on a case-by-case basis. It is also vital to take note of provisions relating to secondary adjust-ment.TheIncomeTaxActprovidesthatataxpayerwouldberequiredtocarryoutsecondaryadjustmentwheretheprimaryadjustment to transfer price has been made, inter alia: (a) suo motu; or (b)by the tax authorities and acceptedby the taxpayer. Itfurther requires that “excess money” shall be repatriated toIndia within the prescribed time, failing which it shall be treated as an advance to the related party (within the Indian transfer pricing regulations) and interest would be computed on such “excessmoney”payablewithintheprescribedtime.Additionally,Indiandomestictaxlawscontaincertain“thin

capitalisation”rules. Under theseprovisions, interestexpenseclaimed by an Indian entity in relation to payments made to its non-resident related parties will be restricted to the lower of:

public procurement/PPP contracts with concessioning author-ities (e.g. road and airport concessions) typically provide for domestic arbitration under the concession document. Further, certainstatutesrequirethatdisputesberesolvedbyreferencetoarbitration. For instance, disputes involving transfer of shares onstockmarketsareusuallyrequiredtoberesolvedbymeansofarbitrationundertherulesoftherelevantstockexchanges.



NospecificpracticeexistsinIndiainthisregard.However,forinstance, the Solar Energy Corporation of India (SECI) has insti-tuted the viability gap funding scheme, in terms of which SECI shall provide viability gap funding to the project developer as an incentive. This funding is released on the commercial opera-tion date of the full project capacity of the developer. However, theMinistryofNewandRenewableEnergywillprovide100%viability gap funding to SECI to disburse to the solar park devel-oper immediately, subject to availability of funds.

17 Tax


(a) Payment of interest to domestic lenders would be subject towithholdingtaxattherateof10%.Inthecontextofforeign lenders, varying withholding tax rates wouldapply depending on whether the loan given is designated in Indian rupees or in a foreign currency, the category of lender, as well as the rates prescribed under the DTAA applicable to the foreign lender, amongst other factors. While the general rate of tax on interest income rangesfrom 20% to 40% (plus applicable surcharge and cess),a special rate of withholding tax of 5% (plus applicablesurcharge and cess) may be available in respect of certain debt instruments issued until 30 June 2020 which satisfy certaincriteriaprescribedundertheIncomeTaxAct,1961.TheFinanceBillproposestoextendthisbenefittosuchdebt instruments issued until 30 June 2023.

(b) The nature and characterisation of payments with respect to proceeds of claim under a guarantee or enforcing secu-ritywouldneedtobeexaminedtodeterminethetaximpli-cations. If such payments are in the nature of interest payments,thentheabovementionedwithholdingtaxrateswould be applicable. If they are characterised as capital payment, then, in certain circumstances, such capital paymentmaynotbetaxableinIndia.

Withholdingoftaxisdeterminedaspertheratesprescribedin the Finance Act of the relevant year as well as the DTAAs that India may have entered into with several countries/territo-ries.Withholdingoftaxisattherateof10%incaseofpaymentofinteresttoloansfromdomesticlenders.TheIncomeTaxActfurtherprovidesforthewithholdingoftaxoninterestpaymentsmadetoforeign lendersataratewhichvariesfrom5%–20%,inter alia, depending on the class of borrowers. Withholding tax shall be deducted in a similarmanner from the proceedsof a claim under a guarantee or from the proceeds of enforcing security.



19 Islamic Finance


At present, RBI regulations do not recognise Islamic financeproducts. Interest rates for market borrowings are usually linked toLIBORandMCLR.


Typically, project contracts or financing contracts do not contain Shari’ah law as the governing law. Indian courts generally rely upon common law jurisdictions and other legislations in force in India and do not rely on/use Shari’ah law for the resolution of disputes.


Provisions pertaining to payment of interest are generally the norm in India, and are held to be valid and enforceable. That being said, there are also laws that restrict: (a) charging of interest by money lenders beyond certain set thresholds (in certain states); and (b) loans being provided at interest rates lower than government security rates, for certain companies (see Section 186 of the Companies Act, 2013).

(a)30%of itsearningsbefore interest, taxes,depreciationandamortisation; or (b) interest paid or payable to such related party.

It also envisages a deeming provision under which a debt shall be deemed to be treated as issued by a related party, where suchrelatedpartyprovidesanyimplicitorexplicitguaranteetothe lender, or deposits a corresponding and matching amount of funds with the lender. The disallowed portion of interest payment can be carried forward and set off within a period of eightyears,asandwhensuchamountsfallwithinthe30%limit.

Any structure or arrangement which is entered into for project financing,withtheobjectiveoftaxsavingoroneofthemainpurposesofwhichistaxsaving,GeneralAnti-AvoidanceRulesortheapplicableMLIruletodenytreatybenefitorcharacterisethetransactionsoastodenythetaxsavingmaybeinvokedbythetaxauthorities.


There are no restrictions in issuance of bonds or other market instruments. However, the end use of such bonds or instru-ments and the investment amount may be restricted based on the nature of the borrowing or the investor, such as under the Master Direction – External Commercial Borrowings,TradeCredit,BorrowingandLendinginForeignCurrencybyAuthorised Dealers and Persons Other than Authorised Dealers, and Investment by Foreign Portfolio Investors (FPI) in Debt.

148

Santosh Janakiram is a partner in and head of Cyril Amarchand Mangaldas’ Projects Group and previously was a partner in Amarchand & Mangaldas & Suresh A. Shroff & Co. (AMSS), India’s largest and foremost law firm. He has worked in AMSS/the firm’s Mumbai office since 2001.Santosh has rich experience in banking, project financing, acquisition financing, structured financing, projects and private equity, and repre-sents developers, sponsors, lenders and contractors in infrastructure and project finance transactions. Santosh is involved in various bond and structured debt financings. Santosh also leads the Firm’s development of the renewable energy practice advising developers, investors and lenders in this space, whereby the firm has emerged as the pre-eminent firm in the sector in India.Santosh has acted on a number of landmark transactions, including advising the Indian Lenders, International Finance Corporation, Development Bank and other national and international financial agencies in the 4,000 MW Mundra Ultra-Mega Power Project which is the first project to be financed by offshore lenders. He has also advised on various high-yield bond transactions being undertaken by Indian groups. A few of his recent significant transactions include advising Engie Solar S.A. and Engie S.A. on the sale of solar projects to Edelweiss group and advising various Indian developers on issuance of high-yield offshore bonds aggregating ~US$1.5 billion. He also advised the International Finance Corporation in its largest solar rooftop debt financing transaction with the Azure group.

Cyril Amarchand MangaldasPeninsula Chambers Peninsula Corporate Park Ganpatrao Kadam Marg, Lower Parel Mumbai 400 013 India

Tel: +91 22 2496 4455Email: [email protected] URL: www.cyrilshroff.com

Cyril Amarchand Mangaldas is India’s leading full service law firm with over 100 years’ experience. Originally founded in Mumbai, it has national coverage with offices in Mumbai, New Delhi, Bangalore, Hyderabad, Ahmedabad and Chennai. Cyril Amarchand Mangaldas advises a full range of clients including domestic and foreign commercial enterprises, financial institutions, and also state and regulatory bodies. The firm has handled large, complex and pioneering transactions of various kinds, winning the respect of the business community and peer recognition on several occasions. The firm has consistently been rated as the leading law firm in India by various professional organisations, law directories and professional journals including Chambers Global, The Legal 500 Asia Pacific, IFLR 1000, Asia Law and Profiles, Who’s Who Legal, India Business Law Journal and a range of other legal and financial publications. It has also won

several awards. The firm also commands the highest respect in business, governmental and corporate media circles. Above all, the firm has a robust value system with a strong client focus, a pragmatic and solution-oriented approach to most problems.

www.cyrilshroff.com


India

Surya Sreenivasan is a partner in Cyril Amarchand Mangaldas’ Projects Group. She has worked in the firm’s Mumbai office since 2010.Surya has significant experience in banking, project financing, projects and private equity, and represents developers, sponsors, lenders and contractors in infrastructure and project finance transactions. Her work has a focus on renewables and airports, and she has worked on several of the leading deals in this space, including GVK’s sale of Bangalore airport to Fairfax Group, investment into GMR Airports Limited by a consortium of investors, investment by ADIA, NIIF and PSP into GVK Airports. She has also advised bidders for all the new airports which are proposed to be privatised in India. In the renewables space, she has advised leading developers on structuring their investment into captive power projects and is advising banks and multi-lateral financial institutions on financing various renewable projects.

Cyril Amarchand MangaldasPeninsula Chambers Peninsula Corporate Park Ganpatrao Kadam Marg, Lower Parel Mumbai 400 013 India

Tel: +91 22 2496 4455Email: [email protected]: www.cyrilshroff.com



Chapter 17 149

Aris Prasetiyo Emalia Achmadi

Indonesia

Soemadipradja & Taher

Rahmat Soemadipradja Oene Marseille

Indonesia



Land and “objects connected to land” (i.e. attached to the land – including machinery and pipelines integrated with the property) wouldbesecuredbywayofamortgage.Mortgagesareestab-lished by: (i) signing a mortgage deed before a land conveyancer (“PPAT”) with jurisdiction over the land; and (ii) registering the deedwiththerelevantLandRegistrationOffice(“BPN”).


Receivables are secured by way of fiduciary assignment (secu-rity), which typically involves a borrower/chargor (the fidu-ciary assignor) giving a lender (the fiduciary assignee) a fiduciary assignment over specified receivables payable to the fiduciary assignor by its debtors. In the absence of default and if the debtors are not notified of the security, the fiduciary assignor is free to collect the receivables from its debtors. The fidu-ciary assignment is made effective by way of a notarial deed and having the deed registered with the fiduciary registration office.


In practice, cash deposits in bank accounts are secured by pledges. The pledge of a bank account is created by a deed of pledge,whichcanbeexecutedprivately,underhandorbeforeanotary, subject to the terms of opening an account.


Security over shares is effectuated by way of a pledge. The pledge is created by a deed of pledge and having such pledge registered in the company’s shareholders’ register.

1 Overview


The Indonesian government (“GoI”) is strongly focused on developing the nation’s infrastructure projects, as can be inferred by the number of projects set out under the latest National Medium-TermDevelopmentPlan. Toacceleratesuchprojectsand to overcome the considerable funding gap, the GoI has initiated and encouraged project financing alternatives through several schemes such as Public Private Partnerships (“PPP”), Non-Government Budget Equity Financing and blendedfinance. These three alternative schemes have become the main trend for project finance in Indonesia. Also, the government has announced the launch of a bill known as the Omni-bus law that focuses on job creation, but also has an important and significantinitiativeofmovingthecapitaltoKalimantanislandand building a new modern capital there with all the necessary infrastructure of a modern city.


One of the most recent significant project financings in Indonesia is the Trans-Sumatra Toll Road project. The project will cost an estimated Rp 309 trillion and will, upon comple-tion, connect the northern end of the island of Sumatra (i.e. Aceh Province) with the southern end (i.e. Lampung Province), involving construction of a 2,261 km road.

2 Security


TheassetsecurityregimeinIndonesiais,ontheonehand,quitespecific and well defined on what assets and based on what type of security/collateral document security can be granted; on the other hand, it is somewhat restricted in the sense that no secu-rity interest would arise under Indonesian law if the asset is not of the type capable of being secured by either: (i) a mortgage; (ii) fiduciary assignment; (iii) pledge; or (iv) vessel hypotec.

150 Indonesia




In the absence of cooperation from the mortgagor, the mort-gagee would need to obtain a writ of execution from anIndonesian court and then proceed to auction the mortgaged property. Enforcing a fiduciary assignment has been compli-catedbyarecentConstitutionalCourtdecisionwhichrequiresthe debtor’s consent and acknowledgment that it is in default – absent which, the creditor would need to obtain a court order toenforce. Enforcingapledgewouldnormallyalsorequireacourt order.


Generally, although there are no specific restrictions on foreign investors or creditors foreclosing assets in Indonesia, from a logistical perspective, the use of a local security agent would usually be critical to ensure an efficient process.



Indonesian law provides for a debtor to work out a court-su-pervised composition plan or settlement between the creditors in the period between the court granting a ‘provisional suspen-sionofpayments’(foramaximumof45days)andsubsequentlya ‘permanentsuspensionofpayments’ (foramaximumof270days), from the date on which the provisional suspension of payments is granted by the court. If the creditors have filed a bankruptcy petition, the debtor can file for a suspension of payments at the first bankruptcy hearing. If the secured and unsecured creditors vote in favour of a composition plan in accordance with the relevant statutory percentages, it will be binding on all the creditors, if ratified by the Commercial Court.


Indonesian legislation provides for preference periods and clawback rights. The general rule is that any past transaction involving the bankrupt project company’s assets can be over-turned if it can be proven that at the time of the transaction, the company and the relevant third party were aware (or should have been aware) that losses to the company’s creditors would result from the consummation of such transaction.


Notarisationfees–whichvary fromonenotary to thenext–are typically associated with the cost of preparing the notarial deed as well as having such deed registered with the appro-priate governmental agencies. In addition, a duty stamp (with a nominalvalueoflessthanUSD0.50)mustbeaffixedtotherele-vant security document for evidentiary purposes. No ad valorem stamp duty is payable in relation to registration of security inter-ests in Indonesia.


Depending on the size and location of property subject to an Indonesian mortgage, the filing, notification and/or registration requirements may be potentially cumbersome and time-con-suming.Similarly,thevesselhypotecprocessmayalsobequitecumbersome. The process to effectuate a fiduciary assign-ment is usually quite straightforward. However, for pledges,there is no public registry in Indonesia for filing, notification or registration.


Governmentalconsentsmayberequired tocreateamortgageover land with certain titles.

3 Security Trustee


Although Indonesia does not recognise the concept of a “trust”, in practice, the role of a security trustee in representing the bene-ficiaries of a security interest during the enforcement process has been widely accepted.


We have seen both the parallel debt concept and several cred-itor status being used in Indonesia to achieve the effect referred to above.

151Soemadipradja & Taher



Law No. 25 of 2007 on Investment (“Investment Law”) guaran-teesequalityoftreatmentbetweenforeignanddomesticinves-tors. The Investment Law also provides that the Indonesian government“shalltakenomeasuresofnationalisationorexpro-priation against the proprietary rights of investors, unless provided by law” – and with compensation.



The relevant government agencies or departments with authority over typical project sectors include:■ theMinistryofEnergyandMineralResources(“MEMR”),

for projects in the energy, mining, geothermal energy and electricity sectors;

■ theSpecialTaskForceforUpstreamOilandGasBusinessActivities(“SKKMigas”),forprojectsintheupstreamoiland gas sector;

■ the Ministry of Communications and Informatics, forprojects in the telecommunications sector;

■ the Ministry of Public Works and Housing and theMinistryofTransportation,forprojectsintheinfrastruc-ture sector;

■ theCommitteeforAccelerationofPriorityInfrastructureDelivery (“KPPIP”) and the National DevelopmentPlanning Agency (“Bappenas”) as the coordinators andfacilitators for general development planning activities; and

■ relevantregionalgovernments.


Reportingandfilingrequirementswillapplytoprojectfinancetransactions, as project companies are likely to become indebted to offshore finance providers. BI requires non-bank companies that have offshore debt

in a foreign currency to adopt certain prudential principles, includingcompliancewithaminimumhedgingratio, liquidityratio and credit rating. A project company with an offshore loan must also submit various reports on its offshore loan manage-ment to BI, the Finance Ministry’s Offshore CommercialLoanTeam(“PKLNTeam”)andtheFinanceMinistry’sFiscalAnalysis Agency.


Ingeneral,allbusinessactivitiesconductedinIndonesiarequirethe entity conducting such activities to hold a specific business licence. According to Article 33 paragraph 2 of the Indonesian Constitution, the state owns all land and natural resources in Indonesia for the welfare of its citizens. This principle


Indonesian law does not discriminate between foreign creditors’ claims against a bankrupt project company and the claims of domestic creditors. However, in some sectors only the relevant regulatory authority has the capacity to file a bankruptcy peti-tion against a project company.


No.Totheextentthatthematterrelatestocivillaw,everyassetseizure must be carried out through the court.


A debtor may seek to negotiate a debt restructuring and enter into an amicable agreement with its creditors outside commer-cial court proceedings. If the debtor and all its creditors have reached an agreement without commercial court assistance, such amicable agreement will be binding.


If a company is declared bankrupt or is in the process of suspen-sion of debt payment, the company directors may continue to run its business based on the relevant creditors’ committee approval or supervisory judge’s approval (in the event of bank-ruptcy) or with the administrator’s approval (in the case of a suspension of debt payment).



Foreign investment in Indonesia is generally done through a limited liabilityforeigninvestmentcompany(“PMAcompany”).Foreigninvestors’ maximum ownership interest in a PMA company islimited to certain industries, depending on the targeted investment sector or field. The list of business sectors that are restricted or closed to foreign investment is set out in a Presidential Regulation issued every few years (commonly known as the “Negative List”).


Indonesia has entered into several bilateral investment treaties, taxtreaties,andfreetradeagreementssettingoutstandardsofprotection offered to the respective country’s investors.

Those treaties do not offer protection against the restrictions describedinquestion6.1above.

152 Indonesia



Project companies are allowed to open and maintain foreign currencyaccountsbothlocallyandwithoffshorebanks,exceptthatpaymentforthesaleorexportofnaturalresourcecommod-ities must be made to an account with a bank that is onshore (including a subsidiary or a branch of an offshore bank that operates in the country.


Generally, there is no such restriction.


Law No. 1 of 1970 on Work Safety sets out the general provi-sions on occupational health and safety. Each different business sector has its own regulations on occupational health and safety. Law No. 32 of 2009 sets out the general provisions on environ-mentalprotection.Thislawrequiresthatanyoperationalactiv-ities be pre-empted by the person holding an environmental permit or a similar document.


There is no specific legal/statutory framework governing procurement in the private sector. Please note that procurement in the private sector will still be subject to certain legal formali-ties,asperourresponsetoquestion7.2above.

8 Foreign Insurance


As a general principle, project assets in Indonesia can only be insured by an insurance company established in Indonesia that holds a licence granted by the Financial Services Authority (“OJK”). However, the limited exceptions to this principlepermit foreign insurance companies to provide insurance cover ifnoOJK-licensedinsurancecompanyinIndonesia:(a) has the ability to take on or manage the risk relating to the

relevant insurance object, either on its own or jointly with another insurance company or companies; or

(b) is willing to provide insurance cover for such objects.On this basis, foreign insurance companies may be able to

provide insurance cover over project assets if they satisfy either oftheaboveexceptions.

is reflected in various laws, including the laws governing the mining, oil and gas and forestry sectors.

LandThe Indonesian agrarian law provides that the ‘right to own’ (hak milik) title over a plot of land may only be held by Indonesian citi-zens.Consequently,aforeignentity(includingaPMAcompany)would typically hold a ‘right to use’ title (hak pakai) or ‘right to build’ title (hak guna bangunan).

Natural resourcesAdomesticorPMAcompanythatintendstocarryoutexplora-tionandexploitationorextractionbusinessactivitiesinvolvingIndonesian natural resources must obtain the relevant licences from the GoI (in the case of mining activities), or enter into a cooperation agreement with the GoI (in the case of oil and gas activities).

PipelinesCertain licences or permits from the government may be required for pipeline business activities, depending on thepurposeoftherelevantpipeline.Forexample,alicenceandaspecial right (hak khusus)arerequiredfortheuseofpipelinesforthe transportation of gas.


Royalties,feesandtaxesarepayableontheextractionorexportofnatural resources, that are determined according to the nature of the specific commodity and the relevant implementing regulations.


According to the prevailing BI regulations, the purchase offoreign currency against Rupiah between a foreign exchangebank and domestic or foreign customers through a spot or standard derivative transaction must be based on an under-lying transaction upon reaching the regulated threshold, i.e. USD 25,000 (or the equivalent in another foreign currency)per month per customer for spot transactions and USD 10,000 (or theequivalent inanother foreigncurrency)permonthpercustomer for standard derivative transactions.

The transfer of Indonesian Rupiah overseas by Indonesian banks is prohibited.


There are no restrictions on the remittance of foreign currency overseas. However, if an amount above USD 10,000 (or its equivalent in another foreign currency) is remitted through abank, a report must be made by the bank based on the informa-tionreceivedfromthecustomer.Withholdingtaxof20percentis applicable to payments of dividends and interest payments (including premiums, discounts and guarantee fees) to offshore parties, subject to the benefit that any foreign investor or cred-itormayhaveunderarelevanttaxtreaty.Therearenorequirementsforprojectcompaniestorepatriate

their earnings derived from their business activities in Indonesia.





Indonesia has several relevant anti-corruption laws and regulations.Where corruption is found under the Anti-Corruption Law,

the court may order: fines of between Rp 50 million and Rp 1 billion; imprisonment for up to 20 years or life; and (under certain special circumstances) the death penalty.

13 Applicable Law


Generally, the parties’ choice of law (including foreign law) in an agreement will be recognised by the Indonesian courts as a valid choice of law provided that there is sufficient connection between the chosen law and the subject matter of, or parties to, the agreement. However, foreign law cannot be chosen in certain circumstances where Indonesian law is mandated, such as agreements regarding security over Indonesian assets, which must be governed by Indonesian law.

As a general proposition, project agreements typically tend to be governed by domestic law.


Typically, England and Wales, New York or Singapore law.


In certain industries, such as mining and oil and gas, and infra-structurePPP,theindustryregulatorswillsometimesexpectthatthe governing law for the relevant contracts be Indonesian law.



Contractual provisions involving submission by the parties to a foreign jurisdiction are generally effective and enforceable under Indonesian law (provided that the foreign court accepts such jurisdiction). However, the utility of such contractual provi-sions may be limited because foreign judgments are not directly enforceable in the Indonesian courts.

The waiver of sovereign immunity under Indonesian law is not clearly regulated. However, civil and administrative claims may be brought against the Indonesian government (both central and regional) and its institutions.



Yes,thecontractualprovisionsrequiringsubmissionofdisputesto international arbitration is enforceable and recognised by local courts.


The circumstances under which insurance policies over project assets are payable to foreign secured creditors are usually where: (a) the project company has entered into fiduciary security over insurance proceeds (in relation to the insured objects) with the relevant foreign creditors, in order to secure a loan; (b) the project company has notified the insurer about the fiduciary security over insurance proceeds and has directed the insurer to name the foreign creditors as the project company’s bene-ficiaries or loss payees in case of an event of default under the loan; or (c) the insurance company has acknowledged the direc-tion from the project company and has agreed to pay the insur-ance proceeds (if any) direct to the foreign creditors in case of notification of an event of default under the loan.



Beforehiringaforeignworker,theprojectcompanywouldneedtocompleteanexpatriatemanpowerutilisationplanandobtainapproval from the Employment Ministry and submit notifi-cation. Theforeignworkerswill thenberequiredtoobtainalimited stay visa and limited stay permit to enable them to work in Indonesia.TheEmploymentMinistrymaintainslistsofoccupationsthat

are permitted and restricted to foreign nationals. The under-lying principle is that no foreign workers are permitted to manage any human resources affairs.



Equipmentimportedforaprojectissubjecttotheimportationrequirementsandimportdutiesandtaxes,asapplicable,underthe relevant regulations.


Project or construction equipment has varied import dutytariffs,generallysetoutunderMinistryofFinanceRegulationNo.6/PMK.010/2017(asamendedfromtimetotime).

11 Force Majeure


As a matter of freedom of contract, the parties to a contract could agree to a force majeure exclusion on specific matters.However, it is not yet clear whether the parties would be able toeffectivelywaiveorexcludethegeneralapplicabilityof force majeure principles under the Indonesian Civil Code.

154 Indonesia



The Investment Law and regulations provide that the Indonesian government may provide certain facilities to foreign inves-torsinvestinginIndonesiathroughtheestablishmentofPMAcompanies,includingimportfacilities,taxbenefitsandincometaxfacilities.Nospecifictaxesapplyforthepurposeofloans,mortgagesor

other security documents, either for the purposes of effective-ness or registration. However, a nominal stamp duty is appli-cable to any instrument (and any document to be submitted to an Indonesian court), and various registration fees may be applicable.

18 Other Matters


Landacquisitionisgenerallyacknowledgedasoneofthemostchallenging aspects for large infrastructure projects (including for PPP projects) in terms of complexity and uncertainty.Accordingly, investorsand lendersshouldexpect landacquisi-tion to have a potentially serious impact on project timing and costs.

Other risks relating to PPP projects that investors and lenders should consider include site risk, design risk and political risk, that are all referred to in the Risk Allocation Guidelines prepared by the IIGF.


Bonds and similar capital market instruments in Rupiah andother currency must in essence be listed with the Indonesia Stock Exchange. The Indonesian capitalmarket sector is currentlyregulatedunderLawNo.8of1995onCapitalMarkets(“CapitalMarketsLaw”),andissupervisedandregulatedbyOJK.

In relation to the issuance of a capital market instrument through a public offering, the Capital Markets Law requiresan issuing company to submit a Registration Statement and supporting documents, including a prospectus, financial state-ment,legalduediligencereportandopinion,totheOJK.

19 Islamic Finance


Conventional financing arrangements for projects always include an interest payment obligation, which is prohibited under Islamic financing. Accordingly, financing projects that

To enforce a foreign award, either the party or the arbitrators asanapplicantmustobtainawritofexecution(exequatur order). The granting of an exequatur order by the Central Jakarta District Court follows certain procedures.


Yes, Indonesia is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards.


Only disputes of a “commercial” nature concerning rights that (according to the Arbitration Law) are “fully controlled by the parties” can be arbitrated. To be a “commercial” dispute, the dispute must involve commerce, banking, finance, investment, industrial or intellectual property rights. In practice, tort claims in Indonesia would not be considered to be arbitrable disputes due to their nature, since they are not based on a specific agree-ment between the disputing parties.


We are not aware of any disputes that are subject to mandatory domestic arbitration proceedings.



In relation to PPP projects, GoI support can be available through the grant of a government guarantee by the Indonesia Infrastructure Guarantee Fund (“IIGF”) or a co-guarantee withtheMinisterofFinance(totheextentthatIIGF’scapitalisinsufficient to provide a guarantee for a particular PPP project). IIGF is a statutory entity, the role of which is to guarantee the GoI’s financial obligations under PPP projects, covering the various risk areas specified in the relevant regulations.

In IIGF’s Risk Allocation Guidelines, many political risks tend to be allocated to IIGF in PPP project negotiated govern-ment guarantees.

17 Tax


Ataxpayerorcompanytaxpayermustbeappointedtowithholdtaxfrominterestpayableonloans.Nospecific taxesareapplicable for theproceedsofaclaim

under a guarantee or the proceeds of enforcing security.



A Murabaha financing instrument is also known as a marked-up sale. This type of instrument is based on the transaction cost and there is a fee to compensate for the service. The fee itself is determined and agreed upon by both parties and written in the contract (aqd ). In Murabaha, the asset should be real although it is not necessarily tangible. Therefore, the seller must truthfully statetheoriginalpriceandtheadditionalexpenses.

In Indonesia, debt-based instruments such as the Murabaha, Istihsna and Ijarah are commonly used to finance infrastructure construction.


It is not common practice for Islamic financing transactions in Indonesia to be governed by Shari’ah law. However, even though it is not common practice, the Council of Indonesian Ulama has ruled that if a dispute arises in relation to an Islamic transaction, failing an amicable settlement, the parties must settle the dispute through the national Shari’ah arbitration board, other dispute settlement venues based on Shari’ah principles or through the Religious Court.


The imposition of an interest payment obligation is prohibited in Islamic project financings. Fee-based, profit-based or sale-based arrangements are alternative structures that may be used in Islamic project financings.

comply with Islamic principles must adopt a structure that does not involve any interest payments. Such a structure can be achieved by combining different types of aqd or contracts (such as Istishna, Ijarah, Wakalah and Murabahah) or using any one of the relevant types of aqd.

In Islamic project financing, using a combination of Istishna and Ijarah structures, the arrangement would be as follows:1. The parties agree on the procurement of a certain asset

(Istishna). The party providing the financing (financier) appoints a special purpose vehicle (“SPV”) to act as thepurchaser and to order the procurement of the asset from a project company, in return for the financier (through the SPV)financingtheprocurementoftheassetinanamountequal to the total project cost. The financing will begiven through several phases of the procurement project. Upon completion of the procurement project, the project companytransferstheownershipoftheassettotheSPVon an agreed date.

2. TheSPV andproject company agree on the lease of theassets upon delivery (Ijarah). The project company will act as the lessee and will pay rent for a period agreed by the parties.Paymentoftherentisequaltopaymentoftheloanunder a conventional structure, while the term of the lease isequaltothematuritydateoftheloan.

3. At the end of the lease period, the asset can either be purchased by the project company (using aqd al-bay’ ) or granted to the project company (in which case the sale price would have been incorporated into the rental amount), depending on the agreement between the parties.

In a Wakala structure, the financiers appoint a project company to act as their agent (Wakeel ) to procure the construc-tion and delivery of the project asset. The project company (as customer) will utilise the financing obtained from the financiers to arrange for project construction. Profits derived from the project asset will be distributed between the project company and the financiers based on a pre-agreed rate, with the proceeds paid to the financiers being applied towards the financing. Once the financing has been paid in full, the project assets will be transferred to the project company based on a pre-agreed arrangement.

156

Rahmat Soemadipradja is a founding partner of S&T. He has assisted clients from a wide range of industries for over 30 years, providing well-thought-out legal solutions to clients’ corporate issues through careful analysis and a solid understanding of the intricacies and challenges of working with governmental agencies and bureaucratic procedures and ensuring that clients can achieve their goals and objectives in line with prevailing laws and regulations.

Emalia Achmadi has over 24 years of financial services, capital markets and M&A/corporate experience. A member of the Inter-Pacific Bar Association, she is a licensed Advocate and a member of the Indonesian Advocates Association (“PERADI”). She is an adviser to various national and international banks on regulatory and compliance matters, including on the ‘fit and proper test’ for relevant banking personnel. In the banking and finance sector, Emalia has advised international banks and financing institutions on financing in Indonesia and has often assisted the International Finance Corporation in regard to financing and share acquisitions.

Soemadipradja & TaherWisma GKBI, Level 9, Jalan Jenderal Sudirman No. 28Jakarta 10210Indonesia


Tel: +62 21 574 0088Email: [email protected]: www.soemath.com

Tel: +62 21 574 0088Email: [email protected] URL: www.soemath.com

Established in 1991, Soemadipradja & Taher (“S&T”) is consistently ranked top tier among Indonesian law firms. Our firm consists of 11 partners, three foreign counsels, one special counsel and 35 associates.Through the collective expertise of our partners, counsels and lawyers, a wealth of experience representing corporate clients, and an ability to look beyond traditional approaches and think creatively, we assist national, foreign and multinational clients to achieve their business objectives in Indonesia.As specialists in providing corporate legal services, we understand our clients’ businesses, industries and corporate goals, ensuring that we provide the most appropriate legal solutions adjusted to our clients’ needs, while applying the highest ethical and professional standards.

S&T has formed an strategic alliance with Allen & Gledhill of Singapore, and maintains relationships with a number of leading regional and inter-national law firms, including Corrs Chambers Westgarth and Nagashima Ohno Tsunematsu.

www.soemath.com


Indonesia

Oene Marseille is a partner at Allen & Gledhill who has recently been assigned to S&T as part of a new alliance between S&T and Allen & Gledhill. Oene’s main practice areas are mergers and acquisitions and corporate and commercial transactions. Prior to joining Allen & Gledhill in November 2018, Oene was a foreign legal counsel with a leading law firm in Indonesia. He has worked in Jakarta, Indonesia for more than 18 years and has extensive experience in working with international agencies as well as private investors in the region. He is native Dutch and is proficient in Dutch, Bahasa Indonesia, English, French and German.

Aris Prasetiyo is an international counsel at Allen & Gledhill who has recently been assigned to S&T as part of a strategic alliance between S&T and Allen & Gledhill. Aris’s areas of practice include mergers and acquisitions, general corporate matters, banking, and other cross-border investment and commercial issues. An Indonesian national, Aris has worked for more than 10 years in Jakarta, Indonesia. Prior to joining Allen & Gledhill, he was a California-licensed Attorney with a leading law firm in Indonesia.







Chapter 18 157

Ireland

Arthur Cox Charlotte Upton

Matt Dunn

Ireland


Outside of renewable energy transactions, a range of PPP trans-actions have been financed in Ireland, primarily involving health-care, social infrastructure (education and courts), energy and transport projects. The National Development Plan 2018–2027 (NDP)setsoutplansfor investmentofapproximatelyEUR116billion tomeet Ireland’s infrastructure and investment require-ments over the above period. While government funding has been allocated for the majority of the planned projects, the NDP states that all large-scale projects included in the NDP should continue to be assessed for suitability for procurement by PPP and/or alternative financing, particularly in respect to conces-sion-based projects which offer for the potential for user charges. Various PPP transactions which were signed in the imme-

diate aftermath of the global financial crisis have been refi-nanced in 2016–2020 as the availability and commercial terms of debt financing have improved significantly, enabling projects to take advantage of improved pricing available from incumbent financiers or to agree new terms with an entirely new lender group,andtoreleaserefinancinggains(totheextentavailable).Forexample,theConventionCentreDublinPPPclosedarefi-nancinginDecember2019andBAMPPPcompletedrefinanc-ings of two schools’ PPPs and one road PPP in 2019.


Significant project financings in Ireland in recent years include:Oweninny Power:AIB,BNPParibasandMUFGprovided

commercial debt facilities alongside EIB financing to fundthe development and financing of the 89MWPhase 1 of theOweninny Windfarm, which will be, once developed, Ireland’s largest wind development project being developed through a joint venture betweenESB andBordnaMona. Phase 2willfurtherincreasetheinstalledcapacityto172MW,makingitbyfar the largest windfarm on the island of Ireland, with the poten-tial for significant further development on the site. Oweninny Power is the first Irish wind project to be co-financed by the EIB, which is providing 50% of the funding part of theInvestment Plan for Europe and backed by the European Fund for Strategic Investments.

Dublin Waste-to-Energy: this project, led by Covanta, entered commercial operation in early 2017 and was refinanced shortly afterwards, with senior secured and junior secured facili-tiesprovidedbycommercialbanks(AIB,BankofIreland,HelabaandNatixis)alongside institutional investorswhichmadeavail-ablefixedandfloatingratetranches,withallthefacilitiesbeingsubject to a common terms agreement. The Dublin WtE facility is capable of processing over 600,000 tonnes of municipal waste

1 Overview


Historically, project finance activity in Ireland has been driven by the needs of the energy sector and PPP programme; project finance transactions tend to come in waves when supported by favourable public policy.

Onshore wind transactions have been one of the mainstays of the Irish project finance market over the past five years: there were 368 operational windfarms on the island of Ireland by the endof2019,withapproximately3.7GWofinstalledcapacityinaggregate. Domestic and international commercial lenders have been active in financing onshore wind projects, with involve-ment from development financial institutions such as the EuropeanInvestmentBank(EIB)andKfW.

The Renewable Energy Feed-In Tariff (REFIT) schemes have supported the growth in renewable energy projects by incentiv-isingsupplierstoenterintofixed(orfloor)pricePPAsbyeffec-tively providing such suppliers with a one-way hedge against market prices falling below a particular level (depending on the REFIT scheme, technology and project size) for a period of up to 15 years. The Irish government in February 2020 announced the final terms and conditions of the new Renewable Energy Support Scheme (RESS) which will involve a series of auctions into which “shovel-ready” energy projects will be able to bid their proposed electricity price, with successful projects being thosewhosepriceisatorbelowtheclearingpricerequiredtomeet the capacity being auctioned. The RESS 1 stage of the scheme will operate as a two-way contract for difference refer-encing a strike price determined through the relevant auction process (which will remain constant over the term of RESS 1 support).

Once it is operational, the introduction of RESS is likely to result in lower pricing for renewable energy projects, potentially giving rise to interest in using other types of debt (in addition to traditional senior project financings) in order to enable sponsors to meet their targeted returns on investment for new projects. TheRESSschemeisalsoexpectedtoaffecttheprojectfinancemarketinvariousotherways:forexample,therewillalsobeafocusfromsponsorsonfixingfinancingcostspriortopartici-pating in auction processes as part of the process of modelling costs used for formulating their bids offered in auctions. There mayalsobearequirementfordeveloperstoofferlocalcommu-nities the right to invest in renewable energy projects (though this will not apply to the first round of RESS auctions).

158 Ireland


the absence of the security trustee/chargee exercising controlover the proceeds of any receivables, a charge over those receiv-ableswillbeafloatingcharge.Asstatedinquestion5.2below,floatingchargeswillrankbehindfixedchargesandpreferentialcreditors in an insolvency. In order to ensure that any assign-ment takes effect as a legal, rather than equitable assignment,expresswrittennoticemustbegiventotherelevantdebtors(inaddition to such assignment being in writing and absolute (rather thanbeingexpressedtobecreatedbywayofchargeonly)).


Yes, both fixed and floating security can be created over bankaccounts. When taking security over bank accounts, considera-tionshouldbegivenastowhetherfixedsecurity(precludingthechargor from dealing with the account) should be taken, or whether floating security is to be taken (whereby the chargor is permitted to deal with the account). Where the bank account is held with the chargee/security trustee, security is generally taken by way of charge. In other cases, it is usually taken by way of assignment.


Yes, the most common approach for taking security over shares is totakeanequitablecharge,underwhichthechargorremainstheregistered shareholder, but must deliver its original share certifi-cates, together with signed but undated share transfer forms (with the name of the transferee left blank for use on enforcement) to thechargee/securitytrustee. It isalsopossible(butquiterare)for a legal mortgage to be taken, under which title to the shares is transferred to the chargee/security trustee (and re-assigned to the chargor once the secured liabilities have been repaid).


Where a charge is created by an Irish company over most classes ofassets(subjecttocertainexceptionsincludingchargescreatedover shares and/or bank accounts only (and not also over other classes of assets)), particulars of that charge must be filed with the CRO within 21 days of the date of creation of such charge, using a Form C1 (the “one-stage” procedure) or a Form C1A and FormC1B(the“two-stage”procedure).

Where the charge is created by a company incorporated outside Ireland,witha registeredbranch inIreland,a similar require-ment to deliver particulars of that charge to the CRO applies. In that case, again both a “one-stage” and a “two-stage” procedure are available. The relevant forms are a Form F8 (“one-stage” procedure)andFormsF8AandF8B(“two-stage”procedure).TheCROfilingfeeisEUR40perFormC1,C1A,F8andF8A.

ThereisnofilingfeeforaFormC1BorF8B.Where any person creates a charge over registered land in

Ireland, that charge must be registered in the Land Registry section of the Property Registration Authority. The filing fee is EUR175.

Where any person creates a charge over unregistered land in Ireland, that charge must be registered in the Registry of Deeds section of the Property Registration Authority. The filing fee is EUR50.

per annumaswellasgeneratingapproximately60MWofelectricity.The project company has entered into waste supply contracts with multiple commercial waste collection companies alongside a concession agreement with Dublin City Council (acting on behalf of four local authorities) which will provide additional revenue support in certain circumstances. This is a unique project intermsofthemixedmerchant/concessionarrangement.

Courts Bundle PPP:thisproject,forBAMPPPtoconstruct,refurbish and maintain seven court buildings, was financed by wayofsecuredbankdebtarrangedbyMUFG,alongsideprivateregisterednotesprovidedbyTalanx,andconstitutedoneofthefirst “bank/bond” PPP financings to be put in place in Ireland following the global financial crisis. There have since been furtherPPP financings involving amix of financing sources,including the refinancing of the N17/N18 Roads PPP built and operatedbytheDirectRouteconsortium(formedbyMarguerite,Strabag, InfraRed, John Sisk & Son, Lagan and Roadbridge) whichinvolvedcommercialloanfacilitiesprovidedbyBankofIreland,Natixis andSocieteGenerale alongsideprivateplace-mentfinancingprovidedbyAviva,AGInsurance,MunichReandMassachusettsMutual/Barings.

2 Security


Yes, an Irish corporate obligor will typically grant an all-assets debenture. Where the Irish obligor owns assets outside of Ireland, applicable local lawsecurity isgenerallyalsotaken. Bothfixedand floating security can be taken from an Irish corporate obligor by way of an all-assets debenture. Security granted pursuant to a debenture must be registered at the Companies Registration Office (CRO) (as detailed in question 2.6below)with separatefilings in respect of security over real property being requiredwith the Property Registration Agency and with other asset regis-tries in respect of security over certain other classes of assets.


Security can be taken over real property (including land, build-ingsandplantandmachinerywhicharefixedorpermanentlyattached to land). Security over registered or unregistered land can only be done by way of charge by deed, and it is not possibletocreatealegalchargeoverfuture-acquiredrealestateinIreland.Future-acquiredrealestateshouldbethesubjectofaseparatechargebydeedwhenitisacquired.

Security over tangible moveable property (such as plant, machineryandequipment)maybecreatedbywayofafixedorfloating charge pursuant to a debenture (as described above).


A security interest over contractual rights is generally created by way of a security assignment, and can be created by way of afixedorfloatingchargewheretherightsarereceivables. In

159Arthur Cox


the use of security documents governed by the laws of certain civil jurisdictions (such as security over offshore bank accounts).



Thereisnorequirementforasecurityagent/chargetoconducta public auction for the purpose of enforcing security over the assets of an Irish company, though common law duties will apply in respect to the manner of such enforcement action and the proceeds realised therefrom. Assetoutinquestion5.4below,asecurityagentorchargee

may avail to various out-of-court procedures to enforce its secu-rity. Another creditor or other third party may seek injunctive relieffromtheIrishcourtstopreventasecuredcreditorexer-cising its enforcement rights, but where the relevant security has been validly granted and (where applicable) registered, and the secured creditor has complied with its common law duties and the requirementsof theLandandConveyancingLawReformAct 2009 (where applicable), the courts would be unlikely to grant such relief in relation to security over project company assets. Where creditors are seeking to exercise their power of sale

over thesharesofaprojectcompany, theremaybea require-ment to make a notification under the Competition Acts 2002 to 2014 (and comply with the related merger control proce-dures) where the aggregate turnover in Ireland of the undertak-ingsinvolvedinthetransactionexceedscertainthresholds(andcomply with the relevant competition legislation).

In certain cases, licences and permits awarded to project companies may be personal to such companies and not capable of being transferred to third parties.


Foreclosure (being for the purposes of Irish law, the process of a chargee taking ownership of a secured asset free from the charg-er’s rights in respectof the secured asset (including its equityof redemption)) is generally not available in Ireland following the implementation of the Land and Conveyancing Reform Act 2009.



Pleaseseequestion5.5belowregardingtheexaminershipregimeand schemes of arrangement.Undersection608oftheCompaniesAct2014,theIrishHigh

Court may order any person who appears to have “use, control or possession” of the property (or the proceeds of sale of that property) of a company that is being wound-up, where the prop-erty was disposed of (including by way of security) and the effect

IfanIrishcompanycreatesafixedchargesecurityoverbookdebts,anoticeundersection1001oftheTaxesConsolidationAct1997 should be served on the Irish Revenue within 21 days of the creation of the charge to avoid the chargee being held liable foranyarrearsofVAT,pay-as-you-earn tax, localproperty taxand pay-related social insurance that the company may have at that date. There is no fee payable in relation to such notice. An updated notice must also be served where there is a change to thechargeholder(forexamplewhereasecurityagentisreplaced).Additionalregistrationandfilingrequirementsmayberequired

in relation to security granted over certain types of assets such as intellectual property, ships, aircraft or agricultural stock.


The fees payable for the main types of filings/registrations are as setoutabove.Theserequirementscangenerallybecompletedin short order, save that registrations of charges over registered land may be more time-consuming.


Generally,regulatoryorsimilarconsentsarenotrequiredwithrespect to the creation of such types of security interests in Ireland. However, since a person must be licensed to own elec-tricity transmission and distribution assets (other than intercon-nectors)andonlyESBislicensedtoownthem,enforcementofsecurity over such assets is not possible, practically speaking.

3 Security Trustee


Irish law recognises the concept of a “trust” as well as the role of a security trustee or security agent and will allow such person to enforce security on behalf of the group of creditors and apply the relevant proceeds in accordance with a contractually-agreed payment waterfall. Where the security has been registered, and the identityof thesecurity trusteechanges, there isa require-ment to make filings with the relevant registries to reflect such change of security trustee.


SuchalternativemechanismsarenotrequiredunderIrish law,though they may be included in Irish law intercreditor agree-mentsorsecuritytrustdeedstotheextentrequiredasaresultof

160 Ireland


■ holdersoffloatingcharges;■ unsecuredcreditors;and■ membersandcontributoriesofthecompany.

The Irish Revenue has an effective priority under section 571of theTaxesConsolidationAct1997 in respectofcertaincapitalgainstax(CGT)orcorporationtaxthatmayariseonthedisposal of an asset by a chargee/security trustee on enforce-ment,orbyaliquidatororareceiveronbehalfofthatchargee/security trustee.


Public or private companies incorporated in Ireland are gener-allynotexcludedfrombankruptcyproceedings.


A security document will generally give the chargee or security agent the right, following a default, to appoint a receiver over the secured assets. The receiver will take control of those assets and deal with them under powers deriving from the security docu-ment and/or the intercreditor agreement or security trustee deed which will also generally set out the order in which the proceeds of realising the secured assets are to be applied.Achargeeorsecurityagentmayalsoexerciseitsright(subject

to that right being properly formulated in the security docu-ment) to take possession of the secured assets rather than appointing a receiver; this will result in the chargee having a liability to strictly account to the chargor for amounts received while the chargee is in possession. As such, it is more common for a receiver to be appointed.

Where the chargee or security agent is a bank and has a charge over a deposit account held with it, it may (instead of appointing a receiver) simply opt to exercise a right of bilateral set-off,subject to this being properly provided for in the underlying contractual documentation.

On the occurrence of an enforcement event relating to secu-rity over financial instruments, a collateral taker has a right to realise its financial collateral by sale or appropriation and by setting off the instrument’s value against, or applying that value in discharge of, the relevant financial obligations. However, the definition of financial collateral does not include shares inacompanywhoseexclusivepurpose is (a) toownmeansofproduction that are essential for the collateral provider’s busi-ness, or (b) to own real property, meaning that this is not likely to assist in enforcing over the shares of a project company.

In common with market practice in other jurisdictions, project financing transactions in Ireland will generally include contractual controls on key assets (for example, by way ofpayment cascades and account bank agreements in respect of the bank accounts established for the construction and opera-tion of the project) and direct agreements which allow the cred-itors (or their representative(s)) to “step-in” to key project agree-ments in place of the relevant obligor(s) in circumstances where the project counterparties would otherwise be entitled to termi-nate such agreements by reason of the obligor’s non-perfor-mance or insolvency.

of that disposal was to “perpetrate a fraud” on the company, its creditors,oritsshareholders,todeliverthatpropertytoaliqui-dator, creditor or contributory of the company, or to pay a sum totheliquidatorinrespectofthatproperty.Under section 602 of the Companies Act 2014, where a

company is being wound-up, a disposal of the company’s prop-ertyafterthewinding-upprocesshasstartedwithouttheliqui-dator’s consent will be void unless the High Court orders otherwise.


■ Unfair preference Under section 604of theCompaniesAct 2014, any one

of a variety of steps (including the making of a payment, or the granting of security) made by a company which is unable to pay its debts as they fall due in favour of one of its creditors, with a view to giving that creditor a prefer-ence over the company’s other creditors, will be deemed to be an unfair preference and invalid if a winding-up of the companybeginswithinsixmonths–wherethecreditorisa“connectedperson”, thatsix-monthperiod isextendedout to two years.

■ Invalid floating charges Undersection597oftheCompaniesAct2014,afloating

charge created by a company will be invalid if it is created within the 12 months prior to the beginning of the wind-ing-up of the company, unless it is demonstrated that the company was solvent immediately after it granted the charge. The 12-month period is extended to two yearsif the floating charge is created in favour of a “connected person”. This provision underlies the importance of obtaining representations as to solvency from obligors in anacquisitionfinancing.

■ Order of distribution of assets on insolvency and pref-erential creditors

Onaninsolvency,theliquidatorappointedtothecompanyis under a statutory duty to collect and gather in the company’s assets, realise those assets, and distribute them in accordance with the ranking of creditors listed below. Assetsthataresubjecttofixedsecurityinfavourofacred-itorofthecompanyarenotavailabletotheliquidatorfordistribution. Instead, the company’s financial position in theleaduptotheliquidator’sappointmentislikelytohavetriggered one or more events of default under the facilities agreement, entitling the lender(s) to accelerate. In such circumstances, the security trustee (acting on behalf of the syndicate of lenders) or, where there is no syndicate, the lender itself as chargee, will appoint a receiver to realise thesecuredassets.Alsoexcludedfromthepoolofassetsavailabletotheliquidatorfordistributionaremoniesthatmust be set-off, provided that there is mutuality of debits and credits as between the company and the relevant creditor.

Regarding the priority of other creditors, the ranking on insolvency is as follows:■ costs,chargesandexpensesincurredinthewinding-upof

thecompany,includingtheliquidator’sremuneration;■ preferential creditors (including the Irish Revenue for

certain taxes, local authorities for certain rates, andemployees of the company in respect of certain amounts owing to them);

161Arthur Cox


creditorwithintherequisiteperiod;or(b)whereitisunabletopay its debts as they fall due, taking into account contingent and prospective liabilities.

Where directors of a company are aware (or ought to be aware) that there is no reasonable prospect of the company avoidinganinsolventliquidation,theyhaveadutytotakeeverystep available to them to minimise loss to creditors. Depending on the circumstances, the directors may decide to cease trading or recommend to the members of the company that the companybewoundupbywayofcreditors’voluntary liquida-tion. Alternatively, if the company has a reasonable prospect of survival, the directors may decide to petition for the appoint-mentofanexaminer.



There are no restrictions on foreign ownership of project companies in Ireland (subject to restrictions relating to compli-ance with sanctions and anti-money laundering legislation).


No, Ireland is not party to any bilateral investment treaties. As anEUMemberState,tradeagreementsenteredintobytheEUwith certain countries apply to Ireland.


The right to own, transfer and inherit property are embodied in the Irish Constitution, which also acknowledges that these rights ought to be regulated by the principles of social justice. The State may pass laws limiting citizens’ rights to private property in the interests of common good, but if it does so, it will likely be requiredtopaycompensationforthisrestriction.Examplesofrestrictions or limitations on the right to own property include town and regional planning, compulsory acquisition of landandpropertytaxes.Somestatutorybodiescan(subjecttolegalprocess) take land by means of a compulsory purchase order in connection with the development of public infrastructure. TheproposedMetroLinkprojectmayrequirethatanumberofhomes are acquired under compulsory purchase orders if theroute proceeds as planned. Nationalisation of assets is generally rare in Ireland, but in 2009 the Irish government nationalised theAngloIrishBanktosecurethebank’sviability.



TheDepartmentofPublicExpenditureandReform’sCentralUnit for PPP facilitates the process of implementing PPP trans-actions in Ireland, although financial responsibility for individual PPP projects remains with the relevant government department


ExaminershipIrelandhasanexaminershipregime,which isacourtmorato-rium/protection procedure introduced in 1990 with the aim of enabling a company in serious financial difficulties, but with a reasonable prospect of survival, to agree a solution with its cred-itors, shareholders and employees which will enable it to return to a financially sound footing. Examinershiptendstobeavailedofbyactivetradingcompa-

nies. A petition to place a company in examinership can bepresented to the Irish High Court by the company, by its direc-tors,byacreditororbyshareholdersholdingatleast10%ofthepaid-up voting share capital of the company.

The company then enters a court-protection period of 70 days (whichcanbeextendedby30days),andanexaminerisappointedto formulate proposals for a compromise or scheme of arrange-ment in relation to the company. A scheme of arrangement often involves the writing down of creditors’ claims and the introductionofnewfunds.Meetingsmustbeheldbytheexam-iner with the company’s members and creditors, and a majority must approve the proposals before the scheme is referred back to the High Court for approval.

Rights of secured creditors are, for the most part, suspended during the protection period, and enforcement action cannot betakenwithouttheexaminer’sconsent.Paymentsinrespectof pre-existing liabilities are also put onhold. The examinermay dispose of assets, and borrow monies. Those monies will rankaheadofanyfloatingcharge,butwillrankbehindanyfixedcharge. The examinermay also take steps that the companywould otherwise, under a negative pledge, have been prevented from taking. The examiner is entitled to dispose of securedproperty – the holder of a floating charge from the company will have the same rights in respect of the proceeds as it had in respect of the charged asset. Where the sold property was subjecttoafixedcharge,theproceedsofsalemustbeappliedtowardsthedebtowingtotheholderofthefixedcharge.

Schemes of arrangementPart9of theCompaniesAct2014providesaprocedure foracompany to implement a compromise or other arrangement with one or more classes of its creditors, which will be binding on all creditors in the relevant class(es), subject to being approved by amajorityinthenumberofcreditorsholding75%ofthevalueof the relevant class of creditors which are present and voting at a properly convened scheme meeting. A scheme of arrange-ment may be used to effect a debt restructuring or cramdown of dissenting creditors but must be proposed by the relevant company and the relevant classes of creditors must be properly constituted and sanctioned by the Irish High Court. The Irish High Court may stay proceedings and restrain further proceed-ings against a company in respect of which one (or more) scheme meeting has been convened or has been ordered by the court.


In Ireland, a company is deemed insolvent where it is unable to pay its debts. The Companies Act 2014 prescribes thata company will be deemed insolvent where: (a) it has failed to discharge a statutory 21-day demand letter delivered by a

162 Ireland



CGTGains on Irish specified assets will always be subject to Irish CGT regardless of the residence of the individual/company disposing of them. The specified assets include:1. Land in the State: this includes not just actual land but any

interest in land such as buildings or leases of land.2. MineralsintheStateoranyrights,interestsorotherassets

in relation to minerals or mining for minerals or searching for minerals. In addition to mineral rights in the State, explorationorexploitationrights intheIrishcontinentalshelf are deemed to be assets situated in the State.

3. Assets which are situated in the State and which were used in or for the purposes of a trade carried on by the person in the State through a branch or agency.

CGT Withholding Tax Where specified assets are disposed of for consideration of more than EUR500,000, a buyer must deduct capital gains with-holdingtaxatarateof15%fromthepurchasepriceandpayitover to the Revenue Commissioners unless the seller provides a CGT clearance certificate.

Corporation Tax RateOperations involving dealing in or developing land (other than such part of the activity that consists of construction operations ordealingbyacompanyinqualifyingland),workingmineralsandpetroleumactivitiesaresubjecttoataxatarateof25%asopposedtothestandardcorporationtaxrateof12.5%.

Relevant Contract Tax (RCT) RCT is awithholding tax that applies to certainpaymentsbyprincipal contractors to subcontractors mainly in the construc-tion,forestryandmeat-processingindustries.Theratesoftaxare0%,20%and35%.RCTcanapplytoactivitiesinvolvingtheextractionofnaturalresources.

Petroleum Production Tax (PPT) PPT applies to net income from oil and gas discoveries made under petroleum authorisations granted on or after 18 June 2014.Thetaxispayableinadditiontotheexistingcorporationtax rateof25%applicable toexcepted trades. PPTpaymentsare allowed as a deduction in calculating the amount of corpo-rationtaxdue.


Therearenoexchangecontrolsorsimilarrestrictionsonforeignexchange transactions, except for any restrictions imposedas a resultof sanctions legislationwhere applicable. Taxmaybe payable in respect of foreign exchange gains in certaincircumstances.


There are no restrictions, controls or fees which are generally applicable to the remittance and repatriation of investment

or agency. The National Development Finance Agency (which is itself part of the National Treasury Management Agency)(NDFA) acts as the statutory financial advisor to the Irish government in respect of PPPs. The NDFA acts as procuring agent on behalf of government departments for accommoda-tion PPP projects. Other significant procuring authorities include Transport Infrastructure Ireland which is responsible for the national roads network and for the operation of light rail systems. The National Transport Authority has overall respon-sibility for developing public transport policy in Ireland particu-larly in light rail and bus sectors.Various ministries have responsibility for policy areas

whicharerelevanttoprojects:forexample,theDepartmentofCommunications, Climate Action and Environment is the main government ministry which is responsible for telecoms, energy policy and the related regulatory framework.

The Commission for Regulation of Utilities is the inde-pendent energy and water regulator in Ireland with responsi-bility, in conjunction with the Utility Regulator in Northern Ireland, for (amongst other things) the regulation of the all-is-landIntegratedSingleElectricityMarket.

The Environmental Protection Agency is an independent public body established under the Environmental Protection Agency Act 1992 and has a wide range of functions to protect the environment, including environmental licensing, enforce-ment of environmental law, environmental planning, research development, waste management and regulating Ireland’s green-house gas emissions.

An Bord Pleanála is the national planning appeals board and is also the competent authority for EU Projects of Common Interest relating to trans-European energy infrastructure and is responsible for planning cases relating to projects which are classified as strategic infrastructure development.


Stamp duty is generally payable on documents effecting transfers of interests in real property. Otherwise registration and/or filing of financings or project documents is not generally required,subject to compliance with the applicable security perfection and registrationrequirementsreferredtoinsection2above.


Various licences are required to own or operate certain land,natural resources or pipeline assets. There is no general prohibi-tion on foreign entities owning such licences. For example, in order to construct or reconstruct a gener-

ating station, a person must have an Authorisation to Construct or Reconstruct. Similarly, a person must have a Licence to Generate in order to generate electricity. It is the responsibility of the Commission for Regulation of Utilities to grant, monitor the performance of, modify, revoke and enforce these authori-sations and licences.Bywayofafurtherexample,underIrishstatutetheonlyentity

permitted to operate a transmission system in Ireland is Eirgrid (the Transmission System Operator) and the only entity permitted tooperateadistributionsystemisESB(theDistributionSystemOperator).

163Arthur Cox


The Environmental Protection Agency is the regulator tasked with the administration of Ireland’s environmental licensing regime. Projects involving certain specified industrial activi-tiesmayrequireanIE(IndustrialEmissions)licenceundertheEU Industrial Emissions Directive and relevant national legisla-tion transposing the Directive, or an IPC (Integrated Pollution Control) licence under the Environmental Protection Agency Act 1992.

The Safety, Health and Welfare at Work Act 2005 is the main piece of Irish legislation governing health and safety. It imposes an obligation on employers to provide and maintain a safe work-place for employees. The legislation is enforced by the Health and Safety Authority.


Project companies are generally special purpose vehicles estab-lished on a commercial basis. For this reason they are generally not bound to observe public procurement law (which applies to public bodies and non-commercial entities) when making purchasing decisions.

In some circumstances in the utility sector project companies are performing regulated utility activities and where doing so are required,whenprocuringsupplies,servicesorworks,toobservepublic procurement law applicable to those activities (as set out inDirective2014/25/EUandtransposingIrishregulations).

8 Foreign Insurance


Where foreign insurance companies are carrying on insurance business intoIreland, theywillgenerally requireauthorisationtodosofromtheCentralBankofIreland(andwillberequiredtocomplywith theappropriateCentralBankof Ireland regu-lations) unless they are appropriately authorised by the rele-vant regulatory authority in another European Economic Area (EEA)MemberStateandareableto“passport”suchauthorisa-tion on a freedom of services basis.

Under the Insurance Act 1936 it is unlawful for any person to carry on an assurance business in Ireland without a licence (where “assurance business” is defined as including the “guar-antee insurance business” which in turn includes the “business of issuing bonds or contracts of suretyship”). The Insurance (Amendment) Act 1978 (as amended by the Insurance Act 1989 and the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992) provides that credit insti-tutionswhicharelicensedinIrelandoranotherEEAMemberState are not prohibited from issuing bonds, contracts of sure-tyship or guarantees in the course of their banking business. Other institutionsmayrequiretobe licensed inorderto issueguarantees or related products (potentially including letters of credit) in Ireland. Thereisalevyof3%onthegrossamountreceivedbyinsurers

in respect of certain non-life insurance premiums, subject to exceptions inrelationto (amongstothers) reinsurance,marineinsurance, aviation and transit insurance and export creditinsurance.

returns or loan payments to parties in other jurisdictions. Withholding tax may apply to dividends and/or interestpayments made by companies in Ireland to parties in other juris-dictions, subject to certain exemptions (see questions 7.8 and17.1 below).


Yes, subject to compliance with applicable domestic and inter-national legislation regarding money laundering and sanctions.


There are no restrictions on the payment of dividends from a project company to its parent company, subject to compliance withcorporatelawrequirementsincludingtherestrictionintheCompaniesAct2014oncompaniesmakingdistributionsexceptout of profits available for the purpose (being accumulated, real-ised profits not previously utilised, less accumulated, realised lossestotheextentnotpreviouslywrittenoffinareductionorreorganisation of capital duly made).

Financing documentation may impose contractual restric-tions on the payment of dividends by a project company. Project documentation may impose contractual restrictions on project companies paying dividends to its parent company in certain circumstances(forexample,intermsofarequirementtoshareany “refinancing gain” with the relevant contracting authority).

Dividends from Irish resident companies will be subject to dividendwithholding tax, subject to applicable exemptions inrespect of domestic and overseas shareholders (for example,inrespectofshareholdersresidentinEUMemberStatesotherthan Ireland or other countries with which Ireland has a double taxationagreement,subjecttocompliancewithotherapplicableconditions).


Proposed developments must be assessed to determine what effectstheymayhaveontheenvironment.Beforedevelopmentconsent is granted, projects likely to have significant effects on the environment by virtue of their nature, size or location must undergo an environmental impact assessment (EIA). The developerwillberequiredtosubmitanEIAtothecompetentauthority (i.e. the relevant local authority or the national plan-ning authority, An Bord Pleanála) when applying for development consent.

In addition, where a proposed development is likely to have a significant effect on a designated European conservation site, an appropriate assessment (AA) must be carried out under the Habitats Directive and the relevant national legislation trans-posingthatDirective.FailuretocarryoutanadequateEIAorAA may result in a proposed development being challenged in the courts by way of judicial review.

164 Ireland


of the term “act of God”, it is not advisable to define force majeure events by reference to this term.



The Criminal Justice (Corruption Offences) Act 2018 (the 2018 Act) was commenced in July 2018 and repeals and replaces previous legislation on anti-corruption and bribery. Irish citi-zens, companies and other corporate bodies registered in Ireland who commit acts outside of Ireland which if committed in Ireland would be an offence under the 2018 Act may be pros-ecuted in Ireland. The offences covered by the 2018 Act include (in very high-level terms): ■ corruptlyoffering,giving,requestingorobtainingagift,

consideration or advantage as an inducement to, or reward for, doing an act in relation to one’s office, employment, position or business;

■ corruptly offering, giving, requesting, accepting orobtaining a gift, consideration or advantage to induce another person to exert an improper influence over anIrish or foreign official;

■ commissionofanact,oruseofconfidentialinformation,by an Irish official in relation to his/her office, employ-ment, position or business to corruptly obtain a gift, consideration or advantage;

■ giving a gift, consideration or advantage to a personknowing that it will be used to facilitate an offence under the 2018 Act;

■ corruptly creating or using a document knowing orbelieving it to contain a false or misleading statement with the intention of inducing another person to do an act in relation to his/her office, employment, position or busi-ness to the prejudice of that other person; and

■ threateningharmtoapersonwiththeintentionofcorruptlyinfluencing that person or another person to do an act in relation to that person’s office employment, position or business.

Under the 2018 Act, a company is liable for the actions of directors, officers, employees, agents or subsidiaries who commit a corruption offence with the intention of obtaining or retaining business or a business advantage for the company. If convicted, a company is liable to a fine of EUR5,000 on summary conviction or an unlimited fine on conviction on indictment. If convicted, individuals may be sentenced to up to 12 months in prison on summary conviction or up to 10 years (depending on the type of offence) on conviction on indictment.

13 Applicable Law


Project agreements are generally governed by Irish law.


Financing agreements for Irish projects are generally governed by Irish law, though certain types of financings (such as private placement notes subscribed for by US-based creditors) may be governed by New York law. English law may be used for widely


Foreign creditors may be co-insureds or named as loss payees under insurance policies in respect of project assets.



EEA and Swiss nationals do not need an employment permit toworkinIreland.FollowingtheUK’sexitfromtheEU,UKnationals do not need an employment permit to work in Ireland, given the continuation of bilateral arrangements between the UKandIreland.

There are various types of employment permits, including thegeneralemploymentpermitwhichrequirestheapplicanttohave a minimum annual remuneration of EUR32,000 (subject to restrictions on certain ineligible occupations), the critical skills employment permits which are available for most occupations wheretheapplicantwillhaveanannualremunerationinexcessofEUR64,000andcontractsforservicesemploymentpermitswhich are intended to allow non-EEA employees to work on an Irish contract in Ireland while remaining on an employment contract outside of Ireland (subject to meeting a labour market needs test).

Employees carrying out certain professional occupations in Ireland will need to be registered with the appropriate body in Ireland.



The importation of project equipment or equipment used byconstructioncontractorsfromanotherEUMemberStateisnotsubject to such controls or taxes. Equipment imported intoIreland from outside of the EU will be subject to compliance with the Irish Revenue’s customs procedures. Customs duty mayapplysubjecttoanyexemptionsorreductionswhichmayapply under applicable trade treaties between the EU and the relevantcountryoforigin.Exciseduty(inrelationtooilprod-ucts)andVATmayalsoapplyinrelationtoequipmentimportedinto Ireland from outside the EU.



11 Force Majeure


Force majeureexclusionsareoftenincludedinprojectdocumentsand such provisions are generally enforceable under Irish law where the relevant contract defines what would constitute a force majeure event. On the basis of Irish case law as to the meaning

165Arthur Cox



Ireland has been a contracting state to the New York Convention since 1981. The Arbitration Act 2010 gives the force of law to theNewYorkConventionandalsototheUNCITRALModelLaw, the Geneva Protocol, the Geneva Convention and the Washington Convention.


Enforcement or recognition of arbitral awards may be refused if the Irish High Court finds that the subject matter of the rele-vant dispute is not capable of settlement by arbitration under Irish law or if enforcement of the relevant arbitral award would be contrary to public policy. However, the Irish courts are generally strongly in favour of enforcing arbitral awards. The Arbitration Act 2010 does not apply to certain employment and industrial relations disputes, or to property valuation disputes.


No, generally arbitration is chosen as a means of dispute resolu-tion as a result of a consensual agreement to do so between the parties to the arbitration.



No, direct agreements with central government or political risk guarantees have not been requested in recent project financetransactions, though on PPP/PFI projects it would be common to enter into a direct agreement with the relevant contracting authority (but not central government itself ). There is a limited precedent in offshore oil and gas fields for lenders to take the benefit of a limited form of direct agreement from government in which the government acknowledged the security interest of the lenders and gave lenders step-in and cure rights before certain licences could be terminated.

17 Tax


In general, interest paid by a borrower incorporated in Ireland issubjecttowithholdingtaxatthestandardrateofincometax(currently20%).Thereareanumberofwithholdingtaxexemp-tions enshrined in Irish domestic law however, which can often remove the requirement to withhold. These include interestpaid:■ to a bank carrying on a bona fide banking business in

Ireland;■ oncommercialpaperandcertainlistedbonds;or

syndicated loan financings involving large numbers of interna-tional creditors, though there has been increased use of Irish law on such financings in recent years.


Agreements relating to the acquisition or use of real estate,concession arrangements and governmental authorisations. Security documents relating to Irish situated assets are typically governed by Irish law.



Pursuant to Regulation (EU) No. 1215/2012 of the European ParliamentandoftheCouncil(theRecastBrusselsRegulation),the submission to the jurisdiction of the courts of other EU Member States will be upheld in the courts of Ireland andprovided that neitherArticle 45 norArticle 46 of the RecastBrusselsRegulationapplies,anyjudgmentobtainedinanotherEUMember State against an Irish companywould be recog-nisedandenforcedinIrelandwithoutretrialorexaminationofthe merits of the case.

Subject to the provisions of the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters signed at Lugano on 30 October 2007 (the LuganoConvention), the Irish courts will uphold the submission to the jurisdiction of the courts of Iceland, Norway and Switzerland unless an unconditional appearance has been entered in another jurisdiction.WhereneithertheRecastBrusselsRegulationnortheLugano

Convention apply, the Irish courts will enforce the submis-sion by the parties to the jurisdiction of the courts of another jurisdiction, and such a judgment will be enforced by the Irish courts,ifthefollowinggeneralrequirementsaremet:■ theforeignjudgmentisforadefinitesum;■ the foreign court had jurisdiction in relation to the

particular defendant according to Irish conflict of law rules; and

■ theforeignjudgmentisfinalandconclusiveandthedecreeis final and unalterable in the court which pronounced it.

It was established by the Supreme Court in Byrne v Ireland and the Attorney General that the Irish State is a juristic person capable of being sued and is vicariously liable for the tortious acts of its servants and agents. However, legislationmay exempt sover-eign entities from liability either generally or in specific circum-stances. A sovereign entity may waive immunity and accept jurisdictionbywayofanexpresscontractualprovisiontosucheffect. As in other jurisdictions, immunity will not attach to the extentthesovereignentityisengagedincommercialortradingactivities, as opposed to “State” or “public” activities.



Yes, the Irish courts will generally enforce arbitral awards, save where there is a reason to deny enforcement on the grounds set out intheUNCITRALModelLawandtheNewYorkConvention.

166 Ireland


TheIrishtaxcodeprovidesforthetaxtreatmentofcertaincredit sale, deposit and investment transactions (referred to in the legislation as “specified financial transactions”) with the aim of treating the return arising on a specified financial transaction asinterestfortaxpurposesandapplyallrelevanttaxlegislationpertaining to interest to that return.


A private company limited by shares cannot offer debt securi-ties to the public (see below). Such a company is also prohibited from applying to have, and from having, securities admitted to trading or listed on any market (regulated or otherwise).

A designated activity company is subject to restrictions on offering debt securities to the public (see below). However, it can apply to have the following securities admitted to trading or listed on any market, regulated or otherwise:■ Anofferaddressedtoqualifiedinvestorsonly.■ Anofferaddressedtofewerthan150persons(otherthan

qualifiedinvestors).■ Anofferaddressedtoinvestorswhoacquiresecuritiesfor

a total consideration of at least EUR100,000 per investor, for each separate offer.

■ An offer whose denomination per unit is at leastEUR100,000.

■ AnofferwithatotalconsiderationintheEUoflessthanEUR100,000, calculated over a 12-month period.

A public limited company can offer debt securities to the public, and can apply to have those debt securities admitted to trading and listed, whether on a regulated market or otherwise.Under the Companies Act 2014, private companies (most

commonly, private companies limited by shares and desig-nated activity companies) cannot offer securities to the public. However,therearesomeexceptionsundersection68(3)oftheCompaniesAct2014,underwhichtheofferofcertaintypesofsecurities by a private company will not constitute an offer to the public. Retail transactions must be issued using a public limited company, but institutional offers are commonly carried out using a designated activity company.TheCompaniesAct2014,theEuronext Rule Book I: Harmonised

Rules and Euronext Dublin Rule Book II: Listing Rules (Regulated MarketRuleBooks)andtheGlobal Exchange Market Listing Rules and Admission to Trading Rules, as appropriate, of the Irish Stock ExchangetradingasEuronextDublinaregenerallyapplicable.

For the prospectus regime, the following legislation and regu-lation is applicable: ■ Regulation (EU) 1129/2017 on the prospectus to be

published when securities are offered to the public or admitted to trading on a regulated market (Prospectus Regulation) and repealing Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive) (which is directly effective in Ireland).

■ EuropeanUnion (Prospectus) Regulations 2019 (SINo.380 of 2019) (Irish Prospectus Regulations).

■ Central Bank (Investment Market Conduct) Rules 2019(InvestmentMarketConductRules).

■ Central Bank Guidance on the Prospectus RegulatoryFramework.

■ CentralBankProspectusRegulatoryFrameworkQ&A.

■ byacompanywhere thebeneficialownerof the interestis a company that is resident for taxpurposes in anEUMemberState (other than Ireland), or in a countrywithwhich Ireland has entered into a double taxation agree-ment, where that country imposes a tax that generallyapplies to foreign source interest receivable in that country bycompanies. However, this exemptiondoesnot applywhere the interest is paid to the recipient company in connection with a trade or business carried on in Ireland by it through a branch or agency.

Relief from withholding tax on Irish-source interest mayalso be available under the terms of a double taxation agree-ment entered into with Ireland and the jurisdiction in which the lender,asrecipientoftheinterest,isresidentfortaxpurposes.Thecaselawonthenatureofguaranteepaymentsisequivocal

but in summary and on the basis that guarantee payments take their nature from the payment which they replace, a payment under a guarantee in respect of interest on an advance should be treated as being a payment of interest (and therefore subject to withholdingtax(unlessanyapplicableexemptionsapply)).Theexemptionoutlined above forEU/DTA residents should alsoapply.

However, payments under a guarantee may be treated as having their own nature, such that they would be subject to withholding tax only if such paymentswere annual paymentswith an Irish source.


Thereareno taxorother incentiveswhichareprovidedpref-erentially to foreign investors or creditors investing in project financing transactions in Ireland.Therearenostampdutyorregistrationtaxeswhicharegener-

ally applicable to loans, mortgages or other security documents for the purpose of effectiveness or registration.

18 Other Matters


On syndicated project financings, where an Irish borrower is a micro, small or medium-sized enterprise (within the meaning of Commission Recommendation 2003/361/EC), if a syndicate member that is an Irish regulated financial services provider, or a financial services provider authorised in another EEA MemberStatetoprovidecreditinIreland,transfersallorpartof its commitment to an unregulated entity, that unregulated transfereeentitymayincertaincircumstancesrequireauthorisa-tionfromtheCentralBankofIrelandasacreditservicingfirmand, if any activities that fall within the definition of “credit servicing”setoutintheCentralBankAct1997arecarriedonbythe facility agent of any other finance party, that party may also requireauthorisationunlessitisalreadyregulated.TheCentralBank (Supervision and Enforcement) Act 2013 (Section 48)(LendingtoSmallandMedium-SizedEnterprises)Regulations2015 also apply to certain types of lending by regulated financial services providers to borrowers which are micro, small or medi-um-sized enterprises, but not to multi-lender credit.

167Arthur Cox


no recent notable cases on the applicability of Shari’ah law or the conflict of Shari’ah and local law which are relevant to the finance sector of which we are aware.Part 8A of the Taxes Consolidation Act 1997 provides for

thetaxtreatmentofcertaincreditsale,depositandinvestmenttransactions (referred to in the legislation as “specified finan-cial transactions”) which achieve the same economic result in substance as comparable conventional financing products.

Although the Irish Revenue has confirmed that the legislation is designed to cover certain Shari’ah-compliant structures, the legislation applies to any financing arrangement falling within the meaning of the term “specified financial transaction”, with the aim of treating the return arising on a specified financial transactionasinterestfortaxpurposesandapplyingallrelevanttaxlegislationpertainingtointeresttothatreturn.


No, subject to ensuring that any default interest provisions in a loan agreement do not conflict with case law restrictions regarding unenforceable penalty clauses. In particular, lenders should ensure that default interest clauses are agreed as part of commercial negotiations and included in the relevant loan agree-ment (as would generally be the case where the loan agreement issubstantiallybasedontheLoanMarketAssociation’srecom-mended forms) rather than cross-referring to the default interest provisions included in any lender’s standard terms of business.

