ICLG

The International Comparative Legal Guide to:

Project Finance 2019
8th edition

A practical cross-border insight into project finance

Published by Global Legal Group, with contributions from:

Abuka & Partners Kantenwein

Allen & Gledhill LLP Lee and Li, Attorneys-at-Law
Anderson Mōri & Tomotsune Milbank LLP
Arthur Cox N. Dowuona & Company
Baker McKenzie Oraro & Company Advocates
Bignon Lebray Prager Dreifuss Ltd.
Brigard Urrutia Rahmat Lim & Partners
Cases & Lacambra RLA – Sociedade de Advogados, RL
Cassels Brock & Blackwell LLP Sabeti & Khatami
Cuatrecasas Sardelas Petsa Law Firm
Cyril Amarchand Mangaldas Skadden, Arps, Slate, Meagher & Flom LLP
Flor & Hurtado TGR Attorneys
Global Law Office Veirano Advogados
Gorrissen Federspiel Vieira de Almeida
Grimaldi Studio Legale Zajednička advokatska kancelarija Marić & Mujezinović in
Guilherme Daniel & Associados cooperation with Kinstellar
IPFA Zaki Hashem & Partners
The International Comparative Legal Guide to: Project Finance 2019

General Chapters:
1 Why the World Needs Project Finance (and Project Finance Lawyers…) – John Dewar, Milbank LLP 1
2 Legal Issues of Cross-Border Project Finance Focusing on the Netherlands and Italy –
Daphne Broerse & Matteo Trabacchin, IPFA 8
3 Common Structures and Market Trends in Holdco Financings in the US Power Industry –
Contributing Editor José A. Morán & Juan Carlos Gonzalez Novo, Baker McKenzie 13
John Dewar, Milbank LLP
4 Current Trends in LNG Development and Construction – Julia A. Czarniak & Gregory D. Howling,
Sales Director Skadden, Arps, Slate, Meagher & Flom LLP 16
Florjan Osmani

Account Director Country Question and Answer Chapters:

Oliver Smith
5 Andorra Cases & Lacambra: Miguel Cases & Marc Ambrós 22
Sales Support Manager
Toni Hayward 6 Angola Vieira de Almeida and RLA – Sociedade de Advogados, RL:
Manuel Protásio & Vanusa Gomes 31
Sub Editor
Oliver Chang 7 Brazil Veirano Advogados: Ana Carolina Barretto & Amanda Leal Brasil 41
Senior Editors 8 Canada Cassels Brock & Blackwell LLP: Alison Manzer & Charles Newman 51
Caroline Collingwood
9 China Global Law Office: Dr. Xin Zhang & Shuhui Luo 60
Rachel Williams
10 Colombia Brigard Urrutia: Manuel Fernando Quinche & César Felipe Rodríguez 68
CEO
Dror Levy 11 Denmark Gorrissen Federspiel: Morten Nybom Bethe & Tina Herbing 78
Group Consulting Editor 12 Ecuador Flor & Hurtado: Mario Flor & Daisy Ramirez 87
Alan Falach
13 Egypt Zaki Hashem & Partners: Sameh Kamal 96
Publisher 14 England & Wales Milbank LLP: John Dewar & Munib Hussain 104
Rory Smith
15 France Bignon Lebray: Sébastien Pinot & Serge Rastorgoueff 122
Published by
Global Legal Group Ltd. 16 Germany Kantenwein: Marcus van Bevern & Sven Ceranowski 135
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Tel: +44 20 7367 0720
Akosua Achiaa Akobour Debrah 143
Fax: +44 20 7407 5255 18 Greece Sardelas Petsa Law Firm: Panagiotis (Notis) Sardelas &
Email: [email protected] Konstantina (Nantia) Kalogiannidi 151
URL: www.glgroup.co.uk
19 India Cyril Amarchand Mangaldas: Santosh Janakiram & Subhalakshmi Naskar 159
GLG Cover Design
F&F Studio Design 20 Iran Sabeti & Khatami: Behnam Khatami & Hooman Sabeti 168

GLG Cover Image Source 21 Ireland Arthur Cox: Matt Dunn & Charlotte Upton 177
iStockphoto 22 Italy Grimaldi Studio Legale: Riccardo Sallustio & Giuseppe Buono 189
Printed by 23 Japan Anderson Mōri & Tomotsune: Kunihiro Yokoi & Wataru Higuchi 199
Ashford Colour Press Ltd
May 2019 24 Kenya Oraro & Company Advocates: Pamella Ager & James K. Kituku 207

Copyright © 2019
25 Malaysia Rahmat Lim & Partners: Dzuhairi bin Jaafar Thani &
Global Legal Group Ltd. Syed Rashid bin Rahim Alsree 218
All rights reserved 26 Mozambique Vieira de Almeida and Guilherme Daniel & Associados:
No photocopying
Teresa Empis Falcão & Guilherme Daniel 230
ISBN 978-1-912509-71-3 27 Nigeria Abuka & Partners: Patrick C. Abuka & Sunday Edward, Esq. 240
ISSN 2048-688X
28 Portugal Vieira de Almeida: Teresa Empis Falcão & Ana Luís de Sousa 250
Strategic Partners
29 Serbia Zajednička advokatska kancelarija Marić & Mujezinović
in cooperation with Kinstellar: Tijana Arsenijević & Branislav Marić 260
30 Singapore Allen & Gledhill LLP: Kok Chee Wai & Kelvin Wong 269
31 South Africa TGR Attorneys: Phologo Pheko 278
32 Spain Cuatrecasas: Héctor Bros & Javier Vivas 290
33 Switzerland Prager Dreifuss Ltd.: Daniel Hayek & Mark Meili 301
34 Taiwan Lee and Li, Attorneys-at-Law: Hsin-Lan Hsu & Pauline Wang 309
35 USA Milbank LLP: Daniel J. Michalchuk & Richard M. Hillman 318

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer
This publication is for general information purposes only. It does not purport to provide comprehensive 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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Chapter 1

Why the World Needs Project

Finance (and Project Finance
Lawyers…)
Milbank LLP John Dewar

“Any fool can make something complicated. It takes a genius to bank loans and conventional capital markets instruments, domestic
make it simple.” government-funded loans, export credit and multilateral agency loans
– Woody Guthrie and guarantees and Islamic Shari’ah-compliant financing structures.
The financial crisis exposed weaknesses in a number of structured Whilst providing desperately needed sources of liquidity, this
finance products (such as collateralised debt obligations, structured diversity of finance and financing structures (combined with the
investment vehicles and certain derivatives) and business models expansion of project finance into new industry sectors and
that were, in essence, arbitrage plays, heavily dependent on short- jurisdictions) has meant that the accompanying legal issues have
term debt funding to finance portfolios of long-dated, illiquid become progressively more complex. Notwithstanding this
investments. By way of contrast, project finance has proved itself to complexity, a combination of proper legal frameworks, sound
be an asset class that has demonstrated the intrinsic value of commercial structures and robust collateral packages have helped
productive tangible assets, extensive due diligence, strong collateral ensure that these new structures have been welcomed and
packages and transparent financial structures that have become effectively integrated into the project finance market.
increasingly relevant post financial crisis. The financial crisis demonstrated that the key to a successful project
Despite the recent market volatility, there remains a pressing need financing (or, indeed, financing of any nature) is due diligence. A
throughout the world for large-scale investment in infrastructure full awareness of the risks inherent in a particular project and its host
across a broad spectrum of industries (in particular in emerging country (and who bears which of the many costs involved in
markets such as Africa). Large-scale project finance typically financing a project) is the first step in identifying mitigants to those
focuses on “greenfield” projects in sectors ranging from power risks. A project finance lawyer must be fully conversant with ever-
generation (conventional, nuclear and renewables) to transmission, shifting market trends as well as the project company’s business
oil and gas, petrochemicals, infrastructure, mining and telecoms. because, in order to advise their clients on the risks associated with
Global economic growth and demand for energy and commodities is a project, they will need to have first considered all aspects of the
a major driver for capital investment in these sectors and underlying project. Only once a comprehensive analysis of the
notwithstanding recent market volatility, the economies of fast- underlying project has been undertaken, from the security of its
growing countries such as Brazil, India and China have underpinned feedstock and fuel supply right through to any potential political,
the upward trend in energy and commodity prices. Some of the regulatory, legal and environmental issues, will it be possible to
largest projects in the world are currently being developed in identify the material risks to that project’s future success.
emerging markets: projects involving capital expenditures of $10 to Having considered the technical, political and legal risks of the
$30 billion are moving forward in countries such as Saudi Arabia, project, a lawyer will then use this expertise to help the parties
the United Arab Emirates and Malaysia. structure the project and its financing, secure consensus as to how
The increase in global competition for resources has led to a those risks should be mitigated and, finally, accurately reflect the
corresponding increase in the size and complexity of infrastructure parties’ agreement in the underlying project agreements and
projects. Today’s governments, institutional investors and the private financing documentation.
sector are unable to shoulder the burden of financing projects of this Before we consider further the all-important question of why the
scale alone. This means that large-scale infrastructure projects are now world needs project finance lawyers, we have set out below some
financed using ever more sophisticated and complex financial key issues that any participant in a project financing should
instruments, which are, in turn, provided by an increasingly diverse consider.
pool of public and private finance institutions. In recent years, project
financiers and sponsors have become adept at mobilising these diverse
sources of finance and developing innovative structures combining
A Brief History of Project Finance
commercial banks, capital markets investors, Export Credit Agencies
(“ECAs”), Multilateral Development Finance Institutions (“DFIs”), Although project finance techniques are applied throughout the
Islamic banks, loans sourced from government-affiliated lending world today in a wide range of industries, project finance can trace
institutions and, in recent years, debt and equity from infrastructure its roots back to ancient Greece and Rome where it was used to
and private equity funds – the latter becoming increasingly important, finance maritime operations and infrastructure development
even in emerging markets. As a result of this seismic shift in the (shipping merchants utilised project financing techniques to dilute
financial landscape, project finance lawyers require a degree of the risks inherent in maritime trading as loans would be advanced to
familiarity with a range of financial instruments, including commercial a merchant on the basis that the loans would be repaid through the

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 Milbank LLP Why the World Needs Project Finance

sale of shipped cargo; in other words, the financing would be repaid increase in the use (particularly in natural resource-based projects)
by the internally generated cash flows of the project). Project of completion guarantees and other forms of sponsor support which
finance in the Civil Law jurisdictions of continental Europe (in the historically has not been a feature of limited or non-recourse
form of “public private partnerships”) can find their origins in the lending. Notwithstanding this difficulty, definitions of project
Roman concession system. Project finance in the Anglo-American finance will generally focus on the basic premise that:
world came to prominence in the mid-20th century in the United ■ a newly formed, often thinly capitalised, special purpose
States where it was used to finance mining and rail companies and vehicle (the project company) will own an asset (which may
evolved into its modern incarnation in the 1980s when it was at that time amount to little more than a collection of licences
principally used by commercial banks to finance the construction of and contracts granting the project company the right to
natural gas projects and power plants in Europe and in North develop and construct the project); and
America following the 1978 Public Utility Regulatory Policy Act. ■ the project company’s lenders will finance (in part) the
Project finance techniques developed in the 1980s were development and construction of the project on the basis of
subsequently honed in the 1990s in emerging markets such as the their evaluation of the projected revenue-generating capability
Middle East, Latin America and Asia. In the 1980s and 1990s, of the project.
project financiers and sponsors (the term used to describe the There are key characteristics that are common to most project
ultimate owner of a project company) were predominantly based in financings:
London, New York and Tokyo. ■ the project is developed through a separate, and usually
Until the financial crisis, commercial banks had dominated the single-purpose, financial and legal entity;
project finance lending market; however, in recent years there has ■ the debt of the project company is often completely separate
been a dearth of liquidity from such institutions (an issue further (at least for balance sheet purposes) from the sponsors’ direct
amplified by the application of the Basel III framework, which obligations;
means that commercial banks now have to assign a higher ■ the sponsors seek to maximise the debt to equity leverage of
percentage of their liquidity to back long-tenor commercial debt the project, and the amount of debt is linked directly to the
financing). As a result, many sponsors have had to look elsewhere cash flow potential, and to a lesser extent the liquidation
to find sources of finance and in recent years we have seen many value, of the project and its assets;
new entrants to the project finance market, including commercial ■ the sponsors’ guarantees (if any) to lenders generally do not
banks from Asia, the Middle East and Latin America as well as cover all the risks involved in the project;
larger roles for ECAs and DFIs. Due to funding pressures facing ■ project assets (including contracts with third parties) and
commercial banks, ECA direct financing has become an revenues are generally pledged as security for the lenders;
increasingly important feature for emerging markets’ greenfield and
infrastructure finance. Finance has also been forthcoming from the ■ firm contractual commitments of various third parties (such as
Islamic finance market and (for the largest projects) the bond construction contractors, fuel and other feedstock suppliers,
markets. A number of the institutions that have stepped in to fill the purchasers of the project’s output and government authorities)
represent significant components of the credit support for the
funding gap left particularly by European banks (such as Japanese
project.
commercial banks) appear to have access to relatively deep pools of
lower cost dollar funding, low exposure to sovereign debt and are
aggressively seeking to expand their project finance loan portfolios. Risk: Assessment and Allocation
The involvement of an ECA in a project financing can be invaluable,
not least due to their provision of either (or both) direct loans and At the outset of any project financing, the project’s lenders will
credit protection for the development of projects, but also because require a lawyer to produce a comprehensive legal due diligence
ECAs act as important anchors and facilitators to attract commercial report identifying the key risks to the future success of the project.
banks to club deals or syndications where banks would otherwise be This is a vital stage of the financing process as an unidentified, and
hesitant to participate due to risk allocation or credit concerns. therefore unmitigated, risk has the potential to jeopardise the
Similarly, the involvement of a DFI (such as the African stability of a project. In order to produce such a report, the lawyer
Development Bank, the Asian Development Bank or the will need to work closely with a series of specialist advisers
International Finance Corporation) can also be critical in providing (typically including insurance advisers, technical advisers and
a so-called “halo” effect for a project. environmental consultants) and local lawyers in the relevant
Although project finance is often seen as a tool for investment in jurisdiction.
emerging markets and a means of facilitating the construction of As the project’s sponsors (who are providing the equity) and the
infrastructure in developing countries, global concerns relating to project’s lenders (who are providing the debt) may have differing
climate change have led to increased activity in mature project finance perspectives as to the likelihood of future adverse events and which
markets such as Europe and North America. Government stimulus party should bear the risk of those events occurring, during the
programmes, in particular targeted efforts to promote investment in financing process the due diligence of a project is of great importance
renewable energy and other forms of low carbon power, have resulted because a project’s risk profile will directly influence the structuring
in an increase in project finance activity in jurisdictions such as of its overall debt and equity arrangements. An example of how this
Europe where ambitious renewable energy targets have been set. works in practice can be seen in Middle Eastern power projects.
Middle Eastern host governments deliberately structure their
tendering processes for the right to build the power plant so as to
What is Project Finance? ensure that they will have to pay the lowest possible electricity tariff.
Typically, this is achieved by the host government’s utility company
Defining “modern” project finance is an increasingly difficult task – guaranteeing to purchase both the project’s power capacity and its
there is no universally adopted definition. As project financing has actual generation. This arrangement significantly decreases the
evolved it has imported techniques and market evolutions from project’s risk profile as the lenders can take comfort from the utility’s
other banking disciplines. One example of this can be seen in the strength as the off-taker and can accurately predict the revenues that

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Milbank LLP Why the World Needs Project Finance

the project company will receive once the project has been
Security
constructed and is generating power. A lower risk profile allows
lenders to offer longer tenors and lower margins. This decreases the
Project financings are in essence complex secured lending
sponsors’ cost of funding which enables the project company to offer
transactions. The willingness of lenders to extend long-term credit to
a more competitive electricity tariff whilst still preserving the
a project may depend on the degree of comfort they take in the
sponsors’ equity returns.
viability of the underlying security package. The structuring of
By way of contrast, in industry sectors such as mining and security packages across jurisdictions and diverse assets can present
petrochemicals, a project company’s off-take arrangements will numerous and unique challenges. The strength of the security
typically be calculated by volume and the (variable) market price for package on offer will also impact the “bankability” of a project. The
its output (the project takes market risk). Because market risk means security package is key as lenders’ only collateral is the project’s
that the project’s revenues are less predictable, lenders will typically assets. Typically, lenders will seek to take security over all of a
require sponsors to invest a greater proportion of equity into the project company’s assets. However, in a project located in an
project. In a project where market risk is an issue, a market analyst’s emerging market with an undeveloped collateral framework, the
report, which will predict future off-take and feedstock supply prices, practical reality of creating and/or enforcing security is that it may be
will be of paramount importance to lenders and sponsors alike. expensive, time-consuming and uncertain in outcome. In practice
In order to be able to raise finance for a project, the sponsors will therefore, enforcement of security over a project company’s assets is
need to demonstrate to potential lenders that the contractual generally seen by lenders as a last resort. For many lenders, the main
arrangements are “bankable”. The less comfortable the lenders are driver in taking security over a project company’s assets is, should
with provisions involving the contractor’s ability to claim extensions the project company face financial difficulties, to maximise the
of time or additional costs, the greater the amount of equity support strength of their bargaining position against (i) the project company’s
the sponsors will have to provide. When asked to advise as to the other creditors, (ii) the host government, and (iii) the project
“bankability” of a project, a project finance lawyer will need to pay company’s sponsors. Should a project face financial difficulties, the
particular attention to the supply and off-take arrangements and the lenders’ ability to enforce their security (with, subject to local law
risk allocation arrangements in a project’s construction contract. A requirements, no obligation to share the benefits of the enforcement
large-scale infrastructure project will typically have a construction proceeds with anyone else) puts them in the strongest possible
contract with an established (and creditworthy) engineering and position in the context of any restructuring negotiations.
supply contractor under a market-tested “bankable” contractual form As noted throughout this guide:
known as an Engineering, Procurement and Construction or “EPC”
■ regimes for creation or perfection of security vary greatly
contract which will typically include provisions for testing and the between different jurisdictions and whether a security interest
payment of liquidated damages in the event that the project is not has been validly created and whether it has priority over
constructed by a certain date. Failure to comply with any competing security interests is a question of local law;
requirements of an EPC contract will usually result in a contractor ■ the strength of a lender’s security package will be influenced
incurring monetary liabilities. by the relevant jurisdiction’s applicable insolvency law; and
The “bankability” of a project will of course differ depending on ■ restrictions on foreign ownership of assets will impact the
that project’s industry sector or jurisdiction. By way of example, the efficacy of a lender’s security package.
technology risk and regulatory risk associated with a satellite Project financiers will want to establish at the outset of a project
project will be greater than the technology risk and regulatory risk whether the law of the jurisdiction where the project is located will
of a power project. Similarly, the key bankability concerns for recognise their rights as secured creditors and, if the project
investors in a mining project situated in a developing country are company becomes insolvent, whether their claims will be dealt with
likely to be influenced by factors such as political, environmental equitably. Any relevant issues would typically be described in a
and social risk, which are not likely to be key concerns in a satellite legal due diligence report in which, amongst other things, a lawyer,
project. working closely with local counsel, will (at a minimum) need to
Broadly speaking, in a successful project financing, the material establish (i) whether the relevant jurisdiction has a registration
project risks will have been allocated (under contracts that will system for the filing of security interests, and (ii) whether the
withstand legal challenge) through the project company’s relevant jurisdiction’s courts, liquidator or equivalent officer will
contractual arrangements with its sponsors, lenders, suppliers and respect the security interests granted by a project company.
purchasers, so that the party best able to bear a risk will do so. Once It should also be noted that in many jurisdictions (particularly those
the project’s material project risks have been identified, the key role with little or no track record of complex financings) the cost of filing
of a lawyer is to advise as to the optimal allocation of those risks or registering security can be significant (sometimes a percentage of
and, so far as is possible, mitigate them through the documentation the total amount being borrowed) and sponsors may argue that the
process. In a perfect world a lawyer would hope to see: creation of security is unduly burdensome and that the practical value
■ the project’s construction risk allocated to a contractor with of the security to the lenders does not warrant the related expense,
an acceptable credit standing though a “turn-key” EPC particularly in jurisdictions with little experience of complex
contract; financings. Lenders will often seek to mitigate this by (if permitted by
■ the project’s supply risk allocated through “firm” supply local law) requiring that certain of the project company’s assets, such
contracts that guarantee a steady supply of feedstock, fuel or as its bank accounts, are held off-shore in a jurisdiction with a
other necessary resources; and favourable security regime (such as England and Wales or New York).
■ the project’s off-take risk allocated through a “firm” long-term
sales contract with an off-taker with an acceptable credit
standing that contains firm pricing and minimum purchasing Foreign Investment and Ownership
obligations (commonly known as “take or pay” commitments). Restrictions
Naturally, the actual outcome will be driven by a host of
commercial, legal and other factors affecting the relevant project. Where large sums of money are at stake, sponsors and project

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 Milbank LLP Why the World Needs Project Finance

financiers should assume that host governments will be insistent on advise as to the existence of any restrictions on the provision of
ensuring that they receive what they view as their rightful share of insurance by foreign insurers, the hiring of foreign workers and
the profits of a successful (i.e. revenue-generating) infrastructure importing equipment into the country. At a minimum, any legal due
project. As host governments will often require project companies diligence report should identify:
to be incorporated under local law, it will need to be established at ■ what permits and consents the project company will require
the outset of a project how the law of that jurisdiction may affect the in order to carry out its business;
governance of the project company. The sponsors will look to ■ whether enforcement of any security interests over a project’s
satisfy themselves that the project company has the ability to assets could lead to a permit being revoked; and
distribute surplus funds to its shareholders. Foreign sponsors (who ■ whether, following the enforcement of a security interest, the
are shareholders alongside domestic sponsors) will wish to satisfy entity to whom the lenders sell the project would be entitled
themselves that whatever rights they have over the project company to the benefit of that project’s permits and consents.
will be both respected and enforceable. Lenders will also take an
Risk relating to regulatory restrictions and approvals may be
interest in how the legal regime of the relevant jurisdiction treats
mitigated by obtaining legal opinions confirming compliance with
foreign sponsors, because, should they need to enforce their security
applicable laws and ensuring that any necessary approvals are a
and sell the project company assets, they may eventually need to
condition precedent to the drawdown of funds under the loan
replace the original sponsors.
agreement.

Regulatory Restrictions Environmental & Social Issues

Typically a host government will impose certain regulatory
Large-scale infrastructure projects will inevitably have an
restrictions on how its public utilities, natural resources and
environmental and social impact and sponsors seeking access to the
infrastructure are owned and operated. It will therefore need to be
financial markets will usually need to demonstrate a high level of
established at the outset of the project what impact, if any, that
environmental and social compliance. Most industrial facilities emit
country’s regulatory regime will have on the project’s construction
at least some waste and pollutants into the air, water and soil and
and operation.
require permits and other authorisations to operate. Environmental
For most projects, the legal analysis of the regulatory environment concerns have become more prominent as a result of increased public
will involve two basic areas of investigation (i) a determination of awareness, more stringent environmental, health and safety laws and
the rights granted to, and the obligations imposed on, the project permitting requirements and heightened liability for the
company, and (ii) an assessment of the risks associated with the identification and clean-up of hazardous materials and wastes.
change in a country’s regulatory regime. In order to minimise the Traditionally, lenders have required, at a minimum, that the project
risk involved in infrastructure development, a host country will company undertakes to comply with all applicable environmental
demand that a project be completed to the government’s and social laws and regulations; however, in recent years lenders
specifications as quickly as possible and seek adequate safeguards (especially ECAs and DFIs) have typically required the project
and assurances that the project will be operated properly and in line company to adhere to a set of guidelines known as the “Equator
with the public’s interests. Principles” which are a financial industry benchmark for
The second of these two areas of investigation is particularly determining, assessing and managing social and environmental risk
important because, although initial certainty as to the scope of a in project financing. The “Equator Principles” incorporate the IFC
jurisdiction’s regulatory regime may be achievable, there will and World Bank environmental performance standards and
always remain the risk that the regulatory regime will change. In guidelines. Thus, the “Equator Principles” extended these
circumstances where there is significant uncertainty as to the international project-based environmental and social standards into
stability of a jurisdiction’s regulatory regime, in order to encourage the realm of private financings. Amongst other things, adherence to
foreign investment in their infrastructure, host governments may be the “Equator Principles” requires the project company to develop and
willing to enshrine specific contractual commitments into national comply with an agreed environmental and social management plan
law, thereby allowing greater certainty that those commitments will focusing on areas such as:
have precedence over competing, and often inconsistent, laws and ■ labour and working conditions;
regulations. The host government may also opt to enter into direct ■ pollution prevention and abatement;
contractual undertakings with the project company and/or its ■ community health, safety and security;
sponsors. These vary from legally binding undertakings, the breach
■ biodiversity, conservation and sustainable natural resource
of which will entitle the claimant to sue for damages or other pre-
management; and
agreed levels of compensation (such as termination payments which
cover the project company’s outstanding indebtedness), to “comfort ■ protection of indigenous peoples and cultural heritage.
letters” which offer little, if any, certainty of remedy. While such requirements are principally for the protection of the
project’s host country, they are also very important for lenders as
high-profile international lending institutions do not want to be
Government Approvals associated with projects that have an adverse environmental or
social impact (and the reputational damage potentially caused by
In addition to the above-described regulatory restrictions, a host any resulting negative publicity).
government will usually require any large-scale infrastructure
project to obtain a broad range of permits and consents in relation to
matters such as site use, environmental impact, health and safety Governing Law Issues
and industrial regulation. In order to determine the permits and
consents that will be required by a project company, a project Sponsors and lenders to large-scale cross-border infrastructure
finance lawyer will need to work closely with local lawyers and projects will typically seek to have the finance documentation
specialists in the relevant jurisdiction. These specialists will also governed by either English or New York law. Although the law of

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Milbank LLP Why the World Needs Project Finance

each of these jurisdictions in relation to the enforceability of advantage of arbitration, given the often complex nature of disputes
customary finance documents is broadly similar, lenders may still that arise from project financings, is the ability to designate an
have strong preferences based on familiarity with customary forms arbitrator better equipped to address complex technical issues than a
and terminology. However, sponsors and lenders will not usually judge with more general skills. It is also the case that, in some
have the ability to choose the governing law of the project’s other instances, an arbitral award may be more likely than a court
agreements as conflict of law principles, such as the doctrine of lex judgment to be enforced in the home jurisdiction of the party against
situs (the rule that the law applicable to proprietary aspects of an whom it is made as international treaty arrangements, such as the
asset is the law of the jurisdiction where the asset is situated), may New York Convention, call for Member States to give effect to
dictate which law is to be applied for specific purposes (notably the arbitral awards made in other Member States.
creation of security interests). Although there is no equivalent legal Judicial proceedings, in some circumstances, may still be preferable
doctrine that stipulates that project agreements should be governed to arbitration, particularly if that jurisdiction’s courts have the
by the law of the jurisdiction in which the project is located, it is ability to compel parties to refrain from certain actions, disclose
often a requirement of the host government that its own domestic documents and order interim relief (which can be very useful when
law be specified as the governing law of certain agreements. This is one party is seeking to prevent another party from moving assets out
particularly true of any agreements to be signed by the government of a jurisdiction). Further, there is a perceived tendency of
or a governmental entity. arbitrators to arrive at compromise positions – so-called “rough
Since the manner in which a project’s agreements will be interpreted justice”. For these reasons, lenders will typically insist that the
or enforced will differ, sometimes significantly, according to the finance documents include an arbitration clause which applies only
governing law of the contract, the following will need to be for their benefit, thus preserving the possibility of recourse to the
established at the outset: relevant jurisdiction’s courts. In addition, as arbitration is a product
■ the effectiveness of the choice of the law clause to govern the of contract, only parties that have specifically consented to the
various project agreements; and arbitration of a dispute can be compelled to proceed in that forum.
■ the extent to which agreements governed by local law are
legal, valid, binding and enforceable (i.e. whether there are
mandatory provisions of local law that will override the terms
Sovereign Immunity
of the contract).
Another potential issue that a project finance lawyer must consider
It is, of course, of fundamental importance that the parties are aware
is the possibility that host governments or state-owned stakeholders
at the outset of the project if a country’s domestic law prohibits
in the project (and their assets) may well be immune from
fundamental aspects of the transaction (for example, a project
proceedings before the courts of the host state, with the result that a
company’s obligation to pay interest on a loan is unenforceable in
successful judicial or arbitration proceeding may prove to be a
some jurisdictions by virtue of the general principles of Islamic
wholly unsatisfactory means of recourse. Sovereign immunity is
Shari’ah law).
widely acknowledged to be a matter of international law. However,
there may be exceptions to its application which means that, if
Disputes required, sovereign immunity can usually be mitigated at the outset
of a project, either because as a matter of local law a state entity
A project finance lawyer will also be concerned with establishing acting in a commercial capacity may not benefit from immunity in
the impact of the choice of the forum for the determination of all (or any) circumstances, or because it is usually possible for a
disputes arising from the transaction (including the extent to which state entity to waive its right to immunity.
judgments or arbitral awards that emanate from that forum will be
enforced in other relevant jurisdictions). Of particular interest to Change of Law/Political Risk
lenders and sponsors will be the following issues:
■ Is the forum likely to be neutral in its decision-making? As project finance loans are generally repaid over a relatively long
■ Will the chosen forum apply the law specified by the parties timeframe the host country’s laws are liable to change during the
in the contract? tenor of the project’s debt. Political risk arises from actions by host
■ Which evidential or procedural rules will apply in the forum? governments that have a negative impact on the financial
■ Will judgments or arbitral awards be enforced in the home performance or commercial viability of a project. In an unstable
jurisdictions of the parties to the dispute? country where regime change is frequent and competing policy
As a result of the increasing popularity of arbitration as a means of objectives vary widely it follows that the risk of a change in law
settling disputes, the parties will also need to consider at the outset adversely impacting a project will be greater. At the more extreme
whether any dispute should be the subject of judicial or arbitration end of the scale, actions by a host government such as expropriation
proceedings. The advantages in opting for judicial proceedings will of the project or the imposition of restrictions on the repatriation of
depend on the country in question; however, key considerations will a project’s foreign currency earnings can have an extremely
be: negative impact on the commercial viability of a project. Economic
cycles will shift the relative negotiating balances between investors
■ Do the country’s courts have a tradition of reported case law
and host governments and, as a country’s economy develops, its
or judicial precedent (in order that a party might be able to
predict the likely outcome of a dispute)? host government may seek to re-negotiate contracts in order to
extract more favourable terms.
■ Are there established procedural laws?
■ How independent is that country’s judiciary from the As practitioners of energy law in the Europe will attest, this is not
legislature and executive? just an issue in emerging markets. In 2011, in response to the
Fukushima nuclear disaster, host governments in Germany and Italy
In recent years, the election of arbitration as a means of settling
took significant decisions with regard to their nuclear programmes
disputes has become increasingly common due to the relative speed
that will have long-term impacts on the price of energy and the
and privacy that an arbitral process affords. Another significant

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 Milbank LLP Why the World Needs Project Finance

direction of energy infrastructure investment in Europe. The certain goods. The immigration laws of many countries will permit
premature shutdown of nuclear power plants in countries such as the employment of qualified expatriates on a limited basis, but
Germany makes the long-term revenue streams of nuclear power prohibit the employment of expatriates without particular skills or
projects less certain for sponsors, especially in countries where qualifications. Some host countries may permit a large influx of
policy decisions are greatly influenced by public opinion. foreign workers during the early stages of a project (particularly
Notwithstanding this uncertainty, at the outset of a project, sponsors during the construction phase), after which indigenisation laws may
and lenders will still seek to satisfy themselves that they are require that an increasing number of local citizens be trained and
comfortable with the political, judicial, economic and social employed by the project company.
stability of the country in which a project is situated. In cases where
there are concerns as to the stability of the host state, such concerns Why Does the World Need Project Finance
may be capable of being addressed through the use of political risk
Lawyers?
insurance (for many commercial lenders, political risk insurance is
often a prerequisite to their internal credit approvals) or the
As well as the ability to negotiate a deal that works for all parties
involvement of multilateral and other public sector lending
throughout the life of the project, project finance lawyers need to be
institutions (such as ECAs and DFIs) whose participation may act as
able to assess the bigger picture, understand which points really
a deterrent to adverse interference by the host government. Other
matter in the overall commercial context, and, as the quote at the
potential mitigants to political risk include:
beginning of this chapter alludes to, try to ensure that what is
■ requiring the host government to “freeze” the laws that apply already a complex and challenging undertaking does not become
to the project company (through, for example, the execution
unnecessarily complicated.
of investment agreements);
■ requiring the project’s off-takers to compensate the project Given the long-term nature of a project financing, the documentation
company through tariff adjustments to cover increased costs must be sufficiently robust to withstand long-term volatility. It is also
arising from changes in law or regulation; and/or important that the parties realise from the outset that, even after the
■ reliance on bilateral investment treaties which afford relevant financing and project documentation has been executed, they
nationals of a contracting state treaty protection from must make an effort to sustain the relationships that underpin the
specified actions by the government of another contracting project. This is because, no matter how extensive or well-drafted the
state. legal documentation, virtually every project encounters technical or
commercial problems over its life, and will face some kind of
economic, political or legal change. Despite the mountain of
Tax and Customs documents governing the project participants’ relationships, issues that
had not been contemplated at the time of signing (and which are
Virtually all projects are subject to some form of taxation, and the therefore not addressed in the documentation) can, and often do, arise.
tax regime will generally have a significant impact on the project’s A key role for the project finance lawyer is to attempt to minimise the
economics. Typically a project company will be required to pay frequency with which any project encounters problems by undertaking
corporate tax which will be determined on the basis of the profits a careful initial assessment of the project risks and encouraging a
that it generates. In some jurisdictions it may also be obliged to pay consensual approach between the parties to resolving risk allocation
royalties to the host government calculated on the gross value of its issues which arise.
sales. Stamp taxes, registration taxes and notarial fees may be
Given the complexity of the process and the large sums of money at
significant and may also impact on a project’s economics. In
stake, project financing is a document-intensive process and project
addition to establishing the level of such fees and taxes at the outset,
finance lawyers play a crucial role in managing that process. In
a project’s sponsors and lenders will want to know whether the laws
many ways the legal skills required to close a project finance
of the host country will require the project company to make
transaction are often as much to do with process management as
withholdings on account of tax on interest and dividend payments it
legal analysis and drafting. As it is not unusual for a project’s
makes to overseas lenders and shareholders.
sponsors, lenders and advisers to be based in different jurisdictions
If interest payments made by a project company to its lenders attract across differing time-zones, keeping on top of the complex set of
withholding tax then those lenders will require the project company documents required for the closing of a project financing can be a
to “gross up” interest payments so that they receive the same significant undertaking and it is important that the lawyers work
amount of interest that they would have received in the absence of together to ensure that signing arrangements do not become overly
the withholding tax. The role of a lawyer in this scenario will be to complex or contingent.
determine if relief from the effects of withholding requirements can
Today’s project finance market sees sponsors and lenders from
be found under an applicable double taxation treaty or the domestic
increasingly diverse backgrounds working together on larger and
tax laws of the jurisdiction in which the investors or lenders are
more complex projects in ever more remote and challenging
situated.
jurisdictions. In this exciting and evolving market place, project
Whenever goods or individuals cross a border, they become subject to finance lawyers have the unique and crucial role of being able to
the laws of both the country they are leaving and the country they are advise their clients, whether sponsors or lenders, on the effective
entering. It will be necessary to ensure that the project company has management of risk in order to enable them to continue to push the
the ability to import into the host country the goods, equipment and frontiers of project financing and ensure the development and
raw materials required for the project, as well as the ability to employ construction of much-needed large-scale infrastructure projects
expatriate managers, engineers and labour. Typically, customs around the world.
restrictions will take the form of simple import duties; however,
certain jurisdictions impose absolute prohibitions on the import of

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Milbank LLP Why the World Needs Project Finance

John Dewar
Milbank LLP
10 Gresham Street
London EC2V 7JD
United Kingdom

Tel: +44 20 7615 3004

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

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,
renewable energy, telecommunications, 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, D.C.
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 100 dedicated 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.

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 Chapter 2

Legal Issues of Cross-Border

Project Finance Focusing on Daphne Broerse
the Netherlands and Italy

IPFA Matteo Trabacchin

(EU) 2004/17/EU and implemented in the Public Procurement Act.

Focus on the Netherlands
It allows for a funnelling process whereby an undetermined number
of candidates must pass through a prequalification phase, whereby
Introduction five candidates are selected based on their experience and financial
stature. Candidates are often consortia of construction companies,
sometimes with an equity partner. Candidates are allowed to use the
The Netherlands has been and still is a very important market for
experience of their consortium members, but given the public
project finance. In the past decade, the Netherlands has been one of
procurement rules, the candidates have to ensure that this
the top markets for PFI projects. In the first part of this chapter, we
experience remains within the consortium.
will look into the reasons why PFI projects in the Netherlands have
been so successful and we will also discuss the latest trends in PFI After the prequalification phase, the candidates go through a risk
projects, whereby we see an important transition from infrastructure management phase, whereby the number of candidates is brought
projects (roads, tunnels, bridges and also social infrastructures such further down to three. In this risk management phase, each
as accommodation projects) to renewable energy projects. candidate describes (based on prior defined Contracting Authority
risks) which mitigatory measures they shall take to limit the chance
PFI projects in the Netherlands have been based on two specific
that such a risk shall occur and/or limit the impact of the risk when
contract structures: the DBFM contract (Design, Build, Finance and
it occurs. The measures suggested shall become part of the
Maintain), which has been used for motorways and lock projects;
obligations of the candidate which is ultimately selected in the
and the DBFMO contract (Design, Build, Finance, Maintain and
DBFM(O) contract.
Operate), which has been used for accommodation projects.
The final phase of the competitive dialogue, i.e. before the
The main difference between the two types of contracts is in the
submission of the final bid, is the dialogue phase. During this phase,
exploitation phase. In respect of accommodation projects, the
several dialogue sessions will be set up between the remaining
contractor which awarded the DBFMO contract is also responsible
candidates and the Contracting Authority, whereby technical, legal
for the operation of the project, which includes, amongst others,
and management issues can be further discussed. Such discussions
facility management. In respect of road and lock projects, the
of course follow the rules of public procurement, which require that
operation of the projects during the exploitation phase remains with
a level playing field for the candidates is maintained at all times.
the Contracting Authority. The reason for this is that the operation
of roads and locks is considered to be a public task where safety is After the dialogue phase, the candidates submit their qualitative bid
paramount. The Contracting Authority for motorway and lock (based on the EMVI criteria) and later on their quantitative bid (the
projects in the Netherlands is the Department of Waterways and final price). Based on the award criteria made known beforehand, the
Public Works, residing under the Ministry of Infrastructure. The preferred bidder will be selected. After the so-called Alcatel term, a
Contracting Authority for accommodation projects is the Central term of 20 days within which competing candidates can file a claim
Government Real Estate Agency, residing under the Ministry of against the appointment of preferred bidder, the preferred bidder
Internal Affairs. becomes final. Contract Close is next. Within a period of
approximately one to four months after Contact Close, Financial Close
takes place. One of the reasons why PFI projects in the Netherlands
Successes and challenges in Dutch PPPs (and in particular DBFM(O) projects) have been quite successful is
that in 99% of all projects, these timelines have been achieved, and up
In the past decade, both Contracting Authorities have taken until now a project has always achieved Financial Close.
considerable efforts to provide market parties with a due process
The fact that Financial Close will always be achieved has created
that enables and ensures the successful tendering of and contracting
considerable comfort with market parties entering into these tender
into these PFI projects. The DBFM and DBFMO contracts are
procedures. That being said, there is also a drawback to this tender
awarded to the preferred bidder via the competitive dialogue
procedure; namely, that it can take up to 12 months and requires a lot
procedure. This tender procedure is meant to provide the
of effort and time of market parties that enter as candidates into this
Contracting Authority with the opportunity to enter into a dialogue
procedure. It has been calculated that the tender costs can be equal
with the candidates for tender and discuss with them – amongst
to 3% to 4% of the total contract price, meaning that for the
others – the risks connected to the project and possibilities to
candidates that are ultimately not selected as the preferred bidder
optimise and innovate the output specification in respect of the
this can be a huge cost. The design fee that the Contracting
project. The competitive dialogue process is laid down in Directive
Authority awards to candidates is not sufficient to cover these costs.

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IPFA Legal Issues of Cross-Border Project Finance

The materiality of these costs has been one of the reasons why investment. The payment mechanism of course differs from PPP
market parties sometimes do not take part in specific tenders. projects where a fixed Availability Payment from the government is
As stated, the fact that after a tender the contract will always achieve the attracting factor for PFI. However, the SDE subsidy grant
Financial Close has been an important factor in providing the available for renewable energy projects provides a similar incentive
market with security in respect of the projects. Another important for PFI, being a fixed income stream over a period of 15 years,
factor has been that the Contracting Authorities have worked since sufficient to repay debt. More recently, there has been a
2004 on a standardised DBFM(O) contract. In 2009, the first development in the renewable energy market, whereby bidders for
standardised DBFM and DBFMO contract was published. And in the SDE grant in respect of (in particular) offshore wind projects
the past decade these standardised contracts have been updated have indicated that they are willing to realise the project without a
based on the lessons learned in previous projects, but also on the subsidy grant (the so-called zero-subsidy bid). This has initially
input given by the market in consultation meetings held by the raised a question in respect of PFI, as to whether this would have an
Contracting Authorities. impact on the appetite of lenders to put forward financing in respect
of these projects. Financiers have, however, indicated that they are
This has led to the fact that important contractual provisions such as
comfortable with providing debt in respect of these projects if and
payment mechanisms, delay and compensation events, core
when there is a corporate long-term PPA connected to the project, to
obligations of the contractor and Contracting Authority, termination
secure an income stream over the course of the project. There have
and compensation on termination are no longer part of the debate,
been structuring discussions as to what the requirements in respect
with parties focusing during the tendering process on the project
of such a corporate PPA should be, and one thing that could be
specifics. Project specifics can be around permitting, ground
required is a floor in respect to the energy price (to take out the
positions, technical issues, etc.
volatility of the energy market).
The Dutch government has taken an important step in
Other differences between PPP/PFI projects and renewable energy
accommodating these PFI projects even further. In the last
projects are the make-up of the sponsors and the type of contracts.
recession, the Dutch government took the position that it was
important that the construction sector and related companies In respect of the sponsors, the renewable energy market in the
remained working. As such, the Dutch government issues a strong Netherlands is booming. There is a large variety of sponsors that are
pipeline of projects with a contract value of over 1.5 billion euros made up out of equity parties and developers active in the Dutch
approximately every year. Furthermore, the Dutch government market. Investors can be quite international, and there is active
issued the so-called Crises and Recovery Act, allowing for a more involvement in the Netherlands from UK, German and Japanese
expeditious process in relation to permits, objections and appeals. investors to name a few. In respect of the sponsors in the Dutch PPP
This meant that there was an increased certainty that projects are market, the number of sponsors able to go through the tendering
also achievable from a public law point of view. process of these sometimes billion-euro projects is limited and has
diminished over the years. These are mostly domestic construction
companies, with a few (mostly Anglo-Saxon) investors.
Transition from PPP to renewable energy for PFI
In respect of the types of contracts, the renewable energy market
mostly makes use of multi-contracting, with different contracts for
In summary, the past decade has been very good for PFI projects in the engineering phase, the construction phase, the supply, the off-
the Netherlands, and many projects have been realised within budget take and the operation and maintenance phase. This multi-
and to plan, and as a result diminishing the governmental budget contracting strategy involves interface risk and in respect of the
costs considerably. That being said, there have also been some bankability of the project this is especially one to look out for. As
projects that have been less successful during realisation, which has mentioned before, the PPP market uses a standardised contract,
caught the public eye. These projects have suffered delays or which is integrated and combines the different phases of the project.
additional costs for multiple reasons, such as difficulties in The DBFM(O) contract is sub-contracted to the builders in a back-
discussions with stakeholders, difficulties in design and engineering, to-back manner, ensuring that all the risks are passed down to the
difficulties in respect of cables and conduits, etc. In DBFM(O) sub-contractors, the only risk residing with the sponsors is the
contracts, all unknown risks are in principle for the contractor, finance risk.
leaving the contractor sometimes with risks that it could not (and
maybe should not) have foreseen when entering into the contract.
Based on some of these experiences the contracts have become more Conclusion
balanced, with the intention to allocate the risks connected with a
project to the party best equipped to deal with that risk. Also, in The Netherlands PFI market has been a hot market over the past
2016, the Contracting Authorities and market parties entered into a decade. Although a change has occurred in respect of the type of
document called the Market Vision, whereby parties set out projects, transitioning from PPP to renewable projects, there is a
principles to ensure that collaboration was again at the forefront of relentless appetite for investors, sponsors and financiers in project
PFI projects (putting back the Partnership in PPP Projects). finance.
Nevertheless, it is true that the PPP market has suffered and that the
appetite of parties to enter into these projects has diminished Focus on Italy
slightly. That being said, the Dutch government still believes that
PFI is an important method of realising projects and efforts are
underway to remedy some of the factors as mentioned above, so that Introduction
risks are again manageable and that the appetite of the market to
take part in these tender procedures returns. The purpose of this part of the chapter is to provide an analysis of
Where PPP projects may be less in numbers at present, the the state of the Italian market for PFI, in light of its evolution over
renewable energy market is booming in respect of project finance. the last 15 years, as well as the trends and prospects stemming from
There are many offshore wind, onshore wind, solar (land-mounted recent legislative developments.
and rooftop) and biomass projects, with a lot of appetite for

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 IPFA Legal Issues of Cross-Border Project Finance

In pursuit of the above, we will first analyse the projects carried out Concerning the procedure undertaken to award a concession under
using a PPP structure, intended as a form of long-term cooperation the project-finance (finanza di progetto) scheme, being one of the
aimed at implementing public infrastructures and managing related agreements included in the list provided by the Italian definition of
services, in the context of which a public entity and private entities PPP, the New Code envisages two different types of tender.
are involved and the relevant financing in favour of the economic In the first type of tender, the public authority publishes the call for
entity owning the project (i.e. the SPV concessionaire) is granted tender in accordance with the feasibility project they have
through a PFI scheme. In such events, the reimbursement of debt is formulated. Bids shall contain a final design, a draft of a concession
guaranteed mainly by the cash flow generated by a potential public contract, and a business plan (piano economico finanziario) attested
contribution granted by the Contracting Authority and/or the by a credit institution; they shall specify, moreover, the
proceeds arising from the operation of the infrastructure. characteristics of the service and operation, as well as report the
We will then continue delving into the examination of the market prior involvement of one or more financial institutions in the project
financed through a PFI scheme, focusing, however, on projects should this be the case.
implemented in a private form with regards to renewable energy The second type of tender pertains to concessions for works not
(therefore, without a public entity being involved), whose included in the public authority’s planning. Economic operators
reimbursement is thus based on proceeds deriving from the sale of may submit proposals to the public authority regarding public works
power produced by the plant and the feed-in-tariff (tariffe and including, inter alia, a feasibility project, a draft concession
incentivanti) envisaged at the regulatory level. contract and a certified business plan.
Within the next three months, the public authority shall evaluate the
The Italian PPP Market proposal’s feasibility and if positive the project, which is subject to
alteration, is then included in the planning and, finally, approved.
According to data released by the government agency DIPE (the Once approved, the project will be at the centre of the tender for the
Italian department responsible for economic policy programming award of the concession to which the bidder is invited and
and coordination), in the course of the last 15 years (2003–2017) the concerning which he is granted a right of first refusal, as well as the
PPP market has become very important for Italy, growing from right to be reimbursed of the costs borne in preparing the feasibility
circa. 331 initiatives in 2003 to a peak, reached in 2015, of 3,334, project.
following which there occurred, in 2017, a slight decline caused by Experience accumulated in recent years has taught us that these
the coming into force of the new Public Contracts Code (Codice dei types of projects exhibit certain critical issues that must be taken
Contratti Pubblici). into consideration, especially during the structuring phase, in order
The PPP phenomenon has grown over time and is now regarded by for them to be handled correctly and efficiently by employing,
the public and especially local authorities as an important where possible, the appropriate contractual provisions. Amongst
instrument for the improvement and upkeep of infrastructures and these issues, it is worth considering in detail the correct risk
public services. The scarcity of resources during these years of allocation that occurs between the private entrepreneur (i.e. the SPV
recession has made this trend, which sees PPP as a possible route for concessionaire) and the Contracting Authority. It is necessary,
the promotion and development of projects, even more apparent. therefore, to find a balance between the establishment of public and
PPP is becoming more and more well-regarded as an approach and private interests, so that the risk in question may be allocated
model for public procurement at the municipal level. efficiently to the party best equipped to deal with it, while also
In recent years, the Contracting Authorities have demanded, in moderating and dealing with the restrictions on the allocation of
particular, works that have an impact on urban territory, in the operational risks imposed by national and European regulations.
context of urban redevelopment, and which are aimed at increasing In recent years, we have witnessed the entrance in the Italian PPP
the number of public services available for residents such as, for market of several international investors; in particular, infrastructure
instance, healthcare facilities, sporting facilities, shopping centres, funds with long-term visions seeking stable and unvarying returns,
car parks, public lighting; these, due to their great demand at the which enter in the capital of SPVs especially once the construction
local level and to a reduced need for economic/financial period is over, and when Italian regulation is less restrictive
contributions, are the PPP projects that are most widespread in the regarding the transferability of the SPVs’ share capital.
Italian market. Coming in second, according of course to the With the aim of providing a boost to Italian public works, on 20
number of projects undertaken and not to their importance, we find March 2019 the Council of Ministers (Consiglio dei Ministri)
the PPP projects in the transport and logistic sectors, such as approved the Decree Law “Sblocca Cantieri”, which will come into
highways, subways, tramlines, airports and ports, and in the grid force in the next few days following its publication in the Official
sector (gas, water and telecommunications). Finally, in these last Journal (Gazzetta Ufficiale). The Decree Law, the contents of
few years, great attention has been paid to the environmental sector, which will not be made wholly available until after its publication,
with regards to, for example, waste disposal, circular economy introduces urgent measures for the revitalisation of the public
projects and energy efficiency. contract sector, as well as measures for speeding up infrastructure
The types of contracts frequently employed by the Contracting projects, rules for streamlining construction work, particularly rules
Authorities in awarding PPP projects can be divided into three main concerning schools, and measures in the event of natural disasters.
categories: public works concession; public services concession, the The text of the Decree Law “Sblocca Cantieri” should consist of
so-called project finance (finanza di progetto); and other forms that five articles regarding, as far as it concerns us, the changes made to
range from financial leasing of public works, to availability the New Code, the regulations concerning awarding in the event of
contracts (contratto di disponibilità), while encompassing mixed a company crisis, and the establishment of special commissioners in
companies (public-private). the event of infrastructural needs of the greatest importance.
Such categories are clarified in the new Italian public procurement As regards the public procurement system, in particular, the Decree
code, Legislative Decree no. 50/2016 (the “New Code”), which was Law should lead to a number of incisive changes, through the
last amended through Legislative Decree no. 56/2017. streamlining of procedures and the restriction of the role played by

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IPFA Legal Issues of Cross-Border Project Finance

the Anti-corruption Authority (Autorità Anticorruzione (“ANAC”)), On the other hand, as far as the waste-to-energy sector is concerned,
as well as regulations raising the threshold for direct awarding of the decree promoting the use of biomethane and other advanced
works and less stringent regulations regarding sub-contracting; it biofuels in the transport sector came into effect on 20 March 2018,
should also re-introduce a single implementing regulation in the the purpose of which is to promote the use of biomethane, favouring
field of public contracts complying with the principles included in advanced biomethane and its relevant production using waste and
the New Code. by-products and integration crops, in line with the provisions set
The Decree Law, as far as we can learn, should include, moreover, forth in Directive (EU) 2009/28 on the promotion of the use of
several of the growth package’s measures designed with a view to energy from renewable sources, as subsequently amended by
revitalising public investment: these range from halving the time Directive (EU) 2015/1513 (the so-called “ILUC” Directive), and
taken for public authorities to reach certain opinions, to Directive (EU) 2014/94 on the deployment of alternative fuels
strengthening PPPs and to exempting non-capital municipalities infrastructure.
from the obligation of using central purchasing bodies for the The goal is to set, by 2020, a target of 10% of renewable energy
tendering procedures. consumption in the transport sector, as well as a sub-target, for
advanced biomethane and other advanced fuels, equal to 0.9% by
2020 and 1.5% by 2021.
Renewable energies for PFI
New incentive mechanisms apply to plants for the production of
With reference to PFI projects implemented and financed in a biomethane, which will become operational by 31 December 2022,
private form, Italy has experienced a very positive period especially and existing biogas plants converted for biomethane production by
with regards to plants producing energy from photovoltaic and wind the same date, and with a maximum limit of potential productivity
sources, owing to the granting of feed-in-tariffs of a duration of 20 equal to 1.1 billion standard cubic metres per year. Premiums are
years from the date in which a specific plant becomes operational. envisaged for the construction of new facilities of gas distribution
both in either compressed, liquefied and/or liquefaction facilities,
It should also be noted that, concerning photovoltaic plants, the pertaining to the production plant.
investors’ eagerness to participate in greenfield projects has
drastically waned due to the fact that the tariffs were no longer In summary, there are three incentive mechanisms: (i) the
granted for newly-built plants, and because of the so-called “decreto production of biomethane distributed by injection into the natural
spalma incentivi” adopted in 2014, providing that the incentives, to gas grid specifically envisaged for transport purposes is incentivised
which photovoltaic plants with a nominal capacity above 200 kWp through the obtainment of the “Certificati di Immissione in
were entitled to, had to be re-determined. Consumo” (“CIC” – Release of Immission Certificates), and as far
as the production of specific raw materials are concerned (i.e.
This led, over the last period, to a standstill in the construction of biomethane produced from the biomass fraction of organic solid
new plants and the rise of interest for investors in M&A operations, municipal waste, “FORSU”) twice the number of CICs are granted
while a market consolidation and an aggregation phenomenon of (double counting); (ii) the production of advanced biomethane
existing plants favouring specialised operators and debt refinancing distributed by injection into the natural gas grid specifically
operations through PFIs have taken place. envisaged for transport purposes is incentivised for a period of 10
With reference to the direction taken by the Italian government, the years by means of (a) the purchase of biomethane by “Gestore dei
European Commission is currently in the process of examining the Servizi Energetici” (the Italian energy services provider) at a pre-
draft of the decree which provides for a new feed-in-tariff to be determined price, and (b) the recognition of the value of
introduced in order for the renewable energy sector to be re- corresponding CICs at a pre-determined value; and (iii) the re-
launched in Italy, the so-called “Decree FER”. The purpose of said conversion of existing biogas plants is incentivised, provided that
decree is to support the production of power from plants powered by such plants are, whether fully or partially, re-converted for the
renewable sources, by establishing incentives and access modalities production of biomethane after the entry into force of the decree.
which promote efficiency, effectiveness and sustainability, both in
terms of the environment and incentive costs, in a manner consistent
Conclusion
with the Guidelines on State Aid for environmental protection and
energy referred to in the communication from the European
Commission (2014/C200/01). The Italian PFI market has experienced practically linear growth
during the last 15 years, despite having gone through a period of
The incentive mechanisms shall apply to plants for the production of
transition due to various factors. A growing number of specialised
power from wind, water, photovoltaic sources and residual gases
operators and well-established compliance to international best
from production processes.
practice make it an attractive market for investors, sponsors, and
Access to tariffs, in particular with reference to photovoltaic plants, financial institutions, which is also due to the implementation of
shall be governed by two mechanisms, depending on the relevant new regulations in the renewable energy and infrastructure sectors.
capacity: plants with a capacity of less than 1 MW are entitled to
incentives subject to a pre-registration process; and plants with a
capacity exceeding 1 MW shall participate in a descending price Acknowledgment
auction. The authors would like to acknowledge the invaluable contribution
In addition to a scenario in which incentive mechanisms are of Sergio Massimiliano Sambri in the preparation of this chapter.
restored, it should also be taken into account that the reduction of Sergio is a partner in the Project Finance and Administrative,
costs for the construction of plants and technical skills gained over Infrastructure and Energy Law departments, and is based in
these years have caused investors in the Italian market to move Grimaldi Studio Legale’s Milan office.
towards the construction of grid-parity plants, resorting to the
execution of long-term PPAs.

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 IPFA Legal Issues of Cross-Border Project Finance

Daphne Broerse Matteo Trabacchin

Norton Rose Fulbright Grimaldi Studio Legale
Amstelplein 1 Via Fratelli Gabba 4
Netherlands Milan, 20121
Italy
Tel: +31 20 46 29 377
Email: daphne.broerse@ Tel: +39 2 3030 9330
nortonrosefulbright.com Email: [email protected]
URL: www.nortonrosefulbright.com URL: www.grimaldilex.com

Daphne Broerse is a projects lawyer (advocaat) based in Amsterdam Matteo Trabacchin is a senior associate in the Project Finance and
and managing partner of the Amsterdam practice. With a combined Banking Finance and Insurance departments, and is based in Grimaldi
administrative law and civil law background, she advises governmental Studio Legale’s Milan office. Matteo specialises in project financing,
authorities as well as private parties on a wide range of issues in the infrastructures and energy. He usually assists lenders and sponsors –
projects sector. in Italy and overseas – in the financing of construction and operation of
infrastructures (among others, rails, undergrounds, hospitals, ports)
Daphne has advised on several major PFI projects and advised on
and renewable and conventional energy projects (wind, solar, hydro,
and negotiated several building contracts. She also has experience
gas storage, LNG), as well as in the sale and purchase of projects. His
with court proceedings regarding administrative as well as civil law.
experience also includes trade finance, acquisition finance, real estate
She started practising in 2001 and has been working as a legal adviser
finance, company law, commercial law and contracts (EPC, O&M,
since 1999 in the field of administrative law and environmental law.
etc.) and physical and financial energy trading. He is co-author of the
Daphne is Chair of IPFA Branch Council: The Netherlands. chapter “La Borsa Elettrica ed i Mercati” in “Il Diritto dell’Energia –
Trattato”, curated by E. Picozza and S.M. Sambri, and published by
CEDAM in 2015.

IPFA is an independent, not-for-profit, professional members’ association dedicated to providing up-to-date information on best practice, industry
trends and new developments in infrastructure and energy. IPFA operates globally, giving members access to an international network of over 600
public and private sector organisations.
We host a continuous programme of 120+ events, webinars and working groups, which are free for members to attend and offer a unique opportunity
to network with senior, decision-making professionals, across the industry. We hold Future Leaders Network (FLN) events that are specifically
targeted at members in junior positions. Other benefits include taking advantage of discounted training courses, facilitated introductions, access to
webinars and a wide range of industry documents and publications.
For further information on IPFA and its activities around the world, please visit www.ipfa.org.

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Chapter 3

Common Structures and Market

Trends in Holdco Financings in José A. Morán

the US Power Industry

Baker McKenzie Juan Carlos Gonzalez Novo

Regardless of the structure used, a holdco financing is a loan made

Introduction
at the holding company level. Such a loan may (or may not) be
secured by assets or revenues of the subsidiaries and operating
Holdco financings are frequently used in the US power industry.
companies (the power generating companies). Generally, the power
This chapter will examine common structures and market trends in
generating company will have entered into a power purchase
such financings.
agreement with an offtaker. The repayment and servicing of these
The concept of lending to a holdco is of course not new, nor is it loans will in many cases depend on the holdco receiving cash from
unique to the power industry. Traditionally, many multinationals one or more operating companies. These operating companies may
have accessed the global debt capital markets through a foreign have their own financing arrangements, which may be traditional
finance subsidiary. In those cases, the finance subsidiary was project financings that are nonrecourse to the holdco or the project
generally incorporated in a tax-friendly jurisdiction exempt from the sponsor. Operating company financing arrangements may include
withholding tax of the jurisdiction of incorporation of the parent construction loans, long-term debt, working capital debt, letters of
company and/or an intermediate holding company. The structure of credit and tax equity financing. The equity structure of an operating
a financing through a foreign finance subsidiary has many project may also affect the financing arrangements, particularly in
similarities with the structure of a holdco financing described in the case of a project that is a JV or has a significant minority
detail later in this chapter. investor.
In a holdco financing, the parent company and/or an intermediate In cases where there is tax equity financing at the operating
holding company generally acts as the borrower under any given company, a holdco financing will be subject to the rights of the tax
credit facility. Under a foreign finance subsidiary financing, the equity investor, in addition to the rights of other claimants at the
finance subsidiary raises debt from investors with the ultimate goal operating company level.
of lending those proceeds to its parent company and/or an
intermediate holdco. The parent and/or holdco accordingly borrows
at a cost lower than that which would be available domestically for Structuring Issues for Holdco Financings
the holdco. In particular, once the foreign finance subsidiary has
received the proceeds of the debt offering, the foreign finance
Structural subordination
subsidiary will on-lend the proceeds to the parent/holdco and then
the parent/holdco will use the proceeds to make separate
intercompany loans to its operating subsidiaries. Further, in many Lenders in holdco financings are structurally subordinated to claims
instances the business rationale for holdco financing lies in the of creditors of the holdco’s operating company subsidiaries.
optimisation of the financing allocated into each of the business Generally, in any bankruptcy of a subsidiary, all claims of creditors
units and/or operating subsidiaries in order to increase of the subsidiary must be paid in full before the parent can receive
accountability and funding autonomy in the same currency where any money from the subsidiary. This can be especially concerning
cash flows are originated, and gain increased flexibility. if the holdco has no assets other than equity in its subsidiaries, and
the operating companies have material assets and revenues that their
Holdco lending in the power space encompasses a wide range of
direct creditors have first crack at.
financing structures, from unsecured financings for mature
companies to highly leveraged and complex structures. Some of the Lenders to a holdco should recognise that they will be structurally
issues discussed below, such as structural subordination, are subordinated to trade creditors of the operating company, as well as
encountered in all holdco lending transactions, while other issues set to lenders at the operating company level (and whether or not such
forth below reflect concerns that are distinctive to the way that lenders have collateral at the operating company level). By
power projects are financed in the US; in particular, with respect to comparison, even an unsecured lender at the operating company
tax equity financing of operating companies in the renewable energy level would be pari passu with the trade credit at such level.
space. In the renewables space, a holdco loan is sometimes referred In order to address this risk, holdco financings frequently limit the
to as “back leverage” or a mezzanine loan. amount of debt that can be incurred by operating company
Sponsors find holdco financing attractive in that it can provide subsidiaries, and couple this with a negative pledge covenant
increased flexibility and provide a source of cheaper financing than covering assets of the operating company. Holdco financings also
other alternatives. Holdco financing can allow a sponsor to finance frequently contain restrictions on operating company capital
its equity contribution to an operating company. expenditures and other activities, including a restriction on the

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 Baker McKenzie Common Structures and Market Trends in Holdco Financings

operating company agreeing to include in its debt instruments or In renewables financings, the tax equity investor will need to agree
other agreement restrictions on dividends, asset sales and negative to permit some cash distributions to the holdco.
pledges (sometimes referred to as a “double negative pledge”).
Holdco access to cash flows of operating companies
Collateral and guaranty packages
Operating company organisational documents and financing
In secured holdco financings, one of the most challenging aspects is documents frequently contain restrictions on the ability of the
whether the assets and revenues of the operating companies are operating company to pay dividends to the holdco. Financing
available to secure the financing (and, if available, the extent of the agreements at the operating company level may also contain cash
availability). The collateral and guaranty packages that lenders seek sweeps and reserve requirements that tie up operating company
depend heavily on the credit profile of the holdco and the financial cash. Therefore, in addition to the due diligence of the power
model, including the creditworthiness of the purchasers or offtakers offtake arrangements and revenue streams at the operating company
under each of the power purchase agreements entered into by each level, holdco lenders need to understand the effect of such
power generating company. restrictions on the ability of the operating subsidiaries to upstream
As noted above, restrictions contained in the organisational cash to the holdco to enable the holdco to service its debt.
documents and financing documents at the operating company level In tax-advantaged structures, the tax equity investor will frequently
may prohibit or severely limit the extent to which the operating require the sponsor to make representations with respect to certain
company may provide collateral or credit support for a holdco matters (such as the date the property is placed in service), as well as
financing. If there is no senior debt or tax equity component, to covenant as to certain matters. The sponsor will be required to
lenders to the holdco may well require security in the assets of the indemnify the tax equity investor for any loss of tax benefits or any
operating company. acceleration of rental income due to a breach of any such
To the extent that the operating company provides collateral for or a representation or covenant. The tax equity investor will also be
guaranty of the holdco debt (generally known as upstream entitled to tap operating company cash flows (and thus reduce
guarantees), such credit support may be subject to fraudulent distributions to the holdco) in order to pay such indemnification
conveyance risk if the operating company is insolvent or receives obligations. It is also common for the equity investor to require that
less than reasonably equivalent value for such credit support. The it be entitled to attach operating company cash flows if the target flip
receipt of reasonably equivalent value should not be an issue to the return is not achieved by a certain date.
extent that the operating company receives the proceeds of the Back leverage lenders will ordinarily use financial modelling to
holdco loan or the proceeds of such loan are otherwise used for the assess the likelihood that any such interruption in cash flow will
benefit of the operating company. occur and will use this modelling to size and price the back leverage
The assets of the holdco may be collateral, including the equity of facility.
the operating companies and the right to receive payment from the Alternatively, many back leverage deals include an indemnity or
operating companies (including pledges over the bank accounts of guaranty by which the sponsor agrees to contribute to the holdco, for
the holdco where such payments will be received). The equity in the the benefit of the holdco lender, cash to cover any diversion of cash
holdco may also be pledged to secure the holdco debt. to the tax equity investor. Other deals have included a cash reserve
A pledge of equity in the operating companies or in the holdco may (or credit enhancement) that can be tapped to protect the lender from
be restricted by change of control provisions in operating company the effect of these diversions.
organisational documents and financing documents. These
provisions may be triggered upon the pledge of equity, upon Documentary protections
foreclosure of the pledge or both.
The holdco lender should expect that a tax equity investor will have Holdco lenders will generally restrict the ability of the holdco to
a right to consent to any transfer of equity upon an enforcement of agree to amendments of the operating company organisational
the lender’s pledge. The lender will typically negotiate with the tax documents and financing documents that would make them more
equity investor to set qualifications of a permitted transferee – such restrictive and impose further restrictions on distributions to the
as net worth or experience requirements – upfront rather than be holdco.
subject to seeking consent after a default has occurred. Holdco financings are without a doubt a common tool used by
companies to improve their capital structure by setting an optimal
Coordination with terms of operating company documents level of debt in their operating subsidiaries and reducing debt at
other levels in the corporate structure. Further, holdco financings in
There is a wide variety of financing and governance structures used an environment of a foreseeable rise in interest rates can allow the
by operating companies. These include partnership flip structures parent to stabilise the cost of debt without significant fluctuations.
and sale-leaseback structures. Many of these structures are Terms and maturities of power purchase agreements are changing in
designed so that tax equity investors in the operating companies light of the boom of “corporate power purchase agreements”, and
may take advantage of tax benefits. The holdco lenders will need to this may have a bigger impact in the use of holdco financings as a
understand these structures and the tax benefits intended to be method to finance multi-utility companies worldwide.
provided thereby, and that the needs of the tax equity investor will
impose limitations on the rights of the holdco lenders. The rights of
the tax equity investor at the operating company level will be senior
to the rights of the holdco lender.

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Baker McKenzie Common Structures and Market Trends in Holdco Financings

José A. Morán Juan Carlos Gonzalez Novo

Baker McKenzie Baker McKenzie
300 East Randolph Street, Suite 5000 300 East Randolph Street, Suite 5000
Chicago, IL 60601 Chicago, IL 60601
USA USA

Tel: +1 312 861 2829 Tel: +1 312 861 7976

Email: [email protected] Email: [email protected]
URL: www.bakermckenzie.com URL: www.bakermckenzie.com

José is a partner at Baker McKenzie and chairs the Firm’s Global Juan is a partner in the Banking, Finance & Major Projects Practice
Energy, Mining & Infrastructure Practice Group. Jose serves as Group of Baker McKenzie, based in Chicago. Juan’s practice focuses
counsel in project finance and infrastructure transactions, moving on acquisition and project finance transactions in the US and Latin
complex projects through development, financial closings and America, particularly those related to water, energy and infrastructure
operations. As a dually admitted lawyer (NY and Spain) José development. Juan is a dually admitted lawyer (NY and Spain).
represents lenders, private equity funds, developers, institutional
investors, and multilateral and bilateral agencies on domestic and
international transactions.

Baker McKenzie is one of the world’s most active project finance law firms. We advise sponsors, developers, financial institutions, investment funds,
governments and governmental agencies on project development and financing across a wide range of industry sectors, including oil and gas, power,
renewable energy, transport, water and social infrastructure on a full array of development and financing structures, including limited recourse
financing, capital market issues, Islamic finance and project bonds.

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 Chapter 4

Current Trends in
LNG Development Julia A. Czarniak

and Construction
Skadden, Arps, Slate, Meagher & Flom LLP Gregory D. Howling

financing reflected successful execution by Qatar Petroleum and its

I. LNG Project Development: A Brief
partners of the earlier projects.
History
There are upsides and downsides to this integrated structure
employed by projects like RasGas. One major upside from the
For multiple decades now, LNG export projects developed and
financiers’ perspective is the integrated project’s ability to benefit
constructed around the world have consistently appealed to lenders
from strong sponsor support – in RasGas’ case, completion support
involved in project financings. In many respects, LNG export
from the sponsors as well as the implied ongoing support of the
projects are perfectly suited to what we think of as a “classic”
Qatari government. Given the upstream component of any
project financing: their development and construction phases are
integrated project, such projects require significant equity
capital-intensive; and they recoup their high development and
investment of the kind that only large multinationals and state-
construction costs by attracting creditworthy offtakers, including
owned sponsors have the financial wherewithal and industry
large oil and gas conglomerates, to purchase LNG pursuant to long-
experience to provide. At the same time, such projects can achieve
term sale and purchase agreements. Though LNG projects and
higher leverage ratios, with third-party financing covering more
related project financings follow different structures – from fully
than the total cost of the liquefaction components of the project
integrated to tolling and trustee borrowing structures, some of which
alone as the lenders are able to include the upstream assets in the
will be discussed in more detail below – these features of LNG
overall project’s value. On the downside, however, the lenders need
development and construction are present in virtually every major
to get comfortable with the upstream risk (e.g., the quality of
LNG export project.1
reserves as well as the project parties’ ability to safely drill, extract
That said, LNG export projects that are brought to the project and deliver hydrocarbons to the LNG plant). In addition, from the
finance markets as of early 2019 have evolved significantly in lenders’ standpoint, the interconnectedness of components of an
structure and risk allocation from their counterpart projects that integrated project creates a potential domino effect where
were first funded through traditional project finance methods, underperformance in one area of the project’s value chain cannot be
beginning more than 20 years ago. For example, in December 1996, separated from another (e.g., in an integrated project which involves
Ras Laffan Liquefied Natural Gas Co. (RasGas), which in broad extraction of field and gas condensate, there is an additional
strokes comprises an incorporated joint venture between Qatar considerations relating to sufficiency of condensate storage and
Petroleum and Exxon Mobil Corporation, raised an initial $2.55 lifting, since reaching storage capacity for condensate could lead to
billion of debt financing from export credit agencies (ECAs) – more curtailment in LNG production) and lenders need to identify,
on them later – and in the capital markets to fund the first two mitigate and, where a risk cannot be completely mitigated, properly
liquefaction trains at RasGas’ project in Qatar.2 At the time of the allocate such risks among the various project participants.
initial RasGas financing, the ECAs, the rating agencies and bond
Now that the US has become a major exporter of natural gas
investors were evaluating what is known in the LNG industry as a
(following recent discoveries of natural gas wells and the use of
“fully integrated” project, by which we mean that the relevant
fracking as a means of extraction), US LNG export projects have
project company who owns the LNG production trains also has an
benefited from abundant gas supply and the market’s corresponding
ownership stake in all other components of the project, such as
view that US LNG export projects have minimal gas supply or other
hydrocarbon extraction and delivery of hydrocarbons to the project
upstream risks compared to their international counterparts. Thus,
site. In addition to its direct ownership of the project’s liquefaction
US LNG export projects that have reached financing stages or have
trains themselves, for example, RasGas received a concession from
been successfully project financed have a much more disaggregated
the Qatari government to drill for, produce and sell natural gas from
structure than early-stage LNG financings like RasGas. This trend
certain formations of Qatar’s voluminous natural gas fields.3 In
is only continuing to accelerate, especially in the US, as we write in
addition to the upstream assets and liquefaction and storage
the first half of 2019. In the disaggregated structure, broadly
facilities comprising the RasGas LNG project, for the purposes of
speaking, the project company seeking financing will usually only
providing financing to the project, the lenders diligenced not only
own the liquefaction trains themselves and necessary ancillary
offtake agreements but also the shipping arrangements and port
equipment and, in some (but not all) cases, export terminals and
facilities on both the loading and receiving side. From this starting
berths and storage tanks. Under this framework, gas will be
point, RasGas and its affiliates began a years-long period of
supplied by third-party vendors and LNG will be purchased by
securing several rounds of financing and refinancing, with
third-party offtakers, ideally with title to the gas being transferred at
additional trains receiving their initial stage project financing up
the project company-owned LNG facility. An affiliate of the project
through 2009.4 Project financing terms with each succeeding

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Skadden, Arps, Slate, Meagher & Flom LLP Current Trends

company often will own a lateral pipeline that connects the export equity, the better the debt service coverage ratio (i.e., the less exposure
project to nearby interstate gas pipelines, but this affiliate will be lenders will have in recouping their costs). In addition, lenders take
distinct from the special-purpose project company and lenders may additional comfort from a larger amount of “at risk” equity capital
sometimes require that these pipeline affiliates be included in the provided by the sponsors; in other words, the more “skin in the game”
project financing for the purposes of the collateral and covenant sponsors have by investing equity in their projects, the greater their
packages. incentives to see the project through to completion. Throughout most
Projects and sponsors are exploring and adopting different of the history of LNG export project financings, equity to cover the
approaches in an effort to minimise project costs. While LNG minimum thirty per cent (30%) of project costs was provided by
export project structures have evolved in recent years, the market sponsors, who were more often than not large oil and gas
for LNG has been particularly robust, and there has been fierce conglomerates, sovereign-owned oil and gas companies or a
competition among project companies to enter into sale and combination of the two. Most of these companies did not have a need
purchase agreements with creditworthy offtakers, which has pushed for third-party equity funding, which is more expensive to obtain than
sponsors to reduce construction costs so that they can offer more senior debt, and satisfied the equity portion of capital costs by funding
competitive terms to their customers. In response, in the US, we the upstream part of the development. Lenders were able to rely on
have seen a trend towards modular fabrication and construction, those sponsors’ credit and operational histories and knew that such
whereby the liquefaction train equipment and materials are largely sponsors had the know-how and liquidity to back up their economic
manufactured offsite. In theory, modular fabrication should incentives to see their projects succeed.
minimise time spent on construction work on the ground, in that the As mentioned above, because the US has only very recently and
principal construction contractor on-site should only have to install very quickly become a major exporter of LNG, sponsors of the first
the equipment once it arrives. However, even though project wave of US LNG projects have not yet had the opportunity to
sponsors have begun to realise certain efficiencies in developing and establish a credit history or track record that can compare to
constructing LNG projects, including through modular construction multinational oil and gas companies with internal funding sources.
and planned expansion of those projects in multiple phases, the With this in mind and the fact that project finance lenders will not
possibility for tension between sponsors and capital providers extend senior debt in excess of seventy to eighty per cent (70–80%)
nevertheless exists and perhaps is augmented by such a of the project costs, the ability of new sponsors in the US to secure
disaggregated approach. For example, it remains to be seen how the private equity or mezzanine debt financing is practically imperative
lenders price this risk in light of the construction delays some US to ensure sufficiency of funds for the development of the project.
LNG projects have experienced, with Cheniere’s projects having The contours of the mezzanine debt or private equity investments
been an exception. Internationally, we have seen sponsors develop that these new sponsors seek can range from the relatively
“megatrains” that are capable of producing close to 8 MTPA of LNG straightforward to the more complex combinations of preferred
on their own. Megatrains were initially implemented and financed equity and back-leverage on such preferred equity. In a standard
as part of the Qatargas II project, where Trains 4 and 5 have mezzanine debt, for example, an institutional investor may provide
nameplate capacity of 7.8 MTPA of LNG. high-yield debt that is structurally and/or contractually subordinated
This chapter will discuss in more detail trends in financings of LNG to the senior project-level debt. Private equity firms may take an
export projects, with a focus on those located in the US. In part II of ownership stake in the sponsor or in the project company itself,
this chapter, we will examine how project sponsors and developers often negotiating a preferred stake that entitles them to certain
are frequently turning to new sources of financing, including private voting rights and preferential distributions. The private equity
equity and mezzanine lenders who support less-experienced investors will look to protect the value of their investment through
sponsors and help satisfy a project’s capital requirements, and how requiring approval over such major decisions as, among others, (i)
the roles of “more traditional” project finance lenders (like ECAs amendments to or terminations of material project documents, (ii)
and bondholders) have adapted to account for the LNG industry’s the entry into new material project documents, (iii) the approval of
evolution. Part III of this chapter will analyse new trends in any project expansions (to build additional LNG trains, for
allocation of construction risk and mitigation, with sponsors example), (iv) the incurrence of additional material debt, or (v) the
offering alternative solutions to the traditional engineering, issuance of additional equity. Private equity investment directly
procurement and construction (EPC) framework to achieve cost into the project company itself presents an interesting wrinkle for
savings. Finally, part IV of this chapter will touch on regulatory the lenders to the project company, since the lenders will need to be
considerations, which are attracting more and more attention from assured that the project company’s organisational and governance
the lenders given challenges to some of the LNG projects. documents sufficiently limit the private equity investor’s
interference in operational and technical matters of the project.
These tensions are mitigated by third-party equity investment into a
II. Sources of Financing holdco one level above the project company, which puts the details
of these arrangements largely outside of the scope of project lenders
review, subject solely to the change in control provisions. Having
A. Mezzanine Financing and Private Equity Investment
equity invested at the level above the project company exposes
equity investors to additional risks for which they expect to be
A “traditional” project financing of an LNG export project – to the
compensated in their returns. The markets have accepted these risks
extent such a thing as a “traditional” project financing exists –
and we have seen structures where even minority equity
typically calls for a debt-to-equity ratio of no more than 70:30 so that
investments into the project company can be financed, as long as the
the project’s contracted revenues and repayment schedule aligns with
lenders have sufficient comfort on the approval rights mentioned
overall economic expectations. In other words, the amount of project
above in addition to the project economics. The main advantage of
finance debt incurred by the project company is usually capped at
mezzanine financing and why we think this trend will remain very
around seventy per cent (70%) of the overall project’s costs, with the
strong in 2019 is the ability to sculpt to the needs and payment
remaining thirty per cent (30%) of project costs supplied by equity
profile of a particular project. Availability of this third-party equity
contributions. The higher the portion of project costs funded with

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 Skadden, Arps, Slate, Meagher & Flom LLP Current Trends

and its flexibility is becoming more important with the need to compensated through the price of LNG). While ECA financing
provide a substantial cushion to cover any potential cost overrun requires heavy upfront diligence and involvement of the ECAs and
risk (as will be discussed below in part III) and, given preferred but their advisors, such financing is typically long term and can be
capped returns to these equity investors, sponsors should still prefer obtained on quite competitive terms. We are also hopeful that if
it to dilution of sponsor equity, especially for a contingent risk. U.S. Eximbank is reauthorised and has its board approved in 2019,
it can play a role possibly even in domestic LNG projects, since they
would be eligible export projects.
B. ECAs

ECAs are generally governmental or quasi-governmental entities C. Intercreditor Issues

that support the export of their host countries’ manufactures and
industrial production. ECAs have been around for practically a As alluded to above, because of the number of different financing
century: many were founded in the wake of World War I to revive parties that often lend to LNG projects and the diversity of the
host countries’ exports and trading capacity that had been decimated overall capital stack, special care needs to be taken to anticipate and
or at least severely constrained during and after that conflict, which address issues that may arise among the various creditor groups.
was sustained through the later economic downturn of the late 1920s Not unexpectedly, ECAs, project bondholders and commercial bank
and 1930s.5 lenders, all of whom are common sources of LNG project debt
For as long as there have been LNG export projects seeking access financing, will sometimes have competing priorities. One common
to the project finance markets, ECAs have invested in those area where the credit groups’ incentives may not align can involve
projects, typically providing their own tranche of debt that shares the covenant package – to take just one example, banks may be
pari passu in the project company’s collateral package alongside the more sensitive than bondholders to compliance with certain
other senior lenders. In addition (or sometimes as an alternative) to environmental requirements, owing to more stringent internal
direct lending, ECAs’ participation can take the form of indirect requirements and standards, and can require that the financing
credit support (known as ECA “coverage” or an “ECA-covered documents’ amendment procedure require bank approval before
facility”), such as a loan guarantee or insurance. A further modifying one of these “fundamental” provisions. The terms of the
advantage of using ECAs as a financing source, especially as bonds would typically provide that, except for amendments to the
compared to a wide-reaching capital markets offering, is that economic terms of the bonds, no vote of the bondholders is required
sponsors only need to interface with a relatively small and bespoke as long as sufficient vote of other lender groups is secured (despite
group of ECAs, lessening the worries of sponsors who are sensitive the fact that with different maturities, the interest of commercial
to disclosing the terms of their offtake agreements or who would banks and the bondholders may not always aligned). Where ECAs
prefer not to endure the procedural hurdles involved in obtaining a are involved, intercreditor issues can be even trickier, depending on
waiver or consent from a large group of debt holders. the ECAs’ individual policy-specific rationales as well as the need
to be treated equally with each other ECAs. Additionally, as a
In many ways, the ECAs’ interest in LNG projects should be no
general matter, sponsors should expect banks and ECAs to be more
surprise, owing to the capital-intensive nature of the projects and
active in loan administration than bondholders. The ECAs’ policy-
sponsors’ and construction contractors’ need to procure highly
derived investment strategies commonly manifest themselves in the
specialised equipment and materials from around the world to
form of certain “golden” votes that allow them to veto lenders’ or
incorporate into their projects, and because many LNG projects
bondholders’ decisions.
have been first-of-their-kind in emerging markets and political
insurance and government-to-government financing provided Consequently, any intercreditor arrangement with respect to an
important political support and coverage. ECAs who are repeat LNG project financing needs to provide for an efficient procedure
participants in LNG projects financings include, among several for approving amendments and waivers to the main financing
others: the Japanese Bank for International Cooperation (JBIC), documents. Note also that mezzanine lenders, to the extent that are
whose representative financings include the Cameron and Freeport not party to the senior intercreditor arrangement, may require their
export projects (US); the Export-Import Bank of Korea (KEXIM), own intercreditor arrangement depending on how the debt is
whose recent representative financings include the Coral South structured.
floating LNG project (Mozambique); U.S. Eximbank, which until
2016 has participated in a number of international LNG projects; III. Construction Risks and Considerations
and Compagnie Francaise d’Assurance pour le Commerce
Exterieur (COFACE), whose representative financings include the
As mentioned in part I, an LNG project sponsor’s ability to provide
Coral South floating LNG project (Mozambique) and the Yamal
completion support has traditionally been a prerequisite for any
project (Russia). As can be seen from the list above, while ECA
LNG project financing. However, the history of US LNG export
involvement in LNG facilities is commonly associated with
projects shows that a given project’s construction contracts can
international projects, ECAs have recently become active in
determine whether that project is financeable. Some of the initial
financings of US LNG export projects like Freeport and Cameron,
project-financed LNG projects in the US negotiated a fixed-price,
as well as rumoured participation in Jordan Cove LNG.
turnkey EPC contract with a creditworthy contractor, but the need to
While they may not be needed for political coverage or currency reduce construction costs to make LNG export projects more
convertibility, ECAs can play an important role in the US LNG competitive has produced a disaggregated contractual structure that
export projects. Given Basel III constraints, commercial banks are can lead to new construction-related risks.
not in a position to provide maturities beyond seven years; thus, any
project using commercial loans is (implicitly or explicitly) planning
A. Completion Support
a bond take-out or other refinancing at the end of the construction
period. In the current interest rate environment this introduces a
certain level of uncertainty which may have implications for returns In a traditional LNG project financing, lenders to LNG projects
to equity (given that any interest rate increase could not be frequently look for sponsors to provide some form of completion

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Skadden, Arps, Slate, Meagher & Flom LLP Current Trends

support or guarantee to mitigate construction delays and further benefit from performance guarantees under two contracts,
underproduction or other underperformance of the facility. Because the EPC contract with the main contractor and another with the
of the capital-intensive nature of LNG projects, lenders units’ manufacturer, though this necessarily presents an
understandably would like as much assurance as possible that the administrative burden to the project company as there are multiple
sponsors will see a project through to completion, as the completed guarantees and liquidated damages regimes to enforce.
project is the only source of debt repayment. To refer back to our A new challenge is presented by having the project companies
discussions in parts I and II, LNG project sponsors have historically directly contract with an additional contractor, however: the project
been able to provide creditworthy completion support, often in company must find a way to properly allocate testing and
addition to the fixed price turnkey EPC contracts, technical installation oversight responsibilities. One way to mitigate the
expertise and equity commitments to cover delays and cost difficulty of making this allocation, and the related possibility that
overruns. the contractor and the liquefaction system supplier blame the other
Completion support of the type traditionally required by lenders in if a performance tests demonstrates inadequate production levels, is
international financings is not possible with entrepreneurial to establish a contractual dispute resolution mechanism to which
sponsors who have up to now led the development of US LNG each of the project company, main contractor and liquefaction
export projects, which have limited credit history and are often system supplier agree. Special care also needs to be taken to ensure
thinly capitalised. None of the financings of US LNG export that the main contractor and liquefaction system supplier do not step
projects to date have included full guarantees of construction debt in on each other’s toes while on-site, in which case it is prudent to
the event that project completion does not occur by a specific date charge the main contractor with oversight abilities so that all
that is negotiated in the relevant credit facility. The first successful personnel are properly situated.
US LNG export project financing by Cheniere mitigated this risk by In concept, one would expect that the trend towards modular
entering into a fixed-price, turnkey EPC contract with Bechtel, a fabrication of the liquefaction equipment to shorten a representative
contractor with high credit and extensive experience in the LNG LNG export project’s overall construction schedule. This is true –
space. As will be discussed in more detail in sub-part B below, because the main equipment, the liquefaction trains and in some cases
given the absence of completion guarantees from US export projects the power generation facilities, is fabricated offsite, the balance-of-
and the pressure to avoid a contractor’s premium,6 sponsors are plant contractor has the room and the time to perform site preparation
looking for alternative solutions to allocate construction risk in and begin building ancillary facilities on-site without being physically
LNG projects being brought to project finance market. impeded by the process of manufacturing such equipment. However,
in reality, the Freeport and Elba Island LNG projects in the US are
B. Revisiting the Traditional “Lump-sum, Turnkey” EPC both experiencing construction delays – and a shorter schedule also
Contract; Construction Delays in the “Disaggregated” makes any delays more pronounced. For example, if liquefaction
Contractual Framework trains, which will usually arrive in the latter part of the construction
period (assuming a disaggregated project structure utilising modular
Developers in the US are moving away from what has long been construction) after the balance-of-plant contractor has performed
viewed as the market expectation for project finance: a single lump- much of its preparation work, are delayed, that could result in a delay
sum, turnkey EPC contract with one primary construction contractor period where the balance-of-plant contractor is effectively sitting idle
who guarantees, or “wraps”, the design, engineering, procurement, at the project site waiting for something to install. Sponsors thus need
construction and testing of the entire project for a fixed price (subject to build in a sufficient cushion in their offtake agreements to ensure
to customary change orders). The reasons for this, we believe, are that the guaranteed dates by which they need to start making LNG
two-fold: with quite significant downward pressure on project costs, deliveries available for purchase fall well after the initially scheduled
contractors are reluctant to take the risk of wrapping a facility’s project substantial completion date.
design and construction without appropriate compensation;7 and the From the financing standpoint, lenders prefer a single point of
sponsors believe that they are as well-positioned to manage responsibility for construction. If anything goes wrong with a
construction risk through a combination of other solutions. project subject to a bifurcated EPC contract structure, in addition to
Due to the increased use of modular fabrication of liquefaction any dispute with the balance-of-plant contractor, a dispute on
trains, contractors and sponsors alike have warmed to a framework allocation of responsibility between the contractor and an
of having a manufacturer provide and guarantee performance of the equipment supplier is almost assured. Lenders traditionally prefer
liquefaction trains and have the contractors first install the to pay a turnkey premium to avoid this as they do not directly
liquefaction trains delivered by the manufacturer and complete the benefit from the savings resulting from the bifurcated approach,
construction of the balance of the export facility. On one hand, the except to the extent that sponsors are able to meaningfully reduce
contractors benefit from no longer having to guarantee the their exposure. Acceptability of this disaggregated approach may be
performance of equipment with which they have limited technical very project-specific based on the strength and experience of the
knowledge: the fabrication of modular liquefaction systems for use sponsor management team, sufficient equity cushion to cover delays
in large-scale financeable projects is still limited to a relative few and cost of any dispute, adequate carve-outs from the contractors’
players, like GE and Siemens. On the other hand, savvy sponsors and suppliers’ limit of liability (to incentivise contractors and
should realise certain cost savings: the balance-of-plant construction suppliers to achieve necessary production levels without paying
contractor will charge a lower premium for the performance of its down liquidated damages), and a sufficient cushion in the
work since it does not have to take the risk of the liquefaction construction schedule before the LNG offtakers have termination
systems underperforming, and the manufacturer of the liquefaction rights, if any.
system should also charge a lower premium than the main
contractor would have, since it should be assured of its technology C. Labour Considerations
and can perform corrective work much more easily. Some of these
cost savings can then be passed onto the offtakers and make the
Labour considerations represent a component of construction risk
project more competitive and attractive. The project companies
which should be assessed and which we believe are likely to be

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prominent for the second phase US LNG financings. Large-scale, concerns because the project must align with the policy preferences
capital-intensive project development will have significant impacts and trade objectives of the sponsor’s and ECA’s host countries.
on local labour markets in the areas where LNG projects are built. Though US LNG projects traditionally carry much less regulatory
Developers and contractors will need to have sufficient access to uncertainty when compared to international projects, owing mainly
both craft and non-craft labourers when designing, engineering, to the US’s relative governmental stability over time and the relative
constructing and overseeing any project. However, the coastal absence of the geopolitical risks discussed above, LNG projects in
regions where LNG export projects are built may be particularly the US remain subject to challenges posed by non-governmental
difficult to access – think of shipping channels in the Mississippi organisations (NGOs) and local opposition under the current
Delta in Louisiana, for instance – and contractors may have regulatory environment. Historically, NGOs have challenged
challenges in recruiting labourers to come work at a given project, required approvals for US LNG export projects issued by the
which will still take years to complete even if construction Federal Energy Regulatory Commission (FERC) and US
schedules are improving, if the region where a project is located has Department of Energy (DOE), including export licences, on
deficient labour supply. Thus, depending on location, ease of climate-change grounds. These efforts have largely been
access, length of the construction period and other factors, unsuccessful, as US agencies cannot rely on effects outside the US
contractors will likely need to factor in a premium for labour costs as a reason to deny approvals.
as part of their contract price. Additionally, contractors will have to
Indications are that NGOs (such as the Sierra Club) are re-evaluating
factor in any difficulty in securing and recruiting workers to the
their approach, however. One new approach NGOs have adopted is
project site into their overall schedules, since any delay in
to coordinate local interests in opposition to LNG projects, with a
recruitment could affect the critical path of the entire project’s
focus on halting development of specific portions of a project (like
construction and lead to increases in cost. According to the
the gas supply pipeline) to stymie the construction progress of the
construction industry executives, tighter restrictions on immigration
entire facility. This strategy involves challenging certain permitting
in the US are also affecting availability of skilled labour. Note also
activities on the basis of local impacts and landowner rights in
that material project contracts will often specify that strikes or other
addition to the broader environmental justice strategy.
labour disturbances that are not limited to the specific contractor or
Unsurprisingly, this approach has a longer time horizon than simply
job site entitle contractors to force majeure relief, presenting another
challenging the major FERC and DOE approval milestones. To date,
obstacle to achieving the original project schedule.
local opposition to US LNG projects has found limited success (e.g.,
the Jordan Cove project in Oregon), but less so in the Gulf region.
D. Geographic Considerations

V. Conclusion
As mentioned above in sub-part C, because LNG export projects are
usually located in coastal areas or other well-travelled shipping
US LNG projects have significant need for development capital and
channels – again, think of the Gulf Coast in Texas and Louisiana,
for new sponsors without very substantial internal funds, project
which is frequently targeted by hurricanes – they are particularly
financing remains the best-suited vehicle for raising development
susceptible to major weather occurrences, floods and other casualty
debt. In the US, to supplement “traditional” project finance sources,
events. As a result, developers and their lenders and investors must
mezzanine debt and preferred equity are also increasingly available
adequately ensure the project site is sufficiently protected against
to these projects. That said, the recent trend away from lump-sum,
force majeure and casualty events of this magnitude. Sponsors and
turnkey EPC contracts presents new challenges to both the senior
their lenders and investors should engage environmental and
and mezzanine lenders and requires careful evaluation, mitigation
insurance consultants as appropriate to evaluate how the project has
and allocation of construction risk. Regulatory and permitting
mitigated these risks. But even with adequate insurance, hurricanes
trends need to be carefully monitored. Lenders, investors and
Ike and Harvey have resulted in construction delays on many
sponsors need to be aware of and sufficiently address each of these
industrial projects along the Gulf Coast due to demands on labour
new, relatively idiosyncratic aspects within the wider context of the
and materials in, as well as delays in shipment of materials and
entire project and typical expectations for financing.
equipment to, the affected areas.

