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

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 3. Legal aspects in securitization
 Tax aspects
 Tax neutrality
 Substance
 Choice of SPV jurisdiction
 Corporate aspects
 Thin capitalization – loss of equity

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. 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. 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. 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. 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. 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. 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. 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. 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. 5. Questions?