The Irish Court of Appeal handed down judgments in the Sheehan v Breccia & others and Flynn & others v Breccia cases in 2018 whichfoundthata4%per annum surcharge interest rate included in a lender’s standard terms and conditions was an unenforce-able penalty on the basis that it was not a genuine pre-estimate of the loss or damage that the lender would have suffered on a non-payment by the borrower.

In the cases of Banco Santander v Demba and another and Cortes v Banco de Sabadell, the European Court of Justice ruled in 2018 that national case law, whereby a non-negotiated contract term in a consumer loan agreement is regarded as automatically unfair wherethedefaultinterestrateexceedsthestandardinterestrateby more than 200 basis points, is consistent with the Unfair Contract Terms Directive.

For the transparency regime, the following are applicable: ■ Directive2004/109/EContransparencyrequirementsfor

securities admitted to trading on a regulated market and amendingDirective2001/34/EC(transposedintoIrishlawby the Irish Transparency Regulations (SI No. 277/2007)).

■ InvestmentMarketConductRules.■ CentralBankGuidanceon theTransparencyRegulatory

Framework. ■ CentralBankTransparencyRegulatoryFrameworkQ&A.

For the market abuse regime, the following are applicable: ■ Regulation (EU) 596/2014 on market abuse (which is

directlyeffectiveinIreland)andDirective2014/57/EUonmarketabuse(transposedintoIrishlawbytheIrishMarketAbuseRegulations(SINo.349/2016)).

■ InvestmentMarketConductRules.■ Central Bank Guidance on Market Abuse Regulatory

Framework. ■ CentralBankMarketAbuseRegulatoryFrameworkQ&A.Issuers and debt securities listed on the Euronext Dublin

Regulated Market are subject to the prospectus regime, thetransparency regime and the market abuse regime. Issuers and debt securities listed on the Global Exchange

Marketaresubjecttothemarketabuseregimeonly.

19 Islamic Finance


Although various Sukuk bonds have been listed in Ireland, we are not aware of Istina’a, Ijarah, Wakala and Murabaha instruments having been used in the structuring of Islamic project financings in Ireland. It would be feasible to structure an Islamic project financing in Ireland, for example, by way of using an Istina’a instrument to finance the procurement or construction of assets requiredinconnectionwithaprojectandanIjarah instrument to lease operational assets from financiers, though there is no estab-lished legislative framework for the use of Islamic finance instru-mentsinIreland(saveasnotedbelowinrespecttotaxlegislation).


Irish law does not recognise Shari’ah law as a system of law which can be used as the governing law of a contract. There have been

168

Matt Dunn specialises in project and infrastructure finance in the energy, utilities and infrastructure sectors, including PFI and PPP. He also has experience advising across a range of loan and bond financing transactions, including some of the largest cross-border acquisition financings in Europe in recent years. Matt’s experience includes financing multiple windfarms and road and social infrastructure PPP projects in Ireland, financings of powerships deployed to provide emergency electricity supplies in Ghana and Indonesia, and financings for the acquisition of TDC A/S (Danish telecom-munications network operator) and E.ON’s Spanish electricity distribution and generation assets. Matt was previously a partner at Clifford Chance LLP in London where he advised on acquisition financings, infrastructure and project financings, margin loans and restructuring work, as well as advising the Loan Market Association on its suite of leveraged finance documentation.

Arthur Cox10 Earlsfort TerraceDublin 2, D02 T380Ireland

Tel: +353 1 920 2020Email: [email protected]: www.arthurcox.com

Arthur Cox is widely regarded as the leading law firm in Ireland. We are one of Ireland’s largest and most innovative law firms. Today, the firm has over 500 legal staff, including almost 100 partners and a total staff of over 850. Arthur Cox is an “all-island” firm, with offices in Dublin and Belfast. The firm also has offices in London, New York and Silicon Valley. The firm’s practice encompasses all aspects of corporate and business law, providing a comprehensive service to an international client base ranging from established global leaders and multinational organisations to govern-ment agencies and statutory bodies, public and private companies, banks and financial institutions to new players in emerging industry sectors. Since our establishment in 1920, we have been at the forefront of develop-ments in the legal profession in Ireland. From the outset, we have striven to deliver superior levels of service, building relationships that grow over time

and developing specialist industry knowledge to help our clients achieve their goals. Our reputation is based on proven professional skills, a thor-ough understanding of client requirements, sound judgment and a prac-tical approach to resolving commercial problems.

www.arthurcox.com


Ireland

Charlotte Upton is a senior associate in the Finance Group at Arthur Cox, specialising in project finance. Charlotte has significant experience in advising both lender and developer clients on all financing aspects of renewable and conventional energy projects, PPP projects and project acquisitions and disposals. Charlotte has recently worked on a number of complex project financings, including transactions involving the European Investment Bank, export credit cover-backed facilities, hybrid financing structures and joint venture vehicles. Charlotte has also advised on a number of acquisitions and disposals of renewable energy and PPP projects in Ireland.Charlotte was admitted as a solicitor in England & Wales in 2008 and in Ireland in 2010. Prior to joining Arthur Cox in 2014, Charlotte trained and worked at a large US law firm in London and subsequently worked for four years at another large Irish law firm, advising on general banking and project finance matters.

Arthur Cox10 Earlsfort TerraceDublin 2, D02 T380Ireland

Tel: +353 1 920 1113Email: [email protected]: www.arthurcox.com



Chapter 19 169

Japan

Mori Hamada & Matsumoto Kei Shirakawa

Yusuke Murakami

Japan


2 Security


A ‘blanket lien’ (i.e. a lien that gives a creditor the entitlement to take possession of any or all of the debtor’s property to cover a loan) is not available for bank loans in Japan. Therefore, it is necessary to individually attach security interests over each type of asset. Only with respect to moveable assets and claims (e.g. trade receivables) is it legally possible to create security over currentandfuture(after-acquired)assetsthatmaychangefromtimetotime,totheextentthatthescopeofthesecuritycanbeidentified by location, type of asset, or underlying agreements.

A mortgage on a factory foundation (special statutory mort-gage on facilities and land rights of plants) can be granted in favour of a bank. The reason for granting such a mortgage in projectfinancerelatestothelegalnatureofsometypesofequip-ment.Specifically,itisunclearwhetherequipmentdirectlyandfirmly attached to the land (e.g. mounting structure, fence, transmission line tower,andundergroundcable)are“fixtures”,which is real property, or “moveables” under Japanese law. Thus, lenders are concerned about the risk that neither security onlandrightsnorsecurityonmoveablescoverssuchequipment.In contrast, it is clear that a mortgage over a factory foundation coverssuchequipmentaslongasthemortgageisregistered.


Among the forms of security available under Japanese law (i.e. mortgage, pledge and security assignment), a mortgage is typically used for real estate. A mortgage is perfected by registration at the legal affairs bureau with jurisdiction over the location of the prop-erty.Theregistrationfeeis0.4%oftheamountofthesecuredobligation. To reduce the upfront cost, some lenders permit the security provider to make a provisional registration only, on day one, which costs JPY 1,000 per property. Once the mortgage is provisionally registered, the priority is reserved for the mortgage oversubsequentcompetingparties,suchasothermortgagees.Toupgrade from a provisional to a formal registration, documents (some of which must be provided by the security provider) must

1 Overview


Following the nuclear power crisis caused by the Great East JapanEarthquakein2011,theelectricityindustryhaschangeddrastically. Renewable energy has drawn increasing attention as an alternative energy source. The Japanese government has accelerated this trend by introducing the feed-in tariff in 2012. Although the focus is now shifting from photovoltaic to other power sources (such as onshore/offshore wind, geothermal and biomass), renewable energy projects remain as one of the high-lights of the Japanese project finance market. On the other end, the suspension of operation of nuclear reactors has made the country more dependent on fossil fuels. However, the global trend of decarbonisation and SDGs has significantly discour-aged the development of new thermal power plants.Asubstantialportionof existing Japanese social infrastruc-

ture was constructed during the 1960s and 1970s. To meet the need to restore or replace these facilities in the coming decades, the Japanese government is facilitating the use of PPP/PFIstructures.Wehaveseenquiteanumberof“concession”projects in various sectors, including airports, toll roads, water services,MICEfacilitiesandsportsstadiums.Thisisanothertrend that market participants are focusing on.


In recent years, offshore wind projects have been gaining atten-tion in Japan. Since it is surrounded by water, Japan is consid-ered to have a huge potential for the development of offshore wind power projects in the midst of a growing need for decar-bonisation and environmentally friendly sources of energy. In 2019, the Japanese government introduced new legislation to designate areas for the promotion of offshore wind projects and conduct a public tender to select operators for such designated areas. In early 2020, the first commercial offshore wind project inJapan,withatotalcapacityofapproximately140MWandledbyMarubeniCorporation,reachedfinancialclose,withatotalprojectcostofapproximatelyJPY100billion. In thecomingyears,evenbiggerprojectfinancingisexpectedtobearrangedfor offshore wind projects in Japan.

170 Japan


shares. If share certificates are not issued pursuant to the arti-cles of incorporation of the issuer, then the share pledge is perfected by recording the pledge in the shareholder ledger.Lendersusually request that the issueramend its articlesof

incorporation to remove any obstacles to the enforcement of the share pledge.


Seequestions2.2and2.3above.


Normally, the filing, notification or registration requirements will not involve a significant amount of time or expense.That said, the registration under a factory foundation scheme tends to be more costly and time-consuming than other secu-rity schemes, which is one reason why the factory foundation scheme is not used in relatively small projects.


Granting a security interest over some assets (e.g. receivables and contractual rights or status) may require consent from athirdparty,butregulatoryorsimilarconsentsarenotrequiredwith respect to major assets which are normally included in the security package for project finance in Japan.

3 Security Trustee


Traditionally, it has been a generally accepted principle in Japan that security must be held by the creditors to whom secured obligations are owed by an obligor. Therefore, each lender is named as a secured party in most syndicated loan transactions in Japan,whichcanbequiteburdensomewhenthereisatransferof loans or a collective enforcement of security interests.

In 2007, the Trust Act of Japan was amended and the concept of a security trust was introduced but, as a matter of practice, securitytrustshavenotbeenfrequentlyusedtodateduetothenumber of drawbacks to overcome. One hurdle is a substantial increase in transaction costs, which results from fees payable to a trust bank or a trust company acting as the trustee of a secu-rity trust and also from additional mortgage registration fees requiredforperfectionofmortgagesheldbyasecuritytrust.

be submitted and registration fees (which are typically borne by the security provider or the borrower) must be paid.

Pledge and security assignment (also known as security by way of assignment or assignment for the purpose of security) can be used to constitute a security over moveable properties. Subject properties can be individual properties or a pool of properties. The pool needs to be sufficiently identified by spec-ifying the type of asset, location, and other necessary criteria. Thismethodenableslenderstocaptureafter-acquiredmoveableproperties as security.

To perfect a security assignment of moveable property, actual or constructive delivery of the subject property (such as an occu-pant’s manifestation of its intent to occupy the subject assets on behalfofthesecuredparties) isrequired. Alternatively,regis-tration of the transfer will also perfect the security assignment. The registration fee is JPY 7,500 per filing, in addition to the professional fees of the judicial scrivener.


Pledge and security assignment are the most typical forms of securityforreceivables.Future(after-acquired)receivablescanbe subject to a pledge or security assignment, provided that the target receivables are sufficiently identified.

Lenders can perfect the pledge or security assignment by giving notice to, or obtaining consent from, the obligor in written form with a notarised date certificate. Alternatively, registration of the pledge or transfer will also perfect the pledge or security assignment. In most cases, the registration fee is JPY 7,500 per filing, in addition to the professional fees of the judi-cial scrivener. The cost of a notarised date certificate is even lower.

Receivables cannot be collateralised without obtaining the obligor’s consent if the underlying contract has a transfer restric-tion clause.


Yes, security over cash deposits is usually included in a typical security package for project finance in Japan. The borrower’s receivables from the depository bank can be pledged for the benefit of the lenders in the same way as other types of receiv-ables. Such pledge is perfected by the written consent of the depositary bank with a notarised date certificate.

A legal opinion on the validity and perfection of security interestsoverordinary(notfixed-term)bankdepositsisusuallylimited or not given at all. This is because of an old court deci-sion which denied the validity of such security interests, although today’s leading law professors are unanimously supportive of its validity and most practitioners agree to this view.


Pledge is the most typical form of security for shares. The method for perfection depends on the type of shares. Unless the issuer is a listed company, the share pledge is normally perfected by the delivery of the share certificates representing the pledged

171Mori Hamada & Matsumoto



Regarding the enforcement of share pledges, foreign lenders are restricted from acquiring pledged shares over companies thatconduct certain categories of business related to national secu-rity, including telecommunications, broadcasting, and aviation.



There are three major statutory insolvency proceedings; namely, bankruptcy (hasan), civil rehabilitation (minji saisei), and corporate reorganisation (kaisha kousei).Bankruptcyresultsintheliquida-tion of the borrower’s business, while the other two proceedings allow the debtor’s business to continue once substantial changes havebeenmadetoitsassets,liabilitiesandequitypursuanttoarehabilitation or reorganisation plan.

Generally, in the course of bankruptcy proceedings (hasan) and civil rehabilitation proceedings (minji saisei), security inter-ests are outside the scope of the control or supervision of the court-appointed administrator/supervisor. The commencement of such proceedings does not affect any security interest in place over the debtor’s property. Therefore, such security interests could be enforced even during the bankruptcy proceedings and civil rehabilitation proceedings.

On the other hand, if corporate reorganisation proceed-ings (kaisha kousei) are commenced, secured creditors will be required to suspend security enforcement (an automatic stay)and their claims may be subject to reduction in accordance with the reorganisation plan. In other words, the court-appointed administrator may reduce the amount covered by a certain security interest, if it approves such reduction. Therefore, under corporate reorganisation proceedings, security interests might not be enforced pursuant to the original terms and conditions thereof.


In terms of priority among secured creditors, Japanese law allows transaction parties to create and perfect most types of security interests in different priorities for the benefit of multiple credi-tors pursuant to certain procedures provided in the Civil Code and other relevant regulations. In addition, the second-ranking securedcreditorswilltypicallyberequestedbytheseniorlendersto enter into an intercreditor agreement in which they covenant not to enforce their security interests without the approval of the first-ranking secured creditors.

On the other hand, unsecured loans are usually treated as general claims in Japanese insolvency proceedings, and are subordinated by law to the following two senior claims: common benefitclaims(suchascostsandexpensesarisingfrominsolvencyproceedings and certain other types of claims having common benefit for creditors overall); and preferred general claims (such aswages for employees and certain tax claims). Also, generalclaims are satisfied in priority to certain subordinated derivative


A conceivable alternative option is the use of a parallel-debt structure, where a security agent holds security to secure parallel debts owed to it by the borrower, rather than to secure each lend-er’s corresponding loan disbursed to the borrower. Although the concept of parallel debt is fairly novel to the Japanese legal community, it should be theoretically feasible to create a paral-lel-debt structure under Japanese law.

One potential drawback to the parallel-debt structure may be theneedtocarefullyexaminethecreditriskofthesecurityagent,which could materialise if a creditor of the security agent were to attempt to seize and collect all or part of the parallel debt, or where an insolvency trustee might seek to collect parallel debt in connection with a security agent’s insolvency proceedings. That said, the use of a parallel-debt structure has been gradu-allyexpandinganditmightpossiblybeestablishedasacommonoption for collective security arrangements in the near future.



In Japan, insolvency proceedings are complex and under thecontrol of the court and a court-appointed administrator/supervisor. In a nutshell,thelendermaynotexerciseitssecurityrights freely if there are insolvency proceedings against the borrower/obligor. Therefore, in order to prevent the project company from being subject to insolvency proceedings, the lender usually requires major related parties (including the projectcompany,theequityholderoftheprojectcompany,EPCcontractorandO&Mcontractor)notto: (i) file any petition for the commencement of any insolvency

proceedings with respect to the project company; nor to(ii) terminate major project agreements without the prior

consent of the lender.Thus, it is important to ensure that the step-in rights of a

bank canbeexercisedbeforethecommencementofany formal insolvency proceedings.

Step-in rights are commonly set out in a direct agreement with a material party to the project. Where step-in rights are given to a lender, the lender is allowed to remedy a default under a project document on behalf of the project company, and project parties cannot terminate the project documents while the step-in rights arebeingexercised.

It is common to set up an arrangement as part of a security package whereby a lender is given an option ( yoyaku kanketsuken) toacquire,orcauseadesignatedpartytoacquire,thecontrac-tual position of the project company. This option usually becomes exercisable upon the occurrence of certain credit ordefault events, before the commencement of the insolvency proceedings.

172 Japan


Also, directors are liable to third parties only when such third parties suffer any damage or loss arising from the wilful miscon-duct or gross negligence of the director.



Basically,only post factoreportingisrequiredundertheForeignExchange and Foreign Trade Act (FEFTA) when a foreign investoracquiressharesinaprojectcompany in Japan. However, when the project company is engaged in certain types of busi-nesses, including electricity, gas, oil, telecommunication, water supply and transportation, the foreign investor who intends to acquiresharesinsuchcompanyisrequiredtomakeafiling30days prior to the investment. Also, there are some laws which provide an upper limit to the foreign ownership ratio in specific industries such as aviation and telecommunication.


There are no bilateral or international investment treaties that provide protection from such basic restrictions mentioned above.


TheExpropriationofLandActallowsexpropriationoflandforpublic interest, including roads, dams and railways. The land-ownerwill be compensated for loss due to the expropriation.This Act applies to any land and thereisnoexceptionaltypeofinvestment which is specially protected.



The primary relevant governmental bodies are as follows:■ Energy projects: the Ministry of Economy, Trade and

Industry (METI), especially the Agency for NaturalResourcesandEnergyinMETI.

■ Concessionprojectsofairports,tollroadsandotherpublicinfrastructure: the Ministry of Land, Infrastructure,TransportandTourism(MLIT).

■ Concessionprojectsofwaterandsewage:theMinistryofHealth,LabourandWelfare(MHLW).

There are various other relevant authorities, including local governments, as well as different ministries of the central government depending on each project.


Generally, there is no need to register or file financing or project documents with any governmental authority or comply with

or incidental claims (such as accrued interest, damages or penal-tiesforcontractualbreachanddelinquenttaxesarisingafterthecommencement of insolvency proceedings) pursuant to the rele-vant insolvency laws.

One of the notable risk areas for lenders in statutory insol-vency proceedings is the risk of avoidance. Where a security interest is created or perfected by an already insolvent debtor or a debtor who suspends payment of debts that are due and payable, the related security interest or perfection may be avoided if bankruptcy proceedings (hasan), civil rehabilitation proceedings (minji saisei) or corporate reorganisation proceed-ings (kaisha kousei) have commenced thereafter.


In the context of project finance, it should be noted thatJapanese limited liability companies (godo kaisha, GK) cannotbe the subject of corporate reorganisation proceedings (kaisha kousei), unlike ordinary stock companies (kabushiki kaisha,KK),whichmeans that the lender toaGKcanenforce its securityinterests outside of the insolvency proceedings commenced with respect toaGK. Inpractice,aGKisoftenusedasaprojectcompany especially in solar power projects in Japan.


Under standard security documentation, a lender may choose to enforce a security interest created by a judicial (in-court) procedure or private (out-of-court) process. One of the problems with judi-cial enforcement is that the sale proceeds are likely to be substan-tially lower than would be realised through a private auction.

However, in the case of project finance, a lender is more keen on being able to replace the project sponsor by enforcing the security over all the assets held by the project company or the pledge over the shares of the project company rather than to sell the individual collateral assets at higher prices.


Generally, private restructuring processes are initiated by the borrower’s lawyer and sometimes involve a third-party organ-isation specialising in private turnaround situations.

This type of process is chosen by a financially distressed debtor who would like to avoid the damage that would be caused by the public announcement of a commencement of stat-utory insolvency proceedings. Given the private nature of this process, the creditor’s rights are not involuntarily impaired, and unanimousagreementamongmajorcreditorsisrequiredforthedebtor to implement its restructuring plan.


Generally, directors are liable to the company only when his or heractionexceedsreasonablediscretionforbusinessjudgment.




KYC procedures, which are conducted by financial institu-tions, are required for foreign currency exchange under theFEFTA. Also, there may be post factofilingrequirementsunderthe FEFTA.


Post factofilingundertheFEFTAisrequiredforoverseasremit-tance exceeding JPY 30million. Also, a withholding tax of20.42% is basically imposed on dividends and interest paidto foreign investorsor lenders,but tax treatiesmay reduceorexemptforeigninvestorsorlendersfromsuchwithholdingtax.


Yes. A company may establish and maintain onshore foreign currency accounts, and/or offshore accounts, but post facto filing withthetaxofficeisrequiredforoffshoreassetsexceedingJPY50 million.


The amount of the dividend may not exceed the “distribut-able amount” under the Companies Act, which is calculated based on the amount of surplus earnings. In addition, a loan agreement for project financing typically contains cash water-fall provisions with conditions and restrictions on distribution of dividends. Other than those, generally, there is no specific restriction on payment of dividends from a project company to its parent company, regardless of the place of incorporation of the parent company.


ThebasicenvironmentalpolicyofJapanissetoutintheBasicEnvironment Act. In addition, various laws and local regula-tions may be applicable in respect of environment, health and safety issues. In particular, whether an environmental impact assessmentisrequiredbylaworlocalregulationwouldhaveasignificant impact on the costs and schedule of the project. The primary relevant authorities in the central government are the MinistryoftheEnvironment(MOE)forenvironmentalissuesandMHLWforhealthandsafetyissues, but the applicable laws and regulations may vary depending on location, and therefore it would be helpful to consult with the local government to iden-tify applicable laws and regulations.

legal formalities in order for such documents to be valid and enforceable, except for certain types of long-term land leaseagreementswhichneedtobeexecutedintheformofnotariseddeed (kosei shousho).


A licence is not required to own land or pipelines, althoughvariouslawsandregulationsmaybeapplicabletotheacquisitionand development of land or pipelines, depending on the type of activities. Forexample, (i)anacquisitionanddevelopmentofagriculturallandrequirespermissionfromthelocalagriculturalcommittee under the Agricultural Land Act, and (ii) to conduct anoilpipelinebusiness,permitsarerequiredfromMETIandMLITundertheOilPipelineBusinessAct.Thesepermitscanbe obtained by a foreign entity as well.

With respect to ownership of natural resources, specifically, minerals, an application for amining right under theMiningAct is required tomine certainminerals. Mining rights canonlybeacquiredbyJapanesenationalsorJapanesecorporations;however, foreign ownership of mining rights through a Japanese corporationisallowedundertheMiningAct.


Themajor taxesandfeesspecificallyapplicable to theminingbusiness are as follows (prospecting rights are the rights for exploratory digging, and digging rights are for commercialdigging):

Tax / Fee Item Rate / Amount (JPY)

Mining Area Tax

Sand ore (prospecting rights)

200 (per 100 ares per annum)*1are=100sq.m

Sand ore (digging rights)

400(per100aresper annum)

Other minerals 200 (per 100 ares per annum)

MiningTax – 1%ofthepriceofmined minerals

Application Fee

Prospecting rights

71,800 (68,200 online)

Digging rights 112,600 (109,800 online)

Registration Fee

Prospecting rights

90,000 (per mining area)

Digging rights 180,000 (per mining area)

Theexportofnaturalresourcesisnotsubjecttospecialrestric-tion under the FEFTA.

174 Japan




In Japan, domestic and cross-border bribery is prohibited. The Penal Code prohibits bribery of Japanese government officials, while the Unfair Competition Prevention Act prohibits bribery of foreign public officials.

On the other hand, private commercial bribery is not gener-ally regulated other than by specific laws that regulate private commercialbriberyunderspecificcircumstances.Forexample,under Article 967 of the Companies Act, giving, offering or promising bribes to a director of the board or similar officer of a stock corporation in response to “unlawful solicitation” in connection with their duties is prohibited.

13 Applicable Law


For projects and assets located in Japan, project agreements are typically governed by Japanese law. However, it is generally possible for transaction parties to choose another governing law.


For projects and assets located in Japan, financing agreements are typically governed by Japanese law. However, except forsecurity agreements where the collateral is assets located in Japanorshares/equityinterestsofanentityincorporatedunderJapanese law, it is generally possible for transaction parties to choose another governing law.


Pleaseseequestions13.1and13.2above.



An agreement to submit to a foreign jurisdiction is gener-ally valid and binding as long as such agreement is executedin writing. Also, a waiver of sovereign immunity is valid and binding subject to the conditions under the Immunity Act, which is based on the U.N. Convention on Jurisdictional Immunities of States and Their Property.



Yes. Generally, the Arbitration Act provides that the following are required for an arbitration agreement to be valid andenforceable: (i) an arbitration agreement is about a civil dispute


No. There is no specific legal restriction on procurement by a projectcompany,totheextentthatthecompanyisprivatelyowned.

8 Foreign Insurance


Foreign insurance companies are required toobtain an insur-ance business licence under the Insurance Business Act toprovide insurance policies over project assets in Japan.


There is no specific restriction on the payment of insurance proceeds to foreign creditors.



As long as the foreign person has the appropriate visa status under the Immigration Control and Refugee Recognition Act, he or she may be employed by a project company as a worker, technician, engineer or executive. The project companyemployinganyforeignpersonisrequiredtoreportsuchemploy-ment to the public employment security office.



Thereareminimalrestrictionsonimportingequipment,suchastheprohibitiononimportingdrugs,gunsandexplosivesdesig-nated by the Customs Act or FEFTA. Import duties may be imposed depending on the types of goods.


Importdutiesvarydependingonthetypeofassets,exportingcountry, and other circumstances. The relevant information is disclosed on the website of Japan Customs at theMinistryofFinance.

11 Force Majeure


Typical project agreements contain force majeureexclusions,whichare generally enforceable under Japanese law.



proceeds of a claim under a guarantee or security enforcement is treated as income from a domestic source, it would be subject to withholdingincometax.


Sometaxtreatiesreduceorexemptcertainpersonsfromwith-holding tax, but there are no special incentives provided forproject finance. Stamp duties will be imposed on certain types of agreements such as EPC contracts, land lease agree-ments, service agreements and loan agreements. For instance, in case of loan agreements, the amount of stamp duty may vary dependingontheprincipalamountoftheloan(themaximumamount of stamp duty is JPY 600,000).

18 Other Matters


Aside from the issues covered in the other questions andanswers,oneadditionalmaterialconsiderationforequityinves-torswouldbe the restrictionon transferofequity interests ina project company, which is typical under finance documents. Such transfer would require the prior consent of the lender,withoutmuchflexibility,evenafterconstructioniscompleted.


Projects bonds, either in the form of corporate bonds or trust beneficial interests, are not common in the Japanese market to date. Projects bonds are securities and are subject to securities regulationundertheFinancialInstrumentsandExchangeActof Japan. Public offering of securities is subject to a suite of filingandregistrationrequirements.

Public offering of securities is not normally used for project financingexceptforcertainlistedinfrastructurefundsinvestingin a portfolio of renewable (especially solar) projects.

Project bonds are usually issued through private placement for a limited number of institutional investors, such as insurance companies and pension funds.

19 Islamic Finance


Islamic financing or Shari’ah law is not used for project finance in Japan and, therefore, there have not been many previous legal studies in structuring Islamic project financing in Japan. Under Islamic law principles, Istina’a may be used to provide funds for construction projects, but the agreement between the financier and the project company under an Istina’a arrangement might be

(excludingdisputesofdivorceor dissolutionof adoptive rela-tion) which can be settled between the parties; (ii) an arbitration agreement is in writing; and (iii) it is possible to carry out arbi-tration proceedings under an arbitration agreement. In addi-tiontotheabovementionedrequirements, thefollowing itemsare considered to be required for an arbitration agreement tobe valid and enforceable: (a) the parties have the power and authority toexecuteanarbitrationagreement; and (b) there isa meeting of the minds with respect to the arbitration agree-ment,whichmustbevalidandnotinvalidated(existenceofanagreement).


Yes, Japan is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and reserves the principle of reciprocity.


The Arbitration Act provides that the arbitration agree-ment should: (i)beaboutcivildisputes (excludingdisputesofdivorce or dissolution of adoptive relation); (ii) involve private lawmattersthatcanbesettledbetweentheparties(excluding,e.g., criminal and administrative law matters and the validity of a registered patent); and (iii) not be about individual labour disputes. Separate from the above, it is worth noting that the by-law of the Arbitration Act stipulates special rules regarding an arbitration agreement between a consumer and a business operator, which can be cancelled by the consumer.


No, as a matter of mandatory rules.



Generally, there is no call for political risk guarantee or insur-ance in Japan.

In PFI/PPP projects, it is common for a lender to enter into a direct agreement with the central or local government, where the lender is afforded an opportunity to be notified by, and discuss the project restructuring with, the government prior to the termination of the project agreement by the government.

17 Tax


Dividends and interest paid to foreign entities by a Japanese entity are subject to withholding income tax at the rate of20.42%(thismaybereducedorexemptedbytreaty).Also,ifthe

176 Japan



No. An interest payment obligation in a loan agreement is valid andenforceableaslongastheinterestratedoesnotexceedthecap(15%to20%perannum)undertheInterestRateRestrictionAct.

prohibited,sincetheBankingActimposesstrictrestrictionsonthe scope of business of banks.


There are no notable cases where Shari’ah law was applied in Japan. The prevailing view under Japanese conflict-of-law rules is that the parties may select a certain law as the governing law only if it is a law of a specific state – the parties may not select non-state laws as a governing law (e.g. lex mercatoria). Therefore, it is arguable that the parties may select Shari’ah as a governing law.

177

Yusuke Murakami is a partner at Mori Hamada & Matsumoto. He has advised sponsors, lenders and EPC contractors across a spectrum of projects – development, project finance, construction, M&A and dispute resolution. He covers a broad range of projects for energy (e.g. onshore/offshore wind, solar, hydro and geothermal power plants) and infrastructure (e.g. casino/integrated resorts, airports, toll roads, port/harbour terminals and other public facilities). He is also strong in cross-border projects, having been seconded to Allen & Overy (London) during 2012–2013.Yusuke is a graduate of Harvard Law School (LL.M., 2012) and the University of Tokyo (J.D., 2006 and LL.B., 2004). He is qualified in Japan (2007) and New York (2013).He was selected for the 10th edition of “The Best Lawyers in Japan” by The Best Lawyers International, and as a Next Generation Lawyer by The Legal 500 Asia Pacific in 2020.

Mori Hamada & MatsumotoMarunouchi Park Building2-6-1 Marunouchi, Chiyoda-kuTokyo 100-8222Japan

Tel: +81 3 6266 8704Email: [email protected]: www.mhmjapan.com

One of Japan’s “Big 4” law firms, Mori Hamada & Matsumoto (MHM) is among the country’s largest full-service firms headquartered in Tokyo. The firm also has its offices in Fukuoka, Osaka, Nagoya and Takamatsu. Our practice brings together advisory, regulation, finance, dispute resolution and M&A specialists to cover the full range of projects and energy law advice. The firm has also established a strong international presence. We now have a presence across East Asia, having recently opened offices in Beijing, Shanghai, Singapore, Bangkok, Yangon, Ho Chi Minh City and Jakarta (AKSET Law MHM Jakarta Desk). The leading law firm in Thailand, Chandler & Thong-ek Law Offices Limited integrated its operations with the Bangkok office on 1 January 2017 under the name Chandler MHM Limited. This enables us to provide international clients with exemplary service in a timely and efficient manner.

www.mhmjapan.com


Mori Hamada & Matsumoto

Kei Shirakawa is a senior associate at Mori Hamada & Matsumoto. He advises on a broad range of financing transactions, including energy and infrastructure financing, project financing, and other finance transactions. Among other projects, he has assisted candidate operators and financiers in several high-profile airport concession deals in Japan.Kei is a graduate of Harvard Law School (LL.M., 2015) and the University of Tokyo (J.D., 2009 and LL.B., 2007). He has been admitted to the bar in Japan (2010) and New York (2019).

Mori Hamada & MatsumotoMarunouchi Park Building2-6-1 Marunouchi, Chiyoda-kuTokyo 100-8222Japan

Tel: +81 3 6266 8916Email: [email protected]: www.mhmjapan.com



Chapter 20178

Kenya

Oraro & Company Advocates James K. Kituku

Pamella Ager

Kenya


2 Security


InKenya,ageneralfinancingagreementwouldbeused,eitherin the form of a loan agreement or facility agreement. Security documentation would differ depending on the type of security afinancierhasoptedtoobtain.Forexample,wheretheassetsof a company include movable assets such as machinery and motor vehicles, then the financier would have a charge by way of debenture registrable in the Companies Registry. On the other hand, where the security was to be over immovable property, for examplelandand/orbuildings,thenKenyanlawrequiresthatacharge be created over these particular immovable assets and be registered in the Lands Registry. Third-party securities in the form of guarantees would entail the preparation of a separate security document.Formovableproperty,thereisalsoanadditionalrequirement

of registering the security online, by filing an Initial Notice undertheMovablePropertySecurityRightsActof2017.


Yes.Inthecaseofacompany,requisiteboardresolutionswouldneed to be obtained from the company borrower authorising the creation of the security. A charge document would be prepared, securing the financial obligations of the borrower to the finan-cier.Thischargewouldthenbeexecutedbyallthepartiesinthe presence of an advocate. Thereafter, the stamp duty, based on the amount secured, would be paid to the Commissioner of DomesticTaxes.Incaseswherethechargeinvolvesagriculturalland, the consent of the relevant land control board would have to be sought and obtained. Further, where the charge involves leasehold property, the consent of the lessor would need to be obtained. Where the charge is over a property belonging to a married individual, then the consent of the spouse would be obtained. The charge would thereafter be submitted for regis-tration at the relevant Lands Registry, accompanied by a rates clearance certificate from the relevant county government

1 Overview


2019wasayearofmixedfortunesas,ononehand,economicgrowth had been projected to be between 5.7% and 6.3%;however, there were also concerns that the economic environ-ment was not investor-friendly, as quite a number of compa-nies laid off staff either by folding operations or through restructuring.

The project finance market has not been any different. There were some new mega projects launched by the government, while others were shelved due to overpricing, corruption and viability concerns.


The Japan International Cooperation Agency ( JICA) entered intoa loanagreementwiththeGovernmentofKenya(GOK)for the construction ofDongoKundu Phase 2 ByPassmeas-uring 8.96 kilometres at a cost ofKES25,000,000,000. Theproject is aimed at decongesting the roads in the coastal city ofMombasa. Itwill include, amongothers, the constructionof an interchange along the Likoni–Lunga Lunga highway and two bridges at different points over the Indian Ocean spanning 660metres and 1440metres respectively. Itwas launched inOctober 2019 and will take two years to complete.The construction of a 180-kilometreNairobi–Mau Summit

highway,projectedtocostKES180,000,000,000,willbeunder-taken under a Public Private Partnership (PPP) deal between GOKandaconsortiumoffourSouthAfricancompaniesunderthenameRiftValleyConnect.Theconsortiumwillconstructand manage the highway. It will also recover its investment through tolling.A 26.7-kilometre expressway linking the Jomo Kenyatta

International Airport and Westlands, is set to be constructed soastodecongesttrafficinNairobi.GOKhasenteredintoaPPPdealwiththeChinaRoadandBridgeCorporation(CRBC)that isexpectedtolastfor30years. CRBCwillconstructtheroad and will recoup the investment through toll stations along theroad.TheprojectisexpectedtocostKES62,200,000,000.

179Oraro & Company Advocates


Kenyabymostfinancialinstitutionstorequiretheborrowertosurrender the relevant share certificate to the financial institu-tion. Inaddition, theborrower isrequiredtoexecuteablankshare transfer form and give the financial institution authorisa-tion to transfer the shares to any person in case of default.The lender is required to file an Initial Notice under the

MPSRconcerningthesecurity.


The following are the charges payable in respect of a charge:■ Security documents are required to be prepared by an

advocate and legal fees at the rate set out in the Advocates Remuneration Order are applicable. Attestation fees would also be payable to any advocate witnessing the executionofthesecuritydocuments.

■ Thestampdutypayable isbasedon theamountsecuredbythechargeordebentureattherateof0.1%,whichisafixed rate regardlessof the typeor sequenceof security.Forexample,thestampdutypayableonacharge,furtherchargeordebentureisthesamerateof0.1%oftheprin-cipal amount. In the case of a guarantee, the stamp duty payableisthenominalamountofKES200.

■ Bankcharges–KES120.■ Lessor’s consent (if the relevant property is leasehold) –

this varies from lessor to lessor.■ LandControlBoardConsent (if theproperty is agricul-

tural) –KES1,000. In addition, theLandControlActprovidesthat:anallowanceofKES500inclusiveoflunchshall be paid to each unofficial member of a land control board for every meeting which he attends; an allowance of KES1,300inclusiveoflunchshallbepaidtoeachunoffi-cial member of a provincial land control appeals board for every meeting which he attends; and a mileage allowance at prevailing government rates shall be paid to unofficial members of a land control board.

■ RegistrationfeesattheLandsRegistry(ifsecurityisoverimmovableproperty)–KES500.

■ FilingfeesattheCompaniesRegistry(ifthechargorisacompany)–KES14,000.


Providedthat thesecuritydocumentshavebeendulyexecutedandconsentedto(whereapplicable)andtherequisitestampdutypaid and rates and rents clearance certificates obtained, registra-tion of securities at a Lands Registry may take a day, or even much longer. There have, however, been instances where a file relating to a particular property cannot be located, and this usually causes significant delays in the registration process. It should be noted that time varies from registry to registry depending on how busy that particular registry usually is. There have also been instances wheredifferentregistriesareclosedbyExecutiveOrderstopavethe way for urgent developments in various registries, such as digitalisation of records or reorganisation of the registries. It has beenourexperiencethatregistrationattheCompaniesRegistrywouldtakeapproximatelyoneweek.

(confirming that all land rates applicable have been paid in full) and, in the case that the property is leasehold, a rents clear-ance certificate (confirming that the applicable land rent has been paid in full). Where the charge is created by a company, the charge would also have to be registered in the Companies Registry. In the event that the proposed security is already chargedtoafinancier,theconsentofthefinancierisrequired.An Inter-lenders Agreement or a Security Sharing Agreement willberequiredinsuchcircumstances,togoverntherelation-ship between the various lenders.


Security can be taken over receivables. It is the practice in Kenyatoeitherhaveachargeoverthereceivablesorhaveadeedof assignment created over such receivables. Financiers are usually advised to place an obligation on the borrower to notify thedebtorsofsuchsecurity.Thefinancierwillalsoberequiredto file an Initial Notice online at the Moveable PropertiesSecuritiesRegistry(MPSR).TherequirementforfilingundertheMPSRisanewdevelopmentwhichtookplacein2017.


When a customer places a deposit with a bank, the deposit repre-sents a loan made to the bank. The bank is the debtor and the customer is the creditor. It had generally been recognised by legal practitioners that there was no difficulty in a bank taking a charge over a cash deposit it held. It has generally been accepted thatwithregardtoafixeddeposit,thesecuredpartymusttakecontrol over the charged accounts and prevent the chargor from withdrawing monies from, or otherwise dealing with, the charged accounts without consent from the chargee.ThebankisalsorequiredtofileanInitialNoticeunderthe

MPSR,asnotedunderquestion2.3above.Where the borrower is a company, the charge instrument

should also be registered in the company’s records at the Companies Registry.

However, the legality of a charge over a cash deposit was not accepted in the English case of Re Charge Card Services. This judg-ment caused a major controversy in legal and banking circles in England. The judge in this case argued that as the deposit represented a debt owed by the bank and grants the right for the depositor to sue the bank for its recovery, the debt cannot be assigned or taken as security, as a debtor – the bank – cannot sue for a debt it owes. The judge stated that it was “conceptu-ally impossible” for a debtor to take a charge over his own debt.


Yes. Shareholders (especially those in private companies) are usually granted share certificates in respect of the shares they own. If a company holds shares in another company and it wishes to offer these shares to a financier as security, then a charge may be prepared over these shares and registered in the Companies Registry. It should, however, be noted that a company cannot create security over its own shares. In the case of shares owned by a natural person, it has been the practice in

180 Kenya


(d) enter into possession of the charged land; or(e) sell the charged land.

In the event that a chargee opts to appoint a receiver, the chargee shall serve a notice in the prescribed form on the chargor and shall not proceed with the appointment until a period of 30 days, from the date of the service of that notice, has elapsed.Intheeventthatachargeeoptstoexercisethepowertosell

the charged land, the chargee shall serve on the chargor a notice to sell in the prescribed form and shall not proceed to complete anycontractforthesaleofthechargedlanduntilatleast40dayshave elapsed, from the date of the service of that notice to sell. Thenoticeisrequiredtobeservedonseveralpeople,including:(a) the National Land Commission, if the charged land is

public land;(b) the holder of the land over which the lease has been

granted, if the charged land is a lease;(c) a spouse of the chargor who had given the consent;(d) any lessee and sub-lessee of the charged land or of any

buildings on the charged land;(e) any person who is a co-owner with the chargor; (f ) any other chargee of money secured by a charge on the

chargedlandofwhomthechargeeproposingtoexercisethe power of sale has actual notice;

(g) any guarantor of the money advanced under the charge;(h) any other person known to have a right to enter on and

use the land or the natural resources in, on, or under the chargedlandbyaffixinganoticeattheproperty;and

(i) any other persons as may be prescribed by regulations, and shall be posted in a prominent place at, or as near as possible to, the charged land.

Achargeeshall,beforeexercisingtherightofsale,ensurethata forced sale valuation is undertaken by a valuer. The price at whichthechargedlandissoldshouldnotbe25%orbelowthemarket value at which comparable interests in land of the same characterandqualityarebeingsoldintheopenmarket.If a chargee or a receiver becomes entitled to exercise the

power of sale, that sale may be by private contract at market value or public auction with reserve price. If a sale is to proceed by public auction, it shall be the duty of the chargee to ensure that the sale is publicly advertised in such a manner and form as to bring it to the attention of persons likely to be interested in bidding for the charged land and that the provisions relating to auctions and tenders for land are, as near as may be, followed in respect of that sale.Achargeeexercisingthepowerofsalemay,withleaveofthe

court, purchase the property. A court shall not grant leave unless the chargee satisfies the court that a sale of the charged land to the chargee is the most advantageous way of selling the land.The purchase money received by a chargee who has exer-

cised the power of sale shall be applied in the following order of priority:(a) first,inpaymentofanyrates,rents,taxes,chargesorother

sumsowingandrequiredtobepaidonthechargedland.The Rating Act provides that any land rates due in respect of land shall be a charge against the land on which the rate was levied; and the charge shall take priority;

(b) second, in discharge of any prior charge or other encum-brance subject to which the sale was made;

(c) third,inpaymentofallcostsandreasonableexpensesprop-erly incurred and incidental to the sale or any attempted sale;

(d) fourth, in discharge of the sum advanced under the charge or so much of it as remains outstanding, interests, costs and all other money due under the charge, including any money advanced to a receiver in respect of the charged land; and


The Land Control Act requires that the consent of the rele-vantLandControlBoardbeobtained incaseswherethe landis agricultural.The Matrimonial Property Act prohibits the alienation in

any form of matrimonial property during the subsistence of a marriage without the consent of both spouses either by way of sale, gift, lease, mortgage or otherwise.WherethetitleisaleasefromtheKenyaRailwaysCorporation

(KRC), for example in some coastal areasof the country, theconsentofKRCisrequiredtochargetheproperty.

Where securities are to be shared between financiers, the existing financier has to give consent for its collateral to beshared with another financier of the same borrower.

3 Security Trustee


If the parties involved have an instrument recognising this role, then the provisions in the particular instrument will be binding to the parties, because this would be a contractual matter.





Charges rank according to the order in which they are registered unless so provided in the charge instrument.

The Land Act sets out the remedies available to a charge in the event of default. If a chargor fails to pay interest or any other periodic payment due under any charge, and continues to be in default for one month, the chargee may serve on the chargor a notice, in writing, to pay the money owing. If the chargor does not comply within two months after the date of service of the notice, the chargee may:(a) sue the chargor for any money due and owing under the

charge;(b) appoint a receiver of the income of the charged land;(c) lease the charged land, or if the charge is of a lease, sublease

the land;



■ anycompensationforredundancyowedtoemployeesthat accrues before, or because of, the commencement ofthebankruptcyorliquidation;

■ amountsdeductedbythebankruptorcompanyfromthe wages or salaries of employees in order to satisfy their obligations to other persons (including amounts payabletotheKenyaRevenueAuthorityinaccordancewiththeIncomeTaxAct);

■ any reimbursement or payment provided for, orordered by the Industrial Court under the Labour InstitutionsAct,2007totheextentthatthereimburse-ment or payment does not relate to any matter speci-fied in the Labour Relations Act, 2007 in respect of wages or other money or remuneration lost during the four months before the commencement of the bank-ruptcyorliquidation;

■ amounts that are preferential claims under sections175(2) and (3); and

■ allamountsthatare,byanyotherwrittenlaw,requiredto be paid, in accordance with the priority established by this subparagraph, by a buyer to a seller on account of the purchase price of goods.

(c) The following debts will have third priority:■ tax deductions made by the bankrupt or company

underthe“payasyouearn”rulesoftheIncomeTaxAct;

■ non-residentwithholdingtaxdeductedbythecompanyundertheIncomeTaxAct;and

■ resident withholding tax deducted by the companyundertheIncomeTaxAct.


Noentitiesareexcludedfrombankruptcyproceedings.


The Land Act, 2012 provides similar remedies to a chargee in the event that a chargor defaults. The statute gives a clear proce-dure to be followed in such circumstances. If a chargor fails to pay interest or any other periodic payment due under any charge and continues to be in default for one month, the chargee may serve on the chargor a notice, in writing, to pay the money owing. If the chargor does not comply within two months after the date of service of the notice, the chargee may: (a) appoint a receiver of the income of the charged land;(b) lease the charged land, or if the charge is of a lease, sublease

the land;(c) enter into possession of the charged land; or(d) sell the charged land.


No, there are no other processes of this nature available. To this extent,companiescanonlyenterintoprivatecontractualnego-tiations which may then introduce new payment plans. Under the Insolvency Act of 2015, the law provides for eligibility

(e) fifth, in payment of any subsequent charges in order oftheir priority, and the residue, if any, of the money so received shall be paid to the person who, immediately before the sale, was entitled to discharge the charge.





The recently enacted Insolvency Act provides that if the prop-erty of a bankrupt is subject to a charge, the creditor who holds the charge may choose either of the following options:(a) to realise the property by having it sold (but only if the

creditor is entitled to do so under the terms of the charge);(b) to have the property valued and prove in the bankruptcy

as an unsecured creditor for the balance due (if any) after deducting the amount of the valuation; or

(c) to surrender the charge to the bankruptcy trustee for the general benefit of the creditors and prove in the bank-ruptcy as an unsecured creditor for the whole debt.

Thebankruptcytrusteemayatanytime,bynotice,requireacreditor who holds a charge over a bankrupt’s property:(i) within 30 days after receipt of the notice, to choose one of

the options above; and(ii) if the creditor chooses option (b) or (c), to exercise the

chosen option within that period.A creditor who fails to comply with the notice is taken to have

surrendered the charge to the bankruptcy trustee under option (c) for the general benefit of the creditors, in which case the creditor may prove as an unsecured creditor for the whole debt.

Further, the Insolvency Act provides that if property of a bankrupt is subject to a security, the bankruptcy trustee may make an application to the court for an order enabling the bank-ruptcy trustee to dispose of the property as if it were not subject to the security, but only if it is satisfied that the disposal of the property would be likely to provide a better overall outcome for the creditors of the bankrupt.


The Insolvency Act provides that debts of a person who is adjudged bankrupt or of a company that is in liquidation arepayable in the following order of priority:(a) Theexpensesof thebankruptcyor liquidationwillhave

first priority.(b) The following debts will have second priority:

■ allwagesorsalariespayabletoemployeesinrespectofservices provided to the bankrupt or company during the four months before the commencement of the bankruptcyorliquidation;

■ anyholidaypaypayabletoemployeesonthetermina-tion of their employment before, or because of, the commencementofthebankruptcyorliquidation;

182 Kenya


section 975(2)(b) of the Act, to ensure that by the time they are making the application for registration, at least 30% of theirshareholdingisheldbyaKenyancitizen.However,thisrequire-ment has since been repealed.


No, there are no such treaties with such protection provisions ratified byKenya. In the recent past,Kenya has received animprovement in Foreign Direct Investment. Foreign investors seeking to establish apresence inKenyagenerally receive thesame treatment as local investors, and multinational compa-niesmake up a large percentage of Kenya’s industrial sector.Through its official bilateral trade promotion agency, KenInvest,Kenyahasbeenviewedfavourablybytheinternationaltrade community. According to the United Nations Conference on Trade and Development (UNCTAD)’s Global Enterprise Registration Network,theKenInvestsitemakesKenyaoneofonly 25 countries to have earned a perfect rating on its infor-mation portal. Further, before any laws touching on foreign investment are passed, there are substantive reviews and delib-erations by stakeholders before any such laws are passed. As there is no bilateral treaty protecting investors from harsh trade restrictions, investorsaremadetofeelsecurebyKenya’s localarrangementsandforeigninvestmentpolicies.However,Kenyahassigned14bilateralinvestmentconventions.ThisshowsthecommitmentthatKenyahasinadvancingforeigninvestment.


Thereareno lawsregardingthenationalisationandexpropria-tion of project companies or assets. The Constitution protects the right to private property, save in the case where such property needstobecompulsorilyacquiredforpublicbenefit.Article5ofthe Foreign Investments Protection Act states that investments by investors of a Contracting Party in the territory of another Contracting Party shall not be expropriated, nationalised orsubjected to any other measures, direct or indirect, having an effectequivalenttoexpropriationornationalisation,exceptforapurpose which is in the public interest, on a non-discriminatory basis, in accordance with due process of law, and against prompt and full compensation. Any compensation that may need to be made under the Act shall be done at current commercial rates and shall be settled at freely convertible currencies.



TherelevantagencyistheKenyaInvestmentAuthority(KIA),whoseroleistoassistandfacilitateinvestmentsinKenya.ItsmainfunctionsaretopromoteinvestmentsinKenyabylocalandforeignbusinessenterprises,toliaisewiththerelevantMinistriesresponsible for approving all new private sector projects and expansionofexistingprojects,toassistbusinessenterprisesinimplementingtheprojectsapprovedbytherelevantMinistriesand, generally, to assist all business enterprises in overcoming managerial, institutional and bureaucratic problems.

thresholds for companies that may or may not enter into mora-toria under voluntary arrangements for payment of debt. For eligible companies who wish to enter into such arrangements, a procedure is followed.

The directors shall:(a) prepare:

(i) a document setting out the terms of the proposal; and(ii) a statement of the company’s financial position

containing such particulars of its creditors and of its debts and other liabilities and of its assets as may be prescribed by the insolvency regulations for the purposes of this section, and such other information as may be so prescribed; and

(b) unless a provisional supervisor has already been appointed in respect of the proposal, appoint as its provisional supervisor an authorised insolvency practitioner who has consented to supervise it.

After preparing the proposal and statement and, if appro-priate, making the appointment, the directors shall submit the proposal and statement to the provisional supervisor for consid-eration and comment.

The directors shall then vote on the proposal.


Such directors are liable to imprisonment if convicted. Courts alsohavethepowertodisqualifydirectors.Undersection218of the Companies Act, a court shall make a disqualificationorder against a person if satisfied, on an application made to it, that the person is or has been a director or secretary of a company that has at any time become insolvent, whether while thepersonwasadirectororsecretaryorsubsequentlyandinthecircumstances where the conduct of the person as a director or secretary of that company, either taken alone or taken together with the person’s conduct as a director or secretary of any other company or companies, makes the person unfit to take part in the management of a company.



No. The government provides the right for foreign and domestic private entities to establish and own business enterprises and engage in all forms of remunerative activity. However, a companywhoseshareholdersarenotKenyancannotownagri-cultural land, freehold land or leasehold property whose term exceeds 99 years. There are also restrictions as to foreignshareholding in the banking, insurance and telecommunica-tions industries. In an effort to encourage foreign investment, the government repealed some regulations that imposed little foreign ownership limitation for firms listed on the Nairobi Securities Exchange, allowing such firms now to be 100%foreign-owned, as reported by the UNCTAD World Investment Report 2016. In 2015, the government established regulations requiring thatKenyans own at least 15% of the share capitalof derivatives exchanges, through which derivatives such asoptions and futures can be traded.

When the Companies Act of 2015 came into force, foreign companiesseekingregistration inKenyawererequired,under




Kenyadoesnotoperateafixedexchangerateagainstanyforeigncurrency. Therefore, the exchange rate between the KenyanShilling and any other currency is determined by market forces, subject of course to interventions from time to time by the CentralBankofKenya(theCBK).TheCBKandthecommer-cial banks usually publish the exchange rates applicable on aday-to-day basis.


Kenya does not have exchange control laws in force sincethe repeal of the Exchange Control Act in December 1995.However,theCBKActestablishestheCBK.UndertheCBKAct, theCBK is empowered to formulate and implement themonetarypolicyinKenya.AccordingtoCentralBankCircularNo.12of1996–“Revised

ForeignCurrencyTransactionGuidelinestoAuthorisedBanks”,commercialbankswereassignedamonitoringrolebytheCBKandeachcommercialbankisrequiredtosubmitreturnstotheCBKonaregularbasis.ForeigncurrencyisfreelyrepatriablefromKenya, provided there is written evidence of an under-lying business transaction and the respective bank handling the repatriation is satisfied as to the genuineness of the transaction. However,foranyamountequivalenttoUSD500,000ormore,the CBK has requested that a commercial bank first consultwith them as to the amount and purpose of the remittance. This is stated to be for statistical purposes. For any amount belowtheequivalentofUSD10,000,commercialbanksarenotrequiredtoobtainanydocumentaryevidencetobackthetrans-action, although in certain cases banks will nonetheless seek an explanation.

The Foreign Investments Protection Act provides that a foreignnationalwhoproposestoinvestforeignassetsinKenyamay apply to the Cabinet Secretary in charge of finance, for a certificate that the enterprise in which the assets are proposed to be invested is an approved enterprise. The Cabinet Secretary shall consider every application made and, in any case in which he is satisfied that the enterprise would further the economic developmentoforwouldbeofbenefittoKenya,hemayinhisdiscretion issue a certificate to the applicant. The holder of a certificate may, in respect of the approved enterprise to which suchcertificate relates, transferoutofKenya in the approvedforeigncurrencyandattheprevailingrateofexchange:(a) the profits, including retained profits which have not been

capitalised,aftertaxation,arisingfromoroutofhisinvest-ment in foreign assets, provided that any increase in the capital value of the investment arising out of the sale of the whole or any part of the capital assets of the enter-prise or revaluation of capital assets shall not be deemed to be profit arising from or out of the investment for the purposes of the Foreign Investments Protection Act;

(b) the capital specified in the certificate as representing and beingdeemedthefixedamountoftheequityoftheholderof the certificate in the enterprise for the purpose of this Act, provided that:■ whereanyamendmentorvariationismadeintheamount

of the said capital, the amended or varied amount shall be substituted for the original amount; and


Financing and project documents would need to be stamped in respectoftheapplicablestampdutypayable.Mostmegaprojectsthat need project financing usually involve development projects that impact heavily on the community. As such, government agencies are usually involved in oversight roles. Since project financing consists of a long string of contractual deals, lawyers ensure all paperwork regarding payment of duties is completed to the end.


In the case of land and/or immovable property, an owner is usually provided with a document of title, and this could either be a Grant, a Certificate of Title, a Title Deed or a Lease. There is a restriction on foreign ownership of freehold land, leases exceeding 99 years and agricultural land. These leases can,however,berenewedwiththeexpiryofthe99-yearperiod.The Constitution, the Mining Act and the Petroleum

(Exploration and Production) Act all provide that naturalresources in the form of minerals and petroleum belong to the GovernmentofKenya.Aninterestedpartymayobtainapros-pecting right or licence from the Government in respect of such natural resources. There are currently no restrictions on foreign ownership of companies intending to undertake such businesses.ToundertakeabusinessinKenya,thebusinessentitywould

need to apply for a single business permit in addition to the licencesthatmayberequiredintheparticulareconomicsector.The KIA will process and grant approvals of new invest-ment, once proposals are submitted on a prescribed application form. Proof of company registration must be attached to the application.


Yes. There are applicable fees which one must pay to obtain a mining licenceorapetroleumexploration licence. Onemustobtain a licence from the relevant authorities in order to be allowedtoexportextractedmineralsorpetroleumoutofKenya.Therearealsoroyaltiesthatarepayableinrespectofextractednaturalresources.Forexample,theMiningRegulationsprovidethat “there shall be payable on all diamonds originating in Kenyaanad valorem royalty of fifteen per centum of the gross value thereof as assessed by an approved valuer appointed under the Diamond Industry Protection Regulations”.ThereistheNationalResourceBenefitSharingBillof2014

which if passed will establish formulae in which proceeds from exploitationofnaturalresourcesshallbesharedbytheminingcompanies, national government, county governments and local communities.ThisroleshallbeunderthescopeoftheBenefitSharing Authority.

184 Kenya


and for the disposal of unserviceable, obsolete or surplus stores,assetsandequipmentbypublicentities)andthePublicPrivate Partnership Act (which provides for: the participation of the private sector in the financing, construction, develop-ment, operation, or maintenance of infrastructure or develop-ment projects of the government through concession or other contractual arrangements; and the establishment of the institu-tions to regulate, monitor and supervise the implementation of project agreements on infrastructure or development projects).

8 Foreign Insurance


There are no restrictions against insurance policies over project assets provided or guaranteed by foreign insurance companies. TheremaybeVATimplicationsastheprovisionofinsurancebya foreign company may be deemed to be an imported service.


Yes, they are.



Such workers would need to apply for and obtain visas (where applicable)andanyrequisiteworkpermits.Workpermitsandvisas are issued under different classes by the Department of Immigration. The general guiding principle for issuance of work permits by the government is that these should be issued to foreign workers, technicians, engineers or executives onlywhere the tasks cannot be undertaken by qualified Kenyans.Even where the work permits are issued to foreigners, there is ageneral expectationby thegovernment that there shouldbeknowledge transfer before the lapse of the work permit.



There are no restrictions on importing project equipment.Applicable customs duty would, however, be payable.TheImportDeclarationFeewasrecentlyloweredfrom2.25%

to2%ofCostInsuranceandFreight.Goods and services for the construction of infrastruc-

ture works in industrial and recreational parks of 100 acres or more inNairobi,Nakuru,Kisumu,MombasaandEldoret areVAT-exempt.


The Customs and Excise Act contains an extensive list ofthe items attracting import duty. In termsof exceptions, the

■ no additional amount or sum shall be added to thecapital specified in the certificate (as amended or varied) to represent any increase in the capital value of the investment since the issue of the certificate or since the last amendment or variation of the certifi-cate; and

(c) the principal and interest of any loan specified in the certificate.


Yes, they can.


No, there is no such restriction.


Yes. The Environmental Management and Co-ordinationAct (theEMCA) requires aprojectproponent tocarryout anenvironmental impact assessment (EIA) study and submit a project report “before financing, commencing, proceeding with, carrying out...or causing to be financed, commenced, proceeded with, carried out...” any undertaking of certain projects, including mining, activities out of character with their surroundings, and major changes in land use. TheEMCArequirestheownerofpremisesortheoperatorof

a project to take all reasonable measures to mitigate any unde-sirable effects not contemplated in the EIA study report, and shall prepare and submit an environmental audit report on those measurestotheNationalEnvironmentManagementAuthority(NEMA)annuallyorasNEMAmayinwritingrequire.NEMAisestablishedundersection7oftheEMCAwiththemandate,inter alia, to coordinate and supervise environmental matters and serve as the principal government institution for the implemen-tation of environmental policies.TheEMCAprovidesthatnoowneroroperatorofanytrade

or industrial undertaking shall discharge any effluents or other pollutants into the environment without an effluent discharge licence issued byNEMA. The EMCA defines “effluent” tomean“gaseouswaste,waterorliquidorotherfluidofdomestic,agricultural, trade or industrial origin treated or untreated and dischargeddirectlyorindirectlyintotheaquaticenvironment”.

In line with Sustainable Development Goals No. 13 on climate action,foreigninvestmentcompaniesthatsetupinKenyaarerequiredtostrictlyadheretoenvironmentallyfriendlypracticesfor realisation of sustainable development.


This is governed by the Public Procurement and Disposal Act (which establishes procedures for efficient public procurement



discharge of their duties. The purpose of the Act is to advance the ethics of public officers by providing for a code of conduct and ethics, and requiring financial declaration from certainpublic officers. Under this Act, where a person is found to have hinderedorinterferedwithothersexercisingtheirdutiesunderthe Act, they shall be liable under the Act and may be convicted forafinenotexceedingKES5,000,000ortoimprisonmentforatermnotexceedingfiveyears.

13 Applicable Law


Project agreements are typically governed by contract, save in the case where one of the parties is the government, a state corporation or a county government, in which case provisions of statutes such as the Constitution, the Government Contract Act, the State Corporations Act, the County Governments Act, Public Private Partnerships Act and the Public Procurement and Disposal Act would need to be considered.


Financing agreements are typically governed by contract law, banking law and debt finance law.


Contracting parties have the freedom to choose the governing law in respect of their contract. Parties would, however, still have to adhere to the laws of the land in respect of various aspects of their project, including but not limited to land. Land-related agreements, permits and consents, employment, etc. are normally governed by the law of the location of the project.



Yes, it is. To this effect, bold pronouncements were made in the case of Talaso Lepalat v The Embassy of the Federal Republic of Germany & 2 Others [2014].



Yes, they are.


Yes, it is. Kenya has also enacted the Investment DisputesConvention Act which gives legal sanction to the provisions of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

CustomsandExciseActalsocontainsquiteanextensivelistoftheinstitutionsandpersonsthatenjoyexemptionsinrespectofvarious items as indicated in the Act.

11 Force Majeure


Yes. These would have to be set out in the applicable contracts. Force majeureexclusionsdonotapplytopaymentobligation.



State officers and public officials are involved in major projects. Chapter6oftheConstitutionoftheRepublicofKenya(whichis the supreme law of the country) provides for Leadership & Integrity of state officers. Chapter 6 clearly stipulates that such officers are required

to take an oath of office before assuming office and conduct themselves ethically. The Chapter further provides for finan-cial probity of state officers. Any officers found to have been engaged in unethical or corrupt business practices are, under the Constitution, prohibited from holding such offices in the future.

There is also the Leadership & Integrity Act No. 19 of 2012 (the LIA), which is a statute that gives effect to the provisions of Chapter 6 of the Constitution discussed above.

Under the LIA, where there have been investigations and a public officer is found to have committed an offence, a referral may be made for civil or criminal proceedings against the officer and,undersection43,themattermaybereferredtotheEthicsand Anti-Corruption Commission (established under the Ethics and Anti-Corruption Act No. 22 of 2011) or the Attorney-General, for civil matters, the Director of Public Prosecutions, for criminal matters or any other appropriate authority. Undersection49oftheLIA,whereit isprovedthatastate

officer obtained any property in breach of the Act, the officer shall be subject to any appeal, which he/she may make, forfeit the property and the property shall be held by the Commission or an agent appointed by the Commission, in trust for the country, until it is lawfully disposed of. The Commission may also order the state officer to compensate such sum including interest, as may be determined by the Commission as just, with regard to the loss suffered by the government and such order shall be deemed to be a decree under the Civil Procedure Act.

The LIA further creates various offences and penalties. For example, under section 47, “any person who has convictedan offence under this Act, for which no penalty is expresslyprovided,shallbeliableonconvictiontoafinenotexceedingfivehundredthousandshillings(KES500,000),ortoimprison-mentforatermnotexceedingthreeyears,ortoboth”.

The Anti-Corruption and Economic Crimes Act provides for the prevention, investigation and punishment of corrup-tion, economic crime and related offences. There are several offences under this Act and each offence attracts a penalty. PenaltiesrangefromfinesofKES300,000toKES2,000,000,tomaximumprison sentences ranging from three years to10years.

Government officials are also subject to Public Officer Ethics Act, which regulates the conduct of public officers in the

186 Kenya


annum.TheIncomeTaxActprescribeshowtocomputewith-holdingtaxondeemedinterest.


Seequestion17.1above.Bothfiscalandnon-fiscal incentivesareavailable inKenya.

TheKenyaRevenueAuthority implementstheissuanceofthefiscal(tax)incentivesincollaborationwithotherregulatorsandfacilitatorssuchastheCapitalMarketAuthorityandtheExportProcessing Zones Authority, among others, as provided under theIncomeTaxAct,LawsofKenya.

18 Other Matters


Equityinvestorsand/orlendersshouldundertakeduediligenceinvestigations on a particular project and/or project company beforeadvancinganyfunds.Theduediligenceexerciseshouldcover the legal and financial status of the companies that the investors or lenders would be contracting with.Further,duediligenceshouldextendtothenatureofprojects

invested in. Eachprojectfinancinghas itsownuniquestruc-ture. For example, many financiers shy away from fundingroad construction projects because of its high income return risks. Realistically, demand/traffic risk is often unavoidable. Financiers should, as need be, conduct their own traffic projec-tions to be in a good position to assess this risk involved in financing these projects as opposed to relying on traffic projec-tions done by project companies. This balancing of information is crucial in the steering of mega projects.


There are legal impositions on project companies issuing bondsorcapitalmarketinstrumentsinKenya.ThelocallegalandregulatoryrequirementsfortheissuanceofcapitalmarketinstrumentsaresetoutintheCapitalMarketsAct.TheCapitalMarketsActprohibitsanypersonfromcarryingonbusinessasa stockbroker, derivatives broker, real estate investment trust (REIT) manager, trustee, dealer, investment adviser, fund manager, investment bank, central depository, authorised secu-rities dealer, or authorised depository, or from holding himself out as carrying on such a business unless he holds a valid licence issued under the Capital Markets Act or under the authorityof theCapitalMarketsAct. However, foreigncompaniescanissue bonds even regionally according to part II section 7 of the CapitalMarketsSecuritiesPublicOffersListingandDisclosuresRegulations of 2002.


Disputes involving matters that are criminal in nature are not generally arbitrable under local law.


No, they are not.



Kenyahashadno recent call forpolitical riskprotections forcompaniesinvestinginKenya.Generally,lettersofundertakingand guarantees are the two most common commitments that the government formally issues to guarantee payments. The Public FinanceManagementAct and thePublicPrivatePartnershipsAct, read togetherwith theConstitution ofKenya, recogniseguarantees by the government subject to specified conditions prescribed thereunder. The choice as to which one it issues will depend on the circumstances of each case. Although both can be binding in law, there is some doubt over the enforcea-bility of letters of undertaking, especially considering that the PublicFinanceManagementActissilentonthesame,thoughthe Public Private Partnerships Act provides for their issuance, albeitvaguely. Aguaranteemay, inthecontextofthepresentlegal framework, be preferable and recommended. Once issued, thePublicFinanceManagementActprovides thatno furtherparliamentary authorisation shall be necessary for payment under a guarantee, and that the same shall be a charge on the consolidated fund. Under the Public Finance ManagementAct, issuance of a guarantee is the prerogative of the Cabinet Secretary responsible for Finance. Once the guarantee is issued, parliament is required to approve it. As to changes in law,Kenya’sConstitutionprovidesthatanynewlyenactedlawshallnot apply retroactively. To cushion any unfavourable changes in law,thereisusuallyroomforextensivedeliberationsbystake-holders before such a law is passed.

17 Tax


Interest to be paid on loans from foreign lenders for the purposes of investing in the energy or water sectors, or in roads, ports,railwaysoraerodromes,areexemptfromtax.

Further, instruments (including charges, debentures and guarantees) executedwith respect to the transactions relatingto loans from foreign sources received by investors in the infra-structure (energy, roads, ports, water, railways and aerodromes) development sector shall be exempted from theprovisionsofthe Stamp Duty Act.

However, for companies not falling in the above bracket, Kenya imposesawithholdingtaxat thebasicrateof15%per



questionsofMuslim lawrelating topersonal status,marriage,divorce or inheritance in proceedings in which all the parties profess theMuslim religion and submit to the jurisdiction ofthe Kadhis’ courts. As such, the jurisdiction of the Kadhis’ court does not extend to contractual relations. TheKadhis’ Courts Act further reiterates this point by providing that a Kadhis’ court shall have and exercise jurisdictionover the determinationofquestionsofMuslim lawrelating topersonal status,marriage,divorce or inheritance in proceedings in which all the parties professtheMuslimreligion.The Judicature Act provides the sources of law in Kenya

which include the Constitution, written laws, the substance of the common law, the doctrines of equity and the statutesof general application in force in England on 12 August 1897, and African customary law. It should be noted that Shari’ah, IslamicorMuslimlawisnotreferredtointheJudicatureAct.Therefore, although a contract may be prepared in accordance with Shari’ah,thegoverninglawwillbeKenyan,asKenyadoesnot recognise Shari’ahlawasgoverningcontractsinKenya.

To our knowledge, there have not been any notable cases to date over jurisdictional matters pertaining to Shari’ah law.


Islamic finance prohibits the charging or payment of interest. Consequently,Kenya,inanattempttoregulateIslamicbankingoperations and products, made slight changes to its BankingAct.Initially,theBankingActonlymadereferenceto“interest”.TheBankingActwassubsequentlyamendedin2008byaddingthe phrase “or a return in the case of an institution carrying out business in accordance with Islamic law” when referring to interest chargeable on a savings account. It would be interesting toseewhatKenyancourtswoulddetermineincaseswhereaninterest payment obligation was included in a loan agreement that is meant to be Shari’ah-compliant. In the English case of Dunlop Pneumatic Tyre Co Ltd v New Garages & Motor Co Ltd [1915] AC 79, the court held that, generally, the inclusion of an interest payment obligation in a loan agreement would not affect its validity and/or enforceability unless that interest payment obli-gation is deemed a penalty offending the rules laid down in that particular case. With the common law doctrine of precedent, thispositionmayhaveabearinginfuturetransactionsinKenyaif Shari’ah law changes to allow charging or payment of interest.

19 Islamic Finance


Istina’a – In Islamic finance, Istina’a is generally a long-term contract whereby a party undertakes to manufacture, build or construct assets, with an obligation from the manufacturer or producer to deliver them to the customer upon completion. This instrument may be used in the manufacturing industry and also in infrastructure projects.

Ijarah – This contract represents a transaction in which a known benefit (usufruct) associated with a specified asset is sold for a payment. In the course of this sale of usufruct, owner-ship of the asset is not transferred – the bank maintains owner-ship of the asset. An Ijarah may be used in a construction project where the financier would be involved in the construction of the development, then subsequently lease out the property to theend consumer, with the end consumer’s last instalment being usedastheamountrequiredtopurchasetheproperty.

Wakala – Describes an agency or a delegated authority where a principal appoints the agent to carry out a specific job on behalf of the principal. Wakala agreements are agency agree-ments where the principal and the agent share in the profit and risk of loss of investment. Any guarantee on minimum return is not Shari’ah-compliant. This can be used where a company acts as the agent for a financier or lender by investing the funds from that financier or lender. The company may choose to invest the funds in different projects, and profits and losses would be sharedequallybybothparties.

Murabaha – It is often referred to as “cost-plus financing” and frequentlyappearsasaformoftradefinancebaseduponlettersof credit. In its simplest form, this contract involves the sale of an item on a deferred basis. This could be used to finance the movableassetsthatmaybeusedinaproject;forexample,motorvehicles.


TheConstitutionisthesupremelawofKenya.Islamicfinanceproducts, on the other hand, are to be governed by Shari’ah.

Article 170(5) of the Constitution states that the jurisdic-tion of a Kadhis’ court shall be limited to the determination of

188

Pamella Ager, as head of the Real Estate, Conveyancing and Securities teams, has been part of various ground-breaking Kenyan commer-cial transactions; for instance, the privatisation of several government entities – including Mumias Sugar Company and Kenya Electricity Generating Company. She also acted in a flotation exercise by KCB (Kenya’s biggest bank, in network terms), two successful rights issues for KCB, the development of Kenya’s Central Depository and Settlement Corporation, and the Private Placement of The Cooperative Insurance Company of Kenya (CIC). Pamella specialises in the following areas: banking & finance; capital markets; conveyancing; mergers & acqui-sitions; and regulatory work. Pamella is recognised for her breadth of expertise, and has served as a Lecturer at the University of Nairobi’s renowned Faculty of Law. In addition, she holds an LL.M. degree, 1st Class Honours from Auckland University.

Oraro & Company AdvocatesACK Garden Annex6th Floor, 1st Ngong AvenueNairobiKenya

Tel: +254 709 250 704Email: [email protected] URL: www.oraro.co.ke

Established 43 years ago, by George Oraro SC (one of Kenya’s top liti-gators), Oraro & Company Advocates is a top-tier, full-service Kenyan law firm. The firm’s areas of strength include Corporate & Commercial, Dispute Resolution, Intellectual Property, Real Estate, Conveyancing & Securities and Tax. Its partnership includes some of Kenya’s best legal minds and its lawyers are recognised by several international leading legal directories. The firm is also well-recognised for its contribution to Kenyan jurisprudence (through its formidable dispute resolution team), work on some of Kenya’s largest deals and its significant contributions to Kenya’s legal profession. The firm’s corporate and commercial team specialises in all aspects of transactional work such as banking and finance, capital markets, corporate finance, corporate regulatory work, energy law, mergers & acquisitions and project finance. It also has Islamic finance capabilities and has advised Islamic finance clients on a variety of matters, including Shari’ah compliance.

www.oraro.co.ke


Kenya

James K. Kituku’s legal experience spans a period of over five years. He has worked in several high-profile corporate and conveyancing briefs for both local and foreign clients. He has also acted for developers and financial institutions in diverse property transactions and major project financing projects in Kenya. James has also advised on several infrastructure projects.

Oraro & Company AdvocatesACK Garden Annex6th Floor, 1st Ngong AvenueNairobiKenya

Tel: +254 709 250 712Email: [email protected]: www.oraro.co.ke



Chapter 21 189

Malaysia

Rahmat Lim & Partners Syed Rashid bin Rahim Alsree

Dzuhairi bin Jaafar Thani

Malaysia


AmidstgrowingglobalconcernssurroundingtheCOVID-19pandemic, the Malaysian government introduced an RM20billion economic stimulus package in a bid to mitigate economic risks arising out of the outbreak, which included additional allo-cations for the development and maintenance of basic infra-structure projects. In addition to the stimulus package, the government had also pledged to continue all projects under theBudget2020,includingtheECRLandtheMRT2,soastoimprove investor confidence.


Notable project financings inMalaysia which commenced orwhich, based on publicly available information, are continuing in 2020 include:1. ECRL:TheRM44billionrailwayprojectwillhavea640

kmtrack line linking thestatesofKelantan,Terengganuand Pahang to Negeri Sembilan, Selangor and the Federal Territory of Putrajaya. The project was relaunched by the Malaysiangovernment inJuly2019andisexpectedtobecompleted in December 2026.