IV. Recent Regulatory Developments Endnotes

1. This chapter will not discuss LNG-to-power projects but

Regulatory considerations are always present in any LNG project rather will focus on the liquefaction part of each LNG project.
financing, though to varying extents based on the applicable
2. “The Evolution of Ras Laffan Liquefied Natural Gas Co.
project’s location. Projects located in developing economies, in
LTD. (RasGas)”, by Neil B. Kelly, Managing Director, Ras
particular, need to be evaluated for geopolitical risks, like Laffan Liquefied Natural Gas Co. Ltd., Twelfth International
expropriation and currency risk – a project may receive revenues in Conference & Exhibition on Liquefied Natural Gas, Perth,
local currencies, or there may be host country requirements that debt Australia, May 4–7, 1998.
be denominated in a certain currency, requiring an adequate hedging 3. Ibid.
programme to counter foreign exchange fluctuations – that are
4. Ibid.
common to cross-border project finance transactions. LNG projects
must work with regulatory regimes governing the transport and sale 5. “The Role and Importance of Export Credit Agencies”, by
Raquel Mazal Krauss, The George Washington University
of gas or other commodities in their host countries. In some
Institute of Brazilian Business and Public Management
respects, in the LNG space, many of these aforementioned concerns Issues, Fall 2011.
are mitigated by the already high level of host government
6. By way of background, in the IPP space the turnkey premium
involvement in the development of LNG exports. Think of a Qatari-
is estimated to be ten to fifteen per cent (10–15%) of project
sponsored LNG project or a financing involving ECAs – these costs.
projects will address many of the geopolitical and regulatory

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7. McDermott International (a successor to CB&I), a contractor Robert is an associate in the Energy and Infrastructure Projects
on Cameron LNG, took a write-down because of the extra Group at Skadden. He represents clients in transactions related to
costs related to the construction. It was reported that as a the development, financing, acquisition and sale of a wide range of
result, McDermott backed away from signing the EPC energy and infrastructure projects, including representations of
contract to build NextDecade’s Rio Grande LNG terminal in lender groups in connection with the financing and ongoing
Brownsville, Texas.
administration of LNG, natural gas, petrochemical and shipping
projects located in the United States and Middle East.
Acknowledgment
The authors would like to acknowledge the invaluable contribution
of their colleague, Robert B. Warfield, in the preparation of this
chapter.

Julia A. Czarniak Gregory D. Howling

Skadden, Arps, Slate, Meagher & Flom LLP Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square Four Times Square
New York 10036-6522 New York 10036-6522
USA USA

Tel: +1 212 735 4194 Tel: +1 212 735 2543

Email: [email protected] Email: [email protected]
URL: www.skadden.com URL: www.skadden.com

Julia A. Czarniak is a partner in the Energy and Infrastructure Projects Gregory D. Howling is an associate in the Energy and Infrastructure
Group at Skadden. She has over 20 years of experience with all Projects Group at Skadden. He focuses his practice on financings,
aspects of oil and gas, power and industrial projects, with a focus on joint ventures and strategic alliances, and mergers and acquisitions
project financing. She has worked on, among others, financings and involving energy and infrastructure projects, including LNG
development of LNG projects in Qatar, Indonesia, Oman, Egypt, transactions in Mozambique, Australia and the United States. He also
Australia, Mozambique and Jamaica. counsels international oil companies on structuring and negotiating oil
and gas rights agreements with sovereign states and national oil
companies.

With more than 1,700 attorneys in 22 offices on four continents, Skadden serves clients in every major financial centre. Our strategically positioned
U.S. and international locations allow us proximity to our clients and their operations and ensure a seamless and unified approach at all times. For
70 years, Skadden has provided legal services to the business, financial and governmental communities around the world in a wide range of high-
profile transactions, regulatory matters, and litigation and controversy issues. Our clients range from a variety of small, entrepreneurial companies
to a substantial number of the 500 largest U.S. corporations and many of the leading global companies, virtually all of the leading investment banks
as well as major insurance and financial services companies.

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 Chapter 5

Andorra
Miguel Cases

Cases & Lacambra Marc Ambrós

Andorran company Túnel d’Envalira, S.A., which holds the

1 Overview
concession of the Andorran tunnel d’Envalira which connects
Andorra with France.
1.1 What are the main trends/significant developments in In February 2017, the Andorran electricity company, FEDA, built
the project finance market in your jurisdiction? the first gas cogeneration plant in Andorra, which is currently in
operation, and another plant for the supply of energy to the El Tarter
In the coming years, we anticipate a potential increase in the area is currently in its first building phase.
Andorran project finance market, in both the public and private
sectors, and also under public and private schemes of collaboration;
in particular, in respect of unique projects related to infrastructure
2 Security
for the tourism and energy industry.
In the public sector, the main focus would be on infrastructure and 2.1 Is it possible to give asset security by means of a
energy projects; in particular, through the development of road general security agreement or is an agreement
infrastructure, a heliport and gas cogeneration and solar power plants. required in relation to each type of asset? Briefly,
what is the procedure?
In the private sector, the major trends relate to direct and indirect
acquisitions of projects already under operation, in terms of both the
In general, each security must be granted by means of its relevant
financing of such acquisitions and the refinancing of the existing
agreement related to each type of asset.
project debt.
The most common structure of guarantees in a project finance
This likely upward trend must be understood within the context of the
transaction in Andorra is the pledge over the shares of the project
potent and deep transformation process that the Principality of Andorra
company (normally a Special Purpose Vehicle (SPV)), one or several
(“Andorra”) is currently undertaking at an economic (progressive
pledges over the bank accounts of the project company, and receivables
opening towards and consolidation of foreign investment) and
deriving from the project (e.g. operation and maintenance (O&M)
regulatory level (implementation of payment services, solvency and
agreements or insurance policies), normally with cash-sweep clauses.
capital adequacy, corporate governance and remuneration policies as
well as European Union legislation on market abuse). Moreover, security over the essential project assets (e.g. certain types
of specific machinery) is eventually used, normally by means of a
In this respect, the traditional paradigm of Andorra as a close and
pledge or mortgage, depending on the characteristics of such asset(s).
protective jurisdiction is definitely veering towards a more open and
internationally competitive jurisdiction, in which the development Under Andorran law, the creation of security interest does not
of alternative financing sources – and particularly project finance – require notarisation or any formal requirement, except in the case of
is being called upon to play a key role in the strengthening of the real estate mortgages, which must be mandatorily constituted by
local economy at all levels. public deed granted before an Andorran Public Notary. However, as
a matter of best practice, it is recommended to formalise the
granting of the security by means of a public deed, in order to
1.2 What are the most significant project financings that
increase the effectiveness of its enforceability against third parties.
have taken place in your jurisdiction in recent years?
However, under Andorran law, security does not provide equal
rights to other common jurisdictions. Security in Andorra only
In the last decade, the Andorran Government has opened the
grants the creditor a preferential position to receive his credit from a
Andorran economy to foreign investors and has also updated the
specific debtor’s asset, in respect of other ordinary creditors, in case
principal regulations of the old-fashioned Andorran legal
of insolvency of the debtor.
framework. This situation has helped to build up some
infrastructure projects, such as the €159m tunnel dels Dos Valires
and the €42m tunnel de la Tapia, both in operation since 2012. 2.2 Can security be taken over real property (land), plant,
In 2015, Fomento de Construcciones y Contratas, S.A. (FCC) and machinery and equipment (e.g. pipeline, whether
underground or overground)? Briefly, what is the
Bankia, S.A. sold their 50% of the share capital in the Spanish
procedure?
concessionaire company Globalvía Infraestructuras, S.A. at €420m
to the Universities Superannuation Scheme (USS), OPTrust and
Security over real property may be taken through a real estate
PGGM funds. The deal included the stake of Globalvía in the

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Cases & Lacambra Andorra

mortgage (hipoteca immobiliària), and security over plants,

machinery and equipment may be granted by means of a chattel 2.6 What are the notarisation, registration, stamp duty
mortgage (hipoteca mobiliària) or non-possessory pledge (penyora and other fees (whether related to property value or
otherwise) in relation to security over different types
sense desplaçament). of assets (in particular, shares, real estate,
The election of the type of guarantee will depend on the receivables and chattels)?
characteristics of the specific asset, as well as the legal requirements

Andorra
to be fulfilled. There is no registration or stamp duty in Andorra related to security.
In general terms, under Andorran law, real estate mortgages cover: Only notarisation fees apply.
(i) the plot of land and construction on it; (ii) natural accretions; (iii) Such fees are published by means of the Decree of 3 May 2000 and vary
improvement works carried out on the property; and (iv) the amount in accordance with the nature and economic interest of the transaction.
of any compensation related to the asset owed to the mortgagee.

2.7 Do the filing, notification or registration requirements

2.3 Can security be taken over receivables where the in relation to security over different types of assets
chargor is free to collect the receivables in the involve a significant amount of time or expense?
absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
The notification or consent required in relation to security may take
a significant amount of time, although the granting of such consent
Yes – under Andorran law, it is possible for security to be taken over may vary depending on the recipient.
receivables by means of a non-possessory pledge (penyora sense
desplaçament), as long as the receivables cannot be possessed.
However, notification would prevent set-off risks. 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,
2.4 Can security be taken over cash deposited in bank whether underground or overground), etc.?
accounts? Briefly, what is the procedure?
Generally, Andorran law does not foresee a specific requirement for the
Yes – security can be taken over cash deposited in bank accounts. granting of security over real property, plant, machinery and equipment.
Such security will normally be taken over a non-possessory pledge However, special consents may be mandatory in very specific cases,
of receivables (penyora sense desplaçament), the possessory depending on certain criteria (e.g. the location of the asset, its legal
displacement being performed by means of notification to the bank nature or connection to the performance of a public activity).
in case of enforcement of the pledge. Usually, in addition to the However, please note that it could be necessary to obtain foreign
granting of security over cash deposited in bank accounts, cash investment authorisation in order to acquire the secured assets after
sweeps are established. an enforcement proceeding, as detailed in question 4.2 below.
When security is taken over financial instruments, the use of a
financial collateral arrangement is recommended, since this type of
guarantee is expressly regulated in Act 8/2013 of 9 May 2013 on the 3 Security Trustee
organisational requirements and operating conditions of entities
operating in the Andorran financial system, investor protection,
3.1 Regardless of whether your jurisdiction recognises
market abuse and financial securities agreements (Llei 8/2013, del 9 the concept of a “trust”, will it recognise the role of a
de maig sobre els requisits organitzatius i les condicions de security trustee or agent and allow the security
funcionament de les entitats operatives del sistema financer, la trustee or agent (rather than each lender acting
protecció de l’inversor, l’abús de mercat i els acords de garantia separately) to enforce the security and to apply the
financera), recently amended for total alignment with Directive proceeds from the security to the claims of all the
2002/47/EC of the European Parliament and of the Council of 6 lenders?
June 2002 on financial collateral arrangements.
Under Andorran law, there is no recognition of the concept of “trust”
as Andorra has not ratified the Convention of 1 July 1985 on the
2.5 Can security be taken over shares in companies Law Applicable to Trusts and on their Recognition.
incorporated in your jurisdiction? Are the shares in
certificated form? Briefly, what is the procedure? Lenders usually appoint an agent for the Andorran security, which
holds the security in its own name and acts on behalf of the rest of
Yes – it is possible to take security over the shares of a company the lenders. Frequently, the agent is granted with powers of attorney
incorporated in Andorra. In fact, it is a customary measure of in order to enforce claims and issue enforcement proceedings on
guarantee in project finance transactions performed in Andorra. behalf of the lenders and the rest of the secured intervening parties.
However, the restriction set out in question 4.2 below should be
taken into account. 3.2 If a security trust is not recognised in your
The procedure to create security over shares requires two jurisdiction, is an alternative mechanism available
consecutives steps: (i) the granting of a deed of pledge before a (such as a parallel debt or joint and several creditor
status) to achieve the effect referred to above which
Public Notary; and (ii) the registration of the pledge in the Registry
would allow one party (either the security trustee or
Book of Shareholders (Llibre Registre de Socis) of the company. the facility agent) to enforce claims on behalf of all the
lenders so that individual lenders do not need to
enforce their security separately?

The structures of joint and several creditor status, “parallel debt”

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 Cases & Lacambra Andorra

between lenders and a SPV or a security agent are not known under
Andorran law and there are no judicial precedents thereof. 5.2 Are there any preference periods, clawback rights or
other preferential creditors’ rights (e.g. tax debts,
Nonetheless, recourse to parallel debt provisions, as well as a employees’ claims) with respect to the security?
parallel debt security package, would be recognised under Andorran
law.
There are no other preferential creditors’ rights with respect to the
security that could affect the secured lender rights, as such
Andorra

4 Enforcement of Security preferential creditors will only have preference over the rest of the
ordinary claims on the insolvency estate but not in respect of the
secured assets.
4.1 Are there any significant restrictions which may The clawback regime under the Insolvency Decree of 4 October
impact the timing and value of enforcement, such as
1969 determines that the insolvency judge will be able to declare the
(a) a requirement for a public auction or the
availability of court blocking procedures to other following acts unenforceable against the insolvent estate: (i) all acts
creditors/the company (or its trustee in of disposal made on a gratuitous basis and all agreements on which
bankruptcy/liquidator), or (b) (in respect of regulated the debtor’s obligations (project finance company) are notably
assets) regulatory consents? superior to the obligations of the other party; (ii) all payments due
for reason of outstanding debts on the cessation-of-payments day;
Yes – the characteristics of the enforcement may vary significantly, and (iii) any mortgage of pledge granted after the cessation-of-
depending on the nature of the enforced security and the payments day, over the debtor assets, for reason of outstanding debts
enforcement proceedings carried out at the discretion of the lenders. prior to the cessation of payments.
In essence, there are two main procedures to enforce securities in the In addition to these, the insolvency judge is entitled to declare as
context of project finance: (i) judicial; or (ii) notarial proceedings. unenforceable against the insolvent estate the gratuitous acts stated
Overall, the former is carried out by a declaratory civil proceeding above which occurred during the six months prior to the date of
in order to reach a judgment, and afterwards such judgment has to cessation of payments.
be enforced, the latter being less costly and time-consuming, Furthermore, the judge can set the cessation-of-payments date up to
although both parties have to agree to carry out the notarial 18 months preceding this declaration.
enforcement proceeding.

5.3 Are there any entities that are excluded from

4.2 Do restrictions apply to foreign investors or creditors bankruptcy proceedings and, if so, what is the
in the event of foreclosure on the project and related applicable legislation?
companies?
Banking entities are subject to special administrative measures
In the event of foreclosure, the Foreign Investment Act 10/2012 which apply before the opening of an ordinary bankruptcy
(Llei 10/2012 d’inversió estrangera al Principat d’Andorra) proceeding, established by Act 8/2015 on Urgent Measures to
establishes a restriction, as foreign investors or creditors would need Implement Banking Restructuring and Resolution Mechanisms
to obtain a prior foreign investment authorisation granted by the (Llei 8/2015 de mesures urgents per implantar mecanismes de
Andorran Government in order to acquire the ownership of real reestructuració i resolució d’entitats bancàries), which sets a
estate in Andorra or more than a 10% stake in the relevant Andorran similar regime to Directive 2014/59/EU of the European Parliament
company. and of the Council of 15 May 2014 establishing a framework for the
However, please note that the Foreign Investment Act specifically recovery and resolution of credit institutions and investment firms.
prohibits foreign legal persons from investing in real estate
properties in Andorra with the sole purpose of commercialising 5.4 Are there any processes other than court proceedings
them. that are available to a creditor to seize the assets of
the project company in an enforcement?

5 Bankruptcy and Restructuring

Yes – it is possible to carry out-of-court foreclosure proceedings
Proceedings
before a Public Notary if such enforcement proceeding and its terms
and conditions have previously been agreed between the parties.
5.1 How does a bankruptcy proceeding in respect of the
project company affect the ability of a project lender 5.5 Are there any processes other than formal insolvency
to enforce its rights as a secured party over the proceedings that are available to a project company
security? to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?
In general, bankruptcy proceedings in respect of the project
company do not affect the ability of a project lender to enforce its The Insolvency Decree establishes a judicial proceeding
rights as a secured party over the security, as long as the security is (Arranjament) prior to the declaration of bankruptcy, allowing the
sufficient to cover the project loan. project company to negotiate with its creditors in order to achieve a
In respect of preferential treatment of creditors, the claims of restructuring of its debts or cramdown of dissenting creditors that
secured creditors will be considered “privileged claims” inasmuch permits it to comply again with its payment obligations.
as they are guaranteed by means of a security, up to the value of such
guarantee or security. Any amount exceeding the value of the
guarantee or security in this way will be considered an “ordinary
claim”.

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The requirements, procedure and guarantees to the expropriated

5.6 Please briefly describe the liabilities of directors (if entity are thoroughly and strictly regulated, due to the fact that the
any) for continuing to trade whilst a company is in expropriation procedure is deemed an aggression against private
financial difficulties in your jurisdiction.
property, which is only justified on the basis of serving the general
and public interest.
Under the Insolvency Decree, directors may incur personal liability
if they continue to trade whilst the company is facing financial

Andorra
difficulties. The bankruptcy effects will be extended to the directors 7 Government Approvals/Restrictions
of the entity in consideration of the continuation of a financially
deficient activity such as an act of bad faith, inexcusable negligence
or serious breach of commercial uses and practices. 7.1 What are the relevant government agencies or
departments with authority over projects in the typical
project sectors?
6 Foreign Investment and Ownership
Restrictions Overall, the public administration/agencies with authority over
projects are determined by the specific sort of project. The main
authorities involved are the different town halls (Comuns) of the
6.1 Are there any restrictions, controls, fees and/or taxes administrative units (“Parishes” – Parròquies) into which Andorra
on foreign ownership of a project company? is divided. According to the Andorran Constitution and the
Qualified Act On Demarcation of Competences of the Comuns,
The Andorran Foreign Investment Act sets out the restrictions, controls dated 4 November 1993, these entities have competence over the
and limits related to the foreign ownership of a project company. Thus, management and governance, in general terms, of goods in both the
prior to investing in a real estate asset or in a stake higher than 10% in a public and private domains, as well as patrimonial goods that may
share capital or acquiring voting rights of an Andorran company, have been acquired and may intervene in energetic projects of
foreign investors have to obtain the relevant foreign investment national interest. In addition, this competence is projected over the
authorisation before the Andorran Government. The amount, use and exploitation of natural resources.
destination and sort of investment (e.g. investment in real estate assets) This general formula includes energy projects, inasmuch as they use
must be notified as a mandatory requirement to obtain the authorisation. natural resources which are located or generated in the territory
Nevertheless, the obligation to obtain the foreign investment under the jurisdiction of a specific Comú.
authorisation does not impose any restriction on the remittance of Additionally, the Andorran Government may play a significant role
income coming from an investment outside Andorra. In addition, depending on the location and size of the project, especially if the
exchange control rules are widely liberalised and, thus, there are no project determines a financing need from the Comuns, as these
restrictions on the transferral of currencies from a registered bank entities are financed from the Central Government by means of
account located in Andorra to any country, and vice versa. Qualified Act 18/2017 of 20 October on Transfers to the Comuns.
Under the Andorran anti-money laundering and counter-terrorism
legislation (Llei 14/2017 de prevenció i lluita contra el blanqueig de
7.2 Must any of the financing or project documents be
diners o valors i el finançament del terrorisme), an Andorran or
registered or filed with any government authority or
foreign entity which formalises a transaction before a Public Notary otherwise comply with legal formalities to be valid or
by granting a public deed shall identify its ultimate beneficial enforceable?
owner, which is any individual (either a natural or legal person)
owning 25% or more of the social capital of the entity and its Certain regulated sectors (e.g. telecommunications or energy) may
identity must be kept in the ultimate beneficial owner registry be subject to the fulfilment of certain specialities and requirements
“Registre de Beneficiaris Efectius”. imposed by the Andorran Government, the territorial entities
(Comuns) or specific regulatory authorities.
6.2 Are there any bilateral investment treaties (or other The guarantees normally granted as a security package in a project
international treaties) that would provide protection finance operation (i.e. mortgages and pledges) are notarised. Please
from such restrictions? note that Andorra does not have a property register, such functions
being equivalently performed by the Chamber of Notaries (Cambra
There are no bilateral investment treaties entered into by Andorra de Notaris).
that would provide protection from the Andorran foreign investment
In addition, please bear in mind the requirements of foreign
restrictions. However, by means of a most-favoured-nation clause
investment authorisation referred to in question 6.1 above.
Andorra has access to the treaties entered into by its neighbouring
countries.
7.3 Does ownership of land, natural resources or a
pipeline, or undertaking the business of ownership or
6.3 What laws exist regarding the nationalisation or operation of such assets, require a licence (and if so,
expropriation of project companies and assets? Are can such a licence be held by a foreign entity)?
any forms of investment specially protected?

Ownership of land or natural resources itself does not require a

The regime governing the nationalisation or expropriation of project licence; however, performing a project or exploitation over such
finance companies and/or assets is set by the Act of Expropriation, land or natural resources may require the prior obtainment of certain
dated 3 September 1993, making no distinction between Andorran authorisations or licences granted by national (e.g. the
and foreign companies or assets, as long as the expropriation of Environmental Impact Assessment (“Avaluació d’Impacte
private property responds to the satisfaction of a public utility or Ambiental”) Licence) or local public administrations, depending in
social interest. particular on the size and relevance of the project.

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 Cases & Lacambra Andorra

The treatment between foreign and Andorran entities does not differ In terms of the contractual covenants normally imposed on the
and, overall, foreign entities can hold licences and be granted project company in project financing agreements, the distribution of
authorisations on the same terms as Andorran entities. dividends is normally restricted. Additionally, there are other
typical financial and corporate restrictions imposed on the project
company, such as: (i) the prohibition of performing structural
7.4 Are there any royalties, restrictions, fees and/or taxes
payable on the extraction or export of natural modifications (e.g. mergers); (ii) the fulfilment of certain financial
ratios (e.g. debt service coverage ratio); and (iii) the operation of the
Andorra

resources?
specific facility during a stipulated period of years.
There are certain taxes related to the processing of hydrocarbons (oil
and natural gas) in order to use them as fuel, and the exploitation of 7.9 Are there any material environmental, health and
electricity generation projects is subject to a burden tax. Thus, the safety laws or regulations that would impact upon a
obtainment, importation and refining of hydrocarbons and the project financing and which governmental authorities
production of electricity within Andorra are, respectively, subject to administer those laws or regulations?
a special tax on hydrocarbons and the general indirect tax of 4.5%.
These special taxes would not be paid by the project company, as the Yes – there are material environmental, health and safety laws
payment would rely on the final consumer of the electricity or the whose application and content will essentially depend on the
hydrocarbon. Please note that importation of both electricity and location, nature and characteristics of the specific project.
certain types of hydrocarbons is exempt from taxation, due to the Moreover, the authorisations to initiate a project (especially in
limited capacity of the Andorran public infrastructure to cover the projects which are notable for their size and capacity of affecting the
energetic demand (electricity is imported from Spain and France). environment) will have to be granted by the relevant authority
(normally, the specific Comú), taking into account the
The income obtained by a project company incorporated in and environmental impact on the territory.
under the laws of Andorra from the sales of the extraction or
exploitation are subject to company income tax at the rate of 10%. The Environmental Impact Assessment (“Avaluació d’Impacte
Ambiental”) Licence must be obtained for development projects that
might have substantial effects on the environment (e.g. mining or
7.5 Are there any restrictions, controls, fees and/or taxes tunnel excavation); it is issued by the Andorran Government after an
on foreign currency exchange? analysis by the competent ministry via a regulated administrative
procedure and acts as a condition precedent for the execution of the
There are no currency, exchange control or other regulatory project(s).
restrictions that limit the availability or transfer of funds for the In addition, before the execution of any private or public project that
project company. Please refer to question 6.1 above. may impact the environment, an environmental impact assessment
needs to be performed prior to the granting of the specific
7.6 Are there any restrictions, controls, fees and/or taxes authorisation by the competent administration.
on the remittance and repatriation of investment
returns or loan payments to parties in other
jurisdictions? 7.10 Is there any specific legal/statutory framework for
procurement by project companies?

There are no restrictions on the repatriation of investment returns.

There is not a specific framework for procurement by project
companies. However, in public projects, the administration could
7.7 Can project companies establish and maintain establish specific requirements.
onshore foreign currency accounts and/or offshore
accounts in other jurisdictions?
8 Foreign Insurance
Yes, project companies are allowed to establish and maintain
onshore foreign currency accounts held in local entities and/or
offshore accounts in other jurisdictions. 8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or
guaranteed by foreign insurance companies?
7.8 Is there any restriction (under corporate law,
exchange control, other law or binding governmental Insurance activity is a reserved activity under the Andorran
practice or binding contract) on the payment of Insurance and Reinsurance Act (Llei 12/2017 d’ordenació i
dividends from a project company to its parent
supervisió d’assegurances i reassegurances del Principat
company where the parent is incorporated in your
jurisdiction or abroad? d’Andorra).
Thus, only licensed insurance/reinsurance companies in Andorra
According to the Andorran Corporate Act 20/2007, there are certain may provide insurance over project assets located in Andorra.
limitations on the payment of dividends to a parent company, as follows:
(i) there is a requirement to offset losses from previous years in order to 8.2 Are insurance policies over project assets payable to
build up 10% of the profits to the statutory reserve until it reaches an foreign (secured) creditors?
amount equal or higher than 20% of the share capital; (ii) dividends may
only be distributed if the mandatory reserves foreseen legally or in the Yes – although a case-by-case analysis is highly recommended.
by-laws are covered, as well as the research and development costs being
covered; and (iii) a restricted reserve equivalent to goodwill must be
funded, at least in the amount of 10% of the profits.

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9 Foreign Employee Restrictions 11 Force Majeure

9.1 Are there any restrictions on foreign workers, 11.1 Are force majeure exclusions available and
technicians, engineers or executives being employed enforceable?
by a project company?

Andorra
Under Andorran law, the verification of a force majeure situation
Yes – there are restrictions on foreign workers being employed by a exonerates any party from liability with respect to a legal
project company. In particular, prior to the hiring of such foreign relationship, although parties to a specific contract may, as in the
workers, the project company has to confirm before the Andorran vast majority of neighbouring jurisdictions, waive the application of
employment department that no qualified Andorran workers are this regime and accept liability arising from it.
eligible for the specific position(s). The normal scenario is that most project financing agreements, and
In order to validly work and reside in Andorra for a short period, ancillary contracts to these (e.g. O&M contracts), establish the
foreign workers must obtain permission for stays of over 30 days in verification of force majeure as an event of default. In the case that
cases where they are working for a foreign company, during the time a force majeure is discussed before a court, an Andorran judge will
that the work for the foreign company in Andorra lasts and without recognise its validity.
limitation regarding the nationality or the professional level of the From the point of view of the lenders, a liability exclusion is
applicant (e.g. worker, technician, engineer or executive). normally established in project finance agreements if this affects
If foreign workers intend to stay for a longer period in Andorra, they their ability to provide the financing for the project facility under a
will need to obtain a residence and working authorisation in force majeure scenario.
advance, which is granted for one year by the Andorran In the case of concession contracts with public authorities, and
Government. This type of permit is normally used for workers that similarly to the situation in Spain, the verification of a force majeure
come to Andorra to carry out professional activities in the country. normally entails compensation from the specific public
administration to the concessionaire, which may take the form of an
10 Equipment Import Restrictions improvement of either the economic or temporal terms of the public
concession.
In addition to the mechanics of a force majeure event (which will be
10.1 Are there any restrictions, controls, fees and/or taxes regulated in the terms established by the project finance agreement
on importing project equipment or equipment used by
– normally a turnkey contract), in the case that the project company
construction contractors?
suffers a prejudicial effect due to unforeseen circumstances, it
would also be possible to invoke the rebus sic stantibus clause if
The Customs Agreement between the Principality of Andorra and foreseen in the relevant contract (lenders may also benefit from this
the European Economic Community establishes a preferential clause).
regime for goods imported from or originating in the EU in
comparison with third countries. Specifically, the objective scope of
the Customs Agreement covers: (i) goods produced in the EU or in 12 Corrupt Practices
Andorra, including those obtained wholly or in part from products
which come from third countries and which are in free circulation in
the EU or Andorra; and (ii) goods which come from third countries 12.1 Are there any rules prohibiting corrupt business
practices and bribery (particularly any rules targeting
and are in free circulation in the EU or in Andorra. Hence, customs
the projects sector)? What are the applicable civil or
duties will be applicable to imported project equipment coming criminal penalties?
from non-EU countries, in the terms established by EU agreements
with these countries or applicable regulations that may be in place.
Qualified Act 9/2005 of 21 February of the Criminal Code (Llei
Please note that, currently, Andorra is an observer member of the 9/2005 qualificada del codi penal) punishes corruption and traffic-
World Trade Organization (WTO) and there are no regulations in of-influence bribery performed by a public authority or by a private
place which confer on the government any powers to impose anti- subject. Among the diverse ways in which this crime may be
dumping measures in line with WTO principles. performed, bribery of a public authority determines the imposition
of a qualified sanction.
10.2 If so, what import duties are payable and are In respect of the crime of corruption, this is defined by the Andorran
exceptions available? Criminal Code as a demand by or an offer made to a public authority
or civil servant, for its own benefit or for the benefit of a third
The import duties depend on the characteristics of the goods, with person, for a handout or remuneration of any sort, in order to dictate
exceptions available in each case; for example, for products coming or perform an act contrary to the duties and obligations inherent to
from non-EU countries, such as imported equipment or machinery, its condition as a public official (active side), as well as the offering
depending on the nature and characteristics of the products. or demanding of the aforementioned remunerations to delay the
Thus, we recommend that a case-by-case analysis is performed. performance of an act (passive side).
The penalties imposed for the perpetration or omission of these
conducts include: (i) a prison sentence (from one to four or two to
five years, depending on the nature and gravity of the felony); (ii)
criminal penalties (e.g. from two to five times the profit obtained);
and (iii) ineligibility for public office for a period of between three
and six years.

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 Cases & Lacambra Andorra

With regard to influence peddling, the Andorran Criminal Code

15 International Arbitration
establishes that any person who, through his personal relationship,
exerts influence over a public authority or civil servant with the aim
of achieving a resolution dictated by the latter which benefits him or 15.1 Are contractual provisions requiring submission of
a third person either directly or indirectly shall be punished with disputes to international arbitration and arbitral
imprisonment and a fine of one to two times the benefit intended or awards recognised by local courts?
obtained. Additionally, the public authority or civil servant may be
Andorra

punished with ineligibility for public office for three years and the Yes – the Andorran courts will recognise submission by the parties
person who influences this authority may be punished, at the court’s in a project finance agreement to international arbitration and
initiative, with prohibition from contracting with a public authority arbitral awards, as the Convention on the Recognition and
for a three-year period. Enforcement of Foreign Arbitral Awards of 1958 (the New York
Arbitration Convention), which applies to the recognition and
enforcement of foreign arbitral awards and the referral to arbitration
13 Applicable Law
by a court, has been in force in Andorra since September 2015.
Andorra currently has an arbitration regime for commercial
13.1 What law typically governs project agreements? disputes. Furthermore, the Andorran Arbitration Court Act 13/2018
(Llei 13/2018, del 31 de maig, del Tribunal d’Arbitratge del
Generally, project agreements are few and governed by Andorran Principat d’Andorra), enacted in mid-2018, set the foundation for
law unless the relevant parties elect the application of a foreign law. the functioning of the Andorran Arbitration Court (Tribunal Arbitral
According to Andorran law, the choice of foreign law is valid and del Principat d’Andorra), which is currently setting up internal
legally binding. procedures/organisation to start its arbitration activity, probably
An Andorran court would apply such law provided that the contents before the end of the year.
of the relevant provisions of the chosen laws may be duly proved
before the Andorran court without contravening the Andorran 15.2 Is your jurisdiction a contracting state to the New York
Constitution or the Andorran principles of public policy. However, Convention or other prominent dispute resolution
please see question 18.1 below. conventions?

Yes – the New York Arbitration Convention entered into force in

13.2 What law typically governs financing agreements?
Andorra in September 2015.

Financing agreements are typically governed by Andorran law.

15.3 Are any types of disputes not arbitrable under local
law?
13.3 What matters are typically governed by domestic law?
The Andorran Arbitration Act 47/2014 (Llei 47/2014 d’arbitratge
All security documents related to assets located in Andorra (i.e. del Principat d’Andorra) excludes labour and consumer arbitration
mortgages or pledges) and personal guarantees granted by Andorran proceedings, while stating that all free disposal subjects can be
entities (e.g. bonds or first demand guarantees) are typically subject to arbitration.
governed, and we would recommend that they be governed, by
Andorran law.
15.4 Are any types of disputes subject to mandatory
As in most of the neighbouring jurisdictions, the contractual domestic arbitration proceedings?
relationship between the public authorities and the concessionaire is
mandatorily regulated by Andorran law.
Considering the response to the previous question, submission to
arbitration as a conflict resolution process is only possible if the
14 Jurisdiction and Waiver of Immunity parties involved in a controversy expressly agree to it, either in the
agreement or in a separate document. The submission of the parties
to an arbitration proceeding must be made in writing and signed by
14.1 Is a party’s submission to a foreign jurisdiction and them, in order to verify their unequivocal will to submit their
waiver of immunity legally binding and enforceable? controversy to arbitration.

Under Andorran case law and the applicable Andorran law (dret
comú), submission to a foreign jurisdiction by the parties to a project 16 Change of Law / Political Risk
finance agreement would be valid, binding and enforceable in
Andorra.
16.1 Has there been any call for political risk protections
There are many judicial precedents that support this view. such as direct agreements with central government or
Moreover, in the case that a claim is presented before the Andorran political risk guarantees?
courts, they should decline their competence in favour of the elected
jurisdiction if an express submission clause had been agreed by the To the best of our knowledge, political risk provisions are not
parties. common in Andorra, given the political stability of Andorra and the
lower political risk of project finance, in line with the adjacent
jurisdictions, as these are direct agreements with public
administrations.

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Cases & Lacambra Andorra

In the current climate of serious concern about the political Therefore, in practice, there is no secondary market for foreign
situation, with potential future changes in the government (national financial entities to buy tickets for local project finance. However,
elections will take place in March/April 2019) or in governmental international project finance transactions with an Andorran leg, where
policies which could substantially affect projected investment, the security has been granted but the disbursement of the loan had been
main options would be either to obtain a specific governmental made abroad, are likely to be seen in the short term and in the
resolution from the competent administration providing support to forthcoming years, due to the limited lending capacity of local players.
the project or to wait for clarification of the political framework.

Andorra
18.2 Are there any legal impositions to project companies
17 Tax issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market
instruments.
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 Currently, Andorra lacks comprehensive capital markets legislation
under a guarantee or the proceeds of enforcing that would enable the issuance of bonds or similar capital markets
security? instruments. Despite this, a favourable view towards capital market
transactions has emerged in the last five years, which crystallised in
Under Andorran law, there is no deduction or withholding tax upon the first covered bonds transaction carried out in Andorra (during
payment of interests on loans made to either domestic or foreign lenders. the last quarter of 2017) as an English and Andorran law governed
On the other hand, under Andorran law, the proceeds of a claim structured (contractual) covered bonds issuance.
under a guarantee and the proceeds of enforcing security are not Considering the above, there are specific limitations on the issuance
subject to withholding tax if they are made to a domestic lender. of capital markets instruments, which determine the use of foreign
However, they are subject to withholding tax at 10% if they are vehicles (acting as issuers) to benefit from international standards in
made to a foreign lender, unless a lower rate applies under a tax this matter.
treaty (with treaty rates ranging between 5% and 10%).

19 Islamic Finance
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
or other security documents, either for the purposes instruments might be used in the structuring of an
of effectiveness or registration? Islamic project financing in your jurisdiction.

The main incentive for foreign investors or creditors are the lower level The Islamic finance instruments Istina’a, Ijarah, Wakala and
of taxation and the possibility to benefit from certain tax exemptions Murabaha are not recognised under the laws of Andorra.
(e.g. corporate tax at 10%), in addition to a solid legal framework. In
particular, there are substantial advantages for those countries with
which Andorra has signed a tax treaty (Spain, France, Luxembourg, 19.2 In what circumstances may Shari’ah law become the
governing law of a contract or a dispute? Have there
Liechtenstein, Malta, the United Arab Emirates and Portugal).
been any recent notable cases on jurisdictional
In essence, under Andorran law, there are no relevant additional issues, the applicability of Shari’ah or the conflict of
taxes on foreign investments, other than those that would apply to an Shari’ah and local law relevant to the finance sector?
Andorran investor.
Although Andorra is not part of the EU, a customs agreement with There is no case law in Andorra which has been pronounced in
the EU is currently in force, allowing the free transit of industrial regard to the application of Shari’ah law, nor in relation to the
products without customs duties being imposed. governing law of a contract or a dispute.
In our view, it is not probable that Andorran courts will accept the
application of Shari’ah, except where the law generally governing a
18 Other Matters
contract is the law of a country whose legislation recognises and is
based on Shari’ah.
18.1 Are there any other material considerations which
should be taken into account by either equity 19.3 Could the inclusion of an interest payment obligation
investors or lenders when participating in project in a loan agreement affect its validity and/or
financings in your jurisdiction? enforceability in your jurisdiction? If so, what steps
could be taken to mitigate this risk?
Yes – please note that Andorra is not integrated within the EU nor the
EEA. In this light, lending is a reserved activity that can only be Yes – there is a risk that the inclusion of interest payment
performed by Andorran-licensed entities, as long as there is no passport obligations in a loan agreement construed in accordance with
to provide lending services on a cross-border basis into Andorra. Shari’ah could affect its validity and enforceability.

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 Cases & Lacambra Andorra

Miguel Cases Marc Ambrós

Cases & Lacambra Cases & Lacambra
Manuel Cerqueda i Escaler 3–5 Manuel Cerqueda i Escaler 3–5
Escaldes-Engordany (AD700) Escaldes-Engordany (AD700)
Andorra Andorra

Tel: +376 728 001 Tel: +376 728 001

Andorra

Email: [email protected] Email: [email protected]

URL: www.caseslacambra.com URL: www.caseslacambra.com

Miguel Cases is the Managing Partner of Cases & Lacambra and Marc Ambrós is a Partner at Cases & Lacambra. He has broad
leads the Corporate and Banking & Finance Practices. He has experience in advising foreign clients in general investment in Andorra,
extensive experience in advising credit institutions and investment although he is specialised in the financial services sector and in project
services firms, being the legal counsel of several national and and corporate finance matters. He regularly advises in M&A, joint
international financial institutions, public administrations and ventures, private equity, corporate restructuring and refinancing,
investment funds. His practice includes regulation of the financial representing both Andorran regulated and non-regulated entities. He
sector, where he is an expert in the legal framework and regulatory is a key advisor in many cross-border transactions that have an
environment applicable to entities subject to prudential supervision, Andorran component.
especially those rendering financial and investment services.

Cases & Lacambra is a client-focused international law firm with a top-tier specialisation in banking, finance and tax law. We offer bespoke advice
and solutions to our clients, which rank among the most highly reputed national and international financial institutions, family offices, investment firms,
group companies and high-net-worth individuals.
The Firm’s and the Banking and Finance department’s lawyers are qualified in Andorra but also in other EU jurisdictions, and so are well-prepared
to advise their clients on EU legislation that is progressively being adopted in the jurisdiction.
The Firm has broad experience in acquisition finance, project finance and refinancing in Andorra.
The Banking and Finance department has a broad range of clients, including local and foreign banks, the Andorran Government and the Andorran
authorities, and regularly advises institutions on their inbound financial transactions towards that jurisdiction.

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Chapter 6

Angola
Manuel Protásio

Vieira de Almeida and

RLA – Sociedade de Advogados, RL Vanusa Gomes

vary depending on the type of the asset. The most frequently used
1 Overview
in rem guarantees are mortgages and pledges.
Mortgages entitle the creditor to obtain repayment of credit through
1.1 What are the main trends/significant developments in the sale of the mortgaged assets before and with preference over
the project finance market in your jurisdiction? other creditors of the debtor, except for some privileged credits and
other credits previously guaranteed by mortgages over the same
Angola is facing several political changes since the new government assets. Specific authorisations may have to be obtained in order to
was elected in September 2017. The new government has made mortgage rights (e.g. surface rights granted by Angolan authorities).
positive progress in strategic areas to promote transparency, good A mortgage must be executed by means of a notary deed with a
governance and to open the country to foreign investment and Notary Public and registered with the relevant Registry Office.
competition. Two political measures recently imposed by the new The pledge is generally created by means of a written agreement and
administration promise to attract investment, partnerships and trade: (i) delivery of the relevant asset to the creditor or to a third party.
the new Law of Private Investment; and (ii) the new Competition/Anti- Pledges are not subject to special formalities (other than a written
Trust Law. Respectively, these two laws set forth new principles and document) nor to any type of public registration, except in the case
rules aimed at facilitating, promoting and accelerating private of pledges of certain types of securities. It should be added that
investment operations and ensure free and fair competition within the specific requirements may apply to pledges depending on the type
Angolan market. Also, it is worth noting that an amendment of the of asset being given as collateral. Certain specific economic sectors
Law on Public-Private Partnerships is currently being drafted with the such as the financial, insurance, media, mining and petroleum
aim of mobilising private investment in the country. sectors are subject to special restrictions or approval requirements,
Internationally, Angola is becoming more assertive and or both. Therefore, certain authorisations can be required from the
demonstrating a more steadfast commitment to compliance and government or other state entities, or both, in order to pledge assets
international anti-money laundering practices. However, despite or equity interests in those sectors.
the new government’s efforts, the economic situation is still critical Under Angolan law, a pledge or mortgage over future assets is not
and the Angolan government’s major challenge is overcoming the prohibited. Alternatively, security agreements may provide for a
economic stagnation. security of existing assets and a promise of security over future
assets. In the latter case, a definitive pledge over the assets is
1.2 What are the most significant project financings that subsequently executed and delivered as a supplement to the security
have taken place in your jurisdiction in recent years? agreement.

The first deep-water port in the country, which is under construction in 2.2 Can security be taken over real property (land), plant,
Caio, Cabinda province is the most significant public-private partnership machinery and equipment (e.g. pipeline, whether
transaction in recent years. The construction of the port is valued at underground or overground)? Briefly, what is the
$831.9 million and the Angolan State supported 85% of the costs. procedure?

The first tenders for public-private partnerships to develop the

infrastructures of several industrial centres in the country was The most common form of security over real estate property is the
recently launched by the government. mortgage. Due to the existing restrictions to foreign ownership of
real estate property, foreign investors in Angola are granted surface
rights over real estate.
2 Security Security over these rights can be created, but it requires the prior
authorisation of the grantor (Angolan authorities). The creation of
security over immovable assets, related rights or movable assets
2.1 Is it possible to give asset security by means of a
general security agreement or is an agreement subject to registration is created through a mortgage. The mortgage
required in relation to each type of asset? Briefly, must be executed by notarial deed and is subject to registration with
what is the procedure? the relevant Registry Office.

Under Angolan law, the terms and formalities for security creation

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extremely high. As regards the filing, notification or registration

2.3 Can security be taken over receivables where the requirements, they are quite straightforward and no longer time-
chargor is free to collect the receivables in the consuming.
absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
2.8 Are any regulatory or similar consents required with
The most common form of security over receivables is a pledge of respect to the creation of security over real property
(land), plant, machinery and equipment (e.g. pipeline,
Angola

credits, which is created by a written agreement. The pledge of

whether underground or overground), etc.?
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 Provided that the security interests are created over assets belonging
assignment whereby the tenants are directed to pay the rental to private entities, Angolan law does not require any governmental or
income to the lender so that the rental income does not pass through other consents. Securities over public domain assets are prohibited
the hands of the borrower. or restricted. These restrictions include governmental consent and/or
approval, imposed through sector-specific regulations, the relevant
concession contracts or general public administrative laws.
2.4 Can security be taken over cash deposited in bank
accounts? Briefly, what is the procedure?
3 Security Trustee
A pledge over cash deposited in bank accounts is deemed as a
pledge of credits (see above).
3.1 Regardless of whether your jurisdiction recognises
the concept of a “trust”, will it recognise the role of a
2.5 Can security be taken over shares in companies security trustee or agent and allow the security
incorporated in your jurisdiction? Are the shares in trustee or agent (rather than each lender acting
certificated form? Briefly, what is the procedure? separately) to enforce the security and to apply the
proceeds from the security to the claims of all the
lenders?
The form of security over shares is a pledge over the company’s
share capital (shares or quotas). The pledge of share capital
These concepts are not recognised by Angolan law.
participations must observe specific requirements to be deemed
valid and binding. The requirements vary depending on the type of
project company. In the case of limited liability companies by 3.2 If a security trust is not recognised in your
quotas, the company must consent on the execution of the pledge, jurisdiction, is an alternative mechanism available
which must then be formalised by means of a notary deed entered (such as a parallel debt or joint and several creditor
before a Notary Public and registered with the Commercial Registry status) to achieve the effect referred to above which
would allow one party (either the security trustee or
Office. As for limited liability companies by (nominative) shares,
the facility agent) to enforce claims on behalf of all the
the pledge is deemed formalised by means of executing a written lenders so that individual lenders do not need to
agreement, inscription of the pledge in the relevant share titles, and enforce their security separately?
registration of the same in the company’s share registration book.
See question 3.1 above.
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 4 Enforcement of Security
of assets (in particular, shares, real estate,
receivables and chattels)?
4.1 Are there any significant restrictions which may
impact the timing and value of enforcement, such as
The calculation of notarisation and registration fees are based on (a) a requirement for a public auction or the
variable percentages, depending on the secured amount and the availability of court blocking procedures to other
number of the pages of deed, if applicable. creditors/the company (or its trustee in
All guarantees and securities, irrespective of their nature or form, bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?
are subject to Stamp Duty (plus notary and land registry fees)
provided that the security is granted in Angolan territory or if the
security is granted outside Angola but submitted therein for any Pursuant to Angolan law, no form of security can be enforced
legal purpose (e.g. enforcement). Further, securities granted by outside of court.
non-resident entities to Angolan-based entities, regardless of the The enforcement of mortgages consists of a sale of the relevant
place where the security is granted, are always subject to Stamp assets through court proceedings. The sale of pledges may be made
Duty and is due upon issuance of the security. Stamp Duty over through court or through out-of-court proceedings, if the parties
securities is calculated over the amount secured and the rates may have so agreed. Therefore, in Angola, the appropriation of the assets
vary between 0.1% to 0.3%, depending on the term of the security. is not available to pledges and mortgages.

2.7 Do the filing, notification or registration requirements 4.2 Do restrictions apply to foreign investors or creditors
in relation to security over different types of assets in the event of foreclosure on the project and related
involve a significant amount of time or expense? companies?

Stamp Duty and the notary and registration costs are usually deemed Pursuant to Angolan law, there are no restrictions in this regard

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(additionally, it must be noted that no different rules on enforcement

of security interests in Angola apply for foreign creditors). 5.3 Are there any entities that are excluded from
However, loans, guarantees and other financial contracts, deposits bankruptcy proceedings and, if so, what is the
applicable legislation?
and the acquisition and sale of shares, bonds and other securities,
involving rights or obligations between residents and non-residents
qualify as capital operations and are subject to foreign exchange The state and some public entities (e.g. BNA) are excluded from
requirements; notably, the Angolan Central Bank’s (“BNA”) prior bankruptcy proceedings.

Angola
approval (see section 6 below). As to the special bankruptcy proceedings, it must be noted that (i)
the Financial Institutions Act foresees that the bankruptcy
preventive measures applicable to financial institutions will be
5 Bankruptcy and Restructuring determined by the competent supervision authority, and (ii) the
Proceedings Public Business Sector Act sets out special procedures regarding the
liquidation of public companies.

5.1 How does a bankruptcy proceeding in respect of the The Angolan Civil Procedural Code does not make distinctions
project company affect the ability of a project lender between foreign or national creditors for bankruptcy purposes.
to enforce its rights as a secured party over the
security?
5.4 Are there any processes other than court proceedings
that are available to a creditor to seize the assets of
Upon the declaration of bankruptcy, all security must be enforced the project company in an enforcement?
within the bankruptcy proceedings.
If a company is declared bankrupt, assets and documents are, for Please see question 5.2 above for the retention rights.
instance, seized in order to protect the creditors’ rights. A
bankruptcy declaration by a court entails the immediate maturity of
5.5 Are there any processes other than formal insolvency
all the debts of the bankrupt company and there are certain acts proceedings that are available to a project company
which are legally deemed to be detrimental to the bankruptcy estate to achieve a restructuring of its debts and/or
(insofar as these transactions cause a depletion of the debtors’ cramdown of dissenting creditors?
assets). For instance, in rem guarantees granted after the underlying
debt within the year that precedes the declaration of bankruptcy or Pursuant to Angolan law, there are two types of preemptive
granted simultaneously with the underlying debt within 90 days insolvency procedures: the Composition; and the Creditors’
preceding the mentioned declaration shall always be assumed to be Agreement.
detrimental to the bankruptcy estate. Therefore, the creditors may
The process known as Composition is an agreement achieved within
challenge the relevant transactions and claw back on those
the judicial process, to be homologated by the court. The company
transactions.
may file for bankruptcy before the company ceases all payments to
Payments to creditors can only be made after the sale of the debtor’s creditors or in the 10 (ten) days following this event. If the filing is
assets. In the case that there are creditors benefiting from performed in a timely manner, the law establishes that the bankrupt
guarantees in rem, payment of such creditors will occur immediately company may propose an agreement to the creditors in order to
after the sale of the secured asset. Common creditors shall be paid achieve the restructuring of its debts and to avoid the declaration of
pro rata every time a value equivalent to 5% of the amount in debt bankruptcy. The agreement must be approved by creditors
to common creditors is deposited in the bank for the account of the representing 75% of the credits. In case the Composition is not
relevant bankruptcy. proposed or its terms are not approved, the creditors may
incorporate a limited liability company to continue commercial
5.2 Are there any preference periods, clawback rights or activity, with the purpose of satisfying the existing credits – the
other preferential creditors’ rights (e.g. tax debts, Creditors’ Agreement.
employees’ claims) with respect to the security? If there is no Composition or Creditors’ Agreement, or if they are
rejected by the court, the bankruptcy shall be, thereupon, declared.
The secured creditor has priority over unsecured creditors at the Finally, it must be noted that the debtor who has been indicted or
time of the payment of debts. tried for fraudulent bankruptcy is prevented from proposing any of
Only special privileged rights are given priority in relation to credits these rescue procedures.
secured by pledges or mortgages. Angolan law provides that senior
security (“Privilégios Creditórios”), in favour of the government
5.6 Please briefly describe the liabilities of directors (if
and/or local authorities (e.g. taxes and outstanding court fees), or in
any) for continuing to trade whilst a company is in
favour of other third parties (e.g. employees credits), rank ahead of financial difficulties in your jurisdiction.
guarantees in rem.
It must be noted that retention rights (under which certain creditors Directors of companies facing financial difficulties may continue to
are entitled to retain certain assets in their possession until their trade, provided they act with a special duty of care and do not violate
credit is paid) over a real estate asset prevails over a mortgage, even any legal duties and legal principles applicable to the management
if such mortgage has been previously registered. of companies. In the event directors have contributed to the
In case of different securities granted over the same asset, the oldest company’s bankruptcy, they are liable and subject to penalties.
(for registration purposes) security shall be paid first. In fact, Directors may also be held criminally liable for fraudulent
pursuant to Angolan law, the time of registration of a security is insolvency and negligent insolvency.
relevant for assuring the priority of the creditor.

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relevant government agency with authority and may vary depending

6 Foreign Investment and Ownership
on the nature of a specific project. A project may fall under the
Restrictions authority of a specific ministry, but in certain cases several
ministries may have authority. This often occurs with large projects
that need, for example, to obtain an environmental licence, in which
6.1 Are there any restrictions, controls, fees and/or taxes
on foreign ownership of a project company? case the intervention of the Ministry of Environment (“MINAMB”)
will always be required at a certain stage.
Angola

Foreign investment projects, such as the incorporation of a local

company or acquisition of shares in an existing Angolan company, 7.2 Must any of the financing or project documents be
are subject to the prior approval of the State Investment Agency registered or filed with any government authority or
(“AIPEX”). otherwise comply with legal formalities to be valid or
enforceable?
The new Private Investment Law entered into force in June 2018
introduced significant changes to the applicable legal framework.
Private documents with acknowledgment of a payment of obligation
Local partnerships are no longer mandatory for investing in certain
shall only be directly enforceable before the courts if authenticated
sectors of the economy, notwithstanding the local content
by a Notary Public or by any competent authority.
requirements provided for in regulations specifically applicable to
certain sectors, such as oil & gas. Also, there is now no minimum Except for certain pledge arrangements which need to be
investment amount in order to be eligible for benefits and incentives. 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
6.2 Are there any bilateral investment treaties (or other authority.
international treaties) that would provide protection
from such restrictions? Financing agreements which involve non-resident entities are
subject to BNA’s prior approval.
The Angolan State has signed bilateral investment treaties (“BITs”)
with several countries, such as Cape Verde, Cuba, Italy, Germany, 7.3 Does ownership of land, natural resources or a
Namibia, Portugal, Russia, Spain and South Africa. Angola is a pipeline, or undertaking the business of ownership or
member of the Multilateral Investment Guarantee Agency (the operation of such assets, require a licence (and if so,
“MIGA”) which provides dispute settlement assistance. Its past can such a licence be held by a foreign entity)?
efforts to resolve foreign investment disputes have proven to be
extremely successful and, as a result, expropriation of private Private ownership of land has been restricted in Angola and,
investment assets is today guaranteed to be fair. Angola also entered presently, land in Angola is divided, in terms of ownership, into
into a Trade Investment Framework Agreement (“TIFA”) with the private land (whose property rights are held by private entities and
United States in May 2009. 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
6.3 What laws exist regarding the nationalisation or
domain land can be granted to private entities or individuals, while
expropriation of project companies and assets? Are
any forms of investment specially protected? the use of state public domain land is limited and subject to special
public law rules. Please see question 2.2 above for details regarding
ownership of land granted to foreign entities.
The rules on nationalisation and expropriation procedures in Angola
are still regulated by the Nationalization Law (Law 3/76 of 3 March All mineral and natural resources found in the country’s subsoil
1976) and the Expropriation Law (Law 2030 of 22 June 1948). belong to the state, being deemed part of the latter’s “public
These regulations were actively enforced in the post-colonial era domain”. The respective prospecting, exploration, development and
and led to the nationalisation of companies and seizure of significant production are normally carried out through a concession.
real estate assets in Angola during this period. Although still in Concession rights should be exclusively granted to the national
force, this statute is clearly outdated and inconsistent with the concessionaires (e.g. Sonangol and Endiama).
Angolan economic environment, the present wording of the
Constitution and with the protection that is granted to private (and 7.4 Are there any royalties, restrictions, fees and/or taxes
foreign) investors under the Private Investment Law. Thus, under payable on the extraction or export of natural
the Constitution, it is only possible to temporarily seize the said resources?
assets or carry out their expropriation for reasons of public interest,
upon payment of fair and prompt compensation, which shall be a The export of natural resources is, typically, subject to specific
condition of effectiveness of the expropriation. In light of these customs regimes (e.g. subject to special authorisations, formalities
Constitutional provisions, the validity of the old statutes on and specific fees) that may vary with regards to the type of natural
nationalisation and seizure of assets may even be challenged. resource. By way of illustration, holders of mining rights are
entitled to trade the product of the mine operations, in the terms set
forth in both law and the relevant investment contract. The export
7 Government Approvals/Restrictions
of mineral resources duly extracted and processed is typically not
subject to customs duties and charges, except for fees for services
7.1 What are the relevant government agencies or rendered by customs. In turn, the direct or indirect exportation of
departments with authority over projects in the typical raw (not processed) mineral resources is subject to a 5% customs
project sectors? duty over the market value of the relevant mineral. The exportation
of Angolan mineral resources that is not expressly allowed under the
Normally, the governmental investment entity (AIPEX) is the Mining Code is prohibited. The exportation of crude oil is also

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subject to a specific customs regime and specific procedures must and dividends abroad qualify as invisible items of trade. A
be followed. The exportation of crude oil is subject to a statistical precondition for the right to transfer profits is the relevant company
tax of 1/100 ad valorem. having approved an investment project under the Private Investment
Law. Other conditions related to timings and submission of
documentation to BNA will also apply.
7.5 Are there any restrictions, controls, fees and/or taxes
on foreign currency exchange?

Angola
7.9 Are there any material environmental, health and
BNA is the foreign exchange control authority, which has a key role in safety laws or regulations that would impact upon a
terms of any repatriation of funds outside Angola. Under Angolan law, project financing and which governmental authorities
administer those laws or regulations?
any entity with a registered office in Angola and local branches qualify
as resident for foreign exchange purposes (Foreign Exchange
Residents). Any currency transfers between a Foreign Exchange The general principle set forth in the Angolan Constitution is that all
Resident and a Non-Foreign Exchange Resident are subject to different citizens have the right to live in a healthy and unpolluted
requirements depending on the nature of the underlying transaction. environment and that the government must take the necessary
The transfer of profits abroad qualify as invisible items of trade. As measures to protect the environment. The Environmental
mentioned above, a precondition and sale of shares, bonds and other Framework Law provides guiding principles for the prevention and
securities, involving rights or obligations between residents and non- control of pollution and standards to protect the environment. A
residents qualify as capital operations. The following rules apply: series of other laws and decrees provide for relatively extensive
regulation of environmental protection and industrial licensing.
(i) capital operations are subject to BNA’s prior approval. The
only exception is for capital operations of a personal nature Environmental licensing is mandatory in the case of construction,
referring to donations from abroad, as well as inheritances installation, refurbishment, extension, modification, operation and
and legacies made exclusively to individuals residing in decommissioning of activities that require an environmental impact
Angola; assessment study (e.g. agricultural, forestry, industrial, commercial,
(ii) the transfer of currency requests for a capital operation must residential, tourism or infrastructure projects, which, by virtue of
be made to the intermediary bank, which will then submit it their nature, size or location, may have implications for the
to BNA; and environmental and social equilibrium and balance or those activities
(iii) BNA’s authorisation for the transfer is valid for a period of that have a potentially hazardous nature) or in the case of activities
180 days. The period can be extended one or more times in that are likely to have a considerable environmental and social
the case that the licence was not wholly or partially used. impact. The MINAMB is responsible for implementing and
supervising the protection of environmental regulations.
7.6 Are there any restrictions, controls, fees and/or taxes Crude oil exploration and production activities are subject to a
on the remittance and repatriation of investment specific regime on environmental protection for the petroleum
returns or loan payments to parties in other industry. In addition to general obligations, oil companies should
jurisdictions? take the necessary precautions to protect the environment and limit
to the greatest extent possible their impact; several environmental
Please see question 7.5 above. plans are required for operations. The Ministry of Petroleum
supervises the oil industry in Angola and is responsible for
implementing national policy and coordinating, supervising and
7.7 Can project companies establish and maintain
onshore foreign currency accounts and/or offshore controlling all petroleum-related activities.
accounts in other jurisdictions?
7.10 Is there any specific legal/statutory framework for
An offshore bank account can only be opened by an Angolan project procurement by project companies?
company in the rare situation where an authorisation from BNA has
been obtained. Angolan project companies may freely open a The legal framework for public procurement in Angola applies to a
foreign currency bank account in Angola, though the operation of wide range of public contracts, including: (i) public works; (ii) lease
the said account is subject to the following limitations. or purchase of movable assets; (iii) acquisition of services; (iv) other
Credit operations in a foreign currency account are limited to: contracts to be entered into by public entities that are not subject to
(i) a deposit of foreign currency arising from its activities; and a special legal regime; (v) public-private partnership contracts; and
(vi) defence and security contracts. Several amendments have been
(ii) a deposit of interest accrued over funds in the relevant
implemented with regard to the specific awarding procedures,
account.
which are now: (i) a public tender (without a qualification phase);
Debit operations in a foreign currency account are limited to: (ii) limited bidding by pre-qualification; (iii) a limited tender by
(i) withdrawal or sale of foreign currency; and invitation; and (iv) a simplified procurement. As a general rule, a
(ii) foreign exchange transactions in accordance with Angolan public tender or a pre-qualification procedure is mandatory for
foreign exchange regulations. contracts with an estimated value equal to or higher than Kz
182,000,000.00 (approx. $1,075,126.55). The Law introduced the
7.8 Is there any restriction (under corporate law, framework agreements in order to allow public contracting entities
exchange control, other law or binding governmental to set the terms and conditions applicable to contracts that shall be
practice or binding contract) on the payment of entered with one or more contractors/suppliers for a given period of
dividends from a project company to its parent time.
company where the parent is incorporated in your
jurisdiction or abroad?

As mentioned above (see question 7.5 above), transfers of profits

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8 Foreign Insurance 10 Equipment Import Restrictions

8.1 Are there any restrictions, controls, fees and/or taxes 10.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or on importing project equipment or equipment used by
guaranteed by foreign insurance companies? construction contractors?
Angola

Under the Angolan General Insurance Law and the Insurance Equipment entering Angolan territory that is to be used in the
Regulations, all insurance contracts with (i) Angolan authorities, (ii) country must be declared to the customs authorities and subject to
activities carried out in Angola, or (iii) assets located in Angola have proper importation procedures. Only companies duly registered in
to be entered into by insurance companies duly authorised to carry Angola as importers are allowed to carry out import operations. As
out insurance activity in Angola. a rule, importations are subject to prior licensing procedures with
However, the Ministry of Finance may authorise that insurance the Ministry of Commerce and attract payment of customs duties
contracts to be entered into outside Angola with a foreign non- and other customs duties (in aggregate up to a maximum of 83% of
admitted insurer, subject to the favourable opinion of the Angolan the customs value). In addition, depending on the nature of the
Insurance Regulator (“ISS”) whenever the specific insurance in equipment, some specific authorisations may be required (from the
question cannot be obtained from a local insurer. The consequence ministry supervising the use of the relevant equipment) and some
of taking insurance outside Angola without the Ministry of additional procedures may apply.
Finance’s authorisation is that the obligations arising from such
contracts, as well as foreign court or arbitration decisions regarding 10.2 If so, what import duties are payable and are
the said insurance contracts, will not be enforceable in Angola. The exceptions available?
Law sets forth specifics regulations for co-insurance for the oil &
gas, mining, aviation and agriculture sectors. Equipment to be used directly and exclusively in petroleum
exploration and production operations or in mineral exploration,
8.2 Are insurance policies over project assets payable to evaluation, mining and processing operations may benefit from
foreign (secured) creditors? customs benefits.
The importation of equipment under a private investment project
Yes, in case all the foreign exchange requirements are fulfilled. approved by the AIPEX may also benefit from customs exemptions.

9 Foreign Employee Restrictions 11 Force Majeure

9.1 Are there any restrictions on foreign workers, 11.1 Are force majeure exclusions available and
technicians, engineers or executives being employed enforceable?
by a project company?
There is no legal definition for force majeure, but this concept is
Pursuant to the Angolan labour requirements, foreign nationals may generally accepted and enforceable (by doctrine and the Angolan
only be hired for professional, technical or scientific job positions courts). It usually relates to events from which liability does not
provided no Angolan nationals are available for such job positions. arise for those responsible for performing the obligation affected by
Companies operating in Angola are required to comply with a force majeure because the relevant events are by nature
statutory ratio of a minimum of 70% Angolans and a maximum of unpredictable, inevitable and irresistible.
30% expatriates (the so-called “Angolanisation” policy). Failure to
comply with this ratio may result in a fine of between seven and 10
12 Corrupt Practices
times the company’s average monthly salary per each expatriate
employee unlawfully employed.
In order to work lawfully in Angola, an expatriate employee must 12.1 Are there any rules prohibiting corrupt business
first obtain a work visa from the Angolan immigration authorities, practices and bribery (particularly any rules targeting
which is, under Angolan law, the only visa that allows an individual the projects sector)? What are the applicable civil or
criminal penalties?
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 an employer with some sort of Corruption in the private sector is not a crime in Angola. In Angola,
legal representation in the country (such as a branch or local this crime may take the form of fraud, abuse of trust, forgery and
company). other related common crimes.
The use of any other visa to perform work is illegal. In the event an Corrupt business practices and bribery targeting the public sector
employee works in Angolan territory without a work visa, the and public officials within the scope of the projects sector may
Angolan Visa Law stipulates fines applicable to the employee and to generally constitute a crime of corruption in Angola.
the employer (Kz 1,000, equivalent to $5,000). In addition to this, Corruption offences are addressed in the Law on the Criminalization
the employee will be expelled from the country and the employer of the Infractions Relating to Money Laundering (Law 3/14 of 10
will have to pay all related expenses. February). Law 3/14 was enacted in the context of 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. The Law on

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Money Laundering and Financing of Terrorism (Law 34/11 of 12 According to the information available, a new Criminal Code has
December) sets forth the crimes of terrorism, money laundering, been prepared and is expected to be enacted soon in Angola.
financing of terrorism and terrorist organisations. Reportedly, the Criminal Code will be aligned with the principles
Among other offences, Law 3/14 sets forth corruption-related contained in international conventions and does not differ much
criminal offences, including active and passive corruption (already from the rules enacted by means of Law 3/14.
provided for as criminal offences under the Criminal Code of 1886),
and enacts the new criminal offences of trading in influence, 13 Applicable Law

Angola
receiving undue benefits and economic participation in business.
Pursuant to Law 3/14, any person who makes a payment, gift, offer
or promise to a public employee with the intent of exerting influence 13.1 What law typically governs project agreements?
to obtain or retain business is criminally liable, and so is the public
employee who has been bribed. Any person who gives or promises Pursuant to the Angolan Civil Code, the general principle is that the
an undue pecuniary or non-pecuniary benefit to a public official creation and enforcement of the contracts are governed by the law
carrying out the duties of his or her office, or because of those chosen by the parties. Concession contracts and other project
duties, commits a criminal offence of receiving undue benefits, and agreements entered into with public entities are governed by
so does the public employee. Finally, provided that some conditions Angolan law.
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 supervision as 13.2 What law typically governs financing agreements?
public officials. The chapter of Law 3/14 relating to corruption also
includes the criminal offences of trading in influence and corruption Please see question 13.1 above. Frequently, financing contracts are
in international business. governed by foreigners laws.
Corruption practices involving customs officials are governed by a
separate regime set forth in the Customs Code, approved by Decree- 13.3 What matters are typically governed by domestic law?
Law 5/06 of 4 October. However, the Customs Code did not
fundamentally change the definition of corruption practices Angolan law shall apply whenever overriding mandatory provisions
previously contained in the Criminal Code and now in Law 3/14. thereof are at stake (public order principles of the Angolan legal
The Angolan legislator accepted that customs officials are entitled to framework, such as clauses excluding or limiting liability in cases of
receive small gifts made for cultural or protocol reasons. The wilful misconduct or gross negligence).
Customs Officials Career Statutes (approved by Presidential Decree
18/11 of 12 January) describes which gifts are permissible.
A Public Probity Law (Law 3/10 of 29 March) was enacted in 2010, 14 Jurisdiction and Waiver of Immunity
the provisions of which have a major impact on the regulation of
corruption in Angola. Among other objectives, this law aims to
14.1 Is a party’s submission to a foreign jurisdiction and
unify in one statute the different rules applicable to bribery in waiver of immunity legally binding and enforceable?
Angola, as well as to the actions of public officials. In brief, the
mainstay of the Public Probity Law is the principle of administrative
Submission to a foreign jurisdiction and a waiver of immunity are
probity under which public officials must perform their duties in an
effective and enforceable contract provisions, to the extent
honest manner, and shall not request or accept anything of value
permitted by Angolan law.
which may affect their independence 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 15 International Arbitration
indirectly, from Angolan or foreign individuals or corporations for
the performance of their duties.
15.1 Are contractual provisions requiring submission of
At an international level, Angola ratified:
disputes to international arbitration and arbitral
(a) the Protocol Against Corruption of the Southern African awards recognised by local courts?
Development Community (“SADC”), as per Council of
Ministers’ Resolution 38/05 of 8 August 2005;
Pursuant to the Angolan Voluntary Arbitration Law, the primary
(b) the United Nations Convention Against Corruption, as per domestic source of law relating to arbitration, parties enjoy full
National Assembly Resolution 20/06 of 23 June 2006; and
autonomy to designate the rules governing their proceedings and in
(c) the African Union Convention on Preventing and Combating doing so may choose to include specific procedural rules or simply
Corruption, as per National Assembly Resolution 27/06 of 14 refer to institutional rules, including those of the International
August 2006.
Chamber of Commerce (“ICC”).
The provisions of the SADC Protocol and the Conventions are not
Hence, there should be no issues with the enforcement of an award
directly applicable in Angola but are directed at the Angolan
based on the fact that it has been issued by the ICC. As to
legislative entities. These should subsequently develop legislation
enforcement of arbitral awards per se, a domestic award is
to implement the principles of the abovementioned Protocol and
automatically enforceable in the country. However, awards
Conventions. Law 3/14 implements some of the principles adopted
rendered in international arbitration proceedings – determined as
under those Conventions, significantly widening the scope of the
those where international trade interests are at stake, in particular
crime of corruption (including conducts that qualify as trading in
where parties to the arbitration agreement have business domiciles
influence and the criminal offence of corruption in international
in different countries at the time of the agreement’s execution, or the
business).

