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Director liability securitization

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A comparison of director's liability in securitisation companies between Luxembourg, Germany and the PR China

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Director liability securitization

  1. 1. M . P . J . S I N N I N G H E D A M S T É 3 2 8 9 8 2 1 4 J U N E 2 0 1 4 Director’s liability in securitization companies; a comparison between Luxembourg, Germany and China
  2. 2. Contents 1. Introduction 2. The concept of securitization 3. Legal aspects in securitization 4. Director’s liability per jurisdiction 5. Potential director’s liability issues in securitization companies 6. Questions?
  3. 3. 1. Introduction  Securitization is an important method of financing  SPVs managed by corporate service providers  Risks and complications underestimated by corporate service providers  Often seen as ‘easy money’ and not handled as a separate type of business  Comparison of jurisdictions  Luxembourg: issuer-friendly jurisdiction specialized in financial services  Germany: largest European economy, solid asset base, mature legal system and large potential  PR China, emerging market, large potential for securitization
  4. 4. 2. The concept of securitization  Definition: Securitization is a device of structured financing, in which an entity seeks to pool together its interest in identifiable cash flows over time, transfer the same to investors either with or without the support of further collaterals, and thereby achieve the purpose of financing  In other words: a pool of assets is ‘repackaged’ via an SPV into a security.
  5. 5. 2. The concept of securitization SPV Stichting /trust Originator / Servicer Investors Trustee Portfolio of assets Arranger Sale Notes • Class A • Class B • Class C • Class X (sub) 100% Cash Manager Servicing
  6. 6. 2. The concept of securitization  Motivators  To isolate certain assets  To link securities to assets rather than a whole company  To improve liquidity and the balance position by liquidating future cash flows  To attract a broader range of investors by offering tailor-made risk profiles
  7. 7. 2. The concept of securitization  Caveats  Costs (both transaction costs and risk premium in return for investors)  Data protection issues  Cherry picking  Liquidity threats  Moral hazard (the subprime crisis)
  8. 8. 2. The concept of securitization  Types of transaction  Repackaging transactions (‘vanilla’ deals)  Synthetic transactions  CDO/CLO/CDO-square/etc.  Compartment- or ‘cell’ structures (multiple separated transactions in 1 SPV)  Islamic securitizations (sukuk)  Uncommon assets (royalties, insurance, wine)  Life settlements  Mortgage-backed securities (including subprime MBS)
  9. 9. 3. Legal aspects in securitization  True sale  The must be a real, valid and irrevocable transfer of assets from the Originator to the SPV  Specific types of assets require specific method of transfer (receivables, real estate)  Ring fencing and bankruptcy remoteness of the SPV  Orphan structure  Limited recourse  Non-petition  Compartments or ‘cells’
  10. 10. 3. Legal aspects in securitization  Events of Default (breach of contract)  Failure to pay  Losing the tax residence  Entering into insolvency  Non-compliance with information requirements towards the Trustee  If listed, losing the listing  Cross default  Choice of law  Most transaction documents are under English or New York law
  11. 11. 3. Legal aspects in securitization  Tax aspects  Tax neutrality  Substance  Choice of SPV jurisdiction  Corporate aspects  Thin capitalization – loss of equity
  12. 12. 3. Legal aspects in securitization  Luxembourg  Securitization Law 2004  Germany  No specific legislation but legal principles clear and worked out  China  Regulatory guidelines  Trust Law
  13. 13. 4. Director’s liability per jurisdiction  Luxembourg  Internal: article 59 Company Law of 1915  Liability based on contractual mandate  Damage, fault, causal link  External: article 1382 Civil Code.  This is seen as a tort  Damage, fault, causal link  In financial distress – Article 100 Company Law 1915  Liability if directors fail to convene a shareholder’s meeting in case of loss of >50% equity.  In bankruptcy  Article 491 Commercial Code: liability for specific cases  Article 495-1 Commercial Code: serious and blatant fault, with a causal link to the bankruptcy
  14. 14. 4. Director’s liability per jurisdiction  Germany  Internal: 43-2 GmbHG and 93 AktG  ‘Standards of a prudent business person’  External: article 823 BGB  This is seen as a tort  Damage, fault, causal link  Bankruptcy  Insolvency to be reported immediately, if not personal liability
  15. 15. 4. Director’s liability per jurisdiction  China  Internal: Article 148 Company Law  Obligation of loyalty and care towards company  Summary of situations (not exhaustive!)  External: Tort Law  This is seen as a tort  Infringement on civil right/interest, fault  Summary of remedies  Trusts: Trust Law  Mentions situations and remedies  Bankruptcy  Non-compliance with obligation of loyalty and care towards company  Trusts have no legal personality, can not go bankrupt!
  16. 16. 4. Potential director’s liability issues in securitization companies  Main common rule: a company is a legal person and therefore responsible for its own obligations; nobody else!  Director’s liability is therefore an exception  Required elements  Non-compliance to a standard  Damage  A causal link
  17. 17. 5. Potential director’s liability issues in securitization companies  Who can sue a director?  The company  The liquidator or administrator in bankruptcy  Third parties, notably  Shareholders  Note- or bondholders (investors)  Transaction counterparties  Who would be the most likely claimant in a securitization?  Investors, due to the large amount and subordination  Other parties: possible but unlikely
  18. 18. 5. Potential director’s liability issues in securitization companies  SPVs are managed by corporate service providers  Unspecialized staff  (Too) many mandates per director  Almost everything is outsourced by the SPV, however…  The SPV remains responsible and has no shareholders or external directors  False sense of security: ‘The banks and agents are doing everything, the lawyers are looking at the documents, we only need to sign, what could possibly go wrong?’
  19. 19. 5. Potential director’s liability issues in securitization companies  Possible errors which could result in liability  Late filing of accounts  Non-compliance with local legal requirements  Non-compliance with listing requirements  Non-compliance with transaction covenants  Failing to inform the trustee or investors in case of a (potential) Event of Default  Late payment (especially large amounts)  Disrespecting fiscal substance  Fraud, wilful misconduct by directors or third parties (implying negligence in applying screening procedures)  Most likely small mistakes with large consequences
  20. 20. 5. Potential director’s liability issues in securitization companies  Recommendations  Specialized staff; securitization is not ‘easy pocket money’!  Smaller or unspecialized corporate service providers should not accept securitizations.  Thorough review of the documentation: the legal counsel is hired by the client and acts in their interest, not that of the corporate service provider or SPV!  Pro-activeness and critical dates / transaction covenant monitoring  Engage third parties (law firm, tax firm) if and when necessary (costs should count as transaction costs)  Respect tax substance  AML screening  D&O insurance
  21. 21. 5. Questions?

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