2. MRT2: ConstructioncommencedonthisRM30.53billiongovernment-fundedMRT2projectin2018.Thisproject,whichisexpectedtobecompletedinJuly2021,isfortheconstruction of a transit line running through several areas intheKlangValleywhicharecurrently lackinginter-cityrail connectivity.

3. Bandar Malaysia: The development of this mega-project withanareaof486acresresumedinDecember2019afterits suspension in 2017, with an estimated total gross devel-opmentvalueofRM140billion.

4. Pan-Borneo Highway: Construction is still ongoing on this federal government-funded mega-project, which has anestimatedcostofRM29billion,andisexpectedtobecompleted in 2025. The 2,325 km highway will connect thestatesofSarawakandSabahinEastMalaysia.

5. TunRazakExchange:TheRM40billionmixeddevelop-mentprojectlocatedon70acresoflandinKualaLumpurwhichisslatedforcompletionin2024.

6. RAPID: The USD27 billion petroleum processing hub in Pengerang, Johor, which covers an area of 2,000 hectares, isexpectedtobereadyforcommercialoperationsin2020.

1 Overview


InMalaysia’sBudget2020,theMalaysiangovernmentoutlinedseveral mega-projects which are expected to generate signifi-cant interest in the local market – such projects notably include: (i) the East Coast Rail Link (“ECRL”); (ii) the Mass RapidTransit Sungai Buloh-Serdang-Putrajaya Line (“MRT2”); (iii) theBandarMalaysiamixed-usedevelopment;and(iv) thePanBorneoHighwayproject.Furtherdetailsontheseprojectsaresetoutinquestion1.2below.

In addition to the above, infrastructure projects under the RM46 billion Penang Transport Master Plan project (whichinclude an undersea tunnel, highways and other transportation networks) is anticipated to further spur local industries. The governmenthadalsoannouncedallocationsofRM587millionandRM500millionforruralwaterprojectsandruralelectrifica-tion projects respectively, which would be largely concentrated in rural areas in the states of Sarawak and Sabah.

In the oil and gas sector, the USD27 billion refinery and petro-chemical integrated development (“RAPID”) project jointly developedbyPetroliamNasionalBerhadandtheSaudiArabianOil Company located in Johor is anticipated to commence commercial operations this year. Intherealestatesector, inadditionto theBandarMalaysia

development, the Tun Razak Exchange project (an RM40billionmixedintegrateddevelopmentinKualaLumpur)whichhas been described as an “international financial district” has alsobeengarneringlocalandinternational interest. Basedonpublicly available information, about 70% of the land parcelswithin the district has been sold to property developers, construction companies and global banking institutions as of earlyMarch2020.

The issuance of sukuk, a Shari’ah-compliant financial instru-ment similar to bonds, remains popular with investors in Malaysia.MalaysiahasbeendescribedbytheMinistryofFinanceas being a “leader in the sukuk market” – as at end-June 2019, Malaysiawas reported to have achieved the strongest growthin this aspect on a global scale, with a total issuance value of RM136.9billion.InOctober2019,itwasannouncedthatEdra Solar Sdn. Bhd.’s “Sustainable and Responsible Investment”(“SRI”) sukuk had been successfully priced – the proceeds of the sukuk will be used to partially refinance costs incurred in connection with the development of its solar power farm in the stateofKedah.

190 Malaysia


Such an assignment would not be considered to be an abso-lute assignment in law, but maystillbevalidinequityagainstthechargor. Under such an arrangement, the chargor may collect thereceivablestotheextentcommerciallyagreedbetweenthechargor and the chargee, and the debtor need not be notified of the security. In such an instance, the chargor will generally hold legal title to the debt on trust for the chargee, and any suit to recover the receivables would have to be in the joint names of the chargor (the legal owner of the receivables) and the chargee (the beneficial owner of the receivables).


Yes, it is common for security to be taken over cash depos-ited in bank accounts. Such security can be in the form of a charge and/or assignment in favour of the creditor. Whilst it is commonplaceforaMalaysianbanktoobtainanassignmentandcharge over a deposit account held with the bank itself, it is tech-nicallynotpossibleunderMalaysian lawtoassignadebtbackto a debtor, as this would result in the destruction of the debt. Wherethesecurityiscreatedoverafixeddeposit,theoriginal

fixeddepositcertificatesaretypicallydepositedwiththecred-itor for the duration of the security.


Yes. Shares in Malaysian companies are in registered (notbearer) form. Security over unlisted shares would typically be createdbywayofanequitablemortgagewhichisconstitutedbythe deposit of the original share certificates and signed transfer forms in blank.

Security over the shares of a listed company can be created by:(a) a legal mortgage. This would involve the actual transfer

of the dematerialised shares by the mortgagor from its own securities account to a so-called “pledged securities account” in the name of the mortgagee or its nominee as mortgagee. The identity of the ultimate beneficial owner oftheshares(unlessexemptionssuchasthoserelatingtoexemptauthorisednomineesandomnibusaccounts)anddetails of “pledged securities accounts” holding substan-tial holdings in a company, will have to be disclosed based on the regulations and to the relevant regulatory author-ities (being Bursa Malaysia Securities Berhad, or theSecuritiesCommissionMalaysia (“SC”), as applicable) if theysorequire;and

(b) charging the beneficial interest in the shares by way of anequitablecharge.Itshouldbenotedthatanequitablechargewillbesubordinatetoanypriorequitableinterestofa third party in the shares, and technically will be defeated by a transfer of legal title to the shares to a subsequentbona fidepurchaserforvaluewithoutnoticeoftheequitablecharge.

As mentioned above, for a legal mortgage, the shares would have to be transferred to a separate “pledged securities account”. Itwouldbecustomaryforthepartiestoexecuteachargedocu-ment setting out the terms and conditions governing the mort-gage. In the case of an equitable charge, the parties wouldagaintypicallyexecuteachargedocument,buttheshareswouldremain in the account of the chargor or its custodian.

2 Security


Yes,intheformofanall-assetdebenturecreatingafixedand,where appropriate, floating charge over all assets of the chargor in favour of the chargee.

Generally, the chargor may not deal with any assets subject to afixedchargeunlessotherwiseagreedbythechargee.Ontheother hand, a floating charge is a charge over a general pool or fund of assets of a company, which may change from time to time in the normal course of business.


Yes. Security over real property (land) can be created by way of a charge, or in some instances, an assignment of rights.

The typical form of security over real property held under an individual issue document of title is a statutory or “legal” charge under the National Land Code 1965 (for real property situated in PeninsularMalaysia),theSarawakLandCode(forrealpropertysituated in the state of Sarawak) and the Sabah Land Ordinance (for real property situated in the state of Sabah) (collectively, the “Land Statutes”). Such a charge may be created by registering the prescribed statutory form with the appropriate land authority in accordance with the relevant Land Statute. Enforcement of a legal charge usually takes the form of a forced sale of the prop-erty in an auction run by the courts or the relevant land authority.

Another fairly common method of taking security over real property owned by a corporation is by way of an equitablechargeunderadebenture.Oneadvantageofsuchanequitablecharge is that a receiver may be appointed to sell the real prop-erty by way of a private sale, as an agent of the chargor.

It is possible for a person to be the beneficial owner of, or have rights to, a piece of property for which a separate issue document of title has not yet been issued, and which still forms part of a larger pieceoflandheldunderamastertitle.Asanexample,apurchasermay agree with a developer to purchase a piece of land forming part of a larger piece of land held under a master title in the name of the developer. In such an instance, it would be common for the purchaser to create security by assigning all of its rights to the property under the relevant sale and purchase agreement. In order for such an assignment to constitute an absolute assignment in law, amongst other things, the assignment would have to be in writing and notice of the assignment given to the relevant counterparty. Security over plant, machinery and equipment would typi-

callybe in theformofa fixedcharge (created,e.g.,bywayofa specific debenture over such assets). It should be noted that underMalaysianlandlaw,fixturesaredeemedtoformpartofthe underlying land, and would technically be subject to any charge over such land.


Yes,receivablesmaybeassignedbywayofanequitableassign-ment in favour of the chargee.

191Rahmat Lim & Partners


security may be created over that real property. The application for such approval involves the submission of a prescribed form to the relevant land office together with certain supporting documents, andtheprocessmaytakebetweentwotosixmonthsdependingona number of factors including where the real property is situated. Inaddition,undertheMalaysianforeignexchangeadministra-

tion rules (the “FEA Rules”)administeredbytheCentralBankofMalaysia(“BNM”),aMalaysianresidentmayrequirethepriorapprovalofBNMtograntfinancialguarantees(asdefinedintheFEAnoticesissuedbyBNMandincludesasecurityinterest)infavour of, or obtain financial guarantees from, non-residents under certain prescribed circumstances. Although an application toobtainthepriorapprovalofBNMdoesnotrequireanyfeeandcanbedoneonlineviaBNM’sonlineportal,thetimeframemaytakebetweentwotosixmonthsdependingonthecomplexityofthe financing and the entities involved. Generally, where no prior approvalwasrequired,buttheamountofthefinancialguaranteeexceedstheequivalentofRM50million,detailsofthefinancialguaranteewouldneedtoberegisteredwithBNMwithinsevenbusiness days from the date such financial guarantee takes effect.

3 Security Trustee


Yes, it is fairly common for a security trustee or agent to be appointed to act on behalf of a syndicate of lenders in syndicated financings or bondholders/sukuk holders in issuance of private debt securities.

The role, rights and obligations of the security trustee or agent may be documented by way of a security agency agreement or security trust deed. The application of enforcement proceeds is typically based on a pre-agreed waterfall.


AparalleldebtstructureisnotcommoninMalaysiaasitcreatesseparate debt obligations between the borrower and the security agent, which may attract additional stamp duty, etc. Although a joint and several creditor structure is doable, the preferred approach would be to have a security agency or trust arrange-ment in place as discussed above.



The enforcement of security created over real property under a Land Statute would need to comply with the applicable


Where the security is created by a company incorporated under the Companies Act 2016, the security would have to be regis-teredwiththeCompaniesCommissionofMalaysia(the“CCM”) within 30 days from the date such security is created. Insofar as a security created by a company incorporated under the Labuan Companies Act 1990 is concerned, the security would need to be registered with the Labuan Financial Services Authority (the “LFSA”) within 30 days from the date such security is created.

It is fairly common for a charge document to contain a power of attorney in favour of the chargee. The signing of the charge document by the chargor would have to be attested by certain prescribed persons in accordance with the Powers of Attorney Act1949. Thechargedocumentwouldalsohave toberegis-teredwith:(a)theHighCourtofMalayatovalidlycreateapowerofattorneywhichhaseffectinWestMalaysia;and(b)thesubor-dinate courts of Labuan if it is in relation to property and is intendedtobeexercisedwithinLabuan.

The relevant charge document, and each power of attorney, would also need to be stamped in accordance with the Stamp Act1949.

Where security is to be created over real property under a Land Statute, as mentioned above, the charge documents together with certain prescribed supporting documents would need to be presented to the appropriate land authority for the purposes of creating a legal charge under that Land Statute.


RegistrationsofsecuritywiththeCCMandtheLFSA,andregis-trationsofpowersofattorneywiththeHighCourtofMalayaand subordinate courts of Labuan, are fairly straightforward and do not involve a substantial registration fee.

Insofar as stamping is concerned, where the loan is a ringgit Malaysia-denominatedloan,thestampdutypayableonaprin-cipal instrument would be stamped ad valorem, which currently is 0.5%oftheprincipalamountoftheloan.Iftheloanisdenom-inated in foreign currency, the stamp duty payable on a principal instrumentwouldbecappedatRM2,000.00.

Any secondary instrument to be stamped in connection with the loan would attract nominal stamp duty in the amount of RM10.00foreachdocumentstamped.Inaddition,stampdutyof RM10.00would be chargeable in relation to any power ofattorney contained in such document.

The stamping process would generally take between a day to two weeks depending on the mode of stamping and the number of documents involved.


Therestrictionsoninterestandexpressconditionsofuserunningwith the landwillbeexpressly statedon the issuedocumentoftitle of the real property. Such conditions may include that the approval of the relevant state authority is required before any

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Secured creditors can enforce their security and they generally stand outside the winding-up process. In the event that their securityisinadequate,thesecuredcreditorcansubmitproofoftheir remaining debt to claim in priority over other creditors.

In addition, proceeds derived from the enforcement of legal charges created over real property would need to be applied in accordance with the provisions of the relevant Land Statute.Insofarasclawbackperiodsareconcerned,underMalaysian

insolvency law, certain transactions (including the creation of charges andother security)within the six-monthperiodpriorto the commencement of winding up are vulnerable to being set aside as “fraudulent preferences” which will be void against the liquidatorofthecompany.


Yes, certain regulated entities are subject to industry specific legislation which sets out the extent to which bankruptcyproceedings can be commenced against such entities.

These include financial institutions, investment banks and insurers licensed under the Financial Services Act 2013 or Islamic Financial Services Act 2013 and trust companies falling underthepurviewoftheTrustCompaniesAct1949.Inaddi-tion, there is specific legislation to regulate the insolvency process of specific institutions with a “public interest” element such as electricity licensees under the Electricity Supply Act 1990 and the StockExchange under theCapitalMarkets andServices Act 2007.


Yes, in certain instances, depending on the nature of the charged assetsandformofsecuritycreated.Forexample,theenforce-mentofanequitablemortgageoversharesmaybebyexerciseofa power of attorney which entitles the attorney to sell the shares by way of a private treaty, with the creditor typically looking towards the original share certificates and signed transfer forms deposited by the chargor as part of the security. In any event, theexerciseofsuchremediesissubjecttotheequityofredemp-tion once the liabilities have been paid in full.

In addition, a debenture holder may possess the power to appoint a receiver or receiver and manager over the charged assets. Even after the winding up of the company, the deben-ture holder would be entitled to enforce its charge over such charged assets.


Yes. A voluntary reorganisation may be carried out by way of a scheme of arrangement in accordance with Section 366 of the Companies Act 2016. A scheme of arrangement is essen-tially a court-approved compromise or arrangement between a company and its creditors (or any class of creditors).

provisions of that Land Statute. For instance, under the National Land Code 1965, upon the occurrence of a default by the chargor which has been continuing for at least one month, the chargee may serve a statutory notice of default (which is in a form prescribed under the National Land Code 1965) on the chargorspecifyingthebreachinquestionandrequiringittoberemedied within a certain time period which shall not be less than one month therefrom. Where the breach has not been remedied within the remedy period provided in such notice, the chargee may then apply for an order for sale of the charged real property in accordance with the National Land Code 1965.


Generally, a foreign entity may enforce security granted to it inaccordancewiththeusualprocessesinMalaysia.However,there are restrictions which would apply where certain charged assetsaretobeacquiredbyforeignentities.Forinstance,underSection433BoftheNationalLandCode

1965,thepriorapprovaloftheStateAuthorityisrequiredforlandor any interest therein (including a lease) to be sold to a foreign entity unless the land is subject to the category “industry” or to anyconditionrequiringitsuseforindustrialpurposes.Pleasenotehowever,thatevenifSection433Bapprovalisnot

required, the landmaystillbesubject toanexpressconditionorrestrictionininterestrequiringthatthepriorapprovaloftheState Authority be obtained for a sale to foreign interests (or in some cases, to any party). Land searches need to be conducted toascertainifsuchconditionsorrestrictionsininterestexistonthe land.Inadditiontotheabove,theremaybeforeignequityowner-

ship restrictions in place in respect of assets within certain industry sectors as highlighted below.



Under the Companies Act 2016 (the “Companies Act”), upon the issuance of a winding-up order by the Malaysian courts,the winding-up of the company concerned will be deemed to commence upon the date of filing of the relevant petition to wind up the company.

The grant of a winding-up order has major implications on secured creditors and security arrangements in three main areas:(a) an automatic moratorium on dispositions of property and

executionproceedings;(b) the imposition of a six-month “claw-back” period

preceding the commencement of winding-up, during which transactions may be set aside as “fraudulent prefer-ences”; and

(c) a re-ordering of ranking in relation to floating charges and certain categories of preferred debt.

Inaddition,underMalaysianinsolvencylaw,asecuredcred-itor is not entitled to any interest in respect of his debt after the making of a winding up order against a corporate debtor, if the creditordoesnotrealisehissecuritywithinsixmonthsfromthedate of the winding up order.



to be provided. PETRONAS has issued a list of standardised workandequipmentcategorieswheretheminimumBumiputeraparticipationpercentagerangesfrom30%to100%.With Malaysia’s recent focus on renewable energy (“RE”)

(Malaysia has targeted to scale up the contribution of RE inthenationalpowermixto20%by2025)itispertinenttonoteforeignequityrestrictionsinthissectoraswell.Foreign equity shareholding is restricted to amaximum of

49%fortheFeed-inTariffsystem,whichisaneconomicpolicythat pays people at guaranteed rates for generating RE over a period of time being 16 years for biomass and biogas resources, and 21 years for hydropower and solar, and for the Large-ScaleSolarPhotovoltaicPlantprogramme,whichisMalaysia’sprogramme for solar photovoltaic plants with capacities of between1MWacand100MWac.

On the other hand, the government has not restricted foreign equity shareholding for companies registered as a Solar PVInvestorfortheNet-EnergyMeteringscheme,whichisamech-anismwhereexcessREisexportedtotheGridtooffsetpartofthe electricity bill, provided that certain conditions are complied with,suchasappointinga100%localcontractorregisteredwiththe Sustainable Energy Development Authority of Malaysiaas the relevant Engineering, Procurement and Construction contractor.

The fees payable by a foreign-owned company may vary dependingon the sector. For example, in theRE sector, theannualfeespayableundertheNet-EnergyMeteringProgrammediffer for local and foreign companies.Inrespectofcorporatetax,thestandardtaxrateforresident

and non-resident companies inMalaysia is 24%. However, aresidentcompanywithpaid-upcapitalofRM2.5millionorlessistaxedatalowerrateof17%onthefirstRM500,000,withthebalancebeingtaxedat24%.


Todate,Malaysiahasexecutedapproximately71bilateralinvest-menttreaties,54ofwhicharestillinforcetopromoteacondu-cive environment for investments and to provide protection for foreign investment.

The bilateral investment treaties serve, among other things, to protect against nationalisation and most favoured nation treatment, provide free transfer of profits and ensure settlement of disputes. However, such bilateral investment treaties do not provideprotectionfromtherestrictionsinquestion6.1above.


Generally, the assets of project companies are protected under Article 13 of the Federal Constitution 1957 which provides that no person shall be deprived of property save in accordance with the law, and no law shall provide for the compulsory use or acquisitionofpropertywithoutadequatecompensation.Forexample,theLandAcquisitionAct1960providesthata

stateauthoritymayacquireanylandwhichisneeded:(a) for any public purpose;(b) by any person or corporation for an economic develop-

mentwhich is deemed tobebeneficial to theMalaysianpublic; or

In addition, the Companies Act 2016 introduced two new corporate rescue mechanisms in the form of a corporate volun-tary arrangement (the “CVA”) and judicial management. The CVAislargelysimilartoaschemeofarrangementalthoughtheprimary difference lies in that there is minimal court supervi-sion for the duration of the restructuring. Under the judicial management mechanism, a company, its directors or a creditor mayapplytotheMalaysiancourtstoplacethemanagementofthe company in the hands of an insolvency practitioner to act as the judicial manager.


Although there are no express statutory provisions providingfor the interests of creditors to supersede those of the share-holders in the event of insolvency, there is a common law rule that upon the insolvency of the company, the interests of the creditors would override the interests of the shareholders. Thus, the directors may be in breach of their duties to the creditors where they continue to commit acts that jeopardise the financial positionofthecompanyinliquidation.

When a company is subject to winding-up proceedings, any officer of the company who is knowingly a party to a transac-tion,withnoexpectationthatthecompanywouldbeabletopaythe resulting debt, may be subject to civil and criminal liability. The officer may be subject to criminal prosecution for insolvent trading pursuant to Section 539(3) of the Companies Act 2016 (“CA 2016”). This is an offence which attracts an imprisonment termnotexceedingfiveyearsorafinenotexceeding500,000ringgit or both upon conviction. In addition, the Court, on applicationof the liquidatororanycreditor,may, if theCourtthinks proper so to do, declare that the officer be personally responsible without any limitation of liability for the payment of the whole or part of the debt.

Separately, where any directors or officers of the company carry on business with the intent to defraud the creditors of the company or for any fraudulent purpose, they may be liable forfraudulenttradingunderSection540ofCA2016andmadepersonally responsible, without any limitation of liability, for all or any of the debts or other liabilities as the Court may direct.



ThroughprogressiveliberalisationofvarioussectorsinMalaysiaover the years, foreign equity restrictions have been lifted toallow100% foreignownershipofprojects. However, foreignequityrestrictionsarestillinplacetoprotectcertainsectorsofstrategic importance, including energy, oil and gas, information technology and telecommunications.Intheoilandgassector,forexample,anyforeigncompany

that wishes to participate in upstream or downstream activities inMalaysiaisrequiredtosubmitalicensingorregistrationappli-cation to PETRONAS through a local company appointed to act as its exclusive agent or through a joint venture companyformed with a local company or individual. Such local company or joint venture company must also comply with minimum Bumiputera participation requirements. The percentage ofparticipationrequireddiffersdependingonthetypeofservices

194 Malaysia


Under the Gas Supply Act 1993, the EC is the primary regulator for activities involving the supply of gas through pipelines and related matters, such as the importation into regasification terminals, regasification, shipping, trans-portation, distribution, retail or use of gas.

(c) Manufacturing The Malaysian Investment Development Authority

(“MIDA”) is the federal agency responsible for the promo-tionofthemanufacturingandservicessectorsinMalaysia.Any application for a manufacturing licence pursuant to the Industrial Co-Ordination Act 1975 shall be made to MIDAforevaluationpriortotheissuanceofsuchlicencebyMITI. Some ofMIDA’s other key roles include theimplementationoftaxincentivesanddutyexemptionsonrawmaterials,components,machineryandequipment.

(d) Minerals The federal government is empowered pursuant to the

MineralDevelopmentAct1994(“MDA”) to inspect and regulate mineral exploration and mining-related issueswhereas each state pursuant to its own legislation (i.e. StateMineralEnactment(“SME”)) is empowered to issue mineralprospectingandexplorationlicencesandminingleases.

TheMDAisenforcedbytheDepartmentofMineralandGeoscienceofMalaysiawhilst the administrationof theSMEisundertakenbytheofficeoftheStateDirectorofLandandMines.

(e) Telecommunications ThetelecommunicationssectorinMalaysiaisregulatedbythe

Malaysian Communications andMultimedia Commission(the “Commission”) under the Communications and MultimediaAct1998. ProvisionofnetworkfacilitiesandnetworkservicesinMalaysiawouldrequireindividualandclass licences issued by the Commission.


Generally,no.However,therearecertainapprovalsrequiredorlegal formalities imposed by the legislation for sector-specific project documents.Forexample,section29(4)oftheElectricitySupplyAct1990

provides that any agreement made between licensees under section 29(1) for the supply of electricity shall be approved by the EC. Therefore, project companies in the energy sector are toobtainsuchECapprovalpriortoexecutinganyagreementforthesupplyofelectricityinMalaysia.


Land Land acquisition by non-citizens or foreign companies isgoverned by section 433B of the National Land Code 1965whichprovides that all land acquisitionof land inPeninsularMalaysiabynon-citizensorforeigncompaniesshallbesubjectto prior approval of the relevant state authority in which certain conditions may be imposed. Any dealings in contravention of section433Bwillbetreatedasnullandvoid.

(c) for mining, residential, agricultural, commercial, industrial or recreational purposes, subject to payment of compensa-tion in accordance with the market value.

The bilateral investment treaties referred to in question6.2 above are typically referred to as “Investment Guarantee Agreements” inMalaysia. Ingeneral, suchagreementswouldincludeaguaranteeagainstexpropriationornationalisationofforeigninvestmentsexceptifforpublicpurposeandaccompa-niedbyadequatecompensation.

As such, there is no form of investment that is specially protected.Aslongasthereisprovisionofadequatecompensa-tionanditisforpublicpurpose,theMalaysiangovernmenthastherighttoacquiresuchassets.In June 2019, the Malaysian government made a RM6.2

billion offer to take over four tolled highway concessions, namely: (i) Lebuhraya Damansara-Puchong (“LDP”); (ii) Sistem Penyuraian Trafik KL Barat (Sprint); (iii) Shah AlamExpressway (Kesas); and (iv) Smart Tunnel (Smart). Basedon publicly available information, the Malaysian governmentproposed to acquire the highway concessionaires through aspecial purpose vehicle (“SPV”)whollyownedbytheMinistryofFinanceinwhichtheofferofRM6.2billionwillbefinancedthroughtheSPVbywayofbondissuance.Atthetimeofwritinghowever, it appears that discussions are still on-going, and that thetermsoftheproposedacquisitionhavenotbeenfinalised.



The relevant government agencies or departments having authorityoverprojectsinMalaysiavarydependingontherele-vant sectors.(a) Energy (including RE) The Energy Commission (“EC”) is the primary regu-

lator of the energy sector in Peninsular Malaysia andSabahwhile TenagaNasional Berhad is the distributionlicenseeholdingexclusiverightstogenerate,transmitanddistributeelectricityinPeninsularMalaysiaandSabah.AsforSarawak,theexclusivelicencetogenerate,transmitanddistribute electricity is held by Syarikat SESCO Berhadwhich is wholly owned by Sarawak Energy Berhad, theprimary regulator of the energy sector in Sarawak.

For the RE sector, the Sustainable Energy Development AuthorityofMalaysia isastatutorybodyformedfor thepurpose of implementing and managing RE schemes (i.e. Feed-in Tariff and Net-Energy Metering programmes)createdtoreduceMalaysia’senergyrelianceon importedfuels.

(b) Oil and Gas PETRONAS has been vested with the ownership and

control of petroleum resources in Malaysia pursuant tothePetroleumDevelopmentAct 1974 (“PDA”). For all upstream activities, PETRONAS is the sole regulator responsible for issuance of approvals whereas for down-stream activities, the Ministry of International Tradeand Industry (“MITI”) is responsible for the issuance of permits for the processing of crude petroleum, natural gas and manufacture of petroleum and petrochemical prod-uctswhiletheMinistryofDomesticTradeandConsumerAffairs is responsible for regulating the marketing and distribution of such petroleum and petrochemicals products.




A non-resident is allowed to repatriate funds fromMalaysia,including any income earned or proceeds from divestment of Malaysianringgitassets,providedthattherepatriationismadein foreign currency.Inaddition,theremayalsobewithholdingtaxconsiderations

as discussed below.


A resident entity is free to open and maintain a foreign currency account with a licensed onshore bank or non-resident financial institution.


Generally,therearenorestrictionsunderMalaysianlawprovidedthat the parent company is not situated in a sanctioned jurisdic-tion and the repatriation does not contravene applicable anti-money laundering laws and regulations. In addition, it should be noted that, as per the Companies Act 2016, dividends may only be paid out of available profits and if the project company will remain solvent immediately after the distribution is made. The project company would be regarded as solvent if the company is able to pay its debts as and when the debts become due within 12 months immediately after the distribution is made.

In addition, we would like to add that it is fairly common for lenders to restrict the company from declaring dividends to its shareholders under the finance documents until such time the liabilities have been paid in full or upon certain project mile-stones being achieved.


Environmental LawThe Department of Environment is the federal agency respon-sible for administering and enforcing the Environmental Quality Act1974(“EQA”) being the principal legislation relating to the prevention, abatement and control of pollution and enhance-ment of the environment.

Pursuant to the EQA, prior written permission of the Director GeneralofEnvironmentalQualityisrequiredforprojectsthatmay involve:(1) certain prescribed premises and prescribed conveyances;(2) theerectionofanincinerator,fuel-burningequipmentand

a chimney;(3) the emission or discharge of any environmental hazardous

substances; and(4) disposinganyscheduledwastes.

Natural Resources Natural resources (except petroleum) are generally owned byeachrelevantstate inMalaysia. Aforeignentitymayapplytotherelevantstateauthorityformineralprospecting,explorationor mining leases. Each state authority has the right to impose conditions along with the issuance of any leases. There are also restrictions in place for foreign entities to procure such licences. For instance, the conditions and restrictions of a prospecting or anexplorationlicencemayincludetherelevantareaforexplo-ration and validity period of such a licence, whereas similarly the conditions and restrictions for a lease may involve, among others, the area of mining and the duration of the lease.

Petroleum Pursuant to the PDA, PETRONAS is the sole owner of all oil and gas resources inMalaysia. A foreign entitymay explore,develop and produce such oil and gas resources owned by PETRONAS only via production sharing contracts or risk service contracts entered into with PETRONAS.

Pipeline Specific licences or permissions from the regulators may be required depending on the purpose of the pipeline. Forexample, permission to install and permission to operateissued by the Department of Occupational Safety and Health (“DOSH”)arerequiredforthetransportationofpetroleumbypipelinespursuanttothePetroleum(SafetyMeasures)Act1984andPetroleum(SafetyMeasures)(TransportationofPetroleumby Pipelines) Regulations 1985. AnotherexampleisthelicencerequiredfromECunderthe

Gas Supply Act 1993 for, inter alia, transportation of gas via pipe-line. However, section11B(2)(b)of theGasSupplyAct1993provides that such licence will not be granted to any person who isnotincorporatedinMalaysiaordoesnothaveaplaceofbusi-nessinMalaysia,exceptforalicencefortheimportintoaregas-ification terminal.


Typically,royaltiesandtaxespayableontheextractionofnaturalresourcesarerevenue-based.Forexample,royaltiespayableinrespect of petroleum are based on the volume or value of petro-leumextracted,andgenerally theroyaltiespayableare10%ofthe gross production for petroleum.

Further, mine operators also pay value-based royalty to the state where their mining operation is located. The royalty rate, ingeneral,is5%ofthevalueofthemineralextractedbutmayvary depending on the mineral commodity, and as assessed by the relevant state.


Pursuant to the FEA Notices, a resident and non-resident may generallybuyorsellMalaysianringgitagainstforeigncurrencywith a licensed money services business (e.g. a money changer) on a spot basis or with licensed onshore banks.

196 Malaysia


or the Board of Directors. All government agencies must comply with the procurement laws and regulations pursuant to the acts, letters and circulars below.

(2) Financial Procedure Act 1957 The Financial Procedure Act 1957 (Revised 1972) provides

for the control and management of the public finances of Malaysia and outlines financial and accounting proce-dures. It includes procedures for the collection, custody andpaymentofthepublicmoniesofMalaysiaandofthestates, and also the purchase, custody and disposal of public property and related matters.

(3) Treasury Instructions The Treasury Instructions detail out financial and

accounting procedures and encompass the regulations that need to be adhered to in the management of government funds including procurement.

(4) GovernmentContractsAct1949 The Government Contracts Act 1949 empowers the

respectiveMinisters in the respectiveministries toenterinto contracts and also empowers the respective ministers to delegate powers to Government Officers to enter into contracts on behalf of the government.

(5) Treasury Circular Letters Treasury Circulars are issued from time to time to inform,

clarify, implement, improve and amend certain policies, rules and procedures whenever required by the govern-ment and financial authorities.

(6) Federal Central Contract Circulars Federal Central Contract Circulars are issued to inform

the users on the availability of common user items which are centrally purchased. The Central Contract Circulars normally contain details such as items, names of suppliers, areas of supply and time of delivery. Apart from procure-ment principles and objectives, most often the Central Contracts objectives are to promote local products and develop vendors.

(7) Competition Act 2010 The Competition Act 2010 (“CA”) is administered and

enforced by the Malaysian Competition Commission.Pursuant to section 4(2)(d) of the CA, any horizontalagreement between project companies with the objective of bid rigging is strictly prohibited.

8 Foreign Insurance


The insurance industry is regulated under the FSA which caters, inter alia, for the licensing and regulation of insurance business inMalaysia.

Section 8(1)(a) of the FSA provides that no person may carry on any insurance business unless it is duly licensed under the FSA.Inthatregard,whetherornotalicenceisrequiredforaforeign insurance company to provide insurance coverage over a local project, would depend on the circumstances of the case and availability of sufficient insurance cover locally.


Yes, provided that, where the insurance proceeds are denom-inated inMalaysian ringgit, such proceeds are converted intoforeign currency onshore before being remitted offshore.

In addition, there is a requirementon theproject companyto submit an environmental impact assessment report (“EIA”) in order to obtain an EIA approval from the Director General prior to the commencement of any prescribed activity under the EQA.Failingwhich,section34A(8)providesthatsuchpersonswouldbeliabletoafinenotexceedingRM500,000ortoimpris-onment for a period not exceeding five years or to both andtoafurtherfineofRM1,000foreverydaythat theoffence iscontinued after a notice by the Director General has been served upon him.

In addition, the Director General may issue a prohibition or stop-work order on prescribed activities that have commenced without the approval of the Director General or when any condi-tion of the EIA approval has been violated.

Health and Safety LawDOSH is the federal agency responsible for administering and enforcing the Occupational Safety and Health Act 1994(“OSHA”) being the principal legislation for securing the safety, health and welfare of persons at work, for protecting others against risks to safety or health in connection with the activi-ties of persons at work and to establish the National Council for Occupational Safety and Health.

Pursuant to the OSHA, every employer is to ensure the safety, health and welfare at work of all his employees and to notify the nearest occupational safety and health office of any accident, dangerous occurrence, occupational poisoning or occupational disease which has occurred or is likely to occur at the place of work.

In the event an occupational safety and health officer is of the opinion that a place of work, plant, substance or process is likely to cause immediate danger to life or property, he is empowered to serve a prohibition notice prohibiting the use or operation of the place of work, plant, substance or process until such time that any danger posed is removed and the defect made good to the satisfaction of the officer.

The stop-work order or prohibition notice under the EQA and OSHA respectively, if issued, would cause delays to a project which would potentially affect a project company’s ability to finance its debts.


There is no specific legal/statutory framework governing procurement in the private sector; however, the relevant govern-mentagenciesmayimposeconditions,forexamplethoserelatingto the use of local contractors and local content for materials and equipmentundertherelevantlicencesorpermits.

As for public procurement by the government, project companies that wish to participate in the tender for government projectsmustberegisteredwiththeMinistryofFinanceand/or theMinistryofWorks. Publicprocurement inMalaysia isdecentralisedwherebysuchprocurementexercisesaredelegatedto the relevant procurement agencies.

The legislations pertaining to public procurement are as follows:(1) Financial Authority For the federal government, the financial authority is

vested with the Minister of Finance and the Secretary-GeneraloftheMinistryofFinancewithdirectionsfromtheMinister.InthecaseofStateGovernments,thefinan-cialauthorityisvestedwiththerespectiveChiefMinisters,and the respective State Financial Officers with direc-tions from the respective Chief Ministers. The finan-cialauthorityinLocalAuthoritiesandStatutoryBodiesisvested with the respective Chairpersons and the Councils





Yes. The Malaysian Anti-Corruption Commission Act 2009(the “MACC”) is the principal legislation which deals with the multiple forms of corruption including corruptly procuring the withdrawaloftenderspursuanttoSection20oftheMACC.TheMACCalsocatersforextraterritorialjurisdictionwhereoffencesof corruption committed outside of Malaysia by citizens orpermanent residentsofMalaysiamaybedealtwithas if thesewerecommittedinMalaysiapursuanttoSection66ofMACC.Inaddition,thenewSection17AoftheMACC(whichwillcomeinto force with effect from 1 June 2020) introduces far-reaching corporate liability provisions which seek to penalise commercial organisations for the corrupt practices of its associated persons. The penalty for an infringement of the Act typically results in imprisonment or a fine or a combination of both. In addition, theMalaysian PenalCodemakes it an offence

for a public servant to obtain any gift from a person involved in any proceeding or business transacted by him or her. A public servant commits an offence if he or she accepts any gratification other than his or her legal remuneration in respect of an official act. Taking a gratification by corrupt or illegal means to influ-enceapublicservantortakinggratificationfortheexerciseofpersonalinfluencewithapublicservantisequallyanoffence.The provisions of the Anti-Money Laundering, Anti-

Terrorism Financing and Proceeds of Unlawful Activities Act 2001 provides for the tracing of corruption proceeds. This Act isextraterritorialasitappliestoanyproperty,whetheritissitu-atedinoroutsideofMalaysia.Theoffenceofmoneylaunderingis punishable by a fine not exceeding five million ringgit orimprisonmentnotexceedingfiveyears,orboth.

13 Applicable Law


Projectagreementsrelating toprojects located inMalaysiaaretypicallygovernedbythelawsofMalaysia.


The financing agreements would be typically governed by the lawsofMalaysia.


Forenforcementpurposes, issuesas to thecreationandexist-enceof interests inassets located inor registered inMalaysia,and as to the transfer of such assets, would generally stand to be determined byMalaysian law. In addition, the applicableLand Statute would be determined on where the real property is situated.



Yes. Generally, foreign workers from certain countries may only beemployedincertainprescribedsectorsinMalaysia.Skilledprofessionals like engineers on the other hand may generally be employedprovided the requisiteworkpermitsareobtained inaccordancewiththeImmigrationAct1959/63ofMalaysia.

In addition, the project company would need to comply with the provisions of theEmploymentAct 1955ofMalaysiawithrespect to foreign employees to which that Act applies (e.g. any person, irrespective of his occupation, whose wages do not exceed2,000ringgitamonth).



Importdutymaybeleviedonimportationofprojectequipmentpursuant to the Customs Act 1967 and Customs Duties Order 2017. Pursuant to the Customs (Prohibition of Imports) Order 2017, certain project equipment may require certificates ofapprovalorexemptionlettersissuedbyeithertheConstructionIndustryDevelopmentBoardortheMITI.


TheCustomsDuties(Exemption)Order2017providesthelistofpersonsandgoodsexemptedfrompayingduty.Animporterwillbeexemptedforcustomsdutyprovidedthat:(1) the goods are imported for supply to any Federal or State

Government Department;(2) they are used solely by the Government Department

concernedandarenotsoldorotherwisedisposedofexceptas sanctioned by the head of the department concerned;

(3) their cost is charged to a departmental vote appearing in the Federal or State Estimates and are not purchased out of any other funds; and

(4) every application for exemption is accompanied by acertificate from the head of the relevant department that the goods are authorised to be imported on his behalf and aretosupplyhisdepartmentatapriceexclusiveofcustomsduty in accordance with the terms of contract.

11 Force Majeure


There is no general concept of force majeure in Malaysia.However, the common law doctrine of frustration is recognised inMalaysiaandisgovernedbytheContractsAct1950.Section57(2) of that Act provides that “a contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

198 Malaysia


arateof15%orsuchotherratehavingeffectbyvirtueofanyapplicabletaxtreaty.AcompanyistaxresidentinMalaysiaifitsmanagementandcontrolareexercisedinMalaysia.


Malaysiaoffersawiderangeofinvestmentincentivesforcompa-nies investing in the manufacturing sector, high technology companies and strategic projects amongst others, and appli-cations for incentives are generally assessed by theMalaysianIndustrialDevelopmentAuthority.AspartofMalaysia’seffortto further develop green technology,Malaysia has also intro-ducedvarioustaxincentivesforthegreensectorsuchasinvest-menttaxallowanceforthepurchaseofgreentechnologyassets,income tax exemption and tax incentive for green technologyservices.As mentioned above, pursuant to the Stamp Act 1949, no

instrument chargeable with stamp duty (which would include financing documents) may be admitted as evidence in the MalaysianCourtsoractedonbyanypublicofficerunlesssuchinstrument has been duly stamped.

18 Other Matters


Generally, depending on the nature of the project, various licences, consents or approvals from the relevant public author-ities and bodies would need to be obtained by the project companyoverthecourseoftheproject.Inthatregard,equityinvestors and lenders would have to take into account the time requiredfortheprojectcompanytoliaiseandengagewithsuchauthorities and bodies, and ensure that such licences, consents orapprovalsareobtainedasandwhenrequired.


TheMalaysiancapitalmarketsfallwithinthepurviewoftheSC,which is a self-funded statutory body entrusted with the respon-sibility to regulate and develop theMalaysian capital market.The SC has wide regulatory functions including:(a) approving authority for corporate bond issues;(b) regulating all matters relating to securities and futures

contracts;(c) licensing and supervising all licensed persons; and(d) ensuring proper conduct of market institutions and

licensed persons.Issuances of private debt securities are regulated by the Capital

MarketsandServicesAct2007aswellastheguidelinesissuedby the SC from time to time.



Yes, provided that the submission and waiver is made in good faith and is not contrary to public policy. In any event, where the Malaysian courts have jurisdiction over a dispute, theMalaysiancourtmay inappropriatecasesnonethelessexerciseits residual jurisdiction to determine the matter if it determines thatMalaysiaisamoreappropriateforumfordeterminationofthe matter and the ends of justice will be better served by the disputebeingdeterminedinMalaysiancourts.



Yes, provided that the provisions comply with the Arbitration Act 2005.


Yes,MalaysiaisacontractingstatetotheNewYorkConventionaswellastheViennaConventionontheLawofTreaties.


Generally, under the Arbitration Act 2005, any dispute which the parties have agreed to submit to arbitration under a valid and binding arbitration agreement may be determined by arbitration unless the agreement is contrary to public policy.


No, there are not.



There have been no such measures that have been made publicly available in recent times.

17 Tax


AllpaymentsbyaMalaysiantaxresidenttoapersonwhoisnottax resident inMalaysiamay be subject towithholding tax at



transaction would have to be identified upfront and in exist-ence at such time. An Istisna’a arrangement, as discussed above, would be a more appropriate structure particularly where the project is still in its development phase.


InMalaysia,althoughShariah principles generally fall under the jurisdictionoftheMalaysianSyariahcourts,thelawrelatingtofinance, trade, commerce and industry falls within the jurisdic-tionof theMalaysian civil courts. In that regard, although acommercialcontractmaynotbeexpressedtobegovernedunderShariah law per se,totheextentthesubjectmatterofthatcontractrelates to matters involving Shariah concepts, such matters may be determined in accordance with recognised Shariah principles asconstruedinaccordancewithMalaysiancivillaw.

In addition, with respect to proceedings before the courts ofMalaysia, the courts may refer queries concerning IslamicfinancingtotheShariahAdvisoryCouncilofBNM,andqueriesconcerning Islamic capital market business or transactions to the Shariah Advisory Council of the SC, for determination. Any ruling made by the relevant Shariah Advisory Council would be binding on the parties to that proceeding.


The inclusion of an interest payment obligation is generally common in conventional financing arrangements.

However, the imposition of Riba (Usury) is prohibited for Shariah compliant financings. Fee-based, profit-based or sale-based arrangements are alternative structures which may be used in Shariah-compliant financings.

19 Islamic Finance


Generally, an Istisna’a instrument coupled with an Ijarah arrange-ment is the common form of structure used in large scale project financings inMalaysia. In an Istisna’a arrangement, the seller sells to a purchaser an asset which has yet to be constructed, with such asset to be delivered according to agreed specifica-tions on an agreed date at a pre-determined sale price.

In a typical structure (particularly for Sukuk issuances), the project company would enter into an Istisna’a arrangement with the financiers (which may be via a special purpose vehicle depending on the mode of financing) whereby the project company would agree to procure the completion of the project assets and deliver the project assets to the financiers at a pre-de-termined time and price. The financiers (as lessor) and project company (as lessee) would then enter into an Ijarah arrangement whereby the project company would lease the relevant project assets from the financiers for a pre-determined period with the payment of an agreed lease rental.

In a Wakala structure, the financiers would appoint the project company to act as their agent (wakeel ) to procure the construc-tion and delivery of the project assets. The project company (as customer) would utilise the financing obtained from the finan-ciers to arrange for the construction of the project. Profits derived from the project assets would be distributed between the project company and the financiers based on a pre-agreed rate, with the proceeds paid to the financiers being applied towards the financing. Once the financing has been paid in full, the project assets would be transferred to the project company based on a pre-agreed arrangement.

On the other hand, Murabaha instruments, which are typi-callystructuredinMalaysiatoincludeaTawarruq arrangement, involves a sale and purchase arrangement whereby goods are sold with an agreed profit margin. Such structures are usually used in other forms of financing (such as for acquisition orworking capital facilities) as the subject matter of the Murabaha

200

Dzuhairi bin Jaafar Thani has extensive experience advising on railway and highway infrastructure projects, and the development and construction of buildings, including oil and gas-related infrastructure and facilities.He has advised on various engineering, procurement, construction and commissioning contracts, including those for railway systems, refinery and petrochemical plants, and other oil and gas-related facilities, and has also advised on the development and construction of commercial buildings.He has also advised on civil aviation laws and regulations, including those pertaining to the purchase, sale and leasing of commercial passenger aircraft.Dzuhairi has been recognised as a Leading Individual in Real Estate and Construction and is noted as a “key name” in Projects and Energy by The Legal 500 Asia Pacific, and by IFLR1000 as a “key partner” in Energy and Infrastructure, in each case for his work in railways, infrastructure and construction.Prior to joining Rahmat Lim & Partners, Dzuhairi was the Co-Head of the Construction and Infrastructure Projects department in another Malaysian law firm.

Rahmat Lim & Partners Suite 33.01 Level 33, The Gardens North TowerMid Valley City, Lingkaran Syed Putra59200 Kuala LumpurMalaysia

Tel: +603 2299 3808Email: [email protected]: www.rahmatlim.com

Rahmat Lim & Partners is an award-winning, full-service law firm in Malaysia which is dedicated to the provision of high-quality legal services. With our extensive experience and premier client base, our Partners and practices have been consistently recognised and ranked as leaders in the market and have won various awards since our Firm was established in 2010.We are, first and foremost, a Malaysian law firm, but take pride in having a distinctive global approach and perspective, and aim to provide effective domestic and cross-border solutions for our local and international clients.Our lawyers have advised on many of the nation’s largest and most high-profile transactions, and offer quality services to clients requiring representation across a wide range of contentious and non-contentious matters.

www.rahmatlim.com


Malaysia

Syed Rashid bin Rahim Alsree is a Partner in the Financial Services Department of Rahmat Lim & Partners.Rashid’s principal area of practice is banking and finance. He has acted for financial institutions and major corporates on a wide spectrum of financing transactions including domestic and cross-border bilateral and syndicated loans, acquisition and project financing, aviation financing, Islamic financing and debt restructuring. He also advises on companies and securities laws, as well as assisting financial institu-tions in the development of a variety of structured products. Prior to joining Rahmat Lim & Partners, he was a practising accountant and was an associate member of the Association of Chartered Certified Accountants. He also holds a Diploma in Islamic Finance certified by the Chartered Institute of Management Accountants.

Rahmat Lim & Partners Suite 33.01 Level 33, The Gardens North TowerMid Valley City, Lingkaran Syed Putra59200 Kuala LumpurMalaysia

Tel: +603 2299 3861 Email: [email protected]: www.rahmatlim.com



Chapter 22 201

Mexico

Canales

Ana C. Decanini

Emilio Sáenz

Mexico

Bernardo Canales Fausti


and rights (by means of fiduciary property). The collateral agent (acting in benefit of the lenders) will be the first place benefi-ciary of the trust; the project and the sponsors will be the second place beneficiaries. We highlight that, due to their nature and thecomplexauthorisationprocessthatisrequiredtoperfecttheirtransfer, certain assets must remain the property of the project (such as permits and licences). In such cases, a non-possessory pledge isexecutedwherethesecuritytrust isnamedasbenefi-ciary of such pledge. The foregoing allows for the lenders to incorporatetheuseandexploitationofsuchpermitsandlicencesto the security. The project and sponsor’s beneficiary rights over the trust may also be encumbered under the non-possessory pledge agreement to ensure that any funds that flow to the distri-bution account may be seized by the lenders in a default scenario.ItisimportanttohighlightthatinMexico,theassignmentof

any rights or undertakings is subject to counterparty consent. Since creation of the security package involves transfer of assets and rights to the security trust, it is important that the assign-ment over all rights and liabilities under any contract or asset bepreviouslyauthorised.Thelenderswilltypicallyrequiretheexecutionofadirectagreementregardingtransfersofmaterialagreements whereby the assignment is acknowledged and any transfer effects are also documented and acknowledged.


Yes.Theprocessisgenerallydescribedinquestion2.1above.An assignment and transfer agreement is entered into regarding all assets and rights which thereon will be the property of the security trust. Depending on the type of asset, the transfer will need to be registered on the corresponding public registry and/or notified to the relevant counterparties or stakeholders.


ThisisnotcustomaryinprojectfinanceinMexico.Allreceiv-ables are transferred to the trust and such transfer is notified to

1 Overview


Since the 2014 enactment of the Electric Industry Law thatopened up the power generation and power marketing activities to private investment, project finance focus has been on power projects. Initially, long-term contracts were available through public auctions that had the former public utility (now a produc-tive state enterprise) enter into financeable power purchase agreements. Last year theMexican government changed andthe new regime cancelled the auctions, leaving lenders and spon-sors the taskof findingcreativesolutions toadequatelyassessmerchant risk and to combine medium-term agreements with re-contracting mechanisms, reserves and cash sweeps that have ultimately allowed power projects to continue being financed.

This creative approach has become increasingly relevant since the government’s infrastructure agenda and budget is insufficient tosatisfythegrowingdemandofelectricityinMexico.Thislackofpublic funding for development is also present in other infrastruc-ture sectors, highlighting the current relevance of project finance.


Power generation projects, refineries, highways and hospitals havebeenleadingtheMexicanprojectfinancesector.

2 Security


Security is typically managed through a single security and source of payment trust. The special purpose vehicle’s voting stock (along with all other rights and assets) are transferred – in property – to the security trust upon financial closing; thereon, the security trust will be the proprietor of all the project’s assets

202 Mexico



Filing and registrationexpenses arenothigh (seequestion2.6above). As for the time for registration, this may vary depending on which state and municipality the security is to be registered in. Encumbrances over some assets (mainly real estate) have to be registered in the Public Register where the asset is located. Times for registration vary from state to state. Some states have a digi-talised platform that is fast and efficient, while other states’ public registriesareyettobemodernised.Nosignificantexpensesareconnected to filing and registration (registration duties are not contingent on the value of the assets being registered).


No. As mentioned before, regulatory consent is required toassign the rights over permits and licences and, in order to avoid this lengthy process, the rights over such permits and licences are included in the security package through a non-possessory pledge agreement.

3 Security Trustee


Yes.InMexicotheconceptofatrustisfullyacknowledgedandauthorised to enforce the security.


Thisquestionisnotapplicable.



No.UnderMexicanlaw,thepartiestoatrustagreementarefreetoagreeonthetermsandprocessforexecutionofthesecurity;such terms are to be included in the trust agreement. As set forth before,regulatoryconsentsarenotanissuetotheextentthat(i)theshares are part of the security package, and (ii) the rights over the permits and licences are part of the security package through their encumbrance by means of the non-possessory pledge agreement.

the corresponding debtors so they pay directly to the security trust’s accounts. The funds will follow a certain waterfall and ultimately be released to the borrower’s distribution account if no default is occurring and the relevant metrics and tests are satisfied. The borrower typically continues to perform collec-tion operation tasks, but is not the titleholder of any funds, for they are all secured and will be deposited directly to the trust.


Yes. The collection rights will be transferred and assigned to the security trust. The lenders may then revoke all authority that the project officers and authorised signatories have over such bank account and take over management of the account. Typically, the funds would be transferred to a trust account (so as to have a centralised management of the security and avoid potential misuse of the funds), with an instruction to the bank that hosts such account, stating that any future funds received in that account should be transferred to the corresponding trust account.


Yes. Upon financial closing the shares are endorsed and trans-ferred to the trustee. This avoids any potential difficulty to seize the shares in the event of a future default.However,itisimportanttonotethatinMexico,single-share-

holder companies are not allowed, and therefore at least one share will be left out of the security trust. This share can be a special series share that has restricted rights.

For the most part, shares are in certified form and are nego-tiable instruments. However, depending on the selected corpo-rateform,thismayvary.Forexample,thesociedad de responsabi-lidad limitadaistheMexicancorporateformtypicallychosenbyAmericans investing through anLLC, since it is theMexicancorporate form that is most similar to an LLC. The partici-pation in a sociedad de responsabilidad limitada is through equityinstrumentsthatarenon-negotiableandthatarenotrequiredtobe documented in any certificate.Regardless of any certification, in Mexico, to be acknowl-

edged as a shareholder, you must be registered in the corporate ledgerasthetitleholderofsuchsharesorequityinterests.


Totheextentanyportionofthesecurityinvolvesrealestate,itwill be compulsory that the security trust is documented in a public deed and be registered in the applicable public Registry of Property and Commerce. Notarisation costs may vary depending on the notary chosen and the size of the security package. The choice of notary public typically lies with the lenders (since notarisation isa requirementand formality thataims toavoidfuture security execution difficulties). Registration duties arenot related to the size or value of the security and therefore do not represent a significant cost. No stamp duty is applicable in Mexico.

203Canales



As mentioned before, the property and title over the assets is transferred to the security trust as a condition to achieve finan-cial closing and therefore, there is no need to enter into a court proceeding to seize the assets, since the assets are already held by the trust. Despite the trust being proprietor of the assets, the projectcompanywillmanagesuchassetsthroughproxiesissuedby the trustee. Upon the occurrence of an event of default, those proxieswillberevokedandthetrusteewillmanagetheassetsdirectlyandcommencetheforeclosureprocess.UnderMexicanlaw,theforeclosureprocessisprivateanddoesnotrequirecourtproceedings.


Mediationcanbeused.


There are no legal provisions that prevent a director from trading due to a company’s financial difficulties. However, there are legal provisions that set forth that if the material possession of the secu-rity is held by a party other than the trustee (as is the case in project finance deals) then, if value of the security deteriorates over time, thetrusteecanrequiresuchpartytoincreasethesecuritypackageto re-establish the original level of security. Notwithstanding, it is customary that the financing agreement has information covenants and financial covenants that will have the effect of preventing the directorsfromtradingifcertaindebttoequityrationsarenotmet.



Entities that allow foreign investment must include a special clause that states that, for the purposes ofMexican law, foreign enti-tiesinvestinginMexicowillreceivelocaltreatment.PursuanttoMexicanforeigninvestmentlaw,allforeigninvestorsmustregisterbeforetheForeignAffairsMinistry.Additionally,iftheforeignentity routinelyperformscommercial activities inMexico, thenitmustobtainalicencefromtheForeignAffairsMinistry.Suchlicencerequirestheforeignentitytohaveanofficeorarepresent-ativeinMexico.Routinereportingobligationsuponexceedingacertaininvestmentthresholdalsoapply.Specificactivitiesrequirespecial licences and authorisations and a minimum percentage of local participation (such as port services and railroads).


Not against such restrictions; notwithstanding, there are trea-tiesthatprotectforeigninvestmentsmadeinMexico(seeques-tion 6.3 below).

However, we highlight that in the event of foreclosure under aMexican security trust, the collateral agentwill seek to sellthe project company and the purchaser or purchasers of the project company sharesmay require theprior approvalof theMexicancompetitionauthorityandtheMexicanforeigninvest-ment authority, to complete any such purchase.


No, to theextent that foreign investorsagree tobe treatedaslocalinregardstotheirpropertyandinterestsinMexico.



The transfer of rights and assets to the trustee under the secu-rity trust cannot be, as amatter ofMexican law, successfullycontested by the project, its present or future creditors nor any mediator, administrator or liquidator (síndico) in the event of bankruptcy, intervention, concurso mercantil, liquidationorinsol-vency of the project company. Once the asset and rights transfer is complete and perfected, such assets and rights will not be part of the estate of the project company or sponsor and, therefore, could not be subject to a successful attachment by any creditor of the project company or sponsor, as applicable. The owner-ship interest and other rights, title and interest of the trustee in and to the assets will not be legally impaired or otherwise affected by the bankruptcy, intervention, concurso mercantil,liqui-dation or insolvency of the project company.

This special protection is precisely why all assets are individ-ually and directly transferred to the security trust, rather than under a much simplified process of just transferring the project company shares to the trust and assuming all assets are therefore indirectly transferred to the trust.

Notwithstanding, we also highlight that the project company shares are part of the security package and as such, the lenders will typically seize control of the management of the company prior to a bankruptcy proceeding occurring.


Mexican federal labour law states that payment of anyoutstanding and due workers’ salaries and compensation of the immediately preceding 12 months will be preferred over any other debt (including taxes and any preferred and/or secureddebt). Tax debtwill bepreferredover paymentof the seniordebt. We highlight however that, in principle, this should not impact the security, provided those assets were transferred to thesecuritytrustpriortoanysuchclaimscomingtoexist.


Bankruptcy law applies to entities that qualify as commercialentitiesunderMexican law. Trustscanqualifyascommercialentitiestotheextentthattheyhavecommercialactivities.

204 Mexico


distribution,andhydrocarbonexplorationandextractionactiv-ities). Other activities (such as transporting gas, generating or marketing power and mining) can be performed by private parties butwill require a permit or licence. Mexico has alsoan economic reserved area (near the coastline) where foreign parties are restricted from owning real estate.


See above. Extractionof somenatural resourcesmaynot beundertakenbyprivateparties. Export of natural resources issubjecttolicencesandpermits.Miningandhydrocarbonactiv-ities can be subject to payment of royalties.


UnderMexicanlaw,allpaymentobligationsmaybedischargedinMexicancurrency(despiteadifferentcurrencybeingagreed),attheapplicableexchangerateatthetimeofpayment.


Foreign investment inMexico is subject to payment of taxesas local investment is. The repatriation of earnings and distri-butionswillneedtobeassessedbytaxconsultantstomitigateimpact.


Yes, they can.


No.Doubletaxationrulesoftheforeignentitymayapplyifnotaxstrategyisfollowed.


Yes. Federal and local agencies of the Environmental and NaturalResourcesMinistryoverseetheseregulations(regardingemission, discharge and release of hazardous substances, super-ficial and underground water bodies, and waste management, amongst others). In addition, all projects must file for and receive an environmental licence which includes ongoing obli-gations regarding, amongst others, flora and fauna management and reallocation, and monitoring of birds and butterflies.


Expropriation is governed by the Federal Expropriation Lawand local expropriation laws (depending on the asset type).Constitutionally,expropriationisonlypossibleforpublicutilityor public welfare causes and is contingent upon the affected party beingcompensated through indemnification for theexpropri-atedassets.Marketvalueisthelegalparametertocalculatetheindemnification amount.Foreign investment may be protected from expropriation

through international law mechanisms; more specifically, if an investment protection treaty exists betweenMexico and aforeign country, then any investment made by a foreign party that is a member of such state will be protected under such treaty. ThisprotectiondoesnotpreventtheMexicangovern-mentfromexpropriating,butratherwillcomplicatetheprocessby imposing additional international standards of due process, non-discriminatory rules, compensation calculation, and repair ofdamagescausedbysuchexpropriation,amongstothers.Thetreatiesmayseektocompensatetheexpropriatedpartyinorderto re-establish the investor in the position it had prior to the expropriation.



Projectsrequirefederal,stateandmunicipalpermitsandlicencesfor their construction and operation. The relevant government agencies vary depending on the type of project, but typically involvetheEnvironmentalMinistry(atfederalandlocallevel),theAnthropologyandHistoryMinistry(toensurenoconstruc-tion affects ruins or other historical landmarks), the munic-ipal government (construction licence), and the specialised agencies that are connected with the nature of the project (the CommunicationsandTransportMinistry,orEnergyMinistry,amongst others).


Asmentionedbefore,totheextentthatthesecurityinvolvesrealestate, then the security trust must be granted in a public deed and filed for registration in the corresponding public registry of property. Other than this, no such registration or formality is required;thisisinpartduetothefactthatpermitsandlicencesare not transferred to the security trust, but are rather covered under a non-possessory pledge to avoid difficulties connected with regulatory matters.


Certain natural resources and activities are only subject to public ownership and therefore cannot be privately held (these include, amongst others, nuclear power, power wheeling and power

205Canales


administrative faults (these activities include bribery and misap-propriation of public funds). Civil penalties vary for individ-uals and companies. For individuals, this includes an indemni-ficationfordamagestotheTaxAuthority,aneconomicpenaltyof up to two times the benefit received. For companies, the relevant penalties are: an economic penalty of up to two times the benefit received; disbarment for a period of three months to 10 years; dissolution; and an indemnification for damages to theTaxAuthority. Thedeterminationof thepenaltymaybereduced if the company has an effective compliance programme. Whether the board members were aware of these activities will also be factored into the calculation of the penalties. Criminal penalties are also applicable and involve additional fines and jail time.

13 Applicable Law


Mexicanlawgovernsprojectagreements.


Mexicanlawgovernsfinancingagreements.However,incertaincases,certainbankswillrequireNewYorklaw.


ThesecuritypackageisalwaysgovernedbyMexicanlaw.



Yes,andthecourtsinMexicowillrecogniseasvalidandfinal,and will enforce, any final and conclusive judgment against a Mexican party or assets, provided that: (i) such judgment is obtained in compliance with (a) all legal requirements of thejurisdiction of the court rendering such judgment, and (b) all legalrequirementsoftherelevantTransactionDocuments;(ii)such judgment is final, non-appealable and authenticated by the appropriate governmental authorities, and is strictly for the payment of a certain sum of money; (iii) the court rendering such judgment is competent to render such judgment in accord-ance with applicable rules under international law and such rules arecompatiblewiththerulesadoptedundertheMexicanCodeof Commerce; (iv) service of process was made personally, or on an appropriate process agent; (v) such judgment does not contra-veneMexicanpublicpolicyorlaws;(vi)theapplicableprocedureunderthe lawsofMexicowithrespect totheenforcementforforeign judgments (including the issuance of a letter rogatory by thecompetentauthorityofsuchjurisdictionrequestingenforce-ment of such judgment and the certification of such judgment as authentic by the corresponding authorities of such jurisdiction in accordance with the laws thereof) is complied with; (vii) the courts of such jurisdiction recognise the principles of reciprocity in connectionwith the enforcementofMexican judgments insuch jurisdiction; and (viii) the cause of action in connection with which such judgment is rendered is not the same cause of action between the same parties that is pending before a Mexicancourt.


No, there is not.

8 Foreign Insurance


No, there are not.


Yes, they are.



Depending on the nationality and the type of work that is to be performed,visasandpermitsmayberequired.



Yes. There are permanent and temporary importation regimes that would need to be considered.


The answer depends on the country of origin and the type of equipment.

11 Force Majeure


Yes, they are.



Yes, the Ley Federal de Responsabilidades Administrativas (Federal Law of Administrative Liabilities) and the corresponding local laws that govern over corruption involving local public officials. Whilst for the most part, the regulation is aimed at liabilities for public officials, private parties are held liable for significant

206 Mexico



Tobeconsultedbytaxexperts.

18 Other Matters


This is not applicable.


None related to project finance.

19 Islamic Finance









Yes, they are.


Yes, it is.


No, there are not.


No, but enforcement will, for the most part, be subject to domestic law.



TheMexicanpowersectorhasbeentheobjectofhighscrutinysince the former public utility has campaigned against private investment in the electricity sector. Mostmaterial long-termagreements have a change in law provision that allows the project to mitigate any cost-increase risk. The financing agreements also have provisions that allow the lenders to call for an early termination upon the occurrence of a material adverse effect. The “material adverse effect” definition tends to be loose so as to allow lenders to include political risk. Other than these miti-gation efforts, no further risk protections have been undertaken.

17 Tax


Tobeconsultedbytaxexperts.

207

Emilio Sáenz is a Partner in the Firm, who is specialised in energy law practices, mergers and acquisitions and financial restructurings. He has more than 25 years of experience.During his professional career, Emilio has been involved in various legal issues and transactions, mainly on acquiring global companies. In the energy industry, he has gained experience structuring projects under financing schemes. Currently, he represents various companies within the electricity market, both in the generation and commercialisation, and consumption areas.

CanalesRicardo Margain 240 Tercer PisoSan Pedro Garza García, NLMexico

Tel: +52 81 8378 1887Email: [email protected]: www.canales.com.mx

We are a boutique law and financial advisory firm with a solid reputation in Mexico. Since 2001, our personalised service has characterised us and positioned us as a prestigious law firm, committed to the permanent evolu-tion of our practice.Our team has focused on corporate and transactional practice, advising our clients in their day-to-day business, as well as participating in the design, structuring, implementation, and start-up of their projects.In 2018, as part of our evolution and the needs of our clients, we decided to integrate financial practice as part of our services, adding a highly qualified team of financial advisors who are highly regarded by the market.With offices in Monterrey and Mexico City, we are strategically located to continue serving the needs of our domestic and foreign clients.

www.canales.com.mx


Canales

Ana C. Decanini is a Senior Associate in Monterrey’s office; her practice is focused on transactional, energy, corporate and financial law. She has more than 10 years of experience advising companies on transactions within the infrastructure industry focusing on energy projects. Her practice includes legal advice on development, financing and construction of infrastructure projects, negotiation of power supply agreements and associated products, project finance, mergers and acquisitions, corporate, real estate, regulatory and contractual due diligence, joint ventures and energy, corporate, company, transactional and real estate law in general.

Bernardo Canales Fausti is a Partner in the Firm with more than 25 years of experience in corporate transactions, including mergers and acquisitions, financing, private equity, joint ventures and corporate restructurings, aviation transactional law; as well as in real estate trans-actions, such as real estate investment vehicles for asset acquisition and sale, leasing, project design and development. Bernardo’s practice includes corporate and finance law, project financing, mergers and acquisitions, debt restructuring, banking law, aviation and airport law and administrative law. Bernardo is also a director of various domestic and international companies and funds.Universidad de Monterrey, J.D., 1993.Columbia University School of Law, LL.M., 2001.







Chapter 23208

Mozambique

VdA Guilherme Daniel & Associados Guilherme Daniel

Teresa Empis Falcão

Mozam

bique


StillregardingthegasprojectsintheRovumaBasin,inMay2019,theMozambicanGovernmentapprovedtheDevelopmentPlan for the Rovuma LNG project operated byMozambiqueRovumaVentura (MRV) a consortiumbetweenExxonMobil,ENI and China National Petroleum Corporation (described in more detail below). The final investment decision (FID) is expectedtobeannouncedinthefirstsemesterof2020.

In the power sector, representatives from the Government ofMozambique,ElectricidadedeMoçambique (EDM) and itsprojectpartners(GlobeleqandEleQtra)andSasol,signedagree-ments that made available the necessary grants, loans and guar-anteesrequiredforthetransmissionlineandsubstationcompo-nents of the Temane Regional Electricity Project with a group of development financing institutions, including theWorldBank,the Government of Norway (through the Norwegian Trust FundmanagedbytheWorldBank),IslamicDevelopmentBank,AfricanDevelopmentBankandtheOPECFundforInternationalDevelopment (OFID). This project involves the construction of a400kVhighvoltagetransmissionline,connectingVilanculostoMaputo,alongwiththreenewsubstationsatVilanculos,ChibutoandMatalaneandupgradestotheMaputosubstation.Thetrans-mission line will then connect to the new 420MW gas-firedpower plant to be constructed at Temane, for which a separate financing process is currently underway. Gas will be supplied by Sasol and ENH from the PSA gas field and electricity will be sold toEDMunderalong-termagreement.


The most significant project financings in Mozambique inrecent years are the Coral South Floating LNG Project (the Coral Project), theMoatize-Macuse Railway and Port Project(theMoatizeRailwayandPortProject),theMozambiqueArea1LNGProjectandtheMetoroSolarPowerPlantProject(theMetoroProject).

The Coral Project is the first project to reach the FID in the development of the gas resources discovered in the Rovuma basin. TheUSD 4.675 billion financing of theCoral South FloatingLiquefiedNaturalGas(FLNG)projectinoffshoreMozambique,to be developed by Italian oil and gas firm Eni and its partners, closedinMay2017.Inthisco-venturepartnership,ExxonMobilownsa35.7%interestinMozambiqueRovumaVentureS.p.A.,whichholdsa70%interest inArea4,and isco-ownedbyEni(35.7%)andCNPC(28.6%).TheremaininginterestsinArea4areheldbyEmpresaNacionaldeHidrocarbonetosE.P. (10%),Kogas(10%)andGalpEnergia(10%).TheFLNGunitwillhaveacapacityofaround3.4MTPAandwillbethefirstFLNGin

1 Overview


Mozambique has not seen significant improvements in itsmacroeconomic conditions since last year. Although some posi-tivemessages have been conveyed by the IMF following theevaluation visits to the country, uncertainty remains regarding the resumption of assistance by the IMF, which maintainsthe country’s public investment capacity and attractiveness to privateinvestment,especiallyFDI,atverylowlevels.TheBankofMozambiqueexpectsanincreaseinthemedium-terminfla-tion for February 2020 and an acceleration of the annual infla-tionfrom3.58%inNovember2019to3.48%inFebruary2020.TothecausespointedoutbytheBankofMozambique, the

outbreak ofCOVID-19 is now added,whichwill have, albeitin unassessed proportions, significant economic impacts for the country.

From the point of view of political and governmental stability, despite some contestation, the election results confirming a significant victory of the Frelimo party were validated and proclaimed by the electoral bodies and followed by the formal takeover of office by the new government and all other elected bodies both nationally and locally, including those elected by the other parties. In the centre region, some military instability persists and the northern region, especially Cabo Delgado, has been the scene of violent attacks on populations and defence and security forces allegedly perpetrated by Islamic radicals.

In terms of projects, despite the increase of interest by inves-tors in the energy (power generation) sector, the LNG projects intheRovumaBasinwillcontinuetoplaythemostsignificantrole inMozambique’s economy due to the size of the invest-ments, around USD 60 billion all combined. InJanuary2020,ExxonMobilanditspartners(CoralSouth)

launched into the sea the floating platform that will collect and processnaturalgas tobeextracted in theArea4blockof theRovuma basin. The Coral South Floating LiquefiedNaturalGas (FLNG) floating platform is one of the largest in the world, andwillbethefirsttocarryoutliquefactionindeepwaters,atadepth of about 2,000 metres.

In August 2019, Anadarko was taken over by Occidental Petroleum Corp. (OXY). A month later, in September, OXY sold Anadarko’s African assets to Total for USD 8.8 billion. This transaction includesAnadarko’s26.5%stake inMozambique’sLNG project for USD 3.9 billion, making Total the main sponsorandtheoperatoroftheMozambiqueLNGproject.

209VdA / Guilherme Daniel & Associados


creating security over movables located in Mozambique by aMozambicansecurityprovider.UndertheMovablesSecurityLaw,anytypeofmovables,parts

or ideal fractions of a movable or all movables owned by a secu-rity provider, either specific or generic, present or future (in this later case, security only becomes effective when the security provideracquiresrightsovertherelevantmovableorbecomesentitled to dispose of it), tangible or intangible, may be given in security, provided that they can be disposed of for consideration at the time of the creation of security.

The security interests must be created by means of a written agreement between the security provider and the secured cred-itor.Nopublicdeedisrequired.Securityinterestsmayalsobecreated verbally, when publicity is completed upon transfer of possession. The security interests become effective immediately upon being created. As for the effectiveness of security against third parties, the new framework sets forth three publication methods: (i) by filing the security with the Central Registry for personal property and rights subject to registration of title; (ii) through bailment or a document fully transferring possession of the movable to the creditor or a third party; or (iii) through a control agreement, if the security is created over a bank account, a securities and brokered financial assets account, to be defined in a separate regulation, which to date has not been published.Specificperfectionrequirementsmayapplydependingonthe

type of movable at stake.TheMovablesSecurityLawalsocreatestheCentralRegistry

Office, which is tasked with recording the information in connection with the security over movables and centralising the information in connection with certain property and rights subject to registration. The Central Registry Office has not yet started to operate.

Note that, as ruled by Decree-Law no. 29.833, of 17 August 1939, in the case of mercantile pledge (penhor mercantil ) granted as security of banking credit facilities, the physical possession of thepledgedgoodsisnotrequiredforthepledgetobefullyvalidand effective.

Real estate assets are subject to mortgages which need to be granted by public deed before a notary and must be registered with the competent real estate registration office.


UnderthelawsofMozambique,landcannotbeprivatelyownedand, accordingly, cannot be mortgaged. Land and its associated resources are property of the State.

However, the Land Law (Law no. 19/97 of 1 October) grants therighttouseandexploittheland,knownas“Direito de Uso e Aproveitamento da Terra” (DUAT). Although the land itself cannot be owned, all assets built on the land in association with the DUATand its improvements canbeownedandconsequentlymortgaged (in case of immovable assets). Any machinery and equipment(movableassets)maybepledgedseparately.EventhoughtheMozambicanCivilCodedoesnotexpressly

provide for the possibility of creation of factory mortgages, reference to those mortgages is made in the Land Register Code (Código do Registo Predial ) and there are precedents of factory mortgages having been successfully created and registered in Mozambique, covering project facilities and all machinery,equipmentandothermovablepropertylocatedtherein.

Africa. The construction of the FLNG facilities will be financed under a project finance structure covering around 60% of itsentire cost. The financing agreement has been subscribed by 15 major internationalbanksandguaranteedbyfiveexportcreditagencies.TheMoatizeRailwayandPortProjectwasawardedtoThai

MoçambiqueLogística,ajointventurebetweenThailand-basedItalian-ThaiDevelopmentCompanywitha60%share,thelocalState-owned ports and railways company Portos e Caminhos de Ferro de Moçambique (better known as CFM) with a20%share and a localprivate-sector consortiumCorredordoDesenvolvimento Integrado do Zambeze (Zambeze Integrated Development Corridor, generally known by the acronym CODIZA)witha20%share.Theproject,whichwouldorigi-nallyconnectMoatizeandMacuseandwouldrunfor500kilo-metres,wasamendedinNovember2017toextendtherailwayforafurther120kilometreswestofMoatizetoChitima.TheMacuseportwillbedesigned to accommodate shipsofup to80,000 tonnes, andannual exports areexpected to start at25MTPA,eventuallyincreasingto100MTPA.

The projected cost of the project is around USD 2.7 billion (USD 810 million for the port and the remainder for the railway).TheMozambiqueLNGProject announced theFID in June

2019.ThenowTotal-ledArea1MozambiqueLNGProject(Totalwith 26.5%,Mitsui E&PMozambique Area 1 with 20%,NHRovumaÁreaUm,15%andONGCVideshwith10%)willbethecountry’s first onshore LNG development, consisting at the first stage of two LNG trains with total nameplate capacity of 12.88 million tonnes per annum. The project has successfully secured salesof90%ofitsproductiontobuyersinAsiaandEurope.TheMozambiqueLNGProjectwasdesignatedas“FirstMover”bythe Government of Mozambique, meaning that the Total-ledArea 1 will be responsible for construction of the support shared facilitiesbetweenArea1andArea4(ledbyMRV)projects.InNovember 2019, it was announced that the project would get a USD400millionloanfromtheAfricanDevelopmentBankwithfinancialcloseexpectedforthefirstsemesterof2020.TheMetoro Project is led by the French renewable energy

company Neoen in partnership with Electricidade de Moçambique (EDM). The financial closing for the 41MWpphotovoltaic (PV) project in Mozambique was announced inDecember 2019 and construction has already started in Cabo Delgado. Commissioning is planned for the end of 2020.

The investment is estimated at USD 56 million, of which USD40millionwereprovidedbyFrenchdevelopmentagencyAFD and its financial arm Proparco.

2 Security


It is indeed possible to give security over movable assets and rights (movables) by means of a general security agreement.