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 Vieira de Almeida and RLA – Sociedade de Advogados, RL Angola

place of performance of a substantial part of the obligations shareholder is subject to a 10% Investment Income Tax withholding.
resulting from the legal relationship from which the dispute arises is Any other interest derived from other loans or credit facilities paid
situated outside the countries where companies have their business by a local company to a non-resident entity is subject to a 15%
domiciles, or where the parties have expressly agreed that the scope Investment Income Tax withholding (for loans granted by resident
of the arbitration agreement is connected with more than one state, entities, the tax should be assessed by the beneficiary of the
are subject to prior recognition proceedings before Angolan judicial interest). As a rule, the mere enforcement of a security does not
courts under the Civil Procedure Code. trigger any income subject to tax. If the payment of any additional
Angola

proceeds is agreed between the parties, Investment Income Tax

withholding may apply.
15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
conventions? 17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What
Angola has been a signatory of the New York Convention on the taxes apply to foreign investments, loans, mortgages
Recognition and Enforcement of Foreign Arbitral Awards since 12 or other security documents, either for the purposes
of effectiveness or registration?
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 arbitral awards are Foreign investment operations may benefit from tax and customs
recognisable and enforceable, so long as granted in the territory of incentives provided that the investor’s project is submitted and duly
another Contracting State. approved by investment entities under the Private Investment Law.
The key elements considered by the Angolan authorities when
It is important to add that there is still a certain level of resistance
granting tax and customs incentives are the location of the
from local courts and practitioners in respect of arbitration, although
investment and the sector of activity (the so-called Development
it is expected that the accession to the New York Convention and its
Zones and Priority Sectors).
implementation will encourage courts to adopt an arbitration-
friendly approach. The tax benefits available for private investment operations include
temporary exemptions from corporate income tax on profits,
withholding tax on dividends and conveyance tax on the acquisition
15.3 Are any types of disputes not arbitrable under local of real estate property. Goods and equipment imported under a
law?
private investment project may also benefit from exemptions from
customs duties and other customs charges.
Under Angolan law, parties are generally free to submit their
Dividends paid by an Angolan resident company to its foreign
disputes to arbitration, with an exception made to disputes that fall
shareholder – either individuals or corporate entities – are subject to
under the state courts’ exclusive jurisdiction and disputes that relate
a 10% Investment Income Tax withholding which is their final tax
to inalienable or non-negotiable rights.
liability in Angola. Tax must be withheld and delivered to the
Angolan Tax Authorities by the resident company. Said withholding
15.4 Are any types of disputes subject to mandatory tax is also applicable in the allocation of profits between a
domestic arbitration proceedings? permanent establishment located in Angola and its foreign head
office.
This is the case, for instance, with disputes arising from private Additionally, there is a supplementary tax over dividends which was
investment contracts (entered into between the Angolan State and created by the new Private Investment Law. The supplementary tax
private entities under Angola’s Private Investment Framework) that is applicable whenever the amount of dividends distributed exceeds
are referred to arbitration, the same applying to disputes concerning the shareholder contribution on the company’s own capital, as
petroleum activities. detailed below:
(i) 15%, up to 20%;
16 Change of Law / Political Risk (ii) 30%, between 20% and 50%; and
(iii) 50%, when it exceeds 50%.

16.1 Has there been any call for political risk protections
The supplementary tax is not applicable whenever the dividends are
such as direct agreements with central government or reinvested in Angola.
political risk guarantees? Loans and securities are subject to Stamp Duty in Angola – rates
vary from between 0.1% and 0.5% depending on the extent of the
Typically, those agreements do not provide any particular political loan/guarantee – provided that one of the following requirements is
risk protections and the change-in-law risk is addressed by contract in met: (i) the loan/security is granted in Angolan territory; or (ii) the
the standard and international terms for project finance agreements. 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
17 Tax Duty regardless of the place where they are signed.
Securities that are deemed materially ancillary of another contract
17.1 Are there any requirements to deduct or withhold tax already subject to Stamp Duty (e.g. a loan agreement), provided
from (a) interest payable on loans made to domestic both contracts are entered simultaneously (i.e. the guarantee must be
or foreign lenders, or (b) the proceeds of a claim entered within 90 days after the main contract), are not subject to
under a guarantee or the proceeds of enforcing Stamp Duty in Angola.
security?

Interest paid under a shareholder’s loan to a local or foreign

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Vieira de Almeida and RLA – Sociedade de Advogados, RL Angola

18 Other Matters 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
18.1 Are there any other material considerations which issues, the applicability of Shari’ah or the conflict of
should be taken into account by either equity Shari’ah and local law relevant to the finance sector?
investors or lenders when participating in project
financings in your jurisdiction?
Please see question 19.1 above.

Angola
There are no other material considerations.
19.3 Could the inclusion of an interest payment obligation
in a loan agreement affect its validity and/or
18.2 Are there any legal impositions to project companies enforceability in your jurisdiction? If so, what steps
issuing bonds or similar capital market instruments? could be taken to mitigate this risk?
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market
instruments. It is common practice in Angola to include an interest payment in a
loan agreement subject to Angolan law, which is fully valid and
enforceable. The law foresees maximum rates of interest that
The Angolan Securities Code is quite recent and the regulations
should be quarterly updated due to the inflation rates in the country.
contain the organisational rules and administrative requirements for
open companies and other issuers of securities admitted to trading in
regulated markets. There is little experience in capital markets 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.

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 Vieira de Almeida and RLA – Sociedade de Advogados, RL Angola

Manuel Protásio Vanusa Gomes

Vieira de Almeida RLA – Sociedade de Advogados, RL
Rua Dom Luis I, 28 Edifício Dália Plaza – Av. de Portugal
1200-151 Lisboa 31–35, 9.º Andar
Portugal Luanda
Angola
Tel: +351 21 311 3400
Angola

Email: [email protected] Tel: +244 937 819 421

URL: www.vda.pt Email: [email protected]
URL: www.rlaadvogados.com

Academic background Academic background

Law Degree, Catholic University of Lisbon, Faculty of Law. Law Degree, University of Coimbra, Faculty of Law.
Professional experience Professional experience
Manuel joined VdA in 1991 and currently is the Group Executive Vanusa joined RLA in 2015. She is a Managing Associate at the M&A,
Partner of the Infrastructure, Energy & Natural Resources group and Banking & Finance, Corporate & Governance, Tax and Employment &
heads the Energy & Natural Resources practice. In such capacity he Benefits practice areas, where she has been actively involved in
has participated and/or led the teams involved in the most relevant several transactions in Angola. She has advised several clients in
projects carried out in Portugal to date in the power (including diverse sectors in transactions such as mergers, spin-offs, joint
renewable energies), oil & gas, road, transport, water and wastes ventures and group restructuring operations. She has particular and
sectors. He has also been actively working on regulation and public vast experience in M&A transactions within the TMT and Banking &
procurement procedures of those sectors. Finance sectors. Vanusa has also provided tax assistance to groups
and corporations in the international and domestic tax optimisation of
Published works
banking and financial structures, real estate projects and domestic
Author of various articles including the chapter about Portugal in The supplies of goods and services.
Projects and Construction Review, published by Law Business
Other professional background
Research in 2016, 2017 and 2018.
Before joining the firm she worked as a Senior Associate at Siqueira
Memberships
Castro & Nobre Guedes and at Miranda Alliance (Miranda Correia e
Admitted to the Portuguese Bar Association. Amendoeira & Associados/Fátima Freitas) in Luanda.
Admitted to the Timor-Leste Bar Association (Conselho de Gestão e Teaching chairs
Disciplina).
Assistant professor of Commercial Law at the Faculty of Law of the
Languages Metodista University of Angola.
English and French. Memberships
Admitted to the Angolan Bar Association.
Languages
English.

Vieira de Almeida (VdA) is a leading international law firm with more than 40 years of history, recognised for its innovative approach and impressive
track record 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 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
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 jurisdictions, 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-Leste
www.vda.pt

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Chapter 7

Brazil
Ana Carolina Barretto

Veirano Advogados Amanda Leal Brasil

In addition, it is worth noting that as part of the reforms announced

1 Overview
by the new Brazilian government that took office as of January
2019, the majority of state-controlled companies may be privatised
1.1 What are the main trends/significant developments in with the aim of reducing expenditures.
the project finance market in your jurisdiction?
1.2 What are the most significant project financings that
The Brazilian Bank of Economic and Social Development (BNDES) have taken place in your jurisdiction in recent years?
still plays an important role in project financing transactions as the
main source to provide financing to such projects in Brazil. Besides The project bonds bulletin published by the Brazilian government
BNDES, Banco do Nordeste do Brasil (BNB, a development bank for outlined that since 2012 and until February 2018 there were more
the Brazilian Northeast), state-owned banks and funds, such as Banco than 200 issuances of infrastructure debentures: 152 relating to the
do Brasil, Caixa Econômica Federal and FI-FGTS (an investment power sector; 38 relating to transportation; five relating to
fund of the employees severance fund FGTS), as well as some telecommunications; and four relating to sanitation.
Brazilian and international commercial and investment banks, such as
At the end of 2018 BNDES approved a financing of R$5.2 billion
Itaú BBA, Bradesco BBI, BTG Pactual, Santander and others, have
(approximately US$1.35 billion) for the transmission line of Xingu
also been very active in the financing of projects in Brazil.
Rio Transmissora de Energia, a company controlled by State Grid.
The BNDES financing mechanism is still popular in the context of The project aims to increase the flow of power generated by the Belo
its favourable financial conditions which, however, will gradually Monte hydropower project, which will increase the installed
change due to BNDES’ new strategies already announced for the capacity of the Brazilian electric system by 11.233 MW. The total
next few years, especially regarding new financing conditions and investment amount estimated by State Grid, the controlling
the replacement of the Long-Term Interest Rate (TJLP) by the company of the project, was R$8.5 billion (approximately US$2.2
Long-Term Rate (TLP), which would bring BNDES financing rates billion), and the company also raised approximately R$1.1 billion
closer to market rates. In this scenario, although BNDES is still (~US$290 million) by means of project bonds.
competitive, in addition to diverse loan structures commonly used
In the same period, BNDES also approved a financing of R$3.64
for project finance in Brazil (some of them very similar to
billion (~US$940 million) to Via Paulista, a company controlled by
international practice, including direct loans and syndicated loans,
Arteris, for the construction of the railway Itaporanga-Franca,
with administrative and security agents, intercreditor agreements
known as “Rodovia dos Calçados”, which is an important railway
and guarantee sharing agreements), the capital markets have
that crosses 35 municipalities in the State of São Paulo, with over
become an interesting mechanism for financing some projects.
2.4 million inhabitants. The project finance also included project
The trend that has been talked about in recent years is that BNDES bonds in the amount of R$400 million (~US$104 million), with a
would gradually decrease its role as the main financier of Brazil’s tenor of eight years.
infrastructure projects, and that commercial banks (national and
foreign) and capital markets would assume increasing importance in
the financing of such projects. The thought is that BNDES would, 2 Security
over time, assume a complementary role, acting as a catalyst to
mobilise other sources of funds, much like international
2.1 Is it possible to give asset security by means of a
development banks are perceived to do in other countries. In this
general security agreement or is an agreement
context, project bonds are becoming increasingly popular in Brazil required in relation to each type of asset? Briefly,
as a financing mechanism and depending on the sector (and on the what is the procedure?
ministry of the relevant sector to prioritise the project for such
investment) they may benefit from tax incentives. The so-called Project financings in Brazil typically comprise the following
“incentivised debentures” market had a significant development in standard security package which will depend on the type of asset to
2018, totalling approximately US$6.2 billion and until February be secured: (i) sponsor guarantees (sometimes replaced by bank
2019 the issuance of such debentures amounted to approximately guarantees such as stand-by letters of credit), especially in the pre-
US$1.2 billion, which is almost double the amount issued in the first operational stage; (ii) pledge or fiduciary transfer of title to shares or
quarter of 2018. This illustrates the growing appetite for capital quotas in the special purpose vehicle (SPV) established for the
markets debt issuances involving infrastructure projects.

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 Veirano Advogados Brazil

project; (iii) security over the SPV’s trade receivables, bank assignment of receivables to be perfected, the debtors must be
accounts and financial assets, formalised by pledge or fiduciary notified of the assignment. In order to avoid this requirement, it
assignment structures; (iv) real guarantees over the SPV’s assets; may be possible to simply direct debtors to make payment into a
and (v) security over specific rights emerging from government certain ear-marked account, but that would not constitute a true
authorisations issued for the project, also formalised by pledge or assignment of receivables and would not give the creditor the right
fiduciary assignment structures. to enforce payment directly from the debtor.
There are differences in the legal consequences deriving from
Brazil

electing pledges or fiduciary assignment structures for the security 2.4 Can security be taken over cash deposited in bank
package and its relevant procedures. Depending on the type of accounts? Briefly, what is the procedure?
security, different perfection requirements and other peculiarities
must be observed, such as registration with various public registries The security over cash deposited in bank accounts is very usual in
depending on the type of asset, notices to counterparties, etc. project finance and can be formalised under Brazilian law by pledge
or fiduciary assignment structures. In order for the bank to agree to
2.2 Can security be taken over real property (land), plant, control the account and block unauthorised transfers, it is necessary
machinery and equipment (e.g. pipeline, whether to enter into an account management agreement with the relevant
underground or overground)? Briefly, what is the bank where the cash is deposited. Without such agreement, in
procedure? principle, the bank would not take any action to prevent movements
of funds out of the account.
Yes. The most common types of real guarantees are mortgages,
pledges and fiduciary assignments of title to real property.
2.5 Can security be taken over shares in companies
Mortgages are generally created over immovable properties, incorporated in your jurisdiction? Are the shares in
although some movable properties may be secured by mortgages, certificated form? Briefly, what is the procedure?
such as aircraft and vessels, which are also regarded as special
mortgages (hipoteca especial) and governed by specific federal Security is frequently taken over shares or quotas of a relevant
laws. The title and possession over the assets remain with the company, which carries the hard assets, contracts and governmental
borrower. Mortgages are created through the registration of the authorisations that comprise the project by means of pledge or
security with the competent public registry of the place where the fiduciary assignment structures. For purposes of perfection, the
asset is located and second and third mortgages may be created over security must be formalised in written form, contain references to
a given asset. the secured amount, describe the shares/quotas granted as security
As a general rule, pledges may be created over movable assets. The and be registered with the relevant Registry of Titles and Deeds of
custody of the pledged assets should be transferred to the lender as the debtors’ corporate seat, as a condition of effectiveness for
a default, but more often than not the debtor is allowed to keep pledges and validity for the fiduciary property. In addition, in order
possession of the pledged assets. Pledges are created through the to be enforceable against third parties, the pledge must be registered,
registration of the security with the competent public registry of the as the case may be, in the shares registry book of the SPV, if the SPV
place where the asset is located. is a Sociedade Anônima. Please see question 5.4 below for more
information regarding enforcement of security over shares.
The main difference between a security created under a fiduciary
assignment (alienação ou cessão fiduciária) in relation to the
security created by mortgage or pledge is that in the fiduciary 2.6 What are the notarisation, registration, stamp duty
assignment, the debtor effectively transfers its property rights over a and other fees (whether related to property value or
given asset to the creditor. The creditor then becomes vested with a otherwise) in relation to security over different types
special sort of “reversible ownership” in which restitution to the of assets (in particular, shares, real estate,
receivables and chattels)?
debtor is conditioned to the satisfaction of the secured obligation.
Possession rights over the secured asset, however, remain with the
debtor. According to Brazilian law and to ensure the enforceability of the
security, the documents in a foreign language other than Portuguese
It is important to note that all-asset security structures present in
must be translated by a sworn translator, notarised by a notary
other countries are not available under Brazilian law, and each
public and legalised with the nearest Brazilian Consulate (or
individual asset over which security is created must be properly
apostilled if the country where the document is signed is a member
identified. Accordingly, project finance security packages will
of the Hague Convention) and then registered with the relevant
normally cover the most relevant assets of the borrower, but not
public registry in Brazil. Notary public registration fees are
necessarily all assets as perfection costs and requirements may not
determined by local regulations and will also vary depending on the
make it worthwhile to include assets that do not have material
value of the secured obligation.
economic value.

2.7 Do the filing, notification or registration requirements

2.3 Can security be taken over receivables where the in relation to security over different types of assets
chargor is free to collect the receivables in the involve a significant amount of time or expense?
absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
Depending on the location of the registration and amount involved
in the secured obligation the notary public registration fees may be
Security over receivables in the context of project finance
significant. Public registries located in larger cities tend to have
transactions in Brazil are usually subject to ear-marked accounts
faster processing times than those located in remote areas.
which are created for the transaction and that may be subject to
being blocked if an event of default occurs. However, for an

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Veirano Advogados Brazil

In addition, while it can be possible to structure fiduciary

2.8 Are any regulatory or similar consents required with assignments for certain types of assets under Brazilian Civil Code
respect to the creation of security over real property provisions and, in the case of fiduciary transfer of title to real
(land), plant, machinery and equipment (e.g. pipeline,
property, under Law 9514/1997, certain types of fiduciary
whether underground or overground), etc.?
assignments are provided for exclusively under the Brazilian
Capital Markets Law (Federal Law 4,728/1965), such as fiduciary
Project finance involving public entities or relating to projects that
assignments of fungible assets. Even though there is some
involve public concessions or are otherwise subject to regulation

Brazil
controversy on this point, some commentators understand that
(such as power, oil and gas, public infrastructure concessions, etc.)
fiduciary assignments granted under the Brazilian Capital Markets
are subject to the applicable rules of the relevant regulations, which
Law can only be created within the scope of Brazilian financial and
may impose restrictions regarding the project’s ability to give
debt capital markets as regulated by the Brazilian Central Bank
security over assets that are deemed essential to the company’s
(BACEN) and/or by the Brazilian Securities Commission
operations and may limit the lenders’ ability to enforce certain of the
(Comissão de Valores Mobiliários or CVM).
debtor’s obligations.

4.2 Do restrictions apply to foreign investors or creditors

3 Security Trustee in the event of foreclosure on the project and related
companies?

3.1 Regardless of whether your jurisdiction recognises

Fiduciary assignments over certain types of assets would only be
the concept of a “trust”, will it recognise the role of a
security trustee or agent and allow the security available to Brazilian banks or foreign banks with BACEN
trustee or agent (rather than each lender acting authorisation to operate in the country. Alternative structures for
separately) to enforce the security and to apply the security packages may be put in place to mitigate the risk that
proceeds from the security to the claims of all the fiduciary assignments of certain types of assets in favour of
lenders? international financial institutions may be challenged, such as the
use of a local financial institution as collateral agent.
The absence of the legal concept of a “trust” creates a hurdle in both Some foreign investors or creditors have attempted to circumvent
the structuring of the security package and in its enforcement. This legal restrictions by dressing up the step-in as “payment in kind”
makes the mechanics of step-ins and enforcement on behalf of (i.e. repayment of the debt with project assets), but such
multiple lenders more complicated than in countries that have trust workarounds may be challenged in Brazilian courts.
structures.
Creative lawyering and a market acknowledgment of the
importance of the step-in right for lenders in project finance
3.2 If a security trust is not recognised in your structures have resulted in the development of alternative structures
jurisdiction, is an alternative mechanism available to implement step-ins in a default scenario, such as granting of
(such as a parallel debt or joint and several creditor powers of attorney on behalf of the lenders as part of the security
status) to achieve the effect referred to above which
package which allow them to replace the company’s management in
would allow one party (either the security trustee or
the facility agent) to enforce claims on behalf of all the case of a default and other mechanisms that seek to allow the
lenders so that individual lenders do not need to creditor to gain voting or political control of the project in case of a
enforce their security separately? default scenario.

A mandate structure must be adopted to accommodate the syndicate

5 Bankruptcy and Restructuring
agent. Since the syndicate agent is not a trustee, loan documentation
is sometimes signed by all syndicate members, and syndicate
Proceedings
members often have to participate directly in any enforcement
procedures. 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
4 Enforcement of Security security?

4.1 Are there any significant restrictions which may All enforcement proceedings that could pose a judicial lien over the
impact the timing and value of enforcement, such as debtor’s assets are stayed for 180 days following the court decision
(a) a requirement for a public auction or the which accepted the bankruptcy proceeding, except if: (i) the
availability of court blocking procedures to other reorganisation plan (plano de recuperação judicial) is not approved
creditors/the company (or its trustee in within the stay period; and (ii) unless it is not extended for an
bankruptcy/liquidator), or (b) (in respect of regulated
additional period at the court’s discretion, the creditors should be
assets) regulatory consents?
able to resume the execution and enforcement proceeding. Courts
tend to extend the stay period whenever necessary.
The creditor’s right to keep the assets given as a debt guarantee in
It is worth noting that in the context of security packages involving
case of foreclosure is subject to certain legal restrictions. According
fiduciary assignments, technically speaking, the assets leave the
to Brazilian law, enforcement procedures should involve a public
debtor’s estate and become property of the creditor. As a result, in
auction (this principle later evolved to include private auction sales
case of bankruptcy of the debtor such assets would not be subject to
as an alternative) of the asset given as security, and the creditor
the bankruptcy and the creditor may recover the asset without
would only be allowed to receive the proceeds of the sale required to
having to join the bankruptcy judicial proceeding.
cover the debt, with any excess being returned to the debtor.

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The advantage of the fiduciary transfer of title vis-à-vis the pledge is

the treatment for fiduciary transfer of title in insolvency 5.5 Are there any processes other than formal insolvency
proceedings: whilst the claim secured by a pledge can be ultimately proceedings that are available to a project company
to achieve a restructuring of its debts and/or
modified under a judicial reorganisation plan and be novated cramdown of dissenting creditors?
thereunder, and must be paid within the scope of the winding-up
proceedings in case of liquidation of the debtor, in the case of
The Bankruptcy Law governs corporate insolvency in Brazil,
fiduciary transfer of title the enforcement rights of the creditor
aiming at the reorganisation of viable businesses and the efficient
Brazil

cannot be modified in reorganisation proceedings and are not

liquidation of businesses that should be discontinued. In the context
affected by a winding-up procedure.
of a judicial reorganisation, a reorganisation plan (consisting of
changes in the corporate control or a sale of its assets, a debt for
5.2 Are there any preference periods, clawback rights or equity swap, mergers or leases of assets) must be presented, voted
other preferential creditors’ rights (e.g. tax debts, and approved by the creditors divided into different classes.
employees’ claims) with respect to the security? However, the bankruptcy court has discretionary powers to
cramdown such plan and confirm the reorganisation.
The clawback period is established by the relevant bankruptcy
court, which begins as of 90 days before: (i) the date of the first
protest for non-payment by a public notary; (ii) the date of the filing 5.6 Please briefly describe the liabilities of directors (if
any) for continuing to trade whilst a company is in
for voluntary or involuntary bankruptcy; or (iii) the date of the filing financial difficulties in your jurisdiction.
for judicial reorganisation proceedings (as applicable). Preferential
transfers do not necessarily involve wrong actions (i.e. with the
The Bankruptcy Law provides certain situations in which preferential
purpose of emptying the company’s estate) and may be deemed as
or fraudulent transfers and payments made by the debtor on or within
preferential or unfair regardless of the intention of the parties.
a suspect period may be avoided by the bankruptcy estate: (a) the
The proceeds of the judicial sale of the bankruptcy estate’s assets payment of unexpired debt made on or within the suspect period; (b)
must be paid to the creditors according to the following order of the payment of matured debt by any other means not provided by the
preference: (a) motions for restitution (provided for the return of agreement; (c) the creation of a secured interest in the debtor’s
third-party property to the respective owner); (b) administrative property, assets or receivables for debts incurred prior to the suspect
claims (“créditos extraconcursais”, which includes claims period; (d) the sale of a set of operational assets as a going concern
constituted after adjudication of the bankruptcy); and (c) pre- (which includes the sale of strategic or high-value assets) either
petition claims (“créditos concursais”), sub-divided as follows: (c.i) without the express approval or the payment of all creditors, unless
labour claims (capped at 150 minimum wages per employee), and the creditors do not oppose the sale within 30 days as of the formal
credits originating from occupational accidents; (c.ii) secured notification of the sale; and (e) the transfer of any interest on the
claims up to the limit of the value of the encumbered asset; (c.iii) tax debtor’s real property. Managers are not personally liable for acts of
claims (tax fines excluded); (c.iv) special privilege claims set out by management of the company, unless they cause damages (to the
law; (c.v) general privilege claims set out by law; (c.vi) unsecured company, the shareholders or third parties) as a result of breach of the
claims; (c.vii) contractual fines, pecuniary penalties and tax fines; law or the bylaws of the company, and/or fault or in wilful
and (c.viii) subordinated credits/claims. misconduct.

5.3 Are there any entities that are excluded from

bankruptcy proceedings and, if so, what is the
6 Foreign Investment and Ownership
applicable legislation? Restrictions

Yes. Different legislation governs the insolvency of financial

6.1 Are there any restrictions, controls, fees and/or taxes
institutions, utilities, insurance companies and other entities. The on foreign ownership of a project company?
Bankruptcy Law does not apply to state-owned corporations
(empresas públicas) or companies with private capital controlled by
Foreign ownership of a project company in Brazil can be formalised
governmental bodies (sociedades de economia mista).
by means of contributions to the capital of a Brazilian subsidiary,
which can be, among other others, through capital contributions in
5.4 Are there any processes other than court proceedings foreign hard currency, assets or credits, which must be registered
that are available to a creditor to seize the assets of with BACEN. Such foreign capital registration allows the Brazilian
the project company in an enforcement? subsidiary to remit dividends to its foreign shareholders and to
repatriate the registered capital. Such registration process is made
Out-of-court enforcement is the prevailing rule for security over through an electronic system of BACEN in which the Electronic
shares and it is generally authorised under the contract and Registration Statement/Foreign Direct Investment, known as
performed, in case of pledges, through an irrevocable power of RDE/IED, related to information in connection with the Brazilian
attorney executed by the guarantor granting to the relevant lender the subsidiary and the foreign investor, shall be registered.
necessary powers to conduct the out-of-court sale. Taking security According to Normative Rulings 1,548/2015 and 1,634/2016 issued
over the quotas or shares of the SPV is the main mechanism adopted by the Federal Revenue Office, foreign legal entities and individuals
to allow lender step-in rights in Brazilian project financings. In owning corporate equity, real estate, airplanes, ships and other
addition, as explained in question 4.2 above, the granting of powers assets located in Brazil, which are subject to public registration with
of attorney on behalf of the lenders as part of the security package the relevant Brazilian authorities, are obliged to register themselves
providing the lender’s powers to replace the company’s management with the Corporate Taxpayers’ Registry (CNPJ) if a legal entity, or
in case of a default are also alternative structures aiming to achieve with the Individual Taxpayers’ Registry if an individual. The same
the same objectives as traditional step-in rights. applies to beneficiaries of certain security such as mortgages.

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order to be able to perform such activities pursuant to concessions or

6.2 Are there any bilateral investment treaties (or other authorisations. There is no limitation or requirement for the
international treaties) that would provide protection ownership or control of the Brazilian incorporated company to be
from such restrictions?
held by local residents, expect for certain limited cases.

Brazil is not a party to bilateral investment treaties applicable

specifically to foreign ownership of a project company. 7.4 Are there any royalties, restrictions, fees and/or taxes
payable on the extraction or export of natural

Brazil
resources?
6.3 What laws exist regarding the nationalisation or
expropriation of project companies and assets? Are Concession and authorisation contracts signed with the relevant
any forms of investment specially protected?
government authority usually set forth, among other provisions,
the concessionaire’s rights and duties, tariffs, administrative
There is no Brazilian law specifically addressing the nationalisation penalties, extension and termination procedures. As an example,
or expropriation of project companies and assets, but any such according to the concession regime of the oil and gas industry, the
expropriation would require the government to indemnify the compensation to the relevant government authority occurs by
owners. means of: (i) a signing bonus, which is a lump sum paid by the
winner of a concession area upon the execution of the concession
7 Government Approvals/Restrictions contract; (ii) monthly royalties, which may be reduced depending
on the geological risks, production expected and other relevant
issues; (iii) special participation compensation to be payable by
7.1 What are the relevant government agencies or concessionaires in cases of high volumes of oil and gas production
departments with authority over projects in the typical or high profitability fields; and (iv) an annual fee for the
project sectors? occupation or retention of areas during the exploration,
development and production phases and calculated based on the
Project sectors involving energy, railways, airports, ports, oil and gas km of the area retained or occupied.
and infrastructure in general are regulated by means of regulations
and inspections by each of the specific applicable regulatory
7.5 Are there any restrictions, controls, fees and/or taxes
authority agencies, such as, among others, National Agency of on foreign currency exchange?
Electric Energy (Agência Nacional de Energia Elétrica – ANEEL),
National Agency of Ground Transportation (Agência Nacional de
Agreements formalised between Brazilian parties may not establish
Transportes Terrestres – ANTT), National Agency of Water
payments to be made in Brazil in foreign currency, otherwise such
Transportation (Agência Nacional de Transportes Aquaviários –
agreements can be challenged and considered null and void.
ANTAQ) and National Agency of Oil, Natural Gas and Biofuels
Therefore, in the case of local agreements signed by two companies
(Agência Nacional do Petróleo, Gás Natural e Biocombustíveis –
headquartered in Brazil, the compensation must be paid in Reais,
ANP). Each of these sectors are highly regulated and have their own
which is the Brazilian currency. BACEN is the public authority
respective regulatory framework and applicable rules.
responsible for authorising private commercial banks to operate
with foreign currency. Controls are exercised on foreign-currency
7.2 Must any of the financing or project documents be transactions, including payment for imports and exports, transfers of
registered or filed with any government authority or capital, repatriation of capital and payments of dividends, interest,
otherwise comply with legal formalities to be valid or and royalties, among others. In this sense, BACEN exercises
enforceable?
certain control on cross-border currency transactions, regulating the
inflow and outflow in Brazil of domestic and foreign currency. All
Except for compliance with the respective regulatory framework foreign exchange transactions must be made through an authorised
and applicable rules, in general, projects are no required to register bank.
or file with a government authority or otherwise to be valid or
enforceable. Nevertheless, the granting of collateral (such as
pledges and mortgages) is usually subject to registration with the 7.6 Are there any restrictions, controls, fees and/or taxes
on the remittance and repatriation of investment
relevant public registry in order to give publicity to third parties and
returns or loan payments to parties in other
secure first priority of the credit. In addition, projects financed by jurisdictions?
incentivised debentures must be filed with and approved by the
ministry of the relevant sector so that the project can be deemed as
Foreign capital registered with BACEN may be repatriated to its
prioritised for such investment and eligible for certain tax
country of origin, which is usually done after: (i) sale of shares to
incentives.
third parties; (ii) capital reduction; or (iii) the company’s
liquidation. In order to avoid remittance of funds restrictions, a non-
7.3 Does ownership of land, natural resources or a resident must comply with registration procedures with BACEN
pipeline, or undertaking the business of ownership or when investing in Brazil, as set forth in question 6.2 above. Returns
operation of such assets, require a licence (and if so, in excess of the registered amount (i.e. the inbound investment) will
can such a licence be held by a foreign entity)?
be considered as capital gains for the foreign investor, and thus
generally subject to 15% Withholding Income Tax, although there
Activities relating to natural resources are usually subject to may be exceptions to this. No restrictions are imposed on the
authorisations or concessions, if relating to public services. amount of dividends distributable to shareholders domiciled abroad.
Foreign entities must incorporate a subsidiary in Brazil under
Brazilian laws, with management and head offices in Brazil, in

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7.7 Can project companies establish and maintain 8 Foreign Insurance

onshore foreign currency accounts and/or offshore
accounts in other jurisdictions?
8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or
Yes, provided that project companies comply with Brazilian laws guaranteed by foreign insurance companies?
with respect to information to be provided to the Brazilian Federal
Services and evidence of the origin of such funds.
Brazil

Insurance policies are strictly regulated in Brazil and, as a general

rule, project companies must contract insurance coverages in Brazil,
7.8 Is there any restriction (under corporate law, with insurance companies in Brazil. Exceptions are in case a
exchange control, other law or binding governmental relevant insurance coverage for a specific risk is not offered by local
practice or binding contract) on the payment of insurance companies or in case of coverage of risks abroad (i.e. risks
dividends from a project company to its parent
associated to an infrastructure project finance in Brazil) and
company where the parent is incorporated in your
jurisdiction or abroad? provided that the contracting party of such insurance policy is a
natural person (pessoa natural) resident in Brazil.
There are no restrictions, except for compliance with the provisions
outlined in questions 6.1 and 7.5 above. 8.2 Are insurance policies over project assets payable to
foreign (secured) creditors?

7.9 Are there any material environmental, health and

safety laws or regulations that would impact upon a Yes, the lender’s requirement of being appointed as co-insured under
project financing and which governmental authorities a relevant insurance policy contracted by the borrower is common in
administer those laws or regulations? project financings in Brazil. In this case, in case of any insurance
claims involving the project assets, the secured creditors shall be
Depending on the type and size, a project finance is usually, in entitled to receive the indemnification from the insurance company.
addition to other licensing processes, subject to an environmental
licensing process, involving a provisional licence, an installation 9 Foreign Employee Restrictions
licence and an operational licence, as per the applicable strict
environmental legislation. Depending on the particularities of the
projects and of the area, impact on archeologic sites and/or 9.1 Are there any restrictions on foreign workers,
indigenous communities may be expected and other authorities, technicians, engineers or executives being employed
such as the Archeology and Historical Heritage Authority (IPHAN) by a project company?
and the National Indigenous People Foundation (FUNAI), may be
called to take part in the environmental permitting process. In such Foreign workers, technicians, engineers or executives employed by
a case, additional surveys and impact assessments are likely to be a project company will need to obtain a visa and a work permit from
requested from the project company. the Ministry of Labour to work in Brazil, provided that the nature
As a practical example, energy projects eligible to participate in a and term of the visa will depend on the work to be performed in
regulated market auction are subject to a technical qualification Brazil. Foreigners working in Brazil have the same rights as
process beforehand carried out by the EPE – Empresa de Pesquisa Brazilian employees. It is important to note that Brazilian labour
Energética. Among the main requirements by the EPE is that the laws establish that at least 2⁄3 of the company’s total number of
project must obtain the environmental licences applicable to the employees must consist of Brazilian nationals. However, this quota
project and present environmental studies produced for the purposes may be decreased in case specialised services are required for the
of the environmental licence application. Regarding oil and gas relevant work and they are not available in Brazil.
activities, as part of the concession regime, in addition to the
environmental licence, during the exploration phase, companies
10 Equipment Import Restrictions
operating blocks under the Production Sharing Agreement (PSA)
regime are obliged to comply with policies and contingency plans
for health, safety, security and the environment. 10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by
construction contractors?
7.10 Is there any specific legal/statutory framework for
procurement by project companies?
In principle, there are no restrictions but unless an exemption is
available, all equipment imported into Brazil is subject to Import
No, expect for public administration applicable to special funds,
Tax (named II) and Federal Excise Tax (named IPI). In this context,
independent agencies, public foundations, mixed-capital companies
it is important to note that in the oil and gas industry the
and other entities directly or indirectly controlled by the Federal
concessionaire has the contractual obligation to observe certain
Government, States, Federal District and Municipalities, which
rules regarding the commitment to acquire local goods and services
must observe rules for procurement, agreement and biddings.
(although the minimum local content commitments have been
reduced and made more flexible).

10.2 If so, what import duties are payable and are

exceptions available?

IPI is imposed on the customs valuation pursuant to GATT rules.

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The customs valuation generally corresponds to the transaction dissolution of the legal entity; and (iv) prohibition on receiving
value (CIF value). The II rate is selective and depends on the incentives, subsidies, grants, donations and/or leases from public
product’s tariff classification. IPI is a value-added tax levied on entities, public financial institutions, or entities controlled by public
industrialised products and, with respect to the importation of powers for up to five years. Authorities may apply all penalties
industrialised products, as a means to equalise the tax cost of the cumulatively or independently, considering the specific features of
imported product with the one produced domestically. the case, and the seriousness and nature of the violations.

Brazil
11 Force Majeure 13 Applicable Law

11.1 Are force majeure exclusions available and 13.1 What law typically governs project agreements?
enforceable?
In case the parties choose arbitration to resolve conflicts or disputes
The Brazilian Civil Code establishes the concept of force majeure arising from a project agreement rather than local judicial courts,
events as those unavoidable and unforeseeable which may excuse there is flexibility related to the election of the applicable law as
non-performance of contractual obligations upon the occurrence of long as Brazilian public order is not violated. However, normally
events that are outside the control of either party. The parties Brazilian law is chosen as governing law due to the mandatory
usually negotiate and expressly set forth in the relevant contractual application of Brazilian laws to several aspects of the project.
instruments what is considered as force majeure events (which may
include natural catastrophes, storms, fire and riots) and those events
13.2 What law typically governs financing agreements?
which shall not be considered as force majeure (usually those that
could be reasonably foreseeable, such as strikes affecting the
supplier’s employees and weather conditions within certain historic Financing agreements entered into by private parties located in
levels) and which therefore shall not excuse such non-performance. Brazil are governed by Brazilian law. However, in the case of cross-
border loans, foreign lenders usually define the applicable law of the
relevant financing agreements.
12 Corrupt Practices
13.3 What matters are typically governed by domestic law?
12.1 Are there any rules prohibiting corrupt business
practices and bribery (particularly any rules targeting The granting of collateral over assets located in Brazil is typically
the projects sector)? What are the applicable civil or governed by Brazilian law.
criminal penalties?

Brazil’s Anticorruption Act (Law 12,846/2013) came into effect in 14 Jurisdiction and Waiver of Immunity
January 2014. Similar to the USA’s Foreign Corrupt Practices Act
(FCPA) and the UK Bribery Act, the Anticorruption Act provides a
14.1 Is a party’s submission to a foreign jurisdiction and
rigorous regime for penalising corrupt conducts practised in Brazil
waiver of immunity legally binding and enforceable?
and abroad. Prior to the enactment of the Anticorruption Act, Brazil
relied on provisions contained in its Criminal Code (Decree 2,848/40,
as amended by Law 7,209/84), Administrative Misconduct Law In case the parties choose arbitration to resolve conflicts or disputes,
(8,429/92) and Public Bidding Law (8,666/93) to combat corrupt submission to a foreign jurisdiction and waiver of immunity are
conducts. These provisions continue to be in effect and to be applied legally binding and enforceable. In case of agreements not subject
in combination with the Anticorruption Act. to arbitration, there may be uncertainties arising from Brazilian
private international law rules regarding submission to a foreign
The Anticorruption Act imposes administrative and strict civil jurisdiction/applicable law.
liability for conducts that are considered harmful to national or
foreign public administration, including: (i) bribery and attempted
bribery of local and foreign officials; (ii) fraud in public bids and in 15 International Arbitration
the procurement or performance of government contracts; and (iii)
hampering government investigations and inspections. Consistent
with the approach taken in the UK, the Anticorruption Act prohibits 15.1 Are contractual provisions requiring submission of
facilitation payments. disputes to international arbitration and arbitral
awards recognised by local courts?
Legal entities may be required to compensate damages caused by
the corrupt acts and may be subject to fines up to 20% of the
Yes. Arbitral awards subject to valid arbitration procedures are
company’s gross revenues from the previous year (provided that the
considered as enforceable in Brazil. However, an arbitral award can
fine will not be lower than the advantage obtained from the corrupt
be set aside by courts in certain exceptional circumstances (for
conduct). If it is not possible to assess the entity’s gross revenue, the
example, as: the arbitral agreement is null; the award was issued by
fine may range from R$6,000 to R$60 million (approximately
someone other than the arbitrator; the award does not comply with
US$3,000 to US$30,000) and will be also subject to a publication of
the necessary formal requirements (e.g. report, grounds and
the conviction decision in a widely circulating newspaper.
decision); the award is issued outside the limits of the arbitration
In judicial proceedings, authorities may also impose the following agreement; the award does not render a decision regarding the entire
penalties: (i) forfeiture of assets that represent the advantage and/or subject matter; the award was a product of corruption; the award
benefit obtained, directly or indirectly, through the violation; (ii) full was rendered after the due date; and the award does not comply with
or partial suspension of the legal entity’s activities; (iii) mandatory the requirements for due process, arbitrator’s impartiality and free

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persuasion). There is a difference between domestic and foreign companies are subject to the same tax treatment applicable to fixed
awards. A domestic award has the same effect as an award issued by income investments – the interest payments are subject to
a Brazilian court and is enforceable as such. For a foreign Withholding Income Tax and the applicable rates vary from 22.5%
arbitration award, a ratification (homologação) procedure with the to 15% based on the term of the loan.
Superior Court of Justice (STJ) is necessary to gain enforceability in Interest payments made by Brazilian companies to foreign lenders
Brazil. In addition, decisions by a foreign arbitration award which are, as a rule, subject to Withholding Income Tax at a 15% rate – an
violates Brazilian national sovereignty, dignity of the natural person exception is made to lenders located in low tax jurisdictions or
Brazil

and Brazilian public order are not enforceable in Brazil. privileged tax regimes, in such cases, the applicable rate is 25%.
Lower tax rates may be applicable if Brazil has signed a double tax
15.2 Is your jurisdiction a contracting state to the New York treaty with the country in which the lender is domiciled.
Convention or other prominent dispute resolution Nevertheless, it is common that gross-up mechanisms are established
conventions? in these cases, so that the payments abroad are made net of taxes.
In any case, transfer pricing and thin capitalisation rules may be
Yes, the growth in Brazil has been particularly significant over the applicable to foreign loan transactions.
past 15 years due to the enactment of the Brazilian Arbitration Law
Payments arising out of the enforcement of guarantees or security
(Law 9,307) in 1996 and the ratification of the 1958 New York
are generally subject to the same rules applicable to the original
Convention on the Recognition and Enforcement of Foreign
amounts guaranteed. In other words, the treatment is the same as if
Arbitral Awards by Brazil.
the borrower made the payments.

15.3 Are any types of disputes not arbitrable under local

17.2 What tax incentives or other incentives are provided
law?
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
Certain matters such as real estate assets located in Brazil or family or other security documents, either for the purposes
matters are of the exclusive competence of the Brazilian courts and of effectiveness or registration?
therefore such disputes decided by a foreign arbitration award are not
enforceable in Brazil. Note that the public administration can arbitrate Brazilian tax laws provide for several tax incentives to non-resident
disputes concerning disposable patrimonial rights provided the investors, which may vary depending on the project, the borrower or
arbitration is conducted according to Brazilian law and public order. even the financing structure. In some cases, the incentives are
focused on foreign investors – as an example, payments connected
to debentures issued by Brazilian Special Purpose Companies for
15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings? the development of infrastructure projects, if some requirements are
met, are not subject to Withholding Income Tax if the beneficiary is
a foreign investor, but are subject to a 15% rate if the investor is a
There is no mandatory domestic arbitration.
Brazilian legal entity.
Non-resident investors also benefit from several tax benefits when
16 Change of Law / Political Risk investing in the local capital markets.
In addition, there are local tax incentives offered by states and
16.1 Has there been any call for political risk protections municipalities (generally connected to Value Added Tax or Tax on
such as direct agreements with central government or Services), which aim at enhancing the investment in local
political risk guarantees? production and exports by means of tax exemptions, taxable basis
and rate reduction, etc.
In order to ensure adequate assessment and allocation of risks, it is
advisable for equity investors or lenders, participants of project 18 Other Matters
financings in Brazil, to be careful with respect to insurance policies
and the proper drafting of eventual contracts to be signed with the
public administration, in addition to thorough due diligence of project 18.1 Are there any other material considerations which
documents and the regulatory framework to which the projects will be should be taken into account by either equity
subject to. In addition, adequate and prompt legal counsel is strongly investors or lenders when participating in project
recommended since, in many instances, certain remedies (including financings in your jurisdiction?
against political intervention) may only be provided by the courts.
However, political risk insurance is not typically seen in Brazil, nor is In addition to the topics covered in this chapter, the privatisations
there a practice of direct agreements with central government. expected to occur and changes in the Brazilian political/economic
environment may create more opportunities for cross-border
investments in Brazilian projects involving both equity investment
17 Tax and financing.

17.1 Are there any requirements to deduct or withhold tax 18.2 Are there any legal impositions to project companies
from (a) interest payable on loans made to domestic issuing bonds or similar capital market instruments?
or foreign lenders, or (b) the proceeds of a claim Please briefly describe the local legal and regulatory
under a guarantee or the proceeds of enforcing requirements for the issuance of capital market
security? instruments.

Interest payments made by Brazilian companies to other Brazilian Foreign investors are entitled to invest in Brazilian capital markets

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and may be entitled tax benefits such as an exemption on capital

gains if their investment is made through BACEN resolution 19.2 In what circumstances may Shari’ah law become the
4,373/2014, which establishes that before any portfolio investment governing law of a contract or a dispute? Have there
been any recent notable cases on jurisdictional
is made, the foreign investor must comply with the foreign issues, the applicability of Shari’ah or the conflict of
investment rules set out by BACEN which includes the appointment Shari’ah and local law relevant to the finance sector?
of one or more legal and tax representatives in Brazil, providing an
identification form and proper registration with CVM.
This is not applicable in our jurisdiction.

Brazil
19 Islamic Finance 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
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha could be taken to mitigate this risk?
instruments might be used in the structuring of an
Islamic project financing in your jurisdiction.
This is not applicable in our jurisdiction.

This is not applicable in our jurisdiction.

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 Veirano Advogados Brazil

Ana Carolina Barretto Amanda Leal Brasil

Veirano Advogados Veirano Advogados
Av. Brigadeiro Faria Lima 3477 16º andar Av. Brigadeiro Faria Lima 3477 16º andar
04538-133 04538-133
São Paulo SP São Paulo SP
Brazil Brazil

Tel: +55 11 2313 5822 Tel: +55 11 2313 5738

Brazil

Email: [email protected] Email: [email protected]

URL: www.veirano.com.br URL: www.veirano.com.br

Ana Carolina Barretto leads the projects practice at Veirano Advogados Amanda Leal Brasil is a projects associate at Veirano Advogados in
in São Paulo, Brazil. She specialises in project finance and São Paulo, Brazil specialising in corporate law, project finance and
infrastructure development, and has significant expertise in the infrastructure development. She holds a Law Degree from the
infrastructure and natural resources industries. Ana is widely Pontifical Catholic University of Rio de Janeiro.
recognised by international publications such as Chambers Global and
Chambers Latin America, The Legal 500, IFLR 1000, LatinLawyer 250,
Euromoney Expert Guides and Who’s Who Legal as a leading lawyer
for project development and finance, energy and construction law. She
holds a Law Degree from the Pontifical Catholic University of Rio de
Janeiro, a Magister Juris and a Master’s in Legal Studies Degree from
the University of Oxford, where she was a Chevening Scholar.

Founded in 1972, Veirano Advogados is a full-service law firm providing a complete spectrum of legal services to support business activities in both
regulated and unregulated sectors. With over 240 attorneys working in an integrated fashion, we handle both routine and complex multidisciplinary
cases that require the coordinated talents of professionals with diverse areas of expertise.
Our services range from providing assistance in M&A transactions, privatisations and company formation to representing clients in disputes, from
offering advice on tax issues and infrastructure projects to guiding oil and gas companies through the challenges inherent in a highly regulated
industry, to name a few examples of our broad range of work.
At Veirano, we understand that our professionals are our equity in a globalised market. In order to build strong client-service teams of specialists,
we recruit Brazilian attorneys with multicultural backgrounds who have received additional education and training in first-tier law schools and law
firms in the US, Europe and Asia.

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Chapter 8

Canada
Alison Manzer

Cassels Brock & Blackwell LLP Charles Newman

Other projects of note include (i) the construction of the Gordie

1 Overview
Howe International Bridge (announced in late 2018) which consists
of a bridge connecting Windsor, Ontario and Detroit, Michigan and
1.1 What are the main trends/significant developments in is expected to be completed in 2024; nearly 85% of this $5.7 billion
the project finance market in your jurisdiction? project will be financed by the federal government while the
remaining 15% will be financed through a private-sector
Governments in Canada continue to maintain a strong focus on consortium, and (ii) the estimated $40 billion LNG Canada Project
infrastructure development across the country at the federal, consisting of the construction of a new coastal pipeline along
provincial and municipal levels. Attention is particularly being paid northern B.C. and liquefied natural gas (LNG) liquefaction and
to sectors such as renewable energy, transportation and other storage facilities to provide natural gas to overseas customers. The
examples of green infrastructure. In addition, governments are LNG Canada Project is the largest private-sector investment project
encouraging investment in infrastructure needs for rural and in Canadian history, comprising a joint-venture financed by five
northern communities and the need to work with and seek the input companies with significant endorsement from the federal
of indigenous partners. Government programmes are creating a government.
focus on these sectors by facilitating grants, guarantees and loan
programmes designed to encourage involvement in project 2 Security
development underpinning these infrastructure needs.
Project finance, particularly for infrastructure projects having this
public policy focus, is generally available from the regulated 2.1 Is it possible to give asset security by means of a
financial institutions in Canada. This will include construction and general security agreement or is an agreement
required in relation to each type of asset? Briefly,
development and take-out loans available through the banking, life
what is the procedure?
insurance and pension sectors. Equity investment underpinning
project finance is also generally available from some of these same
Personal property security is taken in Canada under a personal
regulated financial institution players, particularly the pension
property security system in all provinces except Québec, which has
sector. There is a significant interest in infrastructure project
a generally similar system under the Québec Civil Code. These
development with the pension plans, as a longer-term timeframe and
systems allow the taking of security using a written agreement on an
regulated returns from infrastructure projects fit well with pension
all assets basis. Perfection of the security interest is completed
plan investment objectives.
generally by registration, with some limited classes of assets which
The primary trends are the development of finance structures can also have security taken by possession. There is no requirement
allowing access to these government incentives, tapping the interest for separate security agreements, all assets can be taken using a
of financial institutions with assured revenue streams. general security agreement, or its equivalent. The forms of these
agreements, the nature of the security taken, substantially resembles
1.2 What are the most significant project financings that that of the United States of America under the Uniform Commercial
have taken place in your jurisdiction in recent years? Code.

Canada continues to have a focus on renewable energy projects and, 2.2 Can security be taken over real property (land), plant,
in particular, hydroelectric energy projects. The most notable of machinery and equipment (e.g. pipeline, whether
these being (i) the estimated $9–$10 billion Site C Clean Energy underground or overground)? Briefly, what is the
Project in the province of British Columbia (B.C.) which consists of procedure?
the construction of a dam and hydroelectric generating station on the
Peace River in northeast B.C. which, when completed (anticipated There are two systems for the taking of security in Canada, one for
in 2024), will be B.C.’s 4th largest producer of electricity, and (ii) the personal property security as previously outlined and the second for
estimated $12.5 billion Lower Churchill River hydroelectric power real property security. Real property security interests are taken
projects in the provinces of Newfoundland and Labrador and Nova using documentation which is registered against the title to the real
Scotia, anticipated for completion in 2020. property, on a title-by-title basis. Mortgages are taken to a grant a

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charge over the real property itself, and other types of security complete a share pledge or charge agreement, and to take possession
documentation can be used to take interests in real property interests of the share certificates, while completing registration under the
which do not constitute the real estate itself. The system generally applicable Personal Property Security Act or Québec Civil Code
uses written documentation, with registration, with priority of rights registry. If the shares are uncertificated, then it will be necessary to
dictated by the order of registration, against the real property take the security by registration, and using a control account
register. Security can be taken in assets related to the real property agreement where the shares are held in an uncertificated, third-party
such as machinery and equipment which is attached to the real controlled, account arrangement.
Canada

property, including pipelines, whether underground or overground.

Real property interests can be taken on the basis of a fixtures filing,
2.6 What are the notarisation, registration, stamp duty
which is completed under the personal property security system and and other fees (whether related to property value or
then registered against title to the real property. Real property otherwise) in relation to security over different types
interests can include interests which are less than the ownership of assets (in particular, shares, real estate,
interest in the real property, including licences, leases, ground leases receivables and chattels)?
and easements. Typically, entities seeking to register security
interests in real property located in a specific jurisdiction must be There is no significant cost to the taking of security based upon the
registered to carry on business within such jurisdiction. value of the asset. Registration is generally a fixed amount, and is
relatively nominal. In the province of Québec, notarisation of
2.3 Can security be taken over receivables where the security can be required; however, the notary fees are generally at a
chargor is free to collect the receivables in the fairly nominal level.
absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
2.7 Do the filing, notification or registration requirements
in relation to security over different types of assets
Security over account receivables can be taken by written involve a significant amount of time or expense?
agreement, which is registered under the applicable Personal
Property Security Act or Québec Civil Code. The granting of Generally, the taking of security, and its perfection, in Canada is
security can leave the charger with the right to collect the accounts readily accomplished. Taking of security over personal property
receivable, until a trigger event or default occurs. Notice to the involves registration in the relevant provincial, central, Personal
account debtors is not required; however, the secured party can run Property Security Act Registry or the Québec Civil Code Registry.
the risk that if the account debtor has made payment to a person This is generally capable of being done in real time, using electronic
other than the secured party prior to the time of receiving notice of registration procedures, and does not represent a time-consuming
the assignment to the secured party, then that debt will be discharged activity for either the registration or the confirmation of registration.
by that payment whether the secured party has received the payment Registration of security interests in real property in most provinces
or not. The risk is one of not being able to enforce double payment, is also completed on an electronic basis, and while access may be
where payment is made to the charger or another party, rather than limited to persons entitled to complete registrations in the system,
to the secured creditor. It is not an issue of perfection of the security usually lawyers, the time for completion of registration, and
interest over the accounts receivable which is accomplished without confirmation of registration, is generally the same day.
notice to the account debtors.

2.8 Are any regulatory or similar consents required with

2.4 Can security be taken over cash deposited in bank respect to the creation of security over real property
accounts? Briefly, what is the procedure? (land), plant, machinery and equipment (e.g. pipeline,
whether underground or overground), etc.?
Security can be taken over cash deposited in a bank account in the
same manner as security is taken over other personal property (i.e. There are generally no regulatory or other consents required with
by written agreement between the parties and registration under the regard to the creation of security interests over assets related to real
Personal Property Security Act or Québec Civil Code), recognising property, including plant, machinery and equipment which is attached
that banks will have a priority over such interest in the cash in any to the real property. In general, the party holding the real property
account they maintain based upon legal principles such as a bank’s interest can simply provide security, and will not require any
right of set-off. While there are law reform discussions considering governmental or other regulatory authority for the provision of
the requirement for entering into a control agreement with the security. Some limited forms of asset, generally if there is a
deposit taking institution as well, such agreements are not necessary government licence or ownership aspect, may require consents or
at this time in order to have a valid security interest. However, specific consideration to the ability to transfer the asset for realisation.
secured creditors will often enter into a control agreement over an
account in order to expedite any enforcement and realisation steps.
3 Security Trustee
2.5 Can security be taken over shares in companies
incorporated in your jurisdiction? Are the shares in 3.1 Regardless of whether your jurisdiction recognises
certificated form? Briefly, what is the procedure? 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
Security can be taken over shares of a corporation by written
separately) to enforce the security and to apply the
agreement, and either registration or possession of the shares. proceeds from the security to the claims of all the
Under the Securities Transfer Act, in all of the provinces of Canada, lenders?
security over certificated securities is taken, preferably, and with
priority, by possession of the share certificate. The norm is to
Canada, and all provinces of Canada, recognise the concept of a

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trust and trustee. A role of a security trustee or agent will be

5 Bankruptcy and Restructuring
recognised and accepted, in the ordinary course. The trustee or
agent will have the ability to enforce security, and apply the Proceedings
proceeds of security to the claims of lenders in accordance with the
written agreement between the borrower, trustee or agent and
5.1 How does a bankruptcy proceeding in respect of the
lenders. There is no legal restriction or failure to recognise these project company affect the ability of a project lender
roles and responsibilities. to enforce its rights as a secured party over the

Canada
security?
3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available A bankruptcy proceeding, or the equivalent Companies’ Creditors
(such as a parallel debt or joint and several creditor Arrangement Act proceeding, can result in some delay in realisation
status) to achieve the effect referred to above which by a secured creditor. Initially, the Bankruptcy and Insolvency Act
would allow one party (either the security trustee or requires a 15-day notification prior to the taking of steps to realise;
the facility agent) to enforce claims on behalf of all the
during that period of time, the debtor may file a Notice of Intention
lenders so that individual lenders do not need to
enforce their security separately? to undertake a restructuring plan pursuant to the statute. If the
borrower does not chose to access the right to undertake a
restructuring plan, then secured creditors may proceed with the
All Canadian legal jurisdictions recognise the security trust concept.
usual notice periods for sale or seizure of the asset, generally 15
Accordingly, an alternative is not required.
days for personal property and 30 days for real property. If the
debtor chooses to access insolvency protection, then there may be a
4 Enforcement of Security longer period of stay imposed on the secured lender. In general, the
stay period is to be a period of 45 days, although extensions can be
obtained. During that period of time, no steps can be taken to
4.1 Are there any significant restrictions which may realise. Once the initial stay periods have passed, including any
impact the timing and value of enforcement, such as extensions, the secured creditor will prove that the security is valid,
(a) a requirement for a public auction or the and will generally then be free to proceed with realisation steps. A
availability of court blocking procedures to other
trustee may determine to complete payment to the secured creditor,
creditors/the company (or its trustee in
bankruptcy/liquidator), or (b) (in respect of regulated and will do so in circumstances where the value of the assets
assets) regulatory consents? exceeds the secured debt.

There are no significant restrictions that impact the timing and value 5.2 Are there any preference periods, clawback rights or
of enforcement. Upon a default event in Canada, secured lenders other preferential creditors’ rights (e.g. tax debts,
are generally permitted to exercise the remedies which are specified employees’ claims) with respect to the security?
in the documentation between the debtor and the secured creditor.
The terms of the Personal Property Security Act and Québec Civil There are very limited preference periods and concerns in Canada,
Code for personal property and the terms of the relevant provincial particularly in a commercial transaction. Preferences will generally
Mortgages Act will specify statutory rights which will include the only arise in circumstances of non-arm’s length arrangements or
ability to seize and take in lieu, or seize and sell assets. Relatively arrangements where security has been taken or a transfer completed
limited time periods will be specified for notice, generally in the for undervalue within a specified time period prior to the date of the
range of 15 days for personal property and 30 days for real property, bankruptcy. This is generally three months for arm’s length
these notice periods give the debtor the opportunity to rectify the transactions and 12 months for non-arm’s length transactions. The
default or complete repayment. If a bankruptcy intervenes, stay transfer must have been at undervalue and have been taken with the
periods may be imposed; these are generally relatively short intent to defeat or defraud creditors. It is rare that a preference will
timeframes and once the secured creditor verifies the status of the defeat a secured creditor’s rights where value has been given and the
security, and the value of the asset, they will be free to take the assets security appropriately taken, notwithstanding the close context to a
and complete realisation. There is no dictated necessity for court bankruptcy.
intervention in realisation proceedings in Canada. The choice as to
whether to use court order proceedings will depend upon the
5.3 Are there any entities that are excluded from
circumstances at hand, and may be selected by secured creditors in
bankruptcy proceedings and, if so, what is the
some circumstances to deal with priority, or access issues. applicable legislation?

4.2 Do restrictions apply to foreign investors or creditors The Bankruptcy and Insolvency Act provides that it is binding on her
in the event of foreclosure on the project and related Majesty in Right of Canada or a province, meaning that government
companies? agencies are subject to the terms of the Bankruptcy and Insolvency
Act. There are, accordingly, no persons that are exempt or excluded
There are no specific restrictions applied to foreign investors or from the application of the Act. In Canada, there is also a
creditors in the event of realisation on security. If the foreign Companies’ Creditors Arrangement Act which provides for a
investor intends to complete the sale of assets to a foreign purchaser, scheme of restructuring in insolvency circumstances; this act has
or to take the foreign assets and hold them in their own ownership, more limited application being confined to corporations having a
they may need to comply with Investment Canada Act and specified debt profile.
Competition Act requirements, but these are generally applicable to
the purchase and sale of businesses, and are not unique to realisation
pursuant to security held.

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ownership of projects in Canada. The Investment Canada Act

5.4 Are there any processes other than court proceedings regime is applicable for foreign ownership of certain very large
that are available to a creditor to seize the assets of projects, and triggering thresholds will need to be met before the Act
the project company in an enforcement?
will prevent foreign ownership. In general, most projects will
require only notification of ownership by the foreign entity. The
Realisation can proceed in Canada, including seizure and taking in threshold level for review is $1 billion in enterprise value for
lieu or seizure and sale, without the intervention of the courts. This investments to directly acquire control of a Canadian business by
Canada

is true for both personal property and for real property, other than WTO investors that are not a state-owned enterprise, and by non-
where a secured creditor proposed to take ownership of the real WTO investors where the business has been controlled by a WTO
property under a foreclosure process, in which case court investor. There are higher thresholds, $1.5 billion in enterprise
intervention is required. Otherwise, secured creditors can proceed value, for trade agreement investors. The foreign investor may also
based upon the contractual agreement they have reached with the be subject to the requirements of the Competition Act, which applies
debtor as to the notice, steps and bases for the realisation process. to domestic and foreign investors equally, and requires review and
There are some minimum statutory notice periods, a 15-day notice approval for transactions over specified sizes. In general, pre-
prior to the commencement of steps under the Bankruptcy and notification will be required for transaction sizes of $96 million and
Insolvency Act and sale notice terms under both personal property more (an increase from $88 million in 2017 and $92 million in
and mortgage law, generally 15 and 30 days. Otherwise, the 2018). There are multiple thresholds which will need to be
creditors may proceed by public auction or by private sale, as they considered. As noted, the Competition Act requirements apply
have agreed with their debtor. The requirement is merely that the equally to domestic investors as to foreign investors.
secured creditor must act in a commercially reasonable manner in
undertaking the realisation process.
6.2 Are there any bilateral investment treaties (or other
international treaties) that would provide protection
5.5 Are there any processes other than formal insolvency from such restrictions?
proceedings that are available to a project company
to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?
Bilateral investment treaties will provide some additional protection
to foreign investors. Where there is a bilateral trade treaty, the
review levels will generally be higher, and the criteria for
The statutory processes which are available to achieve a
considering approval of the transaction may be more readily
restructuring of debt, including some limited ability to cram
accomplished. The participation by Canada in the International
competing creditors, is the Bankruptcy and Insolvency Act and the
Treaty on Investment Disputes, the ICSID convention, also provides
Companies’ Creditors Arrangement Act. These both constitute
rules for the resolution of investment disputes that can be beneficial
formal insolvency proceedings, and will involve court intervention.
to foreign investors. Canada has several bilateral treaties, and a
Processes which do not involve the statutory rights, and the
Foreign Investment Promotion and Protection Agreement which
intervention of the court, will generally require a consensual
provides assistance to foreign investors in Canada.
arrangement; the required agreement of creditors will depend upon
the contractual arrangements between the debtor and its creditors.
6.3 What laws exist regarding the nationalisation or
expropriation of project companies and assets? Are
5.6 Please briefly describe the liabilities of directors (if any forms of investment specially protected?
any) for continuing to trade whilst a company is in
financial difficulties in your jurisdiction.
Canada is a country which abides by the concept of no expropriation
except for fair and reasonable consideration. In general,
Directors in Canada do not face the same liability regime for
expropriation in Canada will be limited to specified social and
continuing to trade that are faced by many directors in European
public purposes; generally, the requirement of the taking of land to
countries. Directors liabilities in Canada are relatively limited, the
support infrastructure projects. Parties which are affected by the
directors will face personal liability for environmental liability,
expropriation will be paid compensation based upon the value of the
certain employee obligations, the failure to withhold and remit
property and assets expropriated. Expropriation tends to be rarely
certain taxes; these generally would not be considered continuing to
exercised as a government right in Canada.
trade liabilities or obligations. They are, however, frequent causes
of director liability in circumstances where a company does
encounter financial difficulty. A director will need to have 7 Government Approvals/Restrictions
proceeded in a reckless or fraudulent manner in the undertaking of
business, generally with a concept of inducing parties to continue to
trade with knowledge that they are not likely to be repaid. The test 7.1 What are the relevant government agencies or
would be a high test of intent and knowledge on the part of the departments with authority over projects in the typical
project sectors?
director.

Canada is a bi-level form of government, the federal government

6 Foreign Investment and Ownership has jurisdiction over specifically dictated public matters and the
Restrictions provinces and territories have the remaining public sector matters.
The municipal authorities are a subset of the provincial authorities
and obtain their powers and authority from the province. There is an
6.1 Are there any restrictions, controls, fees and/or taxes element of government regulation, federal or provincial, in many
on foreign ownership of a project company? sectors where project finance might be undertaken including oil and
gas, mining, refining, water treatment, power generation and
There are no restrictions, controls, fees or taxes generally on foreign

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transmission, transportation, ports, telecommunication and similar. resources, will generally require permitting, and the basis and nature
Each of these sectors has had over the history of project finance of that permitting will dictate the nature of the payments required.
some element of state ownership. For many of these sectors, private There is generally no distinction between the charges that will be
delivery is expanding to meet public delivery requirements, and the payable by domestic and foreign parties. Rather, the differences are
government authorities have been withdrawing from those sectors, dependent upon the nature of the exploitation rights and the
but continue to have a degree of regulation. Oil and gas, mining, resource. In general, if the resource being extracted is part of the
refining and telecommunication are largely private at this stage. attributes of real property ownership, taxation will be the applicable

Canada
Government ownership continues in areas such as water treatment, form of payment. Where the resources being exploited using the
power generation and transmission, and with more limited grant of a right, the rights will generally have charges ranging from
ownership in transportation, ports and telecommunication. lease payments, to licence fees, to permits, costs, royalties and
In the power generation sector, interprovincial and international taxation. Oil and gas production is generally royalty-based,
power distribution is governed by the National Energy Board, and generally imposed by provincial legislation. Northern and offshore
the Canadian Nuclear Safety Commission has jurisdiction over exploitation is generally under federal authority and will usually
nuclear power. Otherwise, the power generation and transmission is require royalty or taxation payments.
regulated by the provincial authorities. Natural resource
development will have a significant government involvement with 7.5 Are there any restrictions, controls, fees and/or taxes
both federal and provincial natural resource departments having on foreign currency exchange?
authority over both renewable and extracted non-renewable
resources. Federal and provincial authorities continue to have rights Canada does not impose restrictions, controls, fees or taxes on
to significant portions of the land base, including the subsurface and foreign currency exchange. Foreign currency exchange can be
above surface rights attendant on land ownership. Provincial freely engaged in Canada, and the cost of such will be negotiated
governments are very large holders of undeveloped resource rights. cost of the fees for exchange with the foreign exchange trader.
The focus of each province differs, with Alberta being interested in
oil and gas, B.C., Manitoba, Québec, Newfoundland and Labrador
in hydroelectric power, and Saskatchewan in uranium and potash, as 7.6 Are there any restrictions, controls, fees and/or taxes
on the remittance and repatriation of investment
primary areas of sector interest.
returns or loan payments to parties in other
jurisdictions?
7.2 Must any of the financing or project documents be
registered or filed with any government authority or Subject to meeting the requirements of the Proceeds of Crime
otherwise comply with legal formalities to be valid or (Money Laundering) and Terrorist Financing Act (Canada) and its
enforceable?
regulations, there are generally no restrictions, controls, fees or
taxes on the remittance and repatriation of investment returns or
Financing and project documents generally do not need to be loan payments. Except for interest constituting a participating debt
registered or filed with a government authority, nor must they interest (see question 17.1 for further information), Canada
comply with legal formalities other than the necessity of perfecting generally will permit the payment of interest on foreign debt without
a security interest. Financing documentation creating a security the imposition of withholding tax. Payments which are made by
interest will require compliance with the relevant personal property way of lease, licence, royalty or dividend payments may attract
or real property registration systems, which will have statutorily withholding tax based upon the concept of taxation on income
dictated forms. Otherwise, project finance documentation does not earned in Canada. Canada’s international tax rules generally adhere
have any need for registration, filing or approvals, nor is there to the tax models promoted by the Organization for Economic Co-
intervention of government authorities. operation and Development. Foreign investors doing this in Canada
using a Canadian legal entity will be considered to be Canadian-
7.3 Does ownership of land, natural resources or a resident and will be taxed as such in Canada. Canada does,
pipeline, or undertaking the business of ownership or however, use the international models that are intended to avoid
operation of such assets, require a licence (and if so, double taxation using tax credits and exemptions. If a non-resident
can such a licence be held by a foreign entity)? of Canada does business in Canada through a permanent
establishment, then income tax may be payable on the income
Canada does not generally differentiate between foreign and earned in Canada, generally statutory 25% but may be reduced by
domestic owners of projects. Ownership of land is generally not one of Canada’s many tax treaties.
restricted, and land may be owned by other domestic or foreign
persons in essentially all parts of Canada. Some portions of natural
7.7 Can project companies establish and maintain
resources may require licensing, but licensing will not generally onshore foreign currency accounts and/or offshore
differentiate between a Canadian or a foreign entity, provided that accounts in other jurisdictions?
Investment Canada Act aspects have been dealt with as noted
previously. Subject to any requirements of the Proceeds of Crime (Money
Laundering) and Terrorist Financing Act (Canada) and its
7.4 Are there any royalties, restrictions, fees and/or taxes regulations, Canada does not restrict project companies from
payable on the extraction or export of natural establishing or maintaining foreign currency accounts, whether in
resources? Canada or offshore in other jurisdictions.

Payments can be required to be made with regard to the extraction

of natural resources, these vary by the industry, resource and
jurisdiction in Canada. Exploitation, by extraction of natural

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7.8 Is there any restriction (under corporate law, 8 Foreign Insurance

exchange control, other law or binding governmental
practice or binding contract) on the payment of
dividends from a project company to its parent 8.1 Are there any restrictions, controls, fees and/or taxes
company where the parent is incorporated in your on insurance policies over project assets provided or
jurisdiction or abroad? guaranteed by foreign insurance companies?
Canada

There are no restrictions generally applicable to the payment of Insurers may not carry on business in Canada unless they are
dividends between corporations, including from a Canadian appropriately regulated under Canadian laws to both ownership and
subsidiary to a non-resident parent company. The general rules of products. Regulation can be federal or provincial depending upon
corporate law which do not permit the payment of dividends in the business of the insurer and the products to be provided.
circumstances where such payment would render the company Insurance can be provided to Canadian projects by insurers from
insolvent will continue to apply, this applies to domestic or foreign outside of Canada for risks in Canada, this is true for both Canadian
shareholders. There is no exchange control or other law which domestic enterprise or foreign entities carrying on business in
prohibits the payment of dividends from a Canadian corporation to Canada. The insurer must not be found to be carrying on business in
a foreign parent company. Notes should be made of the withholding Canada, and in that circumstance insurance policies can be provided
tax and in Canada taxation, discussed previously. Otherwise, there to persons resident or domestic to Canada. Fees and taxes will not
are no restrictions which would prevent the payment of the intended be applicable in Canada because the transaction will be found to be
dividends. carried on entirely outside of Canada if appropriately undertaken.

7.9 Are there any material environmental, health and 8.2 Are insurance policies over project assets payable to
safety laws or regulations that would impact upon a foreign (secured) creditors?
project financing and which governmental authorities
administer those laws or regulations? Insurance policies provided by foreign insurers, outside of Canada,
for Canadian risk, may be payable to foreign secured creditors
Canada imposes environmental, health and safety and similar laws without the involvement of Canadian considerations.
and regulations, which will affect most projects. The legislative
authority in this area is split between the federal and provincial
authorities, and the regulatory body that will administer these laws 9 Foreign Employee Restrictions
will depend upon the applicable authority. In some instances, there
may be overlapping authority, and the need to satisfy multiple
9.1 Are there any restrictions on foreign workers,
environmental authorities and laws. Water is a particularly crucial
technicians, engineers or executives being employed
area for environmental protection regulation in Canada, which by a project company?
includes water, fisheries, protection of the arctic, migratory birds,
wild animals and plant protection. Aboriginal rights may also have
Canada does impose immigration restrictions on persons seeking to
an effect on the monitoring and implementation of environmental
enter and work in Canada. Visas, permanent resident and/or citizen
legislation regulation. Workplace health and safety at both the
status, will be required for foreign workers if they are intending to work
federal and provincial level is legislation which will effect project
in Canada. The ability to obtain a work visa in Canada will depend on
development and finance, and requires consideration in project
the nature of the enterprise and the intended involvement of the foreign
planning. Industry-specific legislation may also be applicable as
workers sought to be brought into Canada. In general, where Canadians
legislation and regulation exists in sectors such as
are not available, such as where there is specialised expertise or a
telecommunication, transportation, rail transportation, marine
shortage of Canadians available for work, work visas will generally be
transportation, shipping and others. Where there is a potential
available upon application and justification for the need of those
adverse effect on the environment, there will generally be
workers in Canada. Canada has a temporary foreign worker
environmental legislation intervening. Extensive legislation will
programme which will also allow some limited hiring of foreign
also apply to projects in the mining and oil and gas sectors.
workers to fill temporary labour shortages. Approvals will be needed
from Employment and Social Development Canada for the hiring of
7.10 Is there any specific legal/statutory framework for foreign workers. There will, in all circumstances, need to be labour
procurement by project companies? market opinions verifying the need for the foreign workers because of a
shortage of Canadians reasonably able to undertake the job.
There is no legal or statutory framework as to procurement by
project companies. If a project involves a government agency, as
proponent, guarantor, financer or otherwise, then government
10 Equipment Import Restrictions
procurement rules may be applicable to the project. This, however,
relates strictly to the involvement of the government authority or 10.1 Are there any restrictions, controls, fees and/or taxes
agency, and the specific procurement rules for public procurement. on importing project equipment or equipment used by
Private companies are not subject to regulation as to their basis for construction contractors?
procurement.
Project equipment can generally be freely imported into Canada. There
are two aspects to importation that need to be considered: the ability to
import the goods; and the taxes which be payable upon the importation
of the goods. Foreign Affairs, Trade and Development Canada oversees

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the import of goods into Canada. The Canada Revenue Agency, Excise selected by the lender, usually being the jurisdiction of the location
Duties and Tax Division receives payment of taxes on importation into of the lender. Canadian law, provincial law specifically, is generally
Canada. There are some limited restrictions on the importation of selected to deal with the taking or granting of security in Canada as
goods where they are required to meet health and safety standards, it tends to be lender-friendly. Canada does not prohibit the choice of
labelling standards, and similar. These requirements would be similar other jurisdictions to govern contracts where there is reasonable
to the standards imposed on the manufacturer of the goods in Canada. basis for the selection and it is not contrary to public policy.
Generally, equipment will need to meet the health, safety and labelling

Canada
requirements applicable in general. Generally, once these safety
13.2 What law typically governs financing agreements?
standards are met goods can be freely imported, subject only to the
payment of import duties. Import duties will frequently be the subject
matter of bilateral agreements between Canada and foreign The choice of law will generally reflect the preferred jurisdiction of
jurisdictions, reducing the duties otherwise payable. the lender. If the law selected is not Canadian, the most common
foreign law selected is New York.

10.2 If so, what import duties are payable and are

exceptions available? 13.3 What matters are typically governed by domestic law?

Import duties are payable on many classes of goods to be imported The taking of security over assets located in Canada will generally
into Canada. There are extensive rules which are published by the be governed by the law of the province where the assets are located.
Canada Revenue Agency, Excise Duties and Tax Division. These
duties are frequently reduced or eliminated by bilateral trade 14 Jurisdiction and Waiver of Immunity
agreements between Canada and its trading partners.

14.1 Is a party’s submission to a foreign jurisdiction and

11 Force Majeure waiver of immunity legally binding and enforceable?

11.1 Are force majeure exclusions available and Yes, as long as the selection of jurisdiction is not contrary to public
enforceable? policy, which would seldom be the case. Canadian courts will
generally recognise a choice of jurisdiction.
Force majeure exclusions may be agreed to contractually among the
parties to a project finance transaction. Force majeure clauses are 15 International Arbitration
enforceable in accordance with their terms.

15.1 Are contractual provisions requiring submission of

12 Corrupt Practices disputes to international arbitration and arbitral
awards recognised by local courts?

12.1 Are there any rules prohibiting corrupt business

practices and bribery (particularly any rules targeting Yes, these provisions are enforceable in Canada.
the projects sector)? What are the applicable civil or
criminal penalties?
15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
The Corruption of Foreign Public Officials Act is the principal conventions?
legislation in Canada to combat bribery of foreign public officials.
This will be particularly applicable to international business Canada is a signatory to the ICSID. Canada has accepted and
transactions. The Act prohibits anyone from giving or offering a loan, ratified the ICSID convention and therefore accepts the rules under
reward, advantage or benefit of any kind or a foreign public official to which investment disputes between states and nationals may be
obtain a business advantage. The Act provides that a violation is resolved using conciliation or arbitration. Canada also has
subject to a fine which is in the discretion of a court, and may involve Canadian bilateral treaties and the Foreign Investment Promotion
imprisonment of up to 14 years. There are also provisions of the and Protection Agreement which will also dictate the application of
Canadian Criminal Code that prohibit persons from offering a loan, the ICSID convention. Courts in Canada will generally recognise
reward, advantage or benefit to a federal or provincial government such an agreement choosing mediation or conciliation.
official in Canada as consideration for co-operation, assistance or
exercise of an influence. Criminal Code offences are punishable by a
combination of fines and possible imprisonment. 15.3 Are any types of disputes not arbitrable under local
law?

13 Applicable Law There are no types of disputes that are not arbitrable under local law
in Canada.

13.1 What law typically governs project agreements?

15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
Canadian law recognises the ability of parties to elect the
jurisdiction to govern the contractual agreement provided that there
is a reasonable connection to the selected jurisdiction. Financing There are no types of dispute that are subject to mandatory domestic
agreements are generally governed by the jurisdiction which is arbitration proceedings in Canada.

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 Cassels Brock & Blackwell LLP Canada

in the same manner as domestic investors and lenders in Canada.

16 Change of Law / Political Risk
There are no material considerations which need to be taken into
account that would differentiate between foreign and domestic
16.1 Has there been any call for political risk protections investment or lending. In general, investors may freely participate
such as direct agreements with central government or in ownership of projects in Canada, will face Canadian taxation on
political risk guarantees? the revenue earned in Canada, and there may be withholding tax on
dividends or similar payments paid. These payments will frequently
Canada

There has not been any particular attention paid to a need for be reduced by bilateral tax treaties. Lenders are able to lend into
political risk protection involving projects in Canada. Canada does Canada without withholding tax being applied.
have some bilateral investment treaties which protect Canadian
investors in those foreign jurisdictions. Canada is generally not 18.2 Are there any legal impositions to project companies
considered to be a politically risky jurisdiction. issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market
17 Tax instruments.

Capital market instruments can be issued with regard to projects,

17.1 Are there any requirements to deduct or withhold tax
from (a) interest payable on loans made to domestic whether sponsored by foreign or domestic entities in Canada. The
or foreign lenders, or (b) the proceeds of a claim public market system will be the subject matter of securities law and
under a guarantee or the proceeds of enforcing listing requirements. Securities law will generally provide
security? protections to the investors who are domestic to Canada, with
securities law in Canada focusing on the jurisdiction of the investor.
There are no requirements to withhold tax from interest payable on Prospectus and dealer registration will generally be required for the
third-party loan payments made to foreign lenders. This is qualified public issuance of bonds or similar instruments. The prospectus will
only where the basis for the interest payment constitutes a “participating require clearing by a provincial securities authority, and if listed on
debt interest” which would be considered to be akin to a dividend, in the public markets will require listing approval by the applicable
which case withholding tax would apply. Withholding tax is payable on exchange. Non-public placement of bonds is available in the
other forms of payment such as lease, licence, royalty and dividends, exempt market in Canada, eliminating the need for prospectus and
generally at a 35% rate with reduction based upon bilateral treaties (as dealer registration, and clearing. The system for the regulation of
referenced in question 7.6). There is no requirement to deduct or the issuance of debt in Canada is similar to that of the United States
withhold tax from payments of a claim under a guarantee or the and Europe, differentiating between the public and the exempt
proceeds of enforcing security, these will be considered repayment of market.
loan and will not be the subject matter of withholding tax.
19 Islamic Finance
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
or other security documents, either for the purposes instruments might be used in the structuring of an
of effectiveness or registration? Islamic project financing in your jurisdiction.

Canada does not provide a system of tax incentives or other There is no restriction in Canada on the use of Islamic project
incentives for foreign investors or creditors. In general, foreign financing structures. They are not, however, commonly
investors or creditors will face the same tax regime as domestic encountered, and there is some question as to whether an agreement
investors. Canada generally adheres to the tax model not to recognise the jurisdiction of the courts in Canada would be
recommendations of the Organization for Economic Co-operation recognised. Otherwise, the Islamic law-based instruments will be
and Development. Taxes generally will not apply to foreign loans, considered contractual obligations that will generally be honoured
mortgages nor will there be taxes or charges for security in accordance with their terms.
documentation for effectiveness or registration. Canada has
eliminated withholding tax on loans allowing interest to be paid free
19.2 In what circumstances may Shari’ah law become the
of withholding tax. A foreign investment which involves a
governing law of a contract or a dispute? Have there
participation in the project, resulting in the earning of revenue, and been any recent notable cases on jurisdictional
the payment of dividends, royalties or other payments may be issues, the applicability of Shari’ah or the conflict of
subject to taxation in Canada, and withholding tax on the payment Shari’ah and local law relevant to the finance sector?
when remitted from Canada to the foreign jurisdiction.
Shari’ah law may be selected as the governing law. However, in
Canada, the jurisdiction of the courts may not be ousted by such a
18 Other Matters
contractual agreement, and in circumstances where the courts may
be requested to take jurisdiction they may do so despite the ousting
18.1 Are there any other material considerations which of the courts in favour of Shari’ah law. There have been no notable
should be taken into account by either equity cases in Canada with regard to the application of Shari’ah law and
investors or lenders when participating in project its intersection with local law.
financings in your jurisdiction?

