POLICE ACT, 1861 the details about police system.pptx
Director liability securitization
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