The legal framework of security over movables changed considerably with the enactment of Law no. 19/2018, of 28 December 2018 (theMovables Security Law). TheMovablesSecurity Law applies to pledges, mortgages over vehicles subject to registration, assignments of credits by way of security, finan-cialleases,conditionalbillsofsale/equitablecharges,retentionof title clauses, and to other legal transactions tantamount to

210 Mozambique


Stampdutyonsecurityischargedat0.3%ofthetotalamountsecured, unless those security interests are ancillary and created simultaneously with a loan, and the loan has already been subject toasimilartaxation(noduplicationoftaxapplies).Thestampdutyrateonloansvaries,asfollows:0.3%forloans

withamaturityoflessthanayear;0.4%forloanswithamatu-rity ofmore than a year; and 0.5% for loanswith amaturityequivalenttoormorethanfiveyears.


Filing, notification and registration procedures before the competent authorities normally do not take more than 20 days, but this may vary from registration office to registration office. Expenses/registration fees vary in accordance with the

maximumsecuredamountbythesecurityinterestandtheamountsinvolved may be significant. The registration of the cancellation of anexistingsecurityalsorequiresthepaymentofregistrationfees.


Generally, the creation of security over assets which are in theprivatedomaindoesnot require any regulatoryor similarconsent. Conversely, the creation of security over assets in the public domain is prohibited.

It should be noted that restrictions may be imposed regarding the creation of security over concessions or regulated assets, notably through specific regulations or the relevant concession agreements.

3 Security Trustee


The concept of a “trust” is not recognised in Mozambique.It is, however, common to have security granted to a security agent on behalf of the lenders; in which case, even if the rele-vantagreementsexpresslyspelloutthatthesecurityagentholdssecurity for the benefit of a given lending syndicate, the security agent shall appear as the sole beneficiary of the security enti-tlements and shall be the sole entity with the authority to file enforcement procedures in respect thereof (unless all lenders aredisclosedasholdersthereof).Hence,inthecontextoftheenforcementprocedures,thesecurityagentmayberequiredtoprove before a court that it holds title to the secured obligations.


The only way to have all the lenders recognised as beneficiaries of a given security interest is to name them as holders of the


AccordingtotheMovablesSecurityLaw,securitycanbetakenover current and future receivables by means of a written agree-ment between the security provider and the secured creditor, and those documents, which give possession of the receivables, must be delivered to the secured creditor to ensure effectiveness of the security against third parties. Security over receivables shall be registered with the Central Registry Office.

The third-party debtor shall continue to carry out the relevant payments to the security provider until notice to the contrary. It is common for the secured creditor to authorise the security provider to continue to collect the receivables in the absence of a default.


Security can be taken over cash deposited in bank accounts by means of a written agreement between the security provider andthesecuredcreditor.Theexecutionofacontrolagreementwillberequiredforittobeeffectiveagainstthirdparties.Therequirements of such control agreement will be defined in aseparate regulation, which to date has not been published.

Generally, the secured creditors will grant a mandate to the security provider for him to operate the relevant bank account in the absence of a default.

Security over cash deposited in bank accounts shall be regis-tered with the Central Registry Office. The bank records should also record the security interest and the mandate in favour of the security provider.


In a limited liability company by shares (sociedade anónima), the creation of security is made by written agreement between the parties and, because shares are represented by physical certifi-cates,itrequirestheendorsementofthesharecertificatesbythesecurity provider, the registration of the pledge in the compa-ny’s share register book and the deposit of the share certificates with the financial intermediary used by the company to register itself and its shares. If the shares are bearer shares, the creation and perfection of security is made by delivery of the shares to the secured creditor. Security must be registered at the Central Securities Depository (Central de Valores Mobiliários) operating at theStockExchangeandattheCentralRegistryOffice.In a limited liability company by quotas (sociedade por quotas),

where the shareholding is not materialised in share certificates, security is created by means of a written agreement between the partiesandpriorconsentofthecompanyinwhichquotasarebeinggiven in security is required. Securitymust be registered at theLegal Entities Register Office and at the Central Registry Office.


The costs of public notary and registration fees, when appli-cable, vary according to the secured amount and number of pages of the deed or private document.



orcontinuetheiractionsandexecutions,regardlessofthecourtdecision, is reinstated.

It is possible to file new claims against the debtor after the insolvency is declared and those must be notified to the judge in the insolvency proceedings by either the judge in the new proceedings or by the debtor himself. However, those new proceedings can never be other insolvency proceedings, because the law prohibits the filing of new insolvency proceedings against the same debtor.


The declaration of insolvency results in all debts being acceler-ated and all assets being collected and sold to pay creditors. The creditors are paid with the proceeds of the sale in the following order: (i) labour credits; (ii) secured credits; (iii) tax credits;(iv)ordinarycredits;(v)contractualandtaxpenalties;and(vi)subordinated credits.

When different security interests are granted over the same asset, the first (older or higher ranking) creditor shall be paid first,exceptinthecaseoftherightofretentionwhichentitlescreditors to hold certain assets in their possession until their credit is paid. Credits with a right of retention have preference over common credits secured by pledges and mortgages regard-less of whether the pledges and mortgages were created first.


The general insolvency regime is applicable to both natural and legalpersons,exceptforpubliccompaniesandentities,comple-mentary pension fund entities, societies operating on healthcare plans, insurance companies, credit institutions, as well as finan-cial corporations and other companies similar to the previous, which are subject to specific insolvency rules and proceedings placed in their respective regimes.


Asreferred to in theanswer toquestion5.2above, a creditormay retain possession of the assets pertaining to a certain entity if it is in the possession of such assets and if the claim arises fromexpensesordamagescausedbysuchassets.


TheInsolvencyLaw(Decree-Lawno.1/2013,of4July)providesnot only the steps for the judicial recovery process, but also for theextrajudicialrecoveryprocess.

The judicial recovery can be initiated by the debtor, the debtor’s surviving spouse, debtor’s heirs, the executor orthe remaining partner, by filing a petition with the court. If accepted by the court, the debtor must submit a recovery plan to the court showing evidence of the viability of the business, a detailed description of the recovery process and the proposed

secured obligations and corresponding security. However, this makesitnecessarytoamendtherelevantagreement(orexecutea new notarial deed) each time the lenders assign, buy or sell part of the loans, which may not be a practical solution. For this reason, attempts have been made to set up alternatives and to put in place less burdensome solutions, as is the case where the security agent is made the registered beneficiary of the secu-rity and either benefits from a joint and several creditor status or a parallel debt or is made contractually bound to assign the secured obligations to all the lenders prior to enforcement of the security.



The enforcement of a mortgage by the creditor can only be achieved through a judicial proceeding.

As for security over movables, the sale can be completed judi-cially or, if previously agreed by the parties, through a private sale.ThenewMovablesSecurityLawalsoallowsforappropria-tion or foreclosure of movables by the secured creditors.

It is common practice to grant an irrevocable power of attorney to the creditor pursuant to which the creditor is author-ised to sell the secured asset on behalf of the security provider and be paid from the proceeds of the referred sale.

Court procedures usually take several months or, in certain cases,morethanayear.Thatperiodmaybefurtherextendedifthecomplexityofthelegalargumentsatstakeleadstocourtappeals.

Please refer to section 5 below for restrictions concerning insolvency/bankruptcy and restructuring proceedings.


Alltransactionswithand/orbetweenMozambicanandnon-Mo-zambican persons or legal entities are subject to either registra-tion or prior authorisation with the Bank ofMozambique orboth, depending on the transaction at stake. In case of fore-closure, there-exportationof the investedcapital issubject toauthorisationbytheBankofMozambique.



The Insolvency Law (Decree-Law no. 1/2013, of 4 July) inMozambique establishes a suspension regarding all ongoingclaims against the debtor, following the opening of an insol-vency proceeding. This means that all proceedings that were ongoing are suspended when the insolvency/judicial recovery is declared. In the case of judicial recovery, the law establishes a 180-day “stay period”, after which the right of creditors to start

212 Mozambique


With the implementation of this law, the Mozambican Statebegan to provide housing to citizens for very low prices, as symbolic amounts. Even though this piece of legislation has not been revoked, it has only been applied immediately after national independence as it does not conform to the current realityinMozambique.The Constitution of Mozambique provides that any prop-

ertyrightmaybeexpropriatedincaseofpublicnecessity,utilityand interest, and compensation shall be payable to the property owner.

Also, the Land Law establishes that DUAT may be revoked on grounds of public interest, upon payment of a compensation to the DUAT holder. In those cases, all assets and improvements thatexistonthelandrevertinfavouroftheState.



The governmental agencies or departments with authority over projects depend mainly on the relevant sector of activity of a project. In general terms, the respective Ministries (energy,infrastructure, transport, health, etc., and, when applicable, environment) are responsible for the launch, licensing and major regulation of the projects, either directly or through their govern-mentaldepartments.Inthiscontext,themostrelevantauthor-ities with authority over projects are: the National Institute of Mining (INAMI); theNational Institute ofPetroleum (INP);the Ministry of Land Environment and Rural Development(MITADER);theAgencyforthePromotionofInvestmentsandExports(APIEX);andtheBankofMozambique.


Obligations set out in financing or project documents of private nature are only enforceable before the courts after being authen-ticated or certified by a notary or by any other competent authority. Financing contracts entered into with foreign entities aresubjecttopriorauthorisationoftheBankofMozambique.Anexceptionismadetofinancecontractsforamountsequiv-

alent or less than USD 5 million and which satisfy the following conditions: (i) the interest rate is less than the base lending rate for the relevant currency; (ii) the sum of the relevant rate and marginisnotmorethantherateusedinMozambique;and(iii)the repayment period is at least three years or more. Those financings are treated as pre-authorised and subject only to registration.

Shareholder and intercompany loans made by non-residents to their resident subsidiaries or affiliates will also be treated as pre-authorised and subject only to registration if: (i) they are inter-est-free, the repayment period is, at the latest, three years and no fees and other charges apply; or (ii) the interest rate is lower than the base lending rate for the relevant currency, the repayment periodisatleastthreeyearsandtheloanamountisamaximumof USD 5 million. Note that, in those cases, registration relates to eachdisbursementamountreceivedbytheentityinMozambiquewithin the pre-authorised finance contract and to each repayment of principal made thereunder. Payments of interest and fees or chargesunderorinconnectionwithfinancecontractsqualifyascurrent transactions and are not subject to registration.

recovery measures. If the plan is accepted by the court and not challenged by any creditor, the process follows its normal course, and the restructured claims of the company (i.e. new rights and obligations set out in the plan, after sale of assets, if applicable) shall be binding on the debtor and creditors. If the plan is challenged, a general meeting of the creditors must be convened and the approval depends, cumulatively, on the vote of the creditors present at the meeting that holds more than half of the total claims and on the vote of the simple majority of the members present. Theextrajudicialrecoverycanonlybeinitiatedbythedebtor.

This is a special mediation procedure in which the recovery plan is negotiated with the creditors, according to the rules of conciliation and mediation provided in Law no. 11/99, of 8 July – theArbitration,ConciliationandMediationRegime. If theplan is approved by creditors representing ⅗ or more of the total amount of credits, a recovery agreement is deposited in a judicial court and such agreement shall, in effect, constitute an enforce-ment order, subject to specific performance and grounds for declaring insolvency should the credits not be paid.


Directors may remain in office, supervised by the insolvency administrator, whilst the insolvency proceedings are pending. They may, however, be dismissed where they have contributed to the worsening of the economic situation of the company.



TheMozambicanCommercialCode does not require compa-nies to reserve a percentage of their shareholdings to local part-ners. However, for compliance purposes with the rules on local content in certain sectors, such as oil, gas and mining regarding hiring nationals, only companies with most of the share capital heldbyMozambicanpersonsorlegalentities(i.e.51%ormoreofsharecapital)areconsideredMozambicancompanies.


EventhoughMozambiqueisapartytoseveralbilateralinvest-ment treaties with other nations (South Africa, Germany, Algeria, Belgium,China,Cuba,Denmark,Egypt,USA,Finland,France,Italy,Mauritius,theNetherlands,Portugal,Sweden,theUnitedKingdom,Vietnam,India,Switzerland,SpainandZimbabwe),none of those treaties provide protection from foreign owner-ship restrictions imposed under sector-specific legislation.


Nationalisation is governed by Decree-Law no. 5/76, of 5 February 1976, which determines the reversion to the State of all income from buildings as well as those that were abandoned.




Approved foreign investments projects can remit and repatriate investment returns. Such remittances are concluded through thelocalbankingsystemanduponobtainingtaxclearancefromtheMinistryofFinance.A20%withholdingtaxischargedonbothinterestandfees

paid to non-resident lenders. Where applicable,Value-AddedTax is also due at the rate of 17% on the total income fromservicesrenderedforconsiderationinMozambique.


The opening and operation of onshore foreign currency and offshore bank accounts by non-resident entities is free, save if such accounts are related to capital market transactions, in which case, the opening of such accounts is subject to prior authori-sationby theBankofMozambique. Theopeningandopera-tion of onshore foreign currency and offshore bank accounts by entitiesresidentinMozambiqueisauthorisedforMozambicanresidents with an established relationship with international/non-resident entities, such as exporters, companies or organi-sations, employees of international companies or organisations and all entities that generate or receive foreign currency. The opening of foreign currency bank accounts by entities resident inMozambiquewithout such established relationship requirespriorauthorisationfromtheBankofMozambique.


Dividendpaymentsaresubjecttoa20%withholdingtax,unlesssaiddividendsconcernshareslistedontheMozambiqueStockExchange,inwhichcasethewithholdingtaxis10%.ThesetaxratesmaybereducedbytheapplicationofataxtreatyandarenotappliedincaseofdividendspaidtoaMozambicancompanythathasheld25%ormoreofthesharecapitalinanassociatedcompanyinMozambiqueforatleasttwoyears.MozambiquehastaxtreatieswithPortugal,Mauritius,theUnitedArabEmirates,South Africa, India and others.


PursuanttoDecree54/2015,of31December2015,anyactivitywhich may affect the environment is subject to an evaluation of the potential impact (an environmental impact assessment) to determine its environmental feasibility, which concludes with the issuance of an Environmental Licence. OccupationalhealthandsafetyinMozambiqueisgoverned,in

general terms, by the Constitution and the Labour Law. Special legislation may apply to specific activities, e.g. Legislative Diploma 120/71, of 13 November 1971 (for Civil Engineering), Legislative

Financing or project documents executed by public enti-ties may be subject to approval by the Administrative Court to become effective. Specialrulesapplyincaseoftheexplorationandproduction

concession contracts in the Rovuma basin under Decree-Law no.2/2014,of2December2014.


In general terms, the performance of economic activities inMozambique is subject to licensing. Also, the granting ofthe right of use of an asset in the public domain is admissible through a concession regime.

It should be noted that certain activities in sectors such as oil, gas and mining are kept to companies in which the majority of thesharecapitalisheldbyMozambicanpersonsorlegalentities(i.e.51%ormoreofthecapital).Please note, as referred to in question 2.2, that there is no

privateownershipoflandinMozambique.


TheextractionorexportofnaturalresourcesaresubjecttothepaymentofCorporateIncomeTax,Value-AddedTaxandothertaxesleviedunderthetaxregimeapplicabletomining,oilandgas activities, as applicable. PetroleumProductionTaxisleviedonoilandgasproducedin

each concession area and is due by corporate entities performing petroleumoperationsunderaconcessionagreement. The taxrateis10%foroiland6%forgasandisleviedonthevalueoftheoil and gas produced and may be paid in cash or in kind. Thefollowingrulesandtaxesapplytominingactivities:(i)Tax

ofMiningProduction(IPM); (ii)SurfaceTax(ISS); (iii)Tax inIncomeDerivingfromMineralSources(IRRM);and(iv)specialrules to determine the taxable income under Personal IncomeTaxandCorporateIncomeTax. IPMtaxesratesvarybetween8%fordiamonds,6%forpreciousmetals,preciousandsemi-pre-ciousstonesandheavysands,3%forbasicmetals,charcoal,orna-mental rocks, etc. and1.5% for sand and stone, and are leviedon the value of the extractedmineral product after treatment.ISSisdueannuallyandisleviedontheminingareaofexplora-tion.TheratevariesbetweenMT17.50/ha(MTperhectare)andMT105,00.00/ha,dependingonwhethertheyrelatetothefirstyearofprospectingandresearchorthesixthyearonwardsofthemining concession, respectively, and are levied on the number of hectares of the area subject to a mining title (prospering licence, research, mining concession or mining certificate).TheIRRMtaxrateis20%onthecashearningsaccumulated

during the year, determined according to specific rules.


All transactions between resident and non-resident entities inMozambique,whichmayormaynot result in paymentsorreceiptsfromabroad,aresubjecttotheexchangecontrollegis-lation which may or not require prior authorisation of theBankofMozambiquedependingonthenatureoftherelevanttransaction.

214 Mozambique


the work permit regime, and (iii) the investment projects regime approved by the government. Under the quota regime, the allowed quotas for foreign

employeesare5%ofallworkersinlargecompanies,8%ofallworkers inmedium-sized companies, and 10%of all workersin small companies. Inall cases,priornotice to theMinistryofLabourwithin15daysisrequired. Pleasenotethat incaseoftheexplorationandproductionconcessioncontractsfortheRovumabasinunderDecree-Lawno. 2/2014,of 2December2014,thequotaistheoneestablishedintheworkforceplan.Theworkpermitregime(outofquota)willonlyapplyifthere

arenoMozambicanworkerswhohavethenecessaryacademicorprofessionalqualifications,ortherearequalifiedbutinsuffi-cientMozambicanworkers.

In the case of investment projects approved by the govern-ment,thequotaallowedforforeignworkersistheoneapprovedfor the project. Thework permit is not required, and noticegiven within 15 days from the date of entry of the foreign workers in the country is sufficient.



ImportedequipmenttobeusedinMozambiquemustbeclearedthrough the appropriate customs procedures such as (i) tempo-rary importation, (ii) temporary exportation, (iii) re-importa-tion, (iv) re-exportation, (v) customs transit, (vi) storage, (vii)industrial free zones, and (viii) customs warehousing. Certainproductsareexcludedfromentryundersomeofthese

regimes. This is the case for the importation of left-hand drive vehiclesusedforcommercialpurposesinMozambiquewhichisprohibited.

Other prohibitions and import restrictions apply based on health and moral grounds and in compliance with international conven-tions,towhichMozambiqueisaparty,includingprohibitionsunderthemultilateralenvironmentalagreementstowhichMozambiqueis also a party. Specialrulesapplyforimportsinconnectionwiththeexplo-

ration and production concession contracts for the Rovuma basinunderDecree-Lawno.2/2014,of2December2014.


All goods imported intoMozambican territory are subject tothe payment of customs duties set forth in the Customs Tariff Book,whichincludead valorem charges, service charges, Specific ConsumptionTaxandValue-AddedTax.Specificrulescanbeapplied to SADC countries. Authorised investment projects and activities under certain sector-specific legislation may benefit fromimportdutiesontheimportationofcapitalassets(equip-ment and machinery).

Goods imported under the temporary importation regime benefit from a grace period payment of the relevant customs duties andotherimportchargesandrequirethedeliveryofabond(theamount varies depending on the amount of the customs duties and charges suspended).

Diploma48/73,of5 July1973,ProvincialDecree61/73,of20November 1973 (for Industrial Establishments), Decree 61/2006, of 26 December 2006 (for geological and mining activities), Decree 13/2015, of 3 July 2015 (for mining activities), and Decree 28/2016, of 18 July 2016 (for production, transportation and commerciali-sationofcement).And,asreferredtoinquestion7.1,thegovern-mental authority responsible for administering those measures depends mainly on the relevant sector of activity of the project.


Mozambique’s general procurement terms from theRegulationon the Contracting of Public Works, and Procurement of Goods andServicesbytheState(Decree5/2016,of8March2016),areapplicable to all State bodies and institutions, including local government and companies owned by the State. The Regulation includesageneralmechanism(publictender)andanexceptionalcontractingmechanism(limitedcallfortendersbypriorqualifica-tion, limited call for tenders, two-stage tender, tender by auction, smalltender,tenderbymeansofquotesanddirectaward).

Sector-specific legislation (mainly in natural resources) and the mega-projects legislation also include procurement rules and principles of mandatory application, generally accommodating similar procurement rules or contracting methods (public tender, restricted tender, two-stage tender and direct award).Specialrulesapplyforactivitiesandservicesundertheexplo-

ration and production concession contracts in the Rovuma basin inaccordancewithDecree-Lawno.2/2014,of2December2014.

8 Foreign Insurance


Mozambicanlawgenerallyrequiresinsurancetobeprovidedbylocalinsurers.Becauseofthesmalllocalinsurancemarket,enti-ties can obtain insurance with foreign insurers where it is not possible to insure with local insurance companies and provided that prior notice is given to the regulator – Instituto de Supervisão de Seguros de Moçambique(ISSM).

Special rules apply for insurances in connection with the explorationandproductionconcessioncontractsintheRovumabasinunderDecree-Lawno.2/2014,of2December2014.


Payment of insurance policies contracted offshore by the insuredpersonrequirespresentation,bytheinterestedparties,of evidence that the necessary approval has been obtained from the competent authority in the country in which the insurance has been taken out, in accordance with applicable legislation.



The regimes for the employment of foreign workers in Mozambiquewhichgenerallyapplyare(i)thequotaregime,(ii)



movable or immovable assets are governed by the law of where the property is located. This includes the creation of security over those assets.



Submission to a foreign jurisdiction and waiver of immunity are valid and enforceable inMozambique to the extentpermittedby law. Submission to a foreign jurisdiction is prohibited, regardless of contractual provisions, if, in accordance with the Mozambican mandatory procedural rules, the Mozambicancourts have jurisdiction to decide on a certain matter.



Arbitral awards are recognised by local courts subject to the requirements and procedures for enforcement of arbitrationawards stated in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and provided that they are issued in the territory of another contracting State.


Mozambique has been a contracting State to the New YorkConvention on the Recognition and Enforcement of Foreign Arbitral Awards since 1998. The Constitution states that inter-national conventions are recognised in the internal judicial system and have the same force as internal legislation. Also, the Arbitration Law states that the international conventions do prevail over the Law and other internal provisions. Mozambique is also a contracting State to theWashington

Convention regarding the Settlement of Investment Disputes between States and Nationals of Other States and the International Centre for the Settlement of Investment Disputes between States and Nationals of Other States (ICSID), as well as to the Additional Facility Rules of ICSID approved on 27 September 1978 and is a member of the International Chamber of Commerce.


Mozambican law establishes that all disputes are arbitrable,except disputes of a personal nature (e.g. family matters) ordisputes thatareexpresslysubject to theexclusive jurisdictionof a judicial court.


Disputes about labour rights and disputes arising out of or in connection with administrative agreements are subject to domestic arbitration.

11 Force Majeure


Even though there is no specific legal provision on the issue, force majeure is acceptedandenforceable inMozambiqueunderthe Civil Code. In general, project contracts provide for detailed provisions in relation to force majeure events and terms under which the parties have agreed to mitigate the effects of force majeureandexcludeliabilityforbreachofcontractresultingfroma force majeure event. The terms agreed between the parties in this respectaregenerallyacceptedandenforceableinMozambique.



There are no specific rules which apply to corruption and bribery activities in the projects sector. Nevertheless, entities are subject to general criminal law. According to the Mozambican Criminal Code and Law

no. 6/2004, extortion, attempted corruption and bribery areprohibited.

The penalties for bribery and corruption are imprisonment for up to eight years and payment of pecuniary fines.

13 Applicable Law


The Mozambican Civil Code establishes that contracts aregoverned by the law elected by the parties – if such election has a connection with the contract or is supported by an interest in good faith of the parties.

If a foreign law is elected in accordance with those rules, it will not be acceptable if it violates the fundamental principles of MozambicanpublicpolicyandcertainMozambicanprinciplesand rules that are mandatory for the projects sector.

Concession contracts and other project agreements entered with public entities are typically governed by general laws and regulations of the Republic of Mozambique and by specificlaws and regulations applicable for the sector where the project will be implemented. Construction contracts relating to works tobecarriedout inMozambiquemustalwaysbegovernedbyMozambicanlaw.Specialrulesapplyincaseoftheexplorationandproduction

concession contracts for the Rovuma basin under Decree-Law no.2/2014,of2December2014.


Financing agreements are typically governed by English law.


The Mozambican conflict-of-laws rules regulate that rightsregarding possession, ownership and other related rights over

216 Mozambique



The capital market in Mozambique covers a primary market(the market for new issues of securities) and a secondary market (the trading market for previously issued securities between third parties). Other concepts within this framework include the stock market and over-the-counter market, the latter being a market in which supply and demand are dealt with outside the stock market, with the involvement of authorised financial intermediaries.

A limited liability company by shares (sociedades anónimas) may issue bonds (designated as corporate bonds) up to the value of their share capital inscribed in the most recent balance sheet and income statement, subject to authorisation by general meeting or the board of directors, as stipulated in the articles of association.

19 Islamic Finance


Tothebestofourknowledge,thereisnoexperienceofIslamicprojectfinanceinMozambique,norarethereanyfinanceinstru-ments structured in accordance with Islamic law.




The inclusion of interest payment obligations in a loan agree-mentisvalidandenforceableinMozambique.

AcknowledgmentThe authors would like to acknowledge the invaluable contri-bution of Lorna Guilande, an Associate at Guilherme Daniel & Associados, for her invaluable assistance in the preparation of this chapter.Tel:+25821498770/Email:[email protected]

Specialrulesapplyincaseoftheexplorationandproductionconcession contracts for the Rovuma basin under Decree-Law no.2/2014,of2December2014.



While direct agreements with the government (in its capacity as grantor in a concession contract) are common, those agreements do not particularly offer any political risk protections.

Change-in-law risk is normally addressed by contract in the standard terms for international project finance deals.

17 Tax


A20%withholdingtaxisleviedonbothinterestandfeespaidto non-resident lenders, except where there is a double taxa-tiontreatyinforcebetweenMozambiqueandthelender’shomecountry. The enforcement of security, in general terms, does not triggeranytaxes.However,thismustbeanalysedonacase-by-case basis (e.g. the enforcement of a mortgage, with the subse-quenttransferofownershipoverrealestatepropertymaytriggera2%PropertyTransferTax–SISA).


Mozambique has an attractive regime for foreign investorsestablished in theMozambicanInvestmentLaw, its regulationandtheTaxBenefitsCode.Theselawsprovideawiderangeoftaxincentivestoattractforeigninvestmenttothecountryandfor which foreign investors may be eligible, such as deductions fromtheamountoftaxassessed,accelerateddepreciation, taxcredits, exemption fromtaxand the reduction in tax rateandothertaxpayments,thedefermentofthepaymentoftaxes,andotherspecialtaxmeasures.Forthecostsandtaxestocreateanytypeofsecurities,please

seequestion2.6above.

18 Other Matters


We believe that the most relevant issues have been addressed.

217

Teresa Empis Falcão is a Partner in VdA’s Infrastructure & Mobility practice since 2016. From 2011 to 2014, she acquired a reputation as deputy at the Cabinet of the Secretary of State for Infrastructure, Transports and Communications, being responsible for drafting and reviewing legislation concerning these sectors as well as leading negotiation teams in the context of the infrastructure PPP review requested by the bail-out arrangements applying in Portugal between 2011 and 2014. Before joining VdA in 2008, Teresa was an Associate with the project department at Allen & Overy (London) where she acquired expertise in the financing of projects in various jurisdictions. Teresa is frequently sought for leading-edge national and international transactions on project finance transactions and capital markets, mainly focused on the infrastructure and energy sectors, due to her high expertise. She has extensive experience in overseas markets, particularly in Portuguese-speaking African countries, namely Mozambique.

VdARua Dom Luís I, 281200-151 LisboaPortugal


Vieira de Almeida (VdA) is a leading international law firm with more than 40 years of history, recognised for its impressive track record and innovative approach in corporate legal services. The excellence of its highly special-ised legal services covering several sectors and practice areas enables VdA to overcome the increasingly complex challenges faced by its clients.VdA offers robust solutions grounded in consistent standards of excel-lence, ethics and professionalism. VdA’s recognition as a leader in the provision of legal services is shared with our clients and teams, and is attested by the most relevant professional organisations, legal publica-tions and universities. VdA has successively received the industry’s most prestigious international accolades and awards.Through the VdA Legal Partners network, clients have access to 13 juris-dictions, with a broad sectoral coverage in all Portuguese-speaking and several French-speaking African countries, as well as Timor-Leste.

Angola – Cabo Verde – Cameroon – Chad – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau –

Mozambique – Portugal – São Tomé and Príncipe – Timor-Lestewww.vda.pt


VdA / Guilherme Daniel & Associados

Guilherme Daniel founded Guilherme Daniel & Associados in 2016. As the founder, he is actively involved in several matters mainly in Corporate, Energy and Natural Resources (particularly, Oil and Gas) and Infrastructure.Guilherme provided support to the Ministry of Energy and participated in the drafting of key legal instruments in the downstream petroleum sector regulation since 2006.Guilherme holds a law degree from the Faculty of Law Eduardo Mondlane (UEM) University, and a post-graduate degree in Corporate Law from the Higher Institute of Science and Technology of Mozambique (ISCTEM).Guilherme is admitted to the Mozambique Bar Association and is an Industrial Property Agent.

Guilherme Daniel & AssociadosTorres RaniAv. Tenente Osvaldo Tazama/MarginalTorre 1, Piso 02, Fracção 05MaputoMozambique

Tel: +258 21 498 770Email: [email protected]: www.guilhermedaniel.com



Chapter 24218

Myanmar

Allen & Gledhill (Myanmar) Co., Ltd. Lee Jun Yee

Minn Naing Oo

Myanm

ar


housed under a standalone security agreement due to specific perfectionrequirementsapplicabletosuchsecurity.


Security can be taken over land by way of a mortgage under the Transfer of Property Act 1882 (“TPA”) or, in some instances, an assignment of rights.

Typically, mortgage over land is either in the form of a regis-tered mortgage, executed by way of a mortgage deed subse-quently registered with the Office of Registration of Deeds(“ORD”) or a mortgage by deposit of title deeds, whereby the original title deeds are deposited with the lender/security agent with intent to create a security thereon. Amortgageoverlandwouldalsocreatesecurityoverfixtures

of the land (such as plant, machinery, equipment, pipelinessecurelyfixedtotheland).Plant,machinery and equipment or pipelineswhich donot

constitutefixturesareconsideredchattelsandmaybesecuredbywayofachargeorhypothecation,orviaafixedorfloatingcharge.


Security over receivables can be taken via a general or stan-dalone security agreement. If the chargor is permitted to collect the receivables in the absence of default, or that the debtors are not notified of the assignment of the receivables, such security may be characterised as a floating charge and will rank behind any other security, prior notice of which has been given to the debtor. If no notice of assignment is made to the debtor, the debtor is not bound by the assignment and it may discharge its obligation by paying to the chargor.


Yes, security can be taken over cash deposited in bank accounts via a general or standalone security agreement. Such security can be in the form of a charge or an assignment in favour of the creditor. If the account bank is not the lender, notice of charge/

1 Overview


Following decades of under-investment, infrastructure remains toppriorityforthegovernment.UnderpinnedbytheMyanmarSustainable Development Plan 2018 to 2030, which specifically identifies “build[ing] a priority infrastructure base that facili-tates sustainable growth and economic diversification” as one of the 28 outlined strategies, a public database of infrastructure projects available for financing, the “MyanmarProjectBank”went live in February 2020.KeyprojectsintheMyanmarProjectBankinclude:

■ ConstructionoftheMuse-Htigyaing-MandalayExpressway,withanestimatedtotalprojectcostofUS$4.00billion.

■ ConstructionoftheYangonOuteringRoad,withanesti-mated total project cost of US$2.28 billion.

■ Development of the Yangon Central Station as a trans-port hub, with an estimated total project cost of US$2.15 billion.

ProjectfinancinginMyanmariscurrentlyatitsnascentstagebut is an evolving one, and certainly one to watch out for in the years to come as the government rolls out an increasing number of projects.


The most significant project financing deal would be the financing ofthe225MWpowerplantinMyingyan,backedbyaUS$248millionfacilityextendedbyasyndicateofsixinternationalfinan-cial institutionscomprisingAsianDevelopmentBank,CliffordCapital,DBSBank,DZBank,InternationalFinanceCorporationandOversea-ChineseBankingCorporation.

2 Security


It is possible for security to be granted via a general security agreement such as a debenture which can effect different types of security over different assets; however, certain types of secu-rity (such as security over immovable property) are usually

219Allen & Gledhill (Myanmar) Co., Ltd.



Registration(ashighlightedinquestion2.6)canbemadeelec-tronically and completed instantly in most cases.

Sufficient time needs to be allocated for registration with the ORD as the time needed may vary depending on location of the property and the relevant case officer. The Registration of DeedsLaw2018requiresthedocumenttoberegisteredwiththeORDtobe inMyanmar language; furthermore, it iscommonforcaseofficerstorequirepartiestoexplainthedocumenttohis/her understanding prior to registration. It is also a legal requirement that the signatories to the security document bepresentattheORD.Pleaserefertoquestion2.6forexpenses.


Governmentalconsentsmayberequiredtocreatesecurityoverreal property where the lessor is a governmental authority. Third-partyconsentsareusuallynotrequiredoverplants,machineryandequipmentunlesstheyareagreedcontractuallybetweenparties.

3 Security Trustee


Yes. It is common for a licensed local bank to be appointed as security agent/trustee to take custodianship over the secured assets. The rights and obligations of the security trustee are commonly documented in an agreement among the lenders, borrower, security provider and security trustee/agent. Application of enforcement proceeds, often by way of a pre-agreed waterfall, may also be included in such agreement.


This is not a common practice as the option of a security agent/trustee is available.



Enforcement of security created over real property under the TPA would need to comply with the applicable provisions

assignment should be given to, and an acknowledgment should be received from, the account bank in order to preserve priority.


Yes. Shares incompanies incorporatedpursuant toMyanmarCompanies Law 2017 (“MCL”) can be taken as security. The sharesofMyanmarincorporatedcompaniesareregistered(notin a bearer form) and may be certificated or uncertificated (held in a clearing system).Forunlistedshares,anequitablecharge,wherebythechargor

will deposit the share certificates and execute blank sharetransfer forms in favour of the lender, is usually applicable. This will enable the lender to initiate a transfer of the shares upon enforcement. Certain additional mechanisms (e.g. amendment of the constitution to remove directors’ discretion over registra-tion of share transfers) to enhance security are recommended.

For listed shares, security over such shares would be by way of a legal charge as the shares are in scripless form. Accordingly, legal ownership of the shares is transferred to the lender or its agent, subject to a requirement to re-transfer upon satisfac-tion of the underlying secured obligations. The legal charge is perfected by a transfer of the shares from the chargor’s securi-ties account into the lender or its agent’s securities account.


UnderSection229of theMCL,amortgageorchargecreatedbyaMyanmarcompanyovervarioustypesofassets(includingimmoveable property, book debts,moveable property (exceptstock-in-trade) and floating charge) must be registered with the Directorate of Investment Company Administration (“DICA”). Registration must be completed within 28 days from either the date such security is created (if the instrument is executed inMyanmar) or the date such instrument has been received inMyanmar (if such instrument is executed outside Myanmar).The filing can be done via DICA’s online portal, “MyanmarCompanies Online” (“MyCO”) and the registration fee payable isMMK30,000.All documents executed or received in Myanmar must be

stamped in order to be admissible as evidence for any purpose, and to be acted upon by any person with authority (by law or consent of parties). For loan agreements, an ad valorem stamp dutyof0.5%oftheloanamountapplies;subsequently,therele-vant security documents can be stamped as subsidiary instru-mentsatanominalrateofMMK300perinstrument.For security required tobe registeredwith theORD(e.g. a

mortgagedeed),aregistrationfeeof0.5%ofthevalueofthatproperty applies.There is generally no requirement for documents to be

notarised for purposes of validity or enforcement. However, it is common practice for certain documents (e.g. a declaration in respect of the mortgage by way of deposit of title deeds, power ofattorneyandspousalconsent)tobeexecutedinthepresenceof a notary public.

220 Myanmar


Unfair preference transactions are susceptible to clawback under the Insolvency Law if entered into within two months ending on the date of the winding-up application and the person who received the benefit of the preference was an associate of the insolvent entity.


Yes, certain regulated entities are subject to industry-specific legislation limiting the extent of insolvency proceedings (e.g.financial institutions under the Financial Institution Law 2016).


Yes, depending on the nature of the assets and the form of secu-rity. A lender may proceed to deal with certain types of secu-rity(e.g.equitablesharecharge,accountscharge,assignmentofproceeds) created pursuant to the terms of the respective secu-rity document which may provide the lender with the right to enter into possession or a power of sale. Forexample,alendermayenforceanequitablesharecharge

by either perfecting the transfer of the shares (i.e. completing the share transfer forms and filing the same on MyCo) ordisposing of the shares by way of sale. A lender may also appoint a receiver and manager if such a right is provided for in the rele-vant security document. The purpose of appointing a receiver is to remove the management of the secured assets from the hands of the company and to place it in the hands of a person chosen by the lender.


Section287oftheMCLprovidesanoptionforcorporateenti-ties in financial distress to seek a court-sanctioned meeting with its creditors to discuss and to enter into a compromise or arrangement between the parties. Once the parties are able to show the court that an arrangement or compromise has been agreed between the parties, the court may approve and allow the arrangement to proceed.

The Insolvency Law also allows corporate entities to pursue rehabilitation overseen by an insolvency practitioner, under which the company may obtain a moratorium from legal proceedings. During rehabilitation, no action or arbitration against the company or its property may be proceeded without the leave of court or on such terms as the court may impose, and secured creditors may not enforce their security without leave of court or written permission of the insolvency practitioner.


Where a company is in financial distress or insolvent, the usual fiduciary duties and statutory duties owed by directors to the companywillrequirethedirectorstotakeintoaccountandgiveprimacytotheinterestofcreditorsasawhole.Forexample,if

therein. For instance, the TPA provides that a mortgagee would have the power to sell without the intervention of the court only if (1) the mortgage is an “English mortgage” as defined under the TPA and neither the mortgagor nor the mortgagee is a Hindu, MuhammadanorBuddhistoramemberofanyotherrace,sect,tribe or class from time to time specified by the government, or (2) where a power of sale without the intervention of the court isexpresslyconferredonthemortgageebythemortgagedeed.

The Insolvency Law 2020 (“Insolvency Law”) also provides certain court blocking procedures to other creditors/the company and moratorium on legal proceedings after the commencement of winding-up.

For certain regulated sectors, regulatory consent may be requiredfortransferofassets(e.g.MICapprovalforthetransferof assets of a company holding an investment permit from the MIC(“MIC Permit”)).


The Transfer of Immoveable Property Restriction Act 1987 (“TIPRA”) prohibits the sale, exchange or transfer by anymeans of immoveable property to a foreigner or foreign-owned company. As foreclosure results in a mortgagee becoming the owner of the mortgaged property absolutely and beneficially, it is not available to a foreign investor or creditor.



A secured lender’s enforcement rights over collateralised assets ofthecompanyarenotaffectedby liquidationproceedingsofthe company. If enforcement of security fails to discharge the total liability owed to the lender, the balance may be claimed in theliquidationprocess.

However, a secured lender’s rights may be curtailed if the company has opted for rehabilitation under the Insolvency Law, such that either a leave of court or written permission from the insolvencypractitionerisrequiredbeforeenforcement.Pleaserefertoquestion5.5forfurtherdetailsonrehabilitation.


UnderSection391oftheMCL,certainpreferentialdebtshavepriority over claims secured by floating charges if the assets of the companies are insufficient to meet the preferential debts, includingall revenue, taxes,cessesandrates (ifpayable to thegovernment), unpaid employees’ salaries and superannuation or provident fund contributions.

Furthermore, a floating charge created within three months from commencement of winding up shall, unless it is proved that after the creation of the charge the company was immedi-atelysolvent,beinvalidexcepttotheamountofanycashpaidtothecompanyatthetimeof,orsubsequentlytothecreationof,and in consideration for, the charge, together with interest on thatamountattherateof5%perannum.



nationaliseortakeanymeasurementswhichexpropriateorindi-rectlyexpropriateorarelikelytoeffectaresultinthetermina-tionofanyinvestmentmadeinaccordancewiththeMIL,exceptunder the following circumstances where it is:■ actuallynecessaryforthepublicinterest;■ undertakeninanon-discriminatorymanner;■ withmeasuresinaccordancewiththeapplicablelaws;and■ withprompt,fairandadequatecompensation.



Projects are typically administered by government agencies designated with authority for such sector, such as the following.

Industry Responsible Government Agency

Parent Ministry

Power

■ ElectricPowerGeneration Enterprise

■ DepartmentofHydropower Implementation

MOEE

Roads ■ DepartmentofHighways

MinistryofConstruction

Industrial estate

■ No.1,2or3HeavyIndustries Enterprise

MinistryofPlanning, Finance and Industry (“MOPFI”)

Transport

■ DepartmentofCivilAviation

■ MyanmaRailways■ InlandWaterTransport■ MyanmaPortAuthority

MOTC


Land leases of more than one year must be registered with the ORD.Forfinancingdocuments,pleaserefertoquestion2.6.


With respect to ownership of land, please see question 6.1.Depending on the industry, specific licences, permits and concessions from government entities would be required.Unlesstheindustryinquestionisbarredtoforeigninvestors(asexplained inquestion6.1), foreignentities ingeneralcanholdsuch licences, permits and concessions. For large-scale projects, theMICPermitisgenerallyrequired.

a director makes any false representations to a company’s cred-itors to an agreement vis-à-vis the company’s affairs, he/she will be guilty of an offence under Section 216 of the Insolvency Law and may be subject to imprisonment of up to seven years and additional pecuniary penalty.

If a director continues trading whilst the company is in finan-cialdifficulties,he/shemaybefinanciallyliableandberequiredtomake contributions to the company during the liquidationprocess. Under Sections 218 and 219 of the Insolvency Law, if the director is guilty of fraudulent or wrongful trading, the court may determine that such director is liable to contribute to the company’s property.



The government has largely liberalised foreign ownership restrictions, such that 100% foreign ownership of projects/business is possible unless they are specifically restricted. For example,underNotification15/2017issuedbytheMIC,thereare investment activities which:■ areonlyallowedtobecarriedoutbythegovernment(e.g.

manufacturing of arms, management of forests);■ are restricted to foreign investors (e.g. gemsexploration,

extractionofshallowoilwellsonshore);■ canbeundertakenbywayofjointventurebetweenforeign

and Myanmar investors (e.g. development of residentialapartments); and

■ canbeundertakenbyaforeigninvestor,subjecttocertainconditions (e.g. telecommunication services with the MinistryofTransportandCommunication(“MOTC”)’s approval; and large-scale power projects of more than 30 MW with the Ministry of Electricity and Energy(“MOEE”)’s approval).

Additionally, pursuant to TIPRA, foreign companies are prohibited from owning land or entering into leases of more thanoneyear.Thisrestrictionissubjecttocertainexceptions,includingwheretheprojectcompany,whichmaybe100%ownedbyforeignshareholder(s),holdsanMICPermitoraninvestmentendorsement fromtheMIC. Itmay thusenter into long-termleases vis-à-vis approved parcels of land, up to a term permitted by theMIC.Dependingontheproject,thistermcangoupto50years of initial term plus two renewable terms of 10 years each.


In addition to regional investment agreements (such as the ASEANComprehensive InvestmentAgreement),Myanmar is aparty to 13 bilateral investment treaties, including those with major tradingpartnerssuchasSingapore,China,SouthKoreaandJapan.Generally,theseinvestmentagreementsdonotextendprotec-

tionsfromtherestrictionshighlightedinquestion6.1.


The Myanmar Investment Law 2016 (“MIL”) specifically provides an investment guarantee from the government not to

222 Myanmar


However, a number of the President’s Office directives and notifications govern procurement by government entities, namely Directive No. 1/2017 on the Tender Procedures for Development, Procurement of Goods and Services, Leasing and Sale;NotificationNo.41/2018ontheExecutionofInstruments;and Directive No. 2/2018 on the Project Bank – together,they provide guidelines on organising open tenders and Swiss Challenges, and terms which need to be included in commercial instrumentsexecutedbygovernmententities.

8 Foreign Insurance


Generally, foreign insurance companies intending to insure or guarantee a project asset would need to be licensed with the InsuranceBusinessRegulatoryBoard,underthepurviewoftheFinancialRegulatoryDepartmentofMOPFI.

To date, there are only three foreign-related joint ventures approved to provide non-life insurance services, namely: SompoJapan(withAYAMyanmar);TokioMarineandNichidoFire Insurance (withGrandGuardian); andMitsui SumitomoInsurance(withIKBZ).


Yes, insurance proceeds are generally payable to foreign (secured) creditors provided such creditors are entitled to such proceeds either as an assignee or a loss-payee.



TheMILrequiresthatonlyMyanmarcitizensareappointedforroleswhichrequirenoskill;foreignworkersmaybeemployedforroleswhichrequireskill. Furthermore,engineeringworkswill need to be undertaken by persons registered with the MyanmarEngineeringCouncil.



No,otherthanprohibitedgoods,goodswhichrequireanimportlicence,orgoodswhichrequirespecificrecommendationsfromthe relevant ministries, there are generally no restrictions on the importing of equipment. Such requirementsmay be checkedonlineattheMyanmarTradePortalwebsite.


Unless there are import duties reliefs and exemptions (asdetailedinquestion17.2),theimportdutiesdependonthetypeof imports (based on the HS Code) and the country of origin.


There is generally no overarching legislation relating to such arrangementsonroyalties,restrictions,feesand/ortaxespayableontheextractionorexportofnaturalresources;suchprovisionsare subject to the individual concession granted by the relevant government entities.


Pursuant toForeignExchangeManagementLaw2012and itsaccompanyingrulesandprocedures,theexchangeofMMKtoforeign currencies, or vice versa, can only be carried out with an “authorised dealer” (e.g. a licensed money changer or a licensed bank) in Myanmar on a spot basis. The foreign currenciespermitted tobeexchangedare limited toUSD,EURO,SGD,THBandRM.


Generally,repatriationofcapitalissubjecttotheCentralBankofMyanmar(“CBM”)’s prior approval; for offshore loan repay-ments,CBM’spriorapprovaloftheoffshoreloanisrequired.


Yes,providedCBM’spriorapprovalisobtained.


No, there is generally no such restriction.


Pursuant to the Environmental Conservation Law 2012 and its accompanying rules and procedures, large-scale infrastructure projectstypicallyrequiretheundertakingofanenvironmentaland social impact assessment (“ESIA”) before commencing operations. The ESIA report needs to be submitted to the MinistryofNaturalResourcesandEnvironmentalConservation(“MONREC”) for its review and, if approved, MONRECwould issue an environmental compliance certificate.


There is no specific legal/statutory framework governing procurement in the private sector.



thatMyanmarcourtsareamoreappropriate forum. In particular, theredoesnotappeartobeanyrestrictiononMyanmarcourtstoassumejurisdictiononthebroadprinciplesofjustice,equityandgoodconscienceprovidedforinthe1898MyanmarLawsAct.

There have been a handful of projects where waiver of immu-nity has been provided, although it remains to be seen whether suchclauseswillbeupheldbeforethecourtsinMyanmar.



Yes – generally, under the Arbitration Law 2016 (“Arbitration Law”),contractualprovisionsrequiringsubmissionofdisputestointernational arbitration and arbitral awards are legal and enforce-able, provided the provisions therein have been complied with.

Specifically, the Arbitration Law provides that no court shall intervene inmatters governed by the Arbitration Law exceptwhere the Arbitration Law provides otherwise (e.g. making an order to seize property subject to arbitration).


Yes, it is a contracting state to the New York Convention and ViennaConvention.ItishowevernotacontractingstatetotheICSID Convention.


The Arbitration Law does not expressly provide for types ofdisputes which are not arbitrable under local law, although there is always a possibility that cases of national interest or in contra-vention of public policy may not be.


The Arbitration Law does not mandate any dispute to manda-tory domestic arbitration proceedings.



As far as we are aware based on public records, there has been no such call undertaken.

17 Tax


Paymentof interestbya taxresident toapersonwho isnotataxresidentmaybesubjecttowithholdingtaxatarateof15%or such other ratehavingeffectunderanapplicabletaxtreaty.

11 Force Majeure


There is no general concept of force majeure. However, the commonlawdoctrineoffrustrationisrecognisedinMyanmarandisgovernedbytheMyanmarContractsAct1872(“MCA”). Section56of theMCAprovides that“acontract todoanactwhich, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”.



The principal legislations that relate are the Penal Code and Anti-Corruption Law 2013 (“Anti-Corruption Law”). Generally, the Penal Code prescribes various offences of giving and accepting bribes vis-à-vis public servants and offenders are subject to imprisonment of up to three years and/or a fine upon conviction.

Similarly, the Anti-Corruption Law provides that the bribing of an official makes an offender subject to imprisonment of up to seven years and/or a fine upon conviction.

13 Applicable Law


TheyaretypicallygovernedunderMyanmarlaw.


The loan/facility agreement is typically governed under Myanmar law, and in certain circumstances, English law orSingapore law. Agreements relating to sale and purchase and/or grant of security interests over land and assets (including shares ofaMyanmarcompany)aremattersthataretypicallygovernedbyMyanmarlaw.


Typically,issuesrelatingtolandorassetsinMyanmar,andagree-mentswhereallormostoftheperformancewillbeinMyanmar,aregovernedunderMyanmarlaw.



Yes, submission to a foreign jurisdiction is legally binding and enforceable, although it remains to be seen whether a court in Myanmarwouldexerciseitsdiscretionaryjurisdictiontodetermine

224 Myanmar



Pursuant to theSecuritiesExchangeLaw2013, theSecuritiesandExchangeCommission(“SECM”) is the principal regulator.

Theoretically, a public company (i.e. a company that is not a privatecompanyundertheMCL)can,withSECM’sapproval,offer bonds to the public. Furthermore, bonds can also be offered to offshore noteholders; however, such offshore bonds are considered offshore loans and would thus require CBM’sprior approval.

However, in practice, there has been no precedent of any onshore or offshore bonds issued byMyanmar-related issuersto date.

19 Islamic Finance







Generally, a company is a tax resident if it is incorporatedundertheMCLoranyotherapplicable laws inMyanmar,andwould exclude anybranchof a foreign company registered inMyanmar.


Generally,aninvestormayapplytotheMICforthefollowingtaxincentives.■ Subject tothe investmentbeingapromotedactivity (e.g.

power, telecommunications) and depending on where the activity is undertaken (i.e. a developed, moderately developedorleastdevelopedregion),thereisincometaxexemptionofseven,five,orthreeyearscommencingfromthe date of commercial operations.

■ Exemptions or reliefs from customs duty on import ofmachineries, materials, etc., which are unavailable locally, during the construction phase.

■ Exemptions or reliefs from income tax if profit is rein-vested in the same or similar investment activity within one year.

Unlesstaxincentivesorexemptionsapply,companiesresidentinMyanmararegenerallytaxedataflatrateof25%.Forstampduty,pleaserefertoquestion2.6.

18 Other Matters


Project financing is at its nascent stages in Myanmar, andattempts to enable government agencies to deliver bankable projects are still ongoing. Time needs to be invested to obtain requisiteregulatoryapprovalsbeforeaprojectcangolive.

225

Minn Naing Oo is the Managing Director of Allen & Gledhill (Myanmar) and a Partner of Allen & Gledhill. He has extensive experience advising on banking and finance, mergers and acquisitions, infrastructure projects, corporate and commercial, arbitration and competition. He has acted for multinational corporations, multilateral agencies, financial institutions, private equity funds and Myanmar conglomerates. He has also advised government agencies and worked on various legislative reforms in Myanmar.He was previously the Chief Executive Officer of the Singapore International Arbitration Centre and Director at the Ministry of Trade and Industry Singapore. He is also a Fellow of the Chartered Institute of Arbitrators and the Singapore Institute of Arbitrators, and has been appointed to dispute panels for disputes between World Trade Organisation (“WTO”) member states.Minn graduated from the National University of Singapore with an LL.B. (Hons) in 1996. He was called to the Singapore Bar in 1997, and he obtained an LL.M. in 2001 from Columbia University as a Harlan Fiske Stone Scholar.

Allen & Gledhill (Myanmar) Co., Ltd.Junction City Tower, #18-01, Bogyoke Aung San RoadPabedan Township, YangonMyanmar

Tel: +95 1 925 3719Email: [email protected]: www.allenandgledhill.com

Allen & Gledhill (Myanmar) is the Myanmar office of one of South-east Asia’s leading and largest law firms, Allen & Gledhill. Based in Yangon, it is a fully licensed law firm which provides Myanmar law advice and legal opin-ions. The Myanmar office, staffed by local and foreign qualified lawyers, is supported by the network of Allen & Gledhill and combines sound local knowledge with best international practices to provide value added advice and unparalleled service to its clients. Allen & Gledhill (Myanmar) is led by Minn Naing Oo, a native of Myanmar. Minn has well-established connec-tions in the Myanmar business community and experience advising both foreign investors and local businesses on their projects in Myanmar. Operational since 2014, Allen & Gledhill (Myanmar) has gained an excellent reputation for advising local conglomerates and organisations as well as international clients across diversified industry sectors. Allen & Gledhill (Myanmar) regularly receives top tier rankings in leading publications.

www.allenandgledhill.com


Allen & Gledhill (Myanmar) Co., Ltd.

Lee Jun Yee’s principal area of practice is banking and finance. He also advises on financial and capital markets regulation. Jun Yee has been involved in assisting and advising various foreign banks in relation to the foreign banking licenses issued by the Central Bank of Myanmar and the setting up of their operations in Myanmar. He regularly assists offshore lenders, licensed foreign banks and local banks on a wide range of financing transactions in Myanmar, including domestic and cross-border bilateral and syndicated loans as well as project finance (including cross-border project finance for the telecommunications, powers and ports sectors). He also advises banks and other financial institutions on various compliance and regulatory matters. Jun Yee joined Allen & Gledhill (Myanmar) as Senior Foreign Associate in 2015 and has been a Director since 2017. Prior to joining Allen & Gledhill (Myanmar), he was with Rahmat Lim & Partners, the Malaysian associate firm of Allen & Gledhill, since 2011.

Allen & Gledhill (Myanmar) Co., Ltd.Junction City Tower, #18-01, Bogyoke Aung San RoadPabedan Township, YangonMyanmar

Tel: +95 1 925 3717 / 3718Email: [email protected] URL: www.allenandgledhill.com



Chapter 25226

Netherlands

BarentsKrans Jason van de Pol

Netherlands


Under Dutch law, a security right over registered assets (regis-tergoederen), such as real property (onroerende zaken), takes the form of a mortgage (hypotheek). A mortgage is created by a notarial deed (notariële akte) that is registered in the Dutch land register (Kadaster).

A security right over most other assets, such as movable assets (which are not also registered assets), bank accounts, receiva-bles and shares, commonly take the form of a right of pledge ( pandrecht). The procedure differs for each asset type and secu-rity right created. Below, we describe the most commonlyused security rights in a project financing, together with a brief description of each procedure.■ Apossessoryrightofpledge(vuistpandrecht) over movable

assets is created by bringing the relevant movable asset under the control (in de macht) of the pledgee or a third party agreed between the pledgor and the pledgee.

■ Anon-possessory rightofpledge (bezitloos pandrecht) over movable assets is created by a private deed (onderhandse akte)thatisregisteredwiththeDutchtaxauthoritiesoranotarial deed (notariële akte).

■ Adisclosedrightofpledge(openbaar pandrecht) over receiv-ables is created by a (notarial or private) deed and noti-fication of the right of pledge to the relevant debtor(s). The credit balance standing on a bank account should be pledged pursuant to a disclosed right of pledge, too.

■ Anundisclosedrightofpledge(stil pandrecht) over receiva-bles can be created by a private deed (onderhandse akte) that is registeredwith theDutch tax authoritiesor anotarialdeed (notariële akte).

■ Arightofpledgeoverregisteredshares(aandelen op naam) is created by a notarial deed (notariële akte).


Security over land can be created by way of a mortgage (hypotheek). Plant, machinery and equipment are considered part (bestand-deel )ofthelandtotheextenttheseareabidinglyunitedwiththeland (duurzaam met de grond verenigd ) and in that case they can be secured by a mortgage. It should, however, be noted that the legal ownership of network cables or pipelines, which are laid down underground, on the land or above the land for purposes oftransportofsolid,liquidorgaseoussubstancesofenergyordata, is not automatically with the owner of the land but, in prin-ciple, with the relevant authorised builder. It may, therefore, be necessary to transfer the ownership of such network (or any part thereof) first before a project party can create security over it.

1 Overview


Project finance remains very active in the Netherlands. However, we are seeing a shift in the type of projects developed. Where it used to be PPP projects that were most in play, these days it is the renewable projects (large and small scale) that are mostfrequentlydeveloped. This is theresultofastrongpushtowards renewables, amongst others, delivered by the (stable) StimulationofSustainableEnergyProduction(SDE+)scheme.Following the standardisation of certain project documents (such as deeds of superficies), developers are seeking further to lower transaction costs. One way of doing that is by ‘pooling’ multiple (usually small scale) renewable projects under one financing arrangement if these meet certain eligibility criteria. Finally, there is the recentdevelopmentof theCOVID-19 (or corona-virus) outbreak. Although the impact of this outbreak in general and on the project finance market in the Netherlands is not yet clear,itislikelythatCOVID-19willleadtodelaysinconstruc-tion and events of default. Given the typically thin capitalisation of project companies, the impact on the Dutch project finance market could be severe (without government interference).


TheA9Badhoevedorp-HolendrechtPPPProjectreachedfinan-cial close in December 2019. Furthermore, there have been several financings of offshore windfarms in the North Sea, such asBorselle3&4,ofatotalamountofseveralbillionEurosintherecent years.

2 Security


Dutchlawdoesnotexpresslyprovideforaninstrumentpursuantto which a general security right can be created over all assets of a security provider; the concept of a “floating charge” does not existintheNetherlands.Eachassettypemustbemortgagedorpledged using its own procedure. The mortgaging and pledging of several asset types can, however, be combined in one deed provided that the relevant procedures are correctly applied.

227BarentsKrans



Feesrelatingtotheexecutionofnotarialdeeds(forpurposeofa right of mortgage or right of pledge over registered shares) vary per civil law notary. Registration of a (non-disclosed (stil ) or non-possessory (bezitloos))rightofpledgewiththeDutchtaxauthorities is free of charge. Registration in the Dutch land register (Kadaster)ofarightofmortgagewillcostEUR144.50perrightofmortgage.NootherDutchregistrationtax,stampdutyoranyothersimilardocumentarytaxorduty(otherthancourt fees when enforcing via a court order) is payable in the Netherlands in respect of security rights.


Filing, notification and registration requirements relating tosecurity are fairly straightforward in the Netherlands and gener-ally do not take a long time. For instance, registration of a right of mortgage with the Dutch land register (Kadaster) can usually be effected by the relevant civil law notary electronically on the samedayastheexecutionofthedeedofmortgage.RegistrationwiththeDutchtaxauthoritiescanalsobecompletedatthesameday. Proof of registration (a time stamp on each deed presented) will be returned a few weeks later. The fees involved are nominal ornon-existent,assetoutinourresponsetoquestion2.6above.


Generally,Dutch law does not foresee a specific requirementfor the granting of security over real property (land), plant, machinery or equipment. However, special consentsmay berequiredinveryspecificcases.

3 Security Trustee


The Netherlands does not have its own legislation on trusts. However, the Netherlands is party to The Hague Convention on the Law Applicable to Trusts and their Recognition and there-fore generally recognises foreign trusts. The Netherlands also recognises the role of security agents or trustees to enforce the security and apply the proceeds from a security to the claims of the lenders. However, since it is generally assumed that a right of mortgage or right of pledge cannot be validly created under Dutch law in favour of a person who is not the creditor of secured liabilities, it is standard market practice to use a parallel debt for purpose of Dutch law security rights.

Plant,machineryorequipmentthatisnotpart(bestanddeel ) of the land can be created by way of a (possessory or non-possessory) right of pledge ( pandrecht).Pleaserefertoquestion2.1abovefora generic description of the procedure.


Yes. Under Dutch law, a pledgor can create an undisclosed right of pledge (stil pandrecht) over receivables, without notifying the relevantdebtors,providedthatsuchreceivablesareinexistenceat the moment of creation of the right of pledge or directly arise from a then existent legal relationship (reeds bestaande rechtsver-houding).Pleaserefertoquestion2.1aboveforagenericdescrip-tion of the procedure.


Yes. Under Dutch law, a pledgor can create a disclosed right of pledge (openbaar pandrecht) over cash deposited in bank accounts whicharemaintainedintheNetherlands.Pleaserefertoques-tion 2.1 above for a generic description of the procedure. The notificationprocedure,however, requiresparticularandtimelyattention as receivables in respect of cash deposited in bank accounts may generally not be pledged without the consent of the relevant account bank. In addition, Dutch account banks gener-ally have a (prior ranking) right of pledge and a right of set-off under the general banking conditions (algemene bankvoorwaarden) with respect to any cash deposited in bank accounts. Depending on the situation, account banks may be willing to waive their right of pledge and right of set-off in its entirety or agree to limit theuseofsuchrights(forexample,totheamountofcostsrelatedto maintaining the bank account with the account bank).


Yes. Under Dutch law, security can be created over shares in the capital of a Dutch company, such as a Dutch private limited liability company (besloten vennootschap met beperkte aansprakelijkheid ) and a Dutch public limited liability company (naamloze vennootschap).

Shares in a Dutch private limited liability company take the form of registered shares (aandelen op naam). No share certifi-cates may be issued with respect to such shares.

Shares in a Dutch public limited liability company can take the form of bearer shares (aandelen aan toonder) or registered shares (aandelen op naam). As from 1 January 2020, a change in law has come into effect pursuant to which the option to incorporate a Dutch public limited liability company with bearer shares has ceasedtoexist,pursuanttowhichexistingDutchpubliclimitedliability companies need to amend their articles of association so that such company has only issued registered shares. Holders of bearershareswillhaveuntil1January2021toexchangetheirbearershares intoregisteredshares. Until suchexchange, therelevant holder cannot invoke any rights attached to the shares in the relevant Dutch public limited liability company.Pleaserefertoquestion2.1aboveforagenericdescriptionof

the procedure to create security over registered shares (aandelen op naam).

228 Netherlands


payments (surseanse van betaling) or bankruptcy ( faillissement). However, a bankruptcy trusteemay require themortgageeorthe pledgee to enforce its security right within a reasonable period of time. If the mortgagee or the pledgee fails to do so, the bankruptcy trustee may sell the assets. The mortgagee or the pledgee has a statutory priority right on the proceeds, but will not be paid until the bankruptcy estate is distributed and will have to share in the bankruptcy costs. In addition, the Dutch courts may suspend enforcement of any security rights forthemaximumperiodoffourmonthsifthemortgagororthepledgor has been declared bankrupt ( failliet verklaard ) or has been granted a suspension of payment (surseance verleend ). A suspen-sion of enforcement does not prevent the pledgee from noti-fying the debtors and collecting the receivables pledged after such notification. However, during the suspension the pledgee may not take recourse against any amounts collected nor sell the receivables.


The validity of transactions entered into (such as the granting of securityrights)maybeaffectedbytheprovisionsofSection3:45of the Dutch Civil Code (Burgerlijk Wetboek)orSection42et seq. oftheDutchBankruptcyCode(Faillissementswet). These provi-sions give (future) creditors and the bankruptcy trustee the right to challenge the validity of certain transactions entered into by a person which are prejudicial to the right of recovery of its cred-itor(s),providedthatsuchpersonand,totheextentthetransac-tion is entered into for a consideration, the counterparty knew or should have known that the rights of other creditors would be prejudiced. If the transaction is entered into within the year before bankruptcy without there being an earlier obligation in place to enter into the relevant transaction, Dutch law provides for the rebuttal presumption that the relevant counterparty should have known that the rights of other creditors would be prejudiced with the entering into of the transaction. The Dutch tax authorities and employees are preferred by

statute (bevoorrecht) with respect to tax claims and employees’claims (wages, pensions, etc.), although such claims generally rank after any claim that is secured by a Dutch right of mort-gage or right of pledge. However, it should be noted that the Dutchtaxauthoritieshaveastatutorypriorityright(bodemvoor-recht)onequipmentandothermovableassetswhichareusedforfurnishing and located at the premises of the debtor of certain taxclaimsintheNetherlands(bodemzaken), which prevails over a right of pledge over such assets, even if the pledgor is not the debtorofthetaxclaim.TheholderofasecurityrightoversuchmovableassetsmustgivetheDutchtaxauthoritiesatleastfourweeks prior notice before it may enforce its rights over such movable assets (including collecting or selling such movable assets)toallowtheDutchtaxauthoritiestoexercisetheirstatu-tory priority right first.


Private-sector entities incorporated in the Netherlands are generally not excluded from bankruptcy proceedings in theNetherlands.


Pleaserefertoquestion3.1above.Itisstandardmarketpracticeto use a parallel debt structure for purpose of Dutch law secu-rity rights.



A Dutch law right of mortgage may be enforced if the debtor is in default (verzuim) in the performance of the secured liabil-ities by way of (i) a public auction, or (ii) a private sale author-ised by the competent Dutch court, all with due observance of the applicable provisions of Dutch law. Appropriation by the mortgagee is not allowed, but the mortgagee may bid on the assetsinapublicauctionand,ifaprivatesaleisrequestedandthe mortgagee submits a more favourable bid before the end of the hearing of such request, theDutch competent courtmayauthorise that the assets remain with the mortgagee.

A Dutch law right of pledge may be enforced if the debtor is in default (verzuim) in the performance of the secured liabili-ties by way of (i) a public auction, (ii) a private sale authorised by the competent Dutch court, (iii) a private sale agreed between the pledger and the pledgee after the pledgee has become enti-tled to enforce, or (iv) in respect of receivables only, by collec-tion of such receivables (after notice of the right of pledge to the relevant debtor), all with due observance of the applicable provi-sions of Dutch law. Appropriation by the pledgee is not allowed, but the pledgee may bid on the pledged assets in a public auction and the Dutch competent court may authorise that the pledged assets will remain with the pledgee for an amount determined by such court. If it concerns a financial collateral arrange-ment within the meaning of the Financial Collateral Directive (2002/47/EC), the pledgee may set off the secured liabilitiesagainst the value of the assets, provided that such set-off has been agreed between the pledgor and the pledgee.


Foreign entities or creditors are generally not subject to restrictions in the event of foreclosure on the projects and related companies.



Under Dutch law, a mortgagee and a pledgee may in principle enforce their security rights as if there were no suspension of

229BarentsKrans


in accordance with statutory requirements. In those cases,the directors are irrefutably deemed to have performed their duties improperly and a statutory presumption applies that the improper performance of duties was an important cause of the bankruptcy. The latter presumption may be rebutted if the directorscanprovethatthereareotherexternalcausesforthecompany’s bankruptcy.

Finally, directors may be liable towards the company’s cred-itors under tort law. In contrast to a number of other jurisdic-tions,directorsofadistressedDutchcompanyarenotexplicitlyobliged to file for insolvency at a given moment as a result of not meetingacertainliquidityorsolvencytest.However,adirectormay be personally liable towards the company’s creditors if such director enters into obligations on behalf of the company while knowing, or having sufficient reason to know, that the company would be unable to fulfil those obligations and that the company has insufficient assets against which the deprived creditor could take recourse.



No ownership restriction, controls and fees apply in general to foreign owners of a project company incorporated in the Netherlands.Authorisationisrequiredforinvestmentinspecificregulated areas including nuclear industry, banking, financial services and defence. Dutch and EU competition rules may impact ownership by companies with Dutch, EU or global busi-nessturnoversexceedingspecificthresholds.CompliancewithEU directives may impact an entity’s ability to invest in or own certain assets (such as the project company or assets held by the project company).

Capital gains or losses realised upon the disposal of shares in a Dutch project company are generally not subject to corporate incometaxintheNetherlands.Furthermore,theNetherlandsdoes not levy share transfer taxes. Dividends distributed byaDutch project company tax resident in theNetherlands aregenerally subject to 15% Dutch dividend withholding tax.DeductionsorexemptionsmaybeavailablepursuanttoDutchdomestic law or applicable treaties for the avoidance of double taxation.


The Netherlands has concluded many bilateral investment trea-tiesandtreatiesfortheavoidanceofdoubletaxation.


Pursuant to Dutch law, ownership is in principle inviolable. As ageneral rule,noonemaybeordered to relinquishhisprop-erty exceptwhere the common good so demands. Thismayonly take place in accordance with the Dutch Nationalisation Act (Onteigeningswet) and only against full compensation. This applies irrespective of the form of incorporation or type of investment.


As mentioned above, it is usually not necessary to start court proceedings with respect to the enforcement of Dutch law secu-rity rights. Summary proceedings (kort geding) may, however, be usefulifprovisionalmeasuresarerequiredinviewoftheinterestof the parties.


At this stage, there is no such formal insolvency proceeding available. However, a new formal Dutch insolvency procedure is presented as a bill which provides for court confirmation of an extrajudicialrestructuringplan,makingitbindingonallcred-itors and shareholders affected. It offers great flexibility byallowing for public and non-public variations of the restructuring proceedings,dependingonthedebtor’sCOMI.Itprovidesforcross-class cram-down, the restructuring of group company obligations through either one or more aligned proceedings, and the termination of onerous contracts. Supporting court meas-ures and a short timeframe allow for deal certainty and a swift restructuring process. The procedure is inspired by interna-tionalrestructuringpractices, inparticular theUKSchemeofArrangement and US Chapter 11 proceedings.


Directors are generally not personally liable under Dutch corpo-rate or insolvency law for the debts of a Dutch private limited liability company (besloten vennootschap met beperkte aansprakelijkheid ) or a Dutch public limited liability company (naamloze vennootschap). In general, director’s liability arises only if a serious personal fault can be attributed to him or her. Dutch corporate law allows directors wide discretion in how they fulfil their duties. Even if a director takes a decision that (in retrospect) proves to have negativeconsequencesforthecompanyand/oritscreditors,thestarting point remains that the director is not personally liable.

Dutch law distinguishes between liability to:■ thecompanyundercorporatelaw(i.e.internalliability);■ thebankruptcyestateunderinsolvencylaw;and■ the company’s creditors under tort law (i.e. external

liability). Internal liability may arise if the directors fail to fulfil their

duties. Only the company or its bankruptcy trustee (curator) can bringactionsonthisground.Violationsofcorporaterules(e.g.the company’s articles of association) are deemed to constitute improper management.

Upon bankruptcy, the bankruptcy trustee (curator) can hold directors personally liable for the estate’s deficit if they have performed their duties as directors in an inappropriate manner for a three-year period preceding the bankruptcy. The bank-ruptcy trustee (curator) must prove that the inappropriate fulfil-ment of the director’s duties was an important cause of the company’s bankruptcy. That said, statutory presumptions to lessen the bankruptcy trustee’s burden of proof are available if the board of directors has failed to conduct a proper admin-istration or properly deposit the company’s annual accounts

230 Netherlands


(Minister van Economische Zaken en Klimaat). The ownership of the minerals or geothermal energy is transferred to the licence hold-er(s) only by the production of the minerals or geothermal energy underaproduction licence issuedbytheMinisterofEconomicAffairs and Climate Policy (Minister van Economische Zaken en Klimaat). The same authority is authorised to approve the transfer, merger or demerger of such licences (either directly or indirectly). A foreign entity can be one of the holders of a production licence.

Pipelines and cablesThe ownership of a network of pipelines or cables resides with the employer of such network or its successor in title. Certain networks, such as electricity and gas transport and distribu-tion networks, can only be owned by network operators (netbe-heerders). These network operators are (indirectly) jointly owned by governmental bodies, such as municipalities (gemeenten). As such, not all networks of pipelines and cables can be owned by foreign entities.


TheDutch state charges taxes directly to the licence holder,suchassurfaceduties(offshoreexplorationlicenceorproduc-tion licence), royalties relating to the amount of minerals produced(productionlicence)andthe50%Dutchstateprofitshare (production licence). Furthermore, the Dutch state may derive value through its indirect participation in the production licence.Therearerestrictionsinplaceinrelationtotheextrac-tionandexploitationofminerals.Forexample,duetoseismo-logic activity in the northern parts of the Netherlands, the gas production ceiling applicable to the Groningen reservoir is up to 12 billion m3 for 2020.


Therearenogeneralrestrictionsonforeigncurrencyexchange.However, anti-money laundering rules applicable to all catego-ries of businesses could be relevant. Fees may be imposed by banks in the Netherlands when dealing in foreign currencies. Corporateincometaxmayariseonexchangegainsandlosses,dependingontheassetorliabilityinquestion.


The Netherlands is business-friendly. There are no general restrictions, controls, fees and/or taxes on foreign currencyexchange, whichmeans that repatriation of funds is generallystraightforward, subject to international sanctions that may be in place. There is no discrimination in favour of local companies andthereisnorequirementtoreinvestprofitsintheNetherlands.


Subject to sanctions and anti-money laundering rules, project companies in the Netherlands can establish and maintain



Theexactnatureoftheprojectwilldeterminewhichregulatorybodies and/or Dutch governmental agencies will have authority over the project. However, there are a number of bodies which have an overarching function in respect of the development related to typical project sectors.

With respect to offshore wind energy projects in the Dutch ExclusiveEconomicZoneandprojectsrelatingtotheexplora-tionandextractionofmineralsorgeothermalenergy,whetheronshoreoroffshoreintheDutchExclusiveEconomicZone,apermitisrequiredfromtheMinisterofEconomicAffairsandClimate Policy (Minister van Economische Zaken en Klimaat).Themajorityofonshoreprojectswillrequirespatialplanning

amendments and/or permits. Depending on the nature of the project, municipalities (gemeenten) or provinces ( provincies) of the relevant area are generally the competent authority.

Other governmental agencies and departments may be involved, depending on the nature of the project.


There is no general filing or registration duty for financing or project documents but certain security agreements requirenotarisation (i.e. deeds of mortgage and deeds of pledge of shares) and certain derivatives transactions need to be reported to the relevant Trade Repository. In addition, a right of mort-gage needs to be registered with the Dutch land register (Kadaster). Furthermore, a non-disclosed right of pledge (stil pandrecht) over receivables and a non-possessory right of pledge (bezitloos pandrecht)overmovableassetswhicharenotexecutedasanotarialdeedneedtobefiledwiththeDutchtaxauthorities.


LandThe ownership of land is not licensed in the Netherlands.

WaterIn order to impound or abstract groundwater and surface water, a permit must be obtained from either the relevant province ( provincie), the relevant water board (waterschap)or theMinisterof Infrastructure and Environment (Minister van Infrastructuur en Milieu). Foreign entities can have such licence.

Wind, wave, tidal or solar energyNolicencesarerequiredfortheuseofrenewableenergyresources,althoughtheusualplanningpermissionsandconsentsrequiredtocarryoutconstructionandengineeringworkswillberequired.