Generally, foreign investors, whether equity or debt, will be treated

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Cassels Brock & Blackwell LLP Canada

Acknowledgment
19.3 Could the inclusion of an interest payment obligation
in a loan agreement affect its validity and/or The authors would like to acknowledge the invaluable contribution
enforceability in your jurisdiction? If so, what steps of their colleague, Jenna Clark, in the preparation of this chapter.
could be taken to mitigate this risk?
Jenna Clark is an associate in the Financial Services Group at
Cassels Brock in Vancouver. Her practice focuses on corporate
There are very limited laws affecting the ability to charge interest in financing matters, representing both lenders and borrowers involved

Canada
a debt transaction. These laws in Canada prohibit the charging of in domestic and cross-border lending and corporate reorganisations,
interest, which includes required additional fees and other including secured and unsecured lending transactions, project
payments, in excess of 60% per annum. This is a Criminal Code finance, and syndicated loans. She was called to the Bar in British
matter in Canada. Otherwise, interest payments will be enforceable, Columbia in 2016 and Ontario in 2018. Jenna can be reached at
provided only that they need the disclosure requirements set out in [email protected].
the Interest Act, as federal legislation, and dependent upon the
nature of the relationship under provincial consumer protection law.

Alison Manzer Charles Newman

Cassels Brock & Blackwell LLP Cassels Brock & Blackwell LLP
Suite 2100, Scotia Plaza Suite 2100, Scotia Plaza
40 King Street West 40 King Street West
Toronto, Ontario M5H 3C2 Toronto, Ontario M5H 3C2
Canada Canada

Tel: +1 416 869 5469 Tel: +1 416 860 6603

Email: [email protected] Email: [email protected]
URL: www.casselsbrock.com URL: www.casselsbrock.com

Alison Manzer is a partner in the Financial Services Group at Cassels Charles Newman is a partner in the Financial Services Group at
Brock in Toronto. Her practice encompasses a broad range of Cassels Brock in Toronto. His practice focuses on all types of secured
commercial practice in the financial services sector, including project and unsecured lending transactions, including project/infrastructure
finance, financial institution regulation, structured finance, syndicated financings, cross-border transactions, syndicated loan transactions,
lending and related areas. A significant part of Alison’s practice asset-based and real estate-based lending matters. Charles also does
involves multi-jurisdiction transactions where she has expertise in the extensive work in the subordinated and convertible debt areas
structuring requirements of financing, investment and credit support (representing both borrowers and lenders) and in the areas of
methods to solve taxation, conflicts of laws, documentation, structure, restructuring and treasury management. He was called to the Ontario
currency and rate issues, among others. She was called to the Bar in 1997. Charles can be reached at [email protected].
Ontario Bar in 1979. Alison has an LL.M. in Banking and Finance, an
MBA and an MSc in Business Research. Alison can be reached at
[email protected].

Cassels Brock is a Canadian law firm focused on serving the transaction, advocacy and advisory needs of the country’s most dynamic business
sectors. Our nimble platform allows us to work effectively with organisations of all sizes and types and to handle domestic and international
engagements of every nature and complexity. Our lawyers make it a point to understand their clients’ business objectives, listen to their needs and
stay up to date on the issues that affect their industries and markets. Many of our lawyers have been recognised by prominent Canadian, US and
international publications and directories including Chambers Global, the Canadian Legal Lexpert Directory, the Lexpert/American Lawyer Guide to
the Leading 500 Lawyers in Canada, and Best Lawyers.

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 Chapter 9

China
Dr. Xin Zhang

Global Law Office Shuhui Luo

1 Overview 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
1.1 What are the main trends/significant developments in procedure?
the project finance market in your jurisdiction?
Security over real property and plant (i.e. land use rights and
Since 2014, the Chinese government has promoted a new round of buildings in the context of PRC law) may be granted by means of a
public-private partnership (PPP) reform and achieved fast development real property mortgage, and security over machinery and equipment
across the country, which has become a main trend in the project is normally taken through a mortgage over movable assets.
finance market in the PRC. Based on the data disclosed in the National Mortgage over real property and plant
PPP Information Platform (a PPP project information database set up by
In China, all land is owned by the state. A mortgage can only be
the Ministry of Finance of the PRC), by the end of December 2018,
granted over land use rights, not over the ownership of the land
there were 8,654 PPP projects in the database nationwide with a total
itself. The land use rights to a parcel of land and all buildings and
investment of RMB13.2 trillion, covering 19 sectors (including energy,
plants erected over the land must be mortgaged simultaneously.
transportation, water resources, environmental protection, municipal
engineering, area development, agriculture, forestry, science and To create and perfect a mortgage over real property, the mortgagee
technology, affordable housing, tourism, medical care and public and the mortgagor need to sign a written mortgage agreement and
health, elderly care, education, culture, sports, social security, register such agreement at the relevant land and real estate registrar,
government infrastructure and others). Over the last few years, the depending on the location of the real property.
Chinese government has been tightening the rules on PPP project In addition, construction-in-progress is considered quasi-real estate
management, and is also in the process of drafting a national PPP law. for the purpose of security interests. A construction-in-progress has
no title document but can still be subject to a mortgage similar to a
real property.
1.2 What are the most significant project financings that
have taken place in your jurisdiction in recent years? Mortgage over machinery and equipment
The most common form of security granted over machinery and
The most significant project financings in recent years include, for equipment (including underground or overground pipelines) is a
instance, the construction of the Hong Kong-Zhuhai-Macao Bridge mortgage over movable assets. A mortgage over machinery and
in Guangdong Province, the Waste Interception around Erhai Lake equipment is validly created on the mortgagee and mortgagor upon
PPP Project in Dali City of Yunnan Province, and the Hangzhou- signing the mortgage agreement, but will only be perfected against
Shaoxing-Taizhou Inter-city Railway in Zhejiang Province. third parties after the mortgage agreement is registered with the
State Administration for Market Regulation of the PRC (SAMR) or
its local branches.
2 Security
2.3 Can security be taken over receivables where the
2.1 Is it possible to give asset security by means of a chargor is free to collect the receivables in the
absence of a default and the debtors are not notified
general security agreement or is an agreement
of the security? Briefly, what is the procedure?
required in relation to each type of asset? Briefly,
what is the procedure?
Yes. To create a pledge over receivables, the pledgor and the
Different types of security are generally documented separately. pledgee must enter into a written pledge agreement. The pledge is
The relevant registrars generally require to see a separate security perfected by registration of the pledge agreement at the Credit
document for each type of security (sometimes each type of asset) Reference Centre of the PRC.
falling within their respective jurisdiction. Therefore, a general
security agreement, although possible in theory, is impractical and 2.4 Can security be taken over cash deposited in bank
makes the security registration process more difficult, if not accounts? Briefly, what is the procedure?
impossible.
Yes. Security interests may be granted over deposits in a bank

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Global Law Office China

account in the form of a special account, seal deposits or a security

3 Security Trustee
deposit. In other words, the pledge over a blocked account (i.e. only
money flow-in, no flow-out) or over a fixed amount of deposit is
acceptable under PRC law. To create a pledge over cash deposited 3.1 Regardless of whether your jurisdiction recognises
in bank accounts, the pledgee and the pledgor need to sign a written the concept of a “trust”, will it recognise the role of a
pledge agreement. security trustee or agent and allow the security
trustee or agent (rather than each lender acting

China
separately) to enforce the security and to apply the
2.5 Can security be taken over shares in companies proceeds from the security to the claims of all the
incorporated in your jurisdiction? Are the shares in lenders?
certificated form? Briefly, what is the procedure?

The PRC recognises the trust concept. However, a security trustee

Yes. Under PRC law, shares in a company includes the equity or agent is not commonly used due to the absence of legal rules on
interests in a limited liability company, shares in a company limited this matter.
by shares, stocks and portions of funds that can be transferred
The court will normally recognise a foreign security trustee,
according to law. Shares can be in certificated form or
provided that this is permissible under the governing law of the
uncertificated form. To create a pledge over shares, the pledgor and
agreement. A security trustee under a foreign trust can imitate
the pledgee need to sign a written pledge agreement.
litigation before a PRC court to enforce its rights under the relevant
Depending on the type of shares, the pledge agreement is required to finance documents.
be registered at the relevant registry for the purpose of perfecting
such security interests (for example, for a pledge over equity
interests in a limited liability company or shares in an unlisted 3.2 If a security trust is not recognised in your
company limited by shares, registration of the pledge at the local jurisdiction, is an alternative mechanism available
(such as a parallel debt or joint and several creditor
branch of the SAMR; for registration of shares in a listed company
status) to achieve the effect referred to above which
or fund units traded on stock exchanges, registration of the pledge at would allow one party (either the security trustee or
the China Securities Depository and Clearing Company Limited the facility agent) to enforce claims on behalf of all the
(CSDCC)). lenders so that individual lenders do not need to
enforce their security separately?

2.6 What are the notarisation, registration, stamp duty

and other fees (whether related to property value or There is no such alternative mechanism available in the PRC to date.
otherwise) in relation to security over different types
of assets (in particular, shares, real estate,
receivables and chattels)? 4 Enforcement of Security

Notaries’ fees 4.1 Are there any significant restrictions which may
Security documents do not require notarisation as a general rule. impact the timing and value of enforcement, such as
(a) a requirement for a public auction or the
Documentary taxes
availability of court blocking procedures to other
Security documents are not subject to stamp duty or other creditors/the company (or its trustee in
documentary taxes in the PRC. bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?
Registration fees
Depending on the type of security interest, some registrars may
Mortgage
charge a registration fee, either based on the value of the collateral
or in a lump sum. Generally, the registration fee is not substantial. The mortgagee and the mortgagor can agree on the sale or
foreclosure of the mortgage property on the mortgagor’s default. If
their agreement prejudices other creditors’ interests, the other
2.7 Do the filing, notification or registration requirements creditors can, within one year from the day they discovered, or
in relation to security over different types of assets
should have discovered, the agreement, apply to the court for
involve a significant amount of time or expense?
revocation.
When the mortgagee and the mortgagor fail to agree on the
Registration of the pledge over receivables can be completed online
realisation method of the mortgage, the mortgagee can apply to the
on the same day it is registered. For securities that must be
court to sell or auction the mortgaged property (a fast-track
registered with the local registrars, the registration time varies
approach).
depending on their local practices. For registration fees, please refer
to the answer to question 2.6 above. Pledge
Where the debtor defaults on the underlying debt or any event for
2.8 Are any regulatory or similar consents required with enforcing a pledge agreed by the parties is triggered, either:
respect to the creation of security over real property ■ The pledgee and the pledgor can reach an agreement on the
(land), plant, machinery and equipment (e.g. pipeline, foreclosure of the pledged asset.
whether underground or overground), etc.? ■ The pledgee can sell, either by auction or private sale (which
must be conducted through a court action), the pledged asset
There is no such regulatory or similar consent in this regard. to repay the secured debt in priority.
For a bankruptcy situation, please refer to the answer to question 5.1
below.

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4.2 Do restrictions apply to foreign investors or creditors 5.4 Are there any processes other than court proceedings
in the event of foreclosure on the project and related that are available to a creditor to seize the assets of
companies? the project company in an enforcement?

There are no restrictions that exclusively apply to foreign investors As discussed in the answer to question 5.1 above, a secured creditor
or creditors in foreclosure events, provided that the loan agreement can enforce its security interests at the end of the bankruptcy
or the security agreement (as the case may be) has been duly proceeding. In some cases, a liquidator may consider allowing a
China

registered at the State Administration of Foreign Exchange of the secured creditor to realise the security interests before the end of
PRC (SAFE). such proceeding, but this is subject to the specific facts of the
relevant case.

5 Bankruptcy and Restructuring

Proceedings 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?
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 The PRC Enterprise Bankruptcy Law provides for restructuring and
security? reconciliation procedures, in addition to formal insolvency
proceedings.
The PRC Enterprise Bankruptcy Law establishes an automatic stay Restructuring
regime regarding all ongoing claims against the debtor, following
The application for restructuring can be filed either independently or
the opening of an insolvency proceeding. On the acceptance by a
during the liquidation proceeding. On restructuring, secured
court of a bankruptcy application, any litigation or arbitration
creditors are categorised as one group for the purpose of voting on
proceedings brought by a creditor against the bankrupt debtor must
the restructuring plan. If more than 50% of the secured creditors
be stayed until the liquidator takes over the bankrupt debtor’s assets.
present at the meeting approve a restructuring plan, which covers
If a creditor has applied to the court for an attachment order and the
over two-thirds of the secured debts, the restructuring plan is
enforcement of a judgment or arbitral award, the attachment order
considered approved by the secured creditors. However, even if the
will be lifted and the enforcement is stayed on the court’s
secured creditors refuse approval, the bankrupt debtor (or the
acceptance of a bankruptcy application. As a general rule, the
liquidator) can apply to the court for an approval of the restructuring
secured creditor’s claim will be satisfied at the end of the
plan provided that:
bankruptcy proceeding from the proceeds of the realised security
assets, but in some cases a liquidator may consider allowing a ■ the secured debts will be fully repaid (together with a fair
compensation for loss resulting from a delay in repayment);
secured creditor to realise the security interests before the end of
and
such proceeding.
■ the security interest is not substantially prejudiced.
Reconciliation
5.2 Are there any preference periods, clawback rights or
other preferential creditors’ rights (e.g. tax debts, The reconciliation plan must be approved by more than 50% of
employees’ claims) with respect to the security? creditors that hold more than two-thirds of the unsecured debts who
are present at the meeting. Secured creditors do not attend the
A liquidator may exercise clawback rights. With respect to the meeting, as their claims are satisfied in priority to unsecured
security, if a debtor grants security to an unsecured debt or repays creditors’ claims.
debts before maturity, in either case within one (1) year prior to the
court acceptance of a bankruptcy application, then such act may be 5.6 Please briefly describe the liabilities of directors (if
avoided by the liquidator. any) for continuing to trade whilst a company is in
A creditor secured by the specific property of the bankrupt shall financial difficulties in your jurisdiction.
enjoy the priority in being repaid with the specific property. After
the secured creditors have been paid and after deductions of Directors may continue to trade even if a company is facing
bankruptcy expenses and debts of common benefits from the financial difficulties, provided that they act with a special duty of
bankruptcy property, repayment shall be made in the following care and a duty of loyalty and do not violate their legal duties and
order: (1) employees’ claims; (2) social security expenses and the articles of association of the company. The failure to act in the
insurance claims; and (3) unsecured claims. company’s interests may constitute a violation of the duty of care or
duty of loyalty and result in personal liability.

5.3 Are there any entities that are excluded from

bankruptcy proceedings and, if so, what is the 6 Foreign Investment and Ownership
applicable legislation?
Restrictions
The PRC Enterprise Bankruptcy Law applies to corporate entities,
financial institutions, or other organisations. Natural persons who 6.1 Are there any restrictions, controls, fees and/or taxes
do not qualify for organisation status cannot avail themselves of the on foreign ownership of a project company?
Bankruptcy Law’s protections.
The PRC has maintained a catalogue for industrial sectors that
encourage, limit or prohibit foreign direct investment, which has

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Global Law Office China

been updated at the end of 2018 and will be further updated in 2019 assessment report (EIA) and the approval by the relevant land and
with an aim of attracting more foreign investors. In general, foreign planning authority of its land use and related planning. These
direct investment in projects and infrastructures is encouraged. processes generally need to be completed before the project
However, certain types of projects (for example, the construction of investment proposal is submitted to NDRC for verification or filing.
a nuclear power plant or electricity grid) limit foreign ownership, in
which Chinese investors must have the majority shareholding.
7.2 Must any of the financing or project documents be
In the PRC, no fee or tax is imposed on foreign ownership of a registered or filed with any government authority or

China
project company. otherwise comply with legal formalities to be valid or
enforceable?

6.2 Are there any bilateral investment treaties (or other

international treaties) that would provide protection There is no registration, filing or legal formality requirement on the
from such restrictions? financing or project documents, except that a cross-border loan
agreement between a PRC project company and non-PRC lenders is
The PRC has entered into over 100 bilateral investment treaties to required to be registered as a foreign debt at SAFE and a security
date, and is now negotiating bilateral investment treaties with the document, depending on the type of security interests to be created,
US and the EU which follow two key principles: the principle of is required to be registered at the relevant registry for the purpose of
national treatment for market access; and the principle of the perfecting such security interests (for example, the registration of a
negative list. In other words, the PRC will offer national treatment land and building mortgage at the land and building title registration
to foreign investments not only after the establishment of foreign- authority, or the registration of a mortgage over equipment at the
invested enterprises but also at the stage of investment (i.e. market local branch of the SAMR).
access) and, unless prohibited or restricted under the negative list,
foreign investment in an industrial sector will be allowed. 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,
6.3 What laws exist regarding the nationalisation or can such a licence be held by a foreign entity)?
expropriation of project companies and assets? Are
any forms of investment specially protected?
The ownership of land, natural resources or a pipeline needs a
licence or a title certificate, and undertaking the business of
There is no specific law regarding the nationalisation or expropriation
ownership or operation of such assets generally requires the relevant
of project companies and assets.
governmental approval, licence or filing. A foreign entity needs to
Under the PRC Constitution, there is a general principle that private establish a “local presence” (such as a project company) in the PRC
assets may be expropriated with compensation by the state for the to own and operate such assets.
needs of public interests and in compliance with the laws. The new
PRC Law on Foreign Investments, passed on 15 March 2019 by the
People’s Congress of the PRC (effective from 1 January 2020), 7.4 Are there any royalties, restrictions, fees and/or taxes
payable on the extraction or export of natural
expresses that the state will not expropriate foreign investments and,
resources?
if such expropriation is needed under special situations and for
social public interests, it shall be undertaken pursuant to a legal
The extraction of natural resources is subject to the approval and
process and with fair and reasonable compensation. This illustrates
licensing of the Chinese government, and the operator is required to
the protection of all forms of foreign investment in general under
pay the exploration and exploitation fees applicable to the relevant
PRC law.
natural resources to the Chinese government. Depending on the
type of natural resources to be exported, the Chinese government
7 Government Approvals/Restrictions may impose an export licence and/or export tariff.

7.1 What are the relevant government agencies or 7.5 Are there any restrictions, controls, fees and/or taxes
departments with authority over projects in the typical on foreign currency exchange?
project sectors?
The PRC has liberalised the current account foreign exchange
As a general rule, investment in a project is subject to the transactions (such as trades in goods and in services), and a genuine
verification by, or filing with, the National Development and current account transaction, supported by the relevant underlying
Reform Commission of the PRC (NDRC). NDRC is the competent documents or information, does not need to be verified by, or
authority in charge of project investments in the PRC. For a foreign registered with, SAFE. However, for capital account foreign
investment, after the project investment proposal is verified by, or exchange transactions (such as loans, bonds, equity investments and
filed with, NDRC, the establishment of the project company needs derivatives), SAFE verification is required to date.
to be filed with the Ministry of Commerce of the PRC (MOFCOM), No fee or tax is charged by the Chinese government on foreign
the competent authority in charge of foreign investment and currency exchange.
establishment of foreign-invested enterprises. Finally, the
registration of the project company at the SAMR needs to be
7.6 Are there any restrictions, controls, fees and/or taxes
completed, so as to evidence the establishment of such project
on the remittance and repatriation of investment
company. returns or loan payments to parties in other
In addition to the above key processes at NDRC, MOFCOM and the jurisdictions?
SAMR, a project is normally subject to the approval by the
environmental protection authority of its environmental impact Remittance and repatriation of investment returns is a type of

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current account foreign exchange transaction, without the need of Similarly, there is a complete legal regime on health and safety
any governmental approval in the PRC. issues, led by the PRC Law on Prevention of Occupational Diseases
Borrowing a cross-border loan and making loan payments is a type and related implementing rules and guidelines. Since there are
of capital account foreign exchange transaction, subject to the different types of health and safety issues, different ministries of the
foreign debt registration at SAFE. After registration, the borrower is Chinese government have their powers and functions in this regard.
able to handle with its account bank the loan payments to non-PRC The key authority is the National Health Commission of the PRC.
lenders. Depending on the type of project to be invested, all or some of these
China

While there is no fee charged by the Chinese government on the SHE-related laws and rules will apply to a project company.
remittance and repatriation of investment returns or loan
repayments to parties in other jurisdictions, the PRC withholding 7.10 Is there any specific legal/statutory framework for
tax is applicable on distribution of dividends (normally at the rate of procurement by project companies?
10%) and paying interest on loans (normally at the rate of 10%).
Project companies should comply with the PRC Law on Tenders
7.7 Can project companies establish and maintain and Biddings in relation to procurement issues. If a project
onshore foreign currency accounts and/or offshore company is state-owned or intends to use the funding of the state to
accounts in other jurisdictions? construct the project, the PRC Law on Governmental Procurement
will also apply.
Project companies, if invested by a foreign investor, can establish
and maintain onshore foreign currency accounts. However,
8 Foreign Insurance
establishing and maintaining offshore accounts in other jurisdictions
will be very difficult. In theory, SAFE can approve such offshore
accounts, but in practice it is difficult to justify why a PRC project 8.1 Are there any restrictions, controls, fees and/or taxes
company, with the assets in and revenues from the PRC and having on insurance policies over project assets provided or
no revenue from offshore sources, needs to establish an offshore guaranteed by foreign insurance companies?
account. As explained in the answer to question 7.6 above, there are
well-established routes for the remittance and repatriation of Project assets should be insured by China-incorporated insurance
investment returns or loan repayments by a PRC project company to companies. Foreign insurance companies are not allowed to
parties in other jurisdictions. undertake insurance-related activities without the licensing of the
PRC insurance regulator (currently the China Banking and
7.8 Is there any restriction (under corporate law, Insurance Regulatory Commission of the PRC), so basically they
exchange control, other law or binding governmental cannot insure project assets in the PRC. It is rare to see a foreign
practice or binding contract) on the payment of insurance company providing a guarantee to one PRC project either,
dividends from a project company to its parent even though there is no express prohibition on this type of business.
company where the parent is incorporated in your
jurisdiction or abroad?
8.2 Are insurance policies over project assets payable to
foreign (secured) creditors?
If the parent is incorporated in the PRC, there is no restriction on the
payment of dividends from a project company to that parent, so long
as that project company has paid up the tax due, allocated the As a general rule, foreign (secured) creditors have no insurable
statutory reserves and prepared an audited financial report for the interests in the project assets, because they are only in the capacity
past year, in which case it is able to declare and distribute the past of creditors, rather than owners, of such assets. From the
year’s dividends within the amount of its distributable profits. perspective of transaction documentation, it is possible to require
one China-incorporated insurance company to add a loss payee
The above requirements on distributing dividends also apply to a
clause in the insurance policy and undertake to pay the insurance
foreign-invested project company when it intends to declare and
proceeds to foreign (secured) creditors, supported by an assignment
distribute the dividends to the parent incorporated out of the PRC.
of insurance in favour of foreign (secured) creditors, the payment of
As explained, distribution of dividends is a type of current account
insurance proceeds out of the PRC by the insurance company would
foreign exchange transaction, without the need of any governmental
still need to be verified by SAFE at the time of making such cross-
approval in the PRC.
border payment.

7.9 Are there any material environmental, health and

safety laws or regulations that would impact upon a 9 Foreign Employee Restrictions
project financing and which governmental authorities
administer those laws or regulations?
9.1 Are there any restrictions on foreign workers,
technicians, engineers or executives being employed
The PRC has a complete legal regime on various aspects of by a project company?
environmental protection. The base is the PRC Law on
Environmental Protection, setting out the basic principles of the
If a project company intends to employ a non-PRC employee, it
environmental protection regime. There are a number of specific
needs to apply for, and obtain, the work permit for such non-PRC
laws governing the protection and prevention of pollution of air,
employee from the labour competent authority of the local
water, soil, sound, solid wastes and so on, as well as the EIA. The
government in the city where that project company is incorporated.
competent authority in charge of environmental protection in the
He or she needs to apply for the Chinese work visa before entering
PRC is the Ministry of Ecology and Environment of the PRC.
into the PRC.

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familiar to govern the financing agreements (typically, English law

10 Equipment Import Restrictions
or Hong Kong law in the PRC market). That said, security
documents are typically governed by lex situs, i.e. PRC law.
10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by 13.3 What matters are typically governed by domestic law?
construction contractors?

The capacity and authority issues of the project company or other

China
As a general rule, there is no restriction, control, fee or tax on
PRC guarantors or security providers, as well as the creation and
importing equipment used by construction contractors, provided
perfection of security interests in the assets located within the PRC,
that such equipment will be moved out of the PRC after the
are typically governed by PRC law.
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 14 Jurisdiction and Waiver of Immunity
should depend on the type of such equipment to be imported.
Therefore, there is no universal answer to this question.
14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable?
10.2 If so, what import duties are payable and are
exceptions available? If the relevant contract has a “foreign element” (for example, one
party to that contract is a non-PRC entity or individual, or the
This depends on the type of equipment to be imported, so there is no subject matter of that contract is out of the PRC, or the legal
universal answer to this question. 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,
11 Force Majeure
whether or not state-owned, will be legally binding and enforceable
under PRC law.
11.1 Are force majeure exclusions available and
enforceable?
15 International Arbitration
PRC law recognises the concept of force majeure. As a principle,
force majeure exclusions should be available and enforceable from 15.1 Are contractual provisions requiring submission of
a PRC legal perspective. disputes to international arbitration and arbitral
awards recognised by local courts?

12 Corrupt Practices So long as the relevant contract has a “foreign element” as described
above, its submission of disputes to international arbitration is
recognised by Chinese courts. That said, if purely a domestic
12.1 Are there any rules prohibiting corrupt business
practices and bribery (particularly any rules targeting contract without any foreign element, the parties to such domestic
the projects sector)? What are the applicable civil or contract cannot submit the dispute to a non-PRC arbitration route.
criminal penalties? The PRC is a New York Convention country, so the courts will
recognise and enforce an arbitral award rendered in another New
There are strict rules under the PRC Criminal Law, related laws and York Convention country pursuant to the New York Convention. If
regulations and the judicial interpretations prohibiting corrupt rendered in a non-New York Convention country, the courts will
business practices and bribery. These rules apply to the projects apply the relevant rules under the PRC Civil Procedure Law with
sector too. The civil and criminal penalties range from fines, respect to recognition and enforcement of foreign arbitral awards
penalties, confiscation of proceeds from illegal activities and so on, (which are quite similar to the New York Convention rules).
to imprisonment (for a fixed period or for life) and even capital
punishment.
15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
13 Applicable Law conventions?

The PRC is a New York Convention country.

13.1 What law typically governs project agreements?

15.3 Are any types of disputes not arbitrable under local

PRC law typically governs project agreements. law?

13.2 What law typically governs financing agreements? In accordance with the PRC Arbitration Law, the following types of
disputes are not arbitrable under PRC law: (a) disputes relating to
This depends on the lenders. If the lenders are incorporated in the marriages, adoptions, guardianship, provision for elders and
PRC, PRC law typically governs financing agreements. inheritance; and (b) administrative disputes that shall be dealt with
by administrative authorities.
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

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 Global Law Office China

foreign-invested enterprises. In general, foreign investors or

15.4 Are any types of disputes subject to mandatory creditors do not enjoy a more preferential tax treatment than those
domestic arbitration proceedings?
applicable to domestic investors or creditors. It is possible that
certain tax incentives may be enjoyed if the investment is in high
There is no such mandatory domestic arbitration proceeding, except technology or infrastructure sectors, but such incentives apply to
that some types of labour disputes (for example, relating to the both domestic and foreign investors.
performance of an employment contract, unfair dismissal and
There is no tax applicable to foreign investments, loans, mortgages or
China

severance packages) between an employer and an employee must go

other security documents for the purposes of effectiveness or registration.
through the labour arbitration process first.

18 Other Matters
16 Change of Law / Political Risk

16.1 Has there been any call for political risk protections 18.1 Are there any other material considerations which
such as direct agreements with central government or should be taken into account by either equity
political risk guarantees? investors or lenders when participating in project
financings in your jurisdiction?

In theory, a foreign investor or a PRC-incorporated project company

can sign a direct agreement with the Chinese central government There are no other material considerations in this regard.
(represented by the State Council of the PRC), but this type of direct
agreement is rarely seen in the market. 18.2 Are there any legal impositions to project companies
China Export & Credit Insurance Corporation (Sinosure) is the sole issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory
policy-oriented export credit insurance company in the PRC. It has
requirements for the issuance of capital market
an Inbound Investment Insurance Policy covering political risks of instruments.
making investments in the PRC. But we understand that there are
not many users for this product in the market.
In the PRC, corporate bonds may be issued at the stock exchange market
If a foreign investor prefers, it may consider purchasing a political (governed by the rules issued by the Chinese securities regulator, the
risk guarantee from MIGA under the World Bank to guarantee the China Securities Regulatory Commission) or at the interbank bond
political risks of its investment in the PRC. So far as we understand, market (governed by the rules issued by the People’s Bank of China and
there are not many users for this product in recent years due to the subject to the self-regulation of the National Association of Financial
stability of the political and social environment of the PRC. Market Institutional Investors, or by the rules issued by NDRC).
In either market, the applicable rules require an issuer either to be
17 Tax 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 (especially those in the
17.1 Are there any requirements to deduct or withhold tax construction stage or the early operation stage) to issue bonds.
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?
19 Islamic Finance

There is no withholding tax on interest payable on loans made to a 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
domestic lender, nor on the proceeds of a claim under a guarantee or instruments might be used in the structuring of an
the proceeds of enforcing security payable to a domestic lender. Islamic project financing in your jurisdiction.
If to a foreign lender, the PRC withholding tax on interest is
generally imposed at the rate of 10% (which can be reduced to 7% PRC law has no concept of Islamic financing to date. Whether PRC law
if such interest is payable to a Hong Kong tax resident or a will accept the system of Shari’ah law needs to be further explored in a real
Singapore financial institution tax resident). case too. Therefore, it is unlikely that arranging an Islamic project
In theory, the interest component of the proceeds of a claim under a financing in the PRC will be possible within the foreseeable future.
guarantee or the proceeds of enforcing security payable to a foreign
lender should also be subject to the above PRC withholding tax on 19.2 In what circumstances may Shari’ah law become the
interest. But there is no Chinese tax rule or decision confirming this governing law of a contract or a dispute? Have there
point to date. In practice, it is likely that the Chinese tax authority been any recent notable cases on jurisdictional
will not ask for a withholding tax on this interest component when issues, the applicability of Shari’ah or the conflict of
Shari’ah and local law relevant to the finance sector?
the guarantee claim or security enforcement proceeds are paid to a
foreign lender.
This is not applicable in our jurisdiction.

17.2 What tax incentives or other incentives are provided

preferentially to foreign investors or creditors? What 19.3 Could the inclusion of an interest payment obligation
taxes apply to foreign investments, loans, mortgages in a loan agreement affect its validity and/or
or other security documents, either for the purposes enforceability in your jurisdiction? If so, what steps
of effectiveness or registration? could be taken to mitigate this risk?

The PRC has unified the tax regime applicable to domestic and This is not applicable in our jurisdiction.

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Global Law Office China

Dr. Xin Zhang Shuhui Luo

Global Law Office Global Law Office
15&20F, China Central Place Tower 1 15&20F, China Central Place Tower 1
81 Jianguo Road, Chaoyang District 81 Jianguo Road, Chaoyang District
Beijing 100025 Beijing 100025
China China

Tel: +86 10 6584 6676 Tel: +86 10 6584 6632

China
Email: [email protected] Email: [email protected]
URL: www.glo.com.cn URL: www.glo.com.cn

Dr. Zhang, qualified as a PRC lawyer (1996) and an English solicitor Ms. Luo is a counsel of Global Law Office, specialised in banking,
(2004), provides legal services for Chinese and international banks project financing and capital markets. She has extensive experience
and investors in relation to banking and finance, M&A, FDI and in corporate and commercial matters, bond offerings, project
overseas investment. He has represented most of the Chinese and financings, syndicated loans and security matters, across a wide
international banks, international financial institutions and ECAs active range of industry sectors. She provides legal services to Chinese
in the market on syndicated loans, project financing, trade financing, SOEs and banks for their overseas investment and financing projects
vessel and aircraft financing, export credit loans and financial under the “One Belt and One Road” initiative. She has also assisted a
derivatives. He has also represented foreign investors to invest in or number of Chinese and international issuers in their issuance of bonds
acquire Chinese renewable energy, power and infrastructure assets. within and outside the PRC, and achieved a number of “first deals” in
Further, he supports Chinese investors, banks and ECAs for export of the market, including RMB bonds (the so-called “Panda Bonds”)
China-made capital goods and EPC services and investment in, and issued by the Republic of Korea, IBRD and HSBC.
financing of, infrastructure, natural resources and real estate projects
Ms. Luo holds a LL.B. from Shantou University and a Master of Law
across the world.
from China University of Political Science and Law, and was admitted
Dr. Zhang has been awarded as the Leading Lawyer in PRC Banking to the PRC Bar in 2010.
and Finance and PRC Securitisation & Derivatives by Chambers
Global, Chambers Asia and Asia Legal 500 over the years.

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 experience 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.

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 Chapter 10

Colombia
Manuel Fernando Quinche

Brigard Urrutia César Felipe Rodríguez

currently structuring and which entails investments in the region of

1 Overview
US$800 million, and is expected to handle more than 7.5 million
passengers per year; and (iii) the construction and operation of a
1.1 What are the main trends/significant developments in liquefaction, regasification and storage unit for the processing of
the project finance market in your jurisdiction? natural gas which will be located on the Colombian Pacific Coast.
In addition, Law 1715 of 2014, “through which the integration of
During the last years, Colombia has been experiencing an non-conventional renewable energy to the National Energy System
infrastructure and project finance boom. The fourth generation of is regulated”, and Decree 2143, published by the Colombian
toll road projects (the “4G Program”), which comprises 42 projects government in November 2015, aim to promote research,
aimed at building roads totalling approximately 7,000 km in length development and investment in the generation and use of non-
and requires an investment of around US$20 billion, is under way. conventional renewable power, which translates into business
Given the strategic importance of the 4G Program, the Colombian opportunities in the renewable energy market. This regulatory
government has implemented several actions to provide support and framework is complemented by resolutions issued by the
enhance the risk profile of investments in the 4G Program. A Commission for the Regulation of Energy and Gas (Comisión de
decisive action was the enactment of Law 1508 of 2012 governing Regulación de Energía y Gas) that establish, among others: (a) the
the legal framework for public-private partnerships (“PPPs”) in rules on supply contracts for agricultural-origin fuel for a reliability
Colombia, and Law 1682 of 2013, which aims to offer quick charge; (b) the methodology to determine the firm energy of
solutions to the most common bottlenecks in road construction geothermal plants; (c) the methodology to determine the firm energy
related to land acquisitions, environmental licences and relocation of wind farms; and (d) the methodology to determine the firm
of public utility networks. More recently, on January 2018, the energy of photovoltaic solar plants. Furthermore, the government is
President of Colombia approved Law 1882 of 2018, which amends currently drafting a Decree which will regulate the offering of non-
certain provisions of the infrastructure regime regarding public conventional renewable energy to the National Interconnected
procured contracts, such as: (i) the structure of the public tenders; System. The purpose of this initiative is to facilitate the access of
(ii) the responsibility of advisors, auditors and consultants; (iii) the non-conventional renewable generators into the electric market.
implementation of mandatory standard documents in public Finally, Colombian foreign exchange regulations were recently
procurement proceedings; (iv) inter-administrative agreements; (v) reformed to allow foreign entities to grant loans to Colombian
transport infrastructure projects; and (vi) the settlement of PPP residents in Colombian Pesos. This recent development grants local
contracts in case of annulments. borrowers access to new resources without assuming any foreign
The 4G Program has faced several challenges and complexities, but exchange risk. For foreign lenders and investors, it will open the
the National Government has taken actions and issued regulations to loan secondary market, allowing for a more efficient and profitable
provide a solid legal framework for this ambitious plan to move use of resources. In order to perform these operations, foreign
forward. entities are required to complete all transfers through bank accounts
held in local foreign exchange intermediaries.
The National Infrastructure Agency (“ANI”), which is the
government entity in charge of structuring, tendering and
supervising the performance of projects under the 4G Program, is 1.2 What are the most significant project financings that
seeking to attract foreign lenders (including capital markets have taken place in your jurisdiction in recent years?
financing), infrastructure funds and first-level domestic and
international contractors with sufficient experience, financial The most significant project financings that have taken place in
strength and technical standards. Colombia in recent years are as follows:
Other than the 4G Program, Colombia has a healthy stream of ■ Cartagena Refinery: US$3.5 billion financing for the
infrastructure projects in diverse sectors. The most important public expansion and modernisation of the Cartagena refinery.
procurement projects include: (i) the first line of the Bogotá metro ■ El Dorado Airport: US$500 million refinancing for the
project (27 km), which is currently finalising the structuring phase construction, expansion and modernisation of the El Dorado
and entails investments in the region of US$6 billion; (ii) an Airport in Bogotá, Colombia, along with a US$130 million
additional airport for Bogotá, called El Dorado II, which ANI is financing for the construction of the voluntary works (obras
voluntarias) in the El Dorado Airport.

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Brigard Urrutia Colombia

■ Puerto Bahía: US$370 million financing for the construction

of a multi-purpose port located in Cartagena, Colombia. 2.2 Can security be taken over real property (land), plant,
machinery and equipment (e.g. pipeline, whether
■ Pacífico 2 (4G Toll Road Project): US$250 million and
underground or overground)? Briefly, what is the
COP510,000 million (approximately US$59.7 million)
procedure?
financing for the construction of the Pacífico 2 98 km toll
road project.
Yes. For real property, a mortgage agreement must be executed and

Colombia
■ Conexión Norte (4G Toll Road Project): US$250 million and
COP540,000 million (approximately US$186.2 million) registered before the relevant public instrument registry office
financing for the construction of the Conexión Norte 145 km (Oficina de Registro de Instrumentos Públicos). Security over
toll road project. movables (e.g. machinery and equipment) is created through a
■ Perimetral de Cundinamarca (4G Toll Road Project): US$173 security trust agreement or a pledge agreement. However, if the
million and COP864,000 million (approximately US$59.7 relevant movable assets are attached to real estate and cannot be
million) financing of the Perimetral de Cundinamarca 153.8 separated without deteriorating, those assets may be covered by the
km toll road project. mortgage.
■ Transversal del Sisga (4G Toll Road Project): US$225
million financing of the Transversal del Sisga 137 km toll 2.3 Can security be taken over receivables where the
road project which will be financed in COP. chargor is free to collect the receivables in the
■ Autovía Neiva Girardot (4G Toll Road Project): US$276 absence of a default and the debtors are not notified
million financing of the Autovía Neiva Girardot 196.85 km of the security? Briefly, what is the procedure?
toll road project which will be financed in COP. This is the
first private initiative to have achieved financial closing in Yes, it is possible to provide security over receivables where the
Colombia.
chargor is free to collect the receivables in the absence of an event
■ Mar 1 (4G Toll Road Project): US$116 million bridge of default. To this effect, the receivables must be described in the
financing for the development, design, construction, text of the security agreement. In these events, it is not necessary to
improvement, rehabilitation, operation, and maintenance of
notify the debtor of the receivable unless the parties to the
the Concesión Autopista al Mar 1 toll road and its ancillary
underlying agreement have explicitly agreed to this. Nevertheless,
facilities.
if the parties have agreed to issue the above-mentioned notice and
■ Aeropuerto Ernesto Cortissoz (4G Airport Project):
the debtor is not notified, the chargor is required to indemnify the
COP173,000 million (approximately US$59.7 million) and
US$50 million financing of the modernisation of the Ernesto debtor for all the costs, damages or prejudices stemming from such
Cortissoz Airport in Barranquilla, Colombia. breach of the agreement, and the debtor will be released of its
obligation by paying the receivable to the chargor.
■ 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 2.4 Can security be taken over cash deposited in bank
Coast. accounts? Briefly, what is the procedure?
■ Canacol: US$305 million refinancing for the repayment of
Canacol Energy Ltd.’s existing debt, thereby granting Yes. Law 1676 of 2013 (“Law 1676”) sets forth the possibility of
financial flexibility and allowing the company to pursue its entering into a control agreement to secure the cash deposited in a
stated gas production goal.
bank account. Security over funds deposited in a bank account is
perfected: (i) when the relevant bank is the secured party, by the
2 Security execution of a security agreement in respect of the account (in
which case the secured party shall be deemed to hold possession of
the secured assets); or (ii) when the bank is not a secured party, by
2.1 Is it possible to give asset security by means of a the execution of a control agreement between the bank, the
general security agreement or is an agreement guarantor and the secured party.
required in relation to each type of asset? Briefly,
what is the procedure?
2.5 Can security be taken over shares in companies
incorporated in your jurisdiction? Are the shares in
In principle, it is possible to create a blanket lien or ongoing concern
certificated form? Briefly, what is the procedure?
pledge over a group of assets. In this case, security may be granted
by means of either a commercial establishment pledge agreement
(garantía mobiliaria sobre establecimiento de comercio) or an Yes. In Colombia, if the company’s shares are materialised in
assets pledge agreement (garantía mobiliaria sobre activos) and certificates, security may be taken over the shares by means of a
shall be registered before the national registry for security interests share pledge agreement (garantía mobiliaria sobre acciones) or
over movable assets (Registro Nacional de Garantías Mobiliarias), trust agreements, whereby property of the shares is transferred to the
which provides priority and enforceability against third parties. trust. In both cases, registration of the security in the company’s
stock ledger is required. In this scenario, notwithstanding the fact
Furthermore, it is also possible to grant security over assets by that the shares are represented by certificates, it is not necessary for
transferring these to a security trust. For this purpose, parties should the guarantor to deliver the share certificates to the creditor.
execute a trust agreement with a trustee and register such agreement
before the said national registry. It is also possible to issue shares in uncertificated form (or
dematerialised shares); however, Law 1676 is not applicable for
However, security over certain assets such as real estate, aircraft and security over that kind of shares. In these events, a share pledge
ships must be created by means of mortgage agreements and cannot may be granted over the dematerialised shares and the relevant share
be part of a general security agreement. pledge agreement must be registered with the applicable registry
(e.g. Depósito Centralizado de Valores).

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 Brigard Urrutia Colombia

2.6 What are the notarisation, registration, stamp duty 3.2 If a security trust is not recognised in your
and other fees (whether related to property value or jurisdiction, is an alternative mechanism available
otherwise) in relation to security over different types (such as a parallel debt or joint and several creditor
of assets (in particular, shares, real estate, status) to achieve the effect referred to above which
receivables and chattels)? would allow one party (either the security trustee or
the facility agent) to enforce claims on behalf of all the
Colombia

lenders so that individual lenders do not need to

The cost of a mortgage, notarial expenses, registration tax and
enforce their security separately?
registration rights are required as follows:
(i) Notarisation fees may range between 0.471% and 0.57% of
This is not applicable in Colombia.
the value of the mortgage.
(ii) For the registration tax, tariffs range between 2% and 2.5% of
the value of the mortgage, depending on the municipality in 4 Enforcement of Security
which the mortgage is registered.
(iii) Registration rights tariffs are 0.3% of the value of the
mortgage, which corresponds to the value determined for the 4.1 Are there any significant restrictions which may
calculation of notarial expenses. In case the mortgage does impact the timing and value of enforcement, such as
not specify an amount, the registration rights will be US$20. (a) a requirement for a public auction or the
availability of court blocking procedures to other
Registry costs to complete the registry of security interests over creditors/the company (or its trustee in
movable assets are approximately US$15. bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?
2.7 Do the filing, notification or registration requirements
in relation to security over different types of assets The general restriction regarding mortgages is that the seizure of
involve a significant amount of time or expense? any mortgaged collateral requires a judicial proceeding and a
judicial auction whereby the proceeds of the auction are delivered to
Filing, notifications and registration requirements in respect of the creditor. If the auction is unsuccessful, the collateral will be
security over movable assets can be undertaken online at delivered to the creditor. Any provision in a mortgage agreement
https://www.garantiasmobiliarias.com.co/ and therefore the amount whereby the creditor will be entitled to claim or acquire property
of time and expenses is marginal. over the asset directly is not expressly permitted by law. For
pledges over movable assets, pursuant to Law 1676, the creditor will
Mortgage filings, notifications and/or registration requirements may
be entitled to directly claim or acquire property over the pledged
vary depending on the region. In general, the procedure may take
asset through a direct payment mechanism, special foreclosure of
from one to four months.
the security or judicial proceedings.

2.8 Are any regulatory or similar consents required with

respect to the creation of security over real property 4.2 Do restrictions apply to foreign investors or creditors
(land), plant, machinery and equipment (e.g. pipeline, in the event of foreclosure on the project and related
whether underground or overground), etc.? companies?

In general, there are no regulatory or similar consents required with No, there are no restrictions that exclusively apply to foreign
respect to the creation of security over real estate property, plant, investors or creditors in foreclosure events. The granting of loans as
machinery and equipment. Depending on the particular case, well as the entry and exit of foreign currency, performed as a
regulatory approvals may be required. consequence of the disbursement and repayment of loans (including
the event of foreclosure), must be completed through the foreign
If the project assets are built over public land granted by the
exchange market and must be registered before the Central Bank.
government by means of a concession agreement, such project
assets incorporated into the concession cannot be taken as security.
5 Bankruptcy and Restructuring
3 Security Trustee Proceedings

5.1 How does a bankruptcy proceeding in respect of the

3.1 Regardless of whether your jurisdiction recognises
project company affect the ability of a project lender
the concept of a “trust”, will it recognise the role of a
to enforce its rights as a secured party over the
security trustee or agent and allow the security
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 Upon the commencement of a reorganisation proceeding in
lenders? Colombia, secured creditors are granted priority over unsecured
creditors for payment (including that of employees’ salaries and
Colombian law does recognise the concept of a “trust” as well as the taxes). Therefore, secured creditors are allowed to enforce their
role of security trustees and agents, and allows them to act on behalf security interests during the reorganisation proceeding under certain
of different lenders. The role of a security trustee and the scope of circumstances; for instance, if the secured assets are not deemed
its powers will depend on the particular trust agreement. necessary for the continuation of the operations of the debtor’s
business. In general, from the date of commencement of the

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reorganisation proceeding, any demand for execution or any other entities unless a specific exception is applicable. In general, State-
collection proceeding against the debtor regarding movable assets owned entities at the regional level (nivel territorial), State-owned
or real property necessary for the operation of the debtor’s business universities, health promotion agencies (entidades promotoras de
will be stayed. Please note that a claim filed by a creditor under an salud), stock exchanges, entities under surveillance of the
insolvency proceeding will be deemed to be secured up to the value Superintendence of Finance (Superintendencia Financiera – SFC)
of the encumbered asset. or the Superintendence of Solidary Economy (Superintendencia de

Colombia
Upon the commencement of judicial liquidation proceedings, the la Economía Solidaria – SES), companies with public capital,
debtor’s encumbered property may be excluded from the liquidation companies that provide public services and non-trader individuals,
estate for the benefit of the secured creditors or beneficiaries of the have a different regulation in connection with bankruptcy
security interest, subject to certain rules. Therefore, if there is no proceedings than all other individuals or entities.
reorganisation agreement and the company enters into liquidation,
creditors will be paid in their respective order of priority, with 5.4 Are there any processes other than court proceedings
preference to the specific assets over which said creditors have that are available to a creditor to seize the assets of
security interests (provided that there are still available funds and the project company in an enforcement?
assets after paying creditors with a higher ranking).
Yes. Within the special foreclosure proceeding of security interests
5.2 Are there any preference periods, clawback rights or over movable assets, the creditor may foreclose the secured assets
other preferential creditors’ rights (e.g. tax debts, before chambers of commerce or notaries.
employees’ claims) with respect to the security?
5.5 Are there any processes other than formal insolvency
In the course of insolvency proceedings, any creditor, the promotor proceedings that are available to a project company
or the liquidator may request reversal or declaration of fraudulent to achieve a restructuring of its debts and/or
transfer of some acts executed by the debtor when such acts cramdown of dissenting creditors?
adversely affect any creditor or the priority order among creditors.
Pursuant to Article 74 of Law 1116 of 2006 (“Law 1116”), the acts No. Only judicial reorganisation proceedings under Law 1116 are
that may be revoked by the insolvency court are the following: binding on dissenting creditors. However, according to Law 1116,
(i) Any act that results in the transfer or conveyance of property, business reorganisation may be carried out not only by means of a
including: transfer to a trust with collateralisation purposes; judicial proceeding, but also by means of a private agreement between
payment of a pre-petition claim; granting or cancellation of a the debtor and its creditors with the further approval of the insolvency
lien; and execution of a lease agreement that obstructs the court. Once the insolvency court has approved the agreement, such
insolvency proceeding, if such act took place within 18 months agreement will be binding on all creditors recognised within the
prior to the commencement of the insolvency proceeding. proceeding, including absent and dissenting creditors.
(ii) Any gratuitous act executed within 24 months prior to the
commencement of the insolvency proceeding. The
Superintendence of Companies has held that the act shall be 5.6 Please briefly describe the liabilities of directors (if
presumed to be gratuitous if: (a) the act was verbally concluded; any) for continuing to trade whilst a company is in
(b) the parties did not agree on compensation for the debtor; or financial difficulties in your jurisdiction.
(c) although the parties agreed on compensation for the debtor,
there is no evidence that such compensation was actually paid. Pursuant to Law 1116, since the filing of the application to a
(iii) Any amendment to the by-laws executed within 6 months reorganisation proceeding, directors are not allowed to transfer a
prior to the commencement of the insolvency proceeding in company’s assets or make operations that are not related to the
either of the following cases: (a) if the equity of the debtor ordinary course of the debtor’s business, without previous approval
was reduced; or (b) if the liability regime of the shareholders by the insolvency court. Failing to comply with said limitations will
was altered. cause the directors to be jointly liable for the damages caused to the
Additionally, under Colombian law, claims are classified as follows: company, the shareholders or partners, and the company’s creditors.
(1) first-class claims (judicial costs, salaries and other payments The directors may be removed from their office, and may be
derived from employment contracts, and liabilities in favour of the sentenced to pay successive fines of up to 200 legal minimum
tax authorities); (2) second-class claims (claims secured with a monthly wages (approximately US$54,600) until the operation is
pledge); (3) third-class claims (claims secured with a mortgage); (4) reversed.
fourth-class claims (obligations with suppliers of raw materials or According to Article 82 of Law 1116, if the debtor’s equity is
services related to the core business); and (5) fifth-class claims (all reduced due to wilful or negligent conduct attributable to the
other creditors). In principle, the claims of each category must be shareholders, directors, auditors or employees, these shall be liable
paid in full before any claim in the next category receives any for the payment of the liabilities of the entity. Said article expressly
distribution. However, pursuant to Law 1676, secured creditors provides that the shareholders who did not have knowledge about
now have privileges within insolvency proceedings. Moreover, the action or omission, or who voted against it and did not take part
under certain circumstances, the priorities may be modified in the in its implementation, will not be subject to this kind of liability.
reorganisation plan with the approval of the creditors representing at
In cases of breach of duties or ultra vires acts, or breach of laws or
least 60% of the votes recognised by the insolvency court.
bylaws, the negligence of the persons involved will be presumed.
Furthermore, any contractual provision that exonerates the
5.3 Are there any entities that are excluded from shareholders, administrators, auditors or employees of the
bankruptcy proceedings and, if so, what is the aforementioned liabilities or that limits such liabilities to the amount
applicable legislation? of the bond given in order to exercise their duties, will not be
enforceable. The liability will arise only to the extent that the assets
The general bankruptcy regulation is Law 1116, which applies to all of the company are insufficient to pay off creditors.

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(iii) Infrastructure
6 Foreign Investment and Ownership
(a) National Infrastructure Agency (Agencia Nacional de
Restrictions Infraestructura).
(b) Law 1682 of 2013 gave special powers to the President of
6.1 Are there any restrictions, controls, fees and/or taxes Colombia to create the Unit of Transportation
on foreign ownership of a project company? Infrastructure Planning (Unidad de Planeación de
Colombia

Infraestructura de Transporte) and the Commission for

the Regulation of Infrastructure and Transportation
Foreign investments are granted equal treatment vis-à-vis those of (Comisión de Regulación de Infraestructura y
Colombian investors, with certain exceptions; namely, for Transporte).
investments in the following industries: (i) national defence and (iv) Oil & Gas
national security activities; (ii) disposal and processing of toxic,
(a) Ministry of Mining and Energy (Ministerio de Minas y
dangerous or radioactive waste; and (iii) TV broadcasting (foreign
Energía).
investors can hold up to 40% of the shares in such companies).
(b) National Hydrocarbons Agency (Agencia Nacional de
Since capital contributions are considered direct foreign investment, Hidrocarburos).
these must be registered before the Colombian Central Bank. Any
(c) National Agency of Environmental Licences (ANLA).
other foreign exchange operation must be completed through the
(d) Mining and Energy Planning Unit (UPME).
foreign exchange market.
(v) Mining
(a) Ministry of Mining and Energy (Ministerio de Minas y
6.2 Are there any bilateral investment treaties (or other
Energía).
international treaties) that would provide protection
from such restrictions? (b) National Mining Agency (Agencia Nacional de Minería).
(c) Mining and Energy Planning Unit (UPME).
No. There are no bilateral treaties that prevent an investor from (vi) Energy
having to complete its operations through the foreign exchange (a) Ministry of Mines and Energy (Ministerio de Minas y
market. However, Colombia has several bilateral investment Energía).
treaties pursuant to which investors are granted: (i) national (b) Commission for the Regulation of Energy and Gas
treatment and most-favoured-nation provisions; (ii) no (Comisión de Regulación de Energía y Gas).
expropriation without compensation; and (iii) general promotion (c) Mining and Energy Planning Unit (UPME).
and protection of investments.
(d) Superintendence of Public Utilities (Superintendencia de
Servicios Públicos).
6.3 What laws exist regarding the nationalisation or
expropriation of project companies and assets? Are
7.2 Must any of the financing or project documents be
any forms of investment specially protected?
registered or filed with any government authority or
otherwise comply with legal formalities to be valid or
Expropriation or nationalisation of assets may only take place for enforceable?
previously defined reasons of public utility or social interest. The
Colombian National Constitution states that any expropriation by In general, the enforceability of financing documents and project
the government must be undertaken with due process and be fairly documents does not require any filing or registration (with the
compensated. Except in case of war, the government cannot exception of the above-mentioned registration requirements before
expropriate without prior payment of compensation to the person the national registry for security interests over movable assets,
from whom assets are expropriated. Expropriation may be before the public instrument registry office (Oficina de Registro de
undertaken only if a judge orders so, or, exceptionally, through an Instrumentos Públicos) for security over real property, and before
administrative act which, nonetheless, may be subject to further the Central Bank). Nevertheless, agreements with governmental
judicial review. entities must be previously authorised by the corresponding
governmental authority of the national, regional or local order, and
7 Government Approvals/Restrictions must be published in an official database.
In addition, indebtedness of public entities must fulfil certain
requirements. Specifically, foreign indebtedness must be authorised
7.1 What are the relevant government agencies or in advance by the Ministry of Finance and Public Credit. Also, local
departments with authority over projects in the typical indebtedness of public entities must be authorised in advance by the
project sectors?
Ministry of Finance and Public Credit and requires the previous
issuance of a favourable opinion of the Colombian National
(i) Finance Planning Department (Departamento Nacional de Planeación).
(a) Ministry of Finance and Public Credit.
(b) National Treasury Department of the Ministry of Finance
7.3 Does ownership of land, natural resources or a
(Dirección del Tesoro Nacional del Ministerio de
pipeline, or undertaking the business of ownership or
Hacienda y Crédito Público). operation of such assets, require a licence (and if so,
(ii) Environment can such a licence be held by a foreign entity)?
(a) Ministry of Environment and Sustainable Development.
(b) National Agency of Environmental Licences (ANLA). In general, licences to hold land, natural resources or a pipeline
(c) Regional Environmental Authorities (Corporaciones depend on the particular case and project. Foreign entities are
Autónomas Regionales). allowed to hold such licences. However, the exploitation of certain

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assets, including oil fields, mines and water sources, requires a

concession granted by the competent public authority. Foreign 7.8 Is there any restriction (under corporate law,
entities may obtain any such concessions. A foreign entity that is a exchange control, other law or binding governmental
practice or binding contract) on the payment of
party to a concession agreement must establish a subsidiary or a dividends from a project company to its parent
branch in Colombia. company where the parent is incorporated in your
jurisdiction or abroad?

Colombia
7.4 Are there any royalties, restrictions, fees and/or taxes
payable on the extraction or export of natural In the case that the parent company of a project company is
resources? incorporated abroad, the corresponding foreign investment must be
registered before the Central Bank. Foreign investment duly
Yes. Under the Colombian National Constitution, the Colombian registered with the Central Bank confers the investor with the right
government must be compensated, through the payment of to: (i) transfer abroad the dividends resulting from the investment;
royalties, for the exploitation of non-renewable natural resources. (ii) reinvest dividends and income derived from the disposal of such
The amount payable depends on the type of non-renewable natural investment; and (iii) transfer abroad any income derived from the
resource. The general taxation regime would be applicable. sale of the investment, the liquidation of the company or portfolio or
the reduction of the company’s capital. If the parent company is
incorporated in Colombia, there is no restriction on the payment of
7.5 Are there any restrictions, controls, fees and/or taxes
dividends from the project company.
on foreign currency exchange?

Other than the obligation to complete foreign exchange operations 7.9 Are there any material environmental, health and
through the foreign exchange market, there are no restrictions, fees safety laws or regulations that would impact upon a
project financing and which governmental authorities
or taxes applicable to foreign currency exchange.
administer those laws or regulations?

7.6 Are there any restrictions, controls, fees and/or taxes It is likely that the requirement for licences in relation to
on the remittance and repatriation of investment environmental or construction matters will impact a project
returns or loan payments to parties in other
financing materially. However, depending on the particular project
jurisdictions?
there may be additional environmental, health and/or safety laws or
regulations that may impact the project financing. The main
There are no currency exchange restrictions or controls. However,
governmental authority in charge of administering the issuance of
it is necessary to complete the repatriation of investments or loan
environmental licenses and permits is the National Agency of
payments to parties in other jurisdictions through the foreign
Environmental Licences (ANLA).
exchange market. Additionally, withholding tax will apply to the
payment of any revenue arising from a Colombian source or to the
payment of interests in the case of loan agreements. 7.10 Is there any specific legal/statutory framework for
procurement by project companies?
Regarding taxes, and in accordance with Law 1819 of 2016 (the
“Tax Reform”), if dividends from the project company were taxed at
the project company level, from 2017 onwards such dividends will Project companies deemed to be private entities are not subject to
be taxed at the level of shareholders (foreign entities or individuals) specific procurement rules or regulations. In the case that the
with a dividends tax at a 5% rate. No additional taxes would accrue. project company is a State-owned entity, public procurement laws
However, please bear in mind that if such dividends were not taxed may be applicable, with the exception of special cases regarding
at the company level, the company would have to withhold taxes certain industries with special regulations.
before the remittance of dividends abroad at a consolidated tax rate
of 38.25% (general tax rate of 35% + dividends tax rate of 5%), 8 Foreign Insurance
absent any applicable tax treaty. Finally, it is important to consider
that no dividends tax would be applicable for the distribution of
dividends by the project company to another national legal entity, as 8.1 Are there any restrictions, controls, fees and/or taxes
long as the dividends were taxed at company level. on insurance policies over project assets provided or
guaranteed by foreign insurance companies?

7.7 Can project companies establish and maintain

Colombian residents may enter into insurance agreements with
onshore foreign currency accounts and/or offshore
accounts in other jurisdictions? foreign insurance companies, except for the following cases: (i)
social security related insurances; (ii) mandatory insurance policies;
(iii) insurances in which the insured party is required to provide
Project companies incorporated in Colombia are not entitled to
evidence of a mandatory insurance policy or that it is up to date with
maintain onshore accounts in foreign currency.
its obligations regarding a social security requirement; or (iv)
Project companies incorporated in Colombia are entitled to maintain insurances in which the insured party is a State-owned entity.
offshore foreign currency accounts. Said accounts are subject to
special registration and reporting obligations before the Colombian
Central Bank, when used for certain foreign exchange operations 8.2 Are insurance policies over project assets payable to
(i.e. investment or indebtedness). foreign (secured) creditors?

Onshore foreign currency accounts maintained by non-Colombian

Yes. Insurance policies over project assets may be payable to
residents are subject to numerous restrictions and are permitted only
foreign secured parties (unless this is specifically restricted by any
for specific purposes.
project document). In any case, the payment of any amounts

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resulting from insurance policies to foreign creditors must be

12 Corrupt Practices
reported to the Central Bank for statistical purposes.

9 Foreign Employee Restrictions 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
Colombia

criminal penalties?
9.1 Are there any restrictions on foreign workers,
technicians, engineers or executives being employed
by a project company? Yes. Colombia has developed several mechanisms to control and
prevent corrupt business practices and bribery. Penalties for bribery
In general, there are no restrictions on foreign workers in Colombia. range from imprisonment to a fine of up to 200,000 times the legal
However, certain professions and activities (e.g. engineering activities) monthly minimum wage (approximately US$54,500,249).
have special regulations which require authorisations/permits granted Additionally, there may be the annulment of ownership over the
by certain professional councils (e.g. the Engineering Professional involved assets and civil liability for any damages caused by the
Council). In such cases, foreign workers would need to apply for a criminal conduct. According to Law 1778 of 2016, individuals
temporary professional permit before the relevant professional council condemned for corrupt practices cannot enter into contracts with the
or validate their professional degree or diploma. government, nor the companies in which they are majority
shareholders, officers or directors, for up to 20 years. Moreover,
From an immigration law standpoint, foreigners entering Colombia
very strict compliance and anti-money laundering mechanisms have
for the performance of business or working activities require a
been adopted by the different actors of the 4G Program, which go
proper visa or an entry permit, depending on the case. The
beyond the legal requirements.
appropriate type of visa or entry permit would depend on the
nationality of the applicant, the activities to be performed, the length
of stay and/or the existence of a local employment relationship. 13 Applicable Law

10 Equipment Import Restrictions 13.1 What law typically governs project agreements?

10.1 Are there any restrictions, controls, fees and/or taxes According to the Colombian Code of Commerce, agreements to be
on importing project equipment or equipment used by performed in the Colombian territory are subject to Colombian law.
construction contractors? If substantial parts of the agreement are to be performed outside
Colombia, agreements may be governed by foreign law, depending
In general, there are no restrictions on importing project equipment or on applicable conflict-of-law rules.
equipment used by construction contractors. However, there may be
import fees applicable depending on the particular asset being imported, 13.2 What law typically governs financing agreements?
and the customs regime imposes two types of restriction, namely: (i) the
importation of certain goods is subject to the obtainment of a licence;
Financing agreements, in the context of cross-border financing
and (ii) the importation of some other goods is prohibited.
transactions involving Colombian residents and foreign lenders, are
typically governed by New York State law or English law.
10.2 If so, what import duties are payable and are However, financing documents between Colombian residents and
exceptions available? local banks must be governed by Colombian law, while trust
agreements and security documents over assets in Colombia are
As a general rule, the importation of goods triggers the payment of usually governed by Colombian law. Therefore, cross-border multi-
tariffs and VAT. The specific amount of these duties, and particular currency loans involving foreign and local banks would require
exceptions, will vary depending on: (i) the tariff classification of the certain financing agreements (e.g. local loan agreements) in order to
goods; (ii) the origin of the goods (applicable, for example, to goods be governed under Colombian law.
imported from free trade agreement countries); and (iii) the import
regime. 13.3 What matters are typically governed by domestic law?
Import duties vary depending on whether there is a valid and
enforceable free trade agreement with the corresponding country. Agreements to be performed in Colombia are governed by Colombian
law (e.g. concession agreements, onshore trust agreements and
11 Force Majeure 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
11.1 Are force majeure exclusions available and mortgage agreements) must be governed by Colombian law.
enforceable?

14 Jurisdiction and Waiver of Immunity

Yes. Colombian law sets forth force majeure exclusions which are
available and enforceable even if the parties do not include them in
the project or financing documents. In events of force majeure, the 14.1 Is a party’s submission to a foreign jurisdiction and
parties will not be forced to comply with their obligations under the waiver of immunity legally binding and enforceable?
affected agreement and will not be liable for any default thereunder.
Parties may validly submit to foreign jurisdiction. Nevertheless, if

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a Colombian judge has jurisdiction over a matter, the said judge may
16 Change of Law / Political Risk
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 16.1 Has there been any call for political risk protections
from the Colombian judge a dismissal or stay of the Colombian such as direct agreements with central government or
proceedings. political risk guarantees?

Colombia
Waiver of immunity will be valid and enforceable, provided that
only the individual rights of the waiving party are affected. No. Nevertheless, the Colombian government has established a
fund to cover contingent obligations of governmental entities
derived from contracts. The fund is called the Fondo de
15 International Arbitration Contingencias and is administered by the Ministry of Finance. In
addition, in the context of some 4G project financings, the
government has entered into memoranda of understanding with
15.1 Are contractual provisions requiring submission of
disputes to international arbitration and arbitral concessionaires to clarify certain aspects of 4G concession
awards recognised by local courts? agreements, such as: (i) availability payments; (ii) lenders’ step-in
rights; and (iii) a termination payment formula.
There are contractual provisions requiring submission of disputes to
international arbitration. If the following criteria are met, parties 17 Tax
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 the following 17.1 Are there any requirements to deduct or withhold tax
requirements is met: from (a) interest payable on loans made to domestic
or foreign lenders, or (b) the proceeds of a claim
(i) the parties have their domiciles in different countries;
under a guarantee or the proceeds of enforcing
(ii) a substantial part of the obligations will be performed outside security?
of the country in which the parties have their principal
domicile; or
All interest rate payments will be subject to a withholding tax at a
(iii) the dispute relates to international commercial interests. 15% tax rate. This rule may vary depending on any double taxation
For the enforcement of an international or foreign award by the treaties in place and any special rules for a specific project finance
Colombian authorities, a recognition proceeding must be fulfilled (e.g. long-term infrastructure projects, as explained in question 17.2
unless the seat of the tribunal is in Colombia. below).
Since withholding tax must be applied by the payer, gross-up
15.2 Is your jurisdiction a contracting state to the New York clauses are used whenever parties have agreed on a specific net
Convention or other prominent dispute resolution amount.
conventions?
Loans granted abroad to Colombian credit establishments and loans
granted to Colombian public entities are not subject to any
Colombia is a party to the 1958 New York Convention on the withholding. Multilateral agencies in which Colombia is a Member
Recognition and Enforcement of Foreign Arbitral Awards, as well as State are generally exempt from all Colombian taxes.
to the 1975 Inter-American Convention on International
There is no specific tax applicable to the proceeds in connection
Commercial Arbitration, and the 1965 Washington Convention for
with enforcement of a security interest, to the extent that any such
the Settlement of Disputes between States and Nationals of Other
payment is not sourced as Colombian income. Note, however, that
States.
if a guarantee is granted by a Colombian party to a foreign related
party (principal debtor), transfer pricing rules may apply and require
15.3 Are any types of disputes not arbitrable under local for the Colombian guarantor to charge an arm’s length consideration
law? for the guarantee.
Regarding the requirements to deduct the interest paid, it is
Every dispute is subject to arbitration unless said conflict is not important to mention that if no withholding applies, such payment
susceptible to being transacted (a “transaction” is a specific form of of interest made by the project company will not be deductible.
private agreement whereby the parties terminate their present or Conversely, if the interest payments made are subject to the
potential conflicts). As a general principle, it is possible to transact corresponding withholdings, they will be fully deductible.
over economic rights subject to any waiver (certain private
According to Colombian thin capitalisation rules, interest payments
economic rights are not subject to waiver, including certain labour
will not be allowed as a deduction if they originate on loans whose
and social security rights) that does not affect the rights of third
average amount throughout the corresponding fiscal year exceeds
parties.
the result of multiplying by three the taxpayer’s net worth
determined at December 31 of the preceding fiscal year. These
15.4 Are any types of disputes subject to mandatory Colombian thin capitalisation rules are aimed at limiting the
domestic arbitration proceedings? deductibility of interest payments/accruals derived from debts that
exceed the taxpayer’s net equity (patrimonio liquido) by more than
No. The Colombian Constitutional Court has generally rejected any three times (a 3:1 ratio). Note that Colombian thin capitalisation
law or regulation that has attempted to include arbitration or other rules apply to both local and foreign loans as well as debts with
non-judicial venues as mandatory conflict resolution proceedings. related and unrelated parties.

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register before the National Registry of Securities and Issuers

17.2 What tax incentives or other incentives are provided (Registro Nacional de Valores y Emisores), managed by the SFC,
preferentially to foreign investors or creditors? What and before the Colombian Stock Exchange (Bolsa de Valores de
taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes
Colombia), for the purposes of issuing bonds or similar capital
of effectiveness or registration? market instruments.
Any offering of securities addressed to the public at large or to 100
Colombia

Currently, there are no specific incentives for foreign investors or or more determined investors must be authorised by the local
creditors. Nonetheless, please note that some incentives may apply regulator. For such purposes, project companies must file before the
depending on the type of project that is being financed in Colombia. SFC the prospectus of the offering, along with the financial
For example, interests on loans granted to special-purpose statements of the last three years. If the company does not have such
companies engaged in public-private partnerships for infrastructure financial information, it is advisable to present to the SFC feasibility
projects may be subject to a preferential 5% withholding if the term evaluations of the underlying project. Usually, project finance is
of the loan is at least eight years. Also, certain relief or reduced structured through a securitisation process. Hence, the securities
withholdings may apply if the investor or creditor is a resident of a derived from a securitisation have an underlying asset including
country with which Colombia has a treaty to avoid double taxation cash flows, economic rights, real estate property, etc. It is also
(e.g. Canada, Chile, Mexico, Portugal, Spain and Switzerland, necessary to subscribe a trust agreement with a trustee entity that
among others). would become the administrator of the securitisation, as well as the
relationship between the issuer and the investors.
Foreign investment and loans are typically subject to income tax to
the extent that they produce Colombian-sourced income (e.g.
dividends, interests, royalties, etc.). Since 2015, a net wealth tax 19 Islamic Finance
was created that also applies to foreign persons who hold
Colombian assets in excess of a specific amount (i.e. COP1 billion
or approximately US$294,117). Certain assets can be excluded 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
from the tax base amount (e.g. shares in Colombian companies), instruments might be used in the structuring of an
while others must be included and taxed (e.g. loans to Colombian Islamic project financing in your jurisdiction.
debtors).
Finally, it is noteworthy that a registration tax may apply on any Please refer to question 13.1 regarding conflict of laws. There is no
document that requires registration with the Chamber of Commerce known precedent in Colombia regarding Islamic project financing.
or the Office of Public Records (e.g. public deeds or mortgages). A
case-by-case analysis is required to determine if registration taxes 19.2 In what circumstances may Shari’ah law become the
will be applicable, and the tax base amount. 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
18 Other Matters Shari’ah and local law relevant to the finance sector?

That will depend on the conflict of law rules; please refer to question
18.1 Are there any other material considerations which 13.1 above. There are no known precedents of Shari’ah applicable
should be taken into account by either equity
to the Colombian financial sector.
investors or lenders when participating in project
financings in your jurisdiction?
19.3 Could the inclusion of an interest payment obligation
Since the enactment of Law 1676, security structures have been in a loan agreement affect its validity and/or
modified for projects in Colombia. However, since the enforceability in your jurisdiction? If so, what steps
implementation of such regulation is fairly recent, the actual could be taken to mitigate this risk?
enforcement of said interests is yet to tested.
No. It is common to include interest payment obligations in loan
agreements and such obligations do not affect the validity of
18.2 Are there any legal impositions to project companies enforceability of these type of agreements. Such obligations must
issuing bonds or similar capital market instruments?
comply with legal maximum interest rate regulations and other
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market financial consumer regulations.
instruments.
Acknowledgment
The public offering of securities in Colombia is strictly regulated,
with regard not only to the issuance of shares, but also to the The authors would like to acknowledge the assistance of their
processes for the offering of bonds, notes and securitisations. colleagues Juan Carlos Puentes, Natalia Arango Botero and Alberto
Project companies must comply with certain requirements to Mario Vergara in the preparation of this chapter.

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Brigard Urrutia Colombia

Manuel Fernando Quinche César Felipe Rodríguez

Brigard Urrutia Brigard Urrutia
Calle 70A #4–41 Calle 70A #4–41
Bogotá Bogotá
Colombia Colombia

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

Manuel Fernando Quinche has been a partner at Brigard Urrutia since With more than 15 years of experience, César Felipe Rodríguez has
2011. Mr. Quinche has more than 15 years of experience practising in participated in numerous financial transactions representing lenders
the areas of Structured Finance, Project Finance and Mergers & and borrowers, private and public entities and local and international
Acquisitions. For five years, Mr. Quinche worked in Corporate Finance institutions. Mr. Rodriguez advised IFC, K-EXIM and HSBC as local
at a prestigious law firm in New York. He has acted as legal counsel in counsel for the financing of Bogota’s bus Integrated Public Transport
various national and international corporate and project finance System. Mr. Rodríguez advised Banco Itaú and Davivienda in the
transactions, including, among others, syndicated loans, financings refinancing of Termovalle and assisted BBVA, Helm Bank and
with multilateral institutions and export credit agencies, and financings Bancolombia with respect to a US$75 million syndicated facility
through capital markets. provided to ATC Sitios, for the development of telecom infrastructure.
Mr. Rodriguez also worked as Foreign Legal Consultant from August
Mr. Quinche’s project finance experience includes advising either
2015 throughout July 2016 in Allen & Overy’s New York Office.
financiers or project developers in toll road projects, ports, oil & gas
transportation infrastructure, liquefied natural gas facilities, airports, Mr. Rodríguez obtained his law degree from Universidad de Los Andes
power generation facilities, public transportation infrastructure, in Colombia; he is a specialist in Financial Law and Civil Procedural
telecommunications infrastructure, downstream, midstream and Law. Mr. Rodriguez holds a Masters in Law (LL.M.) in international
upstream oil & gas infrastructure and, in general, public infrastructure Business Law from the University of Liverpool, United Kingdom.
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.

The Banking and Project Finance Team at Brigard Urrutia (BU) is highly 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
international financial dynamics in all industries, which enables them to understand the needs of a diverse client base.
BU encourages a strong commitment to providing innovative legal solutions 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.

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 Chapter 11

Denmark
Morten Nybom Bethe

Gorrissen Federspiel Tina Herbing

Apart from the floating charge, security is generally given in

1 Overview
relation to each type of assets. No formal restrictions apply to the
form of the security agreement with regards to whether more than
1.1 What are the main trends/significant developments in one type of asset can be governed by one sole agreement. However,
the project finance market in your jurisdiction? it should be noted that perfection requirements vary from asset type
to asset type. The perfection requirements are further described in
The market for privately funded project financings in Denmark has the remaining questions of section 2 below.
generally not been very active. The main project financings have
been within the renewable energy sector. 2.2 Can security be taken over real property (land), plant,
EKF, Danmarks Eksportkredit (the Danish ECA) has been machinery and equipment (e.g. pipeline, whether
increasingly active in the area of export of goods and services to underground or overground)? Briefly, what is the
procedure?
projects abroad (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 Pledge over land and buildings
credit guarantees, project finance guarantees, operating lease It is possible to create a non-possessory pledge (i.e. legal mortgage)
guarantees, etc.) and direct funding. over land and buildings. Such pledge must be registered with the
Danish Land Registry in order for the pledge to be effective against
the pledgor’s creditors and bona fide third parties.
1.2 What are the most significant project financings that
have taken place in your jurisdiction in recent years? Registration of mortgages with the Danish Land Registry is subject
to a registration fee of 1.5 per cent of the face value of the secured
Major Danish project financings are rare in Denmark. Large amount, together with a handling fee of DKK 1,660 (approximately
projects, such as the Great Belt Bridge, the Oresund Bridge and the EUR 223).
Metro in Copenhagen, were financed by public loans and the same In addition to a mortgage, a negative pledge/prohibition on sale is
will be applicable for the current Femern Belt project. In recent often registered over the property in the Danish Land Registry,
years, there have not been any privately funded project financings in which is subject to a DKK 1,660 handling fee.
Denmark that we would consider significant. Real property consists primarily of a plot of land. However,
buildings and other fixtures built on the land by the property owner
automatically become an integrated part of the real property if:
2 Security
(i) such asset is “embedded” in the real property (building);
(ii) this embedding has taken place directly or indirectly at the
2.1 Is it possible to give asset security by means of a cost of the property owner (i.e. not a tenant);
general security agreement or is an agreement (iii) the asset is for the use of the property; and
required in relation to each type of asset? Briefly,
what is the procedure? (iv) the asset can be considered a standard fitting.
This generally includes heating plants, pipework and wiring
Under Danish law, we have a floating charge, which will capture the installed in the property at the cost of the owner. Whether items
chargor’s assets in Denmark of the following main categories: such as windmills and pipelines are included in such mortgage must
receivables resulting from sale of goods and services; stock; be evaluated on a case-by-case basis on the basis of the above
operating machinery; tools and equipment; fuel and ancillary guidelines. If these are not included, they must be pledged as
materials; certain unregistered vehicles; livestock; and IP rights. We movables, as further described below.
note that it does not cover other categories, e.g. real property, Further, registered mortgages in real property fitted out as a business
vehicles (registered in the Danish Motor Vehicle Register or similar also encompass the plant, machinery and other equipment of the
register), cash and securities. The charge is floating until an business, including agricultural equipment but not motor vehicles
enforcement event occurs, which means that it allows for disposal in (rights over motor vehicles will have to be registered in the Danish
the ordinary course of business and captures new assets from time to Motor Vehicle Register). The above rule only applies to plant,
time. See our description in question 2.2 below. machinery and other equipment owned by the owner of the real

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Gorrissen Federspiel Denmark

property in question and not, for example, if the real property has A possessory pledge will be valid and binding on third parties if the
been leased. pledgor has effectively been deprived of its physical possession of
Floating charge the assets subject to the pledge. Therefore, this type of pledge is
very rare in project financings.
The floating charge regime under Danish law allows for a number of
assets to be charged under a floating charge. Generally, a floating A non-possessory pledge will be valid and binding on third parties
charge will not prevent the disposal of assets by the debtor in the upon registration of the pledge with the Danish Register of Persons

Denmark
ordinary course of business and new assets acquired after issue of (or, if a motor vehicle, in the Danish Motor Vehicles Securities
the floating charge will become subject to the charge. Under a Register). Such registration is subject to a registration fee of 1.5 per
floating charge, the assets need not be identified individually. The cent of the face value of the charge and a handling fee of DKK
charge will crystallise, e.g., when insolvency procedures against the 1,660.
chargor are commenced.
A floating charge may not be established in favour of 2.3 Can security be taken over receivables where the
companies/persons closely connected with the chargor (e.g. if the chargor is free to collect the receivables in the
chargee holds shares or other ownership rights (directly or absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
indirectly) in the chargor).
There are two types of floating charges available: (i) a business
Receivables may generally be assigned to a third party unless the
charge (in Danish: “virksomhedspant”); and (ii) a receivable charge
agreement establishing the receivable prohibits such assignment.
(in Danish: “fordringspant”). It is not possible to establish a
business charge and a receivable charge at the same time. The assignment is perfected by giving notice to the debtor. Late
notification, for example upon the occurrence of a default, would
Under the business charge, one or more of the following types of
render a security interest invalid, e.g., if the assignor becomes
assets of the chargor may be charged:
subject to insolvency proceedings within a three-month period after
(a) unsecured claims (receivables) from the sale of goods and notification under the Danish claw-back provision, as further
services;
described in question 5.2 below.
(b) stocks of raw materials, semi-manufactured goods and
An effective assignment further requires that the assignor is
finished goods;
restricted from disposing of, or dealing with, the receivable (for
(c) cars that are not and have never been registered in the Danish
example, by collecting the receivable, altering the terms of the
Central Register of Motor Vehicles or in a similar foreign
agreement or otherwise benefiting from the receivable). Ideally, any
register;
payment collected from the debtor should be made directly into a
(d) operating fixtures and equipment (provided that the assets are
separate collection account held in the name of the assignee. The
not comprised by a charge of the real property to which they
assignor can, however, be given certain rights to act as the lenders’
are connected);
agent in administering and collecting the receivables, as long as the
(e) propellants and other intermediary products;
assignor cannot freely dispose of the collections and the
(f) livestock; arrangement is carefully monitored by the assignee. It is also
(g) intellectual property; and possible for payments to be made into an account of the assignor,
(h) cars that are registered or have been registered in the Danish provided that funds are swept on a very frequent basis to a separate
Central Register of Motor Vehicles or in similar foreign bank account held in the name of the assignee. However, all
register, if the chargor carries on business with the purchase scenarios where the assignor may collect the receivable requires
and sale of motor vehicles. separate legal analysis.
The above list of assets is exhaustive. In addition, please see question 2.2 above with respect to floating
The receivables charge allows for the creation of a floating charge receivables charges.
over all existing and future receivables. The advantage of this type
of charge is that it is not necessary to notify the debtors of the
2.4 Can security be taken over cash deposited in bank
chargor in order to perfect a floating receivables charge. This is accounts? Briefly, what is the procedure?
contrary to a fixed receivables charge, where notification of the
charge must be given to the debtor of the chargor in order to perfect
It is possible to create a fixed security interest over bank accounts
the charge. Please see question 2.3 below.
under Danish law.
Both a business charge and a receivables charge must be registered with
A pledge over a bank account is perfected by delivering notice to the
the Danish Register of Persons in order to become binding on the
bank where the account is held. Further, the pledged account must
chargor’s creditors and bona fide third parties. This incurs a registration
be effectively blocked at all times and, accordingly, the pledgee will
fee of 1.5 per cent of the face value of the charge in addition to the
in general be required to consent to every release from the pledged
handling fee of DKK 1,660, an expense which generally makes the
account. Therefore, we often see account pledges being made
floating charge less attractive to the chargor in large financings. A
subject to late perfection in that the account is not blocked until an
floating charge has to be renewed within 10 years of its registration.
event of default having occurred. However, late perfection is
The floating charge regime also allows for the registration of subject to avoidance as further described in our answer to question
negative pledges with the Danish Register of Persons, which is 5.2 below.
subject to a DKK 1,660 handling fee. This mainly prevents other
charges being registered over the relevant assets.
2.5 Can security be taken over shares in companies
Movables incorporated in your jurisdiction? Are the shares in
It is possible to create both possessory and non-possessory pledges certificated form? Briefly, what is the procedure?
over movables in accordance with the Danish rules on security over
chattels. Most often shares in Danish companies are not in certificated form.