Minerals and geothermal energyPursuant to the Mining Act (Mijnbouwwet), it is prohibited to explorefororproducemineralsorgeothermalenergywithoutalicence from the MinisterofEconomicAffairsandClimatePolicy

231BarentsKrans



The EU procurement laws (as implemented in the Netherlands in the Dutch Public Procurement Act (Aanbestedingswet 2012)) are applicable to project companies developing public-sector projects if the public contracts fall within the scope of the rulesandexceedcertainfinancialthresholds.Therulesensurethat the award process is transparent, non-discriminatory and respects the principles of equal treatment. EU procurementlaws apply to contracts awarded by central governments, local authorities or other public-sector bodies.

8 Foreign Insurance


There are no restrictions on insurance policies over project assets provided by foreign insurance companies, unless the foreign insurance company is carrying out and effecting the insurance in the Netherlands. If the foreign insurance company is carrying out and effecting the insurance in the Netherlands, it requiresalicencefromtheDutchCentralBank(DNB)andhasto comply with the Financial Supervision Act (Wet op het financieel toezicht) rules, unless it can rely on European Union passporting rightsorotherexclusions.


Foreign banks, and other foreign creditors, can be named as co-insured on the insurance policies over project assets. In addition, any claims arising under such insurance policy can generally be pledged in favour of such foreign banks, and other foreign creditors.



The general position is that nationals of the European Union have the automatic right to work in the Netherlands by virtue of beinganEUcitizen.Mostcitizensofstateswhicharenotpartof the European Union need both a work permit and a resident permit to work in the Netherlands.



As the EU is a customs union, Dutch companies can buy most goodsfromotherMemberStateswithoutrestrictions–althoughVAT and excise duty will normally still apply. If a Dutchcompany imports from outside the EU, it may have to comply withimportlicensingrequirementsandwithcommoncustomstariffs that apply across the EU. Apart from the general restric-tion concerning materials that are deleterious to health and safety

onshore foreign currency accounts and/or offshore accounts in other jurisdictions.


There are no restrictions on dividend payments to non-Dutch resident parent companies, other than the general Dutch corpo-rate rules on the distribution of dividends. Pursuant to these general rules, the general meeting of a Dutch private limited liability company (besloten vennootschap met beperkte aansprakeli-jkheid ) is generally authorised to resolve on the distribution of dividends based on the company’s accounts prepared by the management board (unless otherwise provided in the articles of association). If the intended distribution is detrimental to the continuity of the company, to be determined on the basis of the outcome of a balance test and liquidity test, themanage-ment board may refuse to approve the intended distribution. The Dutch general corporate rules on distribution of dividends for a public limited liability company (naamloze vennootschap) are authorised by the general meeting of the company and based on the accounts prepared by the company. Distributions are limited to formal rules on capital preservation and creditor protection.


Proposed developments must be assessed to determine what effectstheymayhaveontheenvironment.Beforedevelopmentconsent is granted, projects likely to have significant effects on the environment by virtue of their nature, size or location must undergo an environmental impact assessment (EIA). The developerwillberequiredtosubmitanEIAtothecompetentauthority when applying for development consent. In addi-tion, where a proposed development is likely to have a signifi-cant effect on a designated European conservation site (Natura 2000 areas), an appropriate assessment (AA) must be carried out undertheHabitatsDirective,theBirdsDirectiveandtherele-vant national legislation transposing that Directive. Failure tocarryoutanadequateEIAorAAmayresult inaproposeddevelopment being challenged in the courts by way of judicial review.Dependingontheimpact,theMinistryofAgriculture,Nature and Food Quality (Ministerie van Landbouw, Natuur en Voedselkwaliteit) or the relevant province ( provincie) is the regu-lator tasked with the administration of the Dutch environmental licensing regime.

Projects involving certain specified industrial activities may requireanemissionslicenceundertheEUIndustrialEmissionsDirective and relevant national legislation transposing the Directive. The Dutch Emissions Authority (Nederlandse Emissieautoriteit) is the regulator tasked with the administration of this regime.

The Work Conditions Act (Arbeidsomstandighedenwet) and underlying legislation is the main piece of Dutch legisla-tion governing health and safety. It imposes an obligation on employers to provide and maintain a safe workplace for employees. The legislation is enforced by the Inspection SZW (Inspectie SZW ).

232 Netherlands


accordance with the provisions of Regulation (EC) No. 593/2008 of the Parliament and the Council on the Law Applicable to Contractual Obligations (Rome I), the selection of a foreign law will be valid and legally binding in the Netherlands, and Dutch courts would apply such law provided that the contents of the relevant provisions of the chosen laws do not contravene with the principles of Dutch public policy. The law chosen for security documents will, however, depend the applicable private international laws that apply.


Dutch law is usually chosen if the project solely or mainly concerns the Netherlands. If one of the project parties is the Dutch State or another Dutch public entity, the project agree-ment will almost always be governed by Dutch law.



A judgment rendered by a foreign court will generally be recog-nised and enforced in the Netherlands subject to: (i) the provi-sions of the EC Regulations on Jurisdiction and the Recognition andEnforcementofJudgmentsinCivilandCommercialMattersof 12 December 2012 (recast) or the EC Regulation creating a European Enforcement Order for uncontested claims of 21 April 2004,bothasamendedfromtimetotime;(ii)theprovisionsoftheConvention on Jurisdiction on the Recognition and Enforcement ofJudgmentsinCivilandCommercialMatters,Lugano2007;or(iii) the provisions of any (other) applicable bilateral or multilateral enforcement treaty to which the Netherlands is a party. Parties are generally not entitled to any immunity from suit from any legal proceedings in the Netherlands to enforce any project document or finance document or any liability or obligation of such party arising thereunder in respect of itself or its assets.



Contractual provisions requiring submission to internationalarbitration are generally valid and binding upon the parties to such contract under Dutch law. However, a Dutch competent court may assume jurisdiction in summary proceedings (kort geding)ifprovisionalmeasuresarerequiredinviewoftheinterestof the parties.

An arbitral award rendered by such court will in principle be recognised and enforced in the Netherlands pursuant to Section Vof theConventionon theRecognition andEnforcement ofForeign Arbitral Awards of New York, 1958, and Section 1075 of the Dutch Code of Civil Procedures, unless (a) the party against whom recognition or enforcement is sought proves that: (i) the parties to the submission to arbitration were under some inca-pacity or the submission to arbitration is invalid under the chosen law; (ii) the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or the arbitral proceedings or was otherwise unable to present his case; (iii) the award deals with a difference not contemplated by the submission to arbitration or it contains decisions on matters beyond the scope of the submission to arbitration; (iv) the arbitral

and the environment, there are no legal restrictions or controls whichapplyexclusivelytoimportingconstructionequipment.



11 Force Majeure


Force majeure is recognised in the Netherlands and applies auto-matically when a contract is governed by Dutch law. Parties canneverthelessincludeanexpressprovisionon force majeure if they wish to override or deviate from the statutory provisions. However, liability for non-performance attributable to a party’s ownfaultorgrossnegligencecanneverbeexcluded.



Under Dutch law, multiple forms of bribery are criminalised in the Dutch Criminal Code. A distinction is made between bribery of (foreign) public officials and private commercial bribery, depending on the capacity of the person who was bribed. Furthermore, a distinction is made between active bribery, which relates to the briber’s conduct, and passive bribery, which relates to thepersonwhowasbribed. Themaximumpenaltyfor bribery of public officials can lead to an imprisonment of up to 12 years or a fine of up to EUR 83,000 per violation with respecttoindividuals.Withrespecttolegalentities,amaximumof EUR 830,000 applies, unless the court deems such punish-mentimproperinwhichcaseafineofupto10%oftheannualturnoverofthecompanymayberuled.Maximumpenaltiesforprivate commercial bribery can lead up to an imprisonment of four years or a fine of up to EUR 83,000 per violation for indi-viduals.Withrespecttolegalentities,again,amaximumofEUR830,000 applies, unless the court deems such fine improper in whichcasea fineofup to10%of theannual turnoverof thecompany may be applied.

13 Applicable Law


Project agreements are typically governed by Dutch law. In purely private projects involving only private entities, the parties may however agree to apply a foreign law, which will apply subject to the compliance of the international private law rules of the countries to which each of the private entities belong.


Finance documentation is generally governed by Dutch law. However, English or New York law may be other options when the syndicate of lenders is not familiar with Dutch law. In

233BarentsKrans


18 Other Matters


Dutch, EU, US and UN sanctions can be an issue if a project or business might involve dealing with sanctioned persons, enti-ties or assets.


Therearenolegalrequirementsthatapplyexclusivelytoprojectcompanies seeking to issue bonds or similar capital markets instruments. Any project company seeking to issue debt instru-ments(securities)onEuronextAmsterdam(“Euronext”)mustcomply with Euronext Listing Rules (the “Listing Rules”)and the relevant regulatory rules applicable under the Dutch Financial Supervision Act (Wet op het financieel toezicht).TheFinancialMarketsAuthority(Autoriteit Financiële Markten)

is the body responsible for regulating all securities listed on the Euronext.TheListingRulescontain(i)therulesandregulationsfor listing debt securities, and (ii) the continuing obligations that apply to issuers and bondholders for the duration of the listing. The Listing Rules cover principles ranging from corporate governance and executive remuneration to accounting stand-ards and full disclosure of information to prospective investors.

19 Islamic Finance


DutchlawdoesnotexpresslyrecognisetheconceptsofIstina’a, Ijarah, Sukuk, Wakala and Murabaha. However, it is mainly considered that the structuring of a project financing under Dutch law may comply with Shari’ah law when using Dutch law instruments which are of similar in nature, such as:■ aninvestmenttitleforSukuk, according to which principal

andremunerationareindexedontheperformanceoftheassets owned by an issuer; and

■ the purchase of chattel property with deferred payment(including a positive margin) for Murabaha.


There is no relevant case law in the Netherlands regarding the application of Shari’ah law as regards the governing law of a contract or dispute. It remains also very unlikely that Dutch courts would accept its application, unless (i) the governing law of the relevant agreement is set as the law of a country with legis-lation based on Shari’ah law, and (ii) such legislation does not contradict with Dutch public policies.

tribunal that rendered the award was constituted in violation of the law of the country where the arbitration took place; or (v) the arbitral award has not yet become binding on the parties, or has been set aside or suspended by a competent authority or the country in which or under the law of which it was rendered, or (b) the Dutch court finds that (i) the subject matter of the dispute is not capable of settlement by arbitration under Dutch law, or (ii) recognition or enforcement of the arbitral award would be contrary to public policy (openbare orde) of the Netherlands.


Yes. The Netherlands has been a party to the New York Convention since 1958.


Most disputes are arbitrable under Dutch law. However, anarbitration agreement may not serve to determine legal conse-quencesthat,accordingtoDutchlaw,maynotbefreelydeter-mined by the parties.


There is no mandatory domestic arbitration procedure.



There have not been many calls for political risk protections in the Netherlands in recent years as policy has proven stable. However, it should be noted that the mandatory phasing out of coal-fired energy plants in the Netherlands has triggered a call for compensation.

17 Tax


Payments made by a Dutch project company in respect of interest payable on loans or proceeds of a claim under a guarantee or the proceeds of enforcing security may generally be made free fromwithholdingordeductionofanytaxesofwhatevernatureimposed, levied, withheld or assessed by the Netherlands.


There are noDutch tax incentives provided preferentially orspecifically to foreign investors or creditors.

234 Netherlands



Under Dutch law, the inclusion of an interest payment obliga-tion in a loan agreement generally does not affect its validity and/or enforceability.

235

Jason van de Pol has been active as an attorney at law in the (national and international) banking and finance practice since 2007. He advises financial institutions, other investors, borrowers and real property and project developers on documenting and structuring financing transactions.Jason has ample experience in assisting with the legal aspects of project finance, leveraged finance, real estate finance, direct lending, asset-based finance and financial restructurings. He is also regularly involved in large-scale renewable energy and other sustainability projects.

BarentsKransLange Voorhout 32514 EA The HagueNetherlands

Tel: +31 6 4623 3060Email: [email protected] URL: www.barentskrans.nl/en

BarentsKrans is an independent Dutch law firm with about 80 lawyers and civil-law notaries located in The Hague, the Netherlands. Excellent in dispute resolution and with a strong reputation for transactional advice, BarentsKrans is known for high-quality service. Our clients include listed and privately held multinational companies and financial institutions with commercial interests in the Netherlands. A unique combination of high quality advice, operational independence and knowledge of the Dutch legal and regulatory environment sets us apart among law firms in the Netherlands, and positions us to focus exclusively on helping clients achieve their commercial objectives.

www.barentskrans.nl/en


BarentsKrans



Chapter 26236

Nigeria

Abuka & Partners Sunday Edward, Esq.

Patrick C. Abuka

Nigeria


column equipment. The equipment, designed for crude oilprocessing, has a distilling capacity of 650,000 barrels per day and this will make it the world’s largest single-train refining facility.

Also, a transmission tower manufacturing project is taking off soon inKwale,DeltaState. TheDeltaStateGovernmenthas earmarked US$5m as seed capital for establishment of a transmissiontowermanufacturingplantinKwale,DeltaState.Methanol and transmission tower manufacturing companieshave indicated interest in setting up their plants in the state.

Finally, the just concluded 2020 Global Investment in Aviation Summit which took place in the United Arab Emirates (UAE) has drawn the attention of global investors to the Akwa-IbomStateaviationsector.Manyoftheinvestorshaveindicatedinterest in the completion and running of the Maintenance,Repair and Overhaul (MRO) facility of the Victor AttahInternational Airport, Uyo.

2 Security


Yes, it is possible to give asset security by means of a general securityagreement.AnexampleofthisisAllAssetsDebenturewhich is secured on a floating charge over the whole or a spec-ified part of a company’s undertaking and assets. Parties can also enter separate agreements on each of the assets. The deci-sion whether or not to use a general security agreement for each type of the asset is that of the parties. Procedurally, there is need toconductasearchontheassetinquestionattheappropriateRegistry so as to be sure that the asset is unencumbered. If the outcome of the search is satisfactory, parties can then put their understanding in an agreement form and have the agreement to be signed, sealed and delivered. Furthermore, if the security is by way of legal mortgage, the same has to be registered with the appropriate Registry.


Yes, security can be taken over real property such as land, plant, machineryandequipment. However,Nigeriansprefertotakesecurity over immovable property, such as landed property,

1 Overview


The main trend/significant development in the project finance market in Nigeria is the Public Private Partnership (PPP) initi-ative which is receiving more attention and is seen as the fastest way of resolving social and infrastructure deficit. The Federal and States Governments are calling for PPP collaboration in developing the country. TheKaduna StateGovernment hasrecentlysignedaMemorandumofUnderstanding(MOU)withOCIP of Morocco for the development of a fertilizer plant.Also,OndoStateGovernmenthassignedanMOUwithCrownRefinery and Petrol Chemical Ltd for the construction and management of a US$500m modular refinery which will have a capacity of 30,000 barrels per day of crude oil. A new deep-sea-port is under construction in the Lekki Free Trade Zone in Lagos and was established through a PPP. Nigeria is building the said seaport (and considering two additional facilities) to ease congestion at Apapa seaport which currently handles about 80%of all shipping traffic in the country. Furthermore, theNNPCisseekingtorealizetheAbuja-Kaduna-Kano(AKK)gaspipeline project and is open to partnership with state govern-ments and other stakeholders to ensure the fast delivery of the project.

Another trend/significant development in the project finance market in Nigeria is the priority given to the funding of Small andMediumEnterprises (SMEs) for thepurposeof ensuringeconomicgrowthanddevelopment.FollowingtheCentralBankofNigeria’srecentdirectiveonimprovedfundingforSMEs,theprivate sector has been collaborating with the public sector in providingtherequiredcapitalforthesustenanceofSmallandMediumEnterprises’growthinthecountry.


Apartfromtheprojectsmentionedinquestion1.1above,othersignificant project financing include: the Total Nigeria Plc’s Egina oil project which is producing about 150,000 barrels of oil per day; the N40bn facility upgrade of Transcorp HotelsPlc, Abuja; the US$9bn integrated refinery and petrochemical complexbeingconstructedbyDangoteGroupintheLekkiFreeZone; and Lagos to double Nigeria’s refining capacity and boost activities in the downstream sector. Dangote Refinery, on 1st December, 2019, received the world’s largest crude distillation

237Abuka & Partners


reflected in the company’s register of members. Where the share certificates have been dematerialised and their value has been lodged with the Central Securities System Limited (CSCS), notice of the assignment or charge must be given to CSCS. The cred-itor and debtor must avail CSCS with a copy of their agreement on the security. The debtor must also instruct CSCS (in writing) to place a lien on the shares and also to transfer the same to the creditor in the event of default on his part. The debtor must also give irrevocable instructions (in writing) to his stockbroker to process the transfer of the shares to the creditor in the event of his default and the said stockbroker must also write a letter of consent to carry out the debtor’s instructions.


Notarisation of security documents is optional and it attracts a minimal fee.■ Legalmortgage–AGIS(Abuja):registrationfee–1%of

the consideration; consent fee – N10,000; processing fee – N10,000; and counterpart copy – N2,000 each.

■ Legalmortgageat theLandRegistry,Lagos: registrationfee–0.5%oftheconsideration.

■ DeedofAssets–N100,000.VestingDeed–N100,000.■ Stampduty–0.375%ofthesecuredsum.■ RegistrationfeeforamortgageorchargeattheCAC–1%

of the secured sum.■ FilingofDeedofReleasebyapubliccompanyattheCAC

– N10,000. Filing of Deed of Release by a private company – N5,000.

■ Lienfeeonshares–0.25%ofthetotalmarketvalueoftheshares. Lien fee subsists for a two-year period from the date of the lien and is renewable from time to time.


Save for the stamping and registration of security documents at the Stamp Duties Office and the CAC (respectively), which may not take more than three weeks, the filing, notification or regis-trationrequirementsinrelationtosecurityoverdifferenttypesofassetsinvolveasignificantamountoftimeandexpense.


Yes, the consent of the Governor of the State where the property islocatedisrequired.Thereisalsoaneedtoregisterthemort-gage or charge with the appropriate Land Registry and to have the same stamped at the Stamp Duties Office of the FIRS. The document is to be registered with the appropriate Land Registry within sixmonths from the date thereof. Also, the particu-lars of the mortgage or charge must be registered with the CAC (within90days),wherethemortgagorisacompany.Anequi-tablemortgage, on theother hand, requires no formality andthere is no need to obtain the Governor’s consent thereto. See question2.2aboveformoredetails.

because the value of this property often appreciates. Security over real property is usually by way of a mortgage. A mortgage canbe legalorequitable. Theprocedurefora legalmortgageincludes the creation of the legal mortgage by deed, obtaining the consent of the Governor of the concerned State to the mortgage, registering the mortgage with the appropriate Land Registry and having the same be stamped at the Stamp Duties Office of the Federal Inland Revenue Service (FIRS). The document, in so far as it affects land, must be registered with theappropriateLandRegistrywithinsixmonthsfromthedatethereof, otherwise it will be void by law. The mortgagor must also register the particulars of the mortgage with the Corporate Affairs Commission (CAC) (within 90 days), where the mort-gagor is a company. Where there is a failure to register the same, themortgagemaybeheldvoidagainstanyliquidatorthatmaybeappointedtowindupthecompany.Anequitablemortgage,ontheotherhand,requiresnoformalityandthereisnoneedtoobtain the Governor’s consent thereto.


Yes, security can be taken over receivables and the common way of doing so is to assign the receivables to the creditor. In Nigeria, the debtor will normally be notified concerning the security. Whether the debtor is notified or not concerning the security, the chargor cannot become entitled to the receivables unless there is default on the part of the debtor.


Yes, security can be taken over cash deposited in bank accounts. This can be by way of account charge, the terms and condi-tions of which are normally contained in an agreement which istobedulyexecutedbyparties.Thetermsandconditionsforfinancing a project can include to have the debtor’s account domiciled with a given bank and made subject to a charge. The essence of account charge is to assure the creditor of the safety of the receivables and to guarantee the return of his capital and interest thereon.


Yes, security can be taken over shares in companies incorporated in Nigeria, although banks are not allowed to grant any advances, bonuses or credit facilities against the security of their own shares. Only the shares of public companies are in certificated form, although there is nothing preventing private companies from issuing certificates in relation to their issued shares. It must be noted, however, that only the shares of public liability companies registeredinNigeriaandquotedontheNigerianStockExchangeare acceptable as security for a loan. The shares of private limited liability companies and public limited liability companies not quotedontheNigerianStockExchangearenotacceptablebecausetheyarenotfreelytransferableontheStockExchange.

The procedure for using shares as security or collateral for a loan includes creating the said security by way of a mortgage, an assignment or a charge, surrendering the original share certificate to the creditor, and having the mortgage, assignment or charge

238 Nigeria


ofhisrightasasecuredpartyoverthesecurity.Section413oftheCompaniesandAlliedMattersAct(CAMA),Cap.C20,Lawsof theFederationofNigeria (LFN)2004, rendersvoid (unlessthe court orders otherwise) the disposition of the property of a companythatisunderwinding-upbythecourt.Section414ofCAMAfurtherprovidesthatwhereacompanyisbeingwoundupbythecourt,anyattachment,sequestration,distressorexecu-tion put in force against the estate or effects of the company after the commencement of the winding-up shall be void.


Firstandforemost,itisclearfromsection493ofCAMAthatinthe winding-up of an insolvent company registered in Nigeria, the same rules prevail with regard to the respective rights of secured and unsecured creditors and to debts provable and so on as are in force for the time being under the law of bankruptcy in Nigeria with respect to estates of the person adjudged bank-rupt; and all persons who, in any such case, would be entitled to prove for and receive dividends out of the assets of the company are at liberty to come in under the winding-up and make such claims against the company as they respectively are entitled to.Section37oftheBankruptcyAct1979makesaprovisionfor

preferential claims in the case of apprenticeship, meaning that an apprentice is a preferential creditor in the winding-up of an insolvent company registered in Nigeria.Furthermore,bysection495ofCAMA,preferenceperiods,

drawback rights and other acts relating to the security, such asmortgage,executionandsoon,whichwould, ifdonebyoragainst an individual, be deemed in his bankruptcy a fraudulent preference, shall, if made or done by or against a company, be deemed, in the event of its being wound-up, a fraudulent pref-erence of its creditors and be invalid accordingly. Suffice to say that there are no preference periods and the only known claw-back or preferential creditors’ right with respect to the security is thepreferentialclaimsoftheapprentice.Section494ofCAMAonly makes provisions for preferential payments in priority to all other debts of a company in winding-up. These debts include: a) all local rates and charges due from the company at the

relevant date, and those having become due and payable within 12 months before that date; and all pay-as-you-earn tax deductions, assessed taxes, land tax, propertyor income tax assessedonordue from the companyupto thenextannualdayofassessmentbefore the relevantdate; and in the case of pay-as-you-earn tax deductionsnotexceedingdeductionsmadeinrespectofoneyearofassessmentand,inanyothercase,notexceedingthewholeone year’s assessment;

b) deductions under the Nigeria Social Insurance Trust Fund Act;

c) all wages or salary of any clerk or servant in respect of services rendered to the company; and

d) all wages of any workman or labourer, whether payable for time or for a piece of work, in respect of services rendered to the company.


Entities created by legislation, such as the NNPC and the NigerianPortsAuthority(NPA),areexcludedfrombankruptcy

3 Security Trustee


Yes. Nigerian law will allow the security trustee or agent to enforce the security and to apply the proceeds from the security to the claims of all the lenders, provided the security trustee or agent follows due process and acts within the confines of the law.





Mortgagors, in a bid to stop mortgagees from enforcing thesecurity or auctioning the same, always institute actions against the mortgagees for a declaration that the mortgagors do not owe the mortgagees up to the amount being claimed by the latter. In a situation of this sort, the position of the law is that the action is lacking in merit and is without any reasonable cause. Even though mortgagors who defaulted in the settlement of their mortgage debts may not be entitled by law to restrain the mortgageesfromexercisingtheirrightofsale,themortgagors,by their resort to litigation, may still succeed in delaying the enforcement of the security knowing full well that enforcement cannot be carried out when there is a pending suit.


Therearenorestrictionsexceptwhereacourtmakesanorderto stop enforcement.



Once a bankruptcy proceeding is initiated (whether by the debtor or the creditor), the project lender has to suspend the enforcement

239Abuka & Partners




Yes. According to section 54 of CAMA, a foreign companyintendingtocarryonbusinessinNigeria,exceptwheregrantedanexemption,musttakestepstoobtainincorporationasasepa-rate entity in Nigeria and until so incorporated, the foreign company will not have a place of business in Nigeria for any purpose other than for the receipt of notice and other docu-ments as matters preliminary to incorporation.

Also, from the provisions of sections 17 and 18 of the Nigerian Investment Promotion Act, a non-Nigerian may invest and participateintheoperationofanyenterpriseinNigeriaexceptpetroleum enterprise and enterprises in the “Negative List” (production of arms and ammunition and service uniforms, production and dealing in drugs and so on).

Furthermore, the Nigerian law, the National Office for TechnologyAcquisitionandPromotionAct, requires registra-tionwith theNationalOfficeforTechnologyAcquisitionandPromotion of all contracts and agreements for the transfer of foreign technology to Nigerian partners. The contract or agree-ment is registrable if its purpose or intent is, in the opinion of the National Office, wholly for, partially for or in connection with any of the following purposes:a) the use of trademarks;b) the right to use patented inventions;c) thesupplyoftechnicalexpertiseintheformoftheprepa-

ration of plans, diagrams, operating manuals or any other form of technical assistance of any description whatsoever;

d) the supply of basic or detailed engineering;e) the supply of machinery and plants; andf) the provision of operating staff or managerial assistance

and the training of personnel.The taxespayableby a foreign company include companies

incometax,withholdingtax,value-addedtaxandeducationtax.Also note that stamp duties are payable to governments on

instruments such as project documents. Stamp duties are to be paid to Federal or State Inland Revenue Service (as the case may be)torendertheinstrumentsadmissibleinlaw.Section22(4)oftheStampDutiesAct,Cap.S8,LFN2004.


We are not aware of any bilateral investment treaties that provide protection from restriction. However, section 54 (3) (b) ofCAMAanticipatesthatsuchtreatieswillcomeintoforcewhenit provides thus: “Nothing in this section shall affect the status ofanyforeigncompaniesexemptedunderanytreatytowhichNigeria is party.”


By section 25 (1) of the Nigerian Investment PromotionCommission Act Cap. N117, LFN 2004, no government inNigeriaisallowedtonationalizeorexpropriateprojectcompa-nies. Project companies, from section 25 (2) of the Act, are only

proceedings. The applicable legislation is the legislation that created such entities and other legislation that may be passed by the National Assembly in relation to the entities. Other appli-cable laws include the judgments of courts of the competent jurisdiction.


Even though schemes of arrangement and compromise under sections 538 and 539 of CAMA and sections 119–150 of theInvestments and Securities Act are available to a creditor in an enforcement bid, the creditor cannot seize the assets of the project company if the latter chooses not to be bound by the scheme of arrangement or compromise agreed upon. In that situation, resorting to litigation and/or court proceedings is the only way out for the creditor. Seizing the assets of the project company amounts to self-help which is condemnable by law.


Apart from the formal insolvency proceedings and/or schemes of arrangement and compromise in sections 18 and 19 of the BankruptcyAct,sections538and539ofCAMAandsections119–150 of the Investments and Securities Act that are avail-able to a project company to achieve a restructuring of its debts and/or cramdown of dissenting creditors, resorting to litigation, especially by way of originating summons or originating applica-tion, is another available option for a project company.


A company is a separate legal entity distinct from its directors and the latter, generally, cannot be held liable if the company continues to trade whilst in financial difficulties. However, from section 506 ofCAMA, if the company is in the courseof winding-up and it appears that any part of its business has been carried on in a reckless manner or with intent to defraud creditors for any fraudulent purpose, the court, on the appli-cation of theOfficialReceiver, or the liquidator or any cred-itor or contributory of the company, may, if it thinks proper to do so, declare that any persons, including the directors, who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability for all or any of the debts or other liabili-ties of the company.Also,fromsection503ofCAMA,officers, includingdirec-

tors, of a company being wound up, may be held guilty if, with intent to defraud or deceive any person, they destroy, muti-late, alter or falsify any books, papers or securities belonging to the company. Furthermore, by section 505 of CAMA,where it is shown that proper books of accounts were not kept by a company throughout the period of two years immediately preceding the commencement of the company’s winding-up or the period between the incorporation of the company and the commencement of the winding-up, whichever is shorter, the directors or other officers of the company may be held guilty of an offence and be liable upon conviction.

240 Nigeria


for the transfer of foreign technology to Nigerian partners. See questions2.2,2.5and2.6aboveforfurtherdetails.

Also, a holder of a statutory right of occupancy who wishes to alienate his or her right of occupancy or any part thereof by assignment, mortgage, transfer of possession, sublease or otherwise howsoever is required toobtain the consent of theGovernor before doing so. See section 22 of the Land Use Act.


Yes,alicenceisrequired.By section1of theLandUseAct 1978, all land comprised

in the territory of each state of the Federation is vested in the Governor of that state and such land is to be held in trust and administered for the use and common benefit of all Nigerians. The Governor of each state of the Federation has the power to grant Statutory Right of Occupancy to any person who is inter-ested in being allocated land in the urban area of the state and such Statutory Right of Occupancy is evidenced by a Certificate of Occupancy duly issued by the Governor.

Concerning natural resources and/or pipeline, from section 6 of theMinerals andNaturalResourcesActCap.M12, LFN2004,nopersonisallowedtoprospectorconductminingoper-ationswithoutholdingalicenceorleasegrantedbytheMinister.Also, the Department of Petroleum Resources is empowered to grant licence to construct or operate a refinery. See section 2 of PetroleumAct,Cap.P10,LFN,2004.

The Nigerian National Petroleum Corporation is to grant and issue permits and licence for all activities connected with petro-leum exploration, refinery, storage, marketing, transportationand distribution. See section 10 NNPC Act, Cap.N123, LFN 2004.

Furthermore, many states in the Federation have laws that prescribe that written approval of the Governor must be obtainedbyaforeignerbeforeacquiringaninterestorrightinor over land situate and lying in the state.As to thequestionwhether sucha licencecanbeheldbya

foreign entity, a licence can be held by a foreign entity if the foreign entity is incorporated in Nigeria.


Royalties are payable on the extradition or export of naturalresources. Apart from the taxes listed in question 6.1 above,otherpayable taxes and fees includepetroleumprofit tax andlicencefeesundertheMineralsandNaturalResourcesAct.


By section 10 of the Foreign Exchange (Monitoring andMiscellaneousProvisions)Act,Cap.F34,LFN2004,thetrans-actionsinrespectofwhichforeigncurrencyisbeingexchangedmustbeaneligibletransactionthatisadequatelysupportedbyappropriate documentation. Investment in any enterprise with foreign currency or capital imported into Nigeria is done through an Authorised Dealer and is to be converted into Naira in the AutonomousForeignExchangeMarketpursuanttosection15(1) of the Foreign Exchange (Monitoring AndMiscellaneous

tobeacquiredif theiracquisitionis inthenational interestorfor a public purpose and under a law which makes provision for:a) paymentoffairandadequatecompensation;andb) a right of access to the courts for the determination of the

investor’s interest or right and the amount of compensa-tion to which he is entitled.

Section 25 (3) of the Act provides further as follows: “Any compensation payable under this section shall be paid without undue delay, and authorization for its repatriation in convertible currency shall where applicable, be issued.”

There is no investment that is specially protected.



The relevant government agencies and departments with authority over projects in the typical project sectors include:a) Nigerian Communications Commission: granting licences

to companies to operate telecommunication services. Section 10 of the Nigerian Communication Commission Act,Cap.N97,LFN2004.

b) Department of Petroleum Resources: granting licences to construct or operate refineries. Section 2 of the Petroleum Act,Cap.P10,LFN2004.

c) NNPC: granting and issuing permits and licences for all activities connected with petroleum exploration, refinery,storage, marketing, transportation and distribution. Section 10oftheNNPCAct,Cap.N123,LFN2004.

d) Nigerian Electricity Regulatory Commission: granting licences for electricity generating, electricity transmission, system operation, electricity distribution, or trading in electricity in Nigeria. Section 62 of the Electricity Power Sector Reform Act, Cap.E7, LFN 2010.

e) Infrastructure Concession Regulatory Commission: ensuringtheefficientexecutionofanyconcessionagree-ment or contract entered into by the government, amongst other things. Section 20 of the Infrastructure Concession Regulatory Commission (Establishment) Act, Cap.I25A, LFN 2010.

f ) The National Council on Public Procurement and the BureauofPublicProcurementaretheregulatoryauthori-ties responsible for the monitoring and oversight of public procurement. These authorities harmonize the existinggovernment policies and practices by regulating, setting standards and developing the legal framework and profes-sional capacity for public procurement in Nigeria. Sections 1–3ofPublicProcurementActCap.P44,LFN2010.


Yes. The Infrastructure Concession Regulatory Commission, under the Infrastructure Concession Regulatory Commission (Establishment)Act,isrequiredtotakecustodyofeveryconces-sion agreement made under the Act and monitor compliance with the terms and conditions of such agreement. Also the NationalOfficeforTechnologyAcquisitionAndPromotionActrequires registrationwith theNationalOffice forTechnologyAcquisition And Promotion, of all contracts and agreements

241Abuka & Partners



Yes. The laws include the Federal Environmental Protection Agency (FEPA) Act, Cap.F10, LFN 2004 (which prohibits,amongstotherthings,thedischargeofharmfulquantitiesofanyhazardous substance into the air or upon the land and the waters of Nigeria or at the adjourning shorelines), the Environmental ImpactAssessmentAct,Cap.E12,LFN2004(whichprohibitsthe public or private sector from undertaking or embarking on or authorising projects or activities without prior consid-eration, at an early stage, of their environmental effects and which requires the public or private sector to undertake anenvironmental impact assessment of any proposed project or activity that is likely to significantly affect the environment), theFactoriesAct,Cap.F1,LFN2004(whichrequiresexistingand new factories to register with the Director of Factories and makes provisions for the cleanliness and safety of factories, amongst other things), the Harmful Waste (Special Criminal Provisions, etc.) Act, Cap.H1, LFN 2004 (which prohibits allactivities relating to the purchase, sale, importation, transit, transportation, deposit and storage of harmful wastes), the Standards Organization of Nigeria Act, Cap.S9, LFN 2004(which established the Standards Organization of Nigeria whose functions include to designate, establish and approve standards in respect of metrology, materials, commodities, structures and processes for the certification of products in commerce and industry throughout Nigeria and to enter any building or prem-ises to obtain information on such matters that may be specified by the organization), the National Environmental Standards and Regulations Enforcement Agency (Establishment) Act 2007 (which established the National Environmental Standards and Regulations Enforcement Agency whose functions include enforcing compliance with laws, guidelines, policies and stand-ards on environmental matters, amongst other things).

All the above Acts are Federal laws that are being admin-istered by relevant government agencies including the FEPA, the National Environmental Standards and Regulations Enforcement Agency and the Standards Organization of Nigeria. The violation of any of the provisions of the above ActsisanoffencepunishableundertheActinquestion.

States and local government councils in Nigeria, with the responsibility of protecting and developing their environments, have also made laws for the effective control of the disposal oftoxicandhazardouswastes intheirenvironments,amongstotherthings.AnexampleofStatelawsincludetheLagosStateEnvironmental Protection Agency (LASEPA) Law, Cap.L27, Laws of Lagos State of Nigeria 2015 which is being adminis-tered by the LASEPA.


The specific legal/statutory framework for procurement by project companies are the Public Procurement Act, Cap. P44, LFN, 2010 and Infrastructure Concession RegulatoryCommission Act, Cap.I25A, LFN, 2010. The provisions of the Public Procurement Act apply to all procurement of goods, works and services carried out by the federal government of Nigeria and all procurements entities. The provisions also apply

Provisions) Act. Transactions in the Autonomous Foreign Exchange Market are normally conducted in any convertibleforeign currency and also through the usual money market instruments, such as foreign bank notes, travellers’ cheques,bank drafts and mail or telegraphic transfers. The Authorised Dealerisbylawrequiredtoissueacertificateofcapitalimpor-tationtotheinvestorwithin24hoursoftheforeigncurrencyorcapital importation. The Authorised Dealer is also, by section 15(2)oftheAct,requiredtomake(within48hoursthereafter)returnstotheCentralBankofNigeriagivingsuchinformationastheCentralBankmayfromtimetotimerequire.TheCentralBankofNigeria,bysection15(3)oftheAct,is

also required to furnish to theMinister, on a quarterly basis,detailedreportsonthereturnsfurnishedtotheCentralBankforinformation and statistical purposes only.By section 15 (4) of the Act, foreign currency or capital

imported into Nigeria and invested in any enterprise is guar-anteed: unconditional transferability of the funds through an Authorised Dealer in freely convertible currency, relating to dividendsorprofits(netoftaxes)attributabletotheinvestment;payments in respect of a loan servicing where a foreign loan has beenobtained;andtheremittanceofproceeds(netofalltaxes)andotherobligationsintheeventofsaleorliquidationoftheenterprise or any interest attributable to the investment.


Remittance and repatriation of investment returns and loan payments are guaranteed unconditional transferability. Taxesare not payable on a loan. They are payable on the profits of companies and on dividends and interests on loans.


Yes.However,projectcompanies,bysection2(1)oftheMoneyLaundering (Prohibition) Act, 2011, must report (to the Central BankofNigeriaandSecuritiesandExchangeCommission)anytransfer to or from a foreign country of funds or securities of a sumexceedingUS$10,000oritsequivalent.


Apart from the fact that withholding tax is payable on divi-dends, there is generally no restriction on the payment of divi-dends from a project company to its parent company, whether or not the parent company is incorporated in Nigeria. However, where there are reasonable grounds for believing that the project company is or would be after the payment, unable to pay its liabilities as they become due, the project company will not declare or pay dividends to its parent company. See section 381 ofCAMA.

242 Nigeria


A project company that is interested in employing foreign workers requires an expatriate quota which indicates themaximumnumberofexpatriatestotheemployedbythecompanyand specifies the duration of their stay. Once the approval is granted, the employee must obtain a Combined ExpatriateResidence Permit and Aliens Card, which is the authorization thatenablesanexpatriatetoresideandworkinNigeria.

In Nigeria, there are also restrictions for foreign employees intheareaofentryrequirementsand/orconditions.Aforeignemployee is required to apply to the appropriate diplomaticNigerianMissionoranyotherappropriateauthorityestablishedfor entry permit in his country. See section 9 (1) (c) of the Act.



Therearenorestrictionsfortheimportationofprojectequip-mentorequipmentusedbyconstructioncontractors,providedtheequipmentisofstandardquality.Importdutiesare,however,payableonsuchprojectequipment.


The payable import duties are as specified in the Nigerian Customs Service’s common tariff. The exception is thatmachinery,equipmentorsparepartsimportedintoNigeriabyanindustrialestablishmentengagedintheexploration,processingor power generation through the utilization of Nigerian gas, for itsoperation,areexemptedfromthepayablecustomsduties.

11 Force Majeure


Yes, they are available and enforceable.



There are rules in different statutes prohibiting corrupt busi-ness practices and bribery. The statutes include the Criminal Code and the Penal Code (that are applicable to the Southern and Northern Regions of Nigeria respectively) (Sections 98–116 of the Criminal Code and Sections 115–122 of the Penal Code respectively), the Recovery of Public Property (Special Provision) Act(Cap.R4,LFN2004),theEconomicandFinancialCrimesCommission (Establishment) Act (Cap.E1, LFN 2004), theConstitution of the Federal Republic of Nigeria 1999 and the Corrupt Practices and Other Related Offences Act 2000.

The Corrupt Practices and Other Related Offences Act has a wider focus when compared to other enactments before it. The Act prohibits corruption both in public and private organ-isations. The Act also condemns corrupt practices of any sort including gratification by an official, corrupt offers to Public

to all other entities which derive at least 35 per cent of the funds appropriated or proposed to be appropriated for any type of procurement distributed in the Act from the Federation share of Consolidated Revenue Fund. See section 15 of the Public Procurement Act.

8 Foreign Insurance


In Nigeria, a person cannot conduct insurance or reinsurance business with a foreign insurer or reinsurer in respect of any life, asset, interest or other properties in Nigerian businesses clas-sified as domestic insurance unless with a company registered under the Insurance Act (Section 72 of the Insurance Act, Cap.I17, LFN 2010).

From section 72 (2) of the Act, domestic insurance or rein-surance business includes fire insurance and reinsurance busi-ness, motor insurance and reinsurance business, liability insur-ance and reinsurance business, life insurance and reinsurance business, accident insurance and reinsurance business and other insurance and reinsurance business as the Commission may from time to time prescribe. The National Insurance Commission may, however, in writing permit a person to effect such insurance or reinsurance with an insurer or reinsurer regis-tered outside Nigeria where in any particular circumstances the personsatisfies theCommissionthatbyreasonofexceptionalnature of the risk in or emanating from Nigeria or any other exceptionalcircumstances,suchriskcannotbeplacedwithaninsurerorreinsurerregisteredundertheAct(Section72(4)ofthe Act).


Yes, they are payable.



Yes. A foreign employee, by section 8 (1) (a) of the Immigration Act,Cap.I1,LFN2004, isprohibited fromaccepting employ-ment (not being employment with the federal government or a state government) without the consent in writing of the Director of Immigration. A non-Nigerian cannot also, on his own account or in partnership with another person, practise a profes-sion or establish or take over any trade or business whatsoever or register or take-over any company with limited liability for anysuchpurpose,withouttheconsentinwritingoftheMinistergiven on such conditions as to the locality of operations and persons to be employed by or on behalf of such person, as the Ministermayprescribe. Section 8 (1) (b) of the Act.Before entering Nigeria for any of the aforementioned

purposes, the foreign employee in question must producethe required consent to an immigration officer and failure toproducetherequiredconsentwillamounttoanoffencewhich,upon conviction, can lead to the deportation of the non-Nige-rian as a prohibited immigrant. See section 8 (2) of the Act.

243Abuka & Partners



There are none.



Yes. Companies involved in large capital projects, especially in the areas of oil and gas and infrastructure finance, always insist on signing political risk protection agreements with governments.

17 Tax


Bysection78oftheCompaniesIncomeTaxAct,Cap.21,LFN2004, a companymaking payment on any interest which hasfallen due is required to deduct or withhold 10% therefromat the date when payment is made or credited, whichever first occurs. Nigeria has treaty agreements with about eight coun-trieswhichincludetheUK,NorthernIreland,Canada,Franceand Belgium. These countries are granted a reduced rate ofwithholdingtaxfixedat7.5%.Withholdingtaxisnotpayableon the proceeds of a claim under a guarantee or the proceeds from the enforcement of security.


The tax incentives or other incentives provided preferentiallyforforeigninvestorsorcreditorsincludethreeyearsoftaxrelieffor apioneer company and the reliefperiodmaybe extendedby the President for another two years. See section 10 of the IndustrialDevelopment(IncomeTaxRelief )Act,Cap.I7,LFN2004andtaxexemptionforthefirstthreeyearsofanewcompa-ny’s operation in the mining of solid minerals. The period may beextendedbytheMinisterforonefurtherperiodoftwoyears(section22(2)oftheMineralsandMiningAct,Cap.M12,LFN2004andsection36oftheCompaniesIncomeTaxAct).Thefollowingprofitsareexemptedfromtax:

i) profits of a company other than a Nigerian company brought into or received in Nigeria;

ii) dividend, interest, rent, or royalty derived by a company from a country outside Nigeria and brought into Nigeria through government-approved channels, for example,throughtheCentralBankofNigeriaandsoon;

iii) the interest on deposit accounts of a foreign non-resident company – provided that the deposits into the account are transfers wholly of foreign currencies to Nigeria on or after 1 January 1990 through government-approved channels; and

iv) the interest on foreign currency domiciliary accounts in Nigeria accruing on or after 1 January 1990 (section 23 of TaxReliefsundertheCompaniesIncomeTaxAct).

Officers, corrupt demands by persons, fraudulent acquisitionof property, fraudulent receipt of property, bribery of Public Officers and so on (sections 8–13).

The applicable criminal penalties are stated in each of the Acts. The civil penalties will depend on the reliefs that will be granted by the court in the civil suit brought before it.

13 Applicable Law


Project agreements, being agreements entered into or to be performed in Nigeria, are typically governed by the Nigerian law of contract which is founded on the Common Law of England, DoctrineofEquityandStatutesofGeneral.Projectagreementsare also typically governed by other domestic laws including local statutes and judicial precedents.


Financing agreements are also governed by the Nigerian law of contract and other relevant statutory laws, including the Finance Act 2020. Parties can also agree to make foreign law appli-cable to their matter but they cannot, by their contract, deny the Nigerian courts of jurisdiction over the matter.


Mattersrelatingtoland,landmortgageandotherformsofsecu-rities are typically governed by domestic law.



Yes, it is binding and enforceable.



Yes, they are recognised.


Nigeria is a contracting state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and International Centre for Settlement of Investment Dispute Convention.


Election petition disputes, matrimonial disputes and criminal matters are some of the disputes or matters that are not arbi-trable under Nigerian law.

244 Nigeria


19 Islamic Finance


The instruments are all forms of contracts in Islamic finance. An Istina’a is a contract that allows a party to undertake to produce an asset according to certain agreed specifications at aspecificpriceandforafixeddateofdelivery.Ijarah allows a party to use or take possession of an asset for a specified period inreturnforaconsideration,forexample,atenancyagreement.Wakala is a contract of agency or delegated authority where the principal (muwakkil ) appoints an agent (wakeel ) to carry out a specific task on its behalf. With Murabaha, the seller provides the cost and profit margin of an asset. It is an acceptable form of credit sale agreement, even though it is not an interest-bearing loan. The instruments are not commonly mentioned because Islamic project finance is not a common practice in Nigeria.


Shari’ah law will become the governing law if the parties agree to make it as such. We are not aware of any cases on the appli-cability of Shari’ah law or the conflict between Shari’ah law and local law relevant to the finance sector.


An interest payment obligation is unknown to Islamic financing in Nigeria.

Duty Drawback/Suspension SchemeThe scheme provides for the refund of import duties on:i) Raw materials including packaging materials used in

manufacturinggoodsthatareexported–100%ofimportduty.

ii) Paper used for the manufacture of goods supplied for educational purposes to educational establishments recog-nized by the Federal Adviser on Education – 100% ofimport duty.

iii) Goods exported in the same state as that inwhich theywere imported.

iv) Export incentives under the Export (Incentives andMiscellaneousProvisions)Act,Cap.EI9,LFN2004.

Thetaxespayablebyaforeigninvestmentincludecompaniesincometax,withholdingtax,value-addedtaxandeducationtax.Taxisnotpayableonaloan.

18 Other Matters


Equity investorsor lenders shoulddoabackgroundcheckonthe other party to the project finance and ensure that all the fundamental terms of the contract have been agreed upon and put into writing.


Project companies that are interested in issuing bonds or similar capital market instruments must be registered as public compa-nies and must obtain approval from the necessary authorities (including SEC) to do so.

245

Patrick C. Abuka is the Founding and Managing Partner at Abuka & Partners, Legal Practitioners. He was admitted in 1974 as a Solicitor and Advocate of the Supreme Court of Nigeria. Education: the University of Ife; the University of Lagos; and the Nigerian Law School (LL.B. Hons., 1973; B.L., 1974; M.B.A., 1975; and LL.M., 2000). Lecturer, MBA Class, University of Lagos, 1976–1978. Member: Nigerian Bar Association; International Bar Association; American Bar Association (International Associate Member); The Lagos Chamber of Commerce; Nigerian-American Chamber of Commerce, Hon. Life Vice-President, Nigerian-British Chamber of Commerce; and Nigerian-German Business Association.

Abuka & Partners10th Floor, Western House8/10 Broad StreetLagosNigeria

Tel: +234 803 305 4371Email: [email protected]: www.abukapartners.com

Abuka & Partners emerged from the restructuring of the law firm popu-larly known as Abuka, Ajegbo, Ilogu & Nwaogu which was founded in Lagos on 28th March, 1979 by the four named partners who had practised individually and separately until that date. Abuka & Partners maintains offices in Lagos and Abuja. The Abuja office was set up in the Federal Capital Territory in 1987 initially with a view to effectively providing the complex and sophisticated legal services required by a major multina-tional corporate client which has businesses in 109 countries around the world. The firm’s areas of practice include Commercial and Corporate Law, International Joint Ventures, Foreign Direct Investments, Immigration law, Intellectual Property, Equipment Finance and Leasing, Law of Banking and Insurance, Capital and Money Markets, Secured Credit Transactions, Natural Resources Law, Aviation Law and Constitutional Law.

www.abukapartners.com


Abuka & Partners

Sunday Edward, Esq. is the Head of Chambers and Partner in the Law Firm of Abuka & Partners, Legal Practitioners. He was born on 19th

October 1969 and studied law at the University of Ibadan, Ibadan, Oyo State where he obtained his LL.B. Degree in 1997. He was admitted to the Nigerian Bar as Solicitor and Advocate of the Supreme Court of Nigeria in 1998, after obtaining his qualifying BL certificate at the Nigerian Law School in 1997. Sunday Edward obtained an LL.M. degree at the University of Ife now known as Obafemi Awolowo University, Ile-Ife, Osun State in 2004. Sunday Edward is a member of professional associations including the Nigerian Bar Association (NBA), the Business Recovery & Insolvency Practitioners Association of Nigeria (BRIPAN) and the International Association of Restructuring, Insolvency & Bankruptcy Professionals. Sunday Edward is a Notary Public and a litigator to the core.

Abuka & PartnersAdamawa Meeting RoomTranscorp Hilton HotelMaitama, AbujaNigeria

Tel: +234 806 645 1985Email: [email protected]: www.abukapartners.com



Chapter 27246

Portugal

VdA Ana Luís de Sousa

Teresa Empis Falcão

Portugal


in2015) and the subsequent refinancingunder aprojectfinancestructure,ofthecurrent322MWwindfarmport-folio owned by the purchaser – one of the most significant international groups operating in the energy sector.

■ Theproject financeby issuanceof two setsofbonds intheaggregateamountof€340,000,000fortheacquisitionand refinancing of major companies operating in the gas sector.

■ Therefinancingbyaninternationalsyndicateofcommer-cial banks of a windfarm portfolio, by means of the intro-duction of changes to an existing bond issuance, in theamountof€579,900,000.

■ Theacquisitionandrefinancingofawindfarmportfolioto be implemented through the issuance of bonds in the amountof€210,000,000.

■ The financing of the construction of a new universitycampus in Lisbon under a project finance regime. This is an innovative project as far as project finance structures in Portugalareconcerned,sincetheBorrowerisaprivatelawfoundation and part of the financial flows financing the projectarisesfromdonationstobemadetotheBorrower.

■ Thefinancingofaninnovativebiomassenergyproductionproject, including all relevant phases, from construction to operation and maintenance, comprising two biomass powerplants in the north of Portugal with a combined installed capacity of 30 MW, under a project financeregime.

■ Therefinancingbyaninternationalsyndicateofcommer-cialbanksandtheEuropeanInvestmentBankofsixportsconcessionaires held by Grupo Yildirim, in the amount of €279,806,000.

■ Thefinancingofa25MWphotovoltaicproject,basedonacorporate “PPA” logic. It was the first bank financing of a renewable energy project in the Iberian Peninsula with no guaranteed remuneration (feed-in tariff ).

■ Theprojectfinanceofthefirstoffshorefloatingwindfarmproject in Portugal (25MW) financed by theEuropeanInvestmentBankintheamountof€60,000,000.

■ The financingbyBancoBPI (CaixaBank)of a portfolioof40small-generationsolarprojectsownedby thesamesponsor.

■ The financing byEIB andBancoBPI (CaixaBank) of awindfarmportfoliowith96MWofinstalledcapacityandbenefitting from a feed-in tariff.

■ TherefinancingoftheFinergegroupdebtandoperationsinexcessof€700,000,000,oneofthelargestwindfinanc-ings in Europe, and the longest tenor renewables deal and largest green loan deal in Portugal.

1 Overview


In the past year we have continued to witness the main trend of refinancings with particular emphasis on the energy sector, with one of the major transactions of the past years being the multi-jurisdiction refinancing of the second largest renewable energy generator in Portugal.

In fact, refinancing of project debt transactions continues to be the drive of the project finance market, with an ever-growing interest in bonds issue financings, green loans and sustainable finance–withtheso-calledTaxonomyRegulationalsolikelytorise to prominence soon and leave an imprint on future financ-ings. The market has proven its ability to recover from past mishaps and has been showing greater liquidity and growinginvestor confidence.

There continues to be significant activity in the secondary market, with construction companies and other original share-holders seeking to free up capital to invest in other geogra-phies, or to focus on their core businesses by enhancing trade in market sales of participations in project companies in both the road, ports, water and energy sectors. Investment funds have become increasingly more active in the market, demonstrating and cementing the confidence of investors in both brownfield and greenfield projects, and replacing to a certain extent thetraditional banking groups and investors.

A new wave of greenfield project financing could be forth-coming, with a growing interest from investors in green loans and sustainable finance, as well as a result of several market shiftswhichareexpectedto impactthecomingyears,notablythe solar capacity auctions which headlined 2019, with 1150 MWofcapacityawardedandtobedevelopedinthenextcoupleofyearsandnewcapacityauctionsexpectedtobelaunchedinthe first semester of 2020, as well as concessions entering the laterstagesoftheirrespectiveterms.Mobilityprojectsarealsoexpectedtokickstartanewtrendandbringaboutnewfinancingopportunities.


The most relevant deals which have taken place in Portugal in recent years include greenfield and brownfield transactions, among which we would highlight the following:■ Theacquisitionofpartof the formerENEOPportfolio

(which had resulted from the ENEOP Split of Assets

247VdA



A pledge over cash deposited in bank accounts is deemed a pledge of credits (see above). Generally, the taking of security over bank accounts by financial institutions is made through financial pledges allowing the beneficiary to use and dispose of the deposited funds.


In companies, the capital of which is represented by immate-rial nominative participations (“quotas”), creation of securityrequiresawrittenagreementandregistrationofthesamewiththe relevant Commercial Registry Office.

On the other hand, when share capital is represented by shares, security is created by means of a pledge over such shares by means of an endorsement, whether as a written pledge declaration written by the charger on the certificates and inscription in the issuer’s share ledger book, as is the case for nominative share certificates, or by means of an entry as to the creation of the pledge in the rele-vant securities account, as is the case with dematerialised shares.

It is common practice to have a written contract governing the terms of the relevant pledge.


The creation of security interests over assets located in Portugal (including share pledges) attracts Stamp Duty, levied on the securedamount. Therearecertainexemptions,notablywhenthe creation of security is simultaneous and ancillary to a loan, providedthattheloanhasalreadybeensubjecttoasimilartaxa-tion(noduplicationoftaxapplies),orwhenthebeneficiaryofsuchsecurityisanentitybenefittingfromasubjectiveexemp-tion(e.g.EuropeanInvestmentBank).


The registration before the local Registry Offices of the creation ofpledgesoverquotaswillinvolveacostof€100perquota,andfor thecreationofmortgages therewillbeacostof€250perrequestplusafurther€50foreveryadditionalmortgageditemineachrequest.Themortgageurgencyfeeisthesameamountastherespectiverequest.

As for the time involved, the registration of pledges over quotas generally takes onebusiness day to be completed, andthat of mortgages up to 10 business days (or, if an urgency fee is paid, one business day).


The creation of security over assets which are in the private domain doesnot,ingeneral,requireanyregulatoryorsimilarconsents.

2 Security


Theconceptofafixedchargeistheonlyformofsecurityinterestgenerally admissible in Portugal and the terms and formalities required for security creation vary depending on the type ofassets at stake.

Even though the “floating charge” concept is not recognised under Portuguese law, there is the possibility of creating secu-rity over different assets through a single security agreement.As an exception to the above principles, Portuguese law

on financial collateral (which implemented the Directive on Financial Collateral Arrangements) allows for pledges similar to floating charges on money and securities in bank accounts.


Security on immovable assets or rights relating thereto, or on movable assets subject to registration (such as automobiles, ships andplanes),iscreatedbymeansofmortgages,executedthroughnotarial deeds and subject to registration as a condition for validity.

The creation of security interests over plant and machinery may be made by means of a specific type of mortgage which is called a “factory mortgage”, which covers the factory’s land, as wellastheequipmentandmovableassetsused inthefactory’sactivity identified in an inventory attached to the mortgage deed.

Pledges may be created over movable (non-registered) assets or credits and shall be effected by written agreement. For this purpose, the transfer of possession over such assets to the pledgee ortoathirdpartyisrequired.Thereare,however,certainexcep-tionstothistransferofpossessionrequirement,notablyforthecreation of a pledge having as its beneficiary a credit institution authorised to carry out business in Portugal, in which case-spe-cific rules apply, and in what concerns the creation of financial pledges under the legislation for financial collateral arrangements.


Apledgeoverreceivablesqualifiesasapledgeofcredits.Thevalidity of a pledge of credits is subject to (i) the pledgor’s coun-terparty being served notice thereof, and (ii) the pledgee coming intopossessionofthedocumentsrequiredtoenforcetherightsarising from the relevant contract directly against the pledgor’s counterparty.

A pledge of credits covers all payments to be made under the contractual relationship underlying such credits. After the debtor is notified, such payments must nevertheless be made jointly to the pledgor and the pledgee. As a means of circumventing prac-ticaldifficultiesarisingfromthejointpaymentrequirement,itiscommon for the pledgee to authorise the third-party debtor to continue to carry out the relevant payments to the pledgor until notice to the contrary, and/or to construe the relevant pledge agreement as a financial collateral arrangement, in accordance with the Directive on Financial Collateral Arrangements.

248 Portugal


Court procedures usually take several months or even more thanayearifthecomplexityofthelegalargumentsatstakeleadsto court appeals.

Please refer to section 5 below for restrictions concerning insolvency/bankruptcy and restructuring proceedings.


No different rules apply to domestic or foreign investors in this respect.



Upon the opening of bankruptcy proceedings, all security other than financial collateral over the insolvent’s assets must be enforced within the bankruptcy proceedings and payment of creditors’ claims shall be made in accordance with the Portuguese Insolvency and Company Recovery Code (“CIRE”) rules.

Furthermore, the insolvency order delivered by the court suspendsanyoutstandingexecutoryproceedingshavingasanobject the attachment or seizure of the insolvent’s assets, and preventsthebringingofanynewexecutoryproceedingsortheenforcement of any security against the insolvent entity. Any lawsuits related to such assets are attached to the bankruptcy proceedings.

In addition, all claims from creditors of the insolvent entity must be lodged within the insolvency proceedings. Therein the creditor shall mention the amount of its claim as well as any security from which it may benefit over the assets of the insol-vent entity.


The insolvency administrator is entitled to terminate agree-mentswhichmaybequalified as detrimental to the insolventestate by notice to the relevant counterparty. The counterparty may either accept termination of the contract and return the consideration received to the insolvency estate or, alternatively, challenge the termination of the contract in court.

There are certain acts and transactions which are legally deemed to be detrimental to the insolvent company’s estate. Other than these, acts performed within two years prior to the opening of the corporate bankruptcy proceedings that generally diminish, jeopardise or delay the rights of the debtor’s creditors maybequalifiedasdetrimentaltotheinsolventestate,providedbadfaithoftherelevantpartiesisproven.Badfaithispresumedby law in the case that the counterparty or the beneficiary of the act is related to the insolvent entity.

Upon payment of the insolvency procedure costs (which must be settled prior to all other claims), claims shall be paid in the following order: (a) employees’ claims over the specific company premises

where they carry out their activity;

However, the creation of security over public domain assets is prohibited and some restrictions in respect of the creation of secu-rity over concession/regulated assets may be imposed, notably through specific regulations or the relevant concession contracts.

3 Security Trustee


Trusteeship is generally not recognised by Portuguese law. Thus, even if the relevant agreements indicate that the security agent holds security for the benefit of a given lending syndicate, unless all lenders are disclosed as holders thereof, the security agent shall appear as the sole beneficiary of the security entitle-ments and shall be the sole entity with authority to file enforce-ment procedures in respect thereof.Hence, in the context of the enforcement procedures, the

security agentmaybe required toprovebeforeacourt that itholds title to the secured obligations.


The only prima facie way to have all the lenders recognised as beneficiaries of a given security is to name them as holders of the secured obligations and corresponding security. However, thisentailstheneedtoamendtherelevantagreement(orexecutea new notarial deed and registration, if applicable) each time the lenders assign, buy or sell part of the loans, which is not a prac-tical solution. For this reason, attempts have been made to set up alternatives and to put in place less burdensome solutions, as is the case where the security agent is made the registered beneficiary of the security and either benefits from a joint and several creditor status or a parallel debt or is made contractually bound to assign the secured obligations to all the lenders prior to enforcement of the security.



The enforcement of mortgages consists of a sale of the relevant assets through court proceedings. The sale of pledged assets may be made through court or out-of-court proceedings.

Appropriation or foreclosure of the asset is generally not available to the beneficiaries of mortgages or pledges other than in the case of financial pledges or pledges granted by a business entity or person in security of a commercial obligation.

249VdA


Portuguese law further provides for an out-of-court proce-dure (Regime Extrajudicial de Recuperação de Empresas – “RERE”), which entered into force on 3 March 2018. RERE corre-sponds to a non-judicial procedure that aims to obtain a settle-ment between a company in financial distress or in an imminent insolvency situation and its creditors. It involves a voluntary arrangement between the company and all or part of its cred-itors, whose content is freely established by the parties and is typically confidential.

The effects of the RERE are restricted to the participating creditors and their claims, and securities may be only modified to the extent therein agreed; therefore, and contrary to whathappens in respect of a plan approved and confirmed within a PER, there is no cramdown on dissident creditors.Should the parties to the agreement expressly decide to

deposit the agreement with the Commercial Registry Office and, provided that an auditor formally certifies that through that agreementthedebtorrestructuresat least30%ofitsnon-sub-ordinated liabilities and that, as a result of such agreement, it achieves positive equity and its equity results superior to itssharecapital,itwillbenefitfromthemorefavourabletaxtreat-ment applicable to PER as mentioned above.

Although the RERE is primarily addressed to non-insolvent companies,exceptionallyandtemporarily,withinthe18monthsafter the entering into force of the RERE regime, a debtor that is technically insolvent may still make use of this special regime, instead of filing for its insolvency.


Directors may continue to trade even if a company is facing financial difficulties provided that they act with a special duty of care and do not violate their legal duties and legal principles applicable to the management of companies.

Within insolvency proceedings, the insolvent entity’s direc-tors may be found liable if they fail to meet their legal obligation to file for corporate insolvency proceedings within 30 days of the debtor becoming insolvent or if the insolvency situation has beencreatedoraggravatedasaconsequenceofafeloniousorgross fault during the period of three years before the opening of the corporate insolvency proceedings.

Directors may be subject to ancillary penalties – prohibition from performing commercial activities – and/or ordered to pay amounts unduly received from the insolvent company, and may be deemed jointly and severally liable with the company in certain circumstances.

Where the debtor is declared insolvent by the court, direc-tors may also be held criminally liable for fraudulent insolvency, negligent insolvency and the unlawful favouring of creditors.



Under general Portuguese law, there are no restrictions on foreign direct investment or foreign ownership of a project company.However,theexerciseofaneconomicactivitywithinthe regulated sectors (such as energy, water and waste manage-ment, telecoms, postal services, railways, commercial aviation

(b) propertytaxes;(c) secured claims (those with security over assets which are

part of the insolvent estate up to the value of those assets);(d) preferential claims, including:

i. general creditors’ preferential claims over the assets in the insolvent estate up to the value of the assets overwhich such preferential claims exist andwheretheclaimsarenotextinguishedinconsequenceofthedeclaration of insolvency;

ii. certaindebtstothetaxandsocialsecurityauthorities;iii. claims by creditors which have provided capital to

finance the insolvent’s activity during the PER proce-dure(seequestion5.5below)overallmovableassetsofthe insolvent; and

iv. claims by the party that applied for the opening of the insolvency proceedings;

(e) unsecured claims; and(f) subordinated claims (e.g. the credits of related parties).


Bankruptcyproceedingsaregenerallyapplicabletoallpersonsorlegalentities,exceptfortheRepublicofPortugalandpublic/administrative entities and companies. In addition, insurance companies, credit institutions and other financial corporations are subject to specific insolvency rules (and not to the CIRE).


A creditor may, without filing a judicial proceeding, retain possession of the assets pertaining to a certain entity if it is in the possessionofsuchassetsandiftheclaimarisesfromexpensesor damages caused by such assets.

Creditors may also enforce security over assets of the project company outside the court, provided such security was granted under the Directive on Financial Collateral Arrangements.


The Portuguese insolvency law provides for a special recovery proceeding which aims to promote the rehabilitation of debtors facing financial difficulties (Processo Especial de Revitalização – “PER”). These proceedings are available to a debtor who finds themselves in a situation of financial distress and who is not technically insolvent yet.

The plan approved within a PER is binding on all credi-tors, including those who did not take part in the negotiations. Therefore, when a plan is approved by the legally-prescribed majority of creditors and further confirmed by the judge, the provisions contained therein are enforceable against non-voting or dissident creditors.Moreover, the plan approved by the majority of the cred-

itors and confirmed by the judge by a definitive order allows the debtor and its creditors to benefit from a specific and more favourable tax regime set forth in sections 268 to 270 of thePortuguese Insolvency Code.

250 Portugal



Project documents are valid and enforceable without any need for registration, authentication or filing with any governmental authority, save for certain pledge arrangements which need to be authenticated by a Notary or by any competent authority.

The granting of security and private agreements with acknowl-edgment of a payment obligation shall also only be directly enforceable before the courts if authenticated by a Notary or by any competent authority. For that reason, financing agreements are usually notarised.


Other than assets in the public domain (e.g. the hydro domain, mineral resources, roads and railways) which may not be appro-priated by private entities, the ownership of land or other assets doesnotrequirealicence.However,theexerciseofaspecificeconomicactivitybyuse

oroperationofsuchassetsmayrequirealicenceand,inthecaseof an asset in the public domain, the attribution of a right of use (of the relevant asset, normally through a concession regime).

There is no distinction between national and foreign entities in this respect.


There isnospecific taxregimeapplicable totheextractionorexportofnaturalresources,otherthaninrespectoftheextrac-tion of oil (but not applicable to natural gas).

Additionally, Portuguese oil legislation foresees that the agreements for the prospection, research and production of oil shall include an annual fee (“renda de superfície”) calculated by reference to the area of the concession. Other fees and royalties may be agreed in the relevant concession agreements or licences.Portugal has implemented excise duties on petroleum and

energy products, in line with EU legislation, which are triggered when products are released for consumption.Theextractionand/orexportofnaturalresourcesmayalsobe

subjecttothegeneraltaxesapplicablewithinthePortuguesetaxsystem;namely,CorporateIncomeTax(“CIT”)andValue-AddedTax(“VAT”).


Incomederivedfromforeigncurrencyexchangemaybesubjectto CIT. Commission fees payable to a financial credit institution forforeigncurrencyexchangemaytriggerStampDuty.

In general terms, Portugal does not apply controls on foreign currency exchange, without prejudice to money launderingcontrols in line with those applicable in other EU MemberStates. Furthermore, reporting obligations to the Bank ofPortugal may also apply to certain transactions.

andfinancialservices)mayrequireauthorisationfromtheregu-lator to both Portuguese and foreign investors.RestrictionsmayapplyundertheLawonMoneyLaundering

and the Financing of Terrorism, which transposed the EU MoneyLaunderingregulationsintoPortugueselaw.Theremayalso be temporary embargo situations applying to persons or entities residing in non-EU states.

There are no currency controls under Portuguese law and money can be freely transferred into or out of Portugal. Also, there are no restrictions on the remittance of profits or invest-ments abroad.


No particular restrictions in relation to foreign direct invest-ments apply.


The protection of private property is upheld by the Constitution. Accordingly,thenationalisation,expropriationorrequisitionofprivate property can only take place on the grounds of public interest and provided that private entities are duly compensated.

While there is a legal framework setting out the terms for the expropriation process and calculation of indemnificationpayable in relation to immovable assets, there is no general framework for nationalisation processes.

There is, nevertheless, a specific legal regime setting out the framework for the public appropriation of share capital, in whole or in part, from private legal persons for public interest reasons.

There are no distinctions between domestic and foreign investors in this respect.



The governmental agencies or departments with authority over projects depend mainly on the relevant sector of activity of a project. In general terms, the respective Ministries (energy,infrastructure, transport, health, etc., and – when applicable – environment) are responsible for the launch, licensing and major regulation of the projects, either directly or through their governmental departments, e.g.: Direção Geral de Energia e Geologia (energy); Instituto da Mobilidade e dos Transportes, I.P. (roads); and Administração Regional de Saúde (health), etc. Otherapprovalsmayalsoberequiredwhereaprojectinvolves

public investment or, more generally, where the PPP legal frame-work applies.

In this respect, reference should be made to the Unidade Técnica de Acompanhamento de Projetos (“UTAP”), an administrative entity underthesupervisionoftheMinistryofFinance,createdforthefollow-up of PPP projects.

251VdA


conditions and/or thresholds, operators must hold a permit to emit greenhouse gases, and be the holder of emission allowances.

Depending on the sector of activity, health and safety laws may apply in terms consistent with European directives in this respect.


In general terms, project companies are not subject to specific procurement rules. There are, however, some specific cases where a project company may be subject to the regime set forth in Portuguese public procurement law, namely: (i) if the project company has been established for the specific purpose of meeting general interest needs and is controlled by public entities or financed mainly from the public budget; (ii) if the project company, having been created for the specific purpose of meeting general interest needs or not, operates in the energy, water, transport or postal services,andapublicentityexercisesadominantinfluenceoverit;and (iii) if a project company has been granted, without an interna-tionalpublicprocurementprocess,specialorexclusiverightsinthepublic energy, water, transport or postal services sectors, affecting theabilityofthirdpartiestoexerciseactivitiesonthosesectors.Moreover, public procurement rules shall also apply to

construction contracts and services agreements entered into by a projectcompany(i)whichisinmorethan50%directlyfinancedby a public entity, and (ii) whose contractual price equals orexceeds€5,548,000and€221,000,respectively.

8 Foreign Insurance


Portuguese law does not foresee any restrictions, controls, fees ortaxesonthegrantingofinsurancepoliciesbyaforeigninsur-ance company.


Yes. No limitation applies under Portuguese law regarding payment of insurance to foreign secured creditors.



In general, no restrictions apply to the employment of foreign workers. However, citizens of non-EU countries must obtain awork,visaresidenceorequivalentpermittoliveinPortugal.



In general, the import of goods is a taxable event for thepurposesofVATandcustomsduties.VATandcustomsdutiesarepayablebytheimporters(whetherornotataxableperson)at


Interest or dividends paid by Portuguese-resident companies to non-resident entities are, as a general rule, subject to with-holdingtaxatarateof25%(thisratemay,undercertaincircum-stances,beincreasedto35%).

With respect to interest or dividend payments, the withholding taxcanbewaivedorreducedundertheEUInterestandRoyaltiesDirective, the EU Parent-Subsidiary Directive or under bilateral doubletaxtreatiessignedbyPortugal,aslongascertaincondi-tions are met.

Note that the CIT legislative reform implemented a participa-tionexemptionregimefordividends(andcapitalgains),whichconsiderablyextendedthecasesinwhichdividendspaidtootherjurisdictions(e.g.withwhomPortugalhassignedadoubletaxtreatyandthereisadministrativecooperationintaxmatters)arenotsubjecttowithholdingtax.


There are no restrictions or limitations regarding the establish-ment and maintenance of onshore foreign currency accounts or offshore accounts in other jurisdictions.


Please see question 7.6 above concerning withholding taxesrelated to the payment of dividends to a foreign parent company. Regardingdividendspaidtoaresidentparentcompany,exclu-sionfromtaxationisalsoavailableprovidedsomerequirementsaremet(namely,acertainlevelofshareholding–currently10%held for at least 12 months).


Environmental impact assessments are generally required forinfrastructure projects. The PPP law establishes that PPP procure-ment procedures shall only be launched after approval of the rele-vant environmental impact declaration. Financing documents also normally include this environmental impact declaration as a condition precedent (“CP”) to the disbursement of funds.Dependingon thesector inquestion,aprojectmayalsobe

subject to the European Integrated Pollution Prevention and Control (“IPPC”) rules. The environmental licence (which is required,inparticular,forindustrialprojects)mustbeobtainedbefore operation commences, and must be successively renewed during the entire period of operation of the relevant plant.

Specific titles for the use of water resources (e.g. discharge of wastewaterandextractionofwater)andforemissionsintheair,as applicable, must also be obtained in addition to the obtain-ment of the environmental licence.Furthermore,inthecontextoftheEUemissionstradingsystem,

for projects in certain industrial sectors and meeting certain

252 Portugal



The parties may freely choose the law which will govern the financing agreements with observation of the requirementsset out in Portuguese law or in the applicable international conventions.

Although financing agreements in project finance deals in Portugal are commonly subject to Portuguese law, it is not uncommon for international lending syndicates to requirefinance agreements to be submitted to English law.


In thecontextofproject financedeals, thecreationof securityinterests over assets which are located in Portugal is, according to the applicable conflict of laws rules, mandatorily governed by Portuguese law.



Portuguese courts recognise the parties’ autonomy to select the forum of their disputes, even when the selected forum has no particular connection with the dispute, and have consist-ently recognised the provisions of the Brussels Regulation asprevailing over the Portuguese Code of Civil Procedure, under whichthepartiesarerequiredtoestablishasignificantinterestin the designated jurisdiction to select it as the appropriate forum for their disputes.

Notwithstanding, Portuguese courts may ignore foreign juris-diction clauses and assume jurisdiction in special cases where theymayclaimtoholdexclusivejurisdiction,e.g.actionsrelatingto local land, in proceedings related to the validity of the incor-poration or the dissolution of companies domiciled in Portugal, in proceedings relating to the validity of entries in public regis-ters, or in proceedings related to the registration or validity of patents.

In addition, a waiver of immunity is recognised and enforce-able in Portugal. Although there is no specific national act or international convention entered into by Portugal in this regard, Portuguese law gives immunity from jurisdiction of the Portuguese courts to sovereign states (and to other public entities) by virtue of a general principle of customary interna-tionallaw.Stateimmunityis,however,givenastrictextentandislimitedtoactsinvolvingtheexerciseofsovereignauthority.



Majorprojectcontracts typicallyprovide that thepartiesshallresort to arbitration for the resolution of disputes. Where inter-national contractors are involved, the parties often choose to apply the rules of international centres such as the International Chamber of Commerce (“ICC”), the London Court of International Arbitration (“LCIA”) and the Rules of Arbitration of the United Nations Commission on International Trade Law (“UNCITRAL”).

the time the goods pass the customs control. In some circum-stances,VATmay be self-assessed by importers in theirVATreturn.


VATischargedonimportationofgoodsattheratethatappliesto a supply of similar goods within the Portuguese territory. Thetaxablevalueofimportsisdeterminedinaccordancewithcustomslegislation,excludingVATitselfbutincludingcustomsdutiesandanyothertaxesorchargesleviedonimports,aswellas incidentalexpensessuchascommissions,packaging, trans-portandinsuranceexpensesincurreduptothefirstdestinationwithin Portugal.

Customs duties are calculated, on an ad valorem basis, as a percentage of the value of the goods being declared for impor-tation. The level of that percentage depends on the kind of product imported and the country of origin.

11 Force Majeure


Although Portuguese law does not provide for a specific provi-sion regardingexclusionof liability incaseof force majeure, the principle is generally accepted and enforceable in Portugal. In general, project contracts provide for detailed provisions in rela-tion to force majeure events and the terms under which the parties have agreed to mitigate the effects of force majeure,andexcludeliability for breach of contract resulting from a force majeure event. The terms agreed between the parties in this respect are gener-ally accepted and enforceable in Portugal.



No specific rules apply on corruption and bribery activities in the projects sector. Nevertheless, entities are subject to general criminal law, which sets forth corruption and bribery as crim-inal offences which may be punished with fines or imprison-mentuptoamaximumofeightyears(withoutprejudicetothepossibility of aggravated penalties in specific cases).We also refer to the provisions of the Law on Money

Laundering and the Financing of Terrorism, which transposed theEUMoneyLaunderingregulationsintoPortugueselaw.

13 Applicable Law


Project agreements are typically governed by Portuguese law. A different applicable law may be chosen (provided that the choice oflawobservestherequirementssetoutinPortugueselaworinthe applicable international conventions). We note, however, that concession contracts and other project agreements entered into with public entities are mandatorily governed by Portuguese law.

253VdA




Although it is common in project finance deals to have direct agreements with the government (in particular, in its capacity as grantor in a concession contract), those agreements are normally designed to address step-in rights of financial institutions and do not provide any particular political risk protections.

Change-in-law risk is normally addressed by contract in the standard terms for international project finance deals.

17 Tax


Under certain circumstances (e.g. interest paid to financial insti-tutions),withholdingtaxoninterestpaymentsmaybewaived.

Under the EU Interest and Royalties Directive and since 1 July2013,nowithholdingtaxisdueoninterestpaymentsmadeby resident companies, provided the following conditions are met: (i) the paying and beneficiary entities are subject to (and notexemptfrom)corporatetaxandtakeoneofthelegalformslistedintheannexofthisdirective;(ii)bothentitiesareconsid-eredEUresidentsforthepurposesofdoubletaxtreaties;(iii)adirect25%shareholdingisheldbyoneofthecompaniesintheother’s capital, or both are sister companies (i.e. are both held, inatleast25%,bythesamedirectshareholderandineithercasethe shareholding must be held for at least a two-year period); and (iv) the entity receiving the interest payment should be its effec-tivebeneficiary.UndertheprovisionsofthedoubletaxtreatiessignedbyPortugal,thedomesticwithholdingtaxratesforeseenforinterestpaymentscanbereducedtoratesrangingfrom5%to15%(nowithholdingapplies inthecaseof long-termloansextendedbyUSbankingorfinancialinstitutions).Withholding tax may apply depending on the taxable

construction of the claim under the guarantee.


Portugalhastaxregimesaimedatfosteringinvestment,particu-larly foreign investment. These comprise tax incentives toinvestment made in Portugal in specific business sectors (e.g. the mining and manufacturing industry), such as (i) CIT deduc-tionsor tax credits, and (ii) exemptionsor reductions inRealEstateTax,RealEstateTransferTaxandStampDuty.The tax exposure of a foreign investment in Portugal will

depend on how such investment is structured (e.g. if it involves a direct presence in Portugal or not). For instance, if such foreign investment is made through a local subsidiary, this affiliate will besubjecttothetaxeswhicharetypicallyapplicabletonationalcompanies;namely(amongothers),CIT,VAT,StampDutyandpropertytaxes.

Loans, mortgages and other security documents may be subject to Stamp Duty in Portugal, at rates that vary between

International arbitration clauses are widely recognised by Portuguese courts irrespective of the choice of the parties to locate the seat of the arbitration in Portugal or abroad. At the enforcement stage, the decree of enforceability of an arbitral award is likely to vary greatly depending on the applicable legal regime. An international arbitral award rendered in Portugal is immediately enforceable in Portuguese territory under the rules of the Portuguese Arbitration Act and of the Portuguese Code of Civil Procedure. Foreign arbitral awards are recognised and enforced in Portugal under the applicable international treaty or bilateral agreement (see question 15.2 below), generally underthe 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the New York Convention”).

Foreign arbitral awards that are not covered by any of these international treaties may still be recognised and enforced in Portugal under the general provisions of the Portuguese Arbitration Act, which were greatly influenced by the UNCITRALModelLawandbytheNewYorkConvention.


Inthecontextofinternationalarbitration,Portugalisapartytothe following international conventions:(a) the Geneva Protocol on Arbitration Clauses of 1923;(b) the Geneva Convention on the Execution of Foreign

Arbitral Awards of 1927;(c) the New York Convention, which entered into force in

Portugal on 16 January 1995;(d) the Inter-American Convention on International Comm-

ercial Arbitration, adopted in Panama on 30 January 1975; and

(e) the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force in Portugal on 1 August1984.

On a bilateral level, Portugal has signed Judiciary Cooperation Agreements with Guinea-Bissau, Mozambique, Angola, SãoToméandPríncipe,theSpecialAdministrativeRegionofMacao(People’sRepublic ofChina) andCapeVerde. Thesebilateralagreements entered into between Portugal and other Portuguese-speaking countries equate arbitral awards to national courts’judgments and subject both decisions to the same legal regime.


Unless the matter is subject to the exclusive jurisdiction ofnational courts (e.g. criminal or insolvency disputes and certain disputes with state entities) or to compulsory arbitration (see question 15.4 below), any dispute involving an economicinterest isarbitrable. Portuguese lawalsoextendsarbitrabilityto non-pecuniary rights under which the parties can enter into agreements.

Only a few types of disputes, namely some disputes related to insolvencyproceedings,aresubjecttotheexclusivejurisdictionof national courts and thus considered non-arbitrable.


Disputes concerning collective labour rights and sports regula-tion are subject to mandatory domestic arbitration.

254 Portugal


withtheEuropeanSecuritiesandMarketsAuthority(“ESMA”)or with the Portuguese central bank (Banco de Portugal ), (iii) issu-ances the repayment of which is specially secured in favour of the bondholders, (iv) bond issues with a nominal or subscrip-tionamountequaltoorhigherthan€100,000,or(v)issuancessubscribedbyqualifiedinvestors(andwithoutsubsequentplace-menttonon-qualifiedinvestors).

19 Islamic Finance


To the best of our knowledge, there is no experience ofIslamic project finance in Portugal, nor are there any finance instruments structured in accordance with Islamic law in the Portuguese financial sector.




The inclusion of interest payment obligations in a loan agree-ment is common practice and fully valid and enforceable in Portugal. Althoughcivillawforeseesmaximumratesofinterest,those

provisions are not applicable to loans provided by financial insti-tutions in relation to which only very specific limitations (e.g. for consumer credit or a surplus interest rate for overdue amounts) may apply.

0.04% per month or fractions thereof up to 0.6% (one-off),depending on the maturity of the loan or the term of the guar-antee, as applicable. Interest payments and financial fees also attractStampDutyattherateof0.4%.ThecurrentStampDutyCodeprovidesforexemptionsappli-

cable to certain loans (e.g. shareholders’ loans, under certain conditions) and guarantees (e.g. those granted to financial or credit institutions, under certain conditions).

18 Other Matters


In general, the most relevant issues have been addressed.


In general terms, bonds may only be issued by limited liability companies incorporated in Portugal whose share capital is paid up in full and which have been registered with the relevant CommercialRegistryOfficeforatleastoneyear.Thisrequire-ment may be waived if the issuer makes available to investors financial information on the company, with reference to a date not later than three months prior to the issue date, audited by an independent auditor, registered with the Portuguese Securities MarketCommission,andpreparedinaccordancewiththeappli-cable accounting rules.

In accordance with new legislation published in February 2015, a company may only issue bonds if, after the issuance, it hasaratiooffinancialautonomyequaltoorhigherthan35%,to be calculated in accordance with a certain legally set formula. This limit does not apply to (i) companies listed on a regulated market, (ii) companies enjoying a credit rating or bond issues enjoying a credit ratio attributed by a rating agency registered

255

Teresa Empis Falcão has been a Partner in VdA’s Infrastructure & Mobility practice since 2016. From 2011 to 2014, she acquired a reputation as deputy at the Cabinet of the Secretary of State for Infrastructure, Transports and Communications, being responsible for drafting and reviewing legislation concerning these sectors as well as leading negotiation teams in the context of the infrastructure PPP review requested by the bail-out arrangements applying in Portugal between 2011 and 2014. Before joining VdA in 2008, Teresa was an Associate with the project department at Allen & Overy (London) where she acquired expertise in the financing of projects in various jurisdictions. Teresa is frequently sought for leading-edge national and international transactions on project finance transactions and capital markets, mainly focused on the infrastructure and energy sectors, due to her high expertise. She has extensive experience in overseas markets, particularly in Portuguese-speaking African countries, namely Mozambique.


Tel: +351 21 311 3584Email: [email protected] URL: www.vda.pt

Vieira de Almeida (VdA) is a leading international law firm with more than 40 years of history, recognised for its impressive track record and innovative approach in corporate legal services. The excellence of its highly special-ised legal services covering several sectors and practice areas enables VdA to overcome the increasingly complex challenges faced by its clients.VdA offers robust solutions grounded in consistent standards of excellence, ethics and professionalism. VdA’s recognition as a leader in the provision of legal services is shared with our clients and teams, and is attested by the most relevant professional organisations, legal publications and universi-ties. VdA has successively received the industry’s most prestigious inter-national accolades and awards.Through the VdA Legal Partners network, clients have access to 13 juris-dictions, with a broad sectoral coverage in all Portuguese-speaking and several French-speaking African countries, as well as Timor-Leste.

Angola – Cabo Verde – Cameroon – Chad – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau –

Mozambique – Portugal – São Tomé and Príncipe – Timor-Lestewww.vda.pt


VdA

Ana Luís de Sousa is a Partner and Head of Practice in the Energy & Natural Resources practice area. She is widely recognised as an expert in the development and financing of cross-sector projects. Over the past 18 years, Ana has been involved in several road infrastructures, PPP in the health sector, water and waste concessions, as well as energy (including renewable energies) projects, in Portugal and in all of VdA Legal Partners’ jurisdictions, acting as legal adviser to the administrative authorities, sponsors and financial institutions (in particular, investment banking and EIB).Ana’s practice focuses heavily on the energy sector and its economic regulation. Ana is the author of various publications on matters within her fields of expertise. She is admitted to the Portuguese Bar Association.





Chapter 28256

Singapore

Allen & Gledhill LLP Kelvin Wong

Kok Chee Wai

Singapore


prescribed or approved by the land authority and comply with other legal formalities (including registration of such form with the land registry). For an equitablemortgage, the security istypically by way of deed and a caveat will be lodged with the land authority to notify the security interest held by the lender.If theplant andmachinery constitute fixtures to apieceof

land, a mortgage of that land would also create security over such plant and machinery. Similarly, if any pipelines are securely attached to the land, such pipelines would generally be consid-ered part of the land, and any mortgage of the land would include such pipelines. To theextent that theplant,machineryorpipelinesdonot

constitute fixtures and are considered chattels, separate secu-rityisusuallytakenviaafixedorfloatingcharge.Securityoverplant,machineryandequipmentcanalsobeviaapledge,which,as a matter of Singapore law, gives a creditor a possessory right over chattels or documents of title.


Security over receivables can be taken via a general security agreement or a standalone security agreement. Such security document may provide that the chargor may collect the receiva-bles in the absence of default and the debtors need not be noti-fied. However, the security in such a case may be character-ised as a floating charge and will rank behind any other security, prior notice of which has been given to the debtor.


Security over cash deposited in bank accounts can be taken via a general security agreement or a standalone security agree-ment. If the account bank is not the lender, notice of assignment should be given to, and an acknowledgment should be received from, the account bank in order to preserve priority.


Shares in Singapore can be scripless or scrip. Scripless shares are shares of a local or foreign company listed

ontheSingaporeExchange(“SGX”) held either directly with the Central Depository (Pte) Limited or in a nominee account with

1 Overview


Singaporehasafairlymatureprojectfinancemarketwithamixofpublic-private partnerships (“PPPs”) financing and traditional project financing for other industrial infrastructure. Singapore also plays a key role in arranging financing for regional infra-structure projects. To this end, the Singapore government has established Infrastructure Asia, an agency to coordinate stake-holders, promote information flow and facilitate access relating to infrastructure investment and financing opportunities in Asia.


A significant transaction in Singapore was the financing of the TuasOnewaste-to-energyPPPplantthatwascompletedinMay2016. When completed, the plant will be the largest and most energy-efficient WTE plant in Singapore. Our firm acted for thecommercialbanksprovidingaS$654millionloanfacilitytothe project company to finance the development, construction and start-up costs of the plant.

2 Security


It is possible for security to be granted via a general security agreement, which can effect different types of security over different assets, although security over certain assets must be in prescribed forms (such as mortgages of real property). Generally, security documents are executed by way of deed,although certain assets also have specific perfection require-ments, as set out in the following paragraphs.


Security can be taken over real property. For a legal mort-gage over real property, the security will need to be in a form

257Allen & Gledhill LLP


from the Jurong Town Corporation, which is the statutory body responsible for the leasing of industrial land in Singapore, wouldrequirethepriorwrittenconsentfromtheJurongTownCorporation.Consents are usually not required for security over plant,

machineryandequipmentunlesstheseareagreedcontractuallywith the relevant governmental body. A typical PPP agreement will contain restrictions on creating security over the assets of the project company.

3 Security Trustee


Singapore law recognises and accepts the concept of security trusts where security is granted to a security trustee or agent who holds the security on behalf of a group of lenders and, following enforcement, applies enforcement proceeds to the lenders’ claims.





There are generally no significant restrictions which impact the timing and value of enforcement, but the following should be noted:(a) Please see our response to question 5.1 below on court

blocking procedures affecting enforcement. (b) Under Singapore law, mortgagees have a duty to obtain the

best price possible and this may entail an auction, although itisnotarequirementassuch.

(c) In certain industries (e.g. telecommunications, power), the transfer of assets (e.g. licence, rights over PPP agreements) oftheprojectcompanymayrequiretheconsentfromtherelevant governmental authority.


Under Singapore law, foreclosure results in a mortgagee becoming the owner of the mortgaged property absolutely and beneficially. Foreclosurerequiresjudicialapprovalandisuncommon.

a depository agent. In the former case, security can be created over those shares by way of statutory assignment or charge in the prescribed form. In the latter case, security is often taken under common law, with perfection requirements such as servingnotice of charge/assignment on the depository agent.

Security can be taken over scrip shares by way of legal mort-gageorequitablecharge.Intheformercase,thesharesareregis-tered in the mortgagee’s name with the mortgagor retaining an equityofredemption.Inthelattercase,whichismoreconven-tional, the physical share certificates are delivered to the chargee alongsidesharetransferformsexecutedbythechargorinblank.The terms of the share charge will often provide that the chargee may complete the share transfer forms upon enforcement.


Under the Singapore Companies Act (the “CA”), various types of security interests (including over receivables, land, shares in subsidiaries and chattels) created by a Singapore-incorporated company or a Singapore-registered foreign company must be registered with the Accounting and Corporate Regulatory Authority of Singapore (the “ACRA”)within30days(ifexecutedinSingapore)or37days(ifexecutedoutsideSingapore)afterthecreation of the charge.

Security interests over certain assets may also need to be regis-tered with the relevant registries. A legal mortgage for regis-tered land must be registered with the Land Titles Registry while a grant or assignment of security in intellectual property such as trademarks and patents must be registered with the Intellectual Property Office of Singapore.

For registration of a charge with ACRA, a fee of S$60.00 is currently payable. For the registration of a mortgage with the Registry of Land Titles, a fee of S$68.30 is currently payable.

Stamp duty of up to S$500.00 is currently payable on security over shares of Singapore-incorporated companies or immovable property in Singapore.

For intellectual property, a fee of S$50.00 is currently payable in respect of a trademark or patent over which security is to be created.


Filing,notificationorregistrationrequirementsrelatingtosecu-rity are fairly straightforward in Singapore. For instance, regis-tration of security with the ACRA and the Land Titles Registry can be effected electronically.

The fees involved are nominal, as set out in our response to question2.6above.


Governmental consents may be required to create securityover real property where the lessor is a governmental authority inSingapore. Forexample, creating securityover land leased

258 Singapore


debts, including liquidation expenses, unpaid employees’ sala-ries and superannuation or provident fund contributions.


TherearevariousentitiesunderSingaporelawthatareexcludedin part from certain aspects of the general insolvency regime. Forexample,banks licensed inSingaporethatare infinancialdifficultyaresubjecttointerventionbytheMonetaryAuthorityof Singapore (the “MAS”). There are also entities that are excluded from parts of the enhanced scheme of arrangementregime under Singapore law and these entities include banks, electricity licensees and licensed insurers.

However, there is no special insolvency regime applicable to a special purpose vehicle in a usual project finance transaction.


A project lender may appoint a receiver and manager if such a right has been provided for by the relevant security docu-ment. The purpose of appointing a receiver is to remove the management of the secured assets from the hands of the project company and to place it in the hands of a person chosen by the project lender. Secondly, the express terms of the security document may

give the creditor the right to enter into possession.Thirdly, a secured creditor may exercise a power of sale

grantedunderlaworthesecuritydocument.Whenexercisingthe power of sale, a mortgagee has a duty to act in good faith and to take reasonable steps to obtain the best price reasonably obtainable at the time.


Under Section 210 of the CA, a company may make a scheme of compromise or arrangement with its creditors or any class of them. Leave of court first has to be obtained to convene a creditors’ meeting. At the meeting, the proposed scheme will be put forward, and it will be binding on all creditors in each class if a majority in number representing three-fourths in value of each class of creditors present and voting, either in person or byproxy,approvesit.Providedthatsuchapprovalisobtained,thecourtmaysanctiontheschemeinquestion,uponwhichthescheme becomes binding. UnderSection211H(2)oftheCA,thecourtmayexerciseits

power to cram down on a dissenting class of creditors, provided, among other things, that the relevant majority approvals of an overall majority in number and three-fourths in value of the creditors have been obtained for the scheme and that the scheme not only does not discriminate unfairly between two or moreclassesofcreditors,butisalsofairandequitabletoeachdissenting class.

A project company may also enter into a consensual restruc-turing of its debts. Whether dissenting creditors can be “cram-downed” will depend on the terms of the financing agreements governing the project financing.

Generally, while there are no specific restrictions on foreign investorsorcreditorsexercisingtheremedyofforeclosure,thereare certain restrictions on the enforcement powers on foreign mortgagees who have taken mortgages over certain kinds of property. For instance, where land subject to a mortgage is a residential property (as defined in the Residential Property Act, Chapter274ofSingapore(the“RPA”)), foreign mortgagees are restrictedinexercisingtheirenforcementpowers.



There is a moratorium on legal proceedings after the commence-ment of winding-up in respect of a project company. However, a project lender that is a secured creditor will still be able to enforceitssecuritythroughself-helpremediesbyexercisingitscontractual rights as set out in the security documents to dispose of the security. However, in the case of an insolvent winding up, a secured creditor may not claim post-winding up interest if the secured creditor does not realise the security within 12 months of the making of the winding up order or passing for the passing of the resolution for winding up. The period of 12 months may, however,beextendedbytheliquidator.

Where an application for judicial management is made in respect of a project company under Section 227C of the CA, an automatic interim moratorium will be imposed, during which no security may be enforced over the project company’s property. If a judicial management order is granted, a similar statutory mora-torium and restriction on the enforcement of security will apply.

The project company may also file an application to commence a scheme of arrangement with its creditors. In applying for a scheme, there is an automatic moratorium of 30 days and the project company may also apply for a moratorium, whichpreventstheenforcementofsecurity,underSection211Bof the CA. Depending on the circumstances, the court may also declarethatthemoratoriumhasextra-territorialeffect.


Under Section 330 of the CA, where a floating charge has been createdwithinsixmonthsofthecommencementofwinding-up,then unless it is proved that the project company was solvent immediately after the creation of the charge it shall be invalid exceptastotheamountofanycashpaidtothecompanyatthetimeoforsubsequentlytothecreationofandinconsiderationfor the charge.

Undervalue transactions are susceptible to clawback if entered into within five years ending on the date of the winding-up application. Unfair preference transactions are susceptible to clawback if entered into within two years (for persons connected to the company except employees)or, as the casemaybe, sixmonths (for other persons) ending on the date of commence-ment of winding up.

Under Section 328(5) of the CA, certain preferential debts have priority over claims secured by floating charges if the assets of the companies are insufficient to meet the preferential





A table of various government agencies or departments in typical project sectors is set out below.

Project Sector Government Agency/Department

BuildingandConstructionBuildingandConstructionAuthority and Urban Redevelopment Authority

Transportation Land Transport Authority

Energy EnergyMarketAuthority

Water and Sanitation PublicUtilitiesBoard

TelecommunicationsInfo-communications MediaDevelopmentAuthority of Singapore


In general, financing or project documents need not be regis-tered to be valid or enforceable. However, certain types of secu-rityinterestsmayrequireregistration,perourresponsetoques-tion 2.6 above.


Certainbusinessesorundertakings requirea licence fromtherelevant authorities under Singapore law (see our response to question7.1above).

Foreign ownership of land in Singapore does not gener-ally require licences or approvals, save in respect of “residen-tial property” as defined under the RPA. Foreign ownership of non-residential properties (such as commercial or industrial properties) is generally permitted.Whiletherearegenerallynolicensingrequirementsimposed

on the ownership of pipelines, there are certain licensing requirementsimposedontheoperationofsuchpipelines.Forexample,apipelineownermaynotconveyanyclassofpetro-leum or any flammable material through any pipeline of which he is thepipelineowner exceptunder the authorityof and inaccordance with the provisions of a pipeline licence from the Commissioner of Civil Defence. In addition, under the Gas Act, Chapter 116A of Singapore (“GA”), no person may convey gas through a gas pipeline or gas pipeline network to any prem-ises unless he is authorised to do so by a gas licence (i.e. a gas transporter’slicence)orisexemptedundertheGA.There are no express prohibitions on entities which are

foreign-owned from holding such petroleum or gas licences. However, regulatory approvals may need to be obtained for the acquisitionofanequityinterestinalicensee.


Generally, where a company is in financial distress or insolvent, the usual fiduciary duties owed by directors to the company will require thedirectors to take intoaccountandgiveprimacytothe interests of creditors as a whole. Additionally, statutory liabilities exist for directors who

continue to trade whilst a project company is in financial diffi-culty. If a director of the company contracts a debt which he, at thetimeofcontracting,hadnoreasonablegroundofexpectingthat the company will be able to pay, he will be personally liable for the payment of that debt under Section 339(3) of the CA (readwithSection340(2)oftheCA).



Singapore law does not generally impose any restriction on the foreign ownership of Singapore-incorporated project companies, save for companies operating in specific industries. Such indus-tries include the banking, media and broadcasting industries. These restrictions may be imposed by legislation that restricts thequantityortypeofsharesthataforeignentitymayholdinthe Singapore-incorporated company, or through the system of licensing implemented by the relevant regulatory authority.There is no additional fee or tax imposed on the foreign

ownership of a project company as such. However, Singapore taxresidentcompaniesmayenjoycertainadditionaltaxbenefits(e.g.undertheAvoidanceofDoubleTaxationAgreementsthatSingapore has concluded with other jurisdictions).


Singapore has entered into a number of bilateral investment treaties and free trade agreements that set out certain standards of protection for investments made in Singapore by investors from other jurisdictions.

Such treaties and agreements generally do not provide protec-tion from the restrictions set out in our response to question6.1 above.


Singapore does not have any specific legislation that specifically provides for the nationalisation and expropriation of foreigninvestments. However, certain legislation in Singapore allows thegovernment tocompulsorilyacquireor requisitioncertainproperty.For instance, the Land Acquisition Act, Chapter 152 of

Singapore (“LAA”)providesforthecompulsoryacquisitionofland by the government for public and other specified purposes. This right to compulsorily acquire land is subject to certainprocesses and the payment of market-value compensation for theacquiredlandinaccordancewiththeprovisionsoftheLAA.

260 Singapore


Law/Regulation Description

Environmental Protection and ManagementAct,Chapter94AofSingapore

Relates to the protection and management of the environment and resource conservation. Also regu-lates (a) the discharge of tradeeffluent,(b)theimpor-tation, manufacture and sale of hazardous substances and (c) air impurities.

Environmental Public Health Act, Chapter 95 of Singapore

Relates to environmental public health as well as the disposal and treatment of industrial waste.

Workplace Safety and HealthAct,Chapter354Aof Singapore

Relates to workplace safety, health and welfare. Imposes duties on various persons (including employers) to ensuretheadequacyofwork-place safety measures, work-place training and super-vision and procedures for workplace emergencies.

Fire Safety Act, Chapter 109A of Singapore

Relates to certain environ-mental, health and/or safety matters.

Sewerage and Drainage Act, Chapter294ofSingapore

Energy Conservation Act, Chapter 92C of Singapore

Resource Sustainability Act 2019 (No. 29 of 2019)

Relates to the collection and treatment of certain types of waste (NB: this Act isonly partially in force as of February 2020).


The main legislation governing public procurement in Singapore is the Government Procurement Act, Chapter 120 of Singapore (“GPA”), which was passed to give effect to Singapore’s obli-gations under the World Trade Organisation’s Agreement on Government Procurement and several other free trade agree-ments. There are three pieces of subsidiary legislation made under the GPA, namely the Government Procurement (Application) Order (“GP Order”), the Government Procurement (Challenge Proceedings) Regulations, and the Government Procurement Regulations2014(“GP Regulations”).

8 Foreign Insurance


A foreign insurance company intending to insure or guarantee a project asset should be aware of restrictions in relation to carrying


Singapore has very limited natural resources and there is very limitedactivityinextractingnaturalresources.


Therearegenerallynorestrictions,controls,feesand/ortaxesinSingaporeapplicableontheexchangeofthelocalcurrencytoforeign currencies, or vice versa.


Therearegenerallynorestrictions,controls,feesand/ortaxesapplicable on the remittance and repatriation of investment returns (other than payments of interest and similar payments in respect of any loan or indebtedness) to parties outside Singapore. Pleaserefertoourresponsetoquestion17.1belowonwith-

holdingtaxesapplicableinSingaporeoncertainpaymentsmadeto non-residents in relation to interest and other payments to parties in other jurisdictions.


Yes, they can.


There is generally no such restriction.


Variousenvironmental,healthandsafetylawsmaybeapplicableto a project, depending on the particular nature of the project and/or whether the project involves the use, storage, import, manufacture or sale of hazardous substances. This may include certainlicensingorapprovalrequirements.

A table setting out some of the more salient regulations is set out below.




Imports into Singapore are generally subject to GST and/or duty payment. Currently, the prevailing rate ofGST is 7%of theaggregate of cost, insurance and freight (“CIF”) value, all duties payable and commission and other incidental charges. A list of goods which are dutiable is set out on the Singapore Customs website at: http://www.customs.gov.sg.However, certain exceptions to the payment of GST on

imports are available. Imports of investment precious metals areexemptfromGST,thoughimporterswillstillneedtoapplyforanexemptionpermittocarryoutsuchimports.

Certain GST suspension schemes are also available on imports. Goods imported and stored in Free Trade Zones are not subject to GST, unless removed into customs territory for local use. Similarly, dutiable goods imported and stored in a licensed warehouse, and non-dutiable goods imported and stored in a zero-GST/approved warehouse or through the various GST suspension schemes described below are generally not subject to duty and GST. GST suspension schemes under the GST Actinclude:(i)themajorexporterscheme;(ii)thezero-GST/licensed warehouse scheme; (iii) the approved third-party logis-tics company scheme; (iv) the approved contract manufacturer and trader scheme; (v) the approved refiner and consolidator scheme; and (vi) the import GST deferment scheme.

11 Force Majeure


Force majeure exclusions are generally available and enforceableif provided for in the contract, subject to legislation rendering contractual clauses unenforceable for want of reasonableness. ExamplesofsuchlegislationincludetheUnfairContractTermsAct,Chapter396ofSingaporeandtheMisrepresentationAct,Chapter 390 of Singapore.



ThePreventionofCorruptionAct,Chapter 241of Singapore(the “PCA”) is the principal legislation on bribery. The prohi-bitions thereunder are broad, and both the giver and taker of bribes (whether as principal or agent) may be guilty of an offence. The general punishment upon conviction is a fine not exceedingS$100,000orajailtermnotexceedingfiveyearsorboth. In addition, where a court convicts any person of a PCA bribery offence, the court may order that person to pay a penalty equaltotheamountorvalueofthegratification.Bribery of Members of Parliament or members of certain

public bodies is punished more severely, with givers and/or takers of such bribes liable upon conviction to a fine not exceedingS$100,000orajailtermnotexceedingsevenyearsorboth. This increased punishment shall apply where the subject matter of the offence was a contract, proposal for a contract, or subcontract to executeworkunder such contract,with theSingapore government or any public body. Further public servant bribery offences are set out in Sections 161 to 165 of thePenalCode,Chapter224ofSingapore(the“Penal Code”).

on insurance business in Singapore (see Section 3(1) of the InsuranceAct,Chapter142ofSingapore(the“IA”)), reinsurance (see Section 3(1A) of the IA) and solicitation for insurance business (see Section 6 of the IA).Therearenospecificfeesand/ortaxesoninsurancepolicies

over project assets provided or guaranteed by foreign insurance companies. However, any insurance services, whether provided by a foreign or domestic company, may be subject to goods and servicestax(“GST”).


Insurance proceeds are generally payable to foreign creditors assuming that they are entitled to the insurance proceeds as an assignee or as a loss-payee.



Foreign workersThe Employment of Foreign Manpower Act, Chapter 91Aof Singapore provides that no person shall employ a foreign employee (i.e. an employee that is not a citizen or permanent residentofSingapore)withoutavalidworkpass.Varioustypesof work passesmay be issued by theMinistry ofManpower,depending, inter alia,onthequalificationsoftheforeignworkersand the monthly salaries of the relevant jobs.

Quotas and levies may apply in relation to certain categories of foreign workers.

Foreign engineersOnly engineers registered under the Professional Engineers Act, Chapter 253 of Singapore (“PEA”) may engage in a prescribed branch of engineering work in Singapore (e.g. chemical engi-neering, civil engineering, electrical engineering and mechan-ical engineering).

Foreign engineers not registered under the PEA may seek authorisation to engage in engineering work in collaboration with a registered professional engineer possessing a practising certificate authorising him to engage in that prescribed branch of engineering work.



The import of goods into Singapore is subject to the Customs Act,Chapter70ofSingapore,theGoodsandServicesTaxAct,Chapter 117A of Singapore (the “GST Act”), and the Regulation ofImportsandExportsAct,Chapter272AofSingapore.

Prior to the import of any goods into Singapore, the importer must, amongst other things, activate its Customs Account and appoint a Declaring Agent to apply for customs permits on its behalf, or apply for customs permits for its shipments or on behalf of its clients. If the importer is importing controlled goods, the importerwillalsoberequiredtoobtaintheproperlicencefromthe competent authority in Singapore. Controlled goods include steel helmets, flammable materials and certain batteries.

262 Singapore


case or proceeding to which the agreement applies, unless, for example, the agreement isnull andvoidunder the lawof thestate of the chosen court, a party to the agreement lacked the capacity under the law of Singapore to enter into the agreement or giving effect to the agreement would lead to manifest injus-tice or be manifestly contrary to the public policy of Singapore.

Furthermore, pursuant to Section 13 of the CCAA, parties can apply to the High Court for a foreign judgment to be recog-nised and enforced, and in determining whether to do so the High Court must not review the merits of the foreign judgment.

Singapore law will generally uphold any provisions waiving sovereign immunity by a Singapore entity.



Assuming that the subject matter for arbitration is arbitrable, the relevant dispute falls within the scope of the arbitration clause, and the relevant agreement to arbitrate is not null and void, inop-erative or incapable of being performed, Singapore courts will generallyrecognisecontractualprovisionsrequiringsubmissionof disputes to international arbitration.

The Singapore High Court may grant permission to enforce foreign arbitral awards subject to certain procedural require-ments. Where the arbitral award is made in a state party to the New York Convention, the Singapore High Court will only refuse enforcement on limited grounds, including where arbitral authority or procedure is defective or enforcement contravenes public policy. Where the arbitral award is made in a state not party to the New York Convention, the Singapore High Court has a discretion whether to enforce the arbitral award, but will consider similar factors as if that state were party to the New York Convention.


Yes, it is a contracting state.


There is no exhaustive list on non-arbitrable disputes underSingapore law. However, matters containing a strong public interest aspect, such as criminal matters, the winding up of companies, clawback claims, antitrust regulatory issues and consumer protection may not be arbitrable.


Disputes arising from infrastructure projects will generally not be subject to mandatory domestic arbitration proceedings. Disputes subject to mandatory domestic arbitration proceedings include those relating to the provision of services by a licensed estate agent to a client or the provision of services by a registered private education institution to students.

Separately, under the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, Chapter 65Aof Singapore (the “CDSA”), a person must lodge a Suspicious Transaction Report as soon as practicable where he knows or has reasonable grounds to suspect that any property represents the proceeds of, was used in connected with, or is intended to be used in connection with “criminal conduct” (which is defined in the CDSA to include the bribery provisions under the PCA and the Penal Code). From 1 April 2019, it is an offence under the CDSA for any person to possess or use any property reason-ably suspected of being or representing any benefits of “crim-inal conduct”, if such person is unable to satisfactorily account for such possession or use.

13 Applicable Law


Project agreements in relation to projects undertaken or located in Singapore are typically governed by Singapore law.


Financing agreements for Singapore projects are typically governed by Singapore law.


Agreements relating to the sale and purchase and/or grant of security interests over land, shares in Singapore companies and assets in Singapore are matters that are typically governed by Singapore law.



The irrevocable submission of the borrower to a foreign juris-diction is generally legally binding and enforceable under the laws of Singapore, save where the Singapore courts have juris-diction over a dispute, Singapore is a more appropriate forum and the ends of justice will be better served by the dispute being determinedinSingaporecourts,oraSingaporecourtmayexer-cise its residual jurisdiction to determine the matter.

Contracting parties may stipulate their choice of court for dispute resolution and include an exclusive choice of courtagreement. If a plaintiff wishes to bring an action in Singapore onacontractcontaininganexclusivechoiceofcourtagreementdesignating a foreign court as the chosen court, that foreign court is a court of a country party to the Hague Convention on Choice of Court Agreements entered into on 30 June 2005 (the “Convention”) and the Convention is in force in that country, the Choice of Court Agreements Act, Chapter 39A of Singapore (the “CCAA”) will generally apply, although there are limited exceptions to theCCAAas specified inSection9,Section10and Section 22 CCAA, such as family law and bankruptcy or insolvency matters.

Section 12(1) of the CCAA provides that if a Singapore court isnotthechosencourtunderanexclusivechoiceofcourtagree-ment, the Singapore court must generally stay or dismiss any



with respect to a loan of not less than S$20 million from a non-resident person which is utilised to acquire productiveequipmentincludingplantormachinerywhichwouldgenerallyqualifyforcapitalallowances.TheMinistermay,inhisabsolutediscretion, approve such application and impose any conditions, if he is satisfied as to the bona fides of such application and that it isexpedientinthepublicinteresttodoso.

For stamp duty payable on security documents, please refer to ourresponsetoquestion2.6above.

18 Other Matters


Asmentionedinourresponsetoquestion1.1above,Singaporeplays an important role in arranging infrastructure projects in the region andmany experiencedproject finance advisers arebased in Singapore. Apart from infrastructure fund managers and Singapore-based bankswith extensive regional networks,multilateral development banks have also established a signifi-cant presence in Singapore.

Where disputes are concerned, Singapore is well-known for its rule of law, good governance and reliable legal system, making Singapore a preferred venue for international parties to settle project financing disputes. There are also various dispute reso-lution institutions located in Singapore, including the Singapore International Arbitration Centre, which ranks among the top arbitration institutions globally.All of the foregoing give confidence to equity investors

or lenders participating in project financings in and out of Singapore.


Project companies issuing bonds or similar capital market instruments are subject to the same regulatory requirements,saveforanypotentialtaxexemptionsforprojectbondsusedtofund infrastructure projects.

The main legislation governing the issuance of debentures in Singapore is the Securities and Futures Act, Chapter 289 of Singapore (“SFA”).TheSFArequiresalloffersofdebenturestobeaccompaniedbyaprospectus,unlessanyof theexemp-tions under Part XIII of the SFA are applicable, which include exemptions relating to institutional and accredited investors,small offers, private placements, and where an offer informa-tion statement is used. With the introduction of the Securities andFutures(OffersofInvestments)(ExemptionforOffersofPost-seasoning Debentures) Regulations 2016 and the Securities andFutures(OffersofInvestments)(ExemptionforOffersofStraight Debentures) Regulations 2016, debentures may also be offered to retail investors without the need for a prospectus if the issuermeetsacertainsize,andcreditandlistingrequirements.

If the debt securities are listed on the SGX-ST, issuers will also have to comply with the applicable listing rules in the SGX-STListingManual.



To our knowledge, there has been no such call for any projects.

17 Tax


Under Section 12(6) of the ITA, the following payments are deemed to be derived from Singapore:(a) any interest, commission, fee or any other payment in

connection with any loan or indebtedness or with any arrangement, management, guarantee, or service relating to any loan or indebtedness which is (i) borne, directly or indirectly, by a person resident in Singapore or a perma-nentestablishment inSingapore (except inrespectofanybusiness carried on outside Singapore through a permanent establishment outside Singapore or any immovable prop-erty situated outside Singapore), or (ii) deductible against any income accruing in or derived from Singapore; or

(b) any income derived from loans where the funds provided by such loans are brought into or used in Singapore.

Such payments, where made to a person not known to the payingpartytobearesidentinSingaporefortaxpurposes,aregenerallysubjecttowithholdingtaxinSingapore. Therateatwhichtaxistobewithheldforsuchpayments(otherthanthosesubject to the 15% final withholding tax described below) tonon-resident persons (other than non-resident individuals) is currently17%.Theapplicableratefornon-residentindividualsiscurrently22%.

However, if the payment is derived by a person not resident in Singapore unless from any trade, business, profession or voca-tioncarriedonorexercisedbysuchpersoninSingaporeandisnot effectively connected with any permanent establishment in Singapore of that person, the payment is subject to a final with-holdingtaxof15%.Therateof15%maybereducedbyappli-cabletaxtreaties.

Therefore, payments of interest and other income falling within Section 12(6) of the ITA made by borrowers in Singapore toalendernottaxresidentinSingapore(includingpaymentsofinterest under a guarantee or the proceeds of enforcing security) aresubjecttowithholdingtaxattheaboverates.However,suchpaymentstoalendertaxresidentinSingapore

(or a Singapore branch of a foreign company) are not subject to withholdingtax.


Under the Approved Foreign Loan Incentive, a company can apply to theMinister for Finance (the “Minister”) for with-holdingtaxratesoninterestpaymentstobereducedorexempted

264 Singapore



It is not the norm for the transaction documents of an Islamic financing transaction in Singapore to be governed by Shari’ah law.


The inclusion of an interest payment obligation in a loan agree-ment would not affect its validity and enforceability under Singapore law.

19 Islamic Finance


It is possible to use a combination of some or all of the Shari’ah-compliant financing principles of Istina’a, Ijarah, Wakala and Murabaha in structuring an Islamic project financing.By way of illustration, during the construction phase of a

project, Istina’a could be used as the financing principle for the purposeoffundingsuchconstruction.Subsequently,whentheproject has achieved commercial operation, Ijarah could then be used as the financing principle based on the revenue receivable from the project.

265

Kok Chee Wai is Co-Head of the Financial Services Department and separately, Co-Head of Allen & Gledhill’s regional Energy, Infrastructure & Projects Practice, and Co-Head of the Firm’s Banking & Finance Practice.Chee Wai has broad and deep experience in domestic and international financing. His general banking and finance practice includes acting for lenders and major corporates on domestic and cross-border syndicated loans, structured and acquisition financing and debt restructuring.He also regularly acts for banks and sponsors on limited recourse project financing in various sectors and has acted in many of the public-pri-vate partnership (“PPP”) and other infrastructure projects in Singapore and in the region.Chee Wai is noted for his Banking & Finance and Projects & Energy expertise in international legal directories such as Chambers Global, Chambers Asia-Pacific and The Legal 500 Asia Pacific.

Allen & Gledhill LLPOne Marina Boulevard #28-00Singapore 018989

Tel: +65 6890 7724Email: [email protected]: www.allenandgledhill.com

Allen & Gledhill is an award-winning full-service South-east Asian law firm providing legal services to a wide range of premier clients, including local and multinational corporations and financial institutions. The Firm is consistently ranked as a market leader in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which are the first of its kind. The Firm’s reputation for high-quality advice is regularly affirmed by the strong rankings in leading publi-cations, and by the various awards and accolades. With a growing network of associate firms and offices, it is well-placed to advise clients on their business interests in Singapore and beyond, on matters involving South-east Asia and the Asian region. With offices in Singapore and Myanmar; its associate firm, Rahmat Lim & Partners in Malaysia; and its alliance firm, Soemadipradja & Taher in Indonesia, Allen & Gledhill’s network has over 550 lawyers in the region.

www.allenandgledhill.com


Allen & Gledhill LLP

Kelvin Wong is Co-Head of the Corporate & Commercial Department and Head of the Energy, Infrastructure & Projects Practice at Allen & Gledhill.Kelvin regularly acts as counsel to key global and local players in the energy, gas, petrochemical and specialty gas production, waste treat-ment and disposal, water treatment and supply sectors. He has considerable experience advising on project development and structuring, and complex regulatory and transactional issues. Kelvin possesses extensive knowledge of the energy, gas and utilities sectors in Singapore and is widely regarded as one of the leading lawyers and a trusted legal adviser in infrastructure projects in the region.Kelvin’s practice also encompasses district cooling, storage and terminalling, tolling, contract manufacturing, outsourcing and other service arrangements. He regularly advises on a broad range of general commercial transactions, including public and private procurement (including public-private partnerships (“PPP”)), cross-border sale of goods, distribution and agency arrangements, equipment securitisation and leasing arrangements.

Allen & Gledhill LLPOne Marina Boulevard #28-00Singapore 018989

Tel: +65 6890 7644Email: [email protected]: www.allenandgledhill.com



Chapter 29266

South Africa

Tshisevhe Gwina Ratshimbilani Inc. Eduan Kapp

South Africa


decline of 3.2%. While this was effectively reversed in thesecondquarter(+3.2%),athirdquarterdeclineof0.6%followed.

Electricity supply and infrastructure constraints inhibit domestic growth as weaker global economic conditions weigh onexportdemand.Exacerbating thestuntedgrowthforecast is theCOVID-19

pandemic and the realisation that this, together with economic restraints, will have a major impact on infrastructure develop-ment during the year, with a further contraction in economic growth inevitable. The unknown forecast on the status of the pandemic is likely to severely limit progress, potentially up to thethirdquarteroftheyear.


Wind energy:■ CookhouseWindFarm(135.8Megawatt)atacostofR2.4

billion.■ GoundaWindProject(135.3Megawatt)atacostofR2.7

billion.■ JeffreysBay(135.11Megawatt)atacostofR2.9billion.■ AmakhalaEmoyeniWindFarm(131.5Megawatt)atacost

ofR3.94billion.■ Enel’sGibsonBayWindFarm(108.25Megawatt)atacost

of R2 billion.KazungulaBridge(atacostofR3.9billion)whichconnects

Zambia,BotswanaandtheDurbanPortinSouthAfricatotheDemocraticRepublicofCongo.Thecorridorexpectedtoreachfinancialclosebyquarter4in2020.

2 Security


Under South African law, the basic types of security that can be granted over movable and immovable property (including intan-gible assets) are as follows:■ mortgagebondsregisteredinrespectofimmovableproperty;■ pledgesofmovable,tangibleproperty;■ notarial mortgage bonds registered over movable assets

(general notarial bonds can be registered over all movable assets of the debtors while a special notarial bond may be registered in respect of specifically identified movable assets);

1 Overview


Given the current underperformance of the South African economy, and the impact seen in the construction sector, the Renewable Energy Independent Power Producer Programme (andspecificallytheexpectedRound5inthelatterpartoftheyear) remains a large focus domestically.

It is becoming increasingly evident that Eskom (the Government-owned electricity supplier), in its current struc-ture, is unsustainable. It is therefore inevitable that renewable energy will play an increasing role in the country’s future energy mix. TheproposedrestructuringofEskomneedstobecare-fully but urgently addressed to achieve a transition from a coal to a low-carbon economy.

The REIPPP programme will continue to make a signifi-cant impact on the economy, job creation, community uplift-ment, economic transformation and climate change. It has already illustrated how socio-economic and enterprise develop-ment benefits can be delivered to local and often marginalised communities across South Africa while generating new, clean energy–complementing(ratherthancompetingwith)existingpower sources such as Eskom and coal.

Notwithstanding economic concerns, there is significant political will to drive South Africa’s infrastructure development programmes, with government infrastructure projects devel-oped by way of public private partnerships (PPPs) at municipal, provincial and department level.

Given the scale of the infrastructure development programmes (c.R3.4trillion),itisacceptedthatthegovernmentandthemainbanks alone cannot fully fund the programme. The introduc-tion of project bonds will allow project developers to tap into substantialliquidityfromSouthAfricaninstitutionalinvestors.In addition, Sovereign Wealth Funds are beginning to invest directly into infrastructure projects, so this may also provide an additional source of funding for capital projects in the future.

Additionally, project bonds offer an opportunity for institu-tional investors to participate in infrastructure projects through listed, tradable securities that can offer superior risk-adjusted returns.

It is of major concern, when considering the outlook for project development in South Africa, that the International MonetaryFund(IMF)cutSouthAfrica’sGDPtoaround0.4%for the year.

South Africa’s growth in 2019 was massively stunted by power outagesthroughloadshedding,whichledtoamajorfirstquarter

267Tshisevhe Gwina Ratshimbilani Inc.


Special notarial bond A special notarial bond is a mortgage which: ■ iscreatedoverthetangiblemovableproperty(whichcan

be specifically identified) of a borrower as security for a debt or other obligation;

■ meetstherequirementsoutlinedintheSecuritybyMeansofMovablePropertyAct1993;and

■ isregisteredundertheDeedsRegistriesAct1937(DRA).A special notarial bond (once registered) constitutes real secu-

rity in the mortgaged property as effectively as if it had been expresslypledgedandactuallydeliveredtothelender.Titletothe movable property remains with the borrower, subject to the lender’s security interest. Since property subject to a special notarial bond must be specifically identified, it is not appropriate for creating security over changing (fungible) assets.

Landlord’s hypothec If rent is due and payable, but has not been paid, the lessor has a hypothec (an encumbrance giving a creditor a security interest in a debtor’s movable property for so long as the movable prop-erty is on the leased property), unless the contrary is agreed. The hypothec provides the lessor with a real right of security, allowingthelessortoattachandexecutethelessee’spropertytosatisfy payment of the arrears.

FormalitiesPledge An agreement must be created between the lender and the borrower together with delivery of the pledged movable property to the lender (or its agent). Title to the movable property remains with the borrower, subject to the lender’s security interest. There arenoregistrationornotificationrequirementsforapledge.

General notarial bond The DRA does not prescribe a form for a general notarial bond. Thebondmustbepreparedbyanotarypublic,andisexecutedeither: ■ bytheownerofthemovablepropertysubjecttothebond;or■ by a notary public under a formal power of attorney

granted to him by the mortgagor. Typically, a bond contains both:

■ An acknowledgment of debt by the borrower for theamount of the bond.

■ Adeclarationbindingtheborrower’smovablepropertyinfavour of the lender as security for the debt acknowledged.

A general notarial bond must be registered at the deeds registrywithinthreemonthsafterthedateofitsexecution.

Special notarial bond A special notarial bond for tangible movable property must iden-tify and describe the property secured in a manner which makes the property readily recognisable. The DRA does not prescribe a particular form for this bond. It must be registered in the manner prescribed in the DRA and must be registered at the deedsregistrywithinthreemonthsafterthedateofitsexecution.

Landlord’s hypothec There are no formalities.


Claims and receivables include book debts and other rights under contracts, and security can be granted in respect of them in South Africa.

■ cessionsofpersonal rights in securitatem debiti (namely, as security for a debt) (now treated as a pledge of incorporeal assets);

■ tacithypothecs(arisingbyoperationoflaw,ratherthanbyagreement): landlord’s hypothec for unpaid rent; and sell-er’s hypothec under an instalment sale transaction;

■ judicial pledge (arising on attachment under a writ ofexecution);and

■ rights of retentionor liens (arisingbyoperationof law):enrichment liens; and debtor and creditor liens.

Immovable property is the most common type of asset used to secure debt. This includes land and buildings comprising capital projects (such as power stations, roads, mining opera-tions, office buildings, factory buildings, warehouses and shop-ping centres). Certain mining rights are also capable of being mortgaged although the ability to dispose of such mining right when foreclosed upon may be limited by the terms of the mining licence or specific conditions incorporated under the relevant legislation.

Furthermore, securities such as shares, debentures, bonds and treasury certificates can be used as collateral. Insurance policies over any insurable assets or interest, or both, of the borrower can also be used as collateral to the extent that a first payeeinterest can be duly noted in the policy, allowing proceeds from the policy to be utilised towards settlement of debt. The same applies to bank accounts or any cash standing to the credit of the borrower as well as any future receivables of the borrower.


Tangible Movable PropertyMovablepropertyisanythingwhichcanbemovedfromplaceto place without damage to itself. Generally, all property which is not immovable property is classified as movable property. A further distinction is drawn between:■ tangible movable property, which can be handled or

touched; and ■ intangible movable property, which cannot be handled

or touched (such as intellectual property, book debts and shares).

Common Forms of SecurityThe most common forms of security that can be granted over tangible movable property are outlined below.

PledgeA pledge is a type of mortgage of movable property given by a borrower (pledgor) in favour of a lender (pledgee) as security for a debt or other obligation. A pledge can be used as security for both tangible and intangible movable property.

General notarial bond A general notarial bond is a mortgage by a borrower of all of its tangible movable property in favour of a lender as security for a debt or other obligation. However, a general notarial bond does not (in the absence of attachment of the property before insolvency) make the lender a secured creditor of the borrower. Consequently,itisnotatruemortgageofmovableproperty,butis a means of obtaining a limited statutory preference above the claims of concurrent creditors in the borrower’s insolvent estate.

268 South Africa



There are no “hard and fast rules” as far as the amount of time for registering the different forms of security is concerned. The time period associated therewith is dependent on the circumstances.

The registration fees, court fees and sheriff’s fees that are charged for the granting or taking of security are not prohibi-tivelyexpensive.

Where there is a bond with a large secured sum, the fee charged by the conveyancer or notary public (once calculated at theprescribedtariff )canbeprohibitivelyexpensive. Intheseinstances,itisusualforthelendertorequestadiscountonthefee.Discountsof50%arecommonlynegotiated.



3 Security Trustee


Although a trust can be validly created under South African law, it is unclear (and as yet untested) as to whether a trust can be validly created to hold security in favour of several credi-tors. This is because in order for security to be valid, a principal obligation must be owed to the secured creditor. A trust lacks thisrequirednexus.Theconceptofagencyisalsoproblematicbecausesection54oftheDRAexpresslyprohibitstheregistra-tion of a mortgage bond or notarial bond in favour of any person as the agent of a principal.

Where there are several creditors, security may be granted in favourofaSecuritySpecialPurposeVehicle(SecuritySPV),whichis a shelf company created for such purpose. This structure is the norm for most project finance transactions in South Africa. The SecuritySPVissuesalimitedguaranteetherebyguaranteeingtheobligations of the borrower under the loans in favour of the credi-tors.Inturn,theborrowercounterindemnifiestheSecuritySPVfor any loss that it may suffer under the guarantee and, as security for its indemnity obligations, the borrower grants all security in favouroftheSecuritySPV.Thisallowssecuritytobeeffectivelyheld by one entity in relation to numerous secured claims.



Common forms of securitySecurity over claims and receivables is usually created by a cession in security.

Formalities Therearenospecificperfectionrequirements foracession insecurity, as the act of cession itself is sufficient to perfect the security.


Security over cash deposits is usually created by a cession in security of the borrower’s bank account.

Formalities Therearenospecificperfectionrequirements foracession insecurity, as the act of cession itself is sufficient to perfect the security.


Financial instrumentsThe most common types of financial instruments over which security can be granted are shares and debt securities.

Common forms of securitySecurity over financial instruments is usually created by either a pledge or a cession in security (or a combination of these).

A cession in security is a way of granting security over intan-gible movable property. It is created by the debtor (cedent) granting security by way of a cession over intangible movable property in the creditor’s (cessionary’s) favour. It can be struc-tured as either: ■ A cession in securitatem debiti where title to the property

remains with the cedent (as with a pledge).■ Anout-and-outcession,wheretitletothepropertyistrans-

ferred to the cessionary, subject to the cedent’s right to have the property transferred back to it by the cessionary once the debt, or other obligation secured, is discharged.

Formalities Where financial instruments are evidenced by certificates, those certificates are usually delivered with a transfer form (in blank) to evidence the security and facilitate its easy enforcement, where necessary. Where financial instruments are uncertifi-cated,thesecurityisperfectedbyrecordingitsexistenceonthesecurities account of the borrower where the financial instru-ment is registered.

There are no formalities for a cession in security, which is validly created once the agreement to grant security has been reached.





realisation. The Insolvency Act prescribes certain instances under which a secured creditor can procure the sale of movable property itself.

Section 83 of the Insolvency Act provides for alternative procedures regarding the realisation of certain types of prop-erty held as security. After realising the property, the secured creditormustforthwithpaythenetproceedstotheliquidator.Provided that the secured creditor can prove a valid claim against the insolvent’s estate, the secured creditor will be enti-tled to a payment out of the proceeds of such realisation. Section35BoftheInsolvencyActimposesastatutorynetting

of all obligations arising under certain master agreements. Obligations incorporated in the netting would include those of a transferee of security to return the security to the transferor. We note that security that is pledged, mortgaged or bonded to a secured party cannot be included in the netting.


Undersection32oftheInsolvencyAct,acourtcan,attheliqui-dator’s insistence, set aside certain transactions entered into by an insolvent person/entity prior to its liquidation. These arereferred to as impeachable dispositions. A disposition is any transfer or abandonment of rights to property, and can include a mortgage over immovable property, a cession, a pledge or a special notarial bond, among others. The Insolvency Act provides for the following impeachable dispositions:

Disposition without valueIn terms of section 26 of the Insolvency Act, a court may set aside an insolvent company’s disposition of property provided such disposition is not made for value. A court will set aside suchadispositioniftheliquidatorprovesthateither,atanytime:■ more than twoyearsbefore the liquidationof the insol-

vent’s estate, the insolvent made a disposition of property and that, immediately after the disposition was made, the insolvent’sliabilitiesexceededitsassetsandthedispositionwas not made for value; or

■ withintwoyearsoftheliquidationoftheinsolvent’sestatethe insolvent made a disposition of property not for value, unless the person claiming under or who benefited by the disposition proves that, immediately after the disposition wasmade,theinsolvent’sassetsexceededitsliabilities.

In either case, if proved that at any time after the making of thedisposition the insolvent’s liabilities exceeded its assetsbyan amount less than the value of the property disposed of, the dispositionmaybesetasidetotheextentofsuchexcess.

Voidable preferencesSection 29 of the Insolvency Act provides for the setting aside of a disposition of an insolvent person or entity’s property made within sixmonths before the date of liquidation and has theeffect of preferring one creditor above another, if, immediately after the disposition, the liabilities of the insolvent person or entityexceedthevalueofitsassets.Inthesecircumstances,acourt can set aside the disposition. The setting aside of such a disposition may be avoided if the person or entity in whose favour the disposition was made can prove that the disposition was made in the ordinary course of the insolvent person or enti-ty’s business, and that the disposition was not intended to prefer one creditor above another.



With certain types of security (such as security conferred by way of a cession in security, a pledge and a special notarial bond), the secured creditor can, without prior judgment against, or pursuit of, the security provider, procure the sale of the secured assets and apply the proceeds to satisfy the principal obligation.

For mortgage bonds or general notarial bonds, the secured creditor must first perfect the security by taking possession of the secured assets. The secured creditor must obtain a court order directing the sheriff of the High Court to attach the rele-vant asset. The secured creditor can then procure a sale of the assets and apply the proceeds of the sale to discharge the prin-cipal obligation.

In some cases, the secured creditor can simply agree with the borrower that the secured assets are sold without the need for judicialexecution.Thisisknownasparate executie (the right of a creditor to realise a borrower’s property without first obtaining a court order). An agreement of parate executie concerning mova-bles pledged and delivered to the secured creditor is valid, provided there is no prejudice to the security provider. However, an agreement of this nature is invalid in relation to security over:■ immovableproperty;and■ securedassetsnotinthepossessionofthesecuredcreditor

at the time it wishes to enforce its rights.


As a first step, there must be default of the principal obliga-tion. This is because security is an accessory obligation which is dependentontheexistenceorcomingintoexistenceofaprin-cipal obligation. The secured creditor may procure the sale of the secured property and apply the proceeds toward satisfaction of the principal obligation.

In respect of mortgage bonds and general notarial bonds, the secured creditor must first perfect the security by taking posses-sion of the property. This can only be done after instituting judicial proceedings against the borrower and obtaining a court order directing the sheriff to take possession of the property.

In respect of other security (namely, special notarial bonds, security cessions and pledges), the secured creditor may contrac-tually agree with the borrower to procure the sale of the prop-erty without prior judgment (known as an agreement of parate execute).



Once insolvency proceedings have commenced, a secured cred-itor holding property as security cannot realise that security itself.Itmustdeliverthesecuredpropertytotheliquidatorfor

270 South Africa


Once business rescue proceedings are commenced, a mora-torium is imposed on all claims (secured and unsecured). The moratorium runs from the date the board resolution is filed (and,consequently,beforenoticeisgiventocreditorsandotheraffected persons). If a shareholder or creditor applies to the court to have the company placed into business rescue, the morato-rium applies as soon as the application is issued. Following the board resolution, or court application, for business rescue, the board of directors stay in office throughout the business rescue period. The company must appoint a business rescue practi-tioner. The practitioner can both: ■ Suspend(entirely,partiallyorconditionally),forthedura-

tion of business rescue proceedings, any obligation of the company arising from any pre-commencement contracts (even if that obligation arises post-commencement).

■ Applyurgently to a court to cancel (entirely,partiallyorconditionally), on any terms that are just and reasonable in the circumstances, any agreement to which the company is a party. A business plan must be prepared and voted on by the company’s creditors. The plan must be approved by creditors whose aggregate claims against the company comprise at least 75% of the total value of all amountsowed by the company to all its creditors. At least 50%ofthis75%abovemustbeamountsowedtoindependentcreditors (that is, creditors who are neither related to the company,nortoanyofitsdirectors(thisexcludesshare-holders’loans)).Votingisweighteddependingonthesizeof the claim, and employees are considered to be inde-pendent creditors. If the business plan is not formulated within a specified time, or approved by the creditors, the company must go out of business rescue proceedings, or beputintoliquidation.


South African law offers companies and corporations a process known as a compromise. In some instances, a company may wish to enter into a compromise with its creditors as an alterna-tivetoliquidation.Thisprocedureissetoutinsection155ofCompanies Act No. 71 of 2008. The majority of the provisions ofsection155relatetoformalandproceduralrequirements,andoncetherequisitemajorityvotehasbeenobtainedatameetingconvened for this purpose, there is little left for a disgruntled creditor to do. The only option available to such creditor is to oppose the sanctioning of the scheme of compromise by the court,whichisrequiredtomakeitfinalandbindingonallthecreditors of the company. To be successful with such opposi-tion, a creditormust show that itwouldbe just andequitablefor the court to reject the scheme – not an easy burden to meet. Theconsequencesofacompromisearenottoodifferentfromthat of the adoption of a business rescue plan, being that credi-tors in both instances, if they vote in favour of the compromise or business rescue plan, will compromise their claims against the debtor company and will have no further claims against the debtor company in terms of that specific debt. One major disad-vantage of a compromise is the loss of a creditor’s right to hold officers and directors liable for any contravention of the Act. A compromise is, however, in one instance more beneficial than business rescue; the Act makes provision for a creditor to retain its right to go against the surety of the debtor company.

Undue preference to creditors Section 30 of the Insolvency Act provides that if an insolvent person/entity,priortoitsliquidation,madeadispositionofitsproperty at a timewhen the insolvent’s liabilities exceeded itsassets, with the intention of preferring one of its creditors above another, that disposition can be set aside.

Collusive dealingsSection 31 of the Insolvency Act provides for the setting aside of dispositions under which the insolvent person/entity, prior to its liquidation,andincollusionwithanotherperson,disposedofitsassets in a manner prejudicing the insolvent’s creditors or prefer-ring one creditor over another.

Preferential creditors The Insolvency Act creates preferences regarding the following claims over an insolvent estate (amongst others): ■ Costsofliquidation(section97).■ Costsofexecution(section98).■ Salaryorremunerationofemployees(section98A).■ Statutoryobligations(section99).■ Incometax(section101).■ Claims of holders of general notarial bonds and certain

special notarial bonds (section 102).


Certain entities, such as banks, pension or provident funds, long-term and short-term insurers, or companies in which the government has the sole shareholding or an interest, are subject to specific rules and to the supervision of certain bodies regu-latingtheparticularindustry,andmaybeexcludedfrombank-ruptcy proceedings in certain instances.

It is not possible in this medium in the space provided to detail each and every such entity, and it is suggested that prior to dealing with such an entity careful investigation is conducted to determine the specific legislation applicable.


Under the Companies Act 2008, two new company rescue procedures are available. This is an arrangement between the company and its creditors, or certain classes of creditors. The boardofacompanyoraliquidatorcanproposeanarrangementor a compromise of the financial obligations of the company to all of its creditors or to all of the members of a class of its creditors. The proposal will be adopted if it is supported by a majority in number, representing at least 75% in value of thecreditors or class who are present and voting at a meeting called for that purpose. Business rescue proceedings (sections 128 to 154 of the

Companies Act 2008) can be used where a company is finan-cially distressed, including where a company anticipates being unabletopayitsdebtsinsixmonths’time.Itincludesthesaleofthewholebusinesstogenerateabetterreturnthanaliquidationdividend would achieve. A company can invoke business rescue by filing a resolution at the Companies Office. To dispute this, a creditor must then make a court application and prove that the proposed business rescue would fail.



publicinterest.Thisprohibitsexpropriationforreasonsthatarenot truly for the benefit of all South Africans. The Constitution, however, provides that all expropriations are subject to thepaymentofjustandequitablecompensation.Thereareseveralguidelines that have been developed by the courts over time, and there is also a list of factors in the Constitution that must be taken into account by the courts when determining what “just andequitable”meansinanygivensituation.

However, in November 2018, the Joint Constitutional Review Committee of South Africa adopted a recommendation that theConstitutionshouldbeamendedtoallowforexpropriationwithout compensation. This follows from a policy resolution of the ruling party to that effect and a public participation process. The implications of this policy will only become clearer once the amendments giving effect thereto have been enacted into law.ThecurrentPresidentoftheRepublicofSouthAfrica,Mr.Cyril Ramaphosa, has made numerous public pronouncements that such expropriation will not be wholesale expropriationwithout compensation as people feared. He mentioned that: “It is going to be done in line with the decision taken at [the African National Congress national conference at] Nasrec that it must not tamper with agricultural production. It must create greater growth of the economy and ensure food security.”The Mineral and Petroleum Resources Development Act

2002 (MPRDA) removed thepossibility of private ownershipof mineral rights and vested ownership of minerals and petro-leum for the people of South Africa under the custodianship of the state.



The relevance of any government department to a project is largely dependent on the nature of the project in question.Government departments that are common role-players in the project finance industry include the following (to name a few):■ TheDepartmentofWaterAffairs.■ The Department of Energy (with the National Energy

Regulator of South Africa (NERSA), the electricity, oil and gas regulator).

■ TheDepartmentofTradeandIndustry.■ TheDepartmentofEnvironmentalAffairs.■ TheDepartmentofFinance(NationalTreasury).■ TheDepartmentofTransport.■ TheDepartmentofMineralResources.

Within the above-mentioned government departments, there may be additional bodies that have been established to act as functionaries and regulators within the specific sector and from whichapprovalsorotherparticipationmayberequired.


Therearenorequirementstofileorregisterprojectdocumentswith a regulatory authority or other government body. In some circumstances, theremaybe a requirement for registrationofsecurity in the South African Deeds Registry.However,sections66and70ofthePublicFinanceManagement

Act1999(PFMA)placerestrictionsonorgansofstateinrelation


Directors are obligated to report financial distress – failure to do so might result in personal liability.

Section 77, as read with section 22 of Companies Act No. 71 of 2008, penalises and holds directors personally liable for any loss incurred through knowingly carrying on the business of the company recklessly or with the intent to defraud creditors andotherstakeholders.Section214createscriminalliabilityforthose directors trading a company in a manner which is calcu-lated to defraud a creditor. Section 77(3) (b) and (c) states that any director of a company is liable for any loss, damages or costs sustainedbythecompanyasadirectorindirectconsequenceofthe director:■ having acquiesced to the carrying on of the company’s

business despite knowing that it was being conducted in a manner prohibited by section 22(1) of the Act; or

■ beingpartytoanactoromissionbythecompanydespiteknowing that the act or omission was calculated to defraud a company creditor, employee or shareholder, or had another fraudulent purpose.

Consequently,adirectorwouldhaveadutytopassaresolutionfor a company’s business rescue or alternatively resolve to wind uporliquidatethecompanyassoonasheorshebecomesknow-ingly aware that the company is either financially distressed or is trading in insolvent circumstances (both factually, in that its liabilitiesexceeditsassets,orcommercially,inthatitcannotpayits debts to creditors as and when they fall due).



Generally speaking, there are no restrictions on a foreign company having ownership in a South African project company. However, therequirementsofspecificprojects (suchasundertheRenewableEnergyIPPProcurementProgramme)frequentlyplace foreign ownership restrictions on the project company and requireprojectcompaniestobeheld(tosomeextent)bySouthAfrican citizens.


There are currently no bilateral investment treaties to which South Africa is a party that provide the protection referred to above.


State ownershipUnder the South African Constitution (Constitution) read together with the Expropriation Act 63 of 1975, the SouthAfricangovernmentisauthorisedtoexpropriatelandorrightsin land from anyone in South Africa. However, land or rights inlandcanbeexpropriatedonlyforapublicpurposeorinthe

272 South Africa



In general, South African-resident companies can maintain a foreign currency account with a local bank provided the company either:■ providesaservicefromSouthAfricatonon-residentsand

receives payment in foreign currency in South Africa; or■ receivesforeigncommissionsorprofitinforeignexchange.In other circumstances, under the Exchange Control

Regulations, South African companies are generally not permitted to establish and maintain a foreign currency account in other jurisdictions, export capital from South Africa, holdforeigncurrencyinexcessofcertainlimitsorincurindebtednessdenominated in foreign currencies without the prior approval of theSouthAfricanReserveBank.




All environmental policy and law must be consistent with the Constitution and the principles upon which the Constitution is based. The cornerstone of environmental law and policy in South Africa is the environmental right, which was included insection24oftheBillofRightschapteroftheConstitution,which states that everyone has the right to:■ anenvironmentthatisnotharmfultotheirhealthorwell-

being; and■ havetheenvironmentprotected,forthebenefitofpresent

and future generations, through reasonable legislative and other measures that:■ preventpollutionandecologicaldegradation;■ promoteconservation;and■ secure ecologically sustainable development and

use of natural resources while promoting justifiable economic and social development.

The inclusion of an environmental right in the Constitution has resulted in the promulgation of many pieces of environmental legislation which seek to give effect to this right. Of particular importance is the National Environmental Management Act107of1998(NEMA),whichistheoverarchingumbrellapieceof legislation in South Africa.

A number of environmental management principles are enshrined under NEMA, which must inform all decisionsaffecting the environment and guide the interpretation of NEMAandotherenvironmentalmanagementlegislation.Onesuch principle is the principle of sustainable development, which requiresdevelopmenttobesocially,economicallyandenviron-mentally sustainable. The principle of sustainable development has been included in the environmental right in the Constitution and is a common thread throughout South African environ-mental legislation.

to borrowings, guarantees and other commitments. These sections should be considered if ever any organ of state seeks to bind itself to a future financial commitment under any project document. Absence of compliance would render such commit-ment invalid and non-binding on the organ of state concerned.


Foreign participation in mining and production-related rights is permitted. However, sector-specific charters will require,among other things, that holders of rights have participation by historically disadvantaged South Africans (HDSAs).


TheMineralandPetroleumResourcesRoyaltyAct28of2008(Royalty Act) imposes a royalty on the transfer of a “mineral resource” (as defined in the Royalty Act, and which applies regardless of whether the mineral resource includes processing ormanufacturing(forexample,metals)).TheroyaltyispayableforthebenefitoftheNationalRevenueFundbyanextractor.


In general, South African-resident companies may maintain a foreign currency account with a local bank provided the company:■ providesaservicefromSouthAfricatonon-residentsand

receives payment in foreign currency in South Africa; or■ receivesforeigncommissionsorprofitinforeignexchange.

Authorised dealers may approve the opening of foreign bank accounts by South African-resident companies subject to certain conditions.


UndertheSouthAfricanExchangeControlRegulations,trans-fers of dividends, profits and income distributions to non-resi-dent shareholders can be made in proportion to their percentage shareholdingorownership,orboth,providedcertain require-ments are met.

In relation to shareholder loans, the all-in rate that can be levied is limited to the South African prime overdraft rate for rand-denominated loans, or the relevant base-lending rate for foreign currency loans. Prior approval from the South African ReserveBankisalsorequiredinrespectofthetermsofrepay-ment of the capital portion of the loan.

The following can be remitted abroad:■ dividendsdeclaredbySouthAfricansubsidiariesofforeign

companies; and■ profitsdistributedbyabranchofaforeigncompanyoper-

ating in South Africa.SouthAfricaleviesa20%withholdingtaxondividendspaid

by a South African company to a non-resident, although this maybereducedoreliminatedunderataxtreaty.



8 Foreign Insurance


The issuance of credit insurance or guarantees by foreign insti-tutions or non-resident entities to residents, including to RSA banks,doesnotrequirepriorSARBapproval.


Such policies may be paid to foreign secured creditors and no localinsuranceinvolvementisrequired.



Any foreign national who is not a permanent resident of South Africa and who wishes to render services in South Africa needs to obtain a work permit in order to do so.

“Work” is very broadly defined in Immigration Act No. 13 of 2002 as “conducting any activity normally associated with the running of a specific business or being employed or conducting activities consistent with being employed or consistent with the profession of the person, with or without remuneration or reward within the Republic”. The effect of this is that the requirement toobtain aworkpermit is applicablenotonly to“employees” as defined in our employment law legislation, but also to independent contractors and consultants.

The Immigration ActIn terms of Immigration Act No. 13 of 2002, companies are entitled to employ permanent residents, provided that their employment is not in contravention of any restrictions that may be placed on their permanent residence status. For example,permanent residency may be obtained on the basis of an offer of permanent employment that provides for work in a specific field of employment and for a prescribed period.

Visas and the Immigration ProcessA foreign national is obliged to obtain a work permit by applying in the prescribed manner to the South African consular office in the foreign national’s country of origin or ordinary residence. Inexceptionalcases,whereitisnecessarytoapplywithinSouthAfrica, a foreign national is obliged to apply at the office of the Department of Home Affairs, which has jurisdiction over the area in which the foreign national intends to work and good cause must be shown for the application being brought locally.

Application times vary greatly, depending on the type of permit applied for and the country in which the application is lodged. Although applications at most consular offices take 30 days to process, it can take between five days and two months toobtainapermit.UK,US,CanadianandEUapplicationsaregenerallyprocessedwithin10to14days,whilecountriesintheFarEastusuallytakesixtoeightweekstoprocessanapplica-tion. The processing time of the Department of Home Affairs in South Africa is between 30 days and 10 months.

A foreign national is not permitted to hold more than one permit at a time. A company may employ an unlimited number

Additional primary environmental management legislation which is of particular importance to project development in South Africa include the:■ NationalWaterAct36of1998(NationalWaterAct).■ National Environmental Management: Waste Act 59 of

2008 (Waste Act).■ NationalEnvironmentalManagement:AirQualityAct39

of2004(AirQualityAct).■ NationalEnvironmentalManagement:BiodiversityAct10

of2004(BiodiversityAct).■ EnvironmentalConservationAct73of1989(ECA).Environmental Impact Assessments (EIAs) are required

underNEMA inorder toobtain environmental authorisationtoundertake activitieswhich are listedunderNEMA’s listingnotices. TheEIAprocess and requirements are governed byNEMA’s EIA Regulations. The requirements of the EIAprocess will depend on what activities are triggered. The EIA Regulations prescribe specific timeframes within which EIAs must be conducted. Timeframes are also prescribed for the competent authorities.

The primary environmental licence in South African envi-ronmental law is the environmental authorisation, which must beobtainedunderNEMA.Itislikelythatadditionalenviron-mentallicenceswillberequiredforprojectdevelopments.Themain types of licences typically required for project develop-ment activities are:■ a water use licence to undertake specific water uses

outlined in the National Water Act;■ a waste management licence in respect of listed waste

management activities in the Waste Act; and■ an atmospheric emission licence in order to undertake

listed activities in the Air Quality Act.NEMA has far-reaching provisions regarding liability for

significant pollution or degradation of the environment, which include a provision for director liability. Liability may be imposed on a wide range of persons for failing to comply with thegeneraldutyofcarerequiredunderNEMAtotakereason-able measures to prevent, mitigate or remediate environmental harm. Section 28 of NEMA places a duty of care on everyperson who causes, has caused or may cause significant pollu-tion or degradation to the environment to take such reasonable measures. Although the provision is broad enough to hold any person liable, NEMA specifically mentions land or propertyowners, persons in control of land or premises (such as land-lords) and persons with the right to use land or premises (gener-ally tenants) as carrying primary responsibility. Negligently or intentionally causing significant pollution or degradation of the environment is a criminal offence, for which substantial penal-ties may be imposed upon conviction.


The central legislation governing PPPs for national and provin-cial government is Treasury Regulation 16 issued under the PFMA.Duetothislegislation,SouthAfricahasestablishedafirm regulatory framework under which national and provincial government institutions can enter into PPP agreements. The regulations have been amended since they were first issued in May2000totakeaccountofexperienceinimplementingPPPs.PPPsformunicipalgovernmentaregovernedbytheMunicipal

SystemsAct2000,andtheMunicipalFinanceManagementAct2003.MunicipalitiesarenotsubjecttothePFMAortoTreasuryRegulation 16 (South African National Treasury’s Public Private PartnershipsManual2004).

274 South Africa


A company wishing to employ a number of foreign workers may also apply for a corporate permit in terms of section 21 of the Immigration Act. Corporate permits are suited to corporate applicants who intend to employ a number of foreign nationals in specific positions.



All goods imported into South Africa must be declared to customs within seven days of the date on which the goods are imported. The rate of duty payable on any goods imported is governed by the provisions of the Schedules to the Customs and ExciseAct91of1964(CustomsandExciseAct).