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 Gorrissen Federspiel Denmark

A security interest over shares which (i) are not issued through a
3 Security Trustee
CSD (in Denmark, this would be VP Securities A/S (VP)), and (ii)
in relation to which no share certificate has been issued, are
protected against competing rights by providing notice of the pledge 3.1 Regardless of whether your jurisdiction recognises
to the issuing company and having the pledge registered in the the concept of a “trust”, will it recognise the role of a
company’s share register. security trustee or agent and allow the security
Denmark

A security interest over shares which have been issued through the trustee or agent (rather than each lender acting
separately) to enforce the security and to apply the
CSD is perfected by registering the pledge in the CSD. proceeds from the security to the claims of all the
The perfection requirements in respect of security interests over lenders?
shares for which share certificates have been issued depend on
whether or not the shares are negotiable instruments. It has to be Denmark does not recognise the concept of trust and is not party to
specified in a company’s articles of association whether the shares the Hague Convention on Trusts 1986. However, the concept of
are negotiable instruments or not. If the shares are negotiable security agents/trustees administering security on behalf of
instruments, security interests are perfected by taking possession of beneficiaries, i.e. by way of the security trustee acting as an agent on
the share certificates. However, most often shares in Danish behalf of the beneficiaries is recognised under Danish law.
companies are in non-negotiable form. Security interest in respect Moreover, it is possible to grant the relevant security for the benefit
of non-negotiable shares are perfected by notifying the issuing of the security trustee on behalf of each of the lenders, bondholders
company and having the pledge registered in the company’s share or other financiers in accordance with the rules in the Capital
register. Markets Act.

2.6 What are the notarisation, registration, stamp duty 3.2 If a security trust is not recognised in your
and other fees (whether related to property value or jurisdiction, is an alternative mechanism available
otherwise) in relation to security over different types (such as a parallel debt or joint and several creditor
of assets (in particular, shares, real estate, status) to achieve the effect referred to above which
receivables and chattels)? would allow one party (either the security trustee or
the facility agent) to enforce claims on behalf of all the
There are no mandatory notarisation requirements or stamp duties. lenders so that individual lenders do not need to
enforce their security separately?
Registration requirements and registration fees have been outlined
above in question 2.2.
The security can be granted in favour of a security trustee on behalf
of all lenders, bondholders or other financiers as outlined above in
2.7 Do the filing, notification or registration requirements question 3.1. In such case, the security agent can enforce the
in relation to security over different types of assets
security on behalf of all other finance parties.
involve a significant amount of time or expense?

As set out in further detail above in the other questions of section 2, 4 Enforcement of Security
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 4.1 Are there any significant restrictions which may
registration process less time-consuming. Often the registrations impact the timing and value of enforcement, such as
(a) a requirement for a public auction or the
can be made on a day-to-day basis, but the chargor must render a
availability of court blocking procedures to other
power of attorney to a person (usually the law firm or the financing creditors/the company (or its trustee in
bank) having access to the system in order for such person to make bankruptcy/liquidator), or (b) (in respect of regulated
the registration. In practice, completing, filing and registering the assets) regulatory consents?
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 Any enforcement proceedings in respect of possessory rights (i.e.
the authorised signatories of the chargor holds a Danish NemID rights over shares, receivables, bank accounts, etc.) may only be
(electronic signature provided to persons in Denmark). initiated after the pledgor has been given a one-week prior written
notice by registered post, unless immediate sale is required to avoid
2.8 Are any regulatory or similar consents required with or limit losses. This notice requirement is mandatory (unless it
respect to the creation of security over real property relates to assets subject to financial collateral as set out in the
(land), plant, machinery and equipment (e.g. pipeline, collateral directive) but notice may be sent without first obtaining an
whether underground or overground), etc.? approval to enforce from the enforcement court.
See question 5.1 below as to the enforcement after bankruptcy and
Besides registration procedures as described above, no specific restructuring proceedings having been initiated.
regulatory requirements apply in Denmark, except for projects
Parties may generally agree on an alternative enforcement process
where a separate extraction, mining or similar licence is required.
to judicial sale, including self-help remedies such as private sale or
the pledgee taking full legal ownership of the pledged assets if there
are no other prior or subsequent pledgees or parties that have levied
execution. However, most often real property will be sold by way of
public auction.

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Gorrissen Federspiel Denmark

The Danish Bankruptcy Act is generally not considered applicable on

4.2 Do restrictions apply to foreign investors or creditors the Danish State. This entails that independent administrative units set
in the event of foreclosure on the project and related up under the Danish State in some cases will be so closely connected
companies?
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
Generally, no such specific restrictions apply to foreign investors, the entity cannot be subject to insolvency proceedings.
except that foreign investors cannot become the owner of real

Denmark
property in Denmark without approval from the Ministry of Justice.
5.4 Are there any processes other than court proceedings
that are available to a creditor to seize the assets of
5 Bankruptcy and Restructuring the project company in an enforcement?
Proceedings
If such assets are not subject to perfected security rights in favour of
the relevant lenders, there are no such rights.
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 5.5 Are there any processes other than formal insolvency
security? proceedings that are available to a project company
to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?
Provided that the specific security has been duly and timely
perfected and that claw-back provisions do not apply in the specific
case, a bankruptcy proceeding will generally not affect the ability of The project company can be made subject to the Danish in-court
a project lender to enforce possessory rights as a secured party. reconstruction scheme carried out under the supervision and
However, a secured party will, in case of insolvency of the project authority of one or more supervisors appointed by the bankruptcy
company, be obliged to notify the bankruptcy estate prior to any court. A restructuring must comprise a restructuring of the debtor or
liquidation of the security and the bankruptcy estate is entitled to the debtor’s business by way of either:
require a valuation of such collateral. (i) a transfer of assets and activity (restructuring of the debtor’s
business);
Furthermore, the disposal of assets over which the secured parties
hold a non-possessory right (i.e. mainly the floating charge, the (ii) a compulsory composition (which may aim at either a
composition of the debt (debt reduction), a moratorium
receivables charge, mortgage over real property and assets) is
(postponement of maturity date) or a combination of the
conducted by the bankruptcy administrator. The security agent (or two); or
other secured parties) cannot demand enforcement of such security
(iii) a combination of the above.
interests until six months after the reference date. Prudent
bankruptcy administrators will, however, cooperate closely with a Such restructuring is subject to further procedural rules as outlined
secured parties so as to arrange for the best sale of the real property under the Danish Bankruptcy Act.
and assets which is often done by way of a private sale. The
bankruptcy administrator will generally take instructions from the 5.6 Please briefly describe the liabilities of directors (if
security agent in respect of the conduct of the sale. All disposal any) for continuing to trade whilst a company is in
costs including costs to the bankruptcy administrator will be financial difficulties in your jurisdiction.
deducted before paying the proceeds to the secured parties.
Prior to reconstruction/bankruptcy, any director allowing for the
5.2 Are there any preference periods, clawback rights or company to incur liabilities which the director knows or should
other preferential creditors’ rights (e.g. tax debts, know that the subject company will not meet may become liable
employees’ claims) with respect to the security? itself for such liabilities. If a company is under reconstruction or has
filed for bankruptcy the directors can continue business under the
A lien or other security interest (i) which was not granted to the supervision and authority of the supervisor; see question 5.5 above.
creditor when the debt was incurred, or (ii) which was not perfected Prior to the adjudication order directors can be held liable if they
without undue delay after the debt was incurred, may be declared continue trading after it is no longer financially justifiable to do so.
void if the security interest was established later than three months
before the petition for bankruptcy was filed (or two years if the 6 Foreign Investment and Ownership
parties are closely connected). There are certain other subjective
Restrictions
claw-back rights applicable to security interests which will
generally require knowledge of the imminent bankruptcy.
6.1 Are there any restrictions, controls, fees and/or taxes
5.3 Are there any entities that are excluded from on foreign ownership of a project company?
bankruptcy proceedings and, if so, what is the
applicable legislation? No specific ownership restrictions, controls and fees apply to
foreign owners of a project company incorporated in Denmark.
Bankruptcy proceedings generally apply to all Danish entities Capital gains or losses on shares in a project company incorporated in
(including its foreign branches) but a Danish bankruptcy estate only Denmark will not be subject to Danish capital gains tax for foreign
has jurisdiction over assets in Denmark. Therefore, a Danish branch owners. No share transfer tax currently exists in Denmark. Distributions
of a company incorporated outside of Denmark cannot be declared of dividends may be subject to withholding tax, depending on whether
bankrupt in Denmark, as the branch is not a separate legal entity the foreign owner is a company or an individual and depending on the
under Danish law. foreign owner’s country of residence for tax purposes.

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 Gorrissen Federspiel Denmark

6.2 Are there any bilateral investment treaties (or other 7.3 Does ownership of land, natural resources or a
international treaties) that would provide protection pipeline, or undertaking the business of ownership or
from such restrictions? operation of such assets, require a licence (and if so,
can such a licence be held by a foreign entity)?
Double taxation treaties will usually lower the withholding rate or
the final tax rate on dividend payments to the rate in the applicable Government approvals are usually not required in project finance
Denmark

tax treaty. transactions. However, depending on the type of project, certain

approvals may be required to implement the project (i.e. building
permits, etc.). In addition, a government concession or licence may
6.3 What laws exist regarding the nationalisation or
be required in order to conduct the type of business envisaged by the
expropriation of project companies and assets? Are
any forms of investment specially protected? project.
As a general rule, any physical or body corporate has the right to
Pursuant to the Danish Constitution, ownership is inviolable. acquire real property. However, certain restrictions are imposed on
Accordingly, no one may be ordered to relinquish his property the acquisition of farmland as well as a foreigner’s acquisition of
except where the common good so demands. This may only take real property, which will be subject to approval.
place in pursuance of an act and against full compensation. This
applies irrespective of the form of incorporation or type of 7.4 Are there any royalties, restrictions, fees and/or taxes
investment. payable on the extraction or export of natural
Expropriation is rare in Denmark and is mainly carried out with resources?
respect to land in connection with establishing roads and other
infrastructure. The landowner’s ownership extends as far down as the owner
reasonably can be expected to exploit the soil, although the rights
for exploitation of the underground are held by the state.
7 Government Approvals/Restrictions
Extraction of raw materials such as stone, gravel, sand, clay,
limestone, chalk, peat, top soil, etc., with a commercial purpose,
7.1 What are the relevant government agencies or requires the municipal council’s permission. Other types of raw
departments with authority over projects in the typical materials such as hydrocarbons, sulphur, rock salt, potassic salt and
project sectors? bromine belong to the Danish State and may not be extracted
without prior consent and licence from the Danish Ministry of the
No raw materials may be extracted for commercial purposes without Environment and Food.
prior permission from the Danish Nature Agency.
Import, production and sale of chemicals are supervised by the 7.5 Are there any restrictions, controls, fees and/or taxes
Danish Environmental Protection Agency (EPA). The EPA also on foreign currency exchange?
grants permissions to catchments of groundwater and surface water.
Production and distribution of energy, including oil and gas, is There are no relevant foreign exchange controls, fees or taxes on
supervised by the Danish Energy Agency. Entering into the oil and foreign currency exchange.
gas market requires a concession from the Ministry of Energy,
Utilities and Climate and entering into the energy market requires 7.6 Are there any restrictions, controls, fees and/or taxes
authorisation from the state-owned corporation Energinet.dk which on the remittance and repatriation of investment
controls the top-level infrastructure. returns or loan payments to parties in other
The Danish Ministry of Transport, Building and Housing has the jurisdictions?
overall responsibility of the road sector, as well as bridge
connections. The Road Directorate oversees the state roads, Generally, no such restrictions apply. See also section 17 below.
whereas responsibility for the rest of the road system lies with the
local regions and municipalities. 7.7 Can project companies establish and maintain
The ports and railways are supervised by the Danish Transport, onshore foreign currency accounts and/or offshore
Construction and Housing Authority. accounts in other jurisdictions?

The Danish Business Authority issues permissions for entering into

the telecommunications market, while the actual supervision of the Generally, there are no restrictions as to where Danish companies
telecommunications market is carried out by the Danish Energy can establish and maintain accounts.
Agency.
The issuance of ordinary construction permits generally lies with 7.8 Is there any restriction (under corporate law,
the local municipalities. exchange control, other law or binding governmental
practice or binding contract) on the payment of
dividends from a project company to its parent
7.2 Must any of the financing or project documents be company where the parent is incorporated in your
registered or filed with any government authority or jurisdiction or abroad?
otherwise comply with legal formalities to be valid or
enforceable? Ordinary restrictions with regard to payments of dividend apply.
This entails that payment of dividends may only be made out of
Generally, no specific restrictions apply, except as set out in section distributable reserves, as further defined in the Danish Companies
2 and question 7.1 above and question 7.3 below. Act. Danish companies are also subject to financial assistance rules.

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Gorrissen Federspiel Denmark

7.9 Are there any material environmental, health and 9 Foreign Employee Restrictions
safety laws or regulations that would impact upon a
project financing and which governmental authorities
administer those laws or regulations? 9.1 Are there any restrictions on foreign workers,
technicians, engineers or executives being employed
by a project company?
There are several Danish acts dealing with the issue of

Denmark
environmental contamination and clean-up orders, which are
generally supervised by the regions. Residence and work permits are normally required if a foreign
national wishes to reside and work in Denmark. However, citizens
Any Danish property is to some extent surveyed in order to establish of EU/EEA countries can reside and work in Denmark according to
an overview of contaminated or possibly contaminated properties, special regulations.
to minimise the risk of groundwater pollution, prevent pollution
expanding and to ensure that public health is not put at risk. If a A non-EU/EEA citizen has easy access to the Danish labour market
property is mapped as contaminated or possibly contaminated, if his profession is covered by the so-called “positive list” (which is
certain restrictions to the property apply. A contamination a list of highly skilled professions lacking Danish labour) or if the
registration does not restrict the actual use of the property, but any annual remuneration exceeds a specific threshold.
change of the use to sensitive use or construction on the mapped
property requires a permit from the authorities. 10 Equipment Import Restrictions
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 10.1 Are there any restrictions, controls, fees and/or taxes
to tolerate the clean-up. on importing project equipment or equipment used by
construction contractors?
The environmental liabilities under Danish public law are
supplemented by the general law of torts, which generally provides
Generally speaking, goods imported from other EU/EEA Member
for liability on negligence but under some circumstances applies a
States will be subject to the rules on free movement and may thus be
strict liability.
imported to Denmark without any restrictions. However, with
Rules on health and safety in the workplace, including working respect to certain categories of goods (e.g. chemicals) an import
hours and holidays, are mainly set forth in the Danish Holiday Act, permit may be required. With respect to goods imported from non-
the Danish Act on Working Hours and the Danish Act on Working EU/EEA Member States, an import permit is required. In addition,
Environment (and related executive orders). Such acts are all customs may be levied on the imported goods.
administered by the Ministry of Employment. Further, the Danish
Working Environment Authority (which is an agency under the
10.2 If so, what import duties are payable and are
Ministry of Employment) contributes to the creation of safe
exceptions available?
working conditions at Danish workplaces, e.g., by carrying out
inspections of companies.
See question 10.1 above.

7.10 Is there any specific legal/statutory framework for

procurement by project companies? 11 Force Majeure

No mandatory rules apply for private procurement. However,

11.1 Are force majeure exclusions available and
certain framework legislation is available and can be voluntarily
enforceable?
applied for a procurement.
Companies controlled by public entities may be subject to public Force majeure exclusions are available and enforceable in
procurement requirements. Denmark.

8 Foreign Insurance 12 Corrupt Practices

8.1 Are there any restrictions, controls, fees and/or taxes 12.1 Are there any rules prohibiting corrupt business
on insurance policies over project assets provided or practices and bribery (particularly any rules targeting
guaranteed by foreign insurance companies? the projects sector)? What are the applicable civil or
criminal penalties?
No, the assets related to projects may be insured by foreign
insurance companies. Under Danish law, both active bribery (offering bribery to) and
passive bribery (accepting bribery by) involving persons exercising
8.2 Are insurance policies over project assets payable to a public office or function is an offence. The applicable penalties
foreign (secured) creditors? are fines and imprisonment of up to six years.
Furthermore, the agreement may be declared void (depending on the
Insurance policies will, upon assignment, generally be payable to specific circumstances).
foreign creditors.

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 Gorrissen Federspiel Denmark

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

13.1 What law typically governs project agreements?

Certain disputes concerning matters of public interest (e.g.
questions of the validity of rights obtained by registration or licence
Danish contract parties are allowed to choose the law of a foreign issued by government authorities) are not arbitrable. Arbitrators
Denmark

jurisdiction and such choice will normally be recognised by a may only determine the civil law effects of criminal offences and
Danish court. No general trend with regards to choice of law is competition law infringements between the parties whereas
established. Please see question 13.3 below. consumer disputes are arbitrable only if the arbitration agreement is
entered into after the dispute arose.
13.2 What law typically governs financing agreements?
15.4 Are any types of disputes subject to mandatory
If the financing is provided by Danish banks, the loan agreement is domestic arbitration proceedings?
often governed by Danish law although we also encounter several
loan agreements which are governed by English law. The latter will Automatic arbitration is not a common phenomenon in Denmark;
often be the case in larger financings that are expected to be however, labour disputes within the scope of collective agreements
syndicated in the international market. Security established over may be subject to obligatory arbitration.
assets, etc. located in Denmark will, however, almost always be It can be noted that some sector-specific framework agreements (e.g.
governed by Danish law, but it is not a requirement. standard construction and construction advisory agreements) include
arbitration clauses, but such submission is not mandatory for the parties.
13.3 What matters are typically governed by domestic law?
16 Change of Law / Political Risk
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 16.1 Has there been any call for political risk protections
governed by Danish law. such as direct agreements with central government or
political risk guarantees?

14 Jurisdiction and Waiver of Immunity There has been no call for political risk protections in Denmark.

14.1 Is a party’s submission to a foreign jurisdiction and 17 Tax

waiver of immunity legally binding and enforceable?

17.1 Are there any requirements to deduct or withhold tax

A Danish company may submit to foreign jurisdiction, although a from (a) interest payable on loans made to domestic
judgment obtained in a foreign jurisdiction will not be immediately or foreign lenders, or (b) the proceeds of a claim
enforceable in Denmark unless rendered in another EU/EEA state. under a guarantee or the proceeds of enforcing
Denmark (as part of the EU) has also acceded to the 2005 Hague security?
Convention on Choice of Court Agreements.
Furthermore, a waiver of immunity will generally be effective. There is no withholding or other tax to be deducted by the borrower
However, assets which are necessary for the proper functioning of from any payment, whether of principal or interest or other amounts
the Kingdom of Denmark will be protected against post-judgment to be made pursuant to a loan, except in certain cases on payments
measures of constraint such as attachment, arrest or execution in in respect of controlled debt.
Denmark.
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What
15 International Arbitration taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes
of effectiveness or registration?
15.1 Are contractual provisions requiring submission of
disputes to international arbitration and arbitral No specific incentives apply. Please refer to section 2 and question
awards recognised by local courts? 17.1 above.

Such provisions would generally be recognised in Denmark.

18 Other Matters
15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution 18.1 Are there any other material considerations which
conventions? should be taken into account by either equity
investors or lenders when participating in project
financings in your jurisdiction?
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 This will always depend on the nature of the project in question, but
settle by agreement are arbitrable. generally there are no further material considerations.

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Gorrissen Federspiel Denmark

18.2 Are there any legal impositions to project companies 19.2 In what circumstances may Shari’ah law become the
issuing bonds or similar capital market instruments? governing law of a contract or a dispute? Have there
Please briefly describe the local legal and regulatory been any recent notable cases on jurisdictional
requirements for the issuance of capital market issues, the applicability of Shari’ah or the conflict of
instruments. Shari’ah and local law relevant to the finance sector?

Denmark
Generally, the issuance of bonds (and other capital market Generally, choices of law will be upheld in Denmark. Moreover, if
instruments) in Denmark is governed by the Capital Markets Act the closest connection under an agreement without choice of law
(and the executive orders issued pursuant thereto). If the issuance of leads to a jurisdiction in which Shari’ah law applies, such would, in
bonds is to “the public”, the issue will as a main rule be subject to general, be applied by the Danish courts (subject to the parties
prospectus requirements if the bonds are to be admitted to trading on evidencing the contents of the applicable law).
a regulated market or the aggregate value of the bonds exceed EUR
1,000,000. However, there is no obligation to prepare a prospectus
19.3 Could the inclusion of an interest payment obligation
if, e.g., (i) the bonds are offered to qualified investors only, (ii) the in a loan agreement affect its validity and/or
issue of bonds is directed to fewer than 150 natural or legal persons enforceability in your jurisdiction? If so, what steps
in each country within the EU/EEA, (iii) the minimum investment could be taken to mitigate this risk?
per investor is EUR 100,000, or (iv) the denomination of each bond
is at least EUR 100,000. No, it could not.
If a prospectus is required, it must be approved by the Danish
Financial Supervisory Authority (the FSA).

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 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 mandatory
regulation is complied with. Basically, there is freedom of contract
in Denmark. In cases where it is not obvious that consideration
exists, there may be a risk of tax implications.

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 Gorrissen Federspiel Denmark

Morten Nybom Bethe Tina Herbing

Gorrissen Federspiel Gorrissen Federspiel
Axeltowers Axeltowers
Axeltorv 2 Axeltorv 2
1609 Copenhagen V 1609 Copenhagen V
Denmark Denmark
Denmark

Tel: +45 3341 4141 Tel: +45 3341 4141

Email: [email protected] Email: [email protected]
URL: www.gorrissenfederspiel.com URL: www.gorrissenfederspiel.com

Morten Nybom Bethe works in the Banking and Finance practice Tina Herbing works in the Banking and Finance practice group. She is
group. He advises banks and financial institutions on all aspects of specialised in banking and finance law and advises on all aspects of
financial law, securities, structured products, securitisations, project debt capital financing, including in particular acquisition, asset and
financing and regulatory matters including netting, collateral and general banking finance, composition of security packages and bond
clearing. issues; Tina also has extensive experience in matters relating to
refinancing and financial restructurings. In addition, she advises on
Morten has extensive experience in establishing, buying and selling
buyer credit and project financings, including loans, guarantees and
financial institutions.
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 Federspiel is among the leading Danish law firms with distinguished 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.
Read more about us at www.gorrissenfederspiel.com.

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Chapter 12

Ecuador
Mario Flor

Flor & Hurtado Daisy Ramirez

focus on renewable energy projects; during said process, several

1 Overview
permits were granted in favour of private operators for the
development and construction of power stations. In 2015, in order
1.1 What are the main trends/significant developments in to increase the country’s power generation capacity and the supply
the project finance market in your jurisdiction? of the electricity system, the national government granted a licence
in favour of Hidroalto S.A. for the construction of a hydroelectric
In recent years and particularly in 2018, Ecuador has undertaken a power station with water with an installed power capacity of 49.7
series of actions to modernise its economy based on a scheme MW which includes interconnection facilities to a substation; the
defined by international trends, the globalisation of the economy project is located near the Dué river in the province of Sucumbios
and the opening of markets. Ecuador is modernising its legal and required an investment of $22 million financed by Corporacion
structures to facilitate options for becoming concessionaires in the Andina de Fomento.
“strategic sectors”, which include telecommunications, non- In addition, in the year 2017, the largest mining project in Ecuador
renewable natural resources, transport, refining hydrocarbons, (the Fruta del Norte Gold Project) developed by Canadian Lundin
biodiversity, water and radio spectrum frequency. Gold received financing of $450 million from private financing
The Constitution of the Republic, enacted in 2008, promotes private groups. Later, in July 2018, Lundin Gold closed a $350 million
investment, guarantees freedom for companies, and guarantees free senior secured debt facility for the development and construction of
competition and competitive markets. Moreover, the Constitution the project – a syndicate of seven senior lenders provided the
contains rules for protecting private property. With the interest of financing.
promoting investment, in December 2015, the Ecuadorian By the end of 2018, Interagua, a company in charge of maintaining
legislative branch enacted the Private-Public Partnerships Act (“the and building upgrades for the Guayaquil water, sewer, and drainage
PPP Law”) which establishes the guidelines and incentives for systems, serving approximately 2.6 million people, received long-
project implementation in the form of public-private partnerships as term financing from IDB Invest to cover a portion of the current
well as the institutional framework governing their implementation. five-year investment programme. Furthermore, IDB Invest along
Public-private partnership contracts are aimed at projects in areas of with a group of senior lenders provided a financing package of $377
general interest – usually strategic sectors and public services million for the construction, operation and maintenance of the first
managed by the Central Government or autonomous governments, phase of the Multipurpose Terminal of the Posorja Port, located in
determined in the law, such as: infrastructure; urban development; Guayaquil, Ecuador. The project was developed by DP World
real estate projects; and those related to roads, ports and airports Posorja, a subsidiary created by the company DP World, the third-
infrastructure. largest container operator in the world in terms of capacity and
The PPP Law applies to public-private partnerships for the productivity. The new terminal will in its first phase have an
provision of goods, works or services to be provided by the Central estimated capacity of 800,000 TEU (twenty-foot equivalent units).
Government and the autonomous governments. The PPP Law The location of Posorja, close to the area of free access to the sea,
creates a series of tax benefits available for projects implemented will decrease the average transit time and offer a deeper draft (16.5
under such a structure. Furthermore, Ecuadorian legislation does metres). Once the new port has been completed, vessels of up to
not impose legal requirements for external financing; it provides a 15,000 TEU will be able to utilise it.
non-discriminatory treatment to foreign investors, guarantees The current administration is focused on promoting foreign
private property and allows the free movement of capital. These investment; for this purpose, it has prepared the Ecuadorian
elements are usually considered fundamental for the successful projects’ catalogue which offers 40 projects in the following sectors:
implementation of project finance in Ecuador. ports and airports; basic industries; environment; industrial;
infrastructure; real estate; and tourism. The projects are either
greenfield, in operation or suspended due to the economic meltdown
1.2 What are the most significant project financings that
caused by the decline in oil prices. The delegation models the
have taken place in your jurisdiction in recent years?
government is currently willing to offer are international
cooperation and public-private partnerships.
As of 2014, the national government began the process of changing
the energy matrix – currently fossil fuel intensive – with a main

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 Flor & Hurtado Ecuador

ii) By creating a fiduciary mandate (encargo fiducario); in such

2 Security 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
2.1 Is it possible to give asset security by means of a administration of the funds on an ordinary basis and the
general security agreement or is an agreement
enforcement of the security in case of default. It should be
required in relation to each type of asset? Briefly,
noted that this security does not isolate the funds from the
what is the procedure?
Ecuador

debtor’s patrimony.

Ecuadorian legislation does not provide for general security

agreements nor floating charges; as per Ecuadorian legislation, each 2.4 Can security be taken over cash deposited in bank
type of asset requires a specific security contract, movable property accounts? Briefly, what is the procedure?
is secured by a pledge, while immovable property is secured by a
mortgage. These types of security interests do not impose any The Financial and Monetary Resolutions establish that security over
transfer of title to the creditor. However, the most relatable legal cash deposited in bank accounts constitutes a valid guarantee, the
figure to a general security under Ecuadorian legislation is a procedure for its creation follows the general rules of security
guarantee trust; a trustee is the party in charge of controlling the included in the Civil Code and is often instrumented in a contract by
security (movable and immovable) property granted by the debtor, which the bank acts as depositary of the funds until security is
in this case the security trust becomes the legal owner of the assets. enforced or terminated.
It is common that guarantee trusts are created separately for: i) the
project’s revenues (over credit rights); ii) the company’s assets 2.5 Can security be taken over shares in companies
(movable and immovable); and iii) the project company’s shares. incorporated in your jurisdiction? Are the shares in
Investment agreements are also useful tools for getting regulatory certificated form? Briefly, what is the procedure?
stability although they may not be considered a general security
agreement itself. Yes, the way to create security over shares in companies
incorporated in Ecuador is by means of a pledge agreement or a
2.2 Can security be taken over real property (land), plant, transfer to a guarantee trust.
machinery and equipment (e.g. pipeline, whether Pledge over shares in a limited liability company (compañía de
underground or overground)? Briefly, what is the responsabilidad limitada) are created by means of a public deed
procedure? duly registered at the Mercantile Registrar and notified to the
Superintendence of Companies. Pledges of shares of a stock
Security over real property can be created by means of a mortgage; company (sociedad anónima) are created when signing an
movable property including machinery and equipment are subject to endorsement of the share certificate by way of security and
pledges. However, movable assets that are permanently fixed to the perfected once it has been registered in the company’s Shares and
land are considered to be part of the mortgaged land they are Shareholders Book; it is recommended that the legal representative
attached to. Pledges are divided into three categories: of the company makes the corresponding pledge notification to the
i) ordinary commercial pledge (applicable for any movable Superintendence of Companies.
asset such as shares of the project company or intellectual The creation and registration of security by transferring the title of
property);
the shares to a guarantee trust is slightly similar to the pledge. This
ii) special commercial pledge (available only for registered type of security allows lenders/creditors to have control of the
traders); and
shares through the trustee and in terms of enforcement it may be
iii) agricultural or industrial pledge (applicable for agricultural seen as a stronger security for lenders/creditors.
products, equipment and machinery).
Both traditional security documents (mortgage and pledge) can be
2.6 What are the notarisation, registration, stamp duty
replaced through guarantee security trusts which provide a stronger
and other fees (whether related to property value or
security in favour of lenders. otherwise) in relation to security over different types
Property dedicated to the provision of public services or for the of assets (in particular, shares, real estate,
exploitation of natural resources have a general legal encumbrance receivables and chattels)?
in favour of the State.
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
2.3 Can security be taken over receivables where the
per the Civil Code, mortgage agreements must be mandatorily
chargor is free to collect the receivables in the
absence of a default and the debtors are not notified executed before a notary public; the costs vary each year and are
of the security? Briefly, what is the procedure? established by the National Judicial Council, the fees established for
the year 2018 range from $20 to $480. As mentioned above,
Yes, there are two ways to create security over receivables: security over movable assets is created by pledges, the law provides
that a pledge agreement can be implemented in a private document
i) By creating a trust to which the project company assigns
or executed before a notary public, the fees established for the year
receivables so that funds are collected by the trust in a
separate bank account managed by the trustee in accordance 2018 range from $20 to $480. The final fee is fixed based on the
with the instructions given by the parties in the trust contract’s amount.
agreement. Such instructions are subject to conditions; Mortgages and industrial pledges must be registered with the
therefore, in case of an event of default, creditors can take Property Registry and the Mercantile Registry, respectively,
control over all funds without notification or objection from registration must be performed with the registry of the municipality
the debtor since the title of such receivables is already
where the asset is located, fees are established every year by each
transferred to the trust.

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Flor & Hurtado Ecuador

Municipal Council and the registration fee is calculated over the security. Under a fiduciary mandate, which is an irrevocable power
asset’s value. of attorney granted in favour of a trustee or fiduciary agent to
In case the chosen security is a guarantee trust, notarial fees must be comply with certain instructions on behalf of the principal
considered; the fixed fees for creating a guarantee trust are $16 per (borrower), a creditor or a group of creditors can be beneficiaries of
page, and a guarantee trust does not require registration for its common enforcement instructions so security is not enforced
perfection. separately. Common terms agreements are usually subject to
foreign governing laws.

Ecuador
Ecuadorian legislation does not contemplate stamp duties or other
additional fees besides the notarial and registration costs mentioned
above. 4 Enforcement of Security

2.7 Do the filing, notification or registration requirements

4.1 Are there any significant restrictions which may
in relation to security over different types of assets
impact the timing and value of enforcement, such as
involve a significant amount of time or expense?
(a) a requirement for a public auction or the
availability of court blocking procedures to other
Once the documents are filed for registration, it takes between two creditors/the company (or its trustee in
to three weeks to have the security registered. Expenses only bankruptcy/liquidator), or (b) (in respect of regulated
involve notarial and registration fees which, as described above, are assets) regulatory consents?
charged in accordance to the approved annual fees chart.
Traditional security, such as pledges and mortgages, requires
enforcement conducted through a judicial process which necessarily
2.8 Are any regulatory or similar consents required with
includes a public auction. The enforcement process is ordered by
respect to the creation of security over real property
(land), plant, machinery and equipment (e.g. pipeline, the judge who establishes the public auction’s time and date, as well
whether underground or overground), etc.? as the amount in which the asset is offered in auction – the amount
is fixed in accordance with a valuation report provided by an expert;
Ecuadorian legislation does not provide for approvals or once the process has initiated, proposals can be filed by any person
authorisations to be obtained prior to the creation of security. after depositing 10% of the offered amount, and once the offers have
Nevertheless, in case of goods deemed to be affected to a public been verified, the judge will award the asset to the highest bidder.
service or used for exploiting natural resources, creation of security Once the payment of the auctioned asset has been verified by the
may require a consent to the grantor of the concession or delegation civil judge, the secured creditor who initiated enforcement will
because these assets are reverted to the State at the end of the receive its owed values and the surplus will be returned to the
concession or delegation granted by the State. debtor, unless a judge has ordered a retention. Regulatory consents
are not required for the enforcement of security.
In the case of guarantee trusts, enforcement is not conducted
3 Security Trustee through a judicial process, the process is held privately and depends
on the terms agreed on the guarantee trust agreement, among the
project company/debtor (trustor), lenders (beneficiaries) and the
3.1 Regardless of whether your jurisdiction recognises
the concept of a “trust”, will it recognise the role of a trustee. Commonly, the process consists of a private sale of the
security trustee or agent and allow the security assets conducted by the trustee, and the proceeds of the sale are then
trustee or agent (rather than each lender acting given to the beneficiary pursuant to the trust instructions. This
separately) to enforce the security and to apply the process is certainly more expeditious than the traditional security
proceeds from the security to the claims of all the enforcement.
lenders?

4.2 Do restrictions apply to foreign investors or creditors

Ecuadorian legislation recognises the concept of a security trust, the
in the event of foreclosure on the project and related
trustee is in charge of administering the trust and acting for the companies?
benefit of the lenders/creditors in order to: i) comply with
instructions prior enforcement; and ii) conduct enforcement of the
There is no restriction or special requirement for foreign creditors
assets transferred as security and distribute the proceeds among the
when foreclosing local security.
secured parties. The guarantee trust allows the possibility to isolate
assets from the debtor’s estate as a consequence of the transfer of
property of those assets to the trust. 5 Bankruptcy and Restructuring
Proceedings
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 5.1 How does a bankruptcy proceeding in respect of the
status) to achieve the effect referred to above which project company affect the ability of a project lender
would allow one party (either the security trustee or to enforce its rights as a secured party over the
the facility agent) to enforce claims on behalf of all the security?
lenders so that individual lenders do not need to
enforce their security separately? Ecuadorian laws contemplate a process aimed to help distressed
companies enter into debt workouts agreements with their creditors
The concept of parallel debt is not regulated in Ecuadorian with the purpose of preserving the company’s ongoing business.
legislation; in general terms, creditors can coexist – however, in The process is regulated by the Concordat Law (Ley de Concurso
terms of security, the one created first prevails over subsequent Preventivo) and controlled and overseen by the Superintendence of

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 Flor & Hurtado Ecuador

Companies, and constitutes a requirement prior to the company’s arrangement can exceed seven years. In addition, the Civil Code
bankruptcy declaration. Said debt workout process suspends the establishes the Settlement Agreement, and defines it as a contract by
effects of every claim initiated against the company by any creditor; which parties settle and terminate any out-of-court claim or prevent
therefore, secured creditors are prevented from enforcing their an eventual claim; these type of agreements are not regulated or
security against the project company. Once bankruptcy is initiated, supervised by any entity of court and are not tied to insolvency
the only privileges and preferences for credits are the ones proceedings, therefore a project company can restructure its debts
recognised by law. by entering into a Settlement Agreement with its dissenting
Ecuador

creditors.
5.2 Are there any preference periods, clawback rights or
other preferential creditors’ rights (e.g. tax debts, 5.6 Please briefly describe the liabilities of directors (if
employees’ claims) with respect to the security? any) for continuing to trade whilst a company is in
financial difficulties in your jurisdiction.
The Concordat Law establishes a suspect period of six months prior
to the admission of the workout procedure in favour of the project The Concordat Law establishes that the administrators or persons
company. The law provides that every act or contract implying the who have signed or authorised any act or contract of a company
creation of security or transfer of property without any under this law, without the approval of the Superintendence of
representation constitute enforceable acts. However, the law does Company’s supervisor, shall be personally and financially liable.
not provide for clawback effects; nullity actions must be brought by
any affected party, and these actions must be exercised within one
year. As per Ecuadorian laws, preferential creditors are employees,
6 Foreign Investment and Ownership
tax and social security debts; during the workout process, the Restrictions
administrator/liquidator must make special assignations to cover
preferred debts first – however, when it comes to foreclosing
6.1 Are there any restrictions, controls, fees and/or taxes
security, as a general rule, secured creditors have preference of
on foreign ownership of a project company?
payment up to covering the value of the debt (capital, interests and
costs). The company will have the right to receive any excess unless
The Constitution establishes that the State shall encourage domestic
a judge has ordered otherwise; during the enforcement process, no
and foreign investment, and shall establish specific regulations
other party will have the right to claim any value from secured
depending to the types of investment, giving priority to domestic
assets.
investment. Accordingly, certain regulated sectors mandatorily
require a delegation made from the State, so a private company can
5.3 Are there any entities that are excluded from engage in such activities; those sectors are deemed “strategic” as
bankruptcy proceedings and, if so, what is the mentioned in question 1.1 above and include telecommunication,
applicable legislation? non-renewable natural resources, transport, refining hydrocarbons,
water and radio spectrum frequencies. Besides the delegation of
Bankruptcy and debt workout proceedings are available to strategic sectors, Ecuadorian legislation does not contemplate any
companies subject to the control of the Superintendence of type of restriction, control or additional taxes on foreign investment;
Companies, which are private and mixed-economy companies the Production Code states that domestic and foreign investors,
(companies with majority State participation). As a general rule, companies, firms or entities, and their legally established
governmental entities and State-owned companies, banks and investments, shall be treated as domestic investors which translates
insurance companies are excluded from those proceedings and into equal conditions with respect to the management, operation,
subject to specific insolvency regulations. expansion and transfer of their investments, and shall not be subject
to arbitrary or discriminatory measures.
5.4 Are there any processes other than court proceedings
that are available to a creditor to seize the assets of 6.2 Are there any bilateral investment treaties (or other
the project company in an enforcement? international treaties) that would provide protection
from such restrictions?
Creditors, whether secured or unsecured, must initiate court
proceedings in order to seize assets of the project company; the only The prior government considered the existing bilateral investment
case in which court proceedings can be avoided is by enforcing treaties opposed the Constitution (enacted in 2008); therefore, on
guarantee trusts. It should be noted that in Ecuador trusts hold title May 3, 2017, the legislative branch decided on Ecuador’s
of the assets held in trust; when the trusts are established, debtors withdrawal from 16 bilateral investment treaties, all of them,
transfer ownership of assets. however, included grandfathering clauses which provide for a five
to 15 years continuation for investments made prior to the effective
5.5 Are there any processes other than formal insolvency termination date. The current administration, whose aim is to
proceedings that are available to a project company promote foreign investment, has announced that it has initiated the
to achieve a restructuring of its debts and/or renegotiation of new bilateral investment treaties that will replace
cramdown of dissenting creditors? those that were terminated in 2017.

As mentioned in question 5.1 above, the Concordat Law establishes

6.3 What laws exist regarding the nationalisation or
a regulated debt workout process in which the distressed company expropriation of project companies and assets? Are
can reorganise its debts and enter into agreements with creditors; the any forms of investment specially protected?
term of the process is established by the Superintendence of
Companies on a case-by-case basis – however, no debt workout The Constitution prohibits all forms of confiscation; in addition, the

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Flor & Hurtado Ecuador

Production and Investment Code states that investor property is licence or permit. As for developing a project related to natural
protected under the terms and conditions established in the resources (including oil pipelines), the Constitution establishes that
Constitution and further relevant laws. Therefore, confiscation and those activities mandatorily require a delegation made by the State,
nationalisation of domestic and foreign investments is prohibited by and the delegation can occur through a concession, public-private
law. However, the State may declare, under exceptional cases and in partnership, association contract or any other type established by
accordance with the law, the expropriation of assets with the sole law.
purpose of executing social development plans focused on the

Ecuador
collective wellbeing. In all cases, expropriation shall abide the
7.4 Are there any royalties, restrictions, fees and/or taxes
defined legal procedure in a non-discriminatory manner, and owners payable on the extraction or export of natural
shall receive payment pursuant to an appraisal that will fix a fair and resources?
adequate compensation. Furthermore, in 2018 the Organic Law for
Promoting Production and Attracting Investments was enacted, which The royalties and taxes vary depending on the industry. A general
establishes a series of incentives to local and foreign investment. guideline stated in the Constitution mentions that the State shall
share the profits obtained from the sale of natural resources at least
7 Government Approvals/Restrictions in an equal amount with the company that exploits them. In the
mining industry, each mining concessionaire shall pay a royalty
equivalent to a percentage of the sales of the main and secondary
7.1 What are the relevant government agencies or minerals, which shall be not less than 5% of the reported sales and,
departments with authority over projects in the typical in the case of gold, copper and silver, not more than 8%. In the
project sectors? hydrocarbons industry, it will depend on the contract modality
chosen by the parties. Service Contracts do not establish payment of
The relevant government ministries and agencies regulating projects royalties, they have a fixed per barrel fee in favour of the contractor,
will depend on the sector in which the project is being implemented. risk is not shared since the State owns 100% of the extracted oil. In
For instance, in airports, ports and roads projects, the main relevant Production Sharing Agreements (so-called Participation Contracts),
authority is the Ministry of Transport and Public Works; in addition to the practice is to abide by the minimum royalties established in the
this, investors will have to deal with the authority having competence law for other modalities no longer used: this is a minimum of 12.5%
to control and regulate the specific project. In addition to the project of extracted crude oil up to 30,000 barrels per day, if extraction
contract, investors may opt to sign investment protection agreements exceeds 30,000 barrels per day, the royalty (or participation
(IPAs), which have to be signed by the relevant controlling entity of percentage of the State) shall increase to 14%; likewise, if extraction
the sector where the project is being implemented after the approval increases to 60,000 barrels per day, the royalty (or participation
of the Strategic Committee for Investment Promotion. The Ministry percentage of the State) will go up to 18%. In addition, for
of Foreign Trade, Investments and Fisheries is also taking a major role Production Sharing Agreements, the law establishes a “Price
in promoting foreign investments to the country. Royalty” by which the State will have the right to receive 70% of the
gross revenues obtained by the contractor above a certain agreed
threshold; for example, if the agreed threshold is $70 per barrel, and
7.2 Must any of the financing or project documents be
registered or filed with any government authority or the contractor is exporting its share at $80 per barrel, the State shall
otherwise comply with legal formalities to be valid or have a right to 70% of the excess $10 per barrel.
enforceable?

7.5 Are there any restrictions, controls, fees and/or taxes

Financing documents must be registered with the Central Bank of on foreign currency exchange?
Ecuador for reporting and control purposes, and in order to be
eligible for the 5% capital outflow tax when paying capital and There are no restrictions, fees or tax over currency exchange.
interest offshore, this registration is required to comply with Ecuador uses the US Dollar as the country’s official currency. The
financial regulations and does not affect the financing documents’ US Dollar replaced the national currency (sucre) in the year 2000, as
validity and enforceability. a consequence there are no foreign exchange controls.
As for project documents, registration requirements will depend on
the type of project and the type of document; for instance, in the
7.6 Are there any restrictions, controls, fees and/or taxes
mining sector, concessions and exploitation-related agreements
on the remittance and repatriation of investment
must be registered with the National Mining Registry, in other returns or loan payments to parties in other
sectors, however, such type of formality is not required. With jurisdictions?
regards to financing documents, Ecuadorian legislation does not
contemplate any type of registration or requirement for obligations The Constitution and further lower-level laws guarantee the free
to be valid and enforceable. Securities created over those project remittance and repatriation of funds. Ecuadorian laws establish a
documents must be registered (e.g. conditional assignment of rights 5% capital outflow tax for transfers of money outside the country,
of a concession agreement). In addition, security documents must except when the funds are i) loan payments (capital and interest),
be registered as mentioned in questions 2.5 and 2.6 above. and ii) investment returns in the form of dividends of local
companies.
7.3 Does ownership of land, natural resources or a
pipeline, or undertaking the business of ownership or
7.7 Can project companies establish and maintain
operation of such assets, require a licence (and if so,
onshore foreign currency accounts and/or offshore
can such a licence be held by a foreign entity)?
accounts in other jurisdictions?

Ownership of land by foreign entities does not require any specific

As per the Financial and Monetary Code, all financial transactions,

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 Flor & Hurtado Ecuador

operations and accounting records must be expressed in US Dollars. assets as well as performance bonds must be provided by entities
Onshore foreign accounts are not allowed. There is no restriction established in the country. In addition, the Monetary Code
for project companies and their subsidiaries to establish and establishes that insurance policies for or related to assets located
maintain offshore accounts; however, every transfer of money made within the Ecuadorian territory or risks that may occur in Ecuador
from Ecuador is subject to the 5% capital outflow tax unless it falls must be provided by insurance companies duly established in the
within the exemptions mentioned above. A recent regulatory country and authorised to provide insurance services.
change was enacted in August 2018 with the establishment of the
Ecuador

Law of Promotion of Production and Investment Incentive; such

8.2 Are insurance policies over project assets payable to
law included a series of amendments to tax provisions and other foreign (secured) creditors?
laws focused on attracting investment. Among the reforms there is
an exemption to the 5% capital outflow tax (in force in Ecuador to
Yes, this could be implemented through a conditional assignment of
the outflow of currency) that would facilitate the management of
rights made by the beneficiary in favour of foreign creditors. The
offshore payment accounts for financing institutions.
assignment of rights must be approved by the insurance company.

7.8 Is there any restriction (under corporate law,

exchange control, other law or binding governmental 9 Foreign Employee Restrictions
practice or binding contract) on the payment of
dividends from a project company to its parent
company where the parent is incorporated in your 9.1 Are there any restrictions on foreign workers,
jurisdiction or abroad? technicians, engineers or executives being employed
by a project company?
After the corresponding payment of income taxes, a project
company can freely transfer dividends; however, the income tax rate The hydrocarbons and mining sectors establish specific restrictions
for corporations for the year 2018 is 25%, and if 50% or more of the on foreign workers. The Hydrocarbons Law states that at least 95%
company’s shareholders, partners or beneficiaries are residents or of the employees (specifically, for workers and administrative
established in tax havens or regimes of lower taxation then the tax positions) hired by companies involved in the exploration,
rate will increase by 3 percentage points. Ecuadorian laws do not exploitation, refining, transport and commercialisation of oil must
impose any type of restriction on the payment of dividends to the be Ecuadorian nationals, 90% for administrative positions and 75%
project company’s parent company. for technical positions. Moreover, the Mining Law establishes that
the minimum percentage of employees of Ecuadorian nationality
hired by mining companies for its activities is 80%. There is no
7.9 Are there any material environmental, health and other restriction on foreign employees besides the two
safety laws or regulations that would impact upon a
abovementioned cases; as a general rule, foreign workers are free to
project financing and which governmental authorities
administer those laws or regulations? work in any company after complying with migratory requirements.

As a general rule, every activity in Ecuador must obtain the 10 Equipment Import Restrictions
corresponding environmental authorisation, lower-impact activities
are required to obtain an environmental permit, while large-scale
projects are obliged to obtain an environmental licence which 10.1 Are there any restrictions, controls, fees and/or taxes
includes several obligations such as: periodic inspections; filing of on importing project equipment or equipment used by
reports; guarantees; and implementation of remediation plans (the construction contractors?
authority in charge of granting the environmental licence is the
Ministry of Environment). In addition, labour laws require that General customs duties are imposed on goods imported for the
every employer must implement health and safety regulation, such project, either if importation is made by the project company or by
regulation is approved by the Ministry of Labour. 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 temporary
7.10 Is there any specific legal/statutory framework for
admission for re-exportation; the term for which the goods can
procurement by project companies?
remain in the country is the same term of the delegation contract.
This regime is available for contractors, only subcontractors are not
Ecuadorian law does not establish any specific legal framework for eligible.
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 10.2 If so, what import duties are payable and are
must comply with. exceptions available?

Import duties will be determined based on the official tariff schedule

8 Foreign Insurance in force at the time of the importation of the goods. The Production
Code establishes an exemption of duties for imports directly
allocated for the execution of public projects under a public-private
8.1 Are there any restrictions, controls, fees and/or taxes
partnership modality. For this purpose, the delegating public entity
on insurance policies over project assets provided or
guaranteed by foreign insurance companies? shall issue a certificate stating: i) the destination of the goods to be
imported; and ii) the quantity and quality of the goods to be
imported for the project.
The Public Procurement Act states that all insurance policies over

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Flor & Hurtado Ecuador

however, when one of the parties is a State entity, submission is

11 Force Majeure
permitted only after having the approval of the Attorney General.
Under Ecuadorian law, certain assets such as moneys deposited by
11.1 Are force majeure exclusions available and State entities in accounts held by the Central Bank of Ecuador are
enforceable? not seizable as they have sovereign immunity – said immunity
cannot be waived.

Ecuador
Yes, they are available and enforceable. Force majeure is regulated
by the Civil Code, which defines force majeure as any unforeseen
event that is not possible to resist, like a shipwreck, earthquake, the
15 International Arbitration
capture of enemies, the acts of authority exercised by a public
official, etc.; judicial decisions have concluded that any case of 15.1 Are contractual provisions requiring submission of
force majeure is formed by two elements, which are: i) the disputes to international arbitration and arbitral
unpredictability of the event; and ii) the irresistibility of the event. awards recognised by local courts?

12 Corrupt Practices Ecuadorian legislation allows the inclusion of international

arbitration clauses; in case of contracts with State entities, the clause
must be approved by the Attorney General for it to be valid and
12.1 Are there any rules prohibiting corrupt business enforceable. Arbitral awards are recognised by local courts to the
practices and bribery (particularly any rules targeting extent that the award is final and conclusive and the following
the projects sector)? What are the applicable civil or requirements are met: (a) it does not contravene public order or the
criminal penalties? national laws of Ecuador and are the result of an “in personae”
action; and (b) the documents evidencing the award are in an
Yes, the Constitution states that public officers, officials and their authentic form, have been duly legalised by a Consul of Ecuador
delegates or representatives of State institutions will be subject to and the award has been duly translated into Spanish. The processes
the sanctions established for crimes of embezzlement, bribery, of enforcement of international arbitral awards is regulated by the
concussion and illicit enrichment. The actions to prosecute them Organic Procedural Code and the New York Convention for the
and the corresponding penalties are imprescriptible. The Criminal Enforcement of Foreign Arbitral Awards.
Code provides that criminal penalties for the crimes of
embezzlement, bribery, concussion and illicit enrichment are up to
15.2 Is your jurisdiction a contracting state to the New York
seven years of imprisonment. Anti-money laundering regulations
Convention or other prominent dispute resolution
are also in place in Ecuador. conventions?

13 Applicable Law Ecuador ratified the New York Convention in 1982.

15.3 Are any types of disputes not arbitrable under local

13.1 What law typically governs project agreements?
law?

All project agreements signed with State entities are typically

The Ecuadorian Arbitration Law establishes that arbitration is
governed by Ecuadorian law. Other kinds of project agreements are
permitted for disputes on matters subject to settlement. The Civil
usually governed by Ecuadorian laws; however, other governing
Code establishes the matters on which a person can dispose of are
laws (i.e. New York or English law) are also acceptable.
subject to settlement as well. Generally, non-arbitrable matters are
those which cannot be settled or waived by the interested parties or
13.2 What law typically governs financing agreements? which affect the public interest and relate to family law, antitrust
law, criminal offences, etc.
Financing agreements are typically governed by English or New
York law; however, onshore security is often governed by 15.4 Are any types of disputes subject to mandatory
Ecuadorian law. domestic arbitration proceedings?

13.3 What matters are typically governed by domestic law? Arbitration is possible only if parties agree to submit to it.
Ecuadorian legislation does not establish mandatory domestic
Generally, security documents for assets located in Ecuador are arbitration for any case.
governed by domestic law. Personal obligations undertaken by
companies and investors, such as promissory notes, are also 16 Change of Law / Political Risk
governed by Ecuadorian law.

16.1 Has there been any call for political risk protections
14 Jurisdiction and Waiver of Immunity such as direct agreements with central government or
political risk guarantees?

14.1 Is a party’s submission to a foreign jurisdiction and

waiver of immunity legally binding and enforceable? 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
Submission to a foreign jurisdiction is valid and enforceable;

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 Flor & Hurtado Ecuador

regulation issued in the mining sector establishes that direct State and a private investor may sign an investment contract, which
agreements can be entered by the relevant State institution with the can contain the contractual commitments that are necessary for the
lenders. The terms usually employed in this kind of agreements are: development of the new investment project. IPAs may confer
(i) the possibility that the lenders are notified prior to the initiation stability on tax incentives and regulatory framework during the
of an administrative procedure for termination of the project lifetime 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
Ecuador

18.2 Are there any legal impositions to project companies

termination of the project contract; and (iii) the substitution of the issuing bonds or similar capital market instruments?
borrower in case of default. Direct agreements may also establish Please briefly describe the local legal and regulatory
the terms of payment of non-amortised loans – considered as an requirements for the issuance of capital market
indemnification payment – when a concession of delegation instruments.
agreement is terminated by the State. In general terms, direct
agreements are allowed in Ecuadorian legislation, although it is Capital market instruments may be issued by legal entities
highly recommendable that the main project contract (i.e. PPP (corporations), branches of foreign companies domiciled in
Agreements, concession agreements and delegation contracts) Ecuador, and by those established by the Monetary and Financial
include a reference for the execution of such direct agreements with Policy and Regulation Board. The issuance of bonds is
financial parties. Investment contracts are also allowed in implemented through a contract granted by the issuer which must
Ecuadorian legislation, these kinds of agreements mitigate contain the characteristics as well as the rights and obligations of the
regulatory changes but do not constitute political risk guarantees. issuer, the bondholders and the representative of the latter. All
issuance of bonds will require a risk rating, carried out by risk-rating
companies registered in the public registry of the Ecuadorian
17 Tax
Securities Market. During the term of the issue, the issuer must
maintain the rating, updated in accordance with the standards
17.1 Are there any requirements to deduct or withhold tax established by the National Security Council. All issuance will be
from (a) interest payable on loans made to domestic covered by general and specific guarantees.
or foreign lenders, or (b) the proceeds of a claim
under a guarantee or the proceeds of enforcing
security? 19 Islamic Finance

The Internal Tax Regime Code provides that interest is exempt from
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
income tax (and therefore not subject to any deduction and instruments might be used in the structuring of an
withholding) to the extent that the loan exceeds 365 days, it is Islamic project financing in your jurisdiction.
registered with the Central Bank of Ecuador, and is provided by a
financial institution or by a specialised non-financial institution Istina’a, Ijarah, Wakala and Murabaha are not instruments
registered with the Superintendence of Banks in Ecuador. Proceeds expressly recognised under Ecuadorian law. However, their
resulting from a claim under a guarantee or enforcing security are elements can be implemented in Ecuador as long as they do not
not subject to income tax as per Ecuadorian tax laws. contravene existing laws.

17.2 What tax incentives or other incentives are provided

19.2 In what circumstances may Shari’ah law become the
preferentially to foreign investors or creditors? What
governing law of a contract or a dispute? Have there
taxes apply to foreign investments, loans, mortgages
been any recent notable cases on jurisdictional
or other security documents, either for the purposes
issues, the applicability of Shari’ah or the conflict of
of effectiveness or registration?
Shari’ah and local law relevant to the finance sector?

The main tax incentive for foreign creditors is the exemption of the There are no cases in which Shari’ah law has been the governing
5% capital outflow tax for payment of capital of interests. The law of a contract or a dispute. Shari’ah law may be the governing
registration of loans, mortgages and security documents have the law of a contract or a dispute if private parties so agree.
same costs for domestic and foreign investors. The Organic Law for
Promoting Production and Attracting Investments enacted in 2018
also establishes tax incentives for local and foreign investors in 19.3 Could the inclusion of an interest payment obligation
certain activities and projects. in a loan agreement affect its validity and/or
enforceability in your jurisdiction? If so, what steps
could be taken to mitigate this risk?
18 Other Matters
As per Ecuadorian law, the inclusion of interest payment obligations
is valid and enforceable. It should be noted that the Civil Code
18.1 Are there any other material considerations which expressly prohibits compound interest provisions and limits interest
should be taken into account by either equity rates to the ones fixed by the Central Bank of Ecuador.
investors or lenders when participating in project
financings in your jurisdiction?

It is important to note that Ecuador allows the execution of IPAs; the

Production and Investment Code establishes that the Ecuadorian

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Flor & Hurtado Ecuador

Mario Flor Daisy Ramirez

Flor & Hurtado Flor & Hurtado
Av. 12 de Octubre N26-48 y Orellana Av. 12 de Octubre N26-48 y Orellana
Edificio Mirage, Piso 8 Edificio Mirage, Piso 8
Quito Quito
Ecuador Ecuador

Ecuador
Tel: +593 2394 1050 ext. 108 Tel: +593 2394 1050 ext. 113
Email: [email protected] Email: [email protected]
URL: www.fhlegal.ec URL: www.fhlegal.ec

Mario Flor is a partner at Flor & Hurtado. He was admitted for Daisy Ramirez is a senior associate at Flor & Hurtado. She was
professional practice as Juris Doctor in 1995 from the Pontificia admitted for professional practice as Juris Doctor in 2013 from the
Universidad Católica del Ecuador. Universidad San Francisco de Quito. In 2015, she obtained a Master’s
Degree in Law from Georgetown University Law Center.
His experience includes multiple project and corporate finance, cross-
border acquisitions and cross-border commercial transactions. Mario Her experience includes multiple project and corporate finance
has acted as counsel of Corporacion Andina de Fomento (CAF), the transactions in Ecuador. She has acted as local counsel for the Inter-
Inter-American Development Bank, Inter-American Investment American Investment Corporation (IDB Invest), Inter-American
Corporation (IDB Invest), Export Development Canada, Export-Import Development Bank and Corporacion para el Financiamiento de
Bank of the United States, Overseas Private Investment Corporation, Infraestructura (CIFI); during the past year she was part of the team
China Developments Bank, FMO, Proparco, AFD, DEG Deutsche which advised a group of lenders in the largest mining project in
Investitions, Japan Bank of International Cooperation and SACE, as Ecuador and also in the financing of the Posorja Port. Her experience
well as commercial banks, in projects implemented in Ecuador. also includes advising local companies in corporate and commercial
Among other projects, Mario acted as local counsel for the financing of matters, as well as cross-border acquisitions.
the new international airport of Quito, the financing of the new Posorja
Port and the financing of the Fruta del Norte Gold Project located in
southern Ecuador. 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).

Flor & Hurtado is a firm practising in the Ecuadorean legal market, formed by very well-reputed professionals with large experience in local and cross-
border transactions, which follows international standards as a main rule of practice. The firm consists of 12 lawyers and one financial advisor, the
firm’s practice is focused on the main business areas of Ecuador’s economy, including banking and finance (project finance and corporate finance
transactions), natural resources (oil, gas and mining), tax and tax planning, corporate and commercial, antitrust, telecommunications, electricity, and
domestic and international arbitration – highly rated professionals are leading each of the mentioned areas.
The professional experience of the partners and associates of Flor & Hurtado include providing legal assistance in the major financing projects
carried out in Ecuador in recent years – principally providing assistance to multilaterals and commercial banks.

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 Chapter 13

Egypt

Zaki Hashem & Partners Sameh Kamal

■ Corporate guarantee by the sponsors.

1 Overview
■ Assignment of material contracts, including insurance.
Each of the above requires different formalities for perfection and
1.1 What are the main trends/significant developments in registration.
the project finance market in your jurisdiction?

The construction sector, led by major public and infrastructure 2.2 Can security be taken over real property (land), plant,
projects, including in the electricity and water sectors, has been one machinery and equipment (e.g. pipeline, whether
underground or overground)? Briefly, what is the
of the fastest-growing sectors of the Egyptian economy.
procedure?
In many infrastructure projects, the State of Egypt has allowed the
participation by the private sector through ownership and operation, A mortgage over real estate (and a pledge of usufruct) must be
and has taken progressive strides in tendering many projects registered at the office of the notary public for the jurisdiction where
through a public award under the EPC+ Finance Scheme. the real estate is located. Either the creditor bank on behalf of the
debtor or the mortgagor can apply for registration. The following
1.2 What are the most significant project financings that documents must be submitted with the application:
have taken place in your jurisdiction in recent years? ■ Title deed.
■ Real estate certificate of disposition.
A landmark project tendered by the Egyptian Electricity
■ Names and details of the parties to the mortgage contract.
Transmission Company (EETC) is for the development and
operation of a wind farm in the Gulf of Suez which closed in the ■ A credit facility statement or confirmation of the value and
terms of the finance.
beginning of 2018. The State of Egypt has guaranteed all financial
obligations under the off-take agreement. The application must be recorded in a special register provided for
this purpose at the office of the competent notary public. A decision
In the transportation sector, the Ain-Sohkhna – Al Alamein High
on the application must be issued within seven days of the
Speed Train project worth around USD 6–8 billion has been tendered
application being made.
jointly by the Transport and Housing Ministries to connect both the
Red and Mediterranean seas under the model EPC+ Finance Scheme.
In the trade sector, the “6th of October Dry Port PPP project” worth 2.3 Can security be taken over receivables where the
chargor is free to collect the receivables in the
around EGP 1.6 billion has been tendered as a concession under the
absence of a default and the debtors are not notified
Public Private Partnership model. of the security? Briefly, what is the procedure?

2 Security Security over the receivables can be taken by way of assignment. The
assignment of receivables and a pledge of accounts do not need to be
notarised or registered with any administrative authority for perfection.
2.1 Is it possible to give asset security by means of a However, for the assignment date to be valid against third parties the date
general security agreement or is an agreement
required in relation to each type of asset? Briefly, must be “certainly established” by official means. Commonly, this is
what is the procedure? done by serving a notice of the assignment on the debtor through a court-
appointed bailiff. Under Egyptian law, this is typically done by the
A general security agreement is generally not sufficient from an creditor serving on the debtor notice of the assignment and a demand for
Egyptian legal perspective. The following securities are usually all outstanding sums to be paid to the assignee to satisfy the debt.
required by lenders:
■ Pledge of shares of the special purpose vehicle (SPV). 2.4 Can security be taken over cash deposited in bank
■ Pledge of fonds de commerce. accounts? Briefly, what is the procedure?

■ Pledge of usufruct or the real estate where the project will be

constructed. Security can be taken over cash by way of pledge of a bank account.
■ Pledge of onshore accounts. Please refer to question 2.3 above.

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Zaki Hashem & Partners Egypt

2.5 Can security be taken over shares in companies 3.2 If a security trust is not recognised in your
incorporated in your jurisdiction? Are the shares in jurisdiction, is an alternative mechanism available
certificated form? Briefly, what is the procedure? (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
For a pledge of dematerialised shares, the pledge must be registered
the facility agent) to enforce claims on behalf of all the
with the competent administrative authority (Ministry for Central lenders so that individual lenders do not need to
Clearing, Depository, and Registry (MCDR)) and further formalities

Egypt
enforce their security separately?
must be fulfilled for the completion of perfection of the pledge. All
joint stock companies are obligated by virtue of a recent law to Please refer to question 3.1 above.
dematerialise their shares and register them with MCDR.

4 Enforcement of Security
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, 4.1 Are there any significant restrictions which may
receivables and chattels)? 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
A pledge of dematerialised shares must be registered with MCDR. creditors/the company (or its trustee in
No fees, duties or taxes are associated with the registration. bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?
A pledge of usufruct and a pledge of fonds de commerce must be
registered with the competent notary. The fees that are imposed on a
registration may differ according to whether the registration/perfection Methods of enforcement against security interests differ depending
is made in favour of an Egyptian bank or a non-Egyptian foreign bank. on the type of collateral provided to the lenders. For example, in
relation to enforcement against a pledge of shares, an Egyptian
In addition, the Movables Security Law provides new rules for the
mortgagee bank can sell the mortgaged securities if the debtor does
perfection of a pledge of movables without the need for the
not settle its debt when the mortgage matures on the Egypt Stock
possession of such movables by the creditor. The Movables
Exchange. In doing this, the bank is not restricted by the
Security Law is primarily enforced through the Egyptian Financial
prescriptions in the Trade Law. This is in exception to the normal
Supervisory Authority, which has powers to issue additional
court procedures that should be followed by other creditors
decisions and regulations regulating the implementation of the Law.
(including foreign banks).
There are no fees or charges associated with an assignment of
By comparison, enforcement against real estate takes longer and
receivables.
involves court procedures.

2.7 Do the filing, notification or registration requirements

in relation to security over different types of assets 4.2 Do restrictions apply to foreign investors or creditors
involve a significant amount of time or expense? in the event of foreclosure on the project and related
companies?

Please refer to our answers regarding the registration of securities

No specific restrictions are applicable to foreign lenders in respect
and associated fees set out above.
of foreclosure on the project and related companies. However, a
relatively favourable treatment is provided to Egyptian banks in
2.8 Are any regulatory or similar consents required with case of enforcement against specific categories of assets as
respect to the creation of security over real property highlighted in question 4.1 above.
(land), plant, machinery and equipment (e.g. pipeline,
whether underground or overground), etc.?
5 Bankruptcy and Restructuring
Please refer to our answer to question 2.2 above. Proceedings

3 Security Trustee 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
3.1 Regardless of whether your jurisdiction recognises security?
the concept of a “trust”, will it recognise the role of a
security trustee or agent and allow the security
On bankruptcy, all creditors are treated the same except for
trustee or agent (rather than each lender acting
separately) to enforce the security and to apply the preferred creditors who have registered security rights. On
proceeds from the security to the claims of all the bankruptcy, all creditors will rank at least equally with other
lenders? unsecured creditors subject to debts mandatorily preferred by law,
which include:
A security agent can hold security on behalf of a group of lenders. ■ Legal costs relating to the insolvency.
Normally, the security agent will be chosen from among the lenders ■ Sums due to the State Treasury for taxes, duties and other
in the group. duties of any kind.
A secured lender has priority over any unsecured creditor.

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well as treaties on the avoidance of double taxation that may

5.2 Are there any preference periods, clawback rights or promote project finance transactions.
other preferential creditors’ rights (e.g. tax debts,
employees’ claims) with respect to the security? The purpose of BITs is to encourage, facilitate and protect foreign
investments. BITs usually include a most-favoured nation clause by
which the contracting state offers fair and equitable treatment and
Creditors who have registered security rights have priority versus
protection for investors of the other contracting state. This
unsecured creditors.
treatment and protection must be at least as favourable as that given
Egypt

to investors from any third state. However, most-favoured nation

5.3 Are there any entities that are excluded from status will not grant the level of preferential treatment given to a
bankruptcy proceedings and, if so, what is the third state under a customs union, free trade zone, economic union,
applicable legislation?
double taxation agreement or agreement facilitating frontier trade.
If a state party to a BIT is also party to a treaty or other agreement
Private entities are not excluded from the bankruptcy proceedings. granting even more favourable treatment in a particular area, the
higher level of treatment applies.
5.4 Are there any processes other than court proceedings Within limits, a BIT guarantees the transferability of investment-
that are available to a creditor to seize the assets of related funds out of the contracting state. It also provides against
the project company in an enforcement? expropriation of funds and for compensation to the contracting state
if this occurs. No contracting state can expropriate, nationalise or
No appropriation is available under Egyptian law. It depends on the take similar measures against an investment in its territory made by
type of security to advise the best course of action to seize the asset an investor from the other contracting state, unless this is:
in question. ■ For the public interest.
■ Under domestic legal procedure.
5.5 Are there any processes other than formal insolvency ■ Done without discrimination.
proceedings that are available to a project company
■ Compensated.
to achieve a restructuring of its debts and/or
cramdown of dissenting creditors? Any compensation payable for foreign investments must be:
■ Equivalent to the value of the expropriated investments at the
According to the new Bankruptcy Law issued in February 2018, time when expropriation is declared.
legal alternatives for debt restructuring before filing for bankruptcy ■ Convertible and freely transferable.
were set out. The law also seeks to simplify the liquidation process, ■ Paid without delay.
set out defined time-frames for liquidation and to provide creditors
Compensation for national investments is similar but dealt with
with a greater role in the selection of bankruptcy trustees and other
under separate legislation.
matters.
The International Centre for Settlement of Investment Disputes
(ICSID Centre) provides an effective dispute resolution mechanism
5.6 Please briefly describe the liabilities of directors (if for foreign investors against a contracting state. The ICSID Centre
any) for continuing to trade whilst a company is in was established as an autonomous international organisation by the
financial difficulties in your jurisdiction.
Convention on the Settlement of Investment Disputes Between
States and Nationals of Other States (1965).
Under Egyptian law, there is no specific aggravated liability for the
Further protection is afforded to foreign investments through
board of directors to continue trading whilst the company suffers
treaties on the avoidance of double taxation (tax treaties). A tax
financial difficulties.
treaty is a bilateral economic agreement between two states that
aims to avoid or eliminate double taxation of the same income in the
6 Foreign Investment and Ownership two contracting states. Tax treaties generally resolve issues of dual
Restrictions taxation by stipulating that the state in which the income was
derived has primary right of taxation. The other state (that is, the
state in which the party deriving the income is resident) has the right
6.1 Are there any restrictions, controls, fees and/or taxes to residual taxation. This other state will be entitled to tax the
on foreign ownership of a project company? income, but will be required to avoid double taxation by granting a
credit for any tax paid in the state having the primary right of
There are no specific restrictions, controls, fees and/or taxes with taxation.
respect to foreign ownership of a project company. Foreign
shareholders are afforded the same treatment as Egyptians
6.3 What laws exist regarding the nationalisation or
according to the Investment Law. Only a few activities are expropriation of project companies and assets? Are
restricted to Egyptian nationals such as security. any forms of investment specially protected?

6.2 Are there any bilateral investment treaties (or other Projects established under the Investment Law cannot be
international treaties) that would provide protection expropriated, nationalised or sequestrated by administrative order.
from such restrictions? Bilateral international treaties also provide certain guarantees
against expropriation, nationalisation and other similar measures.
Egypt is a party to several bilateral investment treaties (BITs) with
other sovereign states (approximately 113 treaties as at 2016), as

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the rules and regulations enforced in the jurisdiction where the

7 Government Approvals/Restrictions
account is to be opened.

7.1 What are the relevant government agencies or 7.8 Is there any restriction (under corporate law,
departments with authority over projects in the typical exchange control, other law or binding governmental
project sectors? practice or binding contract) on the payment of
dividends from a project company to its parent

Egypt
This depends on the type of infrastructure project to be established company where the parent is incorporated in your
so that the competent government department can be determined. jurisdiction or abroad?
However, if the project is tendered under the PPP scheme, then the
PPP Central Unit will be responsible for organising all aspects of the There is no restriction on payment of dividends by an Egyptian
project. juristic entity to its foreign shareholders, subject to the availability
of the foreign currency and the submission of the required
documents to the remitting licensed entity.
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 7.9 Are there any material environmental, health and
enforceable? safety laws or regulations that would impact upon a
project financing and which governmental authorities
Please refer to question 7.1 above. Registration of a pledge over real administer those laws or regulations?
property and shares must be registered for perfection purposes.
There are numerous environmental risks that might be encountered
in connection with the construction and operation of energy and
7.3 Does ownership of land, natural resources or a infrastructure projects, including:
pipeline, or undertaking the business of ownership or
operation of such assets, require a licence (and if so, ■ The impact on the natural environment such as noise, visual
can such a licence be held by a foreign entity)? impact, and impact on biological diversity, such as the impact
on living organisms.
There is no specific licence to own the land required for the ■ Logistical impacts related to the transportation of equipment,
execution of the project. The land may be delivered to the project materials and solid tools with long lengths, such as the blades
of turbines and towers.
company by the government through a lease, usufruct or sale lease-
back. The project company shall obtain all required licences in ■ Additional harms that might be caused by constructing roads
to the places of plants in remote areas and their effect on
order to enable it to carry out its activity according to the law.
biological diversity.
Environmental liability is assessed on the basis of indemnifying all the
7.4 Are there any royalties, restrictions, fees and/or taxes damage resulting from pollution accidents caused by the breach of the
payable on the extraction or export of natural
laws and international conventions to which the State of Egypt is a party.
resources?
Compensation includes remedy of environmental and traditional
damage, as well as costs of reinstatement or remedy of the environment.
Consent from the Egyptian Mineral Resources Authority is required
The company committing such breach will be liable to remedy the same.
for the exporting of ores or materials from mines, quarries or salt
pans. Export of those ores or materials that have strategic or
industrial importance can be banned in their raw form. 7.10 Is there any specific legal/statutory framework for
procurement by project companies?

7.5 Are there any restrictions, controls, fees and/or taxes

No. There is no such legal framework.
on foreign currency exchange?

All limitations on exchange (including convertibility and 8 Foreign Insurance

transferability) have been abolished.

8.1 Are there any restrictions, controls, fees and/or taxes

7.6 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or
on the remittance and repatriation of investment guaranteed by foreign insurance companies?
returns or loan payments to parties in other
jurisdictions?
Insurance in Egypt must be conducted through a local insurance
company. There is nothing in Egyptian law that prevents the local
There are no such restrictions. However, dividends tax of 10%
insurance company from procuring reinsurance with either an
came into effect on 30 June 2014).
international or a local insurance entity. This would involve
transferring portions of risk to the reinsurance entity to reduce the
7.7 Can project companies establish and maintain original insurer’s likelihood of having to pay out a large obligation
onshore foreign currency accounts and/or offshore following an insurance claim.
accounts in other jurisdictions?

8.2 Are insurance policies over project assets payable to

There is no specific legal restriction in Egyptian law preventing an
foreign (secured) creditors?
Egyptian company from opening and maintaining an offshore
foreign currency account. However, the account must comply with
The total sum insured must be paid to the insured entity, unless the

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insured entity has assigned its rights to the proceeds to a security

13 Applicable Law
agent or nominated first loss payee in connection with project
financing.
13.1 What law typically governs project agreements?
9 Foreign Employee Restrictions
There is no unified legislation that governs project finance activities
in Egypt. These activities are governed by laws and regulations that
Egypt

9.1 Are there any restrictions on foreign workers, govern not just certain aspects of project finance but also other
technicians, engineers or executives being employed modes of project transactions. The basic laws and their associated
by a project company? Executive Regulations that regulate different aspects of project
finance activities in Egypt include the following:
The right to employ foreign employees up to 10% of the work force, ■ The Law on Partnership with the Private Sector in
which can be increased to 20% according to the prescribed regulations Infrastructure Projects, Services, and Public Utilities (Law
with some exemptions that can be granted for strategic projects No. 67 of 2010), and its associated Executive Regulation.
pursuant to a decision from the Supreme Council for Investment. ■ The Investment Law (Law No. 72 of 2017), which is a new
law regulating investments in Egypt, and its Executive
Regulation issued by the Prime Minister under No. 2310 of
10 Equipment Import Restrictions 2017.
■ The Movables Security Law No. 115 of 2015 and its
10.1 Are there any restrictions, controls, fees and/or taxes Executive Regulation issued by the Minister of Investment
on importing project equipment or equipment used by under No. 108 of 2016 (Movables Security Law).
construction contractors? ■ The Law on Granting Licences for Industrial Establishments
No. 15 of 2017.
Generally speaking, there are no specific restrictions on the ■ The Value Added Tax Law No. 67 of 2016 as amended by
importation of equipment from outside of Egypt for use in a project. Law No. 3 of 2017 and its Executive Regulation issued under
However, there are certain import regulations. No. 66 of 2017.
■ The Law on Public Utilities Concessions (Law No. 129 of
1947).
10.2 If so, what import duties are payable and are
exceptions available? ■ The Tender Law (Law No. 89 of 1998).
■ The Cabinet of Ministers Decision No. 695 of 2001
Constituting a Ministerial Committee and a Working Group
With respect to companies incorporated under the new Investment
to Organize Local and National Projects awarded under BOT
Law, a unified tax of 2% of the value of the imported item shall be
and BOOT Regimes as amended by Decision No. 512 of
applied on all equipment and devices required for its incorporation. 2002.
■ The Customs Duties Law (Law No. 66 of 1963).
11 Force Majeure ■ The Law Concerning the Specific Economic Zones (Law No.
83 of 2002).
■ The Law Setting Forth Some Rules Regarding the Private
11.1 Are force majeure exclusions available and Ownership by the State of Egypt (Law No. 7 of 1991).
enforceable?
■ The Decision by the President of the Republic Issuing the
Law No. 5 for 2015 Concerning the Preference of Egyptian
Yes, they are available and enforceable. Products in Government Procurement.
■ The Law of the Central Bank of Egypt (Law No. 88 of 2003).
12 Corrupt Practices ■ The Trade Law (Law No. 17 of 1999).
■ The Civil Law.

12.1 Are there any rules prohibiting corrupt business

practices and bribery (particularly any rules targeting 13.2 What law typically governs financing agreements?
the projects sector)? What are the applicable civil or
criminal penalties? English law and Egyptian law.

Egypt penalises all forms of bribery and corruption through various

sets of laws, including: 13.3 What matters are typically governed by domestic law?

■ The Egyptian Penal Code No. 58 of 1937 and its

amendments. In particular, the articles addressing the bribery Project agreements are governed by domestic law, such as power
of a state official. purchase agreements, etc.
■ The Decision of the President of the Republic No. 307 of
2004 relating to the Accession of the Republic to the UN 14 Jurisdiction and Waiver of Immunity
Convention against Corruption 2003, signed on 9 December
2003 and ratified on 14 December 2005.
■ The Conflict of Interests Law of Public Officials (Law No. 106 14.1 Is a party’s submission to a foreign jurisdiction and
of 2013), which regulates conflicts of interest of specific public waiver of immunity legally binding and enforceable?
officials, including, among others, the President, the Prime
Minister, ministers, governors and heads of public authorities.
Private parties do not need to waive any immunity. With respect to

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Zaki Hashem & Partners Egypt

state-owned entities, Egypt does not have legislation on waiver of

sovereign immunity. No waiver of immunity is permissible in 17.2 What tax incentives or other incentives are provided
respect of: preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
■ Property used by a diplomatic or consular mission. or other security documents, either for the purposes
■ Property of a military character and under the control of a of effectiveness or registration?
military authority or defence agency.
■ Property located in Egypt and used by Egypt for public or The normal legal umbrella for companies and entities establishing

Egypt
government use (as distinct from commercial use). infrastructure and energy projects is the new Investment Law. An
entity established under the Investment Law benefits from the
following rights, incentives and guarantees:
15 International Arbitration
■ Equal treatment as Egyptian nationals as well as residence for
the duration of the project. The Cabinet of Ministers may
15.1 Are contractual provisions requiring submission of also provide preferential treatment to investors based on
disputes to international arbitration and arbitral reciprocity.
awards recognised by local courts? ■ Administrative actions against investment projects are
limited in favour of final, res judicata court decisions.
Egypt is a party to the UN Convention on the Recognition and ■ Licences and real estate allocation granted to investment
Enforcement of Foreign Arbitral Awards 1958 (New York projects would not be cancelled or suspended without an
Convention). Therefore, arbitration awards are enforceable in opinion from the General Authority for Investment and Free
Egypt, provided they do not violate Egyptian public order. Zones (GAFI) and after granting the investor a cure period to
remedy any violation.
■ No financial or procedural burdens may be imposed by any
15.2 Is your jurisdiction a contracting state to the New York authority except with the prior approval of the Cabinet of
Convention or other prominent dispute resolution Ministers.
conventions?
■ The right to establish, expand, develop, finance, own,
manage, use, dispose of, earn and transfer profits, liquidate
With respect to arbitration, Egypt is a party to the New York and transfer, in foreign currency, without prejudice to the
Convention. rights of others.
■ The right to transfer and convert foreign currency according
15.3 Are any types of disputes not arbitrable under local to the prescribed rules and regulations.
law? ■ The right to employ foreign employees up to 10% of the work
force, which can be increased to 20% according to the
Yes, arbitration is not permissible in certain issues such as family prescribed regulations with some exemptions that can be
granted for strategic projects pursuant to a decision from the
and criminal matters.
Supreme Council for Investment.
■ The right to own land and the real estate required to conduct
15.4 Are any types of disputes subject to mandatory and expand its activities regardless of shareholders’
domestic arbitration proceedings? nationalities, their place of residence or their contribution to
the company’s capital, without prejudice to rules of
Yes, certain disputes are subject to mandatory domestic arbitration ownership enforced in certain zones.
proceedings prior to litigation. ■ For a period of five years starting from its registration in the
commercial register, exemption from stamp tax, authentication
fees and notarisation of its:
16 Change of Law / Political Risk ■ articles of association; and
■ loan and mortgage agreements.
16.1 Has there been any call for political risk protections ■ Exemption from tax and fees for land registration contracts
such as direct agreements with central government or required for establishment of the entity.
political risk guarantees? ■ A tax incentive in the form of a deduction from the net profits
equal to 50% of the investment cost with respect to Zone A
No, but there are contractual events that touch upon these events and projects according to the investment plan to be prepared by
impact on the parties’ obligations and rights. GAFI and the data prepared by the Central Agency for Public
Mobilization and Statistics, and 30% with respect to Zone B
with respect to specific list of projects, all according to the
17 Tax details set out in the Executive Regulation.
The Cabinet of Ministers has the right to grant additional incentives
to the investment projects or to introduce additional non-tax
17.1 Are there any requirements to deduct or withhold tax incentives, including the:
from (a) interest payable on loans made to domestic
or foreign lenders, or (b) the proceeds of a claim ■ Establishment of a special customs port.
under a guarantee or the proceeds of enforcing ■ Extension of all utilities at its expense to the project.
security?
■ Payment for any vocational training.
■ Discounted selling of lands granted to industrial projects
Payments of interest by an Egyptian resident entity are subject to a under special conditions.
20% withholding tax subject to any treaty for the avoidance of
■ Free allocation of land for strategic projects.
double taxation (Egyptian Tax Law No. 91 of 2005).

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The Cabinet of Ministers can issue a single approval (known as a on the type of financial instrument issued, and they are detailed in
Golden Approval) that includes all licences, approvals and the said Law. As a general rule, the said Law stipulates that any
incentives required for the establishment, operation and juristic person wishing to issue securities must notify the Financial
management of strategic and national projects of developmental Regulatory Authority (the FRA) and must provide all required
purposes, as well as public and infrastructure projects. documents and forms. The Law empowers the FRA to reject or
The Investment Law continues to acknowledge the establishment of approve such issuance of securities. Additionally, the issuance of
free zones and private free zones and further accredited investment securities in Egypt depends on the type of offering made. If the
Egypt

zones and technological zones with all tax and special investments issuance is made for the public, a prospectus approved by the FRA
granted thereto. and published in newspapers will be required.
In conclusion, the Investment Law aims to streamline the
bureaucratic and red-tape processes and allows for: 19 Islamic Finance
■ The electronic establishment of companies.
■ The participation in projects with the private sector and
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
entrepreneurs with shortage of capital.
instruments might be used in the structuring of an
■ The encouragement of small and medium-sized companies Islamic project financing in your jurisdiction.
and promotes greater transparency with the investor
especially with respect to the application for permits and
licences required for the conduct of the activity. Islamic-based contracts like Istina’a, Ijarah, Wakala and Murabaha
are not specifically regulated in the Egyptian jurisdiction. They
■ Fair settlement of disputes with the administrative authority,
could however be adopted in the Egyptian market based on the
through ministerial committees without prejudice to the
investor’s right to resort to court or arbitration, the decisions general set of contracting rules and provided they do not contravene
of such committees being final and binding on the any public order or policy. The structure most similar to Murabaha
administrative authority. under Egyptian law is the financial lease. Financial leasing is the
transfer of the right to use a certain asset owned by the lessor to the
user (the lessee) under a contractual agreement between the two
18 Other Matters parties entitling one to use the asset owned by the other party in
return for periodic payments for a specified period. The contractual
agreement shall include an option to transfer the ownership of the
18.1 Are there any other material considerations which
asset to the lessee by the end of the contract.
should be taken into account by either equity
investors or lenders when participating in project
financings in your jurisdiction? 19.2 In what circumstances may Shari’ah law become the
governing law of a contract or a dispute? Have there
Egypt has taken big and courageous strides towards the been any recent notable cases on jurisdictional
revitalisation of its legal ecosystem with a view to encouraging issues, the applicability of Shari’ah or the conflict of
Shari’ah and local law relevant to the finance sector?
foreign investments. Key government reforms implemented in
recent years include, inter alia: (i) the transition to a flexible
exchange rate through the liberalisation of the Egyptian Pound; (ii) It is not possible to apply Shari’ah law directly to a contract in the
the introduction in 2017 of a new Investment Law and industrial Egyptian jurisdiction including civil and commercial contracts.
licensing law; (iii) amending the competition law and the labour law However, some banking arrangements could be designated as
to encourage investment and FDI; (iv) passing a value added tax “Shari’ah Compatible” in order to encourage these types of
(VAT) law, which introduced VAT at a rate of 14%, subject to certain Shari’ah-compliant instruments.
exemptions; and (v) implementing fuel subsidy reforms to increase
efficiency and reduce subsidy-related expenditures. 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
18.2 Are there any legal impositions to project companies
could be taken to mitigate this risk?
issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market The Trade Law provides that if the trader’s profession requires the
instruments. performance of amounts or expenses for his clients, he may demand
them for a return from the date of their payment unless otherwise
No specific restrictions are imposed on project companies for agreed. The return is calculated according to the rate applicable by
issuing bonds and capital market instruments, but there are several the Central Bank of Egypt, unless a lower rate is agreed upon.
regulations regulating this activity. Capital market instruments are However, as a general rule, earning interest exceeding the value of
regulated by virtue of the Capital Market Law No. 95 of 1992 and its the principal debt in addition to earning interest on interest is not
Executive Regulations. The legal requirements, approvals or permissible without prejudice to banking and commercial practice.
authorisations for the issuance of capital market instruments depend

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Zaki Hashem & Partners Egypt

Sameh Kamal
Zaki Hashem & Partners
23 Kasr El Nil
Cairo
Egypt

Tel: +20 2 2399 9999

Email: [email protected]

Egypt
URL: www.hashemlaw.com

Mr. Sameh Kamal, Partner, joined ZH&P in 2012. He leads ZH&P’s

Project Finance Team providing counsel to high-profile international
transactions in Egypt. He possesses a deep understanding and in-
depth knowledge of Egyptian law including BOT, PPPs, EPC, tenders,
FIDIC in relation to infrastructure projects, investments, free zones
and economic zones, leveraged acquisitions, assets and shares
acquisitions with a focus on the energy sector, sukuk structures,
securitisations, shareholders’ agreements, increase of capital through
equity participation and co-investment transactions, capital market
transactions with a focus on finance, mutual funds, and related permits
and licensing issues.
Mr. Kamal has successfully closed large-scale projects including with
respect to significant infrastructure projects such as in the electricity
and power sectors, Feed-in-Tariff schemes, independent power
production, underground garages, trains, metros, petrochemicals, and
other public service projects. Mr. Kamal has advised international
sponsors on the best structures for implementation of all project
phases – from the legal perspective as well as from the business and
strategic perspectives.

Zaki Hashem & Partners (ZH&P) is the oldest and largest law firm to be actively – and uninterruptedly – catering to the needs of foreign and local
clients in the Egyptian business sector since its establishment in 1953.
ZH&P was founded by the late Dr. Zaki Hashem (1920–2014) – Former Cabinet Minister and leading renowned international Attorney at Law and
Arbitrator.
Today, ZH&P stands as a modern partnership firm providing the full range of corporate legal services to both local and international clients through
approximately 100 fee earners and 170 employees – all advocates of professional excellence and integrity in their representation of ZH&P’s clients.
The combined experiences of ZH&P’s members exceeds 1,064 years emanating from the unique mixture of senior associates, partners and of
counsels with individual experience records exceeding 40, 30 and 20 years. This long professional record allows ZH&P’s younger team members to
tap on a wealth of knowledge transferred to them through the mentorship of highly experienced attorneys.

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 Chapter 14

England & Wales

John Dewar

Milbank LLP Munib Hussain

trend comes in part from the US, where a growing (from 2016 to
1 Overview
date) prevalence of greater infrastructure and energy sponsor focus
on Term Loan B structures – used as refinancing tools, or sitting
1.1 What are the main trends/significant developments in alongside conventional financings and/or less conventional
the project finance market in your jurisdiction? financings (for example, inventory and receivables financings) – is
spreading to the European market. Here, commentators are
2019 has been an interesting year for project finance in and from the predicting that such a Term Loan B market will see increased use of
UK, not least given the continued uncertainty following the UK’s forward purchase agreements, cash sweeps and power hedges in
referendum vote to exit the European Union. transactions.

The sector gained confidence over 2019, however, leaving Multilateral and bilateral institutions have continued to participate
commentators with an optimistic view of 2020. in the market, and existing institutions (re-branded with additional
products to help fill debt financing gaps) have continued to invest in
The UK market breaks (broadly speaking) into two quite distinct
the UK’s energy and infrastructure sectors (especially in light of the
halves – a UK-oriented market where local (as in UK-sited) deals
UK’s anticipated exit from the European Union, which has,
are structured and financed, and a much larger and more
seemingly, buoyed governmental commitment to investing in UK
geographically diverse finance market where (for one reason or
infrastructure, and the availability of funds for UK bilateral and
another) international finance is structured, negotiated and
multilateral institutions investing abroad – this is particularly the
documented in the UK (in practice, London), but the underlying
case in the government’s treatment of UKEF’s Direct Lending
project is located elsewhere. The two markets are both relatively
Facility, see below).
large in terms of capital and debt requirements and flows, but the
international English-law finance market far outstrips the domestic By way of example:
UK market in both volume and size of deals. ■ the European Investment Bank continues to maintain its
Europe 2020 Project Bond Initiative;
As the UK emerges from the economic slowdown and moves into a
period of economic growth, there is considerable demand for ■ the UK Green Investment Group, with a mandate to finance
“green” projects, saw its £250 million energy-to-waste
upgrading existing infrastructure or investing in new, greenfield
project (Rookery South Energy Recovery Facility) reach
projects. Each year, the UK Government publishes a “National
financial close in March 2019; and
Infrastructure and Construction Pipeline” (the “NIP”). Last year,
■ UK Export Finance’s (“UKEF”) Direct Lending Facility was
the NIP confirmed that the current value of UK projects, relating to
granted a £2 billion direct lending capacity expansion, which
the transport, energy, utilities, digital infrastructure and flood and
is expected to come on stream in two £1 billion amounts in
coastal, science and research and social infrastructure sectors was at 2020/21 and 2021/22.
over £188 billion (combined public and private investment), of
The UK Green Investment Group was launched in October 2012 (at
which over £125 billion is expected to be delivered by 2020/21.
the time, as a non-departmental public body of the Department for
Through these investments and projects, the government aims at
Business, Energy & Industrial Strategy (“BEIS”), but it was sold to
increasing living standards, driving economic growth and boosting
Macquarie Group Limited in August 2017) and has since committed
productivity. The Conservative Government expects that over the
over £15 billion of financing to 100 green infrastructure projects,
next decade to 2028, total public and private investment in the sector
committing £3.4 billion to the UK’s green economy. From 17
is expected to reach around £600 billion. Already, public and
August 2017 to 31 August 2018, for example, the UK Green
private infrastructure investment has gradually increased over the
Investment Group supported 10 new ‘green transactions’ and
past three decades (since 2010, 4,500 infrastructure projects have
arranged or invested over £1.6 billion. It is the first investment bank
been delivered). The two largest sectors, energy (which boasts
worldwide to invest solely in green infrastructure (their 2017–18
investment of £51.7 billion from 2018/19 to 2020/21) and transport
progress report noted that the UK Green Investment Group had
(£54.9 billion from 2018/19 to 2020/21), account for over half of the
7GW of renewable energy capacity either in development or
infrastructure pipeline’s total value.
construction). The funds have been used to leverage private-sector
In the UK, the divide between conventional project finance and the capital to fund projects in priority sectors from offshore wind to
bond and leveraged finance markets continues to narrow. The waste and non-domestic energy efficiency, with notable success
market saw a continuation of diversification of both sources and stories over 2018 and 2019. For example, in December 2018, the
types of project-related debt. As with the project bonds market, the UK Green Investment Group’s Galloper offshore wind farm (in

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Milbank LLP England & Wales

which it holds a 25% stake) was successfully refinanced to the tune UK. Around a fifth of capacity that was available in 2011 will close
of £1.2 billion. The UK Green Investment Group also had a busy by the end of this decade, and demand for electricity is set to
2019 Q1: in addition to the financial close reached on Rookery increase as major sectors such as transport and heat are electrified.
South Energy, outlined above, in March 2019 the UK Green The subsequent Energy Act 2016 furthers the 2013 Act’s work. It

England & Wales

Investment Group also announced that it was set to buy Savion, the focuses on the oil and gas sector and works to implement
solar and energy storage unit owned by Tradewind Energy, a recommendations into UK offshore oil and gas recovery and its
subsidiary of Enel Green Power North America (financial close is regulation. The Act formally established the Oil and Gas Authority
expected mid-2019). Such robust market activity is a promising (“OGA”) as an independent regulator and enabled a more
sign for the growing strength of UK green energy investment. comprehensive charging of the offshore oil and gas industry for
UKEF has also shown a significant shift in approach and appetite licences for environmental and decommissioning activity. This
for international project finance risk. UKEF has three additional allows the government to continue to recover costs of its
funding-related facilities: the Direct Lending Scheme; the Export environmental and decommissioning activity in line with the
Refinancing Facility; and the Local Currency Finance Scheme. “polluter pays” principle.
Under the Direct Lending Scheme, UKEF provides export credit In broader terms, the UK project finance market in the oil and gas
loans up to £3 billion (as the fund currently stands, though as sector has not been immune to the effects of global trends. The
explained above, this figure is expected to rise to £5 billion by 2022) “new normal” of low commodity prices since 2016, for example,
in aggregate to overseas buyers to finance the purchase of capital has depressed capital investment in oil and gas projects in the UK.
goods and/or services, from exporters carrying on business in the Exploration and production companies are keeping tight budgets,
UK. Loans can be made in sterling, US dollars, euros or Japanese and pressures on margins persist (according to Oil & Gas UK’s 2019
yen. The Export Refinancing Facility is available to banks funding Business Outlook). However, there is also cautious optimism in the
non-sterling buyer credit loans, typically with values above £50 market. Total production (including both oil and gas production)
million that are intended to be refinanced through the debt capital levels are now at their highest levels since 2011 (up 4% in 2018
markets or other commercial loans. The Export Refinancing compared to 2017 and 20% higher than 2014 levels), competition is
Facility aims to boost trade by ensuring that long-term funding is creating cost savings and, despite tight budgets, exploration is
available to overseas buyers of British exports supported by UKEF. gaining traction – particularly with regard to the UK Continental
UKEF has also introduced a Local Currency Finance Scheme. Shelf. In 2017 and 2018, 12 and five (respectively) new field start-
Under this scheme, UKEF can guarantee a credit loan given to an ups were approved, ensuring solid (albeit not spectacular)
overseas borrower in a local currency (it supports around 40 opportunities for future investment.
different currencies), provided the loan is used to purchase capital
The UK’s current electricity mix has changed substantially, and
goods/services from an exporter operating in the UK. Local
rapidly, over the past couple of years. Most notable is an increase in
Currency Financing is particularly useful for reducing foreign
renewable-generated electricity (a trend in line with global
currency risk and variable debt costs where a project does not
patterns). In Q2 of 2018, 31.7% of UK electricity generation came
generate revenues in a foreign currency. As already touched upon,
from renewable sources, and only 1.3% from coal-fired power
the 2016 Referendum result and the UK’s anticipated exit from the
stations (compared to 40% in 2012). Indeed, for two days over 2018
EU has also precipitated a change in UKEF’s work. In addition to
the UK’s electricity was not generated by coal-fired power at all
increased funds for investment, the way UKEF partners with other
(this is the first time this has happened for over a century). Such
institutions has been widened and made more flexible. Whereas
achievements were to a substantial extent reliant on the especially
previously UKEF would establish a panel of invited lending
windy conditions the UK has experienced over the past year; wind
partners to assist its investments, UKEF now has freedom to partner
farms contributed the most to the renewable energy percentage,
with any bank or institution to deliver its direct lending support,
generating 9.5 terawatt hours of power over the year (49.2%). Solar
provided certain criteria are met.
farms, too, contributed a sizeable proportion of the renewable
The Spring Statement (14 March 2019) delivered further arrows to energy percentage – 5.2 terawatt hours (27.1%), representing a new
UKEF’s bow. A new ‘General Export Facility’ has been announced, record of solar generation. Biomass plants contributed 20.8%, and
with the stated aim of allowing a wider range of exporters to access hydro plants a further 2.9% of the renewable energy portion.
UKEF support. It will allow ‘UKEF to support exporters’ overall
The UK Government’s energy and climate change goals are to
working capital requirements, rather than linking support to specific
deliver secure energy and a sustainable low-carbon future. This is
export contracts’ (HM Government press release: New measures to
driven by the need, by 2050, for an 80% reduction in carbon
enhance UKEF support for UK exporters announced in Spring
emissions (across the economy) as against 1990 levels and, by 2020,
Statement).
to achieve the legally binding EU target of sourcing 15% of the
The energy markets UK’s energy from renewable sources (not including nuclear power).
The UK’s energy sector continues to undergo significant change. To allay fears that this target would be lost on the UK’s exit from the
The 2009 Renewable Energy Directive set a target for the UK to EU, in June 2016, the Conservative Government announced the
achieve 15% of its energy consumption from renewable sources by ambitious (but legally binding) target of reducing carbon emissions
2020. by 57% by 2030. Such targets are informed by the UK’s need of
To bolster the UK’s efforts in achieving this, the Energy Act 2013 developing approximately 59GW new net capacity by 2025, with as
implements key aspects of Electricity Market Reform (“EMR”) – a much as 33GW coming from renewables and the remaining 26GW
policy initiative pioneered by the UK Government to mobilise £110 coming from conventional thermal power. In an effort to promote
billion (approximately US$175 billion) of capital investment private investment in the development of large-scale infrastructure
required by 2020 to ensure a reliable and diverse supply of low- projects (and in particular, the development of low-carbon
carbon electricity. Such reforms are vital, as the UK has seen technology) in the UK, the UK Government has instituted a series of
significant power plant closures in recent years – the Act was aimed programmes that are specifically designed to stabilise the
at ensuring both investment in infrastructure, alongside economics of financing for such projects.
decarbonisation as more power plants are decommissioned in the

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The UK Government has, however, continued investment in new ■ Hornsea One, a 1.2 GW offshore wind farm on the Yorkshire
nuclear, and displayed a firm commitment to the role it should play coast. The project is owned by Danish renewable energy
in the UK’s future energy mix. In Q2 of 2018, nuclear generation company Ørsted, and is anticipated as the world’s largest
accounted for 21.7% of total electricity generated in that quarter. offshore wind farm. The project began supplying energy to
the UK grid in February 2019, and full completion of the
England & Wales

This is based on nuclear power being low-carbon, affordable,

project is expected in 2020.
dependable, safe and capable of increasing the diversity of energy
supply. The UK Government’s support echoes similar pro-nuclear ■ Beatrice Offshore Wind Farm in Scotland’s Moray Firth,
political decisions in other jurisdictions, notably the UAE and which is set for completion in 2019. The project is owned by
SSE, Copenhagen Infrastructure Partners, and Red Rock
Turkey. The events at Fukushima, Japan (March 2011) did not
Power Limited.
result in a reversal of this policy, unlike the nuclear phase-out
■ 714 MW East Anglia ONE project in the North Sea will start
announced by Germany and the cancellation of a new-build nuclear
generating power in 2019, and is expected to be fully
programme in Italy. Although the UK Government emphasises that
operational by 2020. The project is owned by ScottishPower
it will be for energy companies to fund, develop and build new Renewables, a subsidiary of Spanish energy company
nuclear power stations in the UK, including meeting the full costs of Iberdrola Renovables, and Swedish company Vattenfall Wind
decommissioning and their full share of waste management and Power.
disposal costs, the Office for Nuclear Development (within the
Offshore wind is anticipated to generate over a third of the UK’s
Department for Business, Energy and Industrial Strategy) is taking
electricity needs, attracting $48 billion in investment, and
active steps to establish and cement the right framework and
employing 27,000 people. The British government has put a fund of
conditions in the UK for investment in new nuclear power stations,
£557 million aside for subsidies for renewable energy, of which a
with the aim of having new nuclear projects generating electricity
sizeable amount is expected to be granted to offshore wind farms.
from around 2020.
Transformation of the UK electricity market
The UK Government’s strong support for nuclear power was shown
in December 2017, when it announced that the UK had the potential From a policy perspective, the Infrastructure Act 2015, the UK
to become a world leader in developing the next generation of Government introduced the UK Guarantee Scheme, which is a
nuclear technologies, with a suite of policy focuses published as mechanism that aims to enhance liquidity to ensure that investment
well. Current policy emphasises establishing a healthy market in in nationally significant and financially credible infrastructure
which plants can come online, whilst also fostering the development projects does not stall due to adverse credit conditions. It works by
of new nuclear technologies. The government has announced that offering a government-backed guarantee to help infrastructure
funding would be available until 2020 to support research and projects access debt finance where they have been unable to raise
development into innovative advanced and small modular reactors, finance in the markets. The UKGS can issue up to £40 billion of
as well as to assess their feasibility and accelerate the development guarantees and is open to at least 2026. To date, it has issued nine
of promising designs. In fact, as of July 2018, the UK market was guarantees totalling £1.8 billion of Treasury-backed infrastructure
dominated by the following developments in the nuclear sector: bonds and loans, supporting over $4 billion worth of investment.
■ Hinkley Point C is under construction and planned to come In addition, the Energy Act 2013 was aimed at bringing about a
online in 2025 (EDF and CGN (as NNB Generation “once-in-a-generation transformation” of the UK electricity market,
Company (NNBG)) are currently constructing two EPRs (a and has had significant implications for the economics of investing
type of reactor) at Hinkley Point C (3.2 GW)); in low-carbon generating technologies. EMR is the UK
■ EDF and CGN also intend to construct two further EPRs at Government’s key policy mechanism for ensuring security of
Sizewell (3.2 GW); energy supply through the development of low-carbon technology.
■ Horizon Nuclear Power, owned by Hitachi-GE Nuclear The key policy measure to incentivise new low-carbon electricity
Energy Ltd, intends to build two advanced boiling water generation is the provision of the contract for difference (“CfD”)
reactors (ABWRs) at each of its sites in Wylfa and Oldbury instrument, where a low carbon electricity generator and the Low
(2.7 GW each); and Carbon Contracts Company (“LCCC” – a government owned
■ NuGen has proposed to build up to 3.8 GW of nuclear power limited company) enter into a contract that ultimately protects
generation at Moorside, Sellafield. consumers from high costs and gives greater certainty of revenues to
It should be noted, however, that both the NuGen project and the electricity generators.
Horizon Nuclear Power plant have been stalled: in late 2018, The provision of CfDs is intended to stabilise revenues for investors
Toshiba announced it was withdrawing from the project and in low-carbon electricity generation projects such as nuclear (and
winding up its NuGeneration subsidiary, and in January 2019 renewables) by helping developers secure the large upfront capital
Hitachi decided not to pursue its plans for the Wylfa and Olbury costs for low-carbon infrastructure. However, the long planning
plants. horizon for nuclear new-build projects and massive capital
In addition, the prospect of leaving the Euratom Community upon requirements pose substantial financial risks to nuclear power
‘Brexit’ means that the UK must establish appropriate measures to sponsors and investors. In the US, it was determined that US
ensure continued cooperation with, and adherence to, European Government guarantees were necessary in order for new-build
nuclear standards and agencies. Treatment of the UK’s nuclear nuclear projects to be commercially viable. In October 2016, the
sector remains an area of particular contention in the British press UK Government confirmed that it had provided a government
during negotiations with the European Union, and what the outcome guarantee to EDF (France) to assist in bringing forward their
of ‘Brexit’ will mean for the everyday running and operation of the investment in Hinkley Point C, the Somerset nuclear power plant. It
sector (and the plants that make it up) remains to be seen. has provided a guarantee for up to £2 billion that will be available
from 2018 to 2020, if necessary conditions are met.
Wind projects in the United Kingdom are expected to make up for
the shortfall in low-carbon energy production resulting from the The CfD is a quasi-power purchase agreement: generators with a
stalled nuclear projects. Notable wind projects anticipated in 2019 CfD will sell their electricity into the market in the normal way, and
include the following: remain active participants in the wholesale electricity market. The
CfD then pays the difference between an estimate of the market

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Milbank LLP England & Wales

price for electricity and an estimate of the long-term price needed to Government stated it was “confident” that the Total Carbon Price is
bring forward investment in a given technology (the strike price). set at the right level, and will continue to target a similar total carbon
This means that when a generator sells its power, if the market price price until unabated coal is no longer used. The European
is lower than needed to reward investment, the CfD pays a “top-up”. Commission considered, but ultimately rejected, a similar system to

England & Wales

However, if the market price is higher than needed to reward reform the EU ETS.
investment, the contract obliges the generator to pay back the In the 2018 budget, the UK Government announced the removal of
difference. In this way, CfDs stabilise returns for generators at a Enhanced Capital Allowances (ECAs) and First Year Tax Credits for
fixed level, over the duration of the contract. This mitigates the technologies on the Energy Technology List as of April 2020.
generator’s long-term exposure to electricity price volatility, Savings generated from this will be reinvested in a newly-
substantially reducing the commercial risks faced by these projects. established Industrial Energy Transformation Fund, which, backed
The Energy Act 2013 includes a provision whereby the LCCC will by £315 million of investment, aims to aid businesses with high
act as the counterparty to eligible generators under the CfD. This energy use to decrease their energy bills and transition UK industry
mechanism was in direct response to concerns about the “credit” into a low-carbon, energy-efficient future.
behind the CfD economics. Although a CfD is a private law
Regulatory framework
contract between a low-carbon electricity generator and the LCCC,
the cost of CfDs will ultimately be met by consumers via a levy on The Office of Nuclear Development has focused on taking actions
electricity suppliers. which are aimed at reducing regulatory and planning risks for
investors. A planning regime has been proposed to aid the
The first CfD auction in January 2015 was a success, with a
installation of nuclear reactors, including – following public
competitive allocation process, and the cost was £105 million less
consultation – identifying sites for new nuclear power stations to be
than the original strike prices published for the same technologies.
built by the end of 2025. The UK Government legislated in the
It was a similar story for the Capacity Market auction, where the
Energy Act 2008 to ensure that operators of new nuclear power
first auction procured capacity at almost half the expected clearing
stations will have secure financing arrangements in place to meet
price. However, following the May 2015 General Election, there
the full costs of decommissioning and their full share of waste
has been a decrease in pace in implementing the CfD and Capacity
management and disposal. The Energy Act 2013 also introduced
Market measures, which, in turn, created uncertainty for EMR. In
measures to create a new independent statutory body, the Office for
July 2015, the Department of Energy and Climate Change (now the
Nuclear Regulation (“ONR”), to regulate the nuclear power
Department for Business, Energy & Industrial Strategy) confirmed
industry. The ONR and the Environment Agency are together
the postponement of the next CfD auction round, and, subsequently,
undertaking a process of Generic Design Assessment (“GDA”) of
in November 2015, the Secretary of State for Energy and Climate
new nuclear designs, which allows the safety, security and
Change confirmed that the delayed October 2015 CfD auction
environmental implications of new nuclear reactor designs to be
would not take place until the end of 2016. This postponement was
assessed before an application is made for a licence and permissions
partly caused by the UK Government’s attempts to rein in the costs
are granted to a particular design of reactor on a particular site. In
of supporting low-carbon electricity generation. Recently, however,
late December 2017, the Hitachi-GE UK Advanced Boiling Water
the UK Government’s commitment to the CfD auction programme
Reactor (UK ABWR) was granted approval, and confirmed as
has been renewed. There was a successful round in 2017 (where
suitable for construction in the UK. The completion of this step is a
two offshore wind projects were awarded CfDs at £57.50 MWh),
significant one in the overall process to construct a new type of
and a third round is planned for spring 2019, where up to £557
reactor in the UK.
million will be made available for investment.
Shale gas
The BEIS announced a new round of CfD auctions for renewable
energy projects to take place as of 29 May 2019. The upcoming Shale gas fracking remains an area of great interest and potential
auctions will include remote island wind schemes off the coast of within the UK – the British Geological Survey estimates that there
Scotland. could be up to 1,300 billion cubic feet of shale gas in the north of
England (primarily in the Bowland shale beneath Manchester,
These results and plans are consistent with the UK’s new “Clean
Liverpool and Blackpool) – equivalent to approximately 50 years of
Growth Strategy”, announced in October 2017 and based on the
UK gas consumption. Further reserves are likely to exist in central
Climate Change Act 2008. This strategy confirms a commitment to
and southern England. In December 2013, the UK Government’s
cut greenhouse gas emissions, achieve clean growth, but also ensure
Department of Energy and Climate Change (now the Department
that businesses and consumers have affordable energy. Practical
for Business, Energy & Industrial Strategy) reported that up to half
measures under the Strategy include providing £20 million to
of the UK’s land area might be suitable for fracking, including as yet
support a new clean technology early stage investment fund.
unexplored deposits throughout much of eastern and southern
Amongst other EMR policies was the establishment of a carbon England. US energy costs (partly as a result of significant
price floor introduced on 1 April 2013, with the aim of encouraging investment by oil and gas buyers in US shale gas development) are
additional investment in low-carbon power generation by providing currently one-third of those of Western Europe – a major issue for
greater support and certainty to the carbon price. Supplies of fossil European exporters.
fuels used in most forms of electricity generation became subject to
While UK shale oil is still in the early stages of exploration in the
either the climate change levy (“CCL”) or fuel duty from that date.
UK, the industry won an important victory in 2016 when the
Such supplies are charged at the relevant carbon price support rate,
government overturned local council objections to a fracking
depending on the type of fossil fuel used, which will be determined
scheme in Lancashire. Scientists from the British Geological
by the average carbon content of each fossil fuel. The carbon price
Survey (BGS) have estimated that the total volume of gas in the
support rates would reflect the differential between the future
Bowland-Hodder shale in northern England is approximately 1,300
market price of carbon and the floor price determined by the UK
trillion cubic feet.
Government. Until 2020, the CPF is frozen at £18 per tonne of
CO2. There have been repeated calls for longer-term clarity on In April 2015 and following the introduction of the Energy Act
carbon pricing and the CPF. In the 2017 Autumn Budget, the 2016, certain functions passed from the Department of Energy and
Climate Change (now the Department for Business, Energy &

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Industrial Strategy) to the OGA, a newly created executive agency. substantially weakened following the vote and has hit new lows in
Following this change, the process of obtaining consent to drill a the subsequent three years since the vote), and a restriction to the
well is the same irrespective of whether the well drills for credit markets both negatively impacted on the UK project finance
conventional or unconventional gas: operators bid for exclusive market. In particular, the vote creates uncertainty over the
England & Wales

rights to an area in competitive licence rounds. The operator then continued access of the UK to European Investment Bank Funding,
needs landowner and planning permission, which may require an which up to the vote had been an important source of funding for
environmental impact assessment. smaller-scale UK projects (in 2015, for example, the EIB provided
On 16 July 2015, the UK Government laid draft regulations that £5.6 billion for 40 different projects, amounting to approximately
defined the protected areas in which hydraulic fracturing will be one-third of total investment in UK infrastructure). At high level,
prohibited. The draft regulations ensure that the process of the position appears to be that the UK can no longer be a member of
hydraulic fracturing can only take place below 1,200 metres in the EIB if it is not also an EU Member State. This means that any
specified groundwater areas outside National Parks, Areas of future relationship the UK has with the EIB will likely be with the
Outstanding Natural Beauty and World Heritage Sites. UK as a third country. Nevertheless, the Government has not made
any public statement about the intended future relationship with the
Fracking remains a controversial issue in the UK, however. In
EIB. In late January 2019, the European Union Committee in the
March 2018, the application by Ineos to explore for shale gas in
House of Lords published a paper analysing the impact of Brexit on
South Yorkshire was rejected by local councillors, raising the
the UK’s relationship with the European Investment Bank, in which
cumulative total of planning rejections against fracking companies
they criticise the Government’s silence on the issue. The report also
to seven in 2018 alone (mainly focused around the Midlands and the
highlights the monetary cost of leaving the EIB: it is envisaged that
north of England). Interestingly, some of the rejections came from
despite the UK receiving its €3.5 billion capital investment in the
Conservative councils, despite the Conservative Government’s
EIB back over 12 years, the UK will not receive any share of the
Manifesto promise of developing a shale gas industry in the UK (the
profits, interest or dividends that the EIB has accumulated.
Labour Party, on the other hand, is anti-fracking).
Additionally, the Committee worried that losing access to the EIB
The United Kingdom Onshore Oil & Gas industry group forecasts translates into losing access to cheaper and longer-term loans than
that fracking has the capacity to eliminate Britain’s need to import those commercial lenders can provide. The sector awaits more
gas by the early 2030s. clarity on the Government’s position on this issue.
However, current regulations require fracking activities to come to a During any possible transition period, it is likely that the UK will
halt if seismic events of 0.5 or above in magnitude are detected. continue to be subject to EU procurement directives (such as the
Cuadrilla, for instance, had to halt its activities several times in 2018. Public Contracts Regulations 2015 SI 2015/102). This means that
Industry stakeholders have called the regulations unworkable and, as organisations under the rules must continue advertising and
a result, believe the fracking industry is unlikely to develop awarding public contracts in accordance with the EU directives. It
significantly – particularly as the British government has no plans to is unclear what the position will be regarding procurement post-exit
review the regulations. Protests and slow, costly planning permission and post-transition period, but it is likely that Parliament will not
processes have further impeded growth of the shale gas industry. repeal the relevant legislation unless a pressing need arises. If the
Brexit negotiations and the EU Withdrawal Bill UK seeks to retain membership of the European Single Market, it
In June 2016, the UK voted to leave the European Union. Since would have to continue to apply all EU public procurement
then, the Conservative Government has been negotiating with the directives.
European Union, and has tabled a bill, “the EU Withdrawal Bill” It has been suggested in the legal press that there are reasons for
that will replace the European Communities Act 1972 and make optimism regarding government liquidity support for projects post-
other provisions in connection with the withdrawal of the United Brexit such as the adoption of a looser monetary policy in the UK or
Kingdom from the EU. It is the primary piece of legislation that will potential policies to stimulate the economy via investment in
determine the UK’s position vis-à-vis current EU legislation post- infrastructure. Standard and Poors have commented that private
exit. It also aims to remove the jurisdiction of the European Court finance initiatives should maintain their credit strength. They have
of Justice over UK courts. It will transfer all current EU law into also noticed that in the short term, projects have benefitted from the
UK domestic law, so that as smooth a transition as possible is higher inflationary environment. On the other hand, five project
achieved in the immediate aftermath of exiting the EU. It is seen as financings have been downgraded from stable to negative (for
“one of the largest legislative projects ever undertaken in the UK” example, Alpha Schools (Highland) Project, Aspire Defence
by the House of Commons library. It precipitates an examination of Finance PLC and Consort Healthcare (Salford) PLC).
“major swathes of the statute book”. As such, it is a highly
contentious piece of legislation.
1.2 What are the most significant project financings that
At the time of writing (late March 2019), it is clear that the original have taken place in your jurisdiction in recent years?
date on which the UK was planned to exit the EU (29 March) will
not be met. The Conservative Government, following nearly Notable recent project finance deals include the Hinkley Point C
unprecedented margins of defeat over the Withdrawal Bill, Project in Somerset, the Moray East Offshore Wind Farm project,
requested an extension to the negotiation period warranted by the Beatrice Offshore Wind Farm project, the Triton Knoll Offshore
Article 50 to 12 April 2019. Under the terms of such extension, the Wind Farm project, the £2.2 million Thames Tideway Tunnel
Conservative Government must come to the EU with a clear plan of project, the Galloper Offshore Wind Farm, the £6.5 billion
next steps before 12 April. If the UK is still a member of the EU on Thameslink Project, and the Intercity Express Programme Phase 1
23–26 May 2019, the UK must take part in elections to the European public-private partnership (“PPP”) refinancing.
Parliament. A variety of different, often mutually exclusive, ways
The British government seeks to encourage low-carbon energy
forward are on the table.
generation – particularly via the construction of offshore wind farms
Brexit’s effects on the project finance market are both general and – through Contracts for Difference, for which up to £557 million of
specific. In general terms, currency exchange volatility (the pound government funding is available. One such wind farm is the Walney

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Milbank LLP England & Wales

Extension, a 659 MW offshore wind farm owned by Ørsted, PKA The main types of securities under English law are mortgages
and PFA adjacent to the 367 MW Walney project off the coast of (equitable and legal), charges (fixed and floating), assignments
Cumbria. The Walney Extension became operational in 2018 and (broadly equivalent to charges), pledges and liens. Mortgages,
received government funding through a Contract for Difference charges and assignments are the most frequently used forms of

England & Wales

awarded in 2014. It is hoped that such government support will security. Assignments may be legal or equitable; the process for
enable the private sector to produce up to 2 GW of new offshore enforcement of the two types of security differs. A debenture will
wind capacity each year as of 2020. include a range of mortgages, charges and assignments depending
As part of the National Grid’s £750 million investment in London’s on the nature of the security assets.
electricity networks, London Power Tunnels is building a new English law differentiates between legal and equitable interests in
network of cable tunnels in and around the capital. Phase 1 of the assets (including security interests) and, in particular, as regards
project sought to replace dated energy circuits and make land and shares.
maintenance more efficient and less disruptive to road users and was It is possible, in theory, to create security orally (unless it relates to
completed in February 2018. Phase 2 will begin in mid-2019, and land) but, in practice, security is always documented. There is no
will entail adding over 30km of tunnels between Wimbledon and prescribed procedure or form of document required to create
Crayford. security (but see question 2.2 below regarding registration).
The Thames Tideway Tunnel is a major infrastructure project A legal assignment of an asset must comply with section 136 of the
aiming to upgrade London’s sewerage system in order to meet the Law of Property Act 1925. If the secured lender wishes to implement
future needs of the city. Construction began in 2017, and tunnelling a legal assignment of rights by way of security, then section 136 sets
will begin in 2019. The Tunnel construction will employ over 4,000 out the procedure. A legal assignment must be in writing and signed by
people directly with several thousand more jobs in the supply chain the assignor, be absolute (meaning that the assignee has the entire right
and wider economy. It will also bring other regeneration benefits to the benefit in the action) and not be set out to be by way of charge
such as lifting constraints on future housing and other only, and any third parties against whom the assignor could enforce the
developments. 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
2 Security 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
2.1 Is it possible to give asset security by means of a assignments. If the requirements under section 136 are not met, the
general security agreement or is an agreement assignee has an equitable assignment, which does not grant the right to
required in relation to each type of asset? Briefly, sue the third party in its own name. Assignments of future contracts
what is the procedure? can only be by way of equitable assignment.
Other securities, such as a charge and a mortgage, require evidence
In domestic UK project financings, the intention of the parties (and in writing, which can be effected by means of a debenture.
the usual requirement of all types of lenders) is to create security Debentures can create legal mortgages and fixed and floating
over all, or substantially all, a project company’s assets. Project charges over all the borrower’s assets, if agreed, and as set out in the
finance borrowing vehicles are normally special purpose vehicles or debenture. The debenture is executed as a deed.
“SPVs” with no pre-existing businesses, rights or liabilities beyond
those associated with the project.
2.2 Can security be taken over real property (land), plant,
Security is normally granted by way of a general security
machinery and equipment (e.g. pipeline, whether
agreement, such as a debenture, which covers all the SPV’s rights underground or overground)? Briefly, what is the
and assets (both pre-existing and after-acquired) or (less commonly) procedure?
by way of separate security agreements for each type of asset.
More often than not, lenders will look to achieve “going concern” Security is usually taken over real estate by way of a legal mortgage
security on a UK-based project or asset. This is aimed at putting over (ideally) a freehold title, or by the creation (or assignment) of a
them in a position of default, stepping in if necessary and operating leasehold interest. Security over moveables is normally effected by
(or selling) the relevant asset as a going concern. Basic legal way of a fixed charge over plant, machinery and equipment. Plant
security is normally insufficient to achieve this type of outcome; and machinery which is fixed to land is normally deemed to be part
conventional legal security is often supplemented by bespoke of that land; pipes and cables can in certain circumstances also
contractual arrangements providing lenders with specific notice, constitute fixtures. The depreciation position differs between
“cure” and “step-in” rights. “fixtures” (which effectively become part of the land or property to
Where (as is very often the case) the viability of a project as a going which they are affixed) and moveables or “chattels” – so fully
concern is dependent upon the continuing availability to an operator analysing the legal standing of an asset is important. Complications
or owner of permits and licences, special attention will need to be arise over the creation of security over assets located on the
paid to the consequences of default in the wider sense – by way of foreshore or in international waters.
example, breach of licence conditions or change of control can The following are the main types of security which require
result in permits and licences being breached and/or becoming registration:
terminable. Certain types of licences and permits are, in effect, ■ company charges;
personal to the initial licence-holder; contractual rights can be
■ mortgages and charges over interests in land;
expressed to be non-assignable in the absence of consents. A careful
■ security over certain IP rights; and
analysis of the regulatory and practical conditions applicable to the
application for, and maintenance of, permits, licences and key ■ security over ships and aircraft.
contracts is necessary and will differ on a case-by-case basis. Registration is important for the chargee to secure its priority rights
and ranking in case of the chargor’s insolvency.

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The procedure is the same as set out above, namely by agreeing the charge is often used as an alternative form of security. This form of
terms and conditions and setting these out in a debenture. In order security enables the chargee to take security without unduly
to perfect a legal mortgage and a fixed charge following the restricting or affecting the chargor’s ability to carry on its business
execution of the debenture, the security has to be registered. by dealing pre-default with its receivables as if no security had been
England & Wales

Under the Companies Act 2006, a company must register details of created. The formalities for this form of security are fewer but
any security it grants (subject to some exceptions) at Companies floating charges rank behind fixed charges in terms of priority, and
House within 21 days of the date of creation of the security. Failure the proceeds of floating charge enforcement are subject to certain
to register will result in the security becoming void against an other prior ranking claims.
insolvency officer, appointed in respect of the chargor and against The new law, the Business Contract Terms (Assignment of
any creditor. Separate registrations regarding security over land and Receivables) Regulations 2017, applies to contracts governed by
real estate interests will be required at the Land Registry or at the English law and invalidates a clause which purports to prohibit the
Land Charges Department. Note that security over intellectual assignment of a receivable.
property may also be subject to separate registration procedures (for
example, at the Trade Marks Registry).
2.5 Can security be taken over shares in companies
incorporated in your jurisdiction? Are the shares in
2.3 Can security be taken over receivables where the certificated form? Briefly, what is the procedure?
chargor is free to collect the receivables in the
absence of a default and the debtors are not notified Security over shares in companies incorporated in England and
of the security? Briefly, what is the procedure? Wales can either be taken by way of legal mortgage, or by way of
charge over the shares (an equitable mortgage or charge). The
Security over receivables is normally taken by way of assignment. governing law of the mortgage should always be English law. The
Fixed charges over receivables or bank accounts require the secured convention in English law financings for security over shares in the
lender to control both the receivables and the account into which they context of projects is for security to be effected by way of equitable
are paid when collected; this is almost always impossible as a charge; lenders will always (subject to very limited exceptions)
practical matter in the context of a typical project. Security over resist becoming shareholders of record in an SPV or project vehicle
receivables can also be taken by way of a floating charge, but the for a wide range of reasons, including incurring shareholder
practical value of a floating charge (which “fixes” on the assets it liabilities and reputational risk. Equitable share charges are
covers only on the occurrence of a crystallisation event) to a lender in normally protected by means of a power of attorney in favour of an
terms of asset security may be limited. If the benefit of the receivables agent or trustee for the lenders, enabling the lenders to take a legal
is assigned to the lender, then, in order to achieve a legal assignment transfer of shares if default occurs, where absolutely necessary.
under section 136 of the Law of Property Act 1925, notice in writing In the ordinary course of events, secured lenders will normally be
of the assignment must be served on the account debtors – often happy for the sponsors/relevant chargors to retain legal title to
impracticable where there are a wide range of debtors. shares until an Event of Default and/or enforcement event occurs.
As it may be impractical to serve notice or to impose a high degree A legal mortgage of shares involves the transfer of the relevant
of control on this asset class, an equitable assignment or floating shares in the company to the lender from the outset, subject to an
charge is often used as an alternative form of security. This form of agreement for their re-transfer once the secured debt is repaid. The
security enables the chargee to take security without unduly lender will be registered in the company’s register of members as a
restricting or affecting the chargor’s ability to carry on its business, fully entitled shareholder of the company, and not just as a
by dealing pre-default with its receivables as if no security had been mortgagee. As a result, the transfer will operate so as to give the
created. The formalities for this form of security are fewer but lender all the rights of a shareholder. While the lender is registered
floating charges rank behind fixed charges in terms of priority, and as a shareholder, it will receive all dividends and any other money or
the proceeds of floating charge enforcement are subject to certain assets paid in relation to the shares, and will be entitled to vote as a
other prior ranking claims. shareholder.
With an equitable mortgage or charge of shares, the chargor remains
2.4 Can security be taken over cash deposited in bank as a registered shareholder and retains legal title to the shares,
accounts? Briefly, what is the procedure? transferring only its beneficial interest to the lender. The chargor
will normally be required to lodge its share certificates and stock
Project financings will invariably establish a strict regime in relation transfer forms with the lender, on the basis that the stock transfer
to the project’s cash flows – this will require revenues to be paid into forms can be completed by the lender (in favour of itself or a
dedicated accounts held by pre-agreed account banks and will set nominee) if an Event of Default or enforcement event occurs.
out clear rules on the priority of application of available cash (the Voting rights and the right to receive dividends will normally remain
Cash Flow Waterfall). A typical project account or account bank with the chargor until an Event of Default occurs.
agreement will establish strict rules as to permitted withdrawals
The CREST system allows CREST members to grant legal and
from those accounts.
equitable mortgages over their shares held in CREST.
Withdrawals will cease to be permitted upon the occurrence of an
actual or potential Event of Default. Any withdrawal which is not
2.6 What are the notarisation, registration, stamp duty
permitted under the relevant accounts or account bank agreement
and other fees (whether related to property value or
will trigger default; default will permit the lenders to enforce otherwise) in relation to security over different types
security. In the context of receivables and bank accounts, this will of assets (in particular, shares, real estate,
include transferring to the lenders full control over receivables and receivables and chattels)?
accounts.
As it may be impractical to serve notice or to impose a high degree A nominal fee is payable to Companies House on registration of
of control on this asset class, an equitable assignment or floating security by a company. The fee does not vary according to the class

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of asset or type of security. Separate registration is required for each

security document. The fee is currently £23 for registering a 2.8 Are any regulatory or similar consents required with
security document using the paper filing process, and £15 for using respect to the creation of security over real property
(land), plant, machinery and equipment (e.g. pipeline,
the electronic filing process. whether underground or overground), etc.?

England & Wales

Additional fees are also payable for registration to the Land Registry
or Land Charges Department as regards security over land. These Subject to limited exceptions in relation to certain types of UK
fees are registration fees and will not usually be significant in the Government-owned, strategic and regulated assets, no regulatory or
context of the overall transaction. No stamp duty is payable on the similar consents are required in relation to most land and real estate
registration of security. rights or in relation to most types of privately held assets. Specific
legal regimes apply, however, to different types of regulated assets –
2.7 Do the filing, notification or registration requirements for example, certain types of governmental assets (in particular,
in relation to security over different types of assets those associated with defence), nuclear generation, nuclear fuel
involve a significant amount of time or expense? production and reprocessing plants and related sites and certain
assets vested in specific types of privatised businesses (for example,
Registration with Companies House requires the completion of a water and transmission businesses). In addition, licences granted by
specified form and must be undertaken within 21 days of the Ofgem (the gas and electricity regulator in England and Wales),
creation of the security, or it will be void on insolvency and against regulatory authorities in relation to exploration for and development
other creditors. of hydrocarbon assets or the Financial Conduct Authority, may
Companies House is not responsible for inaccuracies in the affect the granting of any mortgage, charge or other form of security
registered particulars (acceptance of the particulars does not over an asset. The consent of Ofwat (the regulator of the water and
guarantee their accuracy). Inaccuracies in the registered particulars sewage industry in England and Wales) may also be required under
can have serious consequences as regards priority and effective the instruments of appointment by the Secretary of State for the
registration. Responsibility for ensuring the accuracy of the Environment for water and sewerage, undertaken under the Water
registered particulars lies with the presenter (in practice, the chargee Act 1989.
or its advisors). The 21-day period includes bank holidays and
weekends and does not stop running if the Companies House 3 Security Trustee
registrar identifies a defect and returns the registration form for
correction. As a result, in the context of complicated security
documents, it is essential to draft and agree the registration 3.1 Regardless of whether your jurisdiction recognises
particulars in advance of financial close. If necessary, these the concept of a “trust”, will it recognise the role of a
particulars can be pre-agreed with Companies House to reduce the security trustee or agent and allow the security
risk of rejection and the loss of time (and priority). trustee or agent (rather than each lender acting
separately) to enforce the security and to apply the
Charges over certain assets, such as land, intellectual property proceeds from the security to the claims of all the
rights, ships and aircraft, need to be registered at other specialist lenders?
registries related to the asset in question, as well as at Companies
House. England and Wales fully recognise the concept of trusts. Trusts are
On 6 April 2013, a new regime for the registration of security came normally used to create beneficial interests in assets which may
into force via the Companies Act (Amendment of Part 25) differ from the strict legal ownership of those assets. Trust deeds are
Regulations 2013 No. 600. This regime is intended to streamline often used alongside debentures in England and Wales to create and
existing procedures and to reduce uncertainty over registration. regulate the holding of security over assets.
Principal features of the new registration regime include: The creation of a trust by a borrower will normally involve the
■ Scope of charges covered: All charges created by a company conveyance by the borrower to a trustee (usually a trust corporation
are registrable except for a narrow range of excluded items. – either an eligible financial institution or a specialist trust company
The company and any person “with an interest in the charge” such as any Law Debenture or Banker’s Trust) who may hold the
is entitled to register the charge. security for the benefit of itself, the other secured lenders in the
■ “Voluntary” registration: Failure to register security is no transaction and (on a residual basis) for the borrower itself. English
longer a criminal offence. However, commercial sanctions law trusts are normally long-term arrangements; beneficial
for non-registration (whereby non-registered security ownership remains with the secured party so the trust assets do not
becomes void against a liquidator, administrator or creditor fall within the trustee’s estate if the trustee becomes insolvent.
and any secured debt becomes immediately re-payable)
continue to apply. Security should still be registered within
the 21-day window. 3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available
■ Filing, e-filing and statements of particulars: Persons
(such as a parallel debt or joint and several creditor
wishing to register security have the option of registering via
status) to achieve the effect referred to above which
an electronic filing system. Under this system, a statement of
would allow one party (either the security trustee or
particulars must be filed online together with a certified copy the facility agent) to enforce claims on behalf of all the
of the charging document. The entire charging document is lenders so that individual lenders do not need to
available to view online, although certain personal enforce their security separately?
information (such as bank account details) can be redacted.
There is no longer any need to send an original charging
document to Companies House. This is not applicable in our jurisdiction. See question 3.1 above.

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4 Enforcement of Security 5 Bankruptcy and Restructuring

Proceedings
4.1 Are there any significant restrictions which may
England & Wales

impact the timing and value of enforcement, such as 5.1 How does a bankruptcy proceeding in respect of the
(a) a requirement for a public auction or the project company affect the ability of a project lender
availability of court blocking procedures to other to enforce its rights as a secured party over the
creditors/the company (or its trustee in security?
bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?
There are different types of insolvency proceedings under English
law:
In general, no. In relation to unregulated assets, there is no
requirement for a public auction following enforcement of security. ■ administration;
It is impossible to exclude the possibility of third parties seeking ■ receivership/administrative receivership;
injunctive relief to prevent enforcement of security or the sale of ■ compulsory liquidation;
secured assets following enforcement, but generally English courts ■ company voluntary arrangements (CVAs); and
will oppose any such proceedings where security was validly given ■ schemes of arrangement.
and (where required) properly registered.
From a lender’s perspective, administration and administrative
The Financial Collateral Arrangements (No. 2) Regulations receivership are the most important regimes.
(“FCA”) came into force in England and Wales in December 2003
in order to implement the Financial Collateral Directive Lenders to a project normally insist on taking security over all, or
(2002/47/EC), with the aim of simplifying the enforcement of substantially all, the Project SPV’s rights and assets. Special rules
security over cash, financial instruments (including shares, bonds apply to security created by “Project Companies” (prior to the
and warrants) and credit claims. Enterprise Act 2002, these rules were capable of applying to all
businesses). An administrative receiver is generally appointed over
The FCA Regulations 2003 were amended by the Financial Collateral the whole of the company’s assets by, or on behalf of, the holders of
Arrangements (No 2) Regulations 2003 (Amendment) Regulations any of the company’s charges which, as created, were floating
2009 (SI 2009/2462) which came into force in October 2009. These charges. Since the coming into force of the Enterprise Act 2002,
amendments provided for changes in the Companies Act. only lenders holding security created before 15 September 2003 are
The FCA Regulations 2003 were further amended by the Financial able to appoint an administrative receiver, subject to certain
Markets and Insolvency (Settlement Finality and Financial exceptions. The key exception in the case of project finance is that
Collateral Arrangements) (Amendment) Regulations 2010 (SI set out under section 72E of the Insolvency Act 1986. Section 72E
2010/2993) (FCA Amendment Regulations 2010). These came into states that the appointment of an administrative receiver by a project
force on 6 April 2011 and included credit claims as financial company is not prevented if the project is a “financed” project and is
collateral. subject to step-in rights. A project is “financed” if, under an
Following the FCA, paragraph 43(2) of Schedule B1 to the agreement relating to the project, a project company incurs (or,
Insolvency Act 1986 will not apply to any security interest created when the agreement is entered into, is expected to incur) a debt of at
or otherwise arising under a financial collateral arrangement. This least £50 million for the purposes of carrying out the project. The
means that neither the consent of the administrator, nor the administrative receiver’s primary duty is to the secured lender who
permission of the court, is required to enforce such a security appointed him, but he is also an agent of the company. If the secured
interest, which would otherwise be applicable when a company is in lender has the highest-priority fixed charge over the company’s
administration or the subject of a company voluntary arrangement. assets, the lender may appoint one or more fixed-charge receivers
over the secured assets. Appointing its own receiver offers the
lender more control over the realisation of the assets.
4.2 Do restrictions apply to foreign investors or creditors
in the event of foreclosure on the project and related Out of court, an administrator can be appointed by the holder of a
companies? “qualifying” floating charge, provided that the charge relates to the
whole or substantially the whole of the company’s assets, and the
“Foreclosure” has a narrower meaning under English law than it company has triggered an Event of Default under the financing
does in the US. documentation. A company need not be insolvent in order for
administration to occur. Once appointed, the administrator owes his
Foreclosure in the context of security over an asset is the process by
duties to all creditors, not only to the project lenders. His primary
which the mortgagor’s rights in the secured asset are extinguished
objective is to rescue the company as a going concern. If a lender
(the mortgagor’s equity of redemption is extinguished), and that
has the right to appoint an administrative receiver (as described
asset becomes bested in the mortgagee.
above), that lender may veto the appointment of the administrator.
The mortgagee could obtain a court order under which it becomes
the owner of the property. A mortgagee’s right to foreclose arises
once the liabilities secured by the mortgage have become repayable. 5.2 Are there any preference periods, clawback rights or
other preferential creditors’ rights (e.g. tax debts,
Even in these circumstances, a mortgagee normally has certain employees’ claims) with respect to the security?
obligations to the mortgagor – including an obligation to obtain a
reasonable price on sale of a mortgaged asset, and (pursuant to the Following the formal insolvency of a company, an administrator or
“equity of redemption”) to return any excess proceeds over the liquidator may challenge transactions entered into by the company
secured debt finalised by it to the mortgagor. In general, under before the start of the relevant insolvency procedure. The period
English law, foreign investors are treated differently from when such transactions are vulnerable to being challenged is known
businesses established in England and Wales in relation to the as a “hardening period”. Such transactions include transactions at an
enforcement of security.

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undervalue, preferences, extortionate credit transactions, avoidance company which can be wound up under the Insolvency Act 1986.
of floating charges and transactions defrauding creditors. The This includes UK-registered companies, unregistered companies
hardening period ranges from two years (transactions at an and foreign companies, provided a sufficient connection with
undervalue) to six months (preferences). England is established. This is a determination on the facts, but the

England & Wales

A creditor with a claim that ranks in priority to other unsecured presence of English law governed debt, often together with English
creditors and (in corporate insolvencies) to floating charge holders creditors or bank accounts, will typically be considered sufficient.
and the prescribed part (Schedule 6 and sections 175, 176, 328, 347
and 386, Insolvency Act 1986) is a preferential creditor. Employees 5.6 Please briefly describe the liabilities of directors (if
are usually the only preferential creditors following the introduction any) for continuing to trade whilst a company is in
of the Enterprise Act 2002 (they will receive wages, holiday pay and financial difficulties in your jurisdiction.
contributions to pensions). In order of priority, a party secured by
way of mortgage or fixed charge will rank ahead of any preferential Under English law, a director will potentially be liable for wrongful
creditors. Preferential creditors are paid from the proceeds of trading if “at some time before the commencement of the winding
floating charges, which are ranked below the fixed-charge creditors up of the company, that [director] knew or ought to have concluded
but above all other unsecured creditors. that there was no reasonable prospect that the company would avoid
going into insolvent liquidation or entering insolvent liquidation”
5.3 Are there any entities that are excluded from (section 214(2), Insolvency Act 1986). A director will have a
bankruptcy proceedings and, if so, what is the defence if, after that director knew or should have concluded that
applicable legislation? there was no reasonable prospect of avoiding an insolvent winding-
up or entering insolvent administration, the director took every step
Private-sector entities incorporated in England and Wales are with a view to minimising the potential loss to the company’s
generally not excluded from bankruptcy proceedings in England creditors which he ought to have taken (section 214(3), Insolvency
and Wales. Act 1986). This will generally give conscientious directors facing
financial difficulties sufficient time to organise a restructuring while
continuing to trade, provided there continues to be a reasonable
5.4 Are there any processes other than court proceedings prospect that restructuring negotiations will successfully conclude
that are available to a creditor to seize the assets of
(even if in fact they do not). Liability for fraudulent trading (that is,
the project company in an enforcement?
knowingly carrying on the business of the company with the intent
to defraud creditors) can also extend to directors, who may be
Injunctive relief may be available from the English courts in unusual personally liable in an action brought by a liquidator. Directors
and/or extreme circumstances. As described in the responses to could also face criminal liability for fraud, misconduct, falsification
questions 2.1 to 2.5 above, typical project security arrangements of the company’s books, material omissions from statements and
will include: false representations under sections 206 to 211, Insolvency Act 1986
■ detailed contractual controls over project receivables, cash and are liable to disqualification from being a director of any
and bank accounts; and company for up to 15 years under the Company Directors
■ “step-in” and related contractual arrangements with Disqualification Act 1986.
counterparties to key project documents providing protection
against borrower non-performance, insolvency and other
matters. 6 Foreign Investment and Ownership
There are specific insolvency regimes relating to the insolvency of Restrictions
PPP and public finance initiative (“PFI”) projects and in relation to
the preservation of certain types of strategically important assets
(for example, certain pipelines and transmission assets). 6.1 Are there any restrictions, controls, fees and/or taxes
on foreign ownership of a project company?

5.5 Are there any processes other than formal insolvency There are no restrictions on foreign investors investing in UK
proceedings that are available to a project company
companies as a general rule under English law, but there are specific
to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?
statutory regimes in place for certain industries. Authorisation is
required for investment in specific regulated areas including the
nuclear industry, banking, media, financial services and defence.
Part 26 of the Companies Act 2006 provides a procedure for
companies to make a compromise or arrangement with its creditors UK and EU competition rules may impact ownership by companies
(or any class of them), which will be binding on all creditors in the with UK, EU or global business turnovers exceeding specific
relevant class(es) if the requisite majorities vote to approve the thresholds.
scheme. A scheme requires the approval of a majority in number of Compliance with EU directives may impact an entity’s ability to
creditors holding 75% in value of each affected class, and the invest in or own certain assets.
sanction of the High Court of England and Wales. The court will
consider any objections from creditors, which commonly relate to
6.2 Are there any bilateral investment treaties (or other
the provision of insufficient information or notice of the scheme international treaties) that would provide protection
and/or the fairness of class composition. There is no statutory from such restrictions?
moratorium attached to the scheme, although lock-up agreements,
whereby creditors commit in advance to vote in favour of the The UK has signed bilateral investment treaties, protecting investor
scheme and agree not to take enforcement action, are common in rights, with around 120 countries.
practice. Since the legislation does not prescribe the subject matter
of a scheme, it is a highly flexible device and is available to any

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Marine Management Organisation (“MMO”)

6.3 What laws exist regarding the nationalisation or
expropriation of project companies and assets? Are
The MMO implements and regulates the UK’s marine planning and
any forms of investment specially protected? licensing system in respect of all offshore construction works.
A number of other public, private or semi-public regulators may also
England & Wales

Expropriation of assets or companies is generally rare in the UK in have authority over projects, depending on their exact nature. These
the absence of hostilities, breach of international sanctions or may include Natural England, the Crown Estate, the Office of Gas
financial market turmoil. Certain public-private assets are subject to and Electricity Markets (Ofgem), the Water Services Regulation
compulsory purchase powers; compulsory purchase is also possible Authority (Ofwat) and the Office of Communications (Ofcom).
(subject to public processes and appeal rights, and to the payment of
“market value” compensation) for the development of infrastructure 7.2 Must any of the financing or project documents be
and other assets (such as new railway lines). Subject to limited registered or filed with any government authority or
exceptions (for example, the State’s ability to acquire shareholdings otherwise comply with legal formalities to be valid or
in financial institutions in certain circumstances), the State has no enforceable?
special legal right to expropriate private-sector assets.
In general, no. Registration of prescribed particulars at Companies
House and/or other applicable registrars must, however, comply
7 Government Approvals/Restrictions
with the relevant registration requirements.

7.1 What are the relevant government agencies or 7.3 Does ownership of land, natural resources or a
departments with authority over projects in the typical pipeline, or undertaking the business of ownership or
project sectors? operation of such assets, require a licence (and if so,
can such a licence be held by a foreign entity)?
The exact nature of the project will determine which regulatory
bodies and/or UK Government agencies will have authority over the Land
project. However, there are a number of bodies which have an To own land in England and Wales there is no requirement for a
overarching function in respect of development related to the typical licence, nor is there any general bar on foreign ownership of private-
project sectors. sector land.
Local Authorities Water
The majority of onshore projects will require planning permission, In order to impound or abstract groundwater and surface water, a
and the identity of the body granting planning permission depends on licence must be obtained from the Environment Agency.
the nature of the project. Planning permissions are usually granted
Wind, wave, tidal and solar energy
by the local authority of the relevant area. Local authorities are also
responsible for granting consent for the storage of large quantities of No licences are required to use any renewable energy resources,
hazardous substances, such as natural gas and chemicals. Local although the usual planning permissions and consents required to
authorities, and the London Mayor, introduced the Community carry out construction and engineering works will be required. A
Infrastructure Levy in April 2010, which is a charge attached to licence to generate electricity (or an exemption from obtaining such
development once it has been granted planning permission, to fund a licence) must also be obtained from the Department for Business,
and pay for the maintenance of local infrastructure. Energy and Industrial Strategy.
National Infrastructure Planning Minerals (other than oil and gas, coal, gold and silver)
Where a proposed development in England is classed as a Nationally Ownership rights of minerals located in privately owned land
Significant Infrastructure Project (e.g. power plants, airports and (except oil and gas, coal, gold and silver) will generally reside in the
major road schemes), planning permission/development consent for owner of the surface land, although these rights may be retained by
these will be dealt with by the Planning Inspectorate (specifically the a previous landowner.
Major Infrastructure Planning Unit). The ultimate decision-maker for The Crown Estate generally holds the right to exploit all minerals on
such projects will be the relevant Secretary of State, e.g. the Secretary the UK foreshore and continental shelf, with the exception of gas,
of State for Energy and Climate Change in the case of energy projects. oil and coal.
Welsh Assembly Government Oil and gas
Planning decisions which would be taken by the relevant Secretary Ownership of all onshore and offshore oil and gas in Great Britain
of State in England will be made by the Welsh Ministers when these (to the limits of the continental shelf) is vested in the Crown. The
projects are in Wales. OGA grants exclusive rights to “search and bore for and get”
Environment Agency (“EA”) petroleum within Great Britain. The rights granted by onshore
licences do not include any rights of access, which must be obtained
The EA is the main environmental regulator in England and is
from the relevant landowner, and the licensees must also obtain any
responsible for the environmental permitting regime, which covers
consents required under other legislation, such as planning
a variety of areas including waste management, water pollution and
permissions and environmental permits. Licensees wishing to enter
air pollution. There is a separate Welsh Environment Agency
or drill through coal seams for coal-bed methane and coal mine gas
which, on 1 April 2013, was merged into a new environmental body
must also seek the permission of the Coal Authority (see below).
for Wales alongside the Countryside Council for Wales and Forestry
Within UK territorial waters, consent for placing installations and
Commission Wales.
laying pipelines on the seabed must be obtained from the Crown
Health and Safety Executive (“HSE”) Estate.
The HSE is the principal regulator for all health and safety issues in
Great Britain.

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Coal
7.8 Is there any restriction (under corporate law,
Following the privatisation of the coal industry in 1994, the exchange control, other law or binding governmental
ownership of almost all coal now resides with the Coal Authority, practice or binding contract) on the payment of
which grants licences for coal exploration and extraction. dividends from a project company to its parent

England & Wales

Gold and silver company where the parent is incorporated in your
jurisdiction or abroad?
Rights to gold and silver in most of England and Wales are owned by
the Crown, and a licence for the exploration and development of these
No; only as agreed contractually amongst the shareholders of a
metals must be obtained from the Crown Estate Commissioners
project company, its lenders and the parent. There are UK- and EU-
through the Crown Mineral Agent.
specific tax implications, however.

7.4 Are there any royalties, restrictions, fees and/or taxes

payable on the extraction or export of natural 7.9 Are there any material environmental, health and
resources? safety laws or regulations that would impact upon a
project financing and which governmental authorities
administer those laws or regulations?
Owners of minerals may receive royalties in relation to the
extraction of minerals. Such royalties would be subject to UK tax.
Legislation and regulations, in addition to the permits and licences
From April 2013, all mineral royalties are taxed 100% to income tax
already mentioned above, that may affect a project include:
rather than 50/50 to income and capital gains tax, as before. There
may be restrictions in place in relation to the extraction and Environmental impact assessment
exploitation of natural resources. For example, the Environment Where a development may have adverse impacts on the
Agency has discretion to refuse to grant water abstraction licences if environment, the developer will be required to submit an
it believes there will be a detrimental environmental effect. environmental impact assessment to the relevant planning authority
Customs procedures and/or duties may apply on certain exports. when applying for planning permission/development consent.
Contaminated land regime

7.5 Are there any restrictions, controls, fees and/or taxes The contaminated land regime contained in Part 2A of the
on foreign currency exchange? Environmental Protection Act 1990 may apply to any project that
either pollutes land and/or water or is located on previously
There are no general restrictions on foreign currency exchange. contaminated land. Under the regime, liability for the clean-up of
contaminated land falls on any person who causes or knowingly
The Money Laundering Regulations could be relevant, and apply to
permits contamination in, on or under land. If such people cannot be
all categories of businesses, including those active in the UK
found, then liability passes to the current owners and/or occupiers,
financial sector.
regardless of their awareness of the contamination. However, if a
Fees may be imposed by banks in the UK when dealing in foreign project involves redevelopment of a site, then it is likely that the
currencies. Corporation taxes may arise on exchange gains and planning regime will govern clean-up rather than the contaminated
losses, depending on the asset or liability in question. land regime.
Common law
7.6 Are there any restrictions, controls, fees and/or taxes A person (including a company) who has suffered loss as a result of
on the remittance and repatriation of investment environmental or health and safety issues such as noise, odour or
returns or loan payments to parties in other
other pollution, may in some cases be entitled to bring a civil claim
jurisdictions?
under the common law of nuisance, negligence, or trespass and/or
the rule in Rylands v Fletcher against those who have caused the
The UK is business-friendly (gateway to the European Union, and
loss.
relatively low levels of bureaucracy). There is no exchange control
regulation, which means that repatriation of funds is straightforward Statutory nuisance
subject to international sanctions that may be in place (for example, Certain nuisances such as noise and dust are regulated by local
against North Korea). There is no discrimination in favour of local authorities as “statutory nuisances”.
companies and there is no requirement to reinvest profits in the UK. EU Industrial Emissions Directive (2010/75/EU)
Remittance applies on an individual basis when a non-UK The Industrial Emissions Directive is the main EU instrument,
domiciled UK resident can choose to pay tax on the “arising basis” aiming to prevent or reduce emissions to air, land and water from
or on the “remittance basis”. The latter is when the individual pays industrial installations. The Directive requires installations within
tax on UK income and gains and on any foreign income or gains that its scope to operate under a permit and streamlines permitting,
are brought into (remitted) into the UK. reporting and monitoring requirements to simplify and reduce the
administrative burden on operators.
7.7 Can project companies establish and maintain Most installations will have to comply with the Industrial Emissions
onshore foreign currency accounts and/or offshore Directive from 7 January 2014, but this depends on the type of
accounts in other jurisdictions? installation.
Environmental Permitting regime
Subject to UK and EU sanctions and the Money Laundering
The Environmental Permitting regime is an integrated permitting
Regulations, project companies in England and Wales can establish
regime which regulates a range of activities which may give rise to
and maintain onshore foreign currency accounts and/or offshore
pollution, including those covered by the EU Industrial Emissions
accounts in other jurisdictions.
Directive, such as waste management, air pollution and water
pollution.

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Climate change
9 Foreign Employee Restrictions
The Climate Change Act 2008 established a framework to develop an
economically credible emissions reduction path. The Department for
Business, Energy and Industrial Strategy focuses on climate change 9.1 Are there any restrictions on foreign workers,
England & Wales

and energy supply. technicians, engineers or executives being employed

by a project company?
Environmental Damage (Prevention and Remediation)
(England) Regulations 2015
The general position is that EEA nationals have the automatic right
These Regulations implement the EU Environmental Liability
to work in the UK by virtue of being an EU citizen. In addition,
Directive (2004/35/EC) in England. There are equivalent
Swiss citizens and Commonwealth nationals who have a
regulations in Wales. They apply to damages to species, habitats or
grandparent born in the UK or the British Islands have been granted
water, or risks to human health from contamination of land, and
permission to work in the UK. Unless an individual falls into one of
require those responsible to take immediate action to prevent
these categories, they must obtain immigration permission to work
damage occurring or remediate damage where it does occur.
in the UK under the Points-Based System (“PBS”) by falling into
Nature conservation legislation one of the new tiers (employers must be aware there are five distinct
The Environment Agency and Natural England are responsible for tiers) of the PBS or be a dependant of a migrant coming to the UK
enforcing laws implementing the EU Wild Birds Directive under one of the tiers. With the exception of Tier 1, migrants must
(2009/147/EC) and the EU Habitats Directive (92/43/EC), which be “sponsored” before they can apply to enter or remain in the UK.
protect certain species and habitats. UK employers need to obtain a sponsor licence from UK Visas and
Health and safety legislation Immigration (UKVI) before they can employ migrants under Tiers
2–5. Tier 1 categories require migrants to make their own
The Health and Safety at Work etc. Act 1974 provides the
applications to enter and stay in the UK to work.
framework for health and safety regulation in England and Wales.
The Act is enforced by the Health and Safety Executive and local
authorities, although in general the HSE will be the regulator for 10 Equipment Import Restrictions
major projects. Other legislation such as the Control of Major
Accident Hazards Regulations 2015/483 may also apply to major
projects. 10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by
construction contractors?
7.10 Is there any specific legal/statutory framework for
procurement by project companies? As the EU is a customs union, UK companies can buy most goods
from other member countries without restrictions – although VAT
The EU procurement laws (as implemented in England and Wales) and excise duty will normally still apply. If a UK company imports
are applicable to project companies developing public-sector from outside the EU, it may have to comply with import licensing
projects, if the public contracts fall within the scope of the rules and requirements and with common customs tariffs that apply across the
exceed certain financial values. The rules ensure that the award EU. Apart from the general restrictions concerning materials that
process is transparent, non-discriminatory and respects the are deleterious to health and safety and the environment, there are
principles of equal treatment. no legal restrictions or controls which apply exclusively to
EU procurement laws apply to contracts awarded by central importing construction equipment.
governments, local authorities or other public-sector bodies.
10.2 If so, what import duties are payable and are
8 Foreign Insurance exceptions available?

This is not applicable. Please see the response to question 10.1.

8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or
guaranteed by foreign insurance companies? 11 Force Majeure

There are no restrictions on insurance policies over project assets

11.1 Are force majeure exclusions available and
provided by foreign insurance companies, unless the foreign insurance
enforceable?
company is carrying out and effecting the insurance in the UK.
If the foreign insurance company is carrying out and effecting the Force majeure provisions and exclusions are set out in virtually all
insurance in the UK, it may require authorisation by the Prudential project documents, and although the term “force majeure” is derived
Regulation Authority (“PRA”), and may therefore have to comply with from French law with no recognised meaning under English law,
the PRA rules, unless it can rely on European Economic Area (“EEA”) such provisions and exclusions are enforceable under English law
“passporting” rights or other exclusions. The PRA was created by the provided that they are properly defined in the agreement. Normally
Financial Services Act 2012 and is part of the Bank of England. force majeure exclusions do not apply to payment obligations.

8.2 Are insurance policies over project assets payable to

foreign (secured) creditors?

Foreign banks, and other foreign creditors, can be co-insured by the

insurance company over the project assets.

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The Act has forced natural resources companies which do business

12 Corrupt Practices
in the UK, and UK companies which do business overseas, to re-
examine their approach to assessing and managing bribery risk
12.1 Are there any rules prohibiting corrupt business throughout their operations in the UK and abroad to ensure that

England & Wales

practices and bribery (particularly any rules targeting adequate anti-corruption procedures are in place internally. Such
the projects sector)? What are the applicable civil or procedures also need to address the risk that third-party service
criminal penalties? providers will expose the company to criminal liability by bribing in
connection with the company’s business.
The Bribery Act 2010 received Royal Assent in April 2010 and
came into force on 1 July 2011. It repeals previous statutes in
relation to bribery, including the Public Bodies Corrupt Practices
13 Applicable Law
Act 1889, the Prevention of Corruption Act 1906 and the Prevention
of Corruption Act 1916 (the “Bribery Act” or the “Act”). The 13.1 What law typically governs project agreements?
legislation arms prosecutors with a range of criminal offences which
will cover a wide range of conduct that they may employ to
Project agreements relating to projects located in England and
prosecute any potentially corrupt activity. The Bribery Act’s arrival
Wales are generally governed by the laws of England and Wales.
coincides with a significant shift in the UK’s approach to fighting
Scottish law is substantially different to English law and normally
corruption which has seen prosecutors bring companies into the
applies to some or all project documents relating to projects located
criminal courts for corruption on numerous occasions in recent
in Scotland. Northern Irish law is broadly similar to English law,
years. The Act reflects a general tightening of anti-bribery laws
subject to a number of qualifications.
globally in line with the OECD Convention on the Combating of
Bribery, as well as an increased level of international cooperation to
enforce such legislation; however, the Act raises the bar even higher 13.2 What law typically governs financing agreements?
than equivalent legislation in other jurisdictions, such as the US
Foreign Corrupt Practices Act. Financing agreements for English projects are generally governed
The Act affects all UK businesses and those incorporated abroad by English law. Financing agreements for a broad range of projects
who do business in the UK, and creates four new offences related to located throughout the world are often subject to English law.
bribery (the offering or receipt of financial or other advantages) of a
person with the intent of bringing about improper performance of 13.3 What matters are typically governed by domestic law?
that person’s duties. These are:
(1) Offering (or promising or giving) a bribe, intending that Land-related agreements, concessions and the like, and permits and
another person perform their duties improperly (or rewarding
consents, are normally governed by the law of the location of the
them for having done so).
project.
(2) Accepting (or requesting or agreeing to accept) a bribe,
intending that duties will be performed improperly.
(3) Bribing a foreign public official in order to retain business or 14 Jurisdiction and Waiver of Immunity
to gain an advantage in the conduct of business.
(4) Failure of commercial organisations to prevent bribery on
behalf of the organisation. If any person associated with an 14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable?
organisation is found guilty of bribery, then the organisation
is deemed guilty of an offence, unless it can show it had
adequate procedures in place to prevent those people from Judgments obtained through a party’s submission to a foreign
committing bribery. jurisdiction may be legally binding and enforceable, provided the
Individuals found guilty of certain of these offences can be conditions for recognition and enforcement of those judgments are
imprisoned for up to 10 years and/or receive an uncapped fine. fulfilled. Judgments, relating to civil and commercial matters, of
Commercial organisations found guilty of any of the above offences EU Member State courts (except Denmark), dated from 10 January
can receive an uncapped fine. Directors and senior officers of 2015 onwards, will be enforceable in England and Wales pursuant to
commercial organisations may also be convicted if they are deemed the Recast Brussels Regulation (EU 1215/2012). Similar rules
to have given their consent or connivance to the offence. apply to Iceland, Norway and Switzerland pursuant to the 2007
Lugano Convention. Judgments of courts of some non-EU States
For natural resources companies operating in countries where
(mainly Commonwealth members) with which reciprocal
government offices are seen by some in positions of influence as an
conventions exist will be enforced by a different process of
opportunity to accumulate personal wealth and as involving tasks
registration under the Administration of Justice Act 1920 or the
which justify small additional financial incentives, the Bribery Act
Foreign Judgments (Reciprocal Enforcement) Act 1933.
presents a significant compliance challenge, not least because the
list of those who can expose the company and risk a criminal Judgments of courts of all other States will usually be enforced
conviction extends well beyond its employees. through new English proceedings and the English courts must
recognise the basis on which jurisdiction was accepted by the ruling
The corporate offence of failing to prevent bribery means that senior
court; namely, territorial or submission. Typical exceptions to these
management may be held accountable for the actions of persons
regimes include: judgments obtained following fundamental
associated with the organisation. A company’s only defence is to
procedural irregularities; proceedings brought in breach of statutory
show that it had adequate bribery prevention procedures in place.
or international convention obligations; or where the judgment is
These would include establishing policies which define acceptable
based upon fraud, is contrary to English public policy or natural
behavioural limits, procedures to record all related events with a
justice, or is contrary to the Protection of Trading Interests Act 1980
means of seeking approval in uncertain cases, and training and
(e.g. for multiple damages).
briefing for all staff likely to be affected by the provisions of the Act.

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Sovereign immunity is governed by the State Immunity Act 1978. adjudicated upon by an arbitration tribunal. However, the validity
The starting point is that a State or State entity will enjoy sovereign of a patent would not ordinarily be arbitrated, as patents are subject
immunity from both suit and attachment. However, the Act contains to a system of public registration. Therefore, an arbitral panel would
several ways in which a court can disregard this immunity, such as a have no power to order the relevant body to rectify any patent
England & Wales

consensual waiver. If the usual conditions for recognition and registration based upon its determination. It is relevant to note that,
enforcement of a judgment are fulfilled, a State will not benefit from although the English courts at one point suggested that an arbitration
immunity if it would not have been able to claim immunity had the agreement would be considered “null, void and inoperative” insofar
proceedings been brought in the UK. Ordinarily, where a sovereign as it purports to require the submission to arbitration of issues
entity is acting in a private or commercial capacity, it will not be relating to mandatory EU law (see Accentuate Ltd v ASIGRA Inc.
entitled to claim sovereign immunity from suit or attachment. [2009] EWHC 2655), this approach has not been followed in
subsequent cases (see Fern Computer Consultancy Ltd v Intergraph
Cadworx & Analysis Solutions Inc [2014] EWHC 2908 (Ch)). This
15 International Arbitration case has subsequently received 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.
15.1 Are contractual provisions requiring submission of
disputes to international arbitration and arbitral
awards recognised by local courts? 15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
Contractual provisions in project documents governed by the laws
of England and Wales requiring submission of disputes to As a general principle, arbitration is consensual rather than
international arbitration are generally recognised, and supported by mandatory. If a matter is arbitrable pursuant to agreement by the
the courts of England and Wales. Provided the arbitration parties, then it is subject to the relevant dispute resolution and
agreement is in writing, the English courts will stay any proceedings jurisdiction clause in a contract.
brought in breach of that agreement unless the court is satisfied that
the arbitration agreement itself is null and void (Arbitration Act
1996). The UK is a signatory to the New York Convention, under 16 Change of Law / Political Risk
which arbitral awards may be recognised and enforced.

16.1 Has there been any call for political risk protections
15.2 Is your jurisdiction a contracting state to the New York such as direct agreements with central government or
Convention or other prominent dispute resolution political risk guarantees?
conventions?
There have not been any calls for political risk guarantees in
The UK has been a Contracting State to the New York Convention England and Wales in recent years. Lenders will typically require
since December 1975. direct agreements with governmental authorities if the project is a
PPP or PFI project. Direct agreements are commonly entered into
15.3 Are any types of disputes not arbitrable under local by lenders with key project contract counterparties in all types of
law? UK-based projects. Following retroactive changes to regulatory
support regimes for renewable energy projects in countries such as
Whether or not a matter can be subject to arbitration is determined Spain, Greece, Bulgaria and the Czech Republic, investors in
on a case-by-case basis, although arbitration is, in general, limited to renewable energy are understandably wary of “change in law” risk
civil proceedings. Criminal or family law matters, or matters in the renewables sector and the damaging effect that such
relating to status, are not capable of being submitted to arbitration. retroactive changes can have on a project’s economics. For this
Disputes in which the UK Government has a direct interest, such as reason, both the CfD and IUK Guarantee contain provisions
criminality, cannot be submitted to arbitration. However, a claim safeguarding the generator/guaranteed beneficiary against UK
for compensation arising out of a criminal act may well be arbitrated “change in law” risk.
(for example, in respect of a claim for trespass to the person or
property, as these would be civil actions). Divorce also cannot be 17 Tax
arbitrated and can only be granted by the courts in England and
Wales, though the division of property might be subject to
arbitration proceedings, provided that the arbitrator was not 17.1 Are there any requirements to deduct or withhold tax
involved in the initial divorce proceedings. Similarly, succession from (a) interest payable on loans made to domestic
issues do not lend themselves to arbitration and wills are usually or foreign lenders, or (b) the proceeds of a claim
under a guarantee or the proceeds of enforcing
only contested in court, though certain matters involving trusts
security?
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 The UK imposes a withholding tax at the basic rate of income tax
involving minors and the insane is sometimes possible, but (currently 20%) on any payment of yearly interest arising in the UK.
enforcement will be subject to the same constraints as apply to the Consequently, a UK company paying yearly interest on a debt
courts in respect of enforcement of claims against minors and the security will generally have an obligation to deduct 20% of such
insane for public policy reasons. interest payment and account for this withheld amount to the UK tax
authorities. Double tax treaties exist with many other jurisdictions,
In some disputes, parts of claims may be arbitrable and other parts
which in many cases will reduce withholding tax.
not. For example, in a dispute over patent infringement, a
determination of whether a patent has been infringed could be

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Milbank LLP England & Wales

if marketing its securities to retail investors as opposed to solely

17.2 What tax incentives or other incentives are provided professional investors.
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes 19 Islamic Finance

England & Wales

of effectiveness or registration?

There are no UK tax incentives provided preferentially or 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
specifically to foreign investors or creditors. Specific incentives are instruments might be used in the structuring of an
afforded to foreign investors in relation to the construction and Islamic project financing in your jurisdiction.
operation of projects and businesses in specified locations.
Although these instruments have been used in other financing
contexts in England and Wales (such as acquisition finance,
18 Other Matters corporate finance and capital markets), they have not yet been used
in the project financing context in England and Wales. Were they to
be employed, then it would be likely that an Istina’a or Wakala
18.1 Are there any other material considerations which
arrangement would be used for the purposes of financing the
should be taken into account by either equity
investors or lenders when participating in project construction of the assets during the pre-completion period, and
financings in your jurisdiction? such assets would then be leased by the financier (as direct or
indirect owner of the assets) to the project company, pursuant to the
Currency exchange risk will always be a consideration for foreign Ijarah. The Ijarah is the mechanism by which the principal and the
investors in UK-based projects, where revenues are almost always profit margin are returned to the financier during the post-
sterling-based. construction period of a project financing as rental consideration
comprising the purchase price of the asset as well as a fixed and/or
Change of law remains (as in all other jurisdictions) a risk for
floating profit margin calculated by reference to LIBOR. A
investors in the UK (albeit a risk of very low magnitude, but
Murabaha instrument could be used to make available either a
examples include the early closure of the Renewable Obligation
working capital facility to the project company or equity bridge
regime in the UK), given the inability of any administration to tie
loans to the project company, with full recourse to the sponsors.
the legislative hands of its successors.
EU, US, UK and UN sanctions can be an issue if a project or
business might involve dealing with sanctioned persons, entities or 19.2 In what circumstances may Shari’ah law become the
governing law of a contract or a dispute? Have there
assets.
been any recent notable cases on jurisdictional
issues, the applicability of Shari’ah or the conflict of
18.2 Are there any legal impositions to project companies Shari’ah and local law relevant to the finance sector?
issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory Shari’ah is not applied in the UK, and English law does not
requirements for the issuance of capital market recognise Shari’ah as a system of law capable of governing a
instruments. 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
There are no legal requirements that apply exclusively to project national law. This is based on the Convention on the Law
companies seeking to issue bonds or similar capital markets Applicable to Contractual Obligations 1980 (the Rome
instruments. Convention), which requires that a governing law of an agreement
Any project company seeking to issue debt instruments (securities) must belong to a country, and Shari’ah does not belong to a
on the London Stock Exchange (“LSE”) must comply with the UK particular country (albeit that Shari’ah has been adopted, through
Listing Authority (“UKLA”)’s Listing Rules (the “Listing Rules”). legislation, by countries such as Saudi Arabia).
The UKLA, a division of the Financial Conduct Authority, is the The approach of the English courts, in the main, has been to
body responsible for regulating all securities listed on the LSE. The distinguish between the Shari’ah and the contractual governing law
Listing Rules contain (i) the rules and regulations for listing debt of an Islamic finance agreement by ruling that Shari’ah issues are
securities, and (ii) the continuing obligations that apply to issuers not justiciable in the English courts. That element of the agreement
and bondholders for the duration of the listing. The Listing Rules is deemed as forming part of the commercial agreement (which
cover principles ranging from corporate governance and executive English courts will rarely interfere with) and not the legal
remuneration to accounting standards and full disclosure of agreement. Instead the dispute will be dealt with by applying the
information to prospective investors. ordinary principles of English law, and an English court will avoid
Debt securities admitted to the Main Market of the LSE must be ruling or commenting on the compliance of the agreement with
listed in accordance with Chapters 2 and 17 of the Listing Rules. Shari’ah (see Shamil Bank of Bahrain v Beximco Pharmaceuticals
Debt securities admitted to the Professional Securities Market must Ltd [2003] 2 All ER (Comm) 84). This approach was reaffirmed in
be listed in accordance with Chapter 4. All debt securities admitted a recent English High Court case, Dana Gas PJSC v Dana Gas
to trading must comply with the LSE’s Admission and Disclosure Sukuk Ltd & Ors [2017] EWHC 2928, where Dana Gas (an issuer
Standards and the relevant Disclosure and Transparency Rules. based in the UAE) was attempting to render its mudarabah sukuk
Rules may differ according to the issuer’s market sector. For unenforceable on a number of grounds, one of which was that its
example, mineral, oil and natural gas companies are subject to the sukuk was not Shari’ah-compliant.
additional disclosure requirements set out in Chapter 6 of the Listing Parties may still elect to have a dispute in relation to a contract
Rules. Rules may also differ according to the issuer’s investor base. determined and resolved in accordance with Shari’ah principles by
For example, an issuer will be subject to more stringent obligations submitting to arbitration. Under section 46 of the Arbitration Act

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 Milbank LLP England & Wales

1996, arbitral tribunals are obliged to decide disputes with reference default in payment by a borrower could be deemed to be a penalty;
to either the national law chosen by the parties or any other agreed however, this will be difficult to establish in view of the new test set
considerations (including Shari’ah considerations). out in Cavendish which requires that the clause in question impose
a detriment on the contract breaker “out of all proportion to any
England & Wales

legitimate interest of the innocent party”. In determining this, an

19.3 Could the inclusion of an interest payment obligation
in a loan agreement affect its validity and/or English court will now consider the wider commercial context of a
enforceability in your jurisdiction? If so, what steps transaction and, where the parties have negotiated a contract, on a
could be taken to mitigate this risk? level playing field and with the assistance of professional advisors,
it will now be much harder for the party paying the higher rate of
Generally, the inclusion of an interest payment obligation in a loan interest to challenge the validity of such a provision on the basis that
agreement would not affect its validity and/or enforceability in it is a penalty. Furthermore, a provision that provides for interest to
England and Wales, unless that interest payment obligation is increase on default is not likely to be held to give rise to a penalty if:
deemed a penalty offending the rules laid down in Dunlop (i) the increase is levied only from the date of default (and not
Pneumatic Tyre Co Ltd v New Garages & Motor Co Ltd [1915] AC before); (ii) the main purpose of the clause is not to deter default;
79 and Cavendish Square Holding BV v El Makdessi and and (iii) the increase is modest and commercially justifiable by
ParkingEye Ltd v Beavis [2015] UKSC 67 (Cavendish). Note that a reason of the increased credit risk represented by a debtor in default.
contractual provision for payment of a higher rate of interest after a

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Milbank LLP England & Wales

John Dewar Munib Hussain

Milbank LLP Milbank LLP
10 Gresham Street 10 Gresham Street
London EC2V 7JD London EC2V 7JD

England & Wales

United Kingdom United Kingdom

Tel: +44 20 7615 3004 Tel: +44 20 7615 3000

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

John Dewar is a partner in the London office of Milbank LLP and a Munib Hussain is a senior associate in the London office of Milbank
member of the firm’s Global Projects, Energy and Infrastructure Finance LLP and a member of the firm’s Global Project, Energy and
Group. John is widely recognised as a leading individual in his field by a Infrastructure Finance Group. Munib has significant expertise in
number of journals, among them: Chambers UK (which designated him advising lenders, sponsors and sovereigns on “first-of-a-kind”
among the 1st tier of Project Finance lawyers in the UK); Chambers international projects, energy and infrastructure financings in the oil
Global; The Legal 500; and Who’s Who of Project Finance. He has built and gas, power, and mining sectors, and in particular specialises in
an extremely broad practice and outstanding reputation for advising on multi-sourced financings involving ECAs, multi-laterals, commercial
the most innovative and significant “market-first” transactions around the and Islamic banks. He is also a member of the firm’s Islamic Finance
world. His practice focuses on advising parties in the development and Business Unit and is recognised as an expert for Islamic Finance in
financing of oil and gas, natural resources, independent power, Who’s Who Legal 100.
renewable energy, telecommunications, 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, D.C.
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 100 dedicated 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.

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 Chapter 15

France
Sébastien Pinot

Bignon Lebray Serge Rastorgoueff

(ix) the Marseille ring road (L2);

1 Overview
(x) the Paris law courts (Tribunal de grande instance de Paris);
and
1.1 What are the main trends/significant developments in (xi) the Marseille Velodrome Stadium, Bordeaux Stadium and
the project finance market in your jurisdiction? Nice Stadium.

Project finance remains very active in France. After the closing of

2 Security
many large-scale greenfield projects under the form of public-
private partnerships (“PPP”) (notably to boost France’s railway
network infrastructure and football stadiums to prepare for the 2016 2.1 Is it possible to give asset security by means of a
European Football Championships), the main trends of the last few general security agreement or is an agreement
years mainly focus on (i) the refinancing of existing projects, such required in relation to each type of asset? Briefly,
as highways and railway projects, and on (ii) brownfield projects, what is the procedure?
such as the privatisation of regional airports and those more
generally concentrated in the strategic infrastructure/energy assets Under French law, each type of asset is required to be assigned or
sectors. pledged through a dedicated type of security agreement. In France,
As regards more specifically the role of the State, the State acts now the security package in a project finance transaction usually
more as a lender to special purpose vehicles (“SPV”) in the field of provides for:
innovative projects rather than as a client of a PPP. For instance, the (i) a pledge over the shares of the project company;
State has launched the programmes d’investissement d’avenir and (ii) one or more pledge(s) over a bank account (nantissement de
grants, through the Agence de l’Environnement et de la Maîtrise de solde de compte) and/or a pledge over receivables and/or
l’Energie (“ADEME”), subsidies and loans to SPVs set up by the delegation of cash flows arising from project agreements
sponsors of the most innovative projects in energy fields such as (EPCs, operation and maintenance agreements, hedging
floating wind farms, hydroelectric technology and natural gas agreements, insurance policies, etc.); and
vehicle stations. (iii) actual or contingent security over the project’s physical assets
(whether by means of an assignment, a pledge, a mortgage
(hypothèque), or a lender’s privilege (privilège du prêteur de
1.2 What are the most significant project financings that deniers)) in relation to real estate, depending on the type of
have taken place in your jurisdiction in recent years? assets.
As a general principle, security interests created under French law
The most significant project financings which were successfully security documents do not require notarisation, save for those
closed in the last few years mainly relate to infrastructure projects granted in relation to real estate.
and football stadiums:
Under French law, the concept of “floating” or “adjustable” lien or
(i) the Grand-Est very high-speed (optical fibre) project encumbrance is not recognised, save for certain assignments such as
(greenfield);
an assignment of receivables (nantissement de créances) by way of
(ii) the A150 motorway refinancing (project bond refinancing); security (cession (Dailly) de créances professionnelles à titre de
(iii) the A19 motorway refinancing (project bond/loan garantie) or pledges such as a pledge over a bank account
refinancing); (nantissement de solde de compte), which can be considered as
(iv) the CNM railway project: a high-speed railway to bypass the “quasi-floating” charges.
cities of Nimes and Montpellier (PPP refinancing);
(v) the BPL railway project: a high-speed railway in the Bretagne
2.2 Can security be taken over real property (land), plant,
and Pays de la Loire regions (PPP refinancing);
machinery and equipment (e.g. pipeline, whether
(vi) the CDG Express ongoing railway project (greenfield); underground or overground)? Briefly, what is the
(vii) the high-speed train link between Paris and Brittany (LGV procedure?
Bretagne Pays de Loire);
(viii) the high-speed train link between Paris and the South-West of In France, security over real estate can be granted through (i) a
France (LGV Sud Europe Atlantique); mortgage (hypothèque), or (ii) a lender’s privilege (privilège du

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prêteur de deniers), which are required to be executed before a professionnelles à titre de garantie) – such assignment is
notary and registered. usually made through a framework agreement under which a
borrower or other beneficiary of credit agrees to assign
Mortgages (hypothèques) are to be drafted and registered by a
commercial receivables on a periodic basis as security for
notary and cover the plot of land and the buildings built on it, as well such credit, replacing receivables which have matured by
as the improvement works carried out on the property. assigning fresh receivables as they come into existence by
For the lender’s privilege (privilège du prêteur de deniers) to be delivering new transfer instruments (bordereaux) on a
effective, the following four conditions should be met: periodic basis.

France
(i) the purchase agreement and the facility agreement must be The relevant statutory provisions permit only the assignment
drafted and registered by a notary; of “professional” receivables, i.e. receivables owed to the
assignor by a legal entity or an individual in the exercise of a
(ii) the facility agreement shall provide that the sum borrowed is
professional activity. Consumer receivables cannot be the
intended for the acquisition of the asset;
subject of such an assignment.
(iii) the purchase agreement shall provide that the payment is
It shall also be considered that assignments of receivables by
made using the facility; and
way of security (cessions (Dailly) de créances professionnelles
(iv) the building should already exist. à titre de garantie) may only secure credit made available
The choice between a mortgage (hypothèque) or a lender’s privilege directly to the assignor. Such security is therefore not available
(privilège du prêteur de deniers) will be made on the basis of the to secure guarantees granted by the assignor of the debt of
above conditions, considering also that the registration of a lender’s other companies, even companies in the same group of
companies as the assignor. Such type of security interest
privilege (privilège du prêteur de deniers) is less expensive (see
should not include amounts owed to hedging banks under swap
question 2.6).
agreements or to agents or security agents acting in such
It is now generally accepted that wind turbines can be mortgaged to capacity, etc.
secure financings. On the contrary, the type of security interest The relevant statutory provisions state that the actual creation
granted over a pipeline, whether underground or above ground, is of the security occurs on delivery of a bordereau containing
not completely certain since there is no certainty as to its nature the relevant information relating to the assigned receivables.
(movable or immovable property). The most prudent route is to It is therefore necessary, in a framework security assignment
consider this type of equipment as a movable asset; this analysis agreement, to specify the frequency with which new
being followed for both legal and tax approaches by major French bordereaux enumerating receivables which have come into
companies involved in this field. The asset can be pledged through existence will be delivered by the assignor. While this will
a pledge over a movable asset (contrat de gage d’équipement) depend on the average life of the receivables of the assignor,
the general “market practice” is to require monthly deliveries
which can be executed under a private signature, without the
of bordereaux.
intervention of a notary.

2.4 Can security be taken over cash deposited in bank

2.3 Can security be taken over receivables where the accounts? Briefly, what is the procedure?
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? Under French law, the pledge over a bank account (nantissement de
solde de compte) shall be considered as a pledge over the credit
Under French law, security interests over receivables where (i) the rights of the pledgor of the account vis-à-vis the account holder, i.e.
chargor is free to collect the receivables in the absence of a default, the account balance. The account holder may not be a party to the
and (ii) the debtors are not notified of the security, may be taken in pledge agreement but shall then be notified of the pledge.
two different ways: Acceleration of the security interest granted over the account
balance shall be made through the service of an enforcement notice,
(i) by way of an assignment of receivables (nantissement de
créances) – it is necessary to correctly identify the underlying the form of which shall preferably be agreed with the account
contractual right as a condition of validity of the assignment. holder.
The assignment of future rights is possible, but only “future The details of the flow of earnings to be credited to the pledged bank
rights” which can be clearly identified by reference to account can be documented either in the pledge agreement or in the
specific agreements or arrangements which have been or are underlying facility agreement. However, where such facility
to be entered into should be assigned (even if the amounts or agreement is governed by a law other than French law, it will
dates of payment of such rights cannot be determined at the
generally be worthwhile to provide the details in the pledge
time of assignment).
agreement so that in the event of litigation the French court will
After notification to the debtor, the beneficiary alone may have the entire picture before it.
receive payment of the debt, which is the subject matter of the
security, and keep it as security on a bank account subject to The pledge agreement may allow the pledgor free access to money
returning these amounts to the assignor if the secured on the account unless and until the pledge is enforced (this will
obligation is performed. The prudent approach would be to usually be the case where the account being pledged is the ordinary
implement this payment structure. However, the assignor revenue account of the pledgor). Nonetheless, it is also possible to
may need to receive the payment of the assigned receivables provide for money on the account to be blocked prior to
in order to ensure expenditure arising in the ordinary course enforcement.
of its business may be met. In this case, it may be agreed that
the assignor will keep the collections so long as no default In transactions where the account being pledged is an account
has occurred and, possibly, that the collections are credited on opened (usually by a special purpose company created for the
a dedicated account, the balance of which is pledged in its transaction) especially for the purpose of receiving revenues
favour; or generated by use of an asset and from which the security agent is
(ii) by way of an assignment of receivables (nantissement de instructed to pay amounts to other accounts or other parties in the
créances) by way of security (cession (Dailly) de créances transaction or to be held as cash retention to build up certain ratios,

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additional restrictions on transfer of funds out of the pledged Share pledge agreements (nantissements de parts sociales) are
account may be necessary. perfected against third parties by way of filing with the registry
The granting of cash collateral agreements (contrats de gage- (greffe) of the relevant Commercial Court (Tribunal de Commerce)
espèces), which constitute a delivery of the full title to the cash by of the place of registration of the companies whose shares are being
way of security (remise d’espèces en pleine propriété et à titre de pledged. The filing must include an original copy of the pledge
garantie), has been developed by practitioners and is supported by agreement and a summary table (bordereau) describing the pledge.
several decisions of the French Supreme Court (Cour de Cassation), As it is extremely unlikely that the court bailiff will accept a
France

although never confirmed nor invalidated by any French law or document that is not in the French language (except, perhaps, if the
regulation. The pledgee acquires the title to the pledged assets document is accompanied by a translation prepared by a court-
subject only to an obligation to restitute equivalent assets upon approved certified translator), it is strongly recommended that an
payment of the secured obligation. agreement for the pledge of shares should be signed in French.
This type of security interest should only be used for cash collateral There is no requirement that either the pledgor or the pledgee be
granted in favour of a single beneficiary. The use of cash collateral domiciled in France.
for a syndicated financing raises delicate issues with respect to Due to the manner in which the pledge over financial securities is
property of the cash; in particular, in the context of an insolvency of created and perfected, it is generally – although not unanimously –
the beneficiary. felt that it is not prudent to attempt to create pledges of varying
ranks over the same shares. In a transaction in which there are
lenders of varying ranks, the preferred practice is to conclude a
2.5 Can security be taken over shares in companies
incorporated in your jurisdiction? Are the shares in single share pledge agreement (nantissements de parts sociales) in
certificated form? Briefly, what is the procedure? favour of one beneficiary acting on behalf of all of the lenders and
to deal with issues of priority in a separate intercreditor agreement.
Security interests over shares held in French companies can be Share certifications are not issued by French companies.
granted under French law and differ according to the type of
company. 2.6 What are the notarisation, registration, stamp duty
Pledges over shares held in French companies are very different and other fees (whether related to property value or
depending on the form of the companies: otherwise) in relation to security over different types
of assets (in particular, shares, real estate,
(i) pledges of a securities account (nantissements de compte-
receivables and chattels)?
titres), i.e. pledges of shares in companies issuing
“securities” (valeurs mobilières) such as public limited
companies (sociétés anonymes) or private limited companies The notarisation, registration, stamp duty and other fees vary on the
(sociétés par actions simplifiées) are effected by pledging the type of security interest which is granted:
securities account (nantissements de compte-titres) in which (i) with respect to security interest granted on real estate, the
such pledges are registered; and registration cost for a mortgage (hypothèque) is about 0.7%
(ii) share pledge agreements (nantissements de parts sociales), of the guaranteed amount and for the lender’s privilege
i.e. pledges of shares in companies’ ownership interests (privilège du prêteur de deniers), 0.05% of the guaranteed
which are represented by non-negotiable fractional interests amount. Please note that these registration costs are added to
(parts sociales) such as limited liability companies (sociétés the notary’s fees;
à responsabilité limitée) or partnerships (sociétés en nom (ii) there are no costs, fees or other duties for the following
collectif) are effected using different forms of pledge. instruments, in the absence of registration (neither by way of
Regarding the pledges of a securities account (nantissements de notary nor with the registry (greffe) of the relevant
compte-titres): Commercial Court (Tribunal de Commerce)): pledges of a
securities account (nantissements de compte-titres); pledge
(i) unlike the case of a share pledge agreement (nantissement de
over a bank account (nantissement de solde de compte); cash
parts sociales), there is no legal requirement that pledges of a
collateral agreement (contrat de gage-espèces); assignment
securities account (nantissements de compte-titres) be
of receivables (nantissement de créances); and assignment of
executed in French;
receivables by way of security (cession (Dailly) de créances
(ii) no filing is required to be made with the Clerk (greffier) of professionnelles à titre de garantie); and
the Commercial Court (Tribunal de Commerce);
(iii) with regards to the going-concern pledge agreements
(iii) all dividends and other proceeds related to the shares must be (nantissements de fonds de commerce), pledge of equipment
credited on a special account registered in the books of a credit agreements (nantissements de l’outillage et du matériel
institution, as long as the account holder of the securities d’équipement), pledge of inventory agreements (gages des
account (nantissements de compte-titres) is the issuer of the stocks) and share pledge agreements (nantissements de parts
relevant securities and is not authorised to receive funds from sociales) costs for registration with the registry (greffe) of the
the public (i.e. is not an authorised credit institution); relevant Commercial Court (Tribunal de Commerce) vary
(iv) pledged shares must be transferred to a separate account from €11.87 to €144.05.
which shall be recorded as being pledged. In practice, shares
registered on the books of the company in Account No. “X”
will be moved to an account numbered “X bis”; and 2.7 Do the filing, notification or registration requirements
in relation to security over different types of assets
(v) there is no legal requirement that transfers of shares be involve a significant amount of time or expense?
approved; however, the articles of association may provide
for a clause d’agrément – the relevant statutory provisions
state that approval of a draft of the pledge agreement is The filing, notification or registration requirements before a public
deemed to constitute approval of the subsequent transfer of registry and in relation to the relevant instruments usually take
shares resulting from enforcement of the pledge unless the between one and three weeks, assuming the relevant security
company prefers to buy the shares back and reduce its share document was correctly drafted and no errors were found by the
capital. registry. As to registration fees, see question 2.6.

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assigned cannot therefore be apprehended by the creditors

2.8 Are any regulatory or similar consents required with registered in a collective proceeding of the security agent.
respect to the creation of security over real property
(land), plant, machinery and equipment (e.g. pipeline, The security agent is responsible for the mistakes committed in the
whether underground or overground), etc.? performance of his mission. Except for any gross or fraudulent
negligence, and provided that the breach concerned does not deprive
The creation of security interest over real estate, plant, machinery of its substance the essential obligations of the security agent, the
and/or equipment differ according to the location of the contractual liability of the latter may nonetheless be limited by a

France
contemplated asset, its type and the parties involved in the limitation of liability clause. The security agent will also incur his
transaction (see question 2.2). own assets for any breach of his obligations and/or mistakes
committed in the performance of his mission.

3 Security Trustee
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
3.1 Regardless of whether your jurisdiction recognises
status) to achieve the effect referred to above which
the concept of a “trust”, will it recognise the role of a
would allow one party (either the security trustee or
security trustee or agent and allow the security
the facility agent) to enforce claims on behalf of all the
trustee or agent (rather than each lender acting
lenders so that individual lenders do not need to
separately) to enforce the security and to apply the
enforce their security separately?
proceeds from the security to the claims of all the
lenders?
As referred to above, under French law, the security agent is now
New article 2488-6 of the French Civil Code (Code Civil) clarifies able to enforce claims on behalf of all the lenders so that individual
and broadens the role of the security agent which would hold the lenders do not need to enforce their security separately. It seems,
French security interests granted in the context of the transaction in its therefore, that there is no need to enter into specific mechanics such
own name and on behalf of the other financial institutions involved. as parallel debt or joint and several creditor status. Notwithstanding
this, please note that as this legal framework is very new, there are
In the event of the intervention of several creditors in a financing
clearly insufficient judicial precedents to assess which are the strict
transaction, the use of a security agent is permitted to take, register,
limits to this new concept under French law.
manage and realise the securities guaranteeing this transaction.
The mechanism is extended to all collateral and guarantees, and is
no longer limited to actual collateral. In addition to “personal” 4 Enforcement of Security
security interests, the security agent may also, where applicable,
register, manage and fulfil promissory security interests and security
4.1 Are there any significant restrictions which may
interests under foreign law. It may also be the assignee of trade
impact the timing and value of enforcement, such as
receivables assigned as security or delegated claims securing the (a) a requirement for a public auction or the
secured obligation. availability of court blocking procedures to other
The security agent has the same powers as a trustee, and, as such, creditors/the company (or its trustee in
will be the direct holder of the security interests and guarantees bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?
provided to the creditors of the secured obligation.
The security interests and guarantees will be transferred to a
The timing and value of enforcement depends on the type of security
patrimony with a use distinct from the patrimony of the security
enforced and the enforcement proceedings chosen by the lenders.
agent. This legal recognition will make it possible not to have to
The enforcement of security interest carried out through a public
modify the security interests and guarantees in the frequent
auction or in the context of judicial or notarial proceedings is not
hypothesis of a change of beneficiary creditors and thus be able to
necessarily immediate. For notarial enforcements, see question 5.4.
intervene on behalf of any subsequent assignee of the secured
obligation and any product received by the collateral agent for the The commissory pact (pacte commissoire) is authorised:
management and/or realisation of the collateral, and guarantees will (i) for all pledges (security relating to tangible personal
be part of this assignment patrimony. property): it may be agreed, when pledging or subsequently,
that in the absence of the performance of the secured
The agreement by which the creditors appoint the security agent obligation, the creditor will become the owner of the pledged
must be established in writing, on pain of nullity. The creditors must property;
expressly mention the quality of security agent of their co- (ii) in the case of collateral (security interest in intangible
contractor in order to avoid confusion with other contracts (mandate personal property): in case of default of its debtor, the
or common law trust). They must also specify the purpose of the creditor may be attributed, by the judge or in the conditions
security agent’s mission, its duration and the extent of its powers. provided by the agreement, the pledged claim and all the
The security agent may exercise, within the limits of the powers rights attached thereto; and
conferred by the creditors in the contract of appointment, all rights, (iii) with respect to the pledges of inventory, the stipulation of a
sue for the benefit of the creditors of the secured obligation, and commissory pact (pacte commissoire) was previously
may in the event of the opening of collective proceedings, proceed prohibited; however, since 2016, the former provision has
to the declaration of the receivables without having to obtain a been repealed. Therefore, from now on, it is possible to
include a commissory pact (pacte commissoire) in a pledge of
special mandate of the creditors’ beneficiaries.
inventory.
In the event of the opening of a collective proceeding against him,
The commissory pact (pacte commissoire) is nonetheless prohibited
only the personal assets of the security agent may be liable for his
in the case of any reorganisation, judicial restructuring or judicial
outstanding debts. The assets and rights appearing in the assets
liquidation.

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appears that, at the time of the transaction, the contracting party was
4.2 Do restrictions apply to foreign investors or creditors informed of the situation regarding the company’s insolvency.
in the event of foreclosure on the project and related
companies? As a general rule, secured creditors will be qualified as “privileged
creditors” up to the value of the asset secured and will be paid by
preference to the other creditors on the value of the secured assets.
In France, as a general principle, there are no distinctions between
Exceptionally, employees’ claims are preferred to secured creditors
domestic and foreign entities in the context of foreclosing a French
on the distribution of the sale price of the secured assets.
France

security interest granted on the project and/or related companies: if,

pursuant to article L.151-1 of the French Monetary and Financial
Code (Code monétaire et financier), the financial relations between 5.3 Are there any entities that are excluded from
France and abroad are free, article L.151-3 of the same code bankruptcy proceedings and, if so, what is the
provides that foreign investments in France are nonetheless subject applicable legislation?
to prior authorisation from the Minister of the Economy (Ministre
de l’économie) when they relate to an activity that participates in the In accordance with the provisions of the French Code de commerce,
exercise of public authority, or “activities likely to prejudice public insolvency proceedings only apply to “private law” entities. Public
order, public security or the interests of national defense; [or] entities (e.g. State services and local administrative authorities) are
research, production or marketing activities weapons, ammunition, excluded from insolvency proceedings, but “private law” entities,
powders and explosive substances”. even directly or indirectly controlled by public entities, are subject
These activities are exhaustively listed, a distinction being made to these proceedings.
according to whether the investor is a member of the European
Union or the investor is not a member of the European Union. 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?
5 Bankruptcy and Restructuring
Proceedings Direct enforcement of secured credits is possible in some specific
cases by way of a commissory pact (pacte commissoire),
empowering secured creditors to take ownership of assets pledged
5.1 How does a bankruptcy proceeding in respect of the
project company affect the ability of a project lender to them. For instance, a commissory pact (pacte commissoire)
to enforce its rights as a secured party over the clause is legally authorised on bank accounts when a pledge is
security? granted on the sums of the account holder which is party to the
lending and pledge agreement. The use of a commissory pact (pacte
As a general rule, as from the declaration of the project company for commissoire) is also possible, in favour of the secured creditor, on a
the opening of safeguard (sauvegarde) or rehabilitation mortgage (hypothèque) in real estate, for shares, machinery and IP
(redressement) proceedings, secured lenders will be prevented from elements. Nevertheless, the commissory pact (pacte commissoire)
enforcing their security during a standstill period for defaults arisen practice is prohibited during insolvency proceedings.
prior to the court decision opening the insolvency proceedings, For some securities, a loan agreement can be drafted by a notary and
since the project company is prohibited from paying debts then be vested with the authority (force exécutoire) to seize the
outstanding prior to this court decision. All creditors must file a assets of the debtor without having to initiate court proceedings.
claim with the creditor’s representative within two months of the
publication of the court decision. This period is extended to four
5.5 Are there any processes other than formal insolvency
months for creditors domiciled outside France. proceedings that are available to a project company
There are limited exceptions to this prohibition of payment, as, for to achieve a restructuring of its debts and/or
example, the authorisation given to the judge to pay the creditor in cramdown of dissenting creditors?
order to release the pledge on the secured asset.
In order to anticipate and avoid insolvency, other upstream legal
processes are available to achieve a restructuring of the distressed
5.2 Are there any preference periods, clawback rights or
other preferential creditors’ rights (e.g. tax debts, company’s debts through cramdowns of creditors.
employees’ claims) with respect to the security? (i) Grace periods. Pursuant to article 1343-5 of the French
Civil Code (Code Civil), the judge can take into account the
In case of rehabilitation or liquidation, transactions entered into debtor’s financial position to allocate a grace period in order
to either defer or reschedule the debtor’s debt payment due
during the hardening period (période suspecte) can be subject to
date for a maximum duration of two years. A court order
clawback rights at the initiative of the administrator, the liquidator based on article 1343-5 entails suspension of any pending
or the prosecutor. This period can be backdated by the court up to enforcement measures, contractual interests and penalties for
18 months before the judgment opening the insolvency proceedings. late payment.
For some of the transactions performed during the hardening period (ii) Special mediation (mandat ad hoc). The special mediation
(période suspecte), the court must declare their nullity. This will is a pre-insolvency and confidential procedure that applies
apply, for instance, to contracts in which the debtor’s obligations only to solvent companies encountering financial difficulties
significantly exceed those of the other party, payments made for with the objective of reaching an agreement between the
debts that have not fallen due on the date of payment, payments company and its main creditors.
made by means not commonly used in business transactions, or a (iii) Conciliation. In a situation where a company faces financial
mortgage (hypothèque) or pledge granted to secure a pre-existing difficulty but, contrary to the special mediation, remains in an
debt. Some other transactions performed during the hardening insolvency state for less than 45 days, it may be eligible on a
period (période suspecte) are subject to optional voidance if it voluntary basis to the opening of conciliation proceedings.

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Following the commencing order, a court-appointed conciliator the application files is regulated and a benchmark of satisfactory
(conciliateur) works together with the creditors of the company investments already exists.
to find an agreement reducing and/or rescheduling its
These cases can therefore be used as precedents.
indebtedness. The agreement may be either acknowledged by
the president of the court or approved by the court. In addition, the Minister of the Economy may not discretionarily
refuse such investments and refusal decisions may be challenged
before the administrative courts (cf. Jérémie Boublil, Jacques Goyet,
5.6 Please briefly describe the liabilities of directors (if
Sébastien Pinot, Neil Robertson, “France”, in Dennis Unkovic

France
any) for continuing to trade whilst a company is in
financial difficulties in your jurisdiction. Ed(s), Foreign Direct Investment, A view from the Inside, London,
Global City Media, 2016, pp. 75–88).
When the company is under liquidation and its assets do not cover Finally, it should be noted that, currently, the abovementioned
its debts, an action for mismanagement can lead to its directors regulations do not apply in case of creation of an SPV in the field of
being liable for all or part of its debts. This liability action may be a greenfield project finance scheme.
brought against the appointed directors with representation powers, Nevertheless, foreign investments in such greenfield projects could
and any individual or entity that is not officially a director but has still be monitored, just like domestic investments, through the
acted as a de facto director. Such an action can be initiated by the granting by the administrative authorities of the necessary
liquidator, the prosecutor or the supervising creditors appointed by authorisations and/or contracts necessary to set up the project.
the court, after having been summoned by the supervising directors.
The time limit for this action is three years starting from the date of
6.2 Are there any bilateral investment treaties (or other
the judgment opening the liquidation. international treaties) that would provide protection
In addition, directors or de facto directors found liable for certain from such restrictions?
specific breaches as, for instance, continuing the activity of the
company despite its situation of insolvency can be prohibited by the The abovementioned provisions of the French Monetary and
court from managing any business for up to 15 years and holding Financial Code (Code Monétaire et Financier) make a distinction
any public office for up to five years. between investments made by residents of States of the European
Union (“EU”) and European Economic Area (“EEA”) which have
signed a convention to fight against tax fraud and evasion and
6 Foreign Investment and Ownership
residents of other States. The list of investments subject to prior
Restrictions authorisation is more restricted for the first category.

6.1 Are there any restrictions, controls, fees and/or taxes 6.3 What laws exist regarding the nationalisation or
on foreign ownership of a project company? expropriation of project companies and assets? Are
any forms of investment specially protected?
The government is empowered by law to ensure the defence of the
national interests and may as such, for instance, regulate capital The French Code of Expropriation (Code de l’expropriation)
movements between France and other countries (article L.151-2 of the regulates the expropriation of unmovable assets. Expropriations,
French Monetary and Financial Code (Code Monétaire et Financier)). which are implemented if land is necessary to projects ordered or
Moreover, foreign investments in an activity are subject to prior managed by administrative authorities, must meet public necessity
authorisation of the Minister of Economy if: such activity participates, and general interest criteria, assessed through a public enquiry and a
even occasionally, in the public authority; falls into a list of activities cost/benefit study. Expropriated persons and entities must receive a
such as research, production and sale of weapons and ammunition; or “fair indemnity”, calculated according to real estate market
the nature of which has an impact on public order, public safety or benchmarks.
national defence interests (article L.151-3 of the French Monetary and In addition, the legislator may, under article 34 of the Constitution,
Financial Code (Code Monétaire et Financier)). enact laws deciding on the nationalisation of companies.
The list of the latter activities is defined by decree; the foreign There is no specific form of investment which would be legally
investments that are referred to in this regulation are: specifically protected from expropriation/nationalisation risk.
■ the change of control within the meaning of the French However, the Constitutional Court, which is in charge of assessing the
Commercial Code, the acquisition of all or part of a branch, grounds justifying the nationalisation laws, confirmed in a decision of
or of 1⁄3 of the capital or voting rights of a company having its 16 January 1982 (81-132 DC), in the field of one of the last important
registered office in France; and nationalisation laws, enacted until now, that the legislator can freely
■ the acquisition of a branch by a French company controlled proceed to nationalisation as such nationalisation is founded on public
by a foreign individual or company. necessity and are subject to a fair indemnification pursuant to the
Thus, these regulations cover brownfield projects. Declaration of Human Rights of 1789.
If a foreign investment is implemented in one of the abovementioned
activities without prior authorisation, an administrative fine up to 7 Government Approvals/Restrictions
twice the invested amount may be imposed on the investor by the
Minister of Economy. Criminal sanctions may also be imposed.
Moreover, any contract forming part of the transaction will be 7.1 What are the relevant government agencies or
considered as null and void (article L.151-4 of the French Monetary departments with authority over projects in the typical
project sectors?
and Financial Code (Code Monétaire et Financier)).
Nevertheless, foreign investors have the means to maximise the
The main government agency with authority over projects, which is
chances of having their investment authorised since the content of
attached to the Ministry of Economy and Finance, is Fin Infra, an

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expert body dedicated to the financing of complex public the physical persons running the entity. This is the case, for instance,
investment projects and whose clients are the State and local for railway operators, real estate assets operators who contract leases
administrative authorities (Decree 2016-522 dated 27 April 2016). on behalf of third parties and banking sector operators.
Fin Infra is notably in charge of conducting a reinforced prior Both French and foreign entities can hold such authorisations and
assessment in order to determine whether the project is justified. licences, provided they meet the criteria to obtain such authorisations
Moreover, the Ministry in charge of the budget must grant advice on and licences.
a budgetary sustainability study which has to be made by the State
France

or the administrative authority in order for it to conduct certain types 7.4 Are there any royalties, restrictions, fees and/or taxes
of projects. payable on the extraction or export of natural
resources?

7.2 Must any of the financing or project documents be

registered or filed with any government authority or A general tax on polluting activities is levied on the storage and
otherwise comply with legal formalities to be valid or elimination of waste, the emission of polluting substances, the use
enforceable? or delivery of lubricating oils and the extraction of materials. An
annual form must be submitted in May following the year for which
Financing documents, unless they are built according to a capital the tax is due.
markets scheme, such as a Euro Medium Term Notes Programme, The rate and basis of the tax vary depending on the category of
which must be approved by the French Financial Markets Authority pollutants. For the extraction of natural resources, the rate is €0.20
(Autorité des marchés financiers), do not require specific per ton.
registration/filing formalities per se.
However, certain security packages, such as debt assignments 7.5 Are there any restrictions, controls, fees and/or taxes
(cessions de créance), must follow a specific notification process on foreign currency exchange?
under the French Monetary and Financial Code (Code Monétaire et
Financier) in order to be opposable to the debtor, and certain There are no restrictions, controls, fees or taxes on foreign currency
securities, such as mortgages over unmovable assets, must be exchanges.
registered with the land registry.
France has not implemented foreign exchange control restrictions on
In certain public investment sectors, project documents must be companies or individuals. French banks may lend freely in both Euros
approved by decree to be valid and enforceable. This is, for and foreign currencies. Reporting requirements apply to some
instance, the case of PPPs passed in motorway infrastructure transactions to detect money laundering and tax evasion, and to comply
projects (Article 2122-4 of the Code de la Voirie Routière). with rules on data collection for balance-of-payments statistics.
Moreover, award notifications of project agreements entered into
with the State and local administrative authorities (such as a
7.6 Are there any restrictions, controls, fees and/or taxes
concession contract) must be published on publicly available official
on the remittance and repatriation of investment
material in order for limited duration challenge periods to start returns or loan payments to parties in other
running against the agreements (like for any administrative contracts jurisdictions?
put into tender). This is, however, not a condition of validity and
enforceability of the project documents but a condition to enable Generally speaking, there are no restrictions, fees or taxes on the
challenge periods, and usually lapse after a two-month term. remittance and repatriation of investment returns or loan payments
to non-resident parties. For the withholding taxes on income, see
7.3 Does ownership of land, natural resources or a question 7.8 and section 17.
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)? 7.7 Can project companies establish and maintain
onshore foreign currency accounts and/or offshore
accounts in other jurisdictions?
No licence is required per se in order to own land, natural resources,
a pipeline or a business.
Under French law, project companies, as any company, can
However, large-scale projects such as infrastructure projects usually establish and maintain foreign currency accounts and/or offshore
require the occupation of the public domain of the State or of a local accounts in other jurisdictions, subject to (i) the legality of such
authority, on which all or part of the infrastructure or the assets will account with respect to the relevant offshore laws and regulations,
be built. Thus, the authority must grant its authorisation to occupy (ii) applicable sanctions, anti-bribery, anti-money-laundering and
its domain. anti-terrorism French, European and/or US regulations, and (iii) the
Occupation of the public domain must be authorised in compliance relevant KYC from the contemplated financial institution where
with rules applicable to State and local authorities property, set forth such account would be opened and maintained.
mainly in the General Code of Public Entities Property (Code
général de la propriété des personnes publiques).
7.8 Is there any restriction (under corporate law,
Moreover, certain activities, depending on their impact on the exchange control, other law or binding governmental
environment, must be authorised by the State under the rules of the practice or binding contract) on the payment of
Environmental Code (Code de l’environnement); more specifically, dividends from a project company to its parent
if they meet the criteria of a classified installation for environmental company where the parent is incorporated in your
jurisdiction or abroad?
protection.
In addition, the activities of certain regulated sectors require a specific
Dividends received by a French company are, in principle, taxed at
professional licence which must be granted to the operator and/or to

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normal corporate income tax rate. However, some exceptions are (Code de la Construction et de l’Habitation) in order to check the
applicable. measure taken by the construction companies regarding health,
Scenario 1 employees’ and subcontractors’ safety, and in order to check that the
construction companies meet all their health, safety and labour law
The French project company pays dividends to its parent company
obligations with their employees or their subcontractors.
established in France.
A company is qualified as a parent company if it owns at least 5% of
7.10 Is there any specific legal/statutory framework for

France
the share capital of the project company.
procurement by project companies?
If the parent company holds the shares for at least two years, a
participation exemption regime applies. According to this regime,
If the project companies, whether owned by the State, local
the dividends are taxed on a portion of 5% (exemption on 95%).
authorities or by private entities, meet the criteria in order to be
The effective tax rate is about 1.6%.
considered as adjudicating powers or adjudicating authorities under
If the companies are members of a tax consolidation group, EC Directives 2014/24, 2014/25, 2014/26 and to national regulations
dividends distributed are subject to taxation on 1% of their amount such as ordinance no. 2015-899 dated 23 June 2015, they must select
(exemption on 99%). their contractors following the tender process set out by such
Scenario 2 regulations. Please note that, in this respect, such regulations have
The French project company pays dividends to its parent company been compiled in the new public procurement code (“Code de la
established in the EU. Commande Publique”) which will enter in force on 1 April 2019.

A participation exemption applies to dividends paid to EU parent This could be the case, for instance, if the project companies are,
companies. No withholding tax is levied on such distribution since under certain circumstances, considered as network operators under
the parent company holds at least 5% of the share capital of the article 12 of the abovementioned ordinance (e.g. in gas, electricity,
project company for a minimum of two years. water, transportation networks and petroleum extraction).

Scenario 3 Moreover, specific tender regulations apply in certain specific

sectors. For instance, highway network operators must apply tender
The French project company pays dividends to its parent company
rules in order to select service providers (gas distribution,
established outside the EU.
restaurants, etc.) to end-users on the highway networks (contained
In principle, dividends paid by a French company to a non-EU in article L.122-12 of the Code de la Voirie Routière).
company are subject to a withholding tax of 30%.
This withholding tax is, generally, reduced or eliminated by
application of one of the many double tax treaties signed by France.
8 Foreign Insurance
However, the withholding tax rate is increased to 75% if the parent
company is located in a Non-Cooperative State and Territory 8.1 Are there any restrictions, controls, fees and/or taxes
(“NCST”; black-listed jurisdiction). on insurance policies over project assets provided or
guaranteed by foreign insurance companies?

7.9 Are there any material environmental, health and

safety laws or regulations that would impact upon a
There are no specific restrictions, controls, fees and/or taxes on
project financing and which governmental authorities insurance policies over project assets provided or guaranteed by
administer those laws or regulations? foreign insurance companies, provided that the foreign insurance
company is authorised to operate in France by the French prudential
As indicated above, the assets which are held and/or managed by the authority (“ACPR”) or through a European Passport (for insurance
SPV can meet the criteria of a classified installation for the protection of companies based in a Member State of the EU).
the environment, in which case a declaration/registration/authorisation
process must be complied with pursuant to the Code of Environment. 8.2 Are insurance policies over project assets payable to
In such a case, the installations and activities are regularly controlled foreign (secured) creditors?
and monitored by the State services in charge of the protection of
environment (Directions régionales de l’environnement, de There is no restriction on this aspect under French law.
l’aménagement et du logement). Such services may impose additional
prescriptions to be followed, apply financial penalties and
modify/withdraw authorisations granted.
9 Foreign Employee Restrictions
Moreover, in order to be granted a project agreement by the State or
an administrative authority (e.g. under the form of a concession), the 9.1 Are there any restrictions on foreign workers,
successful tenderer must prove its compliance with tax and labour technicians, engineers or executives being employed
law regulations and must prove such compliance every six months by a project company?
after the award of the contract.
More generally, under the French Labour Code (Code du Travail), Most citizens of countries that are not part of the EU/EEA need both
every company signing a contract above a certain threshold must a work permit and a resident permit to work in the French territory
regularly check that its contractor meets certain labour law (irrespective of their professional level – worker, technician,
obligations such as the prohibition of illicit employment. engineer or executive). The permit type depends on the planned
activity and whether the individual in question asks for a temporary
Finally, construction sites are carefully monitored by inspectors
or long-term work permit.
attached to the Ministry of Labour pursuant to the French Labour
Code (Code du Travail) and the Code of Construction and Housing There are mainly two kinds of work permits: residence visa
(automatically allows the holder to work in France); and the

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temporary working authorisation (which requires the prior Such rule is of public order and may not be overridden by the parties
authorisation of the Labour Inspectorate (Direccte)). to the contract in administrative law contracts.
A number of categories of employees are exempt from obtaining a In any case, the parties may agree on the effects of force majeure in
work permit. This exemption mainly concerns nationals of terms of risk sharing and may provide for rules of allocation of
countries from the EU/EEA. insurance indemnities.
In principle, the social security system of France is applicable.
However, due to the coordination of the social security systems
France

12 Corrupt Practices
within the EU and certain bilateral agreements France signed with
countries outside the EU, the social security system of the home
country can remain applicable if certain conditions are met (this is 12.1 Are there any rules prohibiting corrupt business
mainly the case when an employee is seconded within a French practices and bribery (particularly any rules targeting
company for a limited period of time). The employer should request the projects sector)? What are the applicable civil or
a certificate of coverage from the social security authority in their criminal penalties?
home country to prove that social security contributions are being
paid in the employee’s home country; then the employer will be Corruption and bribery practices are historically governed by the
exempt to pay social security contributions in France. French Criminal Code. Since 2017, specific rules preventing
corruption practices are applicable.
(1) French Criminal Code
10 Equipment Import Restrictions
Unlawfully proffering, at any time, directly or indirectly, any offer,
promise, donation, gift or reward, in order to induce a person
10.1 Are there any restrictions, controls, fees and/or taxes holding public authority, discharging a public service mission, or
on importing project equipment or equipment used by vested with a public electoral mandate, (i) to carry out or abstain
construction contractors? from carrying out an act pertaining to his office, duty or mandate, or
facilitated by his office, duty or mandate, or (ii) to abuse his real or
Customs duty is levied on the value of goods imported into France alleged influence with a view to obtaining distinctions,
from outside the EU. The duty is determined with the common employment, contracts or any other favourable decision from a
customs tariff applicable in all EU Member States. public authority or the government is punished by up to 10 years’
There is no customs duty on equipment delivered within the EU. imprisonment and a fine of €150,000 for natural persons (i.e.
generally, directors of the company) and/or a fine of €450,000 for
legal persons.
10.2 If so, what import duties are payable and are
exceptions available? The same penalties apply to yielding before any person holding
public authority, discharging a public service mission, or vested
with a public electoral mandate who, unlawfully, at any time,
The common customs tariff provides for import duties depending on
directly or indirectly solicits offers, promises, donations, gifts or
the nature of the imported equipment and its country of origin. It
rewards with the same abovementioned aim.
derives from EU regulation and treaties signed by the EU with other
countries. Moreover, a new offence of traffic of influence, introduced in 2013,
involving foreign public agents, which is subject to French law
irrespective of whether the offences are committed by a French
11 Force Majeure citizen abroad or by a foreign citizen ordinarily resident in France or
exercising his/her activity in France, is punished by up to 10 years’
imprisonment and a fine of €1 mn for natural persons (i.e. generally
11.1 Are force majeure exclusions available and
directors of the company) and/or a fine of €5 mn for legal persons.
enforceable?
(2) Specific Rules Preventing Corruption Practices
Force majeure exclusions are defined in a similar way by case law The French anti-corruption arsenal has been reinforced by adopting
as regards administrative law contracts (e.g. project agreements Law No. 2016-1691 on 9 December 2016 on transparency, fight
executed with the State such as public service concessions) and by against corruption and modernisation of business practices.
the French Civil Code (Code Civil) as regards private law contracts. The directors (including chairmen, chief executives and managers)
Article 1218 of the French Civil Code (Code Civil) provides that: of large companies or French groups with over 500 employees and
“there is force majeure in a contract when an event out of control of a turnover of more than €100 mn are required to implement a
the debtor, which could not reasonably be predicted at the time of mechanism to prevent corruption in France and abroad.
the signature of the contract and the effects of which cannot be The eight following measures need be taken: (i) introduce a code of
avoided by appropriate measures, impede the performance by the conduct; (ii) introduce a whistleblowing mechanism to collect
debtor of its obligation” (our translation). reports; (iii) define a risk mapping document; (iv) implement a
In case of force majeure, the parties are released from performing commercial partner assessment procedure; (v) implement an
their obligations. accounting control procedure; (vi) introduce a training programme
for managers or staff that are at risk of corruption; (vii) introduce a
disciplinary sanction procedure for employees who breach the code
of conduct; and (viii) establish internal controls and assessments of
the implemented measures.

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Failure to implement the abovementioned measures is punished by principles, French public policy rules will continue to apply
a fine of up to €200,000 for natural persons (i.e. generally, directors notwithstanding any party’s waiver.
of the company) and/or by a fine of €1 mn for legal persons. As regards project agreements which take the form of administrative
law contracts, a State-owned entity or local administrative
13 Applicable Law authority’s clause of submission to a foreign jurisdiction and waiver
of immunity will in most circumstances be declared null and void by
French courts and will thus not be binding and enforceable in

France
13.1 What law typically governs project agreements? France.

Project agreements are typically governed by French law. 15 International Arbitration

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 15.1 Are contractual provisions requiring submission of
countries to which each of the private entities belong. disputes to international arbitration and arbitral
awards recognised by local courts?
As regards project agreements entered into with the State, State-
owned entities or local administrative authorities, such agreements
The Code of Civil Procedure (Code de procédure civile) provides
usually meet the criteria of an administrative law contract (e.g.
for rules applicable to international arbitration (article 1504 et seq.).
public service concessions). In such a case, the application of
French law is mandatory. Thus, contractual provisions requiring submission of disputes to
international arbitration and arbitral awards will be recognised by
This is important as the contractual relationship in an administrative
local courts, provided that the abovementioned provisions of the
contract is different from that in a private contract. Indeed, the
Code of Civil Procedure (Code de procédure civile) are complied
parties are, de facto, unequal insofar as the public person benefits
with.
from public authority powers.
In a nutshell, international arbitration may only apply to situations
in which international commerce interests are at stake (this criterion
13.2 What law typically governs financing agreements? is, however, usually met if the contractual situation involves several
States; Cass.civ.1ère 26 January 2011, no. 09-10.198) and arbitral
Finance documentation is generally governed by French law. awards will be recognised if they are not contrary to international
However, English or New York law may be other options when the policy (article 1514 of the Code of Civil Procedure (Code de
pool of lenders is not familiar with French law. In accordance with procédure civile)).
the provisions of Regulation (EC) No. 593/2008 of the Parliament Under the same conditions, they are declared enforceable in France
and the Council on the Law Applicable to Contractual Obligations in the course of an exequatur procedure.
(Rome I). The selection of a foreign law will be valid and legally
binding in France, and French courts would apply such law However, the possibilities for the State, State-owned entities and
provided that the contents of the relevant provisions of the chosen local administrative authorities to be subject to arbitration are very
laws do not contravene with the principles of French public policy. restricted (see article 2060 of the French Civil Code (Code Civil)).
Nevertheless, a law enacted in 1986, notably in the context of the
Security documents shall, however, comply with the “lex rei sitae” negotiations relating to the setting up in France of Eurodisney,
principle, according to which the governing law of a security provides for an exception to article 2060 of the French Civil Code
document shall be the law of the jurisdiction where the asset is located. (Code Civil), under which “the State, the local administrative
authorities and entities owned by the State or local administrative
13.3 What matters are typically governed by domestic law? authorities [i.e. “établissements publics”] are authorised, in the
contracts that they sign with foreign companies for the performance
As indicated above, project agreements which take the form of of operations of national interest, to provide for arbitration in the
administrative law contracts are governed by French law in all of contract in order to settle, as the case may be in a definitive manner,
their aspects. litigations relating to the performance and the interpretation of such
contracts” (our translation of article 9 of Law No. 86-972 dated 19
Moreover, as regards project and financing agreements which take
August 1986).
the form of private law contracts, French law will apply in any case
for French public policy matters such as property registration, Thus, under certain circumstances, project agreements to which the
securities, mortgages and bankruptcy. abovementioned entities are parties may be subject to international
arbitration.

14 Jurisdiction and Waiver of Immunity

15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
conventions?
14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable?
France applies the New York Convention only to the recognition
As regards project and financing agreements which take the form of and enforcement of awards rendered on the territory of another
private law contracts, a party’s submission to foreign jurisdiction Contracting State. France is also a Contracting State of the
and waiver of immunity will usually be legally binding and European Convention on International Commercial Arbitration of
enforceable, as confirmed by the French Supreme Court (Cour de Geneva dated 21 April 1961 including the Agreement relating to
Cassation). Nevertheless, under French private international law Application of the European Convention on International
Commercial Arbitration of Paris dated 17 December 1962.

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In any case, the SPV and the public contracting authority can
15.3 Are any types of disputes not arbitrable under local negotiate specific clauses in the project agreements governing
law? indemnification relating to regulation modifications.

Domestic disputes with non-professional parties are not arbitrable.

Furthermore, the arbitration agreement is void if it entrusts the 17 Tax
arbitrators with a mission that infringes French public order policy.
France

Moreover, as indicated above, public bodies and institutions may be

17.1 Are there any requirements to deduct or withhold tax
subject to arbitration only in very restricted cases. However, some
from (a) interest payable on loans made to domestic
categories of public institutions, whether industrial or commercial, or foreign lenders, or (b) the proceeds of a claim
may be authorised by decree to enter into compromise agreements. under a guarantee or the proceeds of enforcing
security?
15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings? Interest payments made by a French company to a non-tax resident
are, in principle, exempt from any withholding tax in France. By
There are no types of disputes subject to mandatory domestic exception, if the payment is made to an entity established in a
arbitration proceedings. NCST, a 75% withholding tax applies.
Rates of interest paid by French corporate taxpayers to related
companies are deemed to be at arm’s length if they do not exceed a
16 Change of Law / Political Risk maximum rate published by the French Tax Authorities
corresponding to the average of annual floating rates applied by
banks. If the interest rate exceeds the said maximum rate, the
16.1 Has there been any call for political risk protections
such as direct agreements with central government or borrower will have to demonstrate that the rate applied is in line
political risk guarantees? with the rate that would have been applied if the lender had been a
third party.
In purely private project financings, where public authorities do not Tax deduction of interest may be limited under French tax law.
intervene as contracting parties, there is, generally speaking, to our Since 1 January 2019, the rules related to the tax deduction of
knowledge, no call for political risk protections in France. We were, financial charges for companies subject to corporate tax have
however, involved a few years ago in a tax stability agreement changed.
between the sponsors of a project and the local authorities in a
The main limitations are the following:
French overseas territory, the details of which may not be disclosed.
(i) If the company is not under a thin capitalisation situation:
In project finance schemes under the form of PPPs, the lenders
(a) The deductibility of net financial expenses would be
always request the signature of a direct agreement with the public
limited to the higher threshold between €3 mn or 30% of
client, which will contain rules applicable in case the main project the “tax EBITDA” (Earnings Before Interest, Taxes,
agreement (e.g. a public service concession) is declared null and Depreciation and Amortisation) realised by the company.
void by a jurisdiction.
The tax EBITDA is based on the taxable result, taking into
Indeed, in such a situation, and notwithstanding the fact that the account the non-deductible depreciations.
public authority is not bound anymore by the project agreement (b) An additional deduction is available for companies that
which has been declared null and void, the lenders will benefit from are members of a consolidated group. This additional
the guarantee from the public authority, contained in the direct deduction is equal to 75% of the net financial expenses
agreement, under which the public authority undertakes to pay any that were not deducted by application of the above
outstanding debt to the lenders in case of default of the SPV (which limitation, provided that the equity-to-assets ratio of the
will inevitably arise as a result of the cancellation of the project company is equal to or higher than the equity-to-assets
agreement). ratio of the consolidated group.
In addition, under French administrative law, which governs project (ii) If the company is thin capitalised, i.e. if the average amount
of loans granted by related parties is higher than 1.5 times the
agreements entered into with public authorities, the latter are not
net equity of the company, then net financial expenses would
allowed to make compromises on their regulatory powers and thus only be tax deductible up to the higher threshold between €1
undertake to avoid modifying the regulations which they are in mn or 10% of the tax EBITDA of the company.
charge of enacting.
Non-deductible interest can be carried forward and may become
Nevertheless, under the theory of the “fait du prince”, in case the deductible in the future. Other specific regimes may limit the tax
contracting public authority imposes new obligations to its contracting deductibility of interest in France under certain circumstances;
party by way of a unilateral modification to the contract, or as a result please seek assistance for more details.
of new regulations having a specific impact on an essential element of
the contract, such contracting party is entitled to indemnification,
under certain circumstances. Such indemnification will repair any 17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What
direct damage suffered.
taxes apply to foreign investments, loans, mortgages
In addition, the State may be held liable for the consequences of the or other security documents, either for the purposes
enactment of a new law in case such consequences over the of effectiveness or registration?
contracts are considered as “very serious and special” (e.g. CE, 1
February 2012, No. 347205). Corporate income tax is payable annually on all profits generated in
France by legal entities. Residents and non-residents are taxable in
France on profits allocable to a French business. France has a broad

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range of tax treaties signed with more than 110 countries. Tax securities to be acquired per investor, and the minimum unit per
treaties prevent double taxation on all types of income and provide value of the securities, capital market instruments may be structured
for a reduction or a cancellation of the withholding taxes levied on as:
dividends, interest and royalties. (i) public placements; or
The main French tax incentives are the following: (ii) private placements, with no or limited disclosure or
a) Corporate income tax rate decrease supervision requirements with the competent French
regulation entities, but with the intervention of an authorised

France
The corporate income tax rate has recently been reduced from 33 financial entity in order to promote the allocation of securities.
1⁄3% to 28% for the portion of the tax profit which does not exceed
€500,000. This reduction will continue progressively until 2022 to
reach a general rate of 25% for all companies, without any limitation 19 Islamic Finance
regarding the amount of profit.
b) Amortisation
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
French tax law provides for different methods of depreciation of assets instruments might be used in the structuring of an
(straight-line depreciation and accelerated depreciation). Straight-line Islamic project financing in your jurisdiction.
depreciation is normally used. In principle, there is no specific
restriction to the deduction of amortisation under French rules. French law does not expressly recognise the concepts of Istina’a,
c) Tax losses Ijarah, Sukuk, Wakala and Murabaha; however, French tax law has
Ordinary tax losses are offsetable against tax profits, with a limit of consequently evolved in the last few years to align these concepts to
€1 mn plus 50% of the portion of profits exceeding €1 mn. The similar French law instruments.
exceeding tax losses may be carried forward indefinitely. It is mainly considered that the structuration of project finance under
d) Capital gains taxation on shares French law may comply with Shari’ah law when using French law
For corporate income tax purposes, capital gains realised on the sale instruments which are similar in nature, such as:
of shares are only taxed on a portion of 12% of their amount (88% (i) an investment title for Sukuk, according to which principal
exemption). The shares have to represent at least 5% of the share and remuneration are indexed on the performance of the
capital of the sold company and have to be held for a minimum of assets owned by an issuer;
two years. (ii) an EPC agreement for Istina’a, which is believed to be the
most popular structure in Islamic project financing;
The taxable portion is subject to corporate income tax at the
standard rate. (iii) an operating lease for Ijarah;
(iv) a mandate for Wakala, where the borrower is employed as the
lenders’ agent per an agency (Wakala) agreement; and
18 Other Matters (v) the purchase of chattel property with deferred payment
(including a positive margin) for Murabaha, which is
probably the least popular structure in Islamic project
18.1 Are there any other material considerations which financing.
should be taken into account by either equity
investors or lenders when participating in project
financings in your jurisdiction? 19.2 In what circumstances may Shari’ah law become the
governing law of a contract or a dispute? Have there
The above answers cover most of the relevant issues raised in been any recent notable cases on jurisdictional
issues, the applicability of Shari’ah or the conflict of
project financings governed by French law.
Shari’ah and local law relevant to the finance sector?

18.2 Are there any legal impositions to project companies There is no relevant case law in France regarding the application of
issuing bonds or similar capital market instruments? Shari’ah law as regards the governing law of a contract or dispute.
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market It remains also very unlikely that French courts would accept its
instruments. application, unless (i) the governing law of the relevant agreement is
set as the law of a country with legislation based on Shari’ah law, and
Under French law, provisions relating to the issuance of bonds or (ii) such legislation does not contradict with French public policies.
similar capital market instruments differ according to the legal form
of the private company; a private limited company (sociétés par 19.3 Could the inclusion of an interest payment obligation
actions simplifiées) may not be legally entitled to issue, guarantee or in a loan agreement affect its validity and/or
secure bonds and other debt securities, while public limited enforceability in your jurisdiction? If so, what steps
companies (sociétés anonymes) are subject to certain quantitative could be taken to mitigate this risk?
limitations in the amount of unsecured bonds outstanding at any one
time, as compared to their level of equity and reserves. Under French law, the inclusion of an interest payment obligation in
These limitations should not apply to financial institutions and a loan agreement does not affect its validity and/or enforceability.
insurance companies, and there are other more minor exceptions. However, please note that:
In any case, in the context of certain PPP projects, the issue of bonds (i) in accordance with article 1343-2 of the French Civil Code
may be subject to prior consent by the relevant governmental (Code Civil), the capitalisation of interest payable pursuant to
authority. a contract (including “default interest”) is permitted only
where the said interest has accrued for at least one year.
Depending on the type of investors addressed, the number of retail
(ii) the French Consumer Code (Code de la Consommation)
investors addressed, the total issue amount, the minimum amount of provides for mandatory requirements regarding the all-in

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 Bignon Lebray France

interest rate (taux effectif global), according to which where Acknowledgment

the all-in interest rate is calculated, if it is wrong or inaccurate
for any reason, or in the event that it is not set out either in the In addition to Sébastien Pinot and Serge Rastorgoueff, who are the
relevant agreement or in a separate letter, the contractual partners in charge of our project finance practice, the following
interest rate would not be applicable and the legal interest rate partners contributed to the drafting of this chapter: Jérémie Boublil
would be applicable as from the date of the contemplated for labour law; Frédéric Coulon for litigation and arbitration;
loan agreement, and the bank may be held criminally liable. Jérôme Granotier for tax; and Philippe Larivière for bankruptcy.
France

Nonetheless, and concerning loans bearing interest at a floating rate,

the bank is not under any obligation to give notice to the borrower
of the actual all-in interest rate resulting from the variation of the
applicable interest rate when the applicable interest rate is based on
an objective index (indice objectif).

Sébastien Pinot Serge Rastorgoueff

Bignon Lebray Bignon Lebray
75, rue de Tocqueville 75, rue de Tocqueville
75017 Paris 75017 Paris
France France

Tel: +33 1 4417 1744 Tel: +33 1 4417 1744

Email: [email protected] Email: [email protected]
URL: www.bignonlebray.com URL: www.bignonlebray.com

Sébastien Pinot has specialised in public law for more than 15 years. After working in leading Anglo-Saxon and American law firms, Serge
After spending several years in Linklaters’ Public Law/Project Rastorgoueff has been advising financial institutions, sponsors,
Financing Department, he joined the Public and Environmental Law investment funds and medium and large companies for more than 10
Department of Bignon Lebray’s office in Paris. years.
Sébastien focuses on various key practice areas such as transactional He has developed expertise in banking, finance and the capital
and contentious matters related to public contracts (including public markets, specifically in corporate finance and private investment,
procurement and PPP), State aid, urban planning and the acquisition, export credit and asset and project financing. Serge
environment. He also advises on all public law and regulatory matters assists French and international banks, but also companies on the
related to project financing, mergers and acquisitions/privatisation, legal aspects related to the financing of complex debt instruments, off-
public sector financing, and State and local government guarantees. balance sheet structurings and central treasury management. Serge
is also involved on all matters related to restructuring, rescheduling
Recently, Sébastien advised the Korean rolling stock and engineering
agreements and the prevention of business difficulties.
services provider within the field of the Abidjan metro concession
project, as well as the State and government agencies for the
financing of innovative floating wind farm projects.

Bignon Lebray is a corporate law firm entirely dedicated to assisting companies and public authorities in both transactional and contentious matters,
both nationally and internationally.
For more than 35 years Bignon Lebray has been one of the foremost independent French corporate law firms. Bignon Lebray brings together more
than 70 lawyers and paralegals, including 25 partners, of different cultural and educational backgrounds, whose work experience was acquired both
in France and abroad.
The firm advises particularly on corporate law, mergers & acquisitions, private equity, tax law, employment & social security tax, banking, project
finance & capital markets, competition & distribution law, property law & property management, public & environmental law, intellectual property &
technology law, transport law, and litigation & arbitration.
The firm has offices in Paris, Lille, Lyon, Aix-Marseille, Shanghai and Beijing.
Bignon Lebray is the French representative of Meritas, an international network that brings together more than 180 law firms and 7,500 legal
practitioners across 90 countries.

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Chapter 16

Germany
Marcus van Bevern

Kantenwein Sven Ceranowski

or a mortgage (Hypothek), the latter being accessory to the secured

1 Overview
claim and rarely used. Both instruments may be granted in
certificated or uncertificated form and need to be notarised and
1.1 What are the main trends/significant developments in registered in the land registry. Plants, machinery and equipment
the project finance market in your jurisdiction? form part of the plot and are subject to the land charge/mortgage if
firmly attached to the land or serving its economic purpose. If the
After the 2011 decision by the German government for a phase-out connection is for temporary purpose only or results from exercising
of nuclear power plants until 2022, there is still a great deal of a right over that land (e.g. in case of pipelines or power supply
activity around the implementation of the “Energiewende”. Further, lines), plants, machinery and equipment are not part of the plot and
real estate markets have been boosted since 2010 and there is further can be separately conveyed by a security assignment. Such a
demand for development in housing and infrastructure. security assignment can be in written form and does not need to be
notarised or registered.

1.2 What are the most significant project financings that

have taken place in your jurisdiction in recent years? 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
There have been several financings of offshore windfarms in the of the security? Briefly, what is the procedure?
North Sea in a total volume of several billion Euros. The German
real estate market has also seen huge amounts of investments,
Receivables can be assigned by security assignment without
including commercial investments in hotels and logistic properties.
notification of the third-party debtor, provided that the debtor
remains entitled to settle the claim by payment towards the assignor.
2 Security 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.
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, 2.4 Can security be taken over cash deposited in bank
what is the procedure? accounts? Briefly, what is the procedure?

There is no floating charge or comparable general security Bank accounts can be pledged by agreement between the account
agreement covering all assets of a debtor. Rather, each type of asset holder as pledger and the creditor as pledgee. The pledge has to be
has to be assigned or pledged separately – which may also be a notified to the account holding bank (unless identical with the
multitude of similar assets (e.g. receivables or chattels) provided pledgee). A consent by the bank is not necessary. However, account
they can be specified unambiguously. In the absence of a floating holding banks usually have a senior pledge under their general
charge, creditors often request the assumption of personal liability business terms and pledgees usually request a waiver or restriction
by a debtor and its submission to immediate foreclosure in a notarial of such senior pledge which requires the consent of the bank.
deed. On the basis of such a deed, a creditor could apply for an
attachment order and foreclose into the borrower’s entire assets. 2.5 Can security be taken over shares in companies
However, as long as foreclosure has not taken place, the deed as incorporated in your jurisdiction? Are the shares in
such does not grant a preceding right of the creditor. certificated form? Briefly, what is the procedure?

2.2 Can security be taken over real property (land), plant, Shares in private limited companies (GmbH) are not in certificated
machinery and equipment (e.g. pipeline, whether form and can be pledged by notarised pledge agreement, unless the
underground or overground)? Briefly, what is the pledge is prohibited in the articles of association. It is not necessary,
procedure? but common, that the pledge is notified to the company. Shares in
public limited companies (AG) are in certificated form and can be
Real property can be encumbered with a land charge (Grundschuld) pledged by written agreement plus hand-over of the share certificate

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 Kantenwein Germany

to the pledgee. In case of listed companies, the shares are usually

certificated in multiple share documents kept by a custodian. In this 3.2 If a security trust is not recognised in your
case, a written pledge of the co-ownership in the documents plus jurisdiction, is an alternative mechanism available
(such as a parallel debt or joint and several creditor
notification to the custodian are sufficient. status) to achieve the effect referred to above which
would allow one party (either the security trustee or
2.6 What are the notarisation, registration, stamp duty the facility agent) to enforce claims on behalf of all the
Germany

and other fees (whether related to property value or lenders so that individual lenders do not need to
otherwise) in relation to security over different types enforce their security separately?
of assets (in particular, shares, real estate,
receivables and chattels)? To avoid legal problems with the security pool, the pool would
either provide for several creditor status, i.e. direct rights of all
Where notarisation is necessary (e.g. land charges and share lenders in the collateral granted and the lenders being represented by
pledges), notary fees are calculated in accordance with a statutory the agent in administering such collateral. Alternatively, a parallel
fee schedule depending on the value of the security. The same debt structure could be implemented whereby the security granted
applies for fees for registration in the land register. There are no to the security agent would also secure the parallel debt owed to the
stamp duty or other fees. agent.

2.7 Do the filing, notification or registration requirements 4 Enforcement of Security

in relation to security over different types of assets
involve a significant amount of time or expense?
4.1 Are there any significant restrictions which may
The duration of the registration of a land charge depends on the local impact the timing and value of enforcement, such as
land register and may take up to a few weeks. Registration can last (a) a requirement for a public auction or the
availability of court blocking procedures to other
longer in case of comprehensive land charges encumbering a
creditors/the company (or its trustee in
multitude of plots because such a land charge has to be registered in bankruptcy/liquidator), or (b) (in respect of regulated
each concerned register. Expenses depend on the amount of the land assets) regulatory consents?
charge. Notifications to third parties can be effected by a simple
letter in writing. Land charges and mortgages are enforced by public auction of the
encumbered property. In the first auction a tender may be rejected if
2.8 Are any regulatory or similar consents required with it does not meet at least 70% of the market value. Lower tenders
respect to the creation of security over real property may be accepted in a second auction not taking place earlier than
(land), plant, machinery and equipment (e.g. pipeline, three months after the first auction. Share pledges and chattels are
whether underground or overground), etc.? also enforced by public auction provided that the parties may
contractually agree to a private sale. With the exception of gold and
There is no general consent requirement, but the encumbrance of silver, the first tender has to meet at least 50% of the market value.
real property with a land charge or mortgage may require the Gold and silver must not be auctioned under their market value.
consent of the competent municipality if the plot is located within a
formally designated redevelopment area. As pipelines and power
4.2 Do restrictions apply to foreign investors or creditors
supply lines (it does not matter if they are underground or
in the event of foreclosure on the project and related
overground) are usually erected in the exercise of a public right companies?
demanding forbearance by the owner, they are not considered part
of the plot. Therefore, the encumbrance of the plot does not require
There are no general restrictions, provided that, if the foreclosure
the consent of the entity running the lines.
shall be based on foreign judgments or enforcement orders, it would
require a separate enforcement judgment by a German court unless
3 Security Trustee the enforcement is allowed in accordance with bilateral treaties or
international conventions, e.g. the Brussels I Regulation or the
Hague Convention on the Recognition and Enforcement of Foreign
3.1 Regardless of whether your jurisdiction recognises Judgments in Civil and Commercial Matters, to both of which
the concept of a “trust”, will it recognise the role of a Germany is a party.
security trustee or agent and allow the security
trustee or agent (rather than each lender acting Further, restrictions could apply in cases of international sanctions,
separately) to enforce the security and to apply the e.g. the EU restrictive measures against Russia according to Council
proceeds from the security to the claims of all the regulation No. 833/2014. Sanctions can result in asset freezes
lenders? including a freeze of proceeds resulting from the foreclosure of
assets.
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, please see the answer to question 3.2 below.

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Kantenwein Germany

requires a qualified majority of both the creditors’ headcount and

5 Bankruptcy and Restructuring
amount of claims. Further, bearer bonds may be changed or
Proceedings amended by majority decision of the creditors, if the bonds’ terms
and conditions provide for a majority decision.
5.1 How does a bankruptcy proceeding in respect of the
project company affect the ability of a project lender 5.6 Please briefly describe the liabilities of directors (if

Germany
to enforce its rights as a secured party over the any) for continuing to trade whilst a company is in
security? financial difficulties in your jurisdiction.

Upon the opening of insolvency proceedings, the company’s right to The directors are obliged to file for insolvency within three weeks
manage and transfer its assets expires and is vested in the insolvency after the company became illiquid or over-indebted. A violation of
administrator. Insolvency creditors may no longer individually execute such duty is a criminal offence. Directors are personally liable for
into the company’s assets during the insolvency proceedings provided delayed filing of insolvency towards creditors of the company.
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 security assignments give a right of separate satisfaction 6 Foreign Investment and Ownership
prior to the remaining creditors of the insolvency estate. Restrictions

5.2 Are there any preference periods, clawback rights or 6.1 Are there any restrictions, controls, fees and/or taxes
other preferential creditors’ rights (e.g. tax debts, on foreign ownership of a project company?
employees’ claims) with respect to the security?

The Federal Department of Economics and Technology can prohibit

Any security granted within the last month prior to the opening of the acquisitions of a domestic company by non-EU residents in case the
insolvency proceedings becomes legally invalid when the insolvency public order or security is endangered, including acquisitions of a
proceedings are opened. Transactions made prior to the opening of direct or indirect participation of more than 10% in certain security
the proceedings to the disadvantage of the other insolvency creditors relevant domestic companies or more than 25% in other companies.
may be contested and clawed back. The preference period depends The department may also restrict the exercise of voting rights or
on the nature and circumstance of the contested transaction and may appoint a trustee to unwind a completed acquisition. There are no
last between three months, in cases of congruent coverage, and 10 particular fees and/or taxes on foreign ownership.
years, in case of acts committed intentionally to the disadvantage of
other creditors. Tax debts and employees’ claims which have
accrued prior to the opening of the proceedings are not preferred. 6.2 Are there any bilateral investment treaties (or other
Debts which have accrued after the opening of the proceedings international treaties) that would provide protection
from such restrictions?
(Masseverbindlichkeiten) are preferred to other creditors, but not to
creditors having a right in rem or a right of separate satisfaction.
Germany has concluded more than 130 bilateral investment treaties
(BITs) providing various standards for, inter alia, fair and equitable
5.3 Are there any entities that are excluded from treatment, protection and security, and protection against
bankruptcy proceedings and, if so, what is the
discrimination. Protection may also result from other BITs under
applicable legislation?
most-favoured nation treatment. The competence for BITs has been
transferred to the EU under the Lisbon treaty, provided that the
The Federation (i.e. the German state) and the single Federal states existing treaties remain in existence as long the EU has not entered
cannot go insolvent. Further, insolvency proceedings are excluded for into BITs. In rendering its decision on a restriction, the Federal
public law entities which are supervised by the Federation or the single Government would have to pay attention to such treaties.
Federal states, if the public law entity is exempted from insolvency
proceedings through the applicable state law.
6.3 What laws exist regarding the nationalisation or
expropriation of project companies and assets? Are
5.4 Are there any processes other than court proceedings any forms of investment specially protected?
that are available to a creditor to seize the assets of
the project company in an enforcement?
The German constitution guarantees property; expropriation is only
permissible in cases of public interest and against compensation which
If the debtor has submitted itself to immediate foreclosure in a notarial has to be provided for in statutory law. The various Federal states have
deed, such deed is enforceable without court proceedings, provided issued a number of laws regulating the preconditions of expropriation
that the debtor is entitled to raise objections against enforcement in a and the compensation to be paid. BITs also usually contain provisions
foreclosure counter-claim (Vollstreckungsgegenklage). for the protection against appropriation without compensation.

5.5 Are there any processes other than formal insolvency

proceedings that are available to a project company
7 Government Approvals/Restrictions
to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?
7.1 What are the relevant government agencies or
departments with authority over projects in the typical
The Insolvency Code provides for the possibility of the insolvency project sectors?
creditors to agree to a settlement of their claims in an insolvency
plan deviating from statutory distribution provisions. The plan
In case of pipelines or power supply lines the “Bundesnetzagentur

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 Kantenwein Germany

für Elektrizität, Gas, Telekommunikation, Post und Eisenbahnen” is payments to foreign entities resident in a country having a double
the competent national agency. The Federal states have tax treaty with Germany, treaty protection may be available. In such
implemented state agencies competent for various issues, inter alia, cases, the withholding tax can be reduced or even be excluded. If
approval of certain prices and fees as well as technical issues. the parent company is resident in an EU Member State, the parent-
subsidiary directive may be applicable reducing the rate to zero.
Please note that in any case a tax exemption certificate issued by the
7.2 Must any of the financing or project documents be
Germany

registered or filed with any government authority or Federal German Tax Office is necessary. Regarding German tax
otherwise comply with legal formalities to be valid or issues related to interest payments, please see the answer to question
enforceable? 17.1 below.

There is no general filing or registration duty but certain security 7.7 Can project companies establish and maintain
agreements require notarisation, e.g. share pledges in public limited onshore foreign currency accounts and/or offshore
companies and land charges. In addition, land charges have to be accounts in other jurisdictions?
registered in the land register.
Yes, subject to compliance with the general fiscal code
7.3 Does ownership of land, natural resources or a (Abgabenordnung), in particular the requirement for authenticity of
pipeline, or undertaking the business of ownership or accounts, and anti-money laundering rules (Geldwäschegesetz).
operation of such assets, require a licence (and if so,
can such a licence be held by a foreign entity)?
7.8 Is there any restriction (under corporate law,
exchange control, other law or binding governmental
The ownership of land is not licensed. Natural resources generally practice or binding contract) on the payment of
belong to the owner of the land. This does not apply to certain dividends from a project company to its parent
resources free for mining including various metals (e.g. iron, company where the parent is incorporated in your
aluminium and lead), salts and coal. Mining of these resources jurisdiction or abroad?
requires approval by the mining authority. The start of operation of
a public power supply (including pipelines or power supply lines) Under the German Commercial Code (HGB), dividend payments
requires approval by the competent authority of the relevant Federal are restricted in certain cases of activations on the assets side
state. Apart from the Department of Economics prohibition right in resulting in mere accounting profits, e.g. activation of latent taxes.
case the public order or security is endangered (please see the There are no particular restrictions for trans-border dividend
answer to question 6.1 above), there is no other restriction payments as such payments fall within the freedom on the
prohibiting approvals from being granted to foreign entities. movement of capital.

7.4 Are there any royalties, restrictions, fees and/or taxes 7.9 Are there any material environmental, health and
payable on the extraction or export of natural safety laws or regulations that would impact upon a
resources? project financing and which governmental authorities
administer those laws or regulations?
Mining companies have to pay annual fees for (i) the use of the land
(Feldesabgabe), and (ii) the exploited resource (Förderabgabe). 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 determined by the
7.5 Are there any restrictions, controls, fees and/or taxes Federal states and is usually the local community or county. The
on foreign currency exchange?
licence includes any other licence which has to be issued under the
law by other authorities.
No. According to Art. 63 of the Treaty on European Union, all
Safety requirements are determined by the Bundesnetzagentur
restrictions on the movement of capital between Member States and
(please see the answer to question 7.1 above), where necessary in
between Member States and third countries are generally prohibited.
coordination with the Federal Office for Information Security and
Restrictions may apply in case of international embargos or
Technology and the Federal Data Protection Officer. The operators
financial sanctions.
of telecommunications, electricity and gas have to observe certain
information duties vis-à-vis the Bundesnetzagentur with respect to
7.6 Are there any restrictions, controls, fees and/or taxes safety requirements.
on the remittance and repatriation of investment
returns or loan payments to parties in other
jurisdictions? 7.10 Is there any specific legal/statutory framework for
procurement by project companies?
The mere repayment of a loan is not subject to German withholding
tax. Except for dividend payments (see below), the remittance and Procurement law applies to public principals or awarding authorities
repatriation of investment returns or loan payments are subject to with respect to public orders, including private law companies
the general freedom on the movement of capital (please see the founded for the purpose of serving non-commercial tasks in the public
answer to question 7.5 above) and are thus not restricted. interest. Statutory law is based on European law (regulations
Exemptions may apply in case of international embargos or 89/665/EEC, 92/13/EEC and 2007/66/EC) and differentiates between
financial sanctions. Payers have to comply with certain notification various quantitative thresholds depending on the ordering body, the
duties to Deutsche Bundesbank for statistical purposes. applicable subject matter of the contract and the branch concerned.
Currently, applicable thresholds are €144,000 for supply and service
Profit repatriation by way of dividend payments is subject to
orders by higher Federal authorities, €221,000 for orders by lower
German withholding tax at a rate of 26.375%. In case of dividend

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Kantenwein Germany

authorities which do not concern national defence and security,

€443,000 for orders concerning national defence and security and 10.2 If so, what import duties are payable and are
€5,548,000 for construction orders. If an order exceeds these exceptions available?
thresholds, it has to be put out to tender Europe-wide. If it falls below
the thresholds, contracting authorities may freely choose between the The amount of customs duties depends on the TARIC Code or code
open procedure and the restricted procedure. In the open procedure number of the specific product/equipment. On application, energy
products may be exempted from the payment of consumption taxes.