The rate of duty payable on any goods imported is governed by theprovisionsoftheSchedulestotheCustomsandExciseAct.It must also be noted that all persons that participate in any activ-itiesregulatedbytheCustomsandExciseActmayberequiredto register with South African Revenue Services (SARS).

11 Force Majeure


Force majeureexclusionsareavailableandenforceableinourlaw.Common law recognises force majeure exclusions even whereparties have failed to cater for force majeure in their contractual arrangements. Project finance documents typically expresslyregulate the parties’ rights and obligations with force majeure events. A force majeureeventwillgenerallyexcuseapartyfromliability for failure to perform its obligations. In a force majeure event it is not customary for either party to claim damages for loss suffered as a result of a force majeure event.



The primary legislation in South Africa is the Prevention and Combating of Corrupt Activities Act, which creates the general offence of corruption with a very wide ambit. Broadly, anyperson who directly or indirectly accepts or agrees to accept any gratification from any other person, or gives or agrees or offers to give any gratification to any other person in order to act, personally or by influencing another person to so act, in a manner designed to achieve an unjustified result, is guilty of the offence of corruption. The Act also creates a number of specific offences, including corruption relating to tenders, contracts and public officials.

A person convicted of committing any of the statutory corruption offences may be liable to a fine and imprisonment of up to a period of life imprisonment.

of foreign nationals who all hold different categories of work permit, provided that each foreign employee holds the appro-priateworkpermit.Oneoftherequirementsofaworkpermitincludes a motivation from the company regarding the reasons for employing a foreign national rather than a South African citizen or permanent resident.

Immigration Permit TypesThere are various categories of work permits provided for in the Immigration Act.

Visitor’s visaFor a placement of under three months, a visitor’s visa with permission to conduct work activities may be applied for in terms of section 11(2) of the Immigration Act.

The Department of Home Affairs has recently issued a Directive regarding the issuance of a section 11(2) visitor’s visa/permit. The Directive confirms that a section 11(2) visitor’s visa/permit will be considered as a one-off, non-renewable visa/permit that addresses an immediate short-term or urgent need for a limited duration of work activity that cannot be met by an application for a work permit. Those foreign nationals who are“visaexempt”(whichincludesUK,US,Canadian,Europeanand Australian nationals) are permitted to obtain a visitor’s visa with permission to conduct work by applying in writing to the Director-General of the Department, at least a week prior to the foreign national’s departure, to confirm why the foreign national cannot apply for a work permit and the reasons why the limited duration work is necessary and urgent.

Spousal visaSpouses of South African citizens or permanent residents are entitled to apply for a spousal work or business permit in terms of section 11(6) of the Immigration Act.

Work permitsSection 19 of the Immigration Act makes provision for various categoriesofworkpermits,forexample,quotapermits,generalworkpermits, intra-company transferpermitsandexceptionalskillspermits,eachofwhichhaveparticularrequirementsthatneed to be complied with.Thequotaworkpermitsystemwasdesignedtosecureforeign

skills in areas where South Africa is experiencing a skillsshortage.Thegreatestadvantageofquotapermitsovergeneralwork permits is that the position need not be advertised and that one need not be in possession of an offer of employment to obtain the permit. Applicants can initially obtain a three-month permit during which time they can secure employment.

Any applicant not falling within the category or classes contemplatedunder thequotapermit sectionmay apply for ageneral work permit in terms of section 19(2) of the Immigration Act. The process is cumbersome, but the greatest advantage of a general work permit is that it can be issued for up to five years.Exceptional skills permits may be granted to candidates

whopossessspecialexpertiseandknow-howinrelationtothemarket inwhich theyoperate. Theadvantagewithanexcep-tional skills permit is that it is not employer specific. Such permits are granted for three years and are renewable.

An intra-company transfer work permit may be issued to a foreign national who is employed abroad by a business oper-ating in the Republic in a branch, subsidiary or affiliate relation-ship,andwhobyreasonofhisorheremploymentisrequiredtoworkintheRepublicforaperiodnotexceedingtwoyearsandisnotrenewable.Therequirementsfortheintra-companyworkpermit are the simplest and easiest to obtain.




Yes, South Africa is a signatory to the New York Convention.


VeryfewmattersarenotarbitrableinSouthAfrica,providedtheparties agree to the arbitration. Status matters (such as matters relating to legal standing or capacity), matrimonial matters and matters incidental to these are not arbitrable (section 2 of ArbitrationAct42of1965). This section simply codifies thepublic policy grounds that are already recognised by common law, and therefore it is not possible to resolve these disputes throughprivate arbitration. Matters incidental to amatrimo-nial cause include disputes relating to interests of children and proprietary rights of spouses.

Criminal matters are also not arbitrable because the Constitution requires that these be resolved in the ordinarycourts. Similarly, claims under the Promotion of Administrative of Justice Act (that is, administrative law reviews) can only be heard in the High Court.


The most prevalent form of compulsory domestic arbitration occurs in terms of labour law in South Africa, which state that certain disputes are subject to compulsory arbitration by the CommissionforConciliation,MediationandArbitration.



The issue of political risk is normally addressed in finance docu-ments concluded between the project company and the debt providers.Forexample,anyformofgovernmentinterventionbywayofnationalisationorexpropriationoftheprojectcompa-ny’s assets or its shares is treated as an “event of default” under thefinancedocuments. Theconsequencethereof is,amongstother things, that the rights of the debt providers under the secu-rity documents may be activated, the assets that are the subject matter of those documents realised and the proceeds used to discharge the project company’s obligations under the finance documents. This measure discourages government intervention or reduces the potential of political risk.

The issue of government intervention can also trigger a default under an agreement between the organ of state and the project company, which would entitle the project company to call a “default” under the agreement concerned. This obviously depends on the terms of the agreement between the organ of state and the project company.From experience, the above is the extent of protections

normally afforded for political risk in our jurisdiction and it is unlikely that there will be a departure therefrom in the short term.

Section 34 of the Act imposes a duty to report known orreasonably suspected corruption and fraud to the value of approximatelyR100,000ormore.

13 Applicable Law


Typically, projects in South Africa are governed by South African law.Totheextentthatthereisanysecurityinaforeignjurisdic-tion, security documents in relation thereto will be governed by the law of that jurisdiction.







Waivers of immunity are effective and enforceable.



South Africa is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention).

The enforcement of foreign court judgments are dealt with in South Africa by common law and applicable legislation and generally foreign judgments are enforceable, subject to certain standards of review. The present position applied by South African courts is not dissimilar to that under the standards of review under the New York Convention, being that a foreign judgment will be enforced by South African courts, provided:■ thecourtwhichpronouncedthejudgmenthadjurisdiction

to entertain the case according to the principles recognised by South African law with reference to the jurisdiction of foreign courts;

■ thejudgmentisfinalandconclusive in itseffectandhasnot become superannuated;

■ therecognitionandenforcementof the judgmentby theSouth African courts would not be contrary to public policy; and

■ thejudgmentwasnotobtainedbyfraudulentmeans.The judgment does not involve the enforcement of a penal or

revenue law of the foreign state.Enforcement of the judgment is not precluded by the provi-

sionsofProtectionofBusinessesAct99of1978,asamended.

276 South Africa


and process required for each project depend on the relevantsector and type of infrastructure being procured or financed. For renewableenergyprojects, for example, there is anestab-lishedframeworkundersection46oftheElectricityRegulationAct2006(ERA),whichrequirestheMinisterofEnergytomakea determination in relation to the procurement of new genera-tion capacity from renewable energy sources, including the:■ Technologies.■ Numberofmegawatts(MW).■ Identityoftheprocurer.■ Buyeroftheelectricitygenerated.

The central legislation governing PPPs for national and provincial government is Treasury Regulation 16, issued under thePFMA.Ingeneral,iftheprojectisprocuredorbeingimple-mented by a government department or entity, the PFMAappliesinrespecttotheexpenditurerelatedtotheprojectandthe security to be provided by the government (among other aspects).

If the project is being developed by the private sector, the approvals required will depend on the relevant sector. Forexample,iftheprojectinvolvestheextractionorproductionofmineralproducts,theMPRDAwillapply.

19 Islamic Finance


Islamic finance is becoming an important player in the finance sector. In South Africa, the market share of Islamic finance is still small in comparison with conventional banking, but this is expectedtochangeinthenearfuture.


Generally, under South African law, contracting parties may select any law as the governing law of the contract, as long as it is sufficiently defined and capable of enforcement. However, there is limited case law and no conclusive rulings by South African courts on whether Shari’ah law would be recognised as a system of law capable of governing a contract.


Generally, no.

17 Tax


The registration fees, court fees and sheriff’s fees that are charged for the granting or taking of security are not prohibi-tivelyexpensive.

Where there is a bond with a large secured sum, the fee charged by the conveyancer or notary public (once calculated at theprescribedtariff )canbeprohibitivelyexpensive. Intheseinstances,itisusualforthelendertorequestadiscountonthefee.Discountsof50%arecommonlynegotiated.


The South African government and the revenue authorities do not provide any specific foreign investment incentives or stabilisation regimes, and such investors participating in the South African marketwillbetreatedequitablywithallothermarketparticipants(including localparticipants). Variousschemesareopento theparticipation of foreign investors and these are largely regulated and facilitated by the Department of Trade and Industry.

18 Other Matters


South Africa has a relatively sophisticated construction sector, and construction risks are dealt with by use of turn-key EPC contractswithperformancebondsandliquidateddamagesfordelay and performance, especially by project sponsors bidding for projects under South Africa’s REIPPP.Giventherequirement forparticipationofHDSAs inproject

equity(whotendtobeundercapitalised),itiscommontousesepa-rate funding structures to ensure that these entities will be able to meettheirequitycontributionandsponsorsupportobligationsasrequired(seethesectioninrelationtoprojectstructuringabove).

Projects are typically funded in South African rand, which reduces the risk of a currency mismatch between the revenue stream and the debt service. The project company is typically required to enter into comprehensive hedging arrangements,both for currency risk during the construction period and interest rate risk thereafter.


In South Africa, the project finance sector is not governed by a single broad regulatory framework. The regulatory approvals

277

Eduan Kapp is a highly experienced Banking and Finance lawyer and an Executive at TGR Attorneys. He has spent nearly three decades nego-tiating transactions and the introduction of new entities into various African jurisdictions and the pursuant transactional close. His focus is on strategic, commercial and legal advice in respect of mergers and acquisitions and, in respect of finance law capacity, both debt and equity. He has advised clients including commercial banks, investment banks, corporates and finance and Private Equity companies. He has been involved – whether in an origination, advisory, structuring or exit role – in more than 140 major transactions in emerging markets, with an aggregate deal size of approximately USD 39 billion across 29 countries in Africa (including South Africa) covering all major sectors. He has strong transactional experience, having advised on all types of debt and equity structuring, as well as debt restructuring and/or financial recovery programmes, including workouts involving banking consortia with and without the use of an SPV structure. His experience also includes dealing with the efficacy and enforceability of specific security arrangements.

Tshisevhe Gwina Ratshimbilani Inc.Vdara 6th Floor41 Rivonia RoadSandhurst, Sandton, 2196South Africa

Tel: +27 11 243 5027Email: [email protected] URL: www.tgrattorneys.co.za

TGR Attorneys is a South African black-owned law firm founded by three former senior directors of large established firms on 1 March 2011. The founding partners of TGR Attorneys felt the need to establish a black-owned law firm that provides exceptional legal services to clients in the fields of Corporate and Commercial (including Mergers and Acquisitions), Banking and Finance, Commercial Litigation, Competition and Real Estate. In so doing, to assist with the pursuit of transformation in the legal frater-nity. TGR Attorneys is led by highly skilled specialist professionals who have worked on some of the most significant transactions in South Africa and its clients include corporates, multinationals and state-owned enter-prises across a range of industry sectors as well as financial institutions. TGR Attorneys and its professionals have received numerous accolades of excellence and has been ranked as one of the best commercial law firms

in South Africa by ABSIP, Best Lawyers, PMR, Deal Makers, Chambers Global and Who’s Who Legal. To date, TGR Attorneys is one of the largest black-owned law firms in South Africa.

www.tgrattorneys.co.za


Tshisevhe Gwina Ratshimbilani Inc.



Chapter 30278

Sweden

Cirio Advokatbyrå AB Fredrik Eliasson

Jesper Johansson

Sweden


to security in the transaction. This is, however, not normally doneduetosuchdocumentsbecomingrathercomplexandvolu-minous. Instead, security under Swedish law is typically docu-mented in one security agreement per asset class, such as shares, contractual claims, real property, etc. In many instances, secu-rity over contractual claims are separated into separate secu-rity agreements based on the nature of the contractual claim over which security is taken. Security over claims under insur-ances, claims under hedging agreements and claims under sale and purchase agreements are examples of contractual claimscommonly documented in their own security agreements.


Swedish real property consists of land parcels that are registered in the Swedish real property register with individual identifying names (typically following the pattern “[municipality] [name] [number]”). Real property can be owned or alternatively held under a land lease (tomträtt). The real property or the land lease (the “plot”) includes all land on the defined area, including the air above it and the soil below it. Other than for three dimen-sional real properties (see the end of this paragraph), it is not legally defined how high up in the air or how deep down in the earth a plot stretches – the practical usability of the relevant plot sets the limits. Anything more permanently attached to the plot by the owner/holder of that plot will become part of that plot andincludedinanysecurityoverit.Thereisanexemptionforindustrialequipmentthatcanbeexcludedfromformingpartofthe real property if this is registered in the real property register. In recent years, it has also been made possible to create so-called three dimensional real properties, where, e.g. the bottom part of a structure is one real property and the top part of that structure is another real property.

In relation to both types of properties (real property or land leases), the way to create security over the relevant plot is by way of hypothecary security by mortgage certificates being pledged to the secured party. Each mortgage certificate has a defined face amount and order of priority following the date of issue. A mortgage certificate is created after an application by the owner/holder of the relevant plot is made to the Swedish Land and Cadastral Authority (Lantmäteriet). The issue of a real prop-erty mortgage certificate triggers a stamp duty to be paid on its issueinanamountequalto2%ofitsthefacevalue.Thereisalsoan administrative fee charged for the issue of each certificate, currently 375 Swedish kronor. Once issued, a mortgage certif-icate can be pledged an unlimited number of times and there

1 Overview


TheSwedishprojectfinancemarketistoalargeextentfocusedon renewable energy, primarily onshore wind projects. The onshore wind park financing market has been very busy the last couple of years in the wake of a booming build-out of Swedish onshore wind capacity. Other types of projects have also been project financed, such as public infrastructure projects but, historically, Sweden has been rather hesitant to project finance the construction of new infrastructure projects.

A major PPP project to construct a new hospital in Stockholm (NyaKarolinska)hasexperiencedseverecriticismbytheSwedishmedia and has sparked a political debate due to what is perceived as toohighacost. Thedebate following theNyaKarolinskaproject will likely result in infrastructure PPP projects being difficult to arrange – at least in the near future.


NyaKarolinska is likely themostnotableprojectfinancingtotake place in recent years. Most other major project financ-ings have primarily been in relation to large onshore windfarms in Sweden, but, in recent history, railway (Arlandabanan) and bridge (Öresundsbron) projects have also been project financed.

2 Security


In order for a security interest to be validly created under Swedish law, there needs to be a binding agreement between the party granting the security and the beneficiary of the secu-rity. The agreement must clearly identify the parties, the secured obligation(s) and the asset(s) that is/are subject to the relevant security. The agreement can be oral as Swedish law recognises oral agreements, but, for obvious reasons, security agreements in project financings (and all other types of financings) are always documented in written agreements.

Security under Swedish law can be created in one global secu-rity agreement that covers all of the relevant asset classes subject

279Cirio Advokatbyrå AB



There are three types of companies under Swedish law – limited companies (aktiebolag), limited partnerships (kommanditbolag) and general partnerships (handelsbolag). Security can be created over interests in all three forms of companies. However, Swedish project financings have almost exclusively used the limitedcompany form.

Security over interests in a limited or general partnership is typically created by way of a pledge. Limited and general part-nerships do not issue certificates representing its membership interests. Therefore, perfection of security over such interests is achieved by giving a notice of the security interest to the rele-vant limited or general partnership (as applicable). In practice, this means giving a notice to the other members of the relevant limited or general partnership (as applicable).

Security over shares in limited companies is typically created by way of a pledge. Limited companies generally issue share certificates representing the shares in the limited company. Perfection of a pledge over shares represented by a share certif-icate is achieved by physically handing over the relevant share certificate to the secured party. While obtaining a security interestoversharestechnicallydoesnotrequireasharecertif-icate to be issued, legal uncertainties regarding perfection requirements for shares not represented by a share certificateeffectivelyrequiresthatasharecertificatehastobeissued.Inaproject financing, if a limited company does not have any share certificates issued at that time, a share certificate representing the shares will be issued no later than on financial close. As a means of facilitating the enforcement of the pledge, the share certificates are also generally endorsed in blank by the pledgor.


Therearenonotarisationrequirementsinrelationtocontractsor agreements in Sweden.

Stamp duty is payable on the issue of new real property mort-gage certificates, which currently amounts to 2% of the faceamount of the relevant real property mortgage certificate. In addition, an administrative fee is charged for each certificate issued, currently 375 Swedish kronor.

Stamp duty is also payable on the issue of new business mort-gage certificates, which currently amounts to 1% of the faceamount of the relevant business mortgage certificate. In addi-tion, an administrative fee is charged for each certificate issued, currently 570 Swedish kronor. A business mortgage is some-thing akin to a floating charge, but generally only creates a priority right in a bankruptcy of the company over which the business mortgage certificate is issued. A business mortgage cannotbecrystallisedinthesamewayas,forexample,anEnglishlaw floating charge. For this reason, as well as the unbalanced cost/benefit analysis in relation to that type of security (due to the stamp duty on new business mortgage certificates), a busi-ness mortgage is as a rule not used in Swedish project financing transactions.

There are no fees or stamp duties payable in relation to the creation of security over any receivables or shares.

is no need to apply for a new mortgage certificate if the aggre-gate amountof the existingmortgage certificates is sufficienttocreatesecurityfortherelevantsecuredliabilityinquestion.

The value to which a mortgage certificate entitles the mort-gageeis115%ofthefaceamountofthatmortgagecertificate.This amount will be paid from the proceeds of an executivesale of the relevant plot. The proceeds from the enforcement sale (after a deduction of enforcement costs) remaining after all mortgagees have had their secured claims paid in full (or to the maximumamountofanyclaimsavailableundertherespectivemortgage security) will be paid to the relevant owner/holder of the plot (the mortgagor).

In most project finance transactions, the project is not oper-ated on land owned by the project company. Land used for the project is typically held under a site leasehold (arrende). Assets constructed on any land held under a site leasehold will not become part of any real property, and therefore cannot form part of the basis for a real property mortgage. If the project is not located on land which is owned by the project company, a real property mortgage cannot be used as security in the financing. The typical way in which security is created over assets constructed by the project company on a site leasehold is therefore by way of a security assignment, whereby the rele-vantprojectassetsareacquiredbythesecuredpartyforsecuritypurposesandsubsequentlyleasedbacktotheprojectcompanyfor the duration of the security period. The reason for this is that the perfection requirements for security assignments onconstructions on leased property are easier to comply with than if the assets would be subject to a Swedish law pledge.


Yes, but this will result in the security not being duly perfected in accordance with Swedish law. Under Swedish law, secu-rity over a receivable is typically created by way of a pledge. In order to duly perfect a pledge over a receivable, the pledgee must notify the underlying debtor under the receivable of the pledge and procure that the pledgor is cut off from being able to dispose over the pledged receivable (which, among other things, includes the collection of payment and making of amendments to the terms of the receivable). It is generally believed that a pledge agreement can be structured in a manner to allow the pledgor to continue to collect the pledged receivable(s) without compromising the perfection of the pledge. However, this conclusion is based on an analogy from a Supreme Court prec-edent in a related legal matter, and the position in relation to pledged receivables has not been confirmed by any Supreme Court precedent.


Yes. Security over cash deposited in a bank account is typically created by way of a pledge. In order to protect the pledge from the pledgor’s other creditors (or bankruptcy of the pledgor), the pledgor must notify the account bank of the pledge and the pledgormustbecutofffromtheabilitytodisposeoforrequirepayments from the account(s) subject to the pledge.

280 Sweden


includes an obligation to account for the proceeds obtained from the enforcement of the security. The secured party is allowed a fair amount of discretion in respect of realising the market value of the asset, which increases if the sale needs to be concluded rapidly in order to avoid substantial losses for the secured party.

An enforcement sale is typically structured as an auction sale of some form. A real property mortgage can, however, only be enforced against the mortgagor through a public sale administered by the Swedish Enforcement Agency (Kronfogdemyndigheten). If the mortgagor is declared to be in bankruptcy, the bankruptcy receiver may allow a mortgagee to arrange for a private sale in certain circumstances. The Enforcement Agency process is generally effi-cient.Itmay,however,takesometimetogetanexecutiontitleifitisrequiredtolitigatetheclaimunderthefacilityagreementfirst.

Security over shares is typically enforced through a process similar to a controlled auction, where there needs to be a reason-able invitation process in terms of information provided, timing and potential purchasers invited in order for the secured party to fulfilitsfiduciarydutytothepledgor.Thisprocessisusuallyquiteefficient provided that the right preparations have been made.

Security over contractual claims may be enforced in the same way as described in respect of security over shares above, but is normally enforced through the pledgee collecting any payments due from the relevant receivable over which the secu-rity is granted as it is difficult to successfully sell receivables in an enforcement sale.

In line with the fiduciary duty to realise a fair market value for a pledged asset in connection with an enforcement of secu-rity, there is also a legal prohibition against forfeiture of secu-rity ( förfallopant). This means that a secured party cannot just assume ownership of the pledged asset. As a result of this prohi-bition, there is some debate regarding whether a secured party can or cannot buy an asset which is being sold in an enforce-ment sale. The general belief in the market is, however, that this is possible if the purchase is made in fair competition with the other potential purchasers of the asset.


No, they do not.



When a Swedish entity is declared to be in bankruptcy, all of its assets are automatically taken over by a bankruptcy estate (konkursbo) which is managed by a bankruptcy receiver (konkurs-förvaltare). Perfected security will not be affected by this and the security will be possible to enforce against the bankruptcy estate. There are certain rules regarding security over real prop-erty owned by an entity in bankruptcy and security over shares in subsidiaries to the bankrupt entity. These rules may result in the bankruptcy receiver being entitled to manage the sale process without the involvement of the pledgee. There may also possibly be delays with a sale if the asset is deemed to be funda-mental to the bankruptcy estate’s continuation of the business of the bankrupt company. A bankruptcy estate continuing the business for any longer period after the bankruptcy is rare and


No, they do not.


No, they are not.

3 Security Trustee


Swedish law does not recognise the concept of a trust. However, the security agent concept is commonly used in financings in the Swedish market. A security agent in a Swedish project financing is generally entrusted with enforcing the security if needed and applying any proceeds from the security to the claims of all lenders in accordance with the principles agreed in the relevant intercreditor agreement. The role and powers of the security agent are generally set out in the facilities agreement or in a sepa-rate intercreditor agreement, in which the lenders authorise the security agent to act on their behalf. A security agent appointed under Swedish law will act on behalf of the secured creditors under a Swedish power of attorney from the secured parties.


Yes, Swedish law recognises the concept of a security agent; seequestion3.1 above. Provided the security agenthasbeenvalidly authorised by way of a power of attorney or any other way which creates an agency position under applicable law, the security agent can enforce claims on the behalf of other lenders in Sweden.



A party holding the benefit of Swedish law security has a fidu-ciary duty towards the pledgor/mortgagor to realise a fair market value for the relevant asset over which the security is created under the relevant circumstances. The fiduciary duty also



reorganisation procedure ( företagsrekonstruktion). The purpose of a Swedish company reorganisation is to protect the company from enforcement measures from its creditors for a limited period and to arrange for a composition with its creditors so that it can continue its business with a more sustainable debt situation. Liabilities with asset security will not be included in any composition achieved in a Swedish company reorganisation. For this reason, a company reorganisation procedure will not be possible to undertake in project financing as the procedure does not function when the claims of most major creditors are secured by asset security.


Therearerulesfordirectorliabilityforthenon-paymentoftaxes.If it is suspected that a Swedish limited company may be

balance sheet insolvent (as defined in the Swedish Companies Act), the directors may become liable for future liabilities of the company if they do not perform the duties set out in the Swedish Companies Act.

Directors are under a duty to keep themselves informed of the business and operations of the relevant company. They may become personally liable if they are passive. An individual director who has been normally active may avoid liability if she or he has entered a protest against a decision, or it is shown that the director received incorrect information.

Finally, the continued trading by a company that is insolvent may trigger criminal liability for the board of directors in certain circumstances.



No specific ownership restrictions, controls or fees apply to foreign owners of a project company incorporated in Sweden. Sweden’s membership in the European Union would also make the introduction of any such concepts difficult.


No, they are not.


The property rights of private individuals and companies are protected by the Swedish constitution. Property rights are also protected by the European Convention on Human Rights, which holds a quasi-constitutional status under Swedish law.Expropriation is further regulated by the Expropriation Act.Onlyrealpropertymaybeexpropriatedanditmayonlybeexpro-priatedbytheSwedishStateoramunicipality. Expropriationisonlypermittedifthepurposeforwhichtheexpropriationismade holds such an important interest for the Swedish State or relevant municipality that it clearly outweighs the detriments

can only happen if this is deemed to be in the best interest of all creditors, i.e. there can be a higher recovery rate with the continuedbusiness thanwithout it. Bankruptcy receivers areusually positive to secured parties that are willing to assist in the sale of the pledged assets, as professional lenders are likely better at finding suitable purchasers than a bankruptcy receiver is.


Yes,thereareclawbackrightssetoutintheSwedishBankruptcyCode (Konkurslag (1987:672)); typically, only clawback in relation tonewsecurityforexistingdebtmaybecomerelevantinprojectfinance transactions. Delayed perfection over security, which isquitecommon inrelation to, forexample,bankaccountsandcertain contractual claims, will from a clawback perspective create a situation where the relevant security is not deemed to be granted until the perfection is properly performed. That security will thus be seen asnew security for existingdebt, although the securitywas granted at financial close (but without due perfection being achieved).Thehardeningperiodfornewsecurityforexistingdebtwill typically be three months (two years if the parties are related).

In addition to the abovementioned clawback provision, there are also clawback provisions dealing with fraudulent conveyance of security, payments made with unusually large sums or before the due date, creation of set-off rights, etc. These provisions are rarely relevant in project financings.

There are no types of claims that would have any priority over claims secured by asset security. There are claims that have a general preferential right, i.e. ranking behind debt secured by asset security but before unsecured claims. These relate to, forexample,costsforaccountingservicesandclaimsbasedonemployment contracts (for claims regarding salaries that are due when the bankruptcy is opened and one month from that date).


Yes, financial institutions that fall within the EU rules for resolution under Regulation (EU) No 806/2014 establishinguniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the frame-workofaSingleResolutionMechanismandaSingleResolutionFund cannot be declared to be in bankruptcy.


Yes, a creditor can, in accordance with the rules in the Swedish Enforcement Code (Utsökningsbalk (1981:774)), go to court and obtain an attachment order (utmätnnig), whereby the creditor may be granted a secured position in relation to certain assets. Any asset that is already subject to perfected security to another cred-itor will be protected from any attachment order.


A Swedish company that, due to over-indebtedness, will have difficulties paying its debts may apply to open a company

282 Sweden



No. However, certain financial institutions are obliged to report certaincross-borderpaymentstotheSwedishNationalBank.


No, there are not.


Yes, assuming that this is possible under the laws of the foreign jurisdiction.


No, there is not.


Pleaseseeresponsetoquestion7.1.


If a project company owns or operates a power grid, which is subject to a concession to operate that grid, the project company would generally be obligated to comply with the Swedish rules ofpublicprocurementinrelationtosourcingofequipmentforthe construction of its grid. Note that under Swedish law, a power-producing company may not own and operate a power grid or a power line that is subject to a concession.

8 Foreign Insurance


No, there are not.


No, they are not.

causedtotheownerbytheexpropriationbeingpermitted. Ifany real estate is expropriated, the owner in question is enti-tledcompensationtotalling125%ofthemarketvalueoftherealproperty.



In many project financing transactions there will be a need for the project to hold an environmental permit. The Swedish Environmental Code (Miljöbalk (1998:808)) sets out that an environmental permitwill be required to carry out any envi-ronmentally hazardous activity in Sweden. An environmental permitisappliedforatthelocalCountyAdministrativeBoard(Länsstyrelsen) or obtained in the form of a court ruling from the Land and Environmental Court, depending on type of permit required. Exemptions fromother regulations, such as shore-line protection (strandskydd ),mayalsoberequired. Adecisionor ruling regarding an application for an environmental permit, whether it be in relation to a rejection of the application or a qualificationthatisundesired,canbeappealedandtriedintheSwedish court system.

In projects including power production and transmis-sion, the requirements to hold a concession (a grid operatinglicence) under the Swedish Electricity Act (Ellag (1997:857)) will need to be considered. Concession applications (and applica-tions regarding exemptions from concession requirements forintra-production site grids) are handled by the Swedish Energy MarketsInspectorate(Energimarknadsinspektionen). A decision by theSwedishEnergyMarketsInspectoratetorejectanapplica-tionforconcessionorexemptionfromtheconcessionrequire-ment can be appealed and tried in the Swedish court system. Constructionsonprojectsiteswill,withcertainexemptions,

need to be covered by a building permit under the Swedish Planning and Construction Act (Plan- och bygglag (2010:900)). Buildingpermit applications arehandledby the localmunici-pality (kommun). A decision by a municipality to reject an appli-cationfor,ortoattachqualificationsto,abuildingpermitinaway which the applicant is not satisfied with can be appealed and tried in the Swedish court system.


No, they do not.


No, it does not.


No, there are not.



13 Applicable Law


Swedish or English law.


Swedish, English, German or Dutch law.


Typically project documents, security agreements and direct agreements in relation to project documents.



Yes, it is.



Yes, Sweden has ratified the New York Arbitration Convention and a foreign law arbitration award will be recognised under the conditions set out in the Swedish Act on Arbitration (lag (1999:116) om skiljeförfarande).


Yes, it is.


Virtually all contractualmatters between companies are arbi-trable under Swedish law. Disputes involving rights, licences, contracts and other types of decisions by government authori-ties generally cannot be settled through arbitration. In certain situations, a declaratory judgment may be necessary to give effect to an arbitral award.


As a general rule, no. The types of disputes subject to manda-tory domestic arbitration are very unlikely to occur within the contextofaprojectfinancetransaction.



TotheextentthatanysuchpersonsarecitizensorresidentsofotherEU/EEAMemberStates,thesepersonsarefreetoworkinSweden under the rules on the free movement of services within the EU/EEA. In relation to citizens of countries outside of the EU/EEA,residenceandworkpermitsarenormallyrequired.



TotheextentthatanysuchequipmentissourcedfromanotherEU/EEAMemberState,suchequipmentmaybefreelyimportedintoSwedenwithoutanyrestrictions,controls,feesand/ortaxesunder the rules on the free movement of goods within the EU/EEA. Certain types of hazardous goods may be subject to envi-ronmental or public health restrictions.

In relation to goods imported from countries outside of the EU/EEA, customs will be levied on the imported goods and an importpermitmayberequired.



11 Force Majeure


Generally, yes. Swedish law may, however, limit the enforcea-bility of contractual rights that create unreasonable results in a specific case, which may (at least in theory) limit the enforcea-bility of a force majeure clause in any given case.



Yes, the Swedish Penal Code (Brottsbalk (1962:700)) contains rules that prohibit corrupt business practices and bribery. The penalties range from a fine to several years of imprisonment. In certain situations, a company may also become subject to penal-ties due to the criminal actions of its senior management or employees. The Swedish Financial Supervisory Authority may also levy civil penalties against companies and individuals for certain types of financial misconduct.

284 Sweden


public limited company requires a higher registered sharecapital as compared to a private limited company, which other-wise is the typical form of a project company. The share capital requiredforaprivatelimitedcompanyis25,000Swedishkronorand thesharecapital required forapublic limitedcompany is500,000 Swedish kronor.

The issuance of bonds and other capital market instru-ments is primarily regulated by the EU Prospectus Regulation (Regulation (EU) 2017/1129).

19 Islamic Finance


To our knowledge there have not been any Islamic financings made in the Swedish project financing market. We know of a few Swedish real property financings which have been struc-tured as Islamic compliant financings. All of these financings have been transactions run out of London with Swedish law security and have been structured to rely on Murabaha instru-ments. As there is generally freedom of contract in Sweden, it is theoretically possible to use any Islamic finance-compliant structure in a project financing in Sweden.


There is no case law in the commercial law field dealing with the recognition of Shari’ah law, but there are a few cases in rela-tion to family law where the parties have been individuals rather than businesses. Our assessment is that a Shari’ah choice of law would not be recognised under Swedish law. However, the elec-tion of the laws of a jurisdiction which incorporates Shari’ah law will be recognised, provided that the relevant laws of that juris-diction do not include any provisions that Swedish law would deem to be contrary to public policy (ordre public) or mandatory Swedish law.


Generally,no.Theexceptiontothisruleisiftheinterestratewould be so high that it is deemed to be contrary to Swedish usury law.



No, not that we are aware of.

17 Tax


As a general rule, no. There are exemptions in relation tointerest payments to individuals or estates after deceased indi-viduals in certain circumstances.


There are none.

18 Other Matters


Since a few years back, restrictions have been imposed on the ability of Swedish companies to deduct costs for interest expensesiftheinterestispaidtoarelatedparty.Thisrestrictionmay result in an investment in a Swedish company being more favourabletodobywayofequityratherthanshareholderloans.How to structure the investment should be analysed in detail togetherwithtaxadvisors.


The only applicable restriction against a project company issuing bonds or similar capital market instruments is that the project company must be organised as a public limited company. A

285

Jesper Johansson is a partner in the firm’s banking and finance group and divides his time between acquisition financing, real property financing and project financing. He has a particular focus on project financing and has acted on a number of the larger project financings in the Swedish market in recent years. He has also considerable experience in leasing and structured financing, as well as derivative products. Jesper is ranked in Band 3 in Chambers and Partners (both Europe and Global guides) where clients have noted that he is “a very experienced project finance lawyer with strong knowledge of the local market and the renewable energy sector”.

Cirio Advokatbyrå ABMäster Samuelsgatan 20P.O. Box 3294103 65 StockholmSweden

Tel: +46 76 617 08 15Email: [email protected]: www.cirio.se

The firm’s heritage dates back to 1918 but took the name Cirio in 2019 to mark the beginning of a new era of business law practice in Sweden. With a passion for progressive business and transactions, we have evolved specialised competence within areas like renewable energy, life sciences and artificial intelligence. The name Cirio holds a promise of a continued advancement in the development of providing legal services on the highest level, where we aim to be not just an exceptional legal advisor, but also a trusted business partner to our clients. The firm consists of around 90 fee earners and in total 130 employees and has a strong focus on providing transactional advice, in particular in relation to the development and financing of renewable energy and infrastructure projects and M&A trans-actions linked to this area.

www.cirio.se


Cirio Advokatbyrå AB

Fredrik Eliasson is a member of Cirio’s banking and finance team. He has been working at Cirio and its predecessor since 2018. Fredrik wrote his master’s thesis on the compatibility of project finance and Swedish law.

Cirio Advokatbyrå ABMäster Samuelsgatan 20P.O. Box 3294103 65 StockholmSweden

Tel: +46 76 617 08 69Email: [email protected]: www.cirio.se



Chapter 31286

Switzerland

Prager Dreifuss Ltd. Mark Meili

Daniel Hayek

Switzerland


Depending on the kind of asset, perfection is achieved through a declaration of pledge/assignment or delivery of the movable asset. Security interests over certain assets (real estate property, railroads,airplanesandships)requireregistration.

In order to obtain security over all assets of a Swiss company, a combination of a share pledge agreement and of security agree-mentsoverthecompany’sassetsisrequired.


For real property (which includes land, buildings and other constructions that are connected to the ground, whether over-ground or underground, e.g. pipelines), security is taken by way ofmortgageormortgagenote.Bothtypesofsecurityrequiretheconclusion of a mortgage agreement in the form of a notarised deed. The mortgage or mortgage note has to be registered in the land registry for perfection. For certified mortgage notes, the secured party also needs to have possession of the mortgage note.Mortgagenotes(whethercertifiedornot)maybepledgedor transferred for security purposes. Movableassetslikemachineryandequipmentmaybepledged

or transferred for security purposes. A security agreement spec-ifies the assets to be pledged or transferred. Since the security holder needs to be in possession of the pledged assets during the security period (Faustpfandprinzip), security over plants, machinery,equipmentorinventoryispossible,butisusuallynottaken.


Security over receivables can be taken either through pledge or assignment for security purposes (receivables are considered to be rights and claims).

Assignments for security purposes, which are more common, require a written agreement in which the assignor and theassignee specify the receivables to be assigned. Under certain circumstances, it is also possible to assign future receivables.

The debtor does not have to be notified of the assignment. However, before such a notification, bona fide payments by the debtor to the assignor will release the debtor from their payment obligations.

1 Overview


Infrastructure projects in the areas of leisure and property, transport, energy and the water sector continue to be signifi-cant. The projects are usually financed by public funds, but due to projected increases of investments, private funds will likely become more important in the future.


The market has been dominated by transport and leisure/prop-ertyprojects;forexample,theLuganoCongressCenter.

2 Security


Asset security can be given by pledge or by assignment or transfer for security purposes.

A pledge gives the secured party possession of the security while the security provider retains ownership of the security. A pledge can be obtained over movable assets, real estate prop-ertyandclaimsandrights. Becauseof theprincipleofacces-sion (Akzessorietätsprinzip), which is applicable to pledges, each of the secured parties would need to be a party to the rele-vant pledge agreement. In a security trustee or security agent structure, Swiss pledge agreements therefore provide that the secured parties – represented by the security agent or trustee – are parties to the agreement.

The parties may favour creating security by assignment (for claims and rights) or transferring for security purposes (for movable assets), which gives the secured party full ownership of the asset. The secured party is contractually obliged to re-assign or re-transfer the asset to the security provider. An assignment is a non-accessory security which means that a security agent or trustee may hold the security as fiduciary in its own name and for the benefit of all secured parties.Thevalidcreationofasecurityrequiresasecurityagreement

and the perfection of the security interest. In the security agree-ment, the security provider undertakes to pledge or transfer/assign for security purposes certain assets to the secured party.

287Prager Dreifuss Ltd.


Further, pledges over railway and navigation companies oper-ating under a federal concession require the consent of thefederal council.

3 Security Trustee


Switzerland does not have its own legislation on trusts. However, Switzerland is party to The Hague Convention on the Law Applicable to Trusts and their Recognition and therefore recognises foreign trusts.

Switzerland also recognises the role of security agents or trustees to enforce the security and apply the proceeds from a security to the claims of the lenders. However, the principle of accessionmaycausechallenges(seequestion2.1).


Sometimes parallel debt structures are used in order to facili-tate changes to the secured parties. Under a parallel debt struc-ture, the borrower owes to the security agent in its individual capacityanamountequaltotheaggregateoftheamountsowedby the borrower to all lenders under the financing documents. However, this concept remains untested in Switzerland.



A transfer or assignment for security provides the secured party with full ownership of the asset which he may privately enforce. This can be done even after the opening of bankruptcy proceed-ings. Receivables and claims may be collected from the third-party debtors or may be sold to a third party.

In the case of a pledge, the secured party may only privately enforce the asset if this has been agreed beforehand in the secu-rity agreement. Otherwise, the pledge has to be enforced through enforcement proceedings with an insolvency official. A public auction, which is the standard procedure of realisation, can be time-consuming and create substantial costs. Under certain circumstances, i.a., if all parties agree or securities or other items withamarketorstockexchangepricearetoberealised,thedebtcollection office may allow the public auction to be replaced with a private sale.


Security over cash deposited in bank accounts can be taken through a pledge or assignment for security purposes (over the claims the account holder has against the bank). Lenders usually prefer assignments. A written security agreement must describe the bank account claims to be pledged/assigned. It is not a legal requirement to notify the bank of the pledge or assignment,even if usually done in practice.


Security over shares in companies incorporated in Switzerland can be taken through assignment for security purposes or, more commonly, through a pledge of the shares. The pledge or assignmentofsharesrequiresasecurityagreement.Theperfec-tionofuncertifiedsharesrequiresawrittendeclarationofthepledge or assignment.

In practice, it is recommended to issue physical share certif-icates to strengthen the secured party’s position in case of enforcement. To perfect the security over certified shares, the pledgee or assignee needs to have physical possession of the shares. For registered certified shares (in contrast to bearer shares),thesharesalsorequireanendorsementorassignment.


In relation to security over shares, receivables and chattels, there are generally no notarisation, registration, stamp duty or other feesthatapply.Stamptaxofupto0.3%maybeleviedonthetransaction value in a transfer of ownership of securities if a Swiss bank or securities dealer is involved. The Swiss legislator iscurrentlydiscussingtherepealofthistax.Securityoverrealestaterequiresanotariseddeedforwhich

notaries’ fees may incur. The registration of the mortgage or mortgage note with the land registry may incur registration fees aswellascantonalandcommunaltaxes.

The voluntary registration of a security over intellectual prop-erty with the intellectual property register incurs registration fees, but protects the holder of the security from a bona fide third partyacquiringtheintellectualpropertyright.


Filings, notifications or registrations in relation to security over assets (only required for certain assets, see question 2.1) canusually be completed within a few days. During certain times of the year, in particular before the summer and Christmas break, it may take longer because registries may be overloaded with work.


Generally, no. However, a pledge over real propertymayrequireaLexKollerpermitifthepledgeisinfavourofaforeignparty.

288 Switzerland


institutions. The proceedings are managed by the supervisory authority(FINMA)itself.


Pleaseseequestion4.1.


Swiss bankruptcy law provides for composition proceedings, which are aimed at enabling a debtor to reach a restructuring agreement with its creditors. It was introduced in the revised DEBAof 1 January 2014 and facilitates companies’ access toprotection under a moratorium for mere restructuring purposes.


Under Swiss corporate law, the board of directors has a general duty to safeguard the interests of the company, which includes the responsibility to ensure that the company remains finan-cially sound and to take appropriate restructuring measures, should it be in financial difficulty. Depending on the balance sheet situation of the company, the directors are legally obliged to take specific measures, which depend on the level of losses the company has incurred.

Taking timely action is a key component of a director’s duty to perform his tasks with due care. Failing to do so incurs the risk of becoming personally liable to anyone suffering losses, if an intentional or negligent breach of duty of care can be estab-lished. The relevant damage consists of the increase in the company’s losses occurring between the point in time, in which the board learned about the situation of over-indebtedness (and failed to notify the bankruptcy judge) and the date on which the company is declared bankrupt. In a series of decisions, the Swiss Federal Court held that subordinated debts should be included in the calculation of the damage caused to a company in a direc-tor’s liability claim as subordination does not constitute a waiver and thus does not diminish the company’s damage. The deci-sions have been subject to criticism, arguing that company law encourages subordination as a last attempt to save the company and that the use of this instrument should not negatively affect directors,ifthecompanysubsequentlyhastofileforbankruptcy.

Further, the Swiss Penal Code may be applicable in case of reckless bankruptcy or mismanagement.



Fewlegalrestrictionsexistinrelationtoforeignownershipofaproject company.

Foreign ownership may be restricted in public monopoly sectorsorwherelicenceorconcessionrequirementsapply(i.e.rail transport, energy supply and postal services).


In general, the same rules will be applied to foreign investors and creditors as to domestic ones.



Firstly, it is to be noted that bankruptcy proceedings over a project company do not affect collateral which has been transferred or assigned to the secured party for security purposes, as such collat-eral is no longer part of the assets of the security provider. The securedcreditorsarenotrequiredtohandthecollateralovertothe bankruptcy administrator and can, if permitted by the secu-rityagreement,liquidatethecollateralprivately.

However, where security is granted in the form of a pledge, ownership remains with the security provider. If bankruptcy proceedings are opened over the security provider, he is no longer entitled to dispose of such assets and must hand the pledgedassetsovertothebankruptcyadministrationfor liqui-dation with other assets. Swiss law guarantees the secured cred-itors’ right to preferential satisfaction.


Security given by a bankrupt entity may become subject to claw-back actions under the following conditions:■ Article286DEBA:ifthedebtordidnotreceiveadequate

compensation for any gifts, gratuitous acts or dispositions, these acts become voidable if they were made within one year prior to the commencement of bankruptcy proceed-ings or one year prior to the notification of the debt mora-torium against said debtor.

■ Article287DEBA:thegrantingofcollateralforexistingobligations, to which the debtor was not obligated, the settlement of monetary debt by unusual means and the payment of undue debt is voidable, if carried out by an over-indebted debtor within one year prior to the opening of the bankruptcy proceedings or one year prior to the notification of the debt moratorium against said debtor.

■ Article288DEBA:allactscarriedoutbyadebtorwithinfive years prior to the initiation of the bankruptcy proceed-ings or five years prior to the notification of the debt mora-torium against said debtor are voidable, if carried out with the intent to harm its creditors or to favour certain cred-itors to the detriment of the remaining creditors, and the contracting party was aware of such intent.


The bankruptcy of certain entities is governed by specific bank-ruptcy regimes; the most important special regime deals with the insolvency of banks, security dealers and mortgage bond




Generally, the ownership of private land does not require alicence(seequestion7.2forexceptions).Thesameappliestotheundertakingofbusinessonprivateland.However,theexploita-tion of natural resources, even if located on the land of the inter-estedparty,mayrequireagovernmentalpermitorlicence.Forstate-ownedland,theextractionandexploitationrights,as

wellastheoperationofapipeline,requirealicenceorconcessionand the payment of fees. In general, a foreign applicant needs to have a legal domicile or a branch in Switzerland during the tenure of the licence or concession to ensure compliance with Swiss law.


Withtheexceptionofgroundwaterthatbelongstothecantons,natural resources belong to the owner of the land. However, their extraction may require a permit or licence. For state-ownedland,pleaseseequestion7.3.Exportrestrictionsapplyin the energy sector.


No,therearenot.Howeverofficialexchangeofficesmaychargea fee for their services.


Therearenorestrictions,controlsorfeeswiththeexceptionofapplicabletaxes(seequestion17.1).


Yes, this is possible.


Restrictions do not apply, as long as dividends are only paid from the disposable profit (after the mandatory allocation of profits to the legal reserve of the project company).


Before a competent authority authorises a public project, itwill examine the compatibility of such project with Swiss

Fortheacquisitionofnon-commercialproperty,LexKollershouldbeconsultedandconcessionrequirementsmayhavetobemet.Theacquisitionofruralrealestateiscontrolledbyruralland legislation. Domicilerequirementsapplyincertainareas,suchasairand

maritime transport, hydroelectric and nuclear power or opera-tion of oil and gas pipelines.

Regarding control of a project company, depending on the company type, certain restrictions as to the composition of the board of a Swiss company may apply.


Switzerland is bound by the WTO’s General Agreement on Trade in Services and its Agreement on Trade-Related Investment Measures.UndertheOECD’sCodeofLiberalisationofCapitalMovements,Switzerlandhasundertakentorefrainfromdiscrim-inatory practices against foreign investments made by OECD investors. Further, more than 120 bilateral investment promotion and protection agreements (BITs) protect foreign investments.DisputesettlementmechanismsareoftenprovidedforintheBITs.


UndertheSwissConstitution,expropriationisonlypermissibleif it is based on law, is in the public interest, is commensurate and theexpropriatedownerisfullycompensated.



Switzerland’s federal structure gives federal, cantonal and communal authorities legal competence to authorise projects. With regard to legislation and approvals of projects in the avia-tion, railway, transport, power generation, energy, telecommu-nication/radio and television sectors, the Federal Department of the Environment, Transport, Energy and Communications (DETEC) is the main competent organ. Cantonal and communal authorities will become involved if affected by a specific project. On the other hand, sectors like water management and mining are regulated by cantonal legislation.


Basically, no. However, exceptionsmay apply for legal trans-actions involving real estate, as in most cases notarial certifi-cation is required. If the specificproject involves acquisitionofnon-commercialpropertybyaforeigner,LexKollershouldbeconsultedandconcessionrequirementsmayhavetobemet.The acquisitionof rural real estate is controlledby rural landlegislation. Should either legislation apply, a permit or a ruling of the competent authority must be obtained. Special licensing or approvals by the competent agency may be required withconstruction projects or projects in the area of public service.

290 Switzerland




Importation of goods into Switzerland depends on the purpose andthevalueofthegoods.Forforeignprofessionalequipmentand contractor equipment, specifically imported for a projectand for a limited period of time, the temporary admission proce-dure may apply. However, in some cases permanent importation couldbelessexpensiveandlesstime-consuming.Furthermore,VATmayapply.


Customs tariffs are available on the website of the Swiss Federal Customs Administration (www.tares.ch). Besides temporaryimportedgoods,exceptionsexistforcommercialsamplesandspec-imens as well as for goods intended for non-profit organisations.

11 Force Majeure


In general, yes. Force majeure risks are, in practice, often covered by insurances.



The Swiss Penal Code provides regulations to combat corrup-tioninthepublicaswellasintheprivatesector.Amaximumof five years of imprisonment or a fine may be indicted on a member of a judicial or another Swiss or foreign authority who (i) offers, promisesor grants an advantage, or (ii) requests oraccepts a promise or a bribe. In the private sector, active and passivebriberyarepunishablebyamaximumsentenceofthreeyears in prison, or a fine. Criminal prosecution of corrupt busi-nesspracticesmayalsobeextendedtotheemployercompany,shoulditnothaveundertakenallrequisiteandreasonableorgan-isationalprecautions required toprevent thebriberyofpublicofficials or persons in the private sector by its staff. The respon-sible company can receive a fine of up to CHF 5 million.

13 Applicable Law


Swiss project agreements will usually be governed by Swiss law.


Financing agreements will usually be governed by the law of the jurisdiction where the arranger of the financing is located.

environmental, health and safety laws. However, these laws would generally not affect the financing part of a project.


Switzerland is a signatory to the General Procurement Agreement dated 15 April 1994 (GPA) and has concluded abilateral agreement with the EU. These international treaties provide the legal framework for both federal legislation and cantonal procurement legislation, of which there are 26 different ones. The fundamental principles of public procurement regu-lationareequaltreatment,transparencyandcompetition.

8 Foreign Insurance


According to the Federal Insurance Supervision Act, foreign insurance companies that insure risks situated in Switzerland are obliged to obtain a licence for their business activities from FINMA.ForeigncompaniesmusthaveabranchinSwitzerlandand appoint a general agent.


Yes, they are.



The restrictions depend on the country of origin of the employees. Foreign workers from EFTA/EU states enjoy unre-stricted access to the Swiss labour market due to the Agreement onFreeMovement,enteredintobetweentheEUandSwitzerlandin 1999. For workers from all other countries – so-called third countries – work and residence permits are strictly controlled andonlygrantedif(i)he/sheisahighly-qualifiedworker,and(ii) his/her skills are urgently required and the Swiss orEU/EFTA labour markets do not have suitable people available.FollowingBrexit,theAgreementonFreeMovementbetween

SwitzerlandandtheUKwillnolongerbeapplicable.AccordingtoanewagreementbetweenSwitzerlandandtheUK,employeeswho are already employed in the other country may remain there. For the future transfer of employees, the countries have agreed on a temporary solution until 31 December 2021 which provides for facilitated access to both markets. On9February2014,theSwisselectoratevotedinfavourof

an initiative limiting immigration into Switzerland by setting quantitativelimitsandquotas,whichhasbeencautiouslyimple-mentedbytheSwissgovernment.InMay2020,theSwisselec-torate will vote on a new initiative to terminate the Agreement onFreeMovementwiththeEU.



17 Tax


While interest paid on a loan granted to a Swiss non-bank is generallyfreefromtaxes,interestpaymentsmaybecomesubjectto35%SwisswithholdingtaxiftheloanqualifiesasabondforSwisswithholdingtaxpurposes.Asyndicatedloanistreatedasabondandissubjecttoawithholdingtaxchargeif(i)aSwisstaxresidentborrowerofonesyndicatedfacility(providingforidentical conditions) owes interest-bearing money of more than CHF 500,000 to more than 10 lenders which are not banks (10 Non-BankRule),or(ii)aSwisstaxresidentborrowerunderdebtrelationships with different conditions owes interest-bearing money of more than CHF 500,000 to more than 20 lenders whicharenotbanks(20Non-BankRule). Recently, theabol-ishmentofthe10/20Non-BankRulehasbeenwidelydiscussedand a consultation draft bill to change the respective law is expectedsoon.

For interest payments secured by Swiss real estate, with-holdingtaxatarateof13%–33%(federalandlocaltax)maybeleviedunlessthereisadoubletaxtreatyfortheforeigntaxresi-dent lender.

The granting of an upstream or cross-stream security may triggera35%dividendwithholdingtaxifnotgrantedonarm’s-length terms (so-called constructive dividend). For non-Swiss lenders,arefundmaybegrantedonlypursuanttoadoubletaxtreaty between Switzerland and the country of residence of the lender.


Industrial companies and production-related service providers that are located in specifically determined economic develop-ment areas and that are creating new jobs through a new venture, orarepreservingexistingjobsthroughasubstantialrealignmentoftheirexistingbusiness,cangetaSwissfederaltaxholidayforaperiodofupto10years.Inordertoobtainafederaltaxholiday,the cantonmust also have granted a cantonal tax holiday forthesametypeofbusinessactivity.ThefederaltaxholidaycanleadtoanannualtaxcreditofuptoCHF95,000foreachnewlycreatedjobandCHF47,500foreachmaintainedjob.

18 Other Matters


No, there are not.


The security agreements will usually be governed by the law of the country where the security is located to ensure their validity and enforceability in the case of insolvency. For assets located in Switzerland, security agreements creating a security interest over these assets will be governed by Swiss law.



Switzerland recognises and enforces waivers of immunity. Swiss courts also recognise the choice of jurisdiction in civil law matters. However, certain matters are subject to mandatory exclusivejurisdictionrules(suchasdisputesrelatedtopropertyor disputes in public law matters).



As provided for in the PILA and the New York Convention, a Swiss court must decline its competence in favour of an arbitral tribunal if a valid arbitration clause has been agreed on between the disputing parties and if the dispute is arbitrable pursuant to Swiss law.


Switzerland is a party to the New York Convention and is a member of the International Centre for the Settlement of Investment Disputes (ICSID).


Only disputes regarding monetary claims are arbitrable under Swiss law.


Not applicable in the area of project finance.



No, we have not seen calls for political risk protections.

292 Switzerland



Although Swiss contract law is based on the principle of contrac-tual freedom, it is disputed whether the parties can choose a non-governmental law as the governing law of a contract or a dispute. To our knowledge, there have not been any recent notable cases involving Shari’ah law in the finance sector.


Generally, no.


To begin with, bonds will be placed directly with investors or indirectly viabankswithno involvementof a stock exchange.Iftradingonastockexchangeisdesired,SIXSwissExchangeisthemainequityexchangeinSwitzerland.Thelistingprocessinvolves the duty to publish a prospectus, the subscription period, thelodgingofalistingapplicationwiththestockexchangeandtheissuermustmeetvariousrequirementssetoutintheListingRules. In order to remain listed, the issuer has to carry out certain duties such as publication of price-sensitive data.

19 Islamic Finance


Instruments like Istina’a, Ijarah, Wakala and Murabaha reflect general principles of Islamic Finance. For Shari’ah-compliant transactions in the scope of an Islamic project, such financing structures can be used in Switzerland.

293

Daniel Hayek is a member of the management committee and head of the Insolvency and Restructuring team as well as the Corporate and M&A team of Prager Dreifuss. Daniel has been a partner with Prager Dreifuss since 2001. His practice focuses on all aspects of insolvency and restructuring matters, including representing creditors in bankruptcy-related litigation, registering or purchasing claims or in enforcing disputed claims before courts. His longstanding expertise includes M&A, corporate finance, takeovers, banking and finance, and corporate matters, including in restructuring situations. Daniel has represented the trustee and the security agent of the bondholders regarding their claims against one of Europe’s largest independent oil refiners, Swiss-based Petroplus group, enforcing a large claim based on derivatives in a litigation against the bankrupt estate of the Swiss Lehman entity and advising the trustee of the Kodak pension plan on the acquisition of assets and restructuring.

Prager Dreifuss Ltd.Muehlebachstrasse 6CH-8008 ZurichSwitzerland

Tel: +41 44 254 5555Email: [email protected]: www.prager-dreifuss.com

Prager Dreifuss is a Swiss law firm with a broad international practice and one of Switzerland’s leading law firms for business law. With over 30 years of experience, recognised expertise and a comprehensive understanding of our clients’ businesses, Prager Dreifuss develops tailored solutions of the highest quality. As independent business lawyers with access to the world’s leading firms in international matters, we are committed solely to our clients’ interests. Uncompromising customer orientation and efficient structures guarantee flexibility, speed and assertiveness. We offer advice in the areas in which we can provide outstanding quality. We thus strive to find integrated, innovative solutions for our clients that are adapted to legal and economic realities. Our attention is equally focused on legal issues as on controlling business risks. All our attorneys have acquired additional qualifications in their practice areas and completed studies abroad or work assignments in industry. Ongoing continuing education, either under-taken personally or in the context of our interdisciplinary practice groups, ensures the highest degree of competence even in highly dynamic times.

www.prager-dreifuss.com


Prager Dreifuss Ltd.

Mark Meili is a member of the Corporate and M&A and Dispute Resolution teams of Prager Dreifuss. He mainly advises companies with regard to commercial and corporate law matters. His main areas of practice include M&A, corporate finance, as well as contract, corporate and commercial law matters. Mark further advises clients in matters of insolvency and restructuring law. In these fields he also represents clients in court and before arbitration tribunals.

Prager Dreifuss Ltd.Muehlebachstrasse 6CH-8008 ZurichSwitzerland

Tel: +41 44 254 5555Email: [email protected]: www.prager-dreifuss.com



Chapter 32294

Taiwan

Lee and Li, Attorneys-at-Law Pauline Wang

Hsin-Lan Hsu

Taiwan


banks have been active in the financing of green-energy projects in Taiwan, especially in the projects of wind farms which is a completely new industry in Taiwan. To date, most of the wind farm project financing was arranged and/or funded by foreign banks(includingbutnotlimitedtoMizuhoBank,MUFGandCACIB, through its Taipei branch or otherwise), and almostall of those project finance transactions were still led by the international financial advisors and banks, adopting the inter-national norms and practice in those transactions. That said, largelocalbanks(suchasCTBCBank,TaipeiFubonBank,andCathayUnitedBank)arealsorecentlyactiveintheparticipationof project finance relating to renewable energy.


The most significant project financing transaction in Taiwan is the Taiwan High Speed Rail project (a NT$323.3 billion (US$10.5 billion) multi-tranche syndicated loan) in 2000 which was restructured to NT$381.06 billion (US$12.7 billion) in 2009. Project financing was also adopted for other large-scale projects, such as: Taipei 101 Tower (NT$35.3 billion (US$1.2 billion)), whichopenedin2004;TaipeiPortContainerTerminal(NT$16billion (US$533 million)), which began operation in 2009; Kaohsiung Kuo Ming Container Terminal (NT$16.2 billion(US$540million)),whichbeganoperation in2011; andTaipeiDome Complex (NT$15.4 billion (US$513 million)), whichconsists of a main dome building used as a baseball ground and for other sporting and cultural activities (construction commenced in 2012 but was suspended in 2016) and shopping malls, cinemas and hotels nearby (construction of the nearby buildings has not yet commenced). For green energy, which has also been a hot topic in recent years in project financing, the significant project financings that are concluded include:■ Formosa 1WindPower project, Taiwan’s first commer-

cial-scale offshore wind farm, which consists of a NT$2.5 billion (US$83 million) syndicated loan in 2016 to finance thefirstphaseofthewindfarm(8MW,whichcommencedoperationsinApril2017)andaNT$62.4billion(US$208million) syndicated loan in 2019 that will be used to refi-nance the 2016 syndicated loan and fund the development ofthesecondphase(120MW).

■ The multi-tranche syndicated loan of NT$74.2 billionextended for the Yunlin Offshore Windfarm Project(640MW)ofWPDin2019.

■ The five-year NT$25 billion revolving syndicated loanextendedfortheGreaterChanghuaProject (900MW)ofØrsted in 2019.

1 Overview


In Taiwan, project finance is primarily applied to infrastructure projects developed by the private sector or through a public-private partnership. The major legislation that governs private participa-tion in infrastructure projects is the Act for Promotion of Private Participation in Infrastructure Projects (the “PPP Act”), last amended in 2018.ThePPPActprovides14categoriesofpublicworks for private sector participation, including, among others: transportation facilities; sewerage treatment facilities; water supply, flood control and drainage facilities; hygienic and medical facil-ities; recreation/tourism facilities; power supply facilities; sports facilities; industrial, commercial, technical and agricultural facil-ities; and government office buildings.

In terms of deal activity in project finance, transporta-tion facilities have the lion’s share of project finance projects. However, green-energy projects have been the hot topic of project finance in recent years in Taiwan, especially solar projects and wind farm projects.

A project company under the PPP Act may apply for mid- and long-term loans from domestic banks at preferential interest rates. Also, foreign banks may participate in the syndication of loans. In addition, there is further deregulation regarding the issuing of new shares and corporate bonds and the securitisa-tion of future incomes of the project companies to facilitate the project company’s financing.

In order to stimulate economic growth and drive indus-trial transformation, the Taiwanese government approved the Special Act for Forward-Looking Infrastructure in July 2017. The Forward-Looking Infrastructure Development Program (2017–2024) will expand investments in major infrastruc-ture (including railways, aquatic environments, green energy,digital technology, and urban and rural facilities). The govern-ment investment in this large-scale infrastructure program will totalNT$882.49billion(US$28.56billion),andisexpectedtospur public and private enterprise investment of NT$1.78 tril-lion(US$57.53billion).Inaddition,theMinistryofEconomicAffairs (“MOEA”)’s InvesTaiwan Service Center will provideevery project with one-stop services by dedicated staff to help resolve problems to rally investments for Taiwan.

As project finance features non-recourse or limited recourse, which goes against the risk-averse mindset of Taiwanese banks who are used to relying heavily upon the creditworthiness of the borrower and its sponsor, most Taiwanese banks do not actively participate in project finance. In recent years, non-Taiwanese

295Lee and Li, Attorneys-at-Law



Yes. To create a pledge over cash deposits, the pledgee and the pledgor must enter into a written agreement. The pledge shall not become effective against the account bank taking the cash deposits unless the account bank is notified of the creation of the pledge. Nevertheless, please note that the concept of a floating charge is not recognised under Taiwan law. In other words, the pledge covers only the cash in the bank account when such pledge is created and notified to the account bank. The pledge will not cover the cash deposited in the bank account after the account bank is notified of the pledge. To deal with this issue, thepledgor,inpractice,willberequiredtoperiodicallyconfirmwith the account bank the amount of cash in the bank account to ensure that the pledge also covers the cash deposited after the creation of the pledge.


Yes. According to the Company Act, a pledge could be created over shares in a Taiwanese company. A private Taiwanese company may determine at its discretion whether it will issue share certificates to its shareholders and, if yes, the share certificates will be in certificated or scripless form. On the other hand, a public company is obligated to issue share certifi-cates to its shareholders.

To create a pledge over shares in certificated forms, a written agreement is required. The certificates of thepledged sharesshall be duly endorsed and delivered by the pledgor to the pledgee. Furthermore, the company issuing the shares shall be notified of the creation of a pledge in order to register such pledge on the shareholders’ roster. The creation of a pledge is valid between the pledgee and the pledgor when the certificates of the shares have been endorsed and delivered to the pledgee. However, the creation of the pledge cannot be claimed against the company unless the company is notified of the creation of the pledge.

To create a pledge over shares in scripless form which are transferred through the book-entry system of the Taiwan Depository and Clearing Corporation (“TDCC”), the pledgor and the pledgee have to sign a form prescribed by the TDCC and have the pledge registered with the TDCC.


Nonotarisation or stampduty is required for the creation ofsecurity over different types of assets. Whether registration is requireddependson the typeofassetsprovidedassecurity(pleaseseetheanswerstoquestions2.2to2.5).

The registration fee for creating a chattel mortgage over a movable asset is NT$900. The registration fee for creating a mortgageoverrealpropertyisequivalentto1/1,000ofthetotalamount secured by the mortgage.

2 Security


As a general rule, the security provider and the security interest holder should enter into an agreement to identify the specific asset subject to the security interest. A general security agree-ment where such specific asset, such as a floating charge, is not identified, is not enforceable under Taiwan law. In addi-tion,differenttypesofassetsmaybesubjecttodifferentrequire-ments, such as registration or filing with the competent author-ities,ontheperfectionofthesecurity. Suchrequirementsarediscussedbrieflyinouranswerstoquestions2.2to2.5.


Yes. In order to create a valid mortgage over the land, build-ings and plants, the mortgagor and the mortgagee should enter into a written agreement, and a registration with the competent authorityisrequired.Asformachineryandequipment,thesecuritytobecreated

may be a pledge or a chattel mortgage. Both security inter-ests (pledge and chattel mortgage) give the security interest holder first priority over the machinery and equipment. Tocreate a pledge, the pledgor and the pledgee have to enter into a written agreement and the pledgor should deliver the posses-sionofthemachineryandequipmenttothepledgee,butregis-trationwiththecompetentauthorityisnotrequired.Tocreateachattel mortgage, the mortgagor need not deliver the possession thereof to the mortgagee; however, registration with the compe-tent authority would be necessary in order for the mortgagee to claim the chattel mortgage against a bona fide third party.

For projects subject to the PPP Act, approval of the authority inchargeofthePPPprojectisrequiredbeforeprojectassetsareencumbered for the purpose of project finance.


To create a pledge over receivables, the pledgee and the pledgor must enter into a written agreement and, with the pledgee’s consent, the pledgor (or charger) is free to collect the receivables in the absence of a default. In addition, the receivables must be identifiable according to the content of the pledge agreement. Further, the debtor should be notified of the creation of the pledge in order for the pledgee to be able to claim the pledge against the debtor. The pledgor should provide the pledgee with documentary evidence of the receivables. Usually, the pledgor andthepledgeewill,inthepledgeagreement,requirethedebtorto remit the outstanding receivables to a bank account desig-nated by the pledgee in the event that the debtor is informed of the pledgor’s default.

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3 Security Trustee


As general practice for a syndicated loan, syndicated banks will appoint an agent bank to act for and on behalf of the syndicated banks, including registering the agent bank as, for instance, a mortgagee and foreclosing the mortgaged property. In addi-tion, there will be a clause in the syndicated loan agreement to the effect that the syndicated banks’ claims against the borrower under the syndicated loan agreement are joint and several. Given this, the agent bank may claim the whole amount of the loan from the borrower and enforce the security and apply the proceeds from the security to the claims of all the lenders.Nevertheless,underTaiwaneselaw,itisquestionablewhether

or not a third party, who is not a creditor/lender, could validly hold the collateral as a trustee or a security agent for other cred-itors/lenders. Pursuant to the Civil Code, a mortgage/pledge would not be validly created in favour of the creditor/mort-gagee/pledgee if there is no underlying credit owned by the mortgagee/pledgee against the debtor.


As advised in question 3.1 above, in practice, if the lenders’ claims against the borrowers are joint and several, one of the lenders may be appointed as the agent bank by syndicated banks to act for and on behalf of all the syndicated banks, including registering the agent bank as, for instance, a mortgagee and fore-closing the mortgaged property.



Asecuredcreditormayexerciseitsrightsoversecuritythroughcompulsory enforcement despite the ongoing bankruptcy proceeding or liquidation. The standard steps for initiatingcompulsory enforcement are: (1) filing a petition with the court forawritofexecution; (2)courtofficialsseizing thesecurity;and (3) the court holding an auction for the sale of the security and distributing the proceeds to the secured creditor. Unless other creditors have priority over the underlying security, the proceeds should be paid to the secured creditor first.


Regarding the registration fee, please refer to our answer to question 2.6. The authority in chargeof the registrationwillonlyconductaformalityreviewanditisnotexpectedthattheregistration will take a significant amount of time.


Inadditiontotherequirementofregistrationforcertaintypesof security interests as mentioned above, generally the creation ofthesecurityinterestsdoesnotrequirearegulatoryorsimilarconsent, unless the individual or private entity has made any contractual commitment with the government agencies. In Taiwan, facilities of public utilities such as pipelines are usually owned by the state or state-owned enterprises, and thus the chance of them being provided as security are remote.

A project company under the PPP Act shall not transfer, lease out, or create any encumbrance on, the concession rights obtained under the concession agreement, nor shall it make such concession rights an object for enforcement in a civil action, unless otherwise declared by the authority in charge of the PPP project that such an act is necessary in accordance with relevant provisions under the PPP Act. According to a ruling issued by the competent authority in charge of the PPP Act, the concession rights refer to the rights to build and operate the infrastructure.

However, a project company may, with the prior consent of the authority in charge of the PPP project, transfer, lease out, or create any encumbrance on, any operating asset and/or equipmentobtainedfromthebuildingand/ortheoperationofinfrastructure.

Any transfer, lease, or creation of any encumbrance in viola-tion of any of the preceding two paragraphs shall be null and void.

It is worth noting that, before the amendment of the Company Act on 1 August 2018, which took effect from 1 November 2018, a foreign company which has not been recognised by the Taiwan competent authorities and has not accordingly estab-lished a branch in Taiwan, has no capacity to act as a security interest holder. Since the amendment to the Company Act, a foreign company is not required to be recognised and set up a branch in Taiwan in order to have the same legal capacity as a local company and thus, legally speaking, should be able to act as a security interest holder unless otherwise provided by law.However,accordingtoarulingissuedbytheMinistryofInterior dated 17 December 2018, the foreign company who wishes to obtain a real estate mortgage as security still needs to register and have a branch in Taiwan. Although there is no similar ruling in connection with chattel mortgage, the authority in charge of the chattel mortgage adopts the same approach as theMinistry of Interior and requests that a foreign companywho wishes to obtain a chattel mortgage as security still needs to register and have a branch in Taiwan.



any other incorporated association with a representative or an administrator. An unincorporated association without a representativeoradministrator isexcludedfromabankruptcyproceeding, and there is no special legislation applicable to such entity.


A creditor and the project company may sign an agreement whereby the ownership of the mortgaged or pledged security will be transferred to the mortgagee or pledgee automatically when the project company defaults. However, in the case of a mortgaged security, such agreement to transfer cannot be enforced against a bona fide third party, unless the mortgage is registered with the competent authorities.


Taiwanese law provides for a reorganisation proceeding which is slightly similar to the “chapter 11 proceedings” used in the US if a company is in financial difficulties, ceases its business or is likely to cease operations but is able to be re-established. The company or its shareholder(s) or creditors meeting the qualification requirements provided under the Company Actmay apply to the court for a reorganisation proceeding. A reorganisation plan, which normally contains a restructuring of the company’s debts, will be prepared by the reorganisation administrators and should be agreed by the secured creditors’ meeting, unsecured creditors’ meeting and shareholders’ meeting and then approved by the court. The shareholders’ meeting will not have a voting right if the company does not have any net assets. The reorganisation plan approved by the court is binding on the company and all its creditors and shareholders.


If a company is in financial difficulty and its assets are insufficient to repay its debts, directors are obligated to apply for reorganisation proceedings (if the company is still able to be re-established) or bankruptcy proceedings instantly. Failure to do so would make directors subject to an administrative fine of NT$20,000 to NT$100,000 and would possibly entail personal liability for failure to perform their fiduciary duty.



Foreign investors who wish to make direct investments in a Taiwanese private company, regardless of the industry, are required to obtain prior approval from the InvestmentCommissionof theMinistryofEconomicAffairs (“IC”). In addition, Taiwan maintains a list of industries in which foreign investment is prohibited or restricted up to a certain percentage


The restrictions explained inquestion4.1 above also apply toforeign investors and creditors in the event of foreclosure on the project company’s operating assets or machinery or concession right.



If the project company enters a bankruptcy proceeding, the security owned by the project company will become a part of the bankruptcy estate and all enforcement actions against the project company will be stayed and all unsecured creditors must follow the bankruptcy proceeding. A secured project lender has a preferential right to claim proceeds from the sale of the underlying security through the bankruptcy proceeding while it still retains the right to initiate a compulsory enforcement action during the bankruptcy proceeding. In addition, if the sale proceeds (from court auction through compulsory enforcement proceedings) are insufficient to repay the claims in full, it may participate in the bankruptcy proceeding to get additional distribution pari passu with the unsecured creditors.


There are no preference periods with respect to the security. The bankruptcy administratormay,within sixmonths of thebankruptcy adjudication, apply to the court for the invalidation of the following acts of the debtor: (1) provision of security for outstanding debtswithin sixmonths prior to the bankruptcyadjudication; and (2) repayment of the debts not yet due. In addition, the bankruptcy administrator shall, within two years after declaration of the bankruptcy proceeding, file with the court to rescind the transaction which the bankrupt conducted with or without consideration before the bankruptcy proceeding if such transaction is deemed detrimental to the rights of the bankrupt’s creditor and is revocable under the Civil Code.

As for preferential creditors’ rights, below are certain examples:(i) land value incremental tax, landvalue taxandhouse tax

levied on the sale of the real property which will rank prior to the mortgagee and the unsecured creditors;

(ii) labour wages due and payable by the employer but overdue foraperiodofuptosixmonthswhichwillrankpriortounsecured creditors; and

(iii) fees and debts incurred for the benefit of the bankruptcy estate which will rank prior to unsecured creditors.


The following may apply for bankruptcy adjudication: (1) natural persons; (2) juristic persons; and (3) partnerships and

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its home country grants reciprocity to Taiwanese nationals and entities.Theextractionofnaturalresourcesrequiresa licenceunder

the Mining Act and the operation of pipelines (for water,electricity,gas,andsoon)alsorequiresalicenceunderrelevantlaws and regulations governing such public utilities. A project company incorporated in Taiwan and awarded the concession right pursuant to the PPP Act should generally be eligible for such licence.


Under the Mining Act, only Taiwanese nationals, whethernatural or judicial persons, can ownmineral rights to extractnatural resources. A mineral rights holder needs to pay the government mineral royalties and mineral rights fees twice a year.Mineralroyaltiesarecalculatedat2%to50%ofthepriceforpetroleumandnaturalgas,2%to20%formetallicminerals,and2%to10%forotherminerals,whiletheamountofmineralrights fees depends on the kind of minerals and the terms of the concession.Tariffsmaybeimposedontheexportofnaturalgasandpetroleum,butthere isnotariffforexportingnaturalgasand petroleum to a WTO member or a country which has a free trade agreement with Taiwan.


Taiwan has foreign exchange restrictions and controls.Generally speaking, a Taiwanese corporate entity or individual hasanannualforeignexchangequota of US$50 million (or its equivalent)orUS$5million(oritsequivalent),respectively,andmaythereforeremitsumsofforeigncurrencywithinthequotainto or out of Taiwan without prior approval from the Central Bankofthe Republic of China (Taiwan) (“CBC”).TheCBChasthe sole discretion to grant or withhold its approval on a case-by-case basis if the Taiwanese corporate entity’s or individual’s quotawouldbeexceededforsuchconversion.Nogovernmentfee or tax is payable purely on foreign currency exchangetransactions.


Any remittance and repatriation of funds to a party in another jurisdiction will be subject to foreign exchange control inTaiwan if it involvesexchangesettlementsagainstNewTaiwandollars.Forexample,anyremittanceofoverUS$1million(orits equivalent) intooroutofTaiwanby a company shouldbedeclared by the remitting company to the bank handling foreign exchange, with supporting documents.As to tax treatment, the remittanceofdividends to foreign

shareholders is subject to withholding tax at 21% or lowerif there is a tax treaty between Taiwan and that jurisdiction,while the remittance of loan payments isnottaxableexceptforinterest,which issubject toa20%withholdingtaxora lowertaxtreatyrate.

(the “Negative List”). For investors from the People’s Republic of China (“PRC”), only those industries that are announced in the “Positive List” by the government are opened for PRC investments. PRC investors are prohibited from investing in the industries which are not in the Positive List.


None of the bilateral or multinational investment treaties signed byTaiwanprovideanyexemptionfromtherestrictionsstatedinquestion6.1above.


Generallyspeaking,theTaiwanesegovernmentmayexpropriatelandinaccordancewiththeLandExpropriationAct,underwhichtheownersof theexpropriated landareentitled toreasonablecompensation. Pursuant to the Statute for Investment by ForeignNationals,thegovernmentmayexpropriateoracquirean invested company for national security and defence reasons by paying a reasonable compensation, provided that the total foreign investment insuchinvestedcompanyis lessthan45%of the total capital amount of the invested company. If the total foreign investment in an invested company has never accounted for less than 45% of its total capital amount, the investedcompany will be immunefromexpropriationfor20yearsfromits establishment.



Variouscentralandlocalgovernmentauthoritiesareauthorisedto implement projects under the PPP Act. The Department of Promotion of Private Participation under the Ministry ofFinance is responsible for administering the PPP Act and overseeing projects in the typical project sectors.


Ingeneral,Taiwaneselawsdonotrequirethatspecificfinancingor project documents be registered or filed with government authorities for validity (or enforceability); nordothelawsrequirethat such documents be in conformity with specific formalities.


Foreign entities may not own forest land, land with mineral deposits, water sources or other pieces of land with similar resources. Other than the above, a foreign entity with a branch inTaiwanmayacquirepiecesoflandinTaiwan,providedthat



8 Foreign Insurance


Foreign insurance companies may not sell insurance policies in Taiwan unless they obtain a licence to do so from the Financial Supervisory Commission (“FSC”). In addition, insurance companies must submit the terms and conditions of their insurance policies to the FSC for approval before selling them in the market. Once licensed and approved, they will not be subject to any special restrictions or controls on their sale of insurance policies over project assets. If the insurance premium on the project assets is paid by a Taiwanese company or the Taiwan branches of a foreign company, such Taiwanese entity mayhavetobearthetaxwithholdingobligation.


A foreign company may be named as a payee or receive an insurance payment through a pledge of the insurance policy in Taiwan. Since the newly amended Company Act taking effect from 1 November 2018, as, legally speaking, a foreign company should have the same capacity as a local company, a foreign company should be able to be a pledgee under a pledge of the insurance policy in Taiwan.



The hiring of foreign workers is subject to certain restrictions under the Employment Services Act. A permit from the competent labour authorities is required in order to hire technicians, engineersorexecutives.Applicationproceduresandgovernmentadministrative measures are provided under the Employment Services Act and the regulations promulgated by the Council of Labour Affairs.



Certain equipment and components used by constructioncontractors such as cranes, cables and wires are subject to inspection during import clearance procedures for public safety reasons. The government authorities in charge of inspecting such imports and labour safety are the Bureau of Standards,MetrologyandInspectionand theCouncilofLabour Affairs. In general, importation of goods for sale or other commercial use is subject to import duties and a5%saletax;theimportationof certain commodities such as tyres, vehicles, gasoline and machineriesissubjecttocommoditytax.ThePPPActprovides:(i) an import duty exemption for certain qualified equipmentused by construction contractors; and (ii) a deferred (until one year after commercial operations) instalment payment of import dutyonoperatingequipmenttobeusedbyaprojectcompany.


A project company may open and maintain a foreign currency accountaslongasitprovidesallthedocumentsrequiredbythebank for opening an account. Taiwanese law does not prohibit a Taiwanese company from opening an offshore account in another jurisdiction.


Under the Company Act, a company should not pay dividends unless and until its losses have been covered, a legal reserve has been set aside, and there are surplus earnings left. If a company paysdividendsinviolationoftheaboverequirements,creditorsofthecompanymayrequestnullificationofthedividenddistributionand demand compensation for losses incurred, and the statutory representative of the company will be subject to a fine of NT$20,000 (about US$667) to NT$100,000 (about US$3,333). If the dividends are paid to a foreign parent company, they will be subjecttowithholdingtaxasexplainedinquestion7.6above.


Taiwan has various environmental, health and safety laws and related administrative regulations. The impact that they may have on a project financing depends on the nature and the contractual terms of the project. If a project involves substantial environmental issues or may create hazardous worksites or substances with a risk of significant liabilities (e.g. soil and groundwater pollution and clean-up), the lenders may be cautious about providing project finance or may demand the inclusion of repayment acceleration clauses in the loan agreement. The Environmental Protection AdministrationundertheExecutiveYuaniscurrentlythehighest governmental authority supervising all environment-related matters, and the local environmental protection bureau would oversee projects located in its jurisdiction.


Aslongasover50%paid-incapitalorissuedsharesofacompanyis owned by the private sector and not characterised as a state-owned enterprise, its procurement should not be subject to any special legal/statutory framework such as the Government Procurement Act. According to the PPP Act, where the govern-ment or any government-owned enterprise makes any equityinvestment in, or makes any donation to, a project company, the total equity investmentor donation from the governmentand such government-owned enterprise shall not exceed 20%of the total capital or the total assets of the project company. If a project company enters into an investment contract with the competent government authorities under the PPP Act, its procurementmaybesubjecttothespecialrequirementsunderthe investment contract.

300 Taiwan


accept a foreign law as the governing law. However, for EPC contracts involving international contractors, we have seen contracts governed by New York law or English law.


Most infrastructure projects in Taiwan are locally financed.Thus, Taiwanese law typically governs financing agreements. However, in recent wind farm project financing, we have seen facility agreements governed by New York law or English law.


Investment agreements, off-take agreements, financing agree-ments, project insurance policies and land acquisition agree-ments are typically governed by domestic law.



Under Taiwanese law, parties may agree to submit their disputes to a foreign court or an arbitral tribunal located outside of Taiwan, even if one of the parties is a government agency. Taiwanese courts generally honour such an agreement on the basis of party autonomy in the absence of any of the following circumstances:(a) it will be unfair for the subject matter to be adjudicated by

the chosen jurisdiction;(b) the consent of a party to submit to the chosen jurisdiction

is obtained by fraud, duress or other unlawful means;(c) the parties are not on an equal footingwhen they enter

into the submission to jurisdiction agreement;(d) it will be inappropriate or inconvenient for the chosen

jurisdiction to adjudicate the subject matter; and(e) the country of the chosen jurisdiction does not recognise

and enforce judgments of the Taiwanese courts on a recip-rocal basis.

The principle of sovereign immunity does not apply to projects in Taiwan.



Taiwanese courts recognise arbitration agreements requiringsubmission of disputes to arbitration institutions or ad hoc arbi-tration outside of Taiwan. The arbitral awards rendered under such arbitration agreements are generally recognised and enforceable unless any of the grounds for denial of recognition or enforcement prescribed under the Arbitration Act apply.


Taiwan is not a party to the New York Convention. However, provisions similar to Article 5 of the New York Convention are


Products are classified in accordance with the Customs’ Classification of Commodities of the R.O.C. Code (“CCC Codes”) with corresponding import duty rates. The CCC Codes are published on the website of the Directorate General of Customs. To encourage the development of certain industries, the importationofsomeequipmentandkeypartsrequiredbysuchindustriesmayenjoyzeroimportduty.Exemptionsfromimport duties are generally provided under Article 49 of theCustoms Act. See also theimportdutyexemptionexplainedinquestion10.1above.

11 Force Majeure


Force majeure exclusions are common in project contracts.Taiwanese law generally respects party autonomy, thus a force majeure clause is usually enforceable. Under the Taiwan Civil Code, an obligor is generally not held liable for non-performance if the non-performance is through no fault of the obligor.



Bribing a public official in exchange for certain favoursconstitutes a criminal offence in Taiwan. According to the Statute of Punishment for Corruption, a person may be sentenced to one to seven years’ imprisonment and fined up to NT$3 million if he offers a bribe or other unjust enrichment to a government official in return for his breach of duty; or up to three years’ imprisonment and/or a NT$500,000 fine for bribing a government official in return for a favour which does not entail a breach of the government official’s duty.

In a government procurement project, if the bidder (or supplier or contractor) gives public officials a commission, kickbacks, a brokerage fee, or any other unjust benefits to win a procurement contract, the bid bond may be confiscated, and the contract may be terminated or rescinded. Furthermore, the bidder may be barred from bidding for government procurement projects for one year.

13 Applicable Law


With regard to the PPP projects, the PPP Act shall prevail. Unless otherwise specified in the PPP Act, the rights and obliga-tions between the authority in charge and the project company shall be governed by the concession agreement and for matters not specified in the concession agreement, the relevant provi-sions under the Civil Code shall apply.

In Taiwan, parties to a contract are generally free to choose the governing law of the contract. In practice, it is common for the parties to choose Taiwanese law as the governing law for projects in Taiwan; in particular, the government counterpart to an investment agreement under the PPP Act is not likely to



foreign government institutions or foreign financial institutions specialisinginexportlending or guarantee.Proceeds from exercising a claim under a guarantee or

proceeds from enforcing security will not be subject to with-holdingtax.


Whiletaxincentiveswereofferedtoforeigninvestorsinthepast,thecurrenttaxregimegenerallydoesnottreatforeignandlocalinvestorsandcreditorsdifferently,except thatnowithholdingtax applies to theprofits repatriated to a foreign companybyits branch office in Taiwan and that certain interest income of a foreigncompanyisexemptfromwithholdingtax,asexplainedinquestion17.1above.A foreign investor subscribing for shares issuedby a quali-

fied project company under the PPP Act and holding the shares for at least four years mayenjoytaxcreditsofupto20%ofitsinvestmentamount.Suchtaxcredits,whicharealsoofferedtodomesticinvestors,maybeappliedagainstthewithholdingtaxonthedividendsexpatriatedbyaprojectcompanytoitsforeignshareholders.UnderTaiwaneselaw,notaxisrequiredtobepaidinorderfor

foreign investments, loans, mortgages or other security docu-ments to take effect or to be successfully registered.

18 Other Matters


The risk allocation under many project agreements with a government counterpart may not necessarily be in line with international practice and may be more protective of the govern-ment party. Thus, risk control or mitigation measures would be especially important.

Legal entities in which the PRC investors hold, directly or indirectly, more than 30% shares or capital in total, or which are controlled directly or indirectly by PRC natural or juristic persons, are considered PRC investors. Their investments in Taiwan are limited to certain businesses and are subject to special approval from the IC.


The issuance of corporate bonds by a project company in TaiwanissubjecttotheregulatoryrequirementsandrestrictionsundertheCompanyActandtheSecuritiesandExchangeAct,including the financial conditions, the limitation on the total issuance amount and the reporting to the competent authorities for effective registration of the issuance.

However, the criteria of the financial conditions and the limi-tation amount applicable to the issuance of corporate bonds by aTaiwanprojectcompanycanbeexemptedtoacertainextentif the Taiwan project company involved in an infrastructure

provided under theArbitrationAct. For example,Taiwanesecourts may dismiss a petition for the recognition and enforce-ment of a foreign arbitral award on certain grounds, including that the recognition or enforcement of the arbitral award is contrary to the public order or good morals of Taiwan, or the dispute is not arbitrable under Taiwanese law, or there is no reciprocity of recognition of arbitral awards.


Under the Arbitration Act, disputes that can be resolved through arbitration are limited to “those which may be settled in accord-ancewiththelaw”.Agoodexampleofamatterthatmaynotbesettled or arbitrated is a dispute over the validity of intellectual property rights because it can only be decided by the Intellectual Property Office or the Intellectual Property Court.


Some types of disputes are subject to mandatory arbitra-tion under Taiwanese law, e.g., a dispute between the Stock ExchangeCorporationandasecuritiesfirm,nomatterwhetherthere is an arbitration agreement between them. In addition, in a dispute over a government procurement contract for construc-tion works or technical services, if the government agency refuses to accept mediation suggestions or resolutions proposed by the Public ConstructionCommission under theExecutiveYuan, and the contractor files for arbitration, the dispute must be resolved by arbitration.



Political risk protections such as direct agreements with the central government or political risk guarantees are rare in Taiwan because the legal framework and political regime are relatively stable, and the government generally does not feel the needtooffersuchprotections.Insomeexceptionalcases,thegovernment has agreed to buy back the project assets to facili-tate project finance.

17 Tax


Interestpaidtoforeignlendersissubjecttowithholdingtaxasexplainedinquestion7.6above. However,exemptionmaybeavailable for interest derived from: (1) loans given by a foreign government or financial institution for economic develop-ment; (2) financing facilities offered to its own branch or other Taiwanese financial institutions by a foreign financial institu-tion;(3)loansextendedby foreign institutions to legal entities within Taiwan for important economic construction projects approvedbytheMinistryofFinance;or(4)favourable-interestexportloansorguaranteesto legal entities within Taiwan from

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To our knowledge, there has not been any notable case of dispute or jurisdiction so far. Furthermore, currently we do not see a trend in favour of Islamic financing in Taiwan.


The inclusion of an interest payment obligation in a loan agree-ment will not affect its validity or enforceability in Taiwan. No case has been reported to date in which such provision has resulted in a validity issue or hindered its enforceability if Islamiclawappliestothecontractandtheintentionistoexecutesuch provision in Taiwan.

project is a public company and the proceeds resulting from such bonds issuance will only be used for the infrastructure project concerned.

19 Islamic Finance


The development of Islamic finance in Taiwan is still in its embryonic stage. To date, there are no known examples ofIslamic projects that have been financed in the jurisdiction of Taiwan. However, under Taiwanese law, Istina’a, Ijarah, Wakala and Murabaha instruments may be used in the structuring of an Islamic project financing in Taiwan.


Under the Law Governing the Application of Laws to Civil Matters InvolvingForeignElements,parties to a contract arefree to select the governing law of their contract. We doubt that ordinary courts would acknowledge Shari’ah as governing law. No precedents have been seen so far.

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Hsin-Lan Hsu graduated from National Taiwan University (LL.B.). She served as a notary public at Keelung and Taipei District Courts for nearly two years. She then won a scholarship from the Ministry of Education to study International Economic Law in France, where she obtained a DEA at Paris I University.Hsin-Lan is a partner in the Banking and Capital Market Department. Hsin-Lan’s major practice areas are banking, capital markets, finance, M&A and general corporate law. Hsin-Lan has advised on many offshore and onshore fundraising projects, finance projects, mergers and acquisitions, and asset sales and purchases. In addition to transactions, Hsin-Lan has provided general advice in the field of financial, investment, data protection and corpo-rate-related inquiries.

Lee and Li, Attorneys-at-Law8F, No. 555, Sec. 4, Zhongxiao E. Rd.Taipei 11072Taiwan

Tel: +886 2 2763 8000 Ext. 2551Email: [email protected]: www.leeandli.com

Lee and Li, Attorneys-at-Law is the largest law firm in Taiwan and its services are performed by over 100 lawyers admitted in Taiwan, patent agents, patent attorneys, trademark attorneys, more than 100 technology experts, and specialists in other fields. With expertise covering all profes-sional areas and building on the foundations laid down over decades, the firm has been steadfast in its commitment to the quality of services to clients and to the country, and is highly sought-after by clients and consist-ently recognised as the preeminent law firm in Taiwan. Lee and Li is often named as one of the best law firms in evaluations of international law firms and intellectual property right firms. For instance, it was selected as the best pro bono law firm in Asia and the best law firm in Taiwan many years in a row by the International Financial Law Review (IFLR); it was also consistently named the National Deal Firm of the Year for Taiwan and awarded Super Deal of the Year by Asian Legal Business.

www.leeandli.com


Lee and Li, Attorneys-at-Law

Pauline Wang graduated from National Taiwan University and obtained an LL.M. from Columbia University. She also passed the New York Bar Examination. Pauline is a partner in the Corporate Investment Department. Pauline specialises in government procurement and private participation in infrastructure projects, and has vast experience in assisting clients in handling project planning, bidding processes, contract negotiation, contract management and dispute resolution. She assisted the Promotion of Private Participation at the Ministry of Finance in drafting and modifying the model contracts for various private participation modes (such as BOT, BOO, OT, ROT, BTO, etc.). She also acted as counsel to the Taipei City Government for negotiating the concession agreement with the President Group for the Taipei Bus Terminal BOT Project; her efforts were recognised with an Eminent Contribution Award for Consulting Firms in 2007.

Lee and Li, Attorneys-at-Law8F, No. 555, Sec. 4, Zhongxiao E. Rd.Taipei 11072Taiwan

Tel: +886 2 2763 8000 Ext. 2137Email: [email protected]: www.leeandli.com



Chapter 33304

USA

Milbank LLP Richard M. Hillman

Daniel J. Michalchuk

USA


resorted to paying third parties with transportation capacity to take their gas so that they can keep producing crude oil, with the Wahahub(locatedinthePermianBasin)spotpricedippingintonegative figures for periods between April and July 2019.

The sharp growth in demand for gas transportation infrastruc-ture has led to various sponsors pursuing large gas transmission projects,withKinderMorgan’s2Bcf/dGulfCoastExpresspipe-linecomingonlineinSeptember2019,andits2.1Bcf/dPermianHighwayprojectexpectedtocomeonlineinlate2020.Stonepeak’sWhistler2.0Bcf/daypipelineisexpectedtofollowinmid-2021.All three projects run from the Waha hub towards the Gulf Coast. Asgastransportationinfrastructureisdeveloped,weexpectthatthepotentialoftheU.S.LNGexportindustrywillbeunlocked.

II. U.S. LNG Export Projects Continue to Gather Momentum

2019sawacontinuationoftherapidgrowthinU.S.LNGexportcapacity, with the first trains for three large projects in the U.S. – FreeportLNGinTexas;CameronLNGinLouisiana;andElbaIsland in Georgia – all commencing commercial operation. AccordingtotheIEA,U.S.LNGexportsareexpectedtoover-takeAustraliaandQatar,thecurrentmarketleaders,in2024.2019 saw significant LNG export projects approved by the

FERC, including Tellurian’s $28 billion Driftwood project in Louisiana, Sempra Energy’s Port Arthur project in Texas, andVenture Global LNG’s $5 billion Calcasieu Pass LNG exportterminalinLouisiana.ThethreeexistingoperatingLNGexportterminals in the U.S., Sabine Pass, Corpus Christi and Cove Point, have utilised project finance facilities, and the scale of capital required in respect of these new LNG projects is expected togenerate considerable demand for additional project financing when they proceed which, given the scale of debt financing required, can be expected to result in challenges and capitalconstraints in securing commitments for the LNG pipeline.The ability of export facilities to secure long-term offtake

arrangements will underpin the viability of new construction and the availability of capital, and certain offtakers overcommitted to volumes incontractsexecutedfrom2011–2013and,withthosecontracts up for renewal (and in some cases, being renegotiated), buyers are increasingly seeking more flexibility on take-or-payarrangements and shorter tenors. We have seen signs that the increasinglyliquidglobalLNGmarketwillcauserenewedinterestamong sponsors in looking towards smaller scale LNG exportterminals, including offshore floating LNG options.

III. Politicisation of Energy Regulatory MattersIt has become increasingly contentious and challenging to permit and build natural gas infrastructure. Some local opposi-tion to energy infrastructure projects has always been anticipated;

1 Overview


The project finance market in the United States is among the most mature and remains highly active, with transactions contin-uingtobeexecutedacrossadiverserangeofindustriesandassetclasses. In 2020, we are watching to see how volatility in the oil price will affect the infrastructure build-out that has been asso-ciated with the shale oil and gas boom and whether major LNG exportfacilitieswillbeinapositiontotapmarketsforcapital.In electricity markets, innovation and the growing demand by Statesandenergyconsumersforadiverseandcleanenergymixisdriving investment into new areas, including offshore wind and battery storage. Other areas such as ports and airports, rail and transit, energy efficiency, data centres and communications infra-structure have been attracting substantial capital investments, as sources of capital continue to expandwhat is includedwithin“infrastructure” and some large infrastructure projects are devel-opedunderpublic-privatepartnershipstructures.Marketpartic-ipants will be closely watching the national election and poten-tial outcomes for U.S. policy (including trade and infrastructure), key decisions will be made (or not made) at the Federal Energy Regulatory Commission (“FERC”) and environmental matters remain at the forefront of regulatory discussions.

I. Record U.S. Crude Oil Exports and Challenges in Natural Gas Sector

For the first time in 75 years, theU.S. became a net exporterofpetroleumin thefourthquarterof2019. Thisnewstatus isalmost entirely due to production increases from the shale boom; domestic demand has remained relatively flat. Trade policy has also had some impact. The Trump administration has, in recent years, instituted sanctions against Iran’s petroleum industry and PDVSA,theVenezuelanState-ownedoilcompany.InDecember2019, the Department of Treasury instituted sanctions against Gazprom’s Turk Stream project (from Russia to Turkey, through the Black Sea) and, in the face of objections byGermany, theNordStream 2 gas transmission pipeline from Russia (traversing Denmark, Finland and Sweden’s territorial waters) to Germany.

The consistent production growth since the shale boom of 2008 has magnified deficiencies in the midstream sector, particu-larly petroleum transmission, treatment and storage terminals. Gas transmission infrastructure is under significant strain, as evidencedby1.15Bcf/dofventedorflaredgas(aby-productofcrudeoilproduction)inthePermianBasin–representingasixfoldincrease since 2017, and an all-time high. Some oil producers have

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The lengthy period to resolve this issue of market design requiredthepostponementofPJM’sbaseresidualauctionsforthe2022/2023and2023/2024deliveryyears,whichatthebeginningof 2020 have yet to occur. This failure to set forward pricing in a timely manner has created significant challenges for forward plan-ningbyparticipantsinthePJMmarkets,includingthoseseekingfinance or that rely on this forward pricing to determine cash sweepsordistributionrightsunderexistingfinancings.Thechal-lenge has been acute for highly levered merchant generators given theirexposuretolowelectricityprices,whichhavebeencausedinpartbylowfuelcosts.RecentexperienceinISO-NEnever-theless demonstrates the potential impact of the FERC’s decision inPJMfor thermalpower sources. TheFebruary2020 resultsof ISO-NE’s forward capacity auction for the 2023/2024 obli-gationsperiodproducedanalmost50%decline in thecapacityprice, a result that was partially attributed to the participation of “Renewable Technology Resources” as price-takers. This is alimiteddesignationthatwillbeexhaustedinthenextforwardcapacity auction. All of these developments in the capacity markets have made it more challenging to develop new-build power projects.

As investment and grid composition has moved from tradi-tional thermal generation sources towards a more intermittent but emission-free renewable generation, reliability planning is increasingly a challenge for regulators and market participants. In the face of this challenge, we have seen increased interest in the development of demand response and distributed generation and storage assets. Storage solutions, such as pumped-storage hydro and battery storage, can operate as alternatives to gas-peaking plants in periods of peak demand, enhancing reliability and assisting to manage the continual integration of renewable energy into the grid. Offshore wind, which has greater consistency of wind resource and is generally located closer to load centres, is alsoexpectedtoexpandsignificantlyintheUnitedStatesasdevel-opers leverage technical expertise from Europe (the first U.S.offshorewindproject,DeepwaterWind’s 30MWBlock IslandWind Farm, has demonstrated a good operational record and was refinanced in Spring 2018). The challenges in delivering and financing these capital-intensive projects, including the lengthy and multi-faceted construction process, a heavy European supply chain and a multi-contract procurement model, rely on certainty of financing and revenue sources (including access to capacity markets and contracted pricing).

The enormous growth in the United States renewables market hasbeenassistedbyasubstantialamountoftaxequityinvest-ment, where financial institutions and large corporates invest capital in renewable energy transactions (principally wind and solar projects) with the return on their investments based largely uponthetaxbenefits(taxcreditsanddepreciationdeductions)expected from their investment. The investment tax credit(“ITC”)beginsitsstep-downin2020(thisisthetaxcreditusedfor solar tax equity investments, with wind projects typicallyutilisingtheproductiontaxcredit(“PTC”))from30%ofeligiblecost basis for projects on which construction began before 2020 to26%forprojectsonwhichconstructionbeginsin2020.TheITC is scheduled to eventually fall to10%. Theendof2019saw many solar project sponsors enter into financing arrange-ments to purchase equipment to safe harbour to help qualifysolarprojectsthatarefinishedafter2019aseligibleforthe30%ITC under rules governing the commencement of construc-tion.Thatequipmentisallexpectedtobedeployedinnewsolarprojectsoverthenextfewyears.The PTC for wind was set to expire for wind projects on

which construction began after 2019. However, Congress extendedthePTC(at60%ofitsoriginalrate)forwindprojectson which construction begins in 2020.

however, the debate over energy infrastructure is no longer a local issue as interest groups have become more sophisticated and coordinated and have taken a national approach, and many new midstream and oil and gas assets are subjected to challenges by environmentalgroups.Moreover,undertheU.S.federalsystem,where power is divided between State and Federal authorities, the interests and objectives of those decision makers can often conflict. The FERC is the lead agency for the environmental review under the National Environmental Policy Act (“NEPA”); however, State authorities are responsible for key decisions. The Commission’s approval of the Jordan Cove project in Oregon was unexpectedlydelayed in lateFebruaryasmoretimewassoughtfor the FERC to consider the denial of a Coast Zone permit by the State. A key point of contention has recently been Section 401oftheFederalCleanWaterAct,whichrequiresaStatewaterqualitypermittobegrantedfortheconstructionoffacilitiesthatmay result in a discharge of pollution in that State. States such as New York, which have generally been opposed to further midstream development, have been involved in contentious litiga-tion on delays and denials of these permits. The Trump adminis-tration and the Environmental Protection Agency have substan-tiallycurtailedthescopeofthisauthoritybyExecutiveOrderandrulemaking that is being finalised at the beginning of 2020.

In an election year and with climate policy a headline polit-ical issue, the make-up of the FERC is under significant scrutiny. Republican commissioners are widely anticipated to be more aligned with the Trump administration’s objectives of encouraging fossil fuelproductionandexports,particularlygivenrecentpartisansplitsat the FERC on the evaluation of carbon emission impacts in new midstream infrastructure. At the start of 2020, the Commission has two Republican commissioners and one Democrat. Republican BernardMcNameehasannouncedhisintentiontoleavetheFERCat the end of his current term in 30 June 2020. Without a replacement, his departure would leave the FERC with only two Commissioners and an increased likelihood of deadlocks on major decisions. The President has re-nominated a third Republican, James Danley, to the Senate for confirmation. Although there is currently a majority ofRepublicansintheSenate,McNameeonlyassumedofficeon11December 2018 after a difficult Senate confirmation process, which culminatedina50-49vote.

IV. Challenges and Opportunities in Electricity MarketsIn June 2018, the FERC issued an order, on a split 3-2 vote, responding to proposed revisions to the electric capacity market administered by PJM, L.L.C. (“PJM”, the regional grid oper-ator for the U.S. mid-Atlantic region covering 14 States) thatwould address State-subsidised generating resources (i.e. nuclear power plants receiving zero emissions credits, and wind and solar projects backed by a State renewable portfolio standard). PJMhadpresentedtheFERCwithachoicebetweentwoalter-native proposals, either of which, PJM argued, would satisfythe “just and reasonable” standard of review under the Federal Power Act. In its order, the FERC rejected both proposals, and took the additional step of declaring the existing structure ofPJM’scapacitymarketas“unjustandunreasonable”.TheFERCproposedanewplanandorderedthatPJMdevelopanewmarketdesign. On 19 December 2019, on a 2-1 split vote, the FERC finally adopted a proposal that requires all State-subsidisedgenerating resources that participate in the capacity market to meet a stringent minimum offer price rule that would effectively negate the bidding advantages of the State subsidy or withdraw fromcapacitymarketparticipationaltogether.Manypartieshavesought rehearing of the FERC’s order and, on 18 February 2020, theFERCissuedatollingorderextendingthetimeforitsrecon-sideration of the merits. Several State officials have threatened to withdrawfromPJMiftheFERCrulingisnotrevised.

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water supply and treatment facilities and social infrastructure projects (including courthouses, public universities and military housing). Familiarity with the model and its adoption by procure-mentauthoritieshasbeenmixedintheU.S.,andthereisvaryingconsistency in terms across deals. This has meant that the model has been used most often for mega-projects which can absorb the transactioncosts,thoughweexpecttheuseofPPPstobeadoptedmore widely as market participants become more familiar with this procurement method. Federal involvement to assist in standardising project structures and terms has been consistently discussed but, while there has been Federal legislation to support access to assistance for transportation and water infrastructure, substantial progress has yet to be made on a national approach.


The USA remains one of the world’s oldest and largest markets for project financings, with a constant volume of deals in energy andinfrastructure.Thereisanextraordinarydiversityofdealsacross industries and financing sources, including tax equityinvestors, bank syndicates, bond markets and direct lenders. Significant financings include the first-of-its-kind financings fornewtypesofresourcessuchasthefinancingfortheBlockIsland offshore wind farm, the financing of large infrastruc-tureprojectssuchasJFKairportinNewYorkunderthePPPprocurement method, and the deployment of billions of dollars in capital into large LNG projects such as Cove Point.

2 Security


Several different tools are typically used to provide lenders’ security in the project assets, including a security agreement covering personal property of the project company.

The Uniform Commercial Code (“UCC”) provides a well-de-veloped and predictable framework for lenders to take a security interest in personal property assets. Each U.S. State has adopted Article 9 of the UCC, which governs secured transactions, with some non-uniform amendments. Under the UCC, a security agreement must, among other elements, describe the collateral and the obligations being secured in order for the lender’s secu-rity interest in the collateral to attach to a grantor’s personal property assets. Filing a UCC-1 financing statement describing the collateral in the appropriate filing office perfects the lend-er’s security interest in most personal property assets owned by the applicable grantor.Lendersusuallyalsorequirethedirectowner(s)oftheproject

company to grant a pledge of its ownership interests. The grant ofanequitypledgeallowslenderstoexerciseremediesovertheownership and governance rights in the project company in addi-tion to the assets owned by that company.


A lien may be taken over real property, subject to the real prop-erty laws of the State in which the real property is located,

V. U.S. Wind Overtakes Hydroelectric Capacity and Generation

For the first time, 2019 saw the total installed nameplate capacityofwindturbinesexceedthetotalcapacityoftheU.S.fleet of hydroelectric generators, including pumped storage facilities. Total nameplate capacity of utility scale wind projects intheU.S.reached105,583MW,accordingtotradeassociationsources, whilst the total capacity of conventional and pumped storagehydroelectricfacilitiesis100,800MW,asreportedbyaFERC staff analysis. In terms of annual output, the U.S. Energy Information Administration reports that U.S. wind electricity generationfor2019totalled300.07millionMWh,whilsthydro-electricgenerationtotalled273,71millionMWh.Windenergyhas displaced hydroelectric as the fourth leading source of elec-tricity in the U.S., behind natural gas, coal and nuclear, respec-tively. U.S. wind projects are predominantly developed by inde-pendent power producers and are project financed.

Although the 2020 outlook for onshore wind projects in the U.S. is favourable, the outlook for offshore projects has been clouded by regulatory problems. The lead U.S. governmental agency responsible for issuing permits for wind projects located on the outer continental shelf is theBureauofOceanEnergyManagement (“BOEM”), an administrative entity within theU.S. Department of the Interior. In a proceeding involving VineyardWind,aproposed800MWprojecttobelocatedoffthecoastofMassachusetts,BOEMpreparedaDraftEnvironmentalImpact Statement (“EIS”) that was issued for public comment in Decemberof2018.AFinalEISwasexpectedintheJune2019timeframe, for an approval of the project later in 2019. However, BOEMannouncedinthesummerof2019thatitwouldpreparea Supplemental EIS in order to evaluate the cumulative environ-mental impacts of multiple offshore wind energy projects. A draft of the Supplemental EIS is now scheduled for release on 12 June 2020, with a Final EIS scheduled for 13 November 2020 andfinalactiononallrequiredpermitsscheduledfor18March2021. As the ITC begins to step-down, the delay in receiving BOEMauthorisationhascreateduncertaintyaroundtheamountof credit the project will be eligible for.Approximately 20,000MW of offshore wind projects have

been proposed for the U.S. east coast, but the economics of manyprojectsareuncertain,pendingqualification for the taxcredit,whichwilldependonanyextensionstobenegotiatedinfuture Federal budget cycles.

VI. Adoption of Public-Private Partnerships in the United States

There is bipartisan recognition in the U.S. of a critical need to repair,replaceandexpandthecountry’sageingroads,bridges,dams, and other infrastructure. The American Society of Civil Engineers has estimated that the U.S. needs to spend some $4.5 trillion by 2025 to fix existing infrastructure that hasshown significant deterioration. Increasingly, to assist in satis-fying infrastructure needs, procurement authorities have been looking to the example of public-private partnerships (alsoknown as “PPPs” or “P3s”) in other jurisdictions such as the UnitedKingdom,CanadaandAustralia.Thisdeviceisdesignedto transfer risk and responsibility for infrastructure assets to private operators under a competitive process that provides for appropriate risk allocation between the parties and access to privatecapitalandexpertise.

PPPs have been utilised by universities such as Ohio State for theirparkingassets,andStatessuchasTexas,California,FloridaandVirginiahaveenactedenablingstatutestoundertakesubstan-tial infrastructure projects. The model has been applied most regularly for transportation infrastructure (including roads, bridges, airport facilities, rail projects and parking concessions),

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signed blank transfer power to ensure it has priority over other secured creditors. In respect of limited liability companies or limited partnerships (as distinct from corporations), the appli-cable entity would need to “opt in” to Article 8 of the UCC under its organisational documents to elect to have the owner-ship interests in that entity treated as a “security” that can be perfected by possession of a certificate and transfer power. If an ownership interest is an “uncertificated security”, then the lender can achieve a priority position through a control agree-ment with the issuer and holder of the ownership interest.


Depending on the relevant State, city and county laws, recording feesandtaxesforperfectingasecurityinterestincertainprop-erty may apply.

For transactions involving a real estate mortgage, lenders will almostalwaysrequiretheborrowertopurchaseatitleinsurancepolicy insuring the lien and priority of the mortgage as shown on a report prepared by a private title company. Title insurance rates are set on a statutory basis and vary from State to State but are generally the most significant cost incurred by borrowers in relation to security over project assets. A real estate mortgage (or comparable instrument depending on the jurisdiction) needs to be notarised, and in some jurisdictions signed by one or more witnesses, and recorded in the county and State in which the real property is located. In addition, some States impose mortgage recordingtaxes,intangiblestaxes,stamptaxesorothersimilartaxes,inadditiontoperpagerecordingfees,inconnectionwiththe recording of the mortgage, which are generally calculated based on the amount secured by the mortgage. In States that imposesuchtaxes,theamountsecuredbyamortgageisgener-ally capped at the lesser of the fair market value of the property and the loan amount.


Pleaseseequestion2.6above.AUCC-1financingstatementistypically filed on the same day as closing and may be filed prior to that date. For transactions involving a real estate mortgage, the longest lead-time item is typically the process of obtaining a real estate survey and preliminary title report and obtaining certain deliverables necessary for the title insurance company to providerequestedendorsements.Thisprocesscantakeonetotwo months depending on how large the property is or the loca-tion of the property.


Requirements for regulatoryconsentsare specific to the loca-tion and nature of the project and the identity of the project parties.

through a mortgage, deed of trust, deed to secure debt, lease-hold mortgage or leasehold deed of trust. In most States, the recording of these instruments will also perfect a security interest in fixtures; however, dependingon the jurisdiction, aUCC-1fixturefilingmayalsoberequired.

To create a lien on real property by mortgage or deed of trust, such instrument will: (i) identify the legal names of the lender and the borrower; (ii) describe the obligations being secured by such instrument; (iii) contain a granting clause describing the secured property; (iv) contain a legal description of the land being mortgaged; and (v) be signed and notarised. Such instru-ment must be recorded in the recorder’s office of the county where the real property is located in order to provide notice to thirdpartiesoftheexistenceoftheliencreatedtherebyandtoperfect the security interest in the fixtures described therein.For pipeline, electric transmission, railway and similar financ-ings it is also customary practice to file a central “transmitting utility” filing with the Secretary of State in the applicable State where the real property is located. This filing perfects a secu-rity interest in fixtures with respect to transmitting utilitiesthroughout the applicable State and affords certain other bene-fits under the UCC.


Yes, depending on the nature of the receivable. A secu-rity interest in assets classified under the UCC as “accounts”, “chattel paper”, “commercial tort claims” and “general intan-gibles” is generally perfected by filing a UCC-1 financing state-ment, although for “commercial tort claims” the claims subject to the security interest must be specifically identified. A secu-rity interest in a “letter of credit rights” must be perfected by control and requires the consent of the issuer of the letter ofcredit. There are provisions in the UCC that override certain (but not all) restrictions on assignment and specific statutory requirementsmayapplyinrespectoftheassignmentofreceiva-bles from governmental entities (the Assignment of Claims Act applies in respect of Federal claims).


Yes. Perfection of rights in deposit accounts and money depos-ited in those accounts is achieved by control rather than by the filing of a UCC-1 financing statement (subject to special rules that apply to proceeds of collateral in which the secured party had a perfected interest). Control in accounts is generally achieved by the secured party entering into an agreement with the debtor and the depositary bank under which the depositary bank agrees to comply with the secured party’s instructions on disbursement of funds in the deposit account without further consent by the debtor.


Yes. Filing of a UCC-1 financing statement can perfect a secu-rity interest in the shares of a company; however, it is common for the lender to take possession of a stock certificate and a

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plantoperatinglicenceortoexercisecontroloverthelicensee.Many energy facilities include a radio communication systemlicensed by the Federal Communications Commission (“FCC”), and a transfer of ownership of the FCC licence related thereto willrequirepriorapprovalfromtheFCC.Inaddition,therearerestrictions on the grant of a security interest in an FCC licence; generally, such security interests are limited to an interest in the proceeds thereof rather than the licence itself.

Any foreclosure or enforcement action is also subject to: (i) the possible imposition of the automatic stay under the FederalBankruptcyCode,Title 11of theUnited StatesCode(“Bankruptcy Code”), if the title-holder commences a caseunder the Bankruptcy Code; and (ii) more generally, for anynon-judicial foreclosure, the obtaining of a specified injunc-tion halting the auction or other proceeding. The consumma-tion of collateral disposition transactions may require notifi-cation under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) and expiration or termination of awaitingperiodprior to completion. Anexemption applies tocertainacquisitionsbyacreditorintheordinarycourseofbusi-ness(suchas inconnectionwithanacquisitioninforeclosure,default, or a bona fide debt workout). There are certain restric-tionsontheexemption’sapplicabilitytosalesoutofbankruptcyandsubsequentdisposalsbythecreditor.

Finally, note that certain incentives or benefits in favour of a project company may be affected by enforcement action. For example,inCalifornia,newlyconstructedsolarsystemsbenefitfrom a one-time exclusion from property tax reassessment,which can greatly reduce property taxes payable because, forlocalpropertytaxpurposes,thesubjectproperty’svalueisdeter-mined without reference to its improvement by the newly added solarsystem.Thebenefitofthispropertytaxexclusionmaybelost where, as a result of a foreclosure, a person or entity directly or indirectlyobtainsmorethan50%oftheprojectcompany’scapital and more than 50% of the project company’s profits(ormorethan50%ofthevotingsharesiftheprojectcompanyis a corporation). Lenders to back-leverage renewable energy transactionsupstreamofa taxequity investment alsoneed tobe familiarwith thepotential consequencesof certain tax-ex-emptandotherdisqualifiedpersonstakinganindirectowner-ship interest in the project company, which can result in a partial recaptureof the tax credits and a corresponding reduction incashflowsreceivedfromthetaxequityinvestment.


See section6below. Asnoted inquestion4.1 above, foreigninvestors or creditors may also need to structure their holdings toavoidadverseconsequencesoftakingadirectoranindirectownershipinterestinanytaxequityinvestment.



Onceabankruptcycase is commencedunder theBankruptcyCode in respect of a project company, the Bankruptcy Codeimposes an “automatic stay”, or statutory injunction, which

3 Security Trustee


Yes. Under New York law-governed security documents where there are multiple lenders or syndication is contemplated, a collateral agent is nearly always appointed to act on behalf of the lenders with respect to the collateral.


Seequestion3.1above.NewYorklawrecognisestheconceptof a security trust, although a collateral agent is customarily appointed to hold collateral for the benefit of lenders.



The cost and time required to execute enforcement decisionsdepends on the location and nature of the project and the iden-tity of the project parties. For example, a direct or indirectchange in control over electric power assets subject to the jurisdic-tion of the FERC must be approved by the FERC. The FERC has jurisdiction over most sellers into wholesale electric markets and electric power transmission facilities in the contiguous U.S. States other than in the ERCOT region, which is subject to the jurisdic-tionoftheStateofTexas.Certainsmallpowergeneratorsknownas“qualifyingfacilities”mayqualifyforexemptionfromFERCapprovalofchangesincontrol.Moreover,iftheremediestobeexercisedinvolvedirecttakingofassetssubjecttoFERChydro-electric licensing rules, or an interstate natural gas pipeline or underground gas storage facility that holds a FERC certificate of public convenience and necessity, transfer of the licence or certifi-catemayberequired.CertainStatelawsandregulationsmayalsorequireapprovals,suchasNewYorkState,whichgenerallyparal-lelsFERC regulations. MostStates,however, require approvalonly if the assets are in the nature of a “traditional” public utility serving captive customers under cost-based rates or are subject to a certificate of public convenience and necessity issued under State law.

Similar considerations arise with nuclear facilities, for which the operator will hold a licence from the Nuclear Regulatory Commission (“NRC”), and any transfer of such licence that mightneedtoaccompanyanenforcementactionwouldrequireseparate NRC approval, recognising that only the licensed oper-ator may operate a nuclear power plant. It should be noted that foreign entities are not allowed to hold an NRC nuclear power

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the lender has no affirmative defence (which includes that the transferwas a contemporaneousexchange fornewvalue, thatthelendergavesubsequentnewvalue,orthatthetransferwasin the ordinary course of business) to such preference. Under theBankruptcyCodeandapplicableStatelaws,aconstructivefraudulent transfer claim can be asserted to avoid a transfer that the project company made to the lender if both (i) the project companymadethetransferinexchangeforlessthanreasonablyequivalentvalue,and(ii)theprojectcompanyatthetimeofthetransferwas, orwas thereby rendered, insolvent, inadequatelycapitalised, or unable to pay its debts as they matured. For this purpose, the securing or satisfaction of a present or antecedent debt of the project company will generally constitute reason-ably equivalent value (although itmaybe an avoidableprefer-ence). Under theBankruptcyCode, the look-backperiod forconstructive fraudulent transfer claims is two years before the commencement of the bankruptcy case. Under State laws, the look-back period can vary, depending on the State, and can be uptosixyears.Ifatransferisavoidableaseitherapreferenceora fraudulent transfer, the project company may be able to cancel the security interest and force a return of the property, which may be used to pay all creditors. It should be noted that not all transfers made during the applicable look-back period are avoid-able,andtheseinquiriesaregenerallyfact-intensive.


TheBankruptcyCodeexcludesfromthecategoryofentitiesthatare eligible to be debtors in a bankruptcy case: governmental entities (other than municipalities); domestic insurance compa-nies; domestic banks; foreign insurance companies engaged in such business in the U.S.; and foreign banks with a branch or agencyintheU.S.Inaddition,theBankruptcyCodehasspecialprovisions for particular types of eligible entities, such as rail-roads, municipalities, stockbrokers and commodity brokers.


Outside of court proceedings, creditors may be permitted to exercise self-help remedies depending upon the nature of thecollateral, provisions of the applicable security agreements, and the governing law. For example, the UCC generally author-ises a secured creditor, after default, to take possession of, to collect on, and to dispose of (such as by public or private sale), personal-property collateral without first commencing a court proceeding, provided that the secured creditor complies with particular formalities and proceeds without breach of the peace.


One possibility is a consensual, out-of-court debt restructuring, which can be used to recapitalise or reorganise the capital struc-ture(debtand/orequity)ofanentityanditssubsidiariesoutsideof a bankruptcy case. Under such a debt restructuring, cram-down of dissenting creditors is not available.

immediately stops all enforcement actions outside of the Bankruptcy Court against the debtor project company or itsproperty. The automatic stay applies to secured creditors, although it is possible for a secured creditor to obtain relief from the automatic stay in certain circumstances, but only through an orderoftheBankruptcyCourt.Inaddition,incertainlimitedcircumstances,theBankruptcyCourtmayextendtheautomaticstay to protect entities that are not debtors in a bankruptcy case, or assets of such non-debtor entities.

A secured creditor is not, however, without protection in a caseundertheBankruptcyCode.Forinstance,asecuredcred-itorisgenerallyentitledto“adequateprotection”ofitsinterestin a debtor’s collateral, and there are limits on the ability of the project company to use some types of collateral, or to dispose of collateral, without the secured creditor’s consent. In particular, the project company will not be permitted to use cash collateral (cashandcashequivalents)withouttheagreementofthesecuredpartyoranorderoftheBankruptcyCourt.Inanysaleofcollat-eral (other than ordinary-course-of-business sales, such as sales of inventory in normal business operations) during a bankruptcy case, the secured creditor generally has the right to “credit-bid” its claim against the debtor, although that right can be limited bytheBankruptcyCourtforcause.Thedeterminationofcauseisfact-intensive,andinseveralrecentcasesBankruptcyCourtshave found that such cause existed, in order to facilitate anauction with active, competitive bidding. It should also be noted thatinthecontextofaplanofreorganisation,asecuredcreditorcannot be compelled to accept a plan through a “cramdown” when the plan provides for the auction of the secured creditor’s collateral without giving the secured creditor the right to cred-it-bid.Butitisstillpossibletocramdownasecuredcreditorbyprovidingitwiththeindubitableequivalentofitssecuredclaim,which can include substitution of collateral.


Generally speaking, the holder of a perfected security interest is entitled to payment from its collateral ahead of all other credi-tors (other than the holder of a security interest that is prior in righttoit).Althoughparticularcreditors,suchastaxingauthor-ities or employees, may be entitled to priority claims under the BankruptcyCode,suchclaimsdonotcomeaheadofasecuredclaim with regard to the collateral. Under certain circum-stances, a debtor (or trustee) may surcharge collateral for the costs of preserving or disposing of it.Under theBankruptcyCode, the term“transfer” isbroadly

defined, and includes the grant or perfection of a security interest. The grant of a security interest to a lender may be “avoided”, or set aside, if the security interest is unperfected. In addition, a lender’s perfected security interest may be avoided as either a “preference” or a “fraudulent transfer”. It is impor-tanttonotethatthereisnorequirementfortheretobeactualfraud or wrongdoing for a transfer to be avoided under either of these theories. A lender’s security interest in a project compa-ny’s property may be avoided as a preference if (i) the lender perfects the security interest during the 90 days (or one year, if the lender is an “insider” of the project company) preceding the commencement of the project company’s bankruptcy case, (ii) that transfer is made for or on account of an antecedent debt owed by the project company to the lender, (iii) the transfer enables the lender to receive more than it otherwise would havereceivedina liquidationoftheprojectcompany,and(iv)

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property without the property owner’s consent, so long as just compensation is paid to the property owner.



Regulatory jurisdiction over the electric power sector in the United States is bifurcated between Federal and State author-ities. State regulatory authorities retain jurisdiction over the siting of electric power generation, transmission and distri-bution facilities. In most of the United States, the FERC has authority over wholesale sales of electric power, and power may not be sold at wholesale until the FERC has granted authority tosellatnegotiated,“market-basedrates”(“MBRAuthority”).Theownersofcertainsmall(notlargerthan20MW)qualifyingfacilitiesareexemptedfromtheneedtoobtainMBRAuthority,althoughownersoffacilitieslargerthan1MWmustfileaformwith theFERC inorder toqualify. Asnoted inquestion4.1above, the FERC lacks jurisdiction in the non-contiguous States (Alaska and Hawaii) and in the intrastate-only ERCOT region.

Dams and hydroelectric facilities on navigable waters are alsosubjecttolicensingbytheFERC,subjecttoexemptionforvery small projects. Interstate natural gas pipelines and under-ground natural gas storage projects are subject to FERC certif-icate authority.

The FERC has jurisdiction over the rates charged by petro-leum pipelines for interstate shipments. The States retain juris-diction over petroleum pipeline permitting and over rates for intrastate shipments. A separate Federal authority, the Pipeline and Hazardous Materials Safety Administration, under theDepartment of Transportation, has jurisdiction over pipeline safety regulation for both natural gas and petroleum pipelines.

Nuclear energy projects and the operators of such projects are subject to licensing by the NRC.

The Environmental Protection Agency (“EPA”) governs the issuance and enforcement of most Federal environmental permits. Environmental permits can alsobe requiredbyState, local andother Federal governmental authorities.


Thereareanumberofregistrationandfilingrequirementsforfinancing or project documents that depend on the nature of theprojectandidentityoftheparties. Forexample,pursuantto Section 204 of the Federal PowerAct, the FERC requiresapproval of issuances of securities or assumptions of liabil-ities (e.g. incurrence of debt), subject to certain exceptions,for companies subject to its electric power jurisdiction. The FERCcustomarilygrantselectricpowergeneratorswithMBRAuthority blanket approval for jurisdictional financings, and the ownersof certainqualifying facilities areexempt fromFERCregulation of financings. It should be noted that the FERC will not regulate such financing approvals if a State regula-tory authority with jurisdiction actively regulates the proposed financing.Please refer to question 18.2 below for SEC-related

requirements.


The United States does not impose personal liability on directors for insolvent trading. Under the law of some States, however, directors of an insolvent company may be found to have fidu-ciary duties not only to the company’s shareholders, but also to its creditors, and a director’s breach of those fiduciary duties may give rise to personal liability.



While the United States generally has a liberal policy toward foreign direct investment, there are certain restrictions with respect to ownership of land with energy resources, as well as energy production facilities, assets and transmission infrastruc-ture, under both State and Federal laws. For instance, only U.S. citizens, corporations and other U.S. entities are permitted to mine coal, oil, oil shale and natural gas on land sold by the Federal government. Ownership and control of nuclear power facilities and leasing of geothermal steam and similar leases of Federal land, or licences to own or operate hydroelectric power facilities, are also generally restricted to U.S. persons only. However, a U.S.-registered corporation that is foreign-owned or -controlled may own hydroelectric power facilities.Under the Exon-Florio Act of 1988, as amended (“Exon-

Florio”), which is administered by the Committee on Foreign Investment in the United States (an inter-agency committee co-ordinated by the Department of Treasury), the President may blockaninvestmentoracquisition(ororderthatsuchinvestmentor acquisition be unwound) after conducting an investigationthatestablishesthataforeigninterestexercisingcontrolorinflu-ence on relevant U.S. resources, assets, infrastructure or tech-nology “might take action that impairs the national security” that cannotbeadequatelyaddressedbyanyotherprovisionoflaw.Asnotedaboveinquestion4.1above,aforeignentitycannot

hold a U.S. nuclear plant operating licence issued by the NRC or otherwise control the licensee. A foreign entity cannot directly hold a FERC hydroelectric licence, but may own or control a U.S. company that holds such a licence.


The United States has concluded a number of bilateral trea-ties that protect investor rights to establish and acquire busi-nesses, freedom from performance requirements, freedom tohire senior management without regard to nationality, rights to unrestricted transfer in convertible currency of all funds related toaninvestment,and,intheeventofexpropriation,therighttocompensation in accordance with international law.


Under the doctrine of eminent domain, the U.S. Federal govern-ment or any of the U.S. State governments may take private

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Otherthanthewithholdingtaxesdiscussedinquestion17.1below,there are no such generally applicable restrictions. However, under theBEAT,describedabove,restrictionsmayapplytocertainverylarge U.S. companies that make payments of interest, which are deductible against their U.S. income, to foreign affiliates.


Yes, they can.


Corporate law restrictions will depend upon the laws of the State in which the project company is incorporated or formed and its corporate form. In most project finance transactions, project companies are pass-through entities and typically the organ-isational form used is a Delaware limited liability company. Delaware limited liability companies are subject to a restric-tion under the Delaware Limited Liability Company Act (the “Delaware Act”) on paying distributions where the liabilities ofthelimitedliabilitycompanytothirdpartiesexceedthefairvalue of its assets. However, this protection does not effectively extendtocreditors,astheDelawareActlimitsstandingtobringderivative claims against the manager of the limited liability company to its members (i.e. the owners) and their assignees (see CML V, LLC v. Bax, 6 A.3d 238 (Del.Ch. 2010)).Apart fromthewithholding taxesdiscussedunderquestion

17.1 below, New York law financing documents, which often impose restricted payment conditions on the issuance of divi-dends, and shareholders’ agreements, typically contain restric-tions. In addition, project companies subject to FERC regu-lation of issuances of securities and assumption of liabilities underSection204oftheFederalPowerAct,otherthanblanketauthority under MBR Authority (discussed at question 7.2above), are subject to certain restrictions, such as restrictions requiring parent debt obligations to follow up to the parentcompany if a project company borrows at the public utility level and “dividends up” the proceeds to its non-public utility parent.


The Clean Air Act and the Clean Water Act are generally the most material Federal statutes that would impact power project construction and operation. Permits related to air emissions and water discharges under these statutes and similar State laws mayberequiredbytheEPAorbyStateorlocalgovernmentalauthorities prior to the start of construction and for operation. In addition, known or likely contamination could be governed by the Federal Superfund statute and other laws.


Please see questions 4.1, 6.1 and 7.1 above. In addition, theoperation of certain U.S. telecommunications infrastructure that is licensed by the FCC may be subject to direct or indi-rectforeignownershiprestrictions,and,withtheexceptionofbroadcast radio and television assets, in many cases waivers of such foreign ownership restrictions are available for investors that are domiciled in countries that provide reciprocal market access for U.S. investors to own or invest in similar telecommu-nications infrastructure.


Federal,Stateandprivateroyaltiesarepayableontheextractionof natural resources, as applicable.Ingeneral,nospecificFederaltaxesareimposedontheextrac-

tionofnaturalresources,althoughincometaxesareimposedonprofitsfromsales.DomesticcrudeoilusedinorexportedfromtheUnitedStates isalsosubject toFederal tax. IncometaxesmayapplytosalesoutsideoftheUnitedStatestotheextentsuchsales are related to business conducted in the United States.


The United States does not generally impose controls or fees onforeigncurrencyexchange. However,U.S.persons,whichinclude U.S. companies and their foreign branches, are gener-ally prohibited from engaging in transactions with foreign indi-viduals or entities that are, or are owned or controlled by one or more individuals or entities that are, (i) designated on U.S. sanctions-related restricted party lists (including the Specially DesignatedNationalsandBlockedPersonsListmaintainedbythe Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”)), (ii) organised or resident in a country or territory against which the United States has imposed compre-hensive sanctions (currently, the Crimea region of Ukraine, Cuba,Iran,NorthKoreaandSyria),or(iii)otherwisethesubjector target of economic or financial sanctions imposed by the U.S. government (including the OFAC and the U.S. Department of State),subjecttolimitedexceptions.Inaddition,U.S.personsand foreign persons engaged in business in the United States are subject toU.S.Federal andState income taxeson foreigncurrencyexchangegains.Additionally,undertheCurrencyandForeign Transactions Reporting Act of 1970 (as amended by the USA PATRIOT Act of 2001) and the implementing regu-lationsissuedthereunder(collectivelyreferredtoasthe“BankSecrecyAct”),U.S.financialinstitutionsarerequiredtoestab-lishandimplementaneffectiveanti-moneylaundering(“AML”)complianceprogramme.ElementsofaneffectiveAMLcompli-ance programme include, among others, establishing effective policies and procedures tomanageAML risks, detecting andreporting suspicious activity, and complying with reporting and recordkeeping requirementswith respect to currency transac-tionsthatexceedcertainmonetarythresholds.Inaddition,U.S.persons and foreign persons engaged in business in the United States are subject to U.S. Federal and State income taxes onforeigncurrencyexchangegains.

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To be employed by a project company or receive a salary or compensation for services provided within the United States as a foreignperson, there is a requirement tohaveworkauthori-sation in accordance with U.S. immigration laws. This can be achieved via various “non-immigrant” or temporary visa catego-ries, which are typically based on employer sponsorship. In addi-tion, work authorisation might be obtained via permanent resi-dent status (also known as green card or immigrant status), often through sponsorship from an employer (which can be a diffi-cult and lengthy process) or from sponsorship by an immediate family member who is a U.S. citizen (which may be less difficult than employer sponsorship but is generally a lengthy process).

Note that for most project finance transactions, project compa-nies do not typically hire employees, who are often engaged by the operator and asset manager.



Theremaybecustomsdutieson importedprojectequipment,which are determined based upon the country of origin of theequipmentunlessarelevanttradeagreementeliminatesorreduces certain of these tariffs.


The Harmonised Tariff Schedule provides duty rates based on theclassificationoftheimportedequipment.

11 Force Majeure


Yes, force majeureexclusionsareavailableandenforceableandareappliedsuchthatoneorbothpartiesareexcusedfromperfor-mance of the project agreement, in whole or in part, or are enti-tledtosuspendperformanceorclaimanextensionoftimeforperformance. Invocation of a force majeure clause can trigger force majeure across other related project agreements, and thus it is important to ensure that the force majeure provisions “mesh” with those found in related project agreements. Force majeure provi-sionstypicallydonotexcusepartiesfromanymonetarypaymentsthat mature prior to the occurrence of the force majeure event.

A typical force majeureprovisionwill set forthanon-exhaus-tive list of events that constitute force majeure, which often include natural force majeure, such as acts of God, and political force majeure, such as war or terrorism, as well as the effect on the parties’ rights and obligations if a force majeure event occurs.



Yes, the Foreign Corrupt Practices Act of 1977 (“FCPA”) contains two sets of relevant provisions: (i) its anti-bribery

Any major Federal action or decision, including the granting of certain permits by the U.S. Fish and Wildlife Service and the U.S. Army Corps of Engineers, or the approval of a loan guarantee by the DOE, is subject to a comprehensive environmental review under NEPA. Some States, notably California, require a similar State-level comprehensive environmental review of discretionary govern-mental actions relating to power project permitting and siting. There are opportunities for public notice, comment and challenge in the application process for some permits and pursuant to NEPA.Intermsofinternationalframeworks,theEquatorPrinciples

are voluntary and would only be used with respect to a project ifrequiredbytheapplicablefinancialinstitutionandforcertaintypes. As of 15 February 2020, 101 financial institutions in 38 countries have adopted the Equator Principles. Since theU.S. has comprehensive environmental laws and is considered a “designated country” under the Equator Principles, cove-nants to comply with environmental law in conjunction with the performance of standard due diligence are often deemed suffi-cient for projects located in the U.S. As a result, representations andwarranties and covenants expressly related to theEquatorPrinciples are often either not included in the applicable project agreement or limited to a general statement of material compliance with theEquatorPrinciples. However, theEquatorPrinciplesAssociation adopted a new version of the Equator Principlesin November 2019 and will take effect in July 2020. The new version, referred to asEquatorPrinciples IVorEP4, imposesadditional obligations and a higher level of scrutiny related to domestic projects, which, in turn, could lead to an increase in thescopeandextentofrelatedcovenants,andrepresentationsinapplicable project agreements may also increase.


Outside of the nuclear industry, privately owned and financed project companies are not subject to governmental oversight for procurement.

8 Foreign Insurance


Such restrictions are applicable on a case-by-case basis depending on the location and nature of the project, the type of project and the identity of the project parties.


Such restrictions are applicable on a case-by-case basis depending on the location and nature of the project, the type of project and the identity of the project parties.



Generally, and subject to State law, foreign persons may be appointed as corporate officers or directors of a project company.

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Yes, the United States is a Contracting State to the New York Convention, which requires courts of Contracting States togive effect to arbitration agreements and recognise and enforce awards made in other States, subject to reciprocity and commer-cial reservations. The United States made a reservation that it will apply the New York Convention only to awards made in the territory of another Contracting State and only to disputes arising out of legal relationships (whether contractual or not) that are considered commercial under the relevant national law.

The United States is also party to: (i) the Inter-American Convention on International Commercial Arbitration (“Panama Convention”), which governs international arbitral awards whereexpressly agreedby thepartiesorwhere“amajorityofthe parties to the arbitration agreement are citizens of a state or states that have ratified or acceded to the Panama Convention and are member States of the Organisation of American States” only; and (ii) the International Convention on the Settlement of Investment Disputes (“Washington Convention”), which is applicable to disputes between a government entity and a national of another Signatory State.


Yes, certain disputes involving family law and criminal law are not arbitrable. Claims under securities laws, Federal anti-trust laws and the civil provisions of the Racketeer Influenced and Corrupt Organisations Act have been found by the U.S. Supreme Court to be arbitrable.


With fewexceptions, suchas smalldisputesat the localcourtlevel, there are no broad categories of commercial disputes that must be resolved by arbitration, absent an agreement of the parties to that effect.



Generally, no.

17 Tax


WithholdingofU.S.Federalincometaxatarateof30%isgener-ally requiredonpaymentsof interest, dividends, royalties andother amounts (not including principal on loans or distributions by corporations that are treated as returns of capital) to foreign persons unless attributable to a branch office maintained by the recipient within the United States. The United States maintains

provisions prohibit U.S. persons and persons otherwise subject to U.S. jurisdiction from making corrupt payments (including bribes, kick-backs and other improper payments) to officials and agents of foreign governments and State-owned enterprises; and (ii) its accountingprovisions requirecompanieswhosesecuri-tiesarelistedonstockexchangesintheUnitedStatesto(a)makeand keep books and records that accurately and fairly reflect the transactions of the company (including transactions involving foreign government officials or agents), and (b) devise and main-tainanadequatesystemofinternalaccountingcontrols.

Among other penalties, (i) for violations of the FCPA’s anti-bribery provisions, the U.S. Department of Justice (“DOJ”) may impose criminal penalties of up to $2 million against offending companies and fines of up to $250,000 and imprisonment for up to five years for offending officers, directors, stockholders, employees and agents, and (ii) for violations of the FCPA’s accounting provi-sions, the DOJ and the Securities and Exchange Commission(“SEC”) may bring civil and criminal actions, which include crim-inal penalties of up to $25 million against offending companies and of up to $5 million and imprisonment for up to 20 years for offending directors, officers, employees or agents of such firm.

13 Applicable Law


Project agreements may be governed by the law of any State but may be subject to the doctrine of lex situs (i.e. the rule that the law applicable to proprietary aspects of an asset is the law of the jurisdiction where the asset is located).


New York law typically governs financing documents given the status of New York City as a major financial centre that provides for a reasonably settled and certain application of commercial laws and legal precedents and which permits liberal enforcement of the choice of New York law. Certain security documents, such asarealestatemortgage,maybelegallyrequiredtobegovernedby the law of the State in which the collateral is located.


Pleaseseequestions13.1and13.2above.



Yes, foreign law may govern a contract. However, the Foreign SovereignImmunitiesActprovidesanexception to immunitythroughwaiver,whichmaybeexplicitorimplicit.



Yes, they are typically recognised by local courts.

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Project bonds are securities and therefore are subject to the various U.S. securities offering and fraud laws (principally the Securities Act of 1933 (“Securities Act”) and the Securities ExchangeActof1934).UndertheSecuritiesAct,securitiesinthe United States must be sold pursuant to an effective regis-trationstatementfiledwiththeSECorpursuanttoanexemp-tion from filing. Very few, if any, project bonds are sold inSEC-registeredofferings. Themost commonexemptions areofferingspursuant toSection4(a)(2)of theSecuritiesActandRule 144A and Regulation S thereunder. Rule 144A projectbondofferingsrequireacomprehensiveofferingdocumentthatdescribes in detail the project, the project and finance docu-ments, the risks associated with the project along with a summary of the bond terms, a description of project modelling, limited information about the sponsors and offtakers and various other disclosures. The underwriters and their legal counsel perform due diligence (in order for counsel to provide 10b-5 statements) to mitigate securities law fraud liability. Offerings solely under RegulationSandSection4(a)(2)typicallyhavemuchlessdisclo-sure and diligence and the disclosure is more similar to that used in a typical bank deal.

19 Islamic Finance


While Islamic project financing is relatively new to the U.S. market, there are generally three types of financing structures used in Islamic project financing globally: (i) Istisna’a (or Istina’a)-Ijarah (construction contract-lease); (ii) Wakala-Ijarah (agency-lease); and (iii) Sharikat Mahassa-Murabaha (joint venture-bank purchase and sale) structures.

Under the Istisna’a-Ijarah structure, which is believed to be the more popular structure in Islamic project financing, an Istisna’a instrument (similar to a sales contract) is usually applied to the construction phase and an Ijarah instrument (similar to a lease-to-own agreement) is usually applied to the operations phase. During the construction phase, the borrower procures construction of project assets and then transfers title to assets to the lenders. As consideration, a lender makes phased payments totheborrower(equivalenttoloanadvances).Duringtheoper-ations phase, the lenders lease project assets to the borrower. Theborrower,inturn,makesleasepayments(equivalenttodebtservice). Unlike in traditional project financing, the lender, as theowneroftheunderlyingassets,canbeexposedtoanumberof potentially significant third-party liabilities, including envi-ronmental risk.

The Wakala-Ijarah structure differs from the Istisna’a-Ijarah structure as the borrower is employed as the lender’s agent per an agency (Wakala) agreement. The borrower/lender relation-ship is different from the Istisna’a-Ijarah structure in that the borrower procures the construction as the lender’s agent.

A less commonly used structure is the Sharikat Mahassa-Murabaha structure. Under this structure, the borrower and the

treaties with numerous jurisdictions that reduce or eliminate thesewithholdingtaxesonamountspaidtoqualifiedresidentsof the counterparty treaty country. In addition, interest paid to foreign persons, other than banks on loans made in the ordi-narycourseofbusiness,isexemptfromthiswithholdingtaxifcertainrequirementsaresatisfied,includingthattheloanisnotin bearer form and the lender is unrelated to the borrower.Even where an exemption may be available, under the

ForeignAccountTaxComplianceAct(“FATCA”),interestpaidto a foreign financial institution (whether such foreign finan-cial institution is a beneficial owner or an intermediary) may be subjecttoU.S.Federalwithholdingtaxatarateof30%unless:(x)(1)theforeignfinancialinstitutionentersintoanagreementwiththeU.S.InternalRevenueServicetowithholdU.S.taxoncertain payments and to collect and provide to the U.S. Internal Revenue Service substantial information regarding U.S. account holders of the institution (which includes, for this purpose, among others, certain account holders that are foreign entities that are directly or indirectly owned by U.S. persons), or (2) the institution resides in a jurisdiction with which the United States has entered into an intergovernmental agreement (“IGA”) to implement FATCA, and complies with the legislation imple-menting that IGA; and (y) the foreign financial institution provides a certification to the payor for such amounts that it is eligible to receive those payments free of FATCA withholding tax.ThelegislationalsogenerallyimposesaU.S.Federalwith-holdingtaxof30%oninterestpaidtoanon-financialforeignentity (whether such non-financial foreign entity is a beneficial owner or an intermediary) unless such entity (i) provides a certi-fication that such entity does not have any “substantial United States owners”, or (ii) provides certain information regarding the entity’s “substantial United States owners”, which will in turn be provided to the U.S. Internal Revenue Service.FromaU.S.taxperspective,amountsreceivedfromaguar-

antor or from the proceeds of property pledged as collateral are characterisedandtaxedinthesamemannerasamountspaidontheunderlyingclaimwouldhavebeentaxed.


There are very few Federal incentives targeted at foreign inves-torsorlendersotherthanthebroadexemptionfromwithholdingtaxoninterestpaymentdescribedinquestion17.1above.NoFederaltaxesarerequiredfortheeffectivenessorregis-

trationof anagreement. Variousdocumentary recordingandtransfertaxesapplyattheStatelevel.

18 Other Matters


The above questions and answers address most of the mainmaterial considerations for project financings governed by New York law in the United States.

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an agreement with Shari’ah law, citing a recent English court case that found that, irrespective of Shari’ah compliance, Shari’ah law was not relevant in determining enforceability of a financing agreement governed by English law, and that Shari’ah principles are far from settled and subject to considerable disagreement among clerics and scholars. However, the precedential value of the ArcapitaBankruptcyCourt’srefusaltoconsiderwhetherthefinancing was Shari’ah-compliant may be limited, given that the districtcourtdismissedtheobjector’sappealoftheBankruptcyCourt’s approval of the financing (along with an appeal asserted by the objector of confirmation of the debtors’ chapter 11 plan ofreorganisation)asequitablymoot.


No,subjecttoStateusurylawsrestrictingexcessiveinterest.

AcknowledgmentsThe authors would like to thank James C. Liles ([email protected]) and Javad Asghari ([email protected]) fortheir substantial assistance in preparing this chapter. James is a regulatory advisor based in the Washington, D.C. office of MilbankLLPandJavadisanassociatebasedintheNewYorkofficeofMilbankLLP.Eacharemembersofthefirm’sGlobalProject, Energy and Infrastructure Finance Group. The authors wouldalsoliketothankMatthewAhrens,DrewBatkin,ChadRichards,LisaBrabant,BijanGanji,LafayetteGreenfield,SeanHeiden,JamesKong,JosephRafferty,FionaSchafferandAlanStone for their input on specific areas of this chapter.

lenders enter into a joint venture (Sharikat Mahassa) agreement which is not disclosed to third parties. A Murabaha transaction is one in which a bank finances the purchase of an asset by itself purchasing that asset from a third party and then reselling that asset at a profit to the borrower pursuant to a cost-plus-profit agreement, akin to a loan. Each member of the joint venture holds Hissas (shares) in the joint venture purchased by capital-ising the Sharikat Mahassa. The Murabaha portion of the transac-tion involves sales of Hissas from time to time by the lenders to the borrower in compliance with Shari’ah law.


Generally, under U.S. State and Federal law, contracting parties may select any law as the governing law of the contract so long as it is sufficiently defined and capable of enforcement. However, there is limited case law and no conclusive rulings by U.S. courts on whether Shari’ah law would be recognised as a system of law capable of governing a contract.In the U.S. Bankruptcy Court case of In re Arcapita Bank,

B.S.C.(c), et al., Case No. 12-11076 (SHL) (Bankr. S.D.N.Y.),an investor of the debtors objected to the debtors’ motion to approve debtor-in-possession and exit financing, asserting,among other things, that the financing was not Shari’ah-compliant. In statements made on the record, the court noted that the financing agreement was governed by English law andexpresslyprovidedthatnoobligorwaspermittedtobringa claim based on Shari’ah compliance of the finance docu-ments. The court then appeared to adopt the English courts’ approach of avoiding ruling or commenting on compliance of

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Daniel J. Michalchuk is a partner in the New York office of Milbank LLP and a member of the firm’s Global Project, Energy and Infrastructure Finance Group. Mr. Michalchuk represents project sponsors and financial institutions in numerous domestic and international project financ-ings. Mr. Michalchuk received a B.A. from Queen’s University, Canada, an M.A. in International Relations from Carleton University, Canada, an LL.B. from University of Ottawa, Canada and an LL.M. in International and Comparative Law from Georgetown University Law Center. He is top ranked by Chambers USA in Projects-Nationwide. Mr. Michalchuk is admitted to practise in New York.

Milbank LLP55 Hudson YardsNew York, NY 10001USA

Tel: +1 212 530 5079Email: [email protected]: www.milbank.com

Milbank LLP is a leading international law firm that provides innovative legal services to clients around the world. Founded in New York over 150 years ago, Milbank has offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, São Paulo, Seoul, Singapore, Tokyo and Washington, DC. Milbank’s lawyers collaborate across practices and offices to help the world’s leading commercial, financial and industrial enterprises, as well as institutions, individuals and governments, achieve their strategic objectives.Project Finance is among our firm’s core practice areas and our Project, Energy and Infrastructure Finance Group comprises more than 120 dedi-cated Project, Energy and Infrastructure Finance attorneys, including 25 partners, in our offices worldwide. We operate on an integrated basis with project finance teams in each of our offices in the US, São Paulo, London, Frankfurt, Seoul, Singapore, Hong Kong and Tokyo.From a first-of-its-kind toll road in Latin America, to a wireless telecom build-out in Southeast Asia to the largest wind and solar farms in the world,

clients recognise our Project, Energy and Infrastructure Finance Group as the leading choice for the financing and development of the most critical and pioneering infrastructure projects across the globe. In the past five years, the firm has acted as the lead legal advisor in a wide variety of power, energy, oil/gas, natural resources and other infrastructure projects world-wide that mobilised hundreds of billions of dollars of capital.

www.milbank.com


USA

Richard M. Hillman is a special counsel in the New York office of Milbank LLP and a member of the firm’s Project, Energy and Infrastructure Finance Group. Mr. Hillman’s experience includes advising lenders, sponsors and other project participants on a range of USA-based and international project and structured finance transactions. Mr. Hillman received a LL.B. (Hons) and B.Com (Hons) from The University of Western Australia and a Master of Banking and Finance Law from The University of Melbourne. Mr. Hillman has been recognised as a “rising star” by The Legal 500 in both “project finance” and “conventional power”. He is admitted to practise in New York and Victoria, Australia.

Milbank LLP55 Hudson YardsNew York, NY 10001USA

Tel: +1 212 530 5326Email: [email protected]: www.milbank.com


Other titles in the ICLG series

Alternative Investment Funds

Anti-Money Laundering

Aviation Finance & Leasing

Aviation Law

Business Crime

Cartels & Leniency

Class & Group Actions

Competition Litigation

Construction & Engineering Law

Consumer Protection

Copyright

Corporate Governance

Corporate Immigration

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Corporate Recovery & Insolvency

Corporate Tax

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Data Protection

Derivatives

Designs

Digital Business

Digital Health

Drug & Medical Device Litigation

Employment & Labour Law

Enforcement of Foreign Judgments

Environment & Climate Change Law

Family Law

Financial Services Disputes

Fintech

Foreign Direct Investment Regimes

Franchise

Gambling

Insurance & Reinsurance

International Arbitration

Investor-State Arbitration

Lending & Secured Finance

Litigation & Dispute Resolution

Merger Control

Mergers & Acquisitions

Mining Law

Oil & Gas Regulation

Outsourcing

Patents

Pharmaceutical Advertising

Private Client

Private Equity

Product Liability

Public Investment Funds

Public Procurement

Real Estate

Sanctions

Securitisation

Shipping Law

Telecoms, Media & Internet

Trade Marks

Vertical Agreements and Dominant Firms

Workplace Pensions

The International Comparative Legal Guides are published by:@ICLG_GLG