Germany
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 participate,
11 Force Majeure
selects a limited number of undertakings in accordance with
objective, transparent and non-discriminatory criteria (competitive
tender) and invites these to submit tenders. 11.1 Are force majeure exclusions available and
enforceable?

8 Foreign Insurance
German statutory law provides for a suspension of limitation in case
of force majeure. Also, a debtor is generally not liable in case of
8.1 Are there any restrictions, controls, fees and/or taxes force majeure due to missing responsibility. Force majeure is
on insurance policies over project assets provided or defined as an external accidental occurrence which could
guaranteed by foreign insurance companies? reasonably not have been prevented even when applying utmost
diligence (e.g. natural catastrophes). Further force majeure rules
Foreign insurance companies having their seat within the European apply to specific contracts. E.g., the official contracting terms for
Economic Area (EEA) may offer insurance policies through domestic the award of construction performance contracts (VOB/B) provide
branches in Germany two months after the competent supervisory for a prolongation of the contractual time limits for carrying out the
agency of their home Member State has provided information pursuant works in case of force majeure.
to the Solvency II Directive (2009/138/EC) to the German supervisory Individual contractual clauses for force majeure exclusions can be
authority (BaFin). With the exception of reinsurances, foreign validly incorporated in a contract. However, if such clauses form
insurance companies having their seat outside the EEA need to apply general terms of business, they could be held invalid if they
for a permit by BaFin to offer policies in Germany. There is a fee to be unreasonably disadvantage the other party.
paid for the application in accordance with a statutory fee schedule.
Currently, the fee for the first application comes up to €10,000.
12 Corrupt Practices
8.2 Are insurance policies over project assets payable to
foreign (secured) creditors? 12.1 Are there any rules prohibiting corrupt business
practices and bribery (particularly any rules targeting
There are no restrictions or differentiations whether the insurance the projects sector)? What are the applicable civil or
holder is a foreign or domestic creditor. criminal penalties?

The taking and giving of bribes to public officials or persons

9 Foreign Employee Restrictions 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
9.1 Are there any restrictions on foreign workers,
not, may result in imprisonment of up to five – in aggravated cases
technicians, engineers or executives being employed
by a project company? 10 – years or a fine. Contracts resulting from bribery are invalid.

Nationals from EU Member States or Member States of the EEA or 13 Applicable Law
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 13.1 What law typically governs project agreements?
department.
Project agreements are usually governed by German or English law.
10 Equipment Import Restrictions
13.2 What law typically governs financing agreements?

10.1 Are there any restrictions, controls, fees and/or taxes Depending on the financing bank or creditor, credit and loan
on importing project equipment or equipment used by
agreements would usually be governed by either German or English
construction contractors?
law. Security agreements are usually governed by the law
applicable at the place where the security is located or which
The import of goods from a state outside the European Union is to be
otherwise applies to the security.
notified with the customs authority and requires the payment of
customs duties. In addition, consumption taxes have to be paid on
imported goods, in particular food (e.g. coffee, beer and alcohol). 13.3 What matters are typically governed by domestic law?
There are no additional fees for the operations of the customs authority.
Usually, most security agreements are governed by German law

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 Kantenwein Germany

unless the collateral concerned is located outside Germany. It is

16 Change of Law / Political Risk
mandatory that any right in rem in assets located in Germany or
governed by German law has to be governed by German law.
16.1 Has there been any call for political risk protections
such as direct agreements with central government or
14 Jurisdiction and Waiver of Immunity political risk guarantees?
Germany

14.1 Is a party’s submission to a foreign jurisdiction and No. In general, investments are protected under the German
waiver of immunity legally binding and enforceable? constitution. In addition, BITs can apply and provide protection for
international investors.
German law acknowledges the principle of state immunity as part of
the general rules of international law which form an integral part of 17 Tax
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 commercially (acta iure gestionis). The 17.1 Are there any requirements to deduct or withhold tax
differentiation between sovereign and non-sovereign acts is to be from (a) interest payable on loans made to domestic
made in accordance with the rules of the place of jurisdiction (lex or foreign lenders, or (b) the proceeds of a claim
forum) and on the basis of the spirit and purpose of the act in under a guarantee or the proceeds of enforcing
dispute. If a sovereign act is concerned, a state can waive immunity security?
and such waiver would be upheld by German courts.
Interest payments from German borrowers to foreign lenders on
Submissions to foreign jurisdiction are binding in accordance with
term loans having fixed interest rates not being secured by German
the Brussels Ia Regulation and the Hague Convention of 30 June
real estate should, in principle, not be subject to German
2005 on Choice of Court Agreements. Absent the application of
withholding tax. Withholding tax may be applicable if the loan is
these rules, a choice of forum is binding if made by express or tacit
secured by German real estate or in case the interest is related to the
agreement between merchants or public or private legal persons.
income of the borrower, e.g. in case of a profit participating loan.
The tax rate amounts to 26.375%. In case that the lender is resident
15 International Arbitration in a country having a double tax treaty with Germany, treaty
protection may be available.
Interest payments from German borrowers to German lenders are, in
15.1 Are contractual provisions requiring submission of
principle, not subject to German withholding tax.
disputes to international arbitration and arbitral
awards recognised by local courts?
17.2 What tax incentives or other incentives are provided
In general yes, provided the claim in dispute is (i) eligible for preferentially to foreign investors or creditors? What
arbitration, and (ii) the arbitration agreement is set out either in a signed taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes
document or in other forms of transmitting messages exchanged by the
of effectiveness or registration?
parties which ensure proof of the agreement by supporting documents.
If a consumer is involved, an arbitration agreement must be contained
in a separate document signed by the parties in their own hands. There are no tax or other incentives for direct investments by
foreign investors. There are also no taxes applying to foreign
investments, loans or security documents for the mere purposes of
15.2 Is your jurisdiction a contracting state to the New York effectiveness or registration.
Convention or other prominent dispute resolution
conventions?
18 Other Matters
Germany is a contracting state to the New York Convention and has
implemented the UNCITRAL Model Law on International
Commercial Arbitration in the German Civil Procedure Code to a 18.1 Are there any other material considerations which
should be taken into account by either equity
large extent.
investors or lenders when participating in project
financings in your jurisdiction?
15.3 Are any types of disputes not arbitrable under local
law? There are no particular legal considerations. Economically, parties
might consider protecting their investment against currency
Any proprietary claim is arbitrable. Non-pecuniary claims are exchange risks and other potential losses.
arbitrable if the parties are entitled to settle the matter in dispute. Not
arbitrable are rental agreements concerning domestic residential space
18.2 Are there any legal impositions to project companies
and matters under family and marriage law as well as insolvency law. issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market
15.4 Are any types of disputes subject to mandatory
instruments.
domestic arbitration proceedings?

Bonds or other securities which shall be traded on a stock exchange

No. If disputes are arbitrable, they may be subject to domestic or
require an admission to trade. The application has to be
international arbitration proceedings, as the case may be.
accompanied by a financial institution and supported by further

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Kantenwein Germany

documents. The issuer has to exist for at least three years. The bond
has to comply with law on securities, must be freely tradable and in 19.2 In what circumstances may Shari’ah law become the
sufficient free float. In addition, the issuer has to publish an governing law of a contract or a dispute? Have there
been any recent notable cases on jurisdictional
information paper and a prospectus containing all relevant issues, the applicability of Shari’ah or the conflict of
information about the issuer and the offering in compliance with Shari’ah and local law relevant to the finance sector?
minimum information requirements set forth in the Securities

Germany
Prospectus Act. Both, the information paper and the draft
The freedom of choice of law by the parties is generally
prospectus have to be submitted to BaFin and the prospectus has to
acknowledged in accordance with the Rome I Convention, provided
be approved by BaFin before being published.
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,
19 Islamic Finance in its entirety, complies with Shari’ah law. This, however, would
cause various problems, one being the difficulty of determining the
content of such state’s law by a German court in case of dispute, the
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha other resulting from potential objections based on public policy
instruments might be used in the structuring of an (ordre public). Parties would therefore rather choose German law
Islamic project financing in your jurisdiction. and agree to contractual provisions and instruments which comply
with the prerequisites under Shari’ah law. Apart from cases under
Istina’a could be structured as a contract for work and labour family law, there have been no private law cases decided by German
(Werkvertrag) with payment after delivery. To comply with Ijarah, courts concerning the compliance of Shari’ah law with German law
a leasing contract could be used, whereby the lessee leases the principles and ordre public. Though there are banks offering
leased assets and the lessor transfers them to the lessee at the end of Islamic banking in Germany, Islamic financing remains a niche
the lease. This could also include a financial lease providing for a product. This is also due to tax problems, e.g. real estate transfer
transfer of ownership of usufructs of some assets for a particular tax.
period. To comply with Wakala, the principal (Muwakkil) could
appoint another person as agent or trustee or otherwise delegate
19.3 Could the inclusion of an interest payment obligation
authority under German law to carry out specific tasks on the
in a loan agreement affect its validity and/or
principal’s behalf. The agent could then enter into the respective enforceability in your jurisdiction? If so, what steps
contracts for the principal, provided that he has to comply with could be taken to mitigate this risk?
money laundering laws and disclose that he is acting for a third
person. Murabaha could be a simple sales contract (Kaufvertrag) No. German law allows loan agreements and interest payment
combined with a future resales contract which would include the obligations as the typical contractual duty of the borrower. German
cost and the margin of the purchaser/reseller. law also imposes statutory interest payment obligations on debtors
in case of default. Restrictions may only apply in case of usury.

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 Kantenwein Germany

Marcus van Bevern Sven Ceranowski

Kantenwein Kantenwein
Theatinerstraße 8 Theatinerstraße 8
80333 Munich 80333 Munich
Germany Germany
Germany

Tel: +49 8996 86 0 Tel: +49 8996 86 0

Email: [email protected] Email: [email protected]
URL: www.kantenwein.de URL: www.kantenwein.de

Marcus van Bevern is an attorney-at-law specialised in banking and Sven Ceranowski is a partner in the tax department of Kantenwein.
capital markets. He advises in banking- and capital market-related
He advises in complex national and international transactions. Sven is
litigation and arbitration as well as in financing transactions. He is also
also specialised in the representation of German and international
regularly appointed as arbitrator in arbitration proceedings. Until 2006
clients in tax litigation procedures.
he worked in the Litigation & Arbitration department of an international
law firm, where he represented, amongst others, national and Before joining Kantenwein in 2015 he worked for UK and US law firms.
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.

Kantenwein is a multidisciplinary law firm consisting of lawyers, tax consultants and auditors. The firm provides advisory services to entrepreneurs
and businesses facing legal and tax-related decision-making situations. 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.

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Chapter 17

Ghana
NanaAma Botchway

N. Dowuona & Company Akosua Achiaa Akobour Debrah

1 Overview Western Corridor Fibre Project $42 million

Eastern Railway Line $1.38 billion

1.1 What are the main trends/significant developments in

the project finance market in your jurisdiction?
2 Security

The Ghanaian project finance market has recorded an interesting 2.1 Is it possible to give asset security by means of a
mix of projects in the power, energy, maritime, aviation and rail general security agreement or is an agreement
sectors. These projects have involved both private and public required in relation to each type of asset? Briefly,
actors. In recent times, project financing in Ghana has seen an what is the procedure?
increased use in alternative credit enhancement facilities due to the
non-availability of government guarantees as a result of public debt Borrowers are permitted to give asset security by means of a general
limitations placed on the government by the International Monetary security agreement. There is no requirement for a separate agreement
Fund (“IMF”) as part of an extended credit facility programme to be executed for each type of asset used as security; however, each
being supervised by the IMF. In response, and as a means of security is assessable to stamp duty separately as though each were set
reducing the risk to their investments, lenders have resorted to the out in a separate agreement. Security is normally created by written
use of partial risk guarantees obtained from mainly World Bank agreement, containing charging clauses. After execution, the
Group institutions, which invariably affects the cost profile of these agreement must be stamped and depending on the type of asset and
projects. whether the borrower is a company, it may require registration with
With regards to the outlook, recent banking reforms are expected to the Collateral Registry, Deeds/Land Title Registry and/or the
influence the Ghanaian project finance market as a result of an Registrar of Companies in order to be enforceable.
increment in the capitalisation requirements of banks. In previous Under the Borrowers and Lenders Act, 2008 (Act 773) charges
years, Ghanaian banks have been limited in their ability to finance created by borrowers to secure credit facilities granted by lenders
large projects because they have not been sufficiently capitalised to must be registered with the Collateral Registry within 28 days of the
lend significantly large sums of money. The increment in the creation of the charge. If the security affects land or a company’s
minimum capital and liquidity requirements for banks, however, is assets, it must additionally be registered with the Deeds/Land Title
expected to provide local banks with the capacity to participate in Registry and/or the Registrar of Companies. Under the Companies
large project finance transactions. Act, 1963 (Act 179), any security created over a company’s assets
shall be void unless registered with the Registrar of Companies
within 28 days of the creation of the charge – however, an extension
1.2 What are the most significant project financings that
have taken place in your jurisdiction in recent years?
of time to register a charge may be granted by a court. Similarly,
any security affecting land, unless registered at the Deeds/Land Title
Registry, is ineffective in creating any interest in the chargee in
Project Name/Description Project Cost respect of the land.
Atuabo Freeport $700 million
GACL Regional Airports $400 million
Expansion Project (incl. Kotoka 2.2 Can security be taken over real property (land), plant,
International Airport Expansion) machinery and equipment (e.g. pipeline, whether
Tema Port Expansion $1.5 billion underground or overground)? Briefly, what is the
procedure?
Takoradi Port Expansion – Phase 1 $350 million
Accra-Takoradi Highway $600 million
Construction Security can be taken over real property, plant, machinery and
225MW Ayitepa Wind Farm $525 million equipment. This is typically done through the creation of a fixed
60MW Aboadze Jacobson Jelco $528 million charge over movable assets or a mortgage over real property. Under
Gas Fired Plant Ghanaian law, a mortgage only operates as a fixed charge on real
Ghana 1000 $1 billion property and does not automatically convey ownership or
Cenpower Kpone Independent $650 million possession in the asset to the mortgagee. A mortgage is required to
Power Plant be in writing, unless excluded from such requirement by operation

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 N. Dowuona & Company Ghana

of law or by a specific statute. Mortgages and fixed charges are duly signed by the mortgagor by the oath of the mortgagor, the
subject to the perfection requirements set out above. mortgagee or any attesting witness. The oath of proof must be
certified by the registrar of lands (or by a notary public, if executed
outside Ghana). Stamp duty is required to be paid on all security
2.3 Can security be taken over receivables where the
chargor is free to collect the receivables in the documents. Where more than one security is created in respect of
absence of a default and the debtors are not notified the same financing transaction, a rate of 0.5% of the secured facility
of the security? Briefly, what is the procedure? must be paid on the principal or primary security as stamp duty.
Ghana

Auxiliary, collateral, substituted or additional securities are charged

Security may be taken over receivables, with the chargor being with stamp duty at a rate of 0.25% each. Nominal registration fees
permitted to freely collect the receivables in the absence of a default. are payable for registration with the Collateral Registry, Registrar of
Security over receivables are usually created through an assignment of Companies and Deeds/Land Title Registry.
the receivables to the lender. The security agreement must be stamped,
and if the assignor is a company, it must be registered with the 2.7 Do the filing, notification or registration requirements
Registrar of Companies. Debtors need not be notified of the creation in relation to security over different types of assets
of the security in order for it to be valid; however, an assignment of a involve a significant amount of time or expense?
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 Registration of security affecting real property at the Land Title
debt and the same debt is subsequently assigned to another person, the Registry may involve a significant amount of time. It usually takes
later assignee shall take priority over the earlier assignee. between three to six months after stamping to register a mortgage
with the Land Title Registry. On the other hand, registering a
2.4 Can security be taken over cash deposited in bank security interest at the Collateral Registry can be done within a day,
accounts? Briefly, what is the procedure? whereas registration with the Registrar of Companies typically takes
between two to three weeks to complete. Other than stamp duty,
Cash deposited in bank accounts may be used as security for a there are not any significant filing/registration expenses.
transaction. This is normally done through the creation of a fixed
charge over the account in favour of the lender. A notice of the 2.8 Are any regulatory or similar consents required with
charge is usually sent to the bank with which the account is held. respect to the creation of security over real property
The charge will specify what transactions can be made and limits on (land), plant, machinery and equipment (e.g. pipeline,
withdrawals from the account will be specified. A charge that is whether underground or overground), etc.?
created over cash in a bank account is subject to the perfection
requirements set out in the answer to question 2.1. Other than the consent of the Lands Commission which is required
for the mortgaging of state land and stool/skin land (lands
collectively owned by communities which are held in trust by chiefs
2.5 Can security be taken over shares in companies
of such communities on their behalf), no regulatory or similar
incorporated in your jurisdiction? Are the shares in
certificated form? Briefly, what is the procedure? consents are required with respect to the creation of security over
real property, plant, machinery or equipment.
Security can be taken over shares in Ghanaian companies. Shares in
non-listed companies are in certificated form and a share charge created 3 Security Trustee
over the shares of a company usually requires the certificates to be
deposited with the lender. Upon the creation of a share charge, the
lender may file a stop notice at the high court requiring the company 3.1 Regardless of whether your jurisdiction recognises
secretary or any other person to be notified of the lender’s interest in the the concept of a “trust”, will it recognise the role of a
security trustee or agent and allow the security
charged shares. Where a stop notice is filed, the company secretary
trustee or agent (rather than each lender acting
cannot register any transfer of the charged shares without serving a separately) to enforce the security and to apply the
notice on the lender regarding the request for registration of the transfer. proceeds from the security to the claims of all the
The lender must then take the necessary steps within eight days of the lenders?
notification to obtain a court order, directed at the company secretary,
blocking the registration of the transfer of the charged shares. Shares in The concept of a trust is recognised in Ghana and the role of the
listed companies are held in dematerialised form with the Central security trustee or agent is also recognised. The security trustee is
Securities Depositary (“CSD”). Shareholders of listed companies may permitted to enforce security on behalf of the lenders and apply the
charge their shares as security by depositing prescribed forms with the proceeds from the security to each of their claims.
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
security, the shares are transferred by the CSD from the register of 3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available
charges back into the securities account of the chargor.
(such as a parallel debt or joint and several creditor
status) to achieve the effect referred to above which
2.6 What are the notarisation, registration, stamp duty would allow one party (either the security trustee or
and other fees (whether related to property value or the facility agent) to enforce claims on behalf of all the
otherwise) in relation to security over different types lenders so that individual lenders do not need to
of assets (in particular, shares, real estate, enforce their security separately?
receivables and chattels)?
This is not applicable; security trusts, although not common, are
Once executed, mortgages are required to be proved to have been recognised.

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N. Dowuona & Company Ghana

insolvent, the liquidator shall give notice to the person or company to

4 Enforcement of Security
whom the property was disposed of, or who benefitted from its
disposal, to return the property or the excess value to the liquidator.
4.1 Are there any significant restrictions which may Further, in terms of ranking of debts for payment during the liquidation
impact the timing and value of enforcement, such as of an insolvent company, debts comprising the unpaid remuneration
(a) a requirement for a public auction or the (not exceeding GHS 6,000) of employees for the four months preceding
availability of court blocking procedures to other the liquidation and unpaid taxes owed to the Republic or a local

Ghana
creditors/the company (or its trustee in authority as at the date of the liquidation have priority over debts
bankruptcy/liquidator), or (b) (in respect of regulated secured by a floating charge that are owed to creditors.
assets) regulatory consents?

Upon the occurrence of an enforcement event, a lender is permitted 5.3 Are there any entities that are excluded from
to take possession of a charged asset registered with the Collateral bankruptcy proceedings and, if so, what is the
applicable legislation?
Registry, if this can be done peaceably, or institute a court action to
enforce the security. Before attempting to take possession, the
lender must give 30 days’ notice to the borrower and a further 30 No entities are excluded from bankruptcy proceedings.
days’ notice to the Collateral Registry.
Where a lender is unable to peaceably take possession of a charged 5.4 Are there any processes other than court proceedings
asset (which in practice is often the case), an action must be instituted that are available to a creditor to seize the assets of
in court to enforce the security. The court may order for a sale of the the project company in an enforcement?
asset or the appointment of a receiver/manager upon the hearing of
the application. A court-ordered sale of an asset used as security shall The Borrowers and Lenders Act (which applies to credit transactions
be by public auction, unless the court orders otherwise. involving lenders who advance loans or other credit facilities as part
of their business) provides that, upon the occurrence of an
Generally, there are no regulatory consents required for the
enforcement event, a lender need not institute proceedings in court to
enforcement of security.
enforce any security that has been registered with the Collateral
Registry. Where possible, the lender may peaceably take possession
4.2 Do restrictions apply to foreign investors or creditors of the secured assets upon 30 days’ notice to the borrower and a
in the event of foreclosure on the project and related further 30 days’ notice to the Collateral Registry. In practice,
companies? however, securities are seldom realised without a court order.

There are no restrictions specially applicable to foreign investors or

creditors. 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
5 Bankruptcy and Restructuring cramdown of dissenting creditors?

Proceedings
Besides insolvency proceedings, there are no formal restructuring
processes that may be used to restructure the debts of the project
5.1 How does a bankruptcy proceeding in respect of the company and/or cram down on dissenting creditors.
project company affect the ability of a project lender
to enforce its rights as a secured party over the
security? 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.
Upon the commencement of bankruptcy proceedings and on
application to the court by a creditor or the liquidator, the company
Under the Bodies Corporate (Official Liquidations) Act, whenever
may be prevented from disposing of any of its property prior to the
the business of a company is carried on at a time when to the
commencement of the liquidation process. A secured lender may,
knowledge of the directors of the company, the company had no
however, institute proceedings in court to realise its security.
reasonable prospect of paying its debts as and when they fall due,
any such business shall be deemed to have been carried on with
5.2 Are there any preference periods, clawback rights or intent to defraud the creditors of the company, and the directors or
other preferential creditors’ rights (e.g. tax debts, any persons who were knowingly parties to the carrying on of such
employees’ claims) with respect to the security? 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,
The Bodies Corporate (Official Liquidations) Act, 1963 (Act 180) on the application of the liquidator or of any creditor, member or
permits a liquidator, during the winding-up of an insolvent company, to contributory of the company, may direct.
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, 6 Foreign Investment and Ownership
upon receiving such notice, be required to return the property or its Restrictions
value to the liquidator. Additionally, where a liquidator determines that
the 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 6.1 Are there any restrictions, controls, fees and/or taxes
on foreign ownership of a project company?
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 the company was
The Ghana Investment Promotion Centre Act, 2013 (Act 865)

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provides a limited number of activities in which foreigners cannot

engage in. With respect to businesses in which foreign participation 7.2 Must any of the financing or project documents be
is allowed, the foreign shareholder of the company has to satisfy the registered or filed with any government authority or
otherwise comply with legal formalities to be valid or
following minimum capital requirements: enforceable?
a. minimum of $200,000 for a joint venture between a foreign
and Ghanaian shareholder;
Under the Stamp Duty Act, 2005 (Act 689), all agreements must be
b. minimum of $500,000 for a wholly foreign-owned stamped by the Land Valuation Division of the Lands Commission.
Ghana

enterprise; and
In the event that the agreement involves an interest in land, it must
c. minimum of $1 million for a trading company. also be registered with the Deeds Registry and/or Land Title
Based on the Supreme Court’s decision in Attorney General v. Registry.
Balkan Energy Ghana Limited [2012] 2 SCGLR 998, and other
cases on the interpretation of Article 181(5) of the 1992
7.3 Does ownership of land, natural resources or a
Constitution, a foreign company or a Ghanaian company with pipeline, or undertaking the business of ownership or
foreign shareholders may be required to obtain Parliamentary operation of such assets, require a licence (and if so,
approval for a contract with the Government of Ghana. can such a licence be held by a foreign entity)?
The Petroleum Local Content & Local Participation Regulations,
2013 (L.I. 2204) require any contractor, subcontractor, licensee or Land is conveyed by a lease for a leasehold interest or by a
allied entity engaged in petroleum activities to have a local content conveyance for a freehold interest. A foreign entity does not require
plan and comply with the relevant local content regulation. Local a special licence to own land in Ghana. Article 267 of the 1992
content refers to the quantum of locally produced materials, Constitution, however, precludes a foreigner from owning an
personnel, financing, goods and services rendered. In the energy interest in land for more than 50 years at a time. Some industries
sector, the newly passed Energy Commission (Local Content and have specific requirements. For example, the Energy Commission
Local Participation) Electricity Supply Industry Regulations, 2017 Act, 1997 (Act 541) requires a foreigner to incorporate in Ghana to
(L.I. 2354), aimed at achieving a minimum local content of 60% and obtain a licence to transmit, wholesale supply, distribute, or sell
local participation of 51% in the electricity supply industry, requires electricity or natural gas.
a company that intends to engage in wholesale power supply
activities to have an initial local equity participation of at least 15%
7.4 Are there any royalties, restrictions, fees and/or taxes
by a Ghanaian partner which must be progressively increased to at payable on the extraction or export of natural
least 51% within a period of 10 years. resources?

6.2 Are there any bilateral investment treaties (or other A company must obtain a concession or right from the regulatory
international treaties) that would provide protection body in the relevant industry. Article 268 of the 1992 Constitution
from such restrictions? requires any contract or undertaking that grants a right or concession
for the exploitation of any natural resource to be ratified by
We are not aware of any bilateral investment treaties that provide Parliament, unless expressly exempted. There are royalties for the
protection from such restrictions. extraction of natural resources. For example, a mining lease is
subject to a royalty (differs based on the mineral being mined) of
between 3% to 6% of the total revenue.
6.3 What laws exist regarding the nationalisation or
expropriation of project companies and assets? Are
any forms of investment specially protected? 7.5 Are there any restrictions, controls, fees and/or taxes
on foreign currency exchange?
The Ghana Investment Promotion Centre (“GIPC”) Act protects
companies from nationalisation or expropriation, subject to the 1992 Under the Foreign Exchange Act, 2006 (Act 723), the Ghana Cedi is
Constitution. Under the GIPC Act, a foreigner would not be forced the sole legal tender in Ghana, and thus residents of Ghana cannot
to cede its shares to another person. Further, in the event that the price, advertise, receive or make payments in foreign currency for
government has to acquire a project company for national interest or goods and/or services, unless authorised by the Bank of Ghana.
public purpose, just compensation would be paid. Further, in relation to the operation of Foreign Exchange Accounts
and Foreign Currency Accounts, the Bank of Ghana rules provide
that: (a) a bank may only make foreign currency transfers if
7 Government Approvals/Restrictions
substantiated by proper documentation; and (b) transfers abroad
without initial documentation of up to $50,000 is permitted;
7.1 What are the relevant government agencies or however, any amounts above that threshold must be substantiated by
departments with authority over projects in the typical proper documentation.
project sectors?
7.6 Are there any restrictions, controls, fees and/or taxes
Cabinet; Parliament; Ministry of Finance; Ministry of Energy and on the remittance and repatriation of investment
Petroleum; National Petroleum Agency; Petroleum Commission; returns or loan payments to parties in other
Ministry for Roads and Highways; Ministry of Railways jurisdictions?
Development; Ministry of Food and Agriculture; Ghana Ports and
Harbours Authority; Ministry of Lands and Natural Resources; The Ghana Investment Promotion Centre Act, 2013 (Act 865)
Lands Commission; Minerals Commission; Registrar General’s guarantees the transfer of funds in convertible currency for
Department; Ghana Investment Promotion Centre; and Public dividends, servicing of foreign loans, payment of fees and charges
Procurement Authority. for technology transfer agreements and remittance of proceeds (net

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N. Dowuona & Company Ghana

of all taxes and other obligations) where the company is wound up. company must register and obtain a licence in Ghana to provide
Also, dividends are subject to withholding tax of 8%. insurance. Also, a foreign insurance company may not provide
insurance for property located in Ghana, liabilities arising in Ghana or
for goods (other than personal effects) imported into Ghana. A person
7.7 Can project companies establish and maintain
onshore foreign currency accounts and/or offshore in Ghana, however, may apply to obtain insurance from a foreign
accounts in other jurisdictions? company for specific instances such as where the required insurance
policy cannot be obtained in Ghana. Also, the Income Tax Act, 2015

Ghana
Project companies in Ghana may establish and maintain onshore (Act 896) imposes a 5% withholding tax on insurance premiums paid
and offshore foreign currency accounts, subject to the laws of Ghana by residents of Ghana to foreign insurance companies.
as well as the laws of the relevant offshore jurisdictions.
8.2 Are insurance policies over project assets payable to
foreign (secured) creditors?
7.8 Is there any restriction (under corporate law,
exchange control, other law or binding governmental
practice or binding contract) on the payment of Yes they are, subject to any laws specific to that industry that may
dividends from a project company to its parent require the foreign creditor to be registered in Ghana.
company where the parent is incorporated in your
jurisdiction or abroad?
9 Foreign Employee Restrictions
Other than the requirement that a company shall not pay a dividend
to its shareholders unless it is able, after the payment, to pay its debts
9.1 Are there any restrictions on foreign workers,
as they fall due and that the value of the payment does not exceed the
technicians, engineers or executives being employed
income surplus of the company immediately before the payment of by a project company?
the dividend, there are no restrictions on the payment of dividends,
regardless of whether the parent company is incorporated in Ghana.
In general, a foreigner must obtain a work and residence permit to
work in Ghana. The project company, in its application for a work
7.9 Are there any material environmental, health and and residence permit, must provide sufficient evidence as to why it
safety laws or regulations that would impact upon a is necessary to hire a foreigner, i.e. that the skills required have not
project financing and which governmental authorities been found in a Ghanaian citizen. Companies in some industries,
administer those laws or regulations? such as minerals and mining industries, are granted automatic
quotas for foreign employees – work and resident permits, based on
The Environmental Protection Act, 1994 (Act 490) contains significant these quotas, will be granted upon application.
requirements for undertakings whose activities impact the environment.
In addition, the GIPC provides automatic quotas upon registration.
Additionally, there are various health and safety laws and regulations
For example, where the project company with foreign ownership has
for different industries. The Labour Act, 2003 (Act 651) has health and
a stated capital of up to $250,000, it is entitled to one automatic quota.
safety requirements for employment conditions, such as provision of
requisite training to maintain a safe working environment, and adequate Foreign employees working in areas where professional licences are
toilet facilities. Some more specific requirements are built into industry required may have to register with the relevant licensing authority.
practices, laws and regulations. For example, mining companies are
subject to specific Environmental Protection Agency rules. 10 Equipment Import Restrictions

7.10 Is there any specific legal/statutory framework for

procurement by project companies? 10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by
construction contractors?
The Public Procurement Act, 2003 (Act 663), as amended, governs
the public procurement process in Ghana. Where the project
Generally, all imported equipment are subject to customs duties;
involves a partnership with the Government of Ghana or a public
however, there are exemptions for specific industries, such as the
institution, the National Policy on Public Private Partnership (“the
agricultural and petroleum industries. Where the company registers
PPP Policy”) will apply. The Public Private Partnership Bill, 2018,
with the GIPC or the Free Zones Board, it will enjoy various
expected to replace the PPP Policy is currently before Parliament.
exemptions and incentives. Where the good is exempted from
The PPP Policy establishes the thresholds for seeking approval for
custom duties, it must be used solely for its intended use in the
public-private partnership (“PPP”) projects. For example, a PPP
project company. If the good is later sold in Ghana, the exempted
project would require Cabinet and/or Parliamentary approval
custom duty will now be payable.
(where required by Article 174 or 181 of the 1992 Constitution),
where the estimated project cost exceeds GHS 50 million.
10.2 If so, what import duties are payable and are
exceptions available?
8 Foreign Insurance
Goods imported into Ghana are classified in accordance with the
Harmonized System Code to determine the applicable tax. Some
8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or applicable taxes are Value-Added Tax, special import levy (expected
guaranteed by foreign insurance companies? to expire in December 2019) and customs and excise duties unless
an exemption or concession exists. Exemptions may exist for
Under the Insurance Act, 2006 (Act 724), a foreign insurance mining, oil and gas and free zones-registered entities.

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discretion determines otherwise given the specific facts of a

11 Force Majeure
particular case. For instance, where the court determines that a
contract is so intricately connected with Ghana that it does not make
11.1 Are force majeure exclusions available and sense to subject disputes arising thereunder to determination by a
enforceable? foreign jurisdiction. This is, however, rare and generally the courts
would uphold the parties’ choice of forum for resolving disputes.
Force majeure exclusions are available and enforceable under Contractual waivers of immunity are binding and enforceable.
Ghana

Ghanaian law and are usually included in financing agreements.

15 International Arbitration
12 Corrupt Practices
15.1 Are contractual provisions requiring submission of
disputes to international arbitration and arbitral
12.1 Are there any rules prohibiting corrupt business
awards recognised by local courts?
practices and bribery (particularly any rules targeting
the projects sector)? What are the applicable civil or
criminal penalties? Generally, Ghanaian courts will not assume jurisdiction over
matters which the parties have agreed to resolve by arbitration. If
Project companies are subject to general anti-bribery and corruption the court is satisfied that the matter is one in respect of which there
laws. Bribery and corruption under Ghanaian law is limited to acts is a valid arbitration agreement and that the contract does not fall
of bribery by public officers, jurors or voters. Hence, bribery or outside the scope of matters that are arbitrable under Ghanaian law,
corruption committed between private persons are not recognised as a submission to arbitration will be enforced. Arbitral awards are
criminal offences in Ghana. The Public Procurement Act, 2003 (Act recognised by Ghanaian courts and may be enforced through an
663), as amended, which regulates procurement processes for state application to the court. Leave to enforce a local arbitral award shall
entities, agencies and departments, enjoins entities and participants be granted by a court unless it is shown that the arbitral tribunal
involved in a procurement process to refrain from corrupt practices lacked jurisdiction to render the award. The enforcement of foreign
as construed under the Criminal and other Offences Act, 1960 (Act arbitral awards require the satisfaction of additional requirements
29). Under Act 29, an act of bribery or corruption is considered to including showing the court that: (a) the award was made by a
be a misdemeanour and a person convicted of such offence is liable competent authority and under the laws of the country in which the
to a maximum term of imprisonment of 25 years. Foreign persons award was made; (b) a reciprocal arrangement exists between the
are also subject to the provisions of the Anti-Money Laundering Republic of Ghana and the country in which the award was made or
Act, 2008 (Act 749) and the Economic and Organised Crime Office the award was made under the New York Convention or under any
Act, 2010 (Act 804), which authorise relevant institutions to other international convention on arbitration ratified by the
monitor money laundering activities and empowers state institutions Parliament of Ghana; (c) the original award and the agreement
to seize and recover the proceeds of crime and prosecute offenders. 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
13 Applicable Law the arbitration; and (e) no grounds for invalidating the award as
provided under the Courts Act exist.

13.1 What law typically governs project agreements?

15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
Parties are at liberty to choose the governing law of a contract. In
conventions?
practice, English law is typically selected. The Public Private
Partnership Bill 2018, however, provides that PPP agreements shall
be governed by Ghanaian law. Ghana is a contracting state to the New York Convention.

13.2 What law typically governs financing agreements? 15.3 Are any types of disputes not arbitrable under local
law?

Parties to a financing agreement typically select the laws of the

Under Ghanaian law, matters involving the national or public
jurisdiction where the lenders are located.
interest, the environment, the enforcement and interpretation of the
Constitution or any other matter that by law cannot be settled by an
13.3 What matters are typically governed by domestic law? alternative dispute resolution method are not arbitrable.

Security agreements are typically governed by domestic law. 15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
14 Jurisdiction and Waiver of Immunity
Under the Labour Act, 2003 (Act 651) and its regulations, the
Labour Commission is mandated to resolve, by reference to
14.1 Is a party’s submission to a foreign jurisdiction and compulsory arbitration, any labour dispute which remains
waiver of immunity legally binding and enforceable? unresolved after seven working days following a strike or lockout
by employees or employers. The compulsory arbitration award is
A party’s submission to a foreign jurisdiction is generally binding, unless set aside on appeal to the Court of Appeal on
enforceable in a Ghanaian court, except where the court in its questions of law only.

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Exchange (“GSE”) for listed companies set out in the Listing Rules
16 Change of Law / Political Risk
and the Securities and Exchange Commission’s (“SEC”) applicable
laws and regulations. To list on the GSE, a company must be a
16.1 Has there been any call for political risk protections public limited liability company incorporated under the Companies
such as direct agreements with central government or Act of Ghana. For an original listing application, the company must
political risk guarantees? submit an application to the GSE, together with the draft prospectus,
which also needs to be submitted to the SEC for approval. The

Ghana
In PPP transactions, lenders typically insist on direct agreements company must appoint a licensed dealing member of the GSE to act
with the governmental agencies or departments whom the as its sponsor, and provide the GSE with information regarding its
borrower/private party is partnering with. Direct agreements and business, capital structure, directors and key management
political risk guarantees with or from central government are personnel, details of long-term and funded debt, investments and
resisted by the latter, and hence, lenders typically turn to assets, profit and loss accounts, and any other relevant information.
development finance institutions for partial risk guarantees for their The company should also have passed a shareholders’ resolution
investments. Contractual protections against change of law and approving the issuance of the securities, the number of securities to
material adverse governmental actions are also quite common in be issued and the price per security on offer. Debt securities, other
project financing agreements. 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
17 Tax approved by the GSE, a date is set for the launch of the public offer.
Listed companies are required to comply with the GSE Listing
Rules, which sets out initial and continuing listing obligations for
17.1 Are there any requirements to deduct or withhold tax
companies.
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?
19 Islamic Finance

Under the Income Tax Act, 2016 (Act 896), withholding tax of 8% 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
is deductible from interest payments on loans, except where the instruments might be used in the structuring of an
lender is a resident financial institution. Interest payments to Islamic project financing in your jurisdiction.
individuals are also subject to a reduced rate of 1% withholding tax.
Although the Banks and Specialised Deposit-Taking Institutions
Act, 2016 (Act 930) states that a licensed bank or specialised
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What deposit-taking institution may provide non-interest banking
taxes apply to foreign investments, loans, mortgages services, and a few banks and micro-finance institutions do provide
or other security documents, either for the purposes such services, the regulatory framework and operational structures
of effectiveness or registration? to support Islamic financing (such as the establishment of a Shari’ah
board) have not yet been developed or operationalised.
There are no preferential tax incentives for foreign investors or
creditors. Foreign investors, however, may take advantage of
19.2 In what circumstances may Shari’ah law become the
general tax incentives granted to free zones companies and sector- governing law of a contract or a dispute? Have there
specific businesses or businesses sited in specific locations. 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?
18 Other Matters
Ghanaian courts would generally respect the choice of governing
18.1 Are there any other material considerations which law by parties to a contract. Therefore, unless any circumstances
should be taken into account by either equity exist (for example, in respect of matters deemed contrary to public
investors or lenders when participating in project policy) that necessitate that the parties’ choice be disregarded, the
financings in your jurisdiction? courts would uphold the chosen law of the parties. Under the rules
of court and the Evidence Act, 1975 (NRCD 323) the party seeking
The main issues to consider when structuring a project finance to rely on the law is obliged to prove it. We are not aware of any
transaction include foreign exchange risk (especially for foreign cases on jurisdictional issues on Shari’ah law relevant to the finance
currency financed projects whose income is expected to be sector.
generated in Ghana Cedis), and local participation and local content
laws for certain regulated industries. 19.3 Could the inclusion of an interest payment obligation
in a loan agreement affect its validity and/or
18.2 Are there any legal impositions to project companies enforceability in your jurisdiction? If so, what steps
issuing bonds or similar capital market instruments? could be taken to mitigate this risk?
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market The inclusion of interest payment obligations in a contract would
instruments. not affect its validity and enforceability, unless such payments are
penal in nature.
The issuance of capital market instruments by project companies are
subject to the general requirements prescribed by the Ghana Stock

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 N. Dowuona & Company Ghana

Acknowledgment
The authors would like to thank Judith O. Koranteng, an Associate
at N. Dowuona & Company, for her invaluable assistance in the
preparation of this chapter (Tel: +233 506 423 973 / Email:
[email protected]).
Ghana

NanaAma Botchway Akosua Achiaa Akobour Debrah

N. Dowuona & Company N. Dowuona & Company
Solis House, GL-056-7567 Solis House, GL-056-7567
Adembra Road, East Cantonments Adembra Road, East Cantonments
Accra Accra
Ghana Ghana

Tel: +233 244 319 936 Tel: +233 541 152 787
Email: [email protected] Email: [email protected]
URL: www.dowuonalaw.com URL: www.dowuonalaw.com

NanaAma is the Managing Partner of N. Dowuona & Company. She Achiaa is an Associate at N. Dowuona & Company. She has advised
has advised on numerous investments in Ghana and other parts of on projects such as a $300 million information technology public-
Africa and has significant experience in advising on construction private partnership project in Ghana. Achiaa’s areas of focus are
projects including planning, permitting and project finance. She has corporate and commercial law, banking and finance and energy and
advised on several projects such as the Kingdom Hotel Investments infrastructure projects. Her recent work with the firm includes advising
acquisition and the development of the $100 million multipurpose on the structuring of an asset purchase acquisition of a multi-national
property development in Ghana, and Volta Lake Transport Company’s manufacturing and distribution chain, and advising an international
$300 million Eastern Corridor Multi-Modal Transport Project. Prior to consortium of contractors on the structuring of an investment vehicle
founding N. Dowuona & Company, NanaAma practised with Bentsi- for tendering for certain public infrastructure works in Ghana. Prior to
Enchill, Letsa & Ankomah. Before returning to Ghana, NanaAma was joining the firm, Achiaa practised with Ghartey and Ghartey in their
an Associate in the mergers and acquisitions and corporate tax private client and dispute resolution teams. Achiaa obtained her LL.B.
departments of the New York office of the international law firm from the Kwame Nkrumah University of Science and Technology and
Simpson Thatcher & Bartlett. NanaAma received her Juris Doctor also holds an LL.M. (with distinction) in International Corporate
from Columbia University School of Law. She is licensed to practise Governance and Financial Regulation from the University of Warwick.
law in Ghana. She is licensed to practise law in Ghana.

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 experience 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’ businesses in formulating our advice. We are proactive in avoiding conflicts of
interest and aim to forge strong and enduring relationships with our clients.

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Chapter 18

Greece
Panagiotis (Notis) Sardelas

Sardelas Petsa Law Firm Konstantina (Nantia) Kalogiannidi

The successful completion of the project is expected to demonstrate

1 Overview
that well-structured PPPs in Greece will generate investor appetite
and bring large-scale external investment into the Greek economy.
1.1 What are the main trends/significant developments in
the project finance market in your jurisdiction?
2 Security
Over recent years there have been two major developments in the
Greek markets. First of all, institutional lenders, such as the European 2.1 Is it possible to give asset security by means of a
Bank for Reconstruction and Development (“EBRD”) and the general security agreement or is an agreement
European Investment Bank (“EIB”) are investing in Greek financing required in relation to each type of asset? Briefly,
projects, supporting the Greek economy. Secondly, the real estate what is the procedure?
sector is developing at a fast pace and Greek banks are investing in
real estate projects being developed by real estate investment Asset security by means of a general security agreement is possible.
companies (“REIC”). Notably, it should also be mentioned that, in Nevertheless, since each type of asset and each type of security is
virtue of Law no. 4354/2015, a new legal framework for the perfected by different procedures and registration requirements, a
management and transfer of claims from non-performing loans separate agreement is commonly used. As far as the procedure is
(“NPLs”) has been introduced into the Greek market, so as to help concerned, see our answers below regarding different types of assets
credit institutions clean up their balance sheets from non-performing, and different types of security.
or so-called “red”, loans. Further, Law no. 3869/2010 is also worth
mentioning, considering that it was the first Greek legislative act to 2.2 Can security be taken over real property (land), plant,
uniformly regulate the issue of over-credited individuals (non- machinery and equipment (e.g. pipeline, whether
merchants). The imperative need for a legal framework, regulating underground or overground)? Briefly, what is the
individuals’ bankruptcy, which was itself a product of the financial procedure?
crisis that has plagued Greece over much of the past decade, dictated
the passage of Law no. 3869/2010, which involves a judicial Security over real property (land) and plant is created by mortgage
settlement of the debts that the bankrupt individual is unable to repay. (by virtue of a notarial mortgage deed) or by mortgage prenotation
(by virtue of a county court decision) and perfected by registration
1.2 What are the most significant project financings that
in the public books of the competent land registry or cadastre, where
have taken place in your jurisdiction in recent years? 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
One of the most significant lending transactions that is ongoing is
mortgage, once its claim becomes final. Such security extends to all
the privatisation of 14 Greek regional airports. Fraport Greece, the
component parts and accessories of the real estate (i.e. machinery
concessionaire for the 14 Greek regional airports, is owned by
and equipment).
Fraport AG, Copelouzos Group and Marguerite, the 2020 European
Fund. This group of lenders provides long-term financing to the As far as machinery and equipment are concerned, security can be
concessionaire of a total amount of €813,000,000. The project is a created by a non-possessory pledge agreement by virtue of article 1
significant large-scale infrastructure project in Greece, to be of Law no. 2844/2000 and perfected by registration to the public
financed under a Public Private Partnership (“PPP”) arrangement. book of Law no. 2844/2000 kept by the competent public registry
The transition impact of the project is expected to come mainly from where the borrower has its corporate seat.
greater private sector involvement in the airports sector through
demonstrating the effect of: (i) the benefits of private sector 2.3 Can security be taken over receivables where the
financing of infrastructure assets which may be replicated by the chargor is free to collect the receivables in the
Greek government in other sectors and also by governments in absence of a default and the debtors are not notified
neighbouring countries considering infrastructure PPPs; and (ii) the of the security? Briefly, what is the procedure?
development and restructuring of the sector, as the project involves
upgrading the airport facilities to increase capacity and improve the Security over receivables (trade receivables and insurance proceeds)
service quality offered to airlines and passengers. is created by a private agreement and perfected by notification to the

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 Sardelas Petsa Law Firm Greece

debtor of the relevant claims. In banking practice, such security is registration to the public books of the competent land registry and/or
granted in the form of a pledge and an assignment of the receivables cadastre. Registration fees for the land registry amount to 0.775%
due to such pledge, by virtue of legislative degree 17.7.1923. of the secured amount. Registration fees for the cadastre amount to
Security over business receivables may also be granted under 0.875% of the secured amount.
articles 11–15 of Law no. 2844/2000 and perfected by registration to In case of mortgages, notarial fees range from 0.2% to 1% of the
the public book of Law no. 2844/2000 kept by the competent public secured amount. In case of prenotation of mortgages, court fees do
registry where the borrower has its corporate seat (in addition to not exceed €300.
Greece

notification to the debtor).

Pledge over shares is not subject to any costs and fees. Security over
Security may extend to future receivables, provided that they are receivables, if created by virtue of legislative degree 17.7.1923, is
specifically defined in the security agreement and fall within the subject to court bailiff’s costs in order for the debtor to be notified
scope of the pledge. The chargor would be free to collect the and if created by virtue of articles 11–15 of Law no. 2844/2000 is
receivables if no default is outstanding, if such agreement is subject to the costs described above in order for the security
provided to the security agreement. agreement to be registered to the competent public books.
Under the legal framework for bond loans, registration fees are
2.4 Can security be taken over cash deposited in bank fixed at €100 per registration, which minimalises the costs of
accounts? Briefly, what is the procedure? security granted, under bond loans.

Collateral security over cash deposited in bank accounts is created

2.7 Do the filing, notification or registration requirements
by a private agreement and perfected by notification to the bank in relation to security over different types of assets
holding such accounts. Standard practice provides for such involve a significant amount of time or expense?
collateral in cash to be governed by legislative degree 17.7.1923
and/or Law no. 3301/2004 on financial collateral agreements.
The filing, notification and registration process usually does not
involve a significant amount of time in order for it to be completed.
2.5 Can security be taken over shares in companies However, the time needed may vary depending on the efficiency of
incorporated in your jurisdiction? Are the shares in the competent authority/registry office in each individual case. As
certificated form? Briefly, what is the procedure? for the expenses, please refer to question 2.6 above.

Unless otherwise provided by the Articles of Association of the

2.8 Are any regulatory or similar consents required with
company incorporated under Greek law, collateral security (pledge) respect to the creation of security over real property
over the company’s shares is created by a private agreement and (land), plant, machinery and equipment (e.g. pipeline,
perfected by physical delivery of the shares to the pledgee or a third- whether underground or overground), etc.?
party custodian.
It should further be noted that according to the new provisions of the In principle, no consents are required.
Company Law, Greek companies can no longer issue bearer shares.
Bearer shares that have been already issued by Greek companies
must be converted to registered ones until 1.1.2020.
3 Security Trustee
Security over shares listed on the Athens Stock Exchange is created
by private agreement and perfected by notification and registration 3.1 Regardless of whether your jurisdiction recognises
to the Dematerialised Securities System, pursuant to the regulation the concept of a “trust”, will it recognise the role of a
of the Hellenic Central Securities Depositary. security trustee or agent and allow the security
trustee or agent (rather than each lender acting
Security may extend to new shares issued by the company and separately) to enforce the security and to apply the
dividends or other benefits, such as voting rights, but not to proceeds from the security to the claims of all the
preference rights of the shareholders, since such rights do not exist lenders?
at the time the security agreement is perfected (under Greek law,
preference rights of the shareholders are considered as rights of The role of the agent/trustee is provided by the bond loan legal
expectation and are created when the General Assembly decides on framework, under which any security granted by the borrower is
a share capital increase). granted in the name of the bondholders’ agent, for the benefit of the
The law governing the pledge over shares issued by Greek bondholders. The bondholders’ agent is responsible for enforcing
companies is subject to the rule of lex rei sitae; i.e. the law of the loan documentation and collateral securities and applying the
place where the property is situated. Therefore, such security may proceeds from the collateral to the claims of all the lenders pro rata,
only be governed by Greek law. unless otherwise agreed.
Furthermore, Article 73 §3 of the Company Law provides that in
2.6 What are the notarisation, registration, stamp duty case a bond loan is governed by foreign law, collateral security and
and other fees (whether related to property value or guarantees are granted in the name of the person who, under the law
otherwise) in relation to security over different types governing the bond loan, may hold securities and guarantees on
of assets (in particular, shares, real estate, his/her account on behalf of the bondholders. The registration shall
receivables and chattels)? be made in the name of the agent, with explicit indication that the
guarantee is granted to secure debts from a bond loan.
Mortgages and prenotation of mortgages over real estate, non-
possessory pledges and floating charges over chattels are subject to

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Sardelas Petsa Law Firm Greece

It should be noted that the legislative decree of 17.7.1923 introduces

3.2 If a security trust is not recognised in your an exception to the aforementioned rule, according to which the
jurisdiction, is an alternative mechanism available liquidation of the attached assets is effectuated through public
(such as a parallel debt or joint and several creditor
electronic auction. More specifically, the legal effect of a pledge of
status) to achieve the effect referred to above which
would allow one party (either the security trustee or claims under the provisions of the legislative decree of 17.7.1923 is
the facility agent) to enforce claims on behalf of all the that the pledgee-credit institution arguably acquires full ownership
lenders so that individual lenders do not need to of the claim and is entitled to liquidate the claim, with the obligation

Greece
enforce their security separately? to return to the pledgor-debtor any amount exceeding the secured
claim.
Since Greek law recognises only the notion of bondholders’ agent, Another exception to the above rule is introduced by Law no.
an alternative mechanism to achieve such an effect is a contractual 3301/2004 on financial collateral agreements, under which
agreement between the lenders of a syndicated credit facility provisions to the satisfaction of the pledgee-creditor are effectuated
(intercreditors’ agreement) providing that the collateral security is through sale, set-off or application of the financial instruments
granted in the name of the security trustee, who is also a joint and and/or cash in discharge of the relevant obligations.
several creditor with the other secured lenders. However, lenders
No regulatory consents are required.
are not protected in case of insolvency proceedings of the security
agent.
4.2 Do restrictions apply to foreign investors or creditors
in the event of foreclosure on the project and related
4 Enforcement of Security companies?

No restrictions apply. However, it has been argued that foreign

4.1 Are there any significant restrictions which may
lenders do not enjoy the benefits of the legislative decree of
impact the timing and value of enforcement, such as
(a) a requirement for a public auction or the 17.7.1923.
availability of court blocking procedures to other
creditors/the company (or its trustee in
bankruptcy/liquidator), or (b) (in respect of regulated 5 Bankruptcy and Restructuring
assets) regulatory consents? Proceedings

Under applicable law, that is, pursuant to the provisions of the

5.1 How does a bankruptcy proceeding in respect of the
relevant articles of the Greek Code of Civil Procedure, the individual
project company affect the ability of a project lender
stages of the enforcement procedure are described in detail and to enforce its rights as a secured party over the
specific timeframes are set, within which enforcement proceedings security?
shall be effectuated. As a general rule, in order for the enforcement
procedure to commence, the creditor-beneficiary of the collateral Pursuant to the provisions of Law no. 3588/2007 (i.e. the Greek
security (i.e. the mortgagee/pledgee of mortgaged/pledged Bankruptcy Code), in the case of declaration of bankruptcy, a
immovable/movable assets) must obtain an enforceable title (i.e. suspension of all individual enforcement actions is imposed on all
mainly non-appealable judgments, arbitral awards, payment orders, unsecured creditors and/or all priority creditors (i.e. creditors whose
notarial deeds, etc.). Subsequently, as far as pecuniary claims are claims have a general privilege for satisfaction from the whole of the
concerned, the enforcement procedure involves the following main debtor’s estate). As for the secured creditors (i.e. creditors whose
stages: (a) the attachment of the debtor’s assets; (b) the intervention claims are secured by special privilege or real security on a specific
of other creditors; (c) the liquidation of the attached assets through asset of the debtor’s estate), they may undertake enforcement action
public electronic auction; and (d) the distribution of proceeds. In against the specific secured asset, unless such secured assets are
particular, regarding the liquidation process, it is noted that functionally and directly linked to the debtor’s business. The
liquidation is effected by electronic auction, which is administered aforementioned moratorium may last up to ten (10) months starting
by a notary public who is certified to conduct electronic auctions (we from the issuing date of the court decision which declares the
also refer to our answer to question 7.3. above). As to the distribution bankruptcy. As far as pre-insolvency proceedings are concerned,
of proceeds from the public electronic auction of a specific asset, it is under the relevant provisions of the Greek Bankruptcy Code, which
noted that, in principle, the proceeds are distributed to all the provide for the conclusion of an agreement between the debtor and a
creditors who participated in the liquidation process. In the case the certain percentage of its creditors (60% of the total claims including
electronic auction proceeds, after deducting the costs and expenses 40% of secured claims) (hereinafter referred to as the
of the enforcement proceedings, are less than the total claims of the “Rehabilitation Agreement”) and the subsequent ratification from
creditors, who participated in the respective proceedings, then they the court of such agreement, from the filing of the Rehabilitation
are proportionally distributed. However, certain categories of Agreement for ratification until the issuance of the decision of the
creditors have priority over the proportional distribution as follows: court, all individual and collective enforcement action is
(a) claims provided with a general privilege (i.e. claims of the State automatically suspended. This moratorium may not normally exceed
and of other public entities, claims for wages and personal four (4) months and may be extended, following application, for as
maintenance, etc.) have a minimum priority of 25% of the total long as the decision for ratification remains pending. It is also noted
proceeds; (b) claims provided with a special privilege, that is, that the Rehabilitation Agreement may include more specific
secured claims (i.e. collateral security on the specific asset on which provisions concerning such moratorium. However, it should be
enforcement takes place) as well as claims regarding the mentioned that agreements on financial collateral under Law
maintenance of the property and the production and harvest of its 3301/2004 do not fall under the scope of any kind of moratorium on
fruits, have a minimum priority of 65% of the total proceeds; and (c) enforcement in the abovementioned cases, namely in the case of
unsecured claims have a minimum priority of 10% of the total declaration of bankruptcy and pre-insolvency proceedings, etc.
proceeds.

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Moreover, please note that the Greek Bankruptcy Code provides that institutions; (b) Law no. 4514/2018 regarding investment firms; and
transactions carried out during the so-called “suspect period” (i.e. the (c) Law no. 4364/2016 regarding insurance undertakings.
period specified in the court decision declaring the bankruptcy, which
may not precede the date of issuance of the said decision by more than
5.4 Are there any processes other than court proceedings
two (2) years and during which it is assumed that the bankrupt debtor that are available to a creditor to seize the assets of
has discontinued its payments), including transactions concerning the the project company in an enforcement?
establishment of in rem securities (including the prenotation of
Greece

mortgage) or provision of guarantees for pre-existing obligations, are Greek law provides fast-track injunction procedures in case of
subject to clawback, upon request of the bankruptcy administrator or a urgency.
creditor, and thus rescinded and made null and void. It should also be
noted that security agreements established by virtue of the provisions of
Law no. 3301/2004 on financial collateral agreements are, in principle, 5.5 Are there any processes other than formal insolvency
not subject to the clawback provisions of the Greek Bankruptcy Code proceedings that are available to a project company
to achieve a restructuring of its debts and/or
and generally remain unaffected by bankruptcy proceedings. The same
cramdown of dissenting creditors?
holds true for the security agreements which were carried out pursuant
to the provisions of the Rehabilitation Agreement.
Please refer to our answer to question 5.1 above regarding the
Rehabilitation Agreement.
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? 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.
As mentioned above under question 5.1, pursuant to the relevant
provisions of the Greek Bankruptcy Code, certain types of
transactions, that are (a) donations or other transactions in which the In case of seizure of payments, over-indebtedness or insolvency,
consideration received by the bankrupt person or entity from its directors are instantly obliged to apply for insolvency proceedings.
counterparty are disproportionately small in relation to its own In case of continuation of trading the directors may face criminal
obligations, (b) payments of non-outstanding debt, (c) non-cash liabilities on (simple or fraudulent) bankruptcy. Furthermore, the
payments of outstanding debts, or (d) establishment of in rem directors may be personally considered liable for damages caused
securities (including the prenotation of mortgage) or provision of from their actions or omissions.
guarantees, for pre-existing obligations, if carried out during the
“suspect period”, are subject to clawback, upon request of the 6 Foreign Investment and Ownership
bankruptcy administrator or a creditor. Please note that the legal Restrictions
consequences of the clawback are that transactions in question are
null and void and are rescinded. Further, transactions involving the
bankrupt debtor and entered into during a period of five (5) years 6.1 Are there any restrictions, controls, fees and/or taxes
preceding the declaration of bankruptcy are subject to clawback if on foreign ownership of a project company?
the bankrupt person has acted intentionally to damage its creditors
or discriminate against some of them and the counterparty was In general, there are no restrictions on foreign ownership of a project
aware of the bankrupt person’s intention. company. However, there are several restrictions on real estate
As far as the procedure regarding the liquidation of the bankrupt situated in forest, coastal or archaeological areas. Furthermore, the
debtor’s estate is concerned, it is noted that the liquidation proceeds acquisition by non-EU citizens and contracts related to real estate
in the context of the bankruptcy proceedings are distributed in located in border areas requires State approval.
accordance with the relevant provisions of the Greek Code of Civil
Procedure, which regulate the liquidation process in the context of
6.2 Are there any bilateral investment treaties (or other
the enforcement proceedings in general, and also the same system of international treaties) that would provide protection
privileges applies. from such restrictions?

5.3 Are there any entities that are excluded from Greece has entered into several bilateral investor treaties, which
bankruptcy proceedings and, if so, what is the offer protection for investor rights with more than 47 countries.
applicable legislation?

6.3 What laws exist regarding the nationalisation or

Under applicable law, that is, pursuant to the relevant provisions of expropriation of project companies and assets? Are
the Greek Bankruptcy Code, merchants (either individuals or legal any forms of investment specially protected?
entities) as well as associations with legal personality that pursue
economic purposes are subject to bankruptcy proceedings. Legal The Greek Constitution recognises and protects private property. It
entities governed by public law, public authorities in general as well may only be expropriated for the public good and upon payment of
as local authorities are not subject to bankruptcy proceedings and just compensation. No form of investment is specially protected
cannot be declared bankrupt. from nationalisation or expropriation. Such compensation, in case
Please also note that there are separate laws providing and of conflict, is determined by the courts.
regulating a special liquidation process for certain categories of
legal entities, that is: (a) Law no. 4261/2014 regarding credit

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of Greek project companies (unless otherwise provided by a double

7 Government Approvals/Restrictions
taxation treaty or in case that the EU parent-subsidiary directive
applies). Interest payments by Greek legal entities are in principle
7.1 What are the relevant government agencies or subject to 15% withholding tax (unless otherwise provided by a
departments with authority over projects in the typical double taxation treaty or in case that the EU interest-royalties
project sectors? directive applies).

Greece
For a number of typical project business sectors there will be 7.7 Can project companies establish and maintain
competence at the level of the relevant Ministry (i.e. Energy, onshore foreign currency accounts and/or offshore
Environment, Transport) and the relevant regulatory authorities. accounts in other jurisdictions?
The Hellenic Republic Asset Development Fund (“HRADF”)
leverages the State private property assigned to it by the Hellenic Project companies established under Greek law may establish and
Republic. maintain foreign currency accounts in and outside of Greece.

7.2 Must any of the financing or project documents be 7.8 Is there any restriction (under corporate law,
registered or filed with any government authority or exchange control, other law or binding governmental
otherwise comply with legal formalities to be valid or practice or binding contract) on the payment of
enforceable? dividends from a project company to its parent
company where the parent is incorporated in your
In general, there are no formal registration requirements in relation jurisdiction or abroad?
to financing or project documents, save for certain security and
collateral documents (such as pledge agreements and mortgages) There are no restrictions on dividend payments to non-Greek
and also licensing documentation related to the project. resident parent companies, other than the general company and
accounting applicable rules on distribution of dividends.
7.3 Does ownership of land, natural resources or a
pipeline, or undertaking the business of ownership or 7.9 Are there any material environmental, health and
operation of such assets, require a licence (and if so, safety laws or regulations that would impact upon a
can such a licence be held by a foreign entity)? project financing and which governmental authorities
administer those laws or regulations?
Actual ownership of land and natural resources does not in general
require a licence. However, operation of businesses and On 18.6.2018, the Hellenic Energy Exchange S.A. was founded as
development of projects related to exploitation of or constructions part of the EU’s Target Model to create a single energy market. Law
on such land requires certain permits, authorisations and licences no. 4425/2016 (“Urgent regulations of the Ministries of Finance,
granted by national or regional authorities, depending on the Environment and Energy, Infrastructure, Transport and Networks
location, the size, the nature of the relevant industry and its and Labor, Social Security and Social Solidarity for the
environmental impact. implementation of the agreement on budgetary objectives and
structural reforms and others provisions”), as amended by Law no.
4512/2018 (“Regulations for the implementation of the structural
7.4 Are there any royalties, restrictions, fees and/or taxes
reforms of the Economic Adjustment Program and other
payable on the extraction or export of natural
resources? provisions”) includes provisions related to the establishment and
operation of the Energy Exchange. Its establishment aims at
achieving further transparency in transactions involving energy
Such issues are examined on a case-by-case basis. However,
goods.
typically concessions are against royalty.

7.10 Is there any specific legal/statutory framework for

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

There is no specific legal framework for procurement by project

In principle, no. However, certain capital controls restrictions are
companies. State or State-owned companies shall comply with the
still in place and prohibit or limit the free transfer of monies and
public procurement rules transposing EU legislation. The Single
foreign exchange transactions. In general, such restrictions are
Public Procurement Authority monitors public procurement
gradually phasing out.
procedures and compliance with EU legislation.

7.6 Are there any restrictions, controls, fees and/or taxes

on the remittance and repatriation of investment 8 Foreign Insurance
returns or loan payments to parties in other
jurisdictions?
8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or
Undistributed income (i.e. dividends, interest, etc.) of foreign legal
guaranteed by foreign insurance companies?
entities participating by 50% or more in the share capital of the
project entity in Greece, and being tax resident in a non-cooperative
There are no restrictions on insurance policies over project assets
jurisdiction or with a beneficial tax regime outside the EU, is
provided or guaranteed by foreign insurance companies.
considered as taxable income. Furthermore, there is a 10% tax
withholding on dividends paid out to non-Greek parent companies

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permanently or temporarily, to render public services, and (ii)

8.2 Are insurance policies over project assets payable to encompasses any and all other categories of foreign public officials
foreign (secured) creditors? as determined by international instruments already ratified and
integrated into Greek legislation. The criminal penalties imposed
Insurance policies may be payable to foreign (secured) creditors. relate to imprisonment of at least five (5) years and a fine between
€15,000 and €150,000. Furthermore, a sentence of imprisonment
may be imposed to business managers (or any person with decision-
9 Foreign Employee Restrictions
Greece

making or supervisory authority) in the event that they negligently

did not prevent any of their employees from committing active
9.1 Are there any restrictions on foreign workers, bribery to public officials.
technicians, engineers or executives being employed Civil liabilities are related to compensation rights and annulment of
by a project company? contracts and agreements that have been concluded under bribery.

As a member of the European Union, Greece is bound by and

respects the European Union law principle of free movement of 13 Applicable Law
labour within the European Union. Nevertheless, to the extent
employees are working in Greece, Greek labour law applies.
13.1 What law typically governs project agreements?
Workers from outside the European Union must apply for a work
permit.
Project agreements are typically governed under Greek law.
However, the parties may agree to apply foreign law, such as the
10 Equipment Import Restrictions proper law of the contract, subject to compliance of private
international rules of the countries related to the contracting parties
and/or the project.
10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by
construction contractors? 13.2 What law typically governs financing agreements?

There are no relevant restrictions on the importation of project Financing agreements are generally governed by Greek law,
equipment or equipment used by construction contractors, other especially when financing is provided by Greek banks. However, in
than tariffs applying to goods imported from outside the European international financing projects, the facility agreements are often
Union. Within the European Union, no tariffs apply owing to the governed by English or German law.
European Union law principle of the freedom of movement of
goods.
13.3 What matters are typically governed by domestic law?

10.2 If so, what import duties are payable and are In any case, security documentation regarding assets located in
exceptions available? Greece and mortgages, registration matters shall be governed by
Greek law.
Please refer to our answer to question 10.1 above.

14 Jurisdiction and Waiver of Immunity

11 Force Majeure

14.1 Is a party’s submission to a foreign jurisdiction and

11.1 Are force majeure exclusions available and waiver of immunity legally binding and enforceable?
enforceable?
Yes, a party’s submission to a foreign jurisdiction is legally binding
Force majeure exclusions are generally available according to and enforceable under Greek law. EU courts decisions may also be
Greek law. In some cases, liability for force majeure is already directly enforceable in Greece. Under several circumstances,
explicitly excluded by law. It shall be examined on a project basis if enforceability depends on bilateral international treaties.
certain conditions may lead to non-enforceability of such
exclusions.
15 International Arbitration
12 Corrupt Practices
15.1 Are contractual provisions requiring submission of
disputes to international arbitration and arbitral
12.1 Are there any rules prohibiting corrupt business awards recognised by local courts?
practices and bribery (particularly any rules targeting
the projects sector)? What are the applicable civil or Greece participates in the New York Convention on the Recognition
criminal penalties?
and Enforcement of Foreign Arbitral Awards. Foreign arbitration
agreements and awards can be recognised by Greek courts.
Corrupt business practices and bribery are considered criminal However, for recognition of enforceability of arbitration awards
offences. The Greek Criminal Code provides special provisions in certain national procedures should be followed.
relation to passive and active bribery of public officials. The term
“public official” (i) relates to a person who is appointed,

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15.2 Is your jurisdiction a contracting state to the New York 18 Other Matters
Convention or other prominent dispute resolution
conventions?
18.1 Are there any other material considerations which
should be taken into account by either equity
Greece is a signatory to the New York Convention on the investors or lenders when participating in project
Recognition and Enforcement of Foreign Arbitral Awards as ratified financings in your jurisdiction?

Greece
by Law no. 4220/1961.
The project finance industry is not regulated by specific public
15.3 Are any types of disputes not arbitrable under local bodies in Greece. All the relevant public law aspects (concessions,
law? permits, approvals, registrations, etc.) are handled by separate
public entities which are competent on the related matter (i.e.
Public interest, criminal matters and labour disputes are not renewable energy matters, building matters, etc.). Furthermore,
arbitrable. collateral matters may be limited by mandatory law provisions (i.e.
limitations under certain conditions in granting loans or providing
guarantees between affiliated companies).
15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
18.2 Are there any legal impositions to project companies
In general, there are no types of disputes subject to mandatory issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory
domestic arbitration proceedings. However, Law no. 3389 on PPPs
requirements for the issuance of capital market
states that every dispute arising from the execution, interpretation or instruments.
validity of a PPP Agreement is mandatorily subject to arbitration
proceedings.
In general, there are no special legal impositions to project companies
issuing bonds or similar capital market instruments (i.e. share capital
16 Change of Law / Political Risk financing). In case of public offering of bonds or share capital, the
issuer shall mainly issue a prospectus, subject to approval by the
competent authority (HCMC and/or Athens Exchange). In case of
16.1 Has there been any call for political risk protections listing and admission to trading, additional legal requirements and
such as direct agreements with central government or procedures shall be followed. Issuers of listed bonds/shares have
political risk guarantees?
increased reporting, publication and notification obligations.

It is common in project finance deals to have direct agreements with

the government, which usually are designated to provide step-in 19 Islamic Finance
rights of financial institutions and do not include particular political
risk protections. In international projects, change-of-law protection
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
provisions are also usually addressed in contractual terms.
instruments might be used in the structuring of an
Islamic project financing in your jurisdiction.
17 Tax
The relevant instruments are not currently used in Greece.

17.1 Are there any requirements to deduct or withhold tax

from (a) interest payable on loans made to domestic 19.2 In what circumstances may Shari’ah law become the
or foreign lenders, or (b) the proceeds of a claim governing law of a contract or a dispute? Have there
under a guarantee or the proceeds of enforcing been any recent notable cases on jurisdictional
security? issues, the applicability of Shari’ah or the conflict of
Shari’ah and local law relevant to the finance sector?

The current tax rate for tax withholding on interest from bond loans
Although Shari’ah law may be agreed by the parties to become the
is 15%. Notably, interest payable on credit facilities concerning
governing law of a contract or a dispute, it is highly unusual to apply
either domestic or foreign lenders is not subject to withholding tax.
such law in project financing in Greece, and also there are no known
As for foreign lenders in particular, please refer to question 17.2
cases concerning applicability of Shari’ah law and conflict between
below.
Shari’ah and local law to the finance sector in Greece. Furthermore,
any applicable legislation shall not contradict the Greek public-
17.2 What tax incentives or other incentives are provided order policies.
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes 19.3 Could the inclusion of an interest payment obligation
of effectiveness or registration? in a loan agreement affect its validity and/or
enforceability in your jurisdiction? If so, what steps
could be taken to mitigate this risk?
Interest payments to lenders that are tax resident outside of Greece
and without a permanent establishment in Greece are subject to
Greek withholding tax, currently at the rate of 15%, if not otherwise The inclusion of interest payment obligation in a loan agreement
provided for in the tax treaty (if any) between Greece and the would not initially affect validity and/or enforceability unless the
jurisdiction of the tax residence of the foreign lender. interest payment rate is considered to be illegal and/or excessive
under Greek law.

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 Sardelas Petsa Law Firm Greece

Panagiotis (Notis) Sardelas Konstantina (Nantia) Kalogiannidi

Sardelas Petsa Law Firm Sardelas Petsa Law Firm
8, Papadiamantopoulou Street 8, Papadiamantopoulou Street
115 28, Athens 115 28, Athens
Greece Greece

Tel: +30 210 72 96 550 Tel: +30 210 72 96 550

Greece

Email: [email protected] Email: [email protected]

Panagiotis (Notis) is a partner at Sardelas Petsa Law Firm and a highly Konstantina (Nantia) is a Court of Appeals lawyer and has been
experienced business lawyer with particular expertise in the field of admitted to the Athens Bar Association since 2012. She graduated
capital markets and banking & finance law of more than 15 years. The from the National and Capodistrian University of Athens (Faculty of
capital markets side of his practice involves advising Greek and Law) and holds an LL.M. in Public Law from the National and
international financial institutions, IFIs, funds and large corporates, as Capodistrian University of Athens, as well as an M.Sc. in Business for
well as the Greek State and State-owned enterprises, on ECM and Lawyers from Alba Graduate Business School. Nantia joined our firm
DCM transactions and financial operations in Greece and abroad, and in 2012 and specialises in the areas of project finance, energy and
compliance with securities regulations. Notable highlights include the banking and finance. Her finance practice includes advising clients,
first listing of an investment firm in the Greek EN.A., the structuring of mainly banks, acting as lenders into syndicated loans, bond loans and
the first Eurobond-compatible Greek bond issued under Law no. 3156 restructurings, including voluntary restructuring under article 99 of the
and its listing in the Bank of Greece secondary market (HDAT), the first Greek Bankruptcy Code. Nantia also has experience in banking
dematerialisation and listing in HDAT of Greek law bonds, the last regulatory issues.
recapitalisation and LME of a major Greek bank, and the public offer
and listing of the first Greek domestic corporate bond issue under the
new electronic book-building procedure. In the context of the
abovementioned transactions, Notis has also assisted the Greek
market operator in shaping the regulatory framework for Greek
domestic corporate bond listings. He also has considerable
experience in acting in tender offers, mergers & acquisitions and
restructurings, especially in the context of privatisations.

Sardelas Petsa Law Firm has established a leading position in Greek legal services as a business law firm with a strong international dimension. The firm
is well known in Greece and abroad for its top drawer specialised professional 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 creates innovative, practical and legally sage solutions in relation to complex transactions, some of which are considered
to be innovative, not only by Greek, but also by international 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 was selected for the IFLR Awards shortlist for the most innovative debt and equity-linked transaction in Europe.

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Chapter 19

India
Santosh Janakiram

Cyril Amarchand Mangaldas Subhalakshmi Naskar

assignment of rights in project and insurance contracts; and a charge

1 Overview
over the project bank accounts. The charge over immovable property
is typically created by executing an indenture of mortgage or by
1.1 What are the main trends/significant developments in undertaking a deposit of title deeds for the property. On the other
the project finance market in your jurisdiction? hand, security over movable assets (both fixed and current) is created
by executing a deed of hypothecation. Security over shares is created
While the last financial year has seen significant development in sectors via a pledge, which requires possession to be transferred by way of
such as aviation (with the process being initiated for the privatisation of deposit of the share certificates, or if the shares are in dematerialised
six airports), city gas distribution projects and renewable energy (with form, by recording the same with the depository of shares. An
the focus also being on hybrid renewable projects), amongst others, assignment of rights (such as rent receivables) arising out of project
India has also witnessed a consolidation of sorts (especially in the contracts is done via a deed of assignment. The charge over
renewable energy sector) and an increased focus in resolving stressed immovable property, movable property and an assignment of rights
assets (both under the Insolvency and Bankruptcy Code, 2016 (IBC) and can be clubbed together under a single indenture.
under the February 12, 2018 stressed assets resolution framework
(which was subsequently struck down by the Supreme Court of India on 2.2 Can security be taken over real property (land), plant,
April 2, 2019)), especially in the power sector. Recently, India has also machinery and equipment (e.g. pipeline, whether
cleared Faster Adoption and Manufacturing of Electric Vehicles II, to underground or overground)? Briefly, what is the
increase the push for electric vehicles and energy storage systems in procedure?
India. The roads and transportation sector has also seen the introduction
of the toll-operate-transfer model. There has also been a focus in making Yes, lenders typically have security over real property, plant,
infrastructure projects more bankable, with modifications being made in machinery and equipment. If the land is leasehold property,
standard form power purchase agreements and concession agreements, permission may be required from the lessor for the creation of
to make infrastructure projects more appealing to developers. charge. If the security is created via an indenture of mortgage, it is
necessary to register the same with the local registrar of assurances.
Further, if security has been created by a company, it is mandatory
1.2 What are the most significant project financings that
to register the charge with the registrar of companies (RoC). The
have taken place in your jurisdiction in recent years?
charge created over movable/immovable properties is also required
to be registered with the Central Registry of Securitisation Asset
In financial year 2018–19, HPCL-Rajasthan Refinery Limited availed a
Reconstruction and Security Interest of India (CERSAI).
secured facility aggregating to INR 28,753 crores, for the purpose of
setting up a 9 MMTPA greenfield refinery-cum-petrochemical complex
in the state of Rajasthan, India, which is the largest project debt 2.3 Can security be taken over receivables where the
syndication in India. The last financial year also witnessed the financial chargor is free to collect the receivables in the
closure of India’s first national highway project undertaken on a toll- absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
operate-transfer basis by nine SPVs promoted by the Macquarie Group.
Renewable energy companies such as ReNew Power and Azure Power
have also issued high-yield bonds to refinance high-cost domestic debt. Yes, security may be taken over receivables without the express
consent of the debtors. However, such charge over receivables or
other current assets (which is a floating charge) crystallises into a
2 Security fixed charge only upon occurrence of an event of default.

2.1 Is it possible to give asset security by means of a 2.4 Can security be taken over cash deposited in bank
general security agreement or is an agreement accounts? Briefly, what is the procedure?
required in relation to each type of asset? Briefly,
what is the procedure? Yes, a typical project financing security package involves the
creation of security over the project specific bank accounts. The
Generally in India, security is created over the following asset types: procedure to be followed in this case mirrors that of any other
immovable property; movable fixed assets; current assets; shares; movable asset. A notice of such a charge is given to the bank.

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 Cyril Amarchand Mangaldas India

2.5 Can security be taken over shares in companies 3 Security Trustee

incorporated in your jurisdiction? Are the shares in
certificated form? Briefly, what is the procedure?
3.1 Regardless of whether your jurisdiction recognises
the concept of a “trust”, will it recognise the role of a
Yes, security over shares is a prevalent form of security creation in security trustee or agent and allow the security
India. Typically, a pledge agreement is entered into with a power of trustee or agent (rather than each lender acting
attorney to enforce the pledge which is also executed by the pledgor separately) to enforce the security and to apply the
India

upfront. If the shares are in certified form, the share certificates are proceeds from the security to the claims of all the
physically deposited along with a share transfer form. If the shares lenders?
are in dematerialised form, certain forms (indicating the agreement
number, closure date of the pledge, quantum of shares pledged, etc.) Yes, the trust structure is recognised and the rights and obligations
will be required to be submitted at the relevant share depository. of the security trustee is 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
2.6 What are the notarisation, registration, stamp duty
and other fees (whether related to property value or enforcement of the security and to apply the proceeds to the claims
otherwise) in relation to security over different types of all lenders.
of assets (in particular, shares, real estate,
receivables and chattels)?
3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available
In India, stamp duty on security documents varies from state to (such as a parallel debt or joint and several creditor
state. In some states, stamp duty is uncapped, whereas in others the status) to achieve the effect referred to above which
liability is capped. Additionally, all indentures of a mortgage must would allow one party (either the security trustee or
be registered with the local registrar of assurances. In some states, the facility agent) to enforce claims on behalf of all the
lenders so that individual lenders do not need to
a mortgage created via a deposit of title deeds is also compulsorily
enforce their security separately?
registrable; however, in most states such registration is optional.
The charge creation is also filed/registered with the RoC and
CERSAI. Certain types of documents (viz., powers of attorney and A security trust is recognised in India, so the security trustee can sue
affidavits) are required to be notarised by a notary public, at a for the enforcement of the security and can apply the proceeds to the
nominal charge. claims of all lenders. There is also no bar on any lender suing for
enforcement independently.

2.7 Do the filing, notification or registration requirements

in relation to security over different types of assets 4 Enforcement of Security
involve a significant amount of time or expense?

4.1 Are there any significant restrictions which may

The time taken to register a mortgage with the local registrar of
impact the timing and value of enforcement, such as
assurances may vary drastically, depending on the efficiency of the (a) a requirement for a public auction or the
local bureaucracy. Similar to stamp duty, registration fees payable availability of court blocking procedures to other
also vary from state to state, as some states have ad valorem charges creditors/the company (or its trustee in
whereas others have capped limits. Filing/registration with the RoC bankruptcy/liquidator), or (b) (in respect of regulated
and CERSAI are required to be done online and is neither time- assets) regulatory consents?
consuming nor expensive.
The timelines for enforcing security may depend on the nature of
security held by the lender. To illustrate, enforcement of a pledge
2.8 Are any regulatory or similar consents required with
respect to the creation of security over real property created over shares, which are in dematerialised form, is relatively
(land), plant, machinery and equipment (e.g. pipeline, simple and does not require a decree of a court of competent
whether underground or overground), etc.? jurisdiction. Enforcement of a mortgage may require a decree of the
court under the Civil Procedure Code, 1908 or enforcement action
For the creation of security over freehold land, no consents or under the Securitisation and Reconstruction of Financial Assets and
regulatory approval is required unless it has been reserved for a Enforcement of Security Interest Act, 2002. In a scenario where an
specific purpose (such as forest land, coastal land) by the insolvent company is subject to proceedings under the IBC, a
government. If the land over which the security is created is publicly solicited bid process is undertaken wherein bidders are
leasehold in nature, typically prior consent of the lessor would be required to submit resolution plans that are required to be inter alia
required. However, with respect to pipelines (once embedded in the approved by the committee of creditors. In assets in regulated
earth), the land over which pipelines for the transport of petroleum, sectors (e.g. airports, telecommunications, roads) the enforcement
minerals or gas are laid are not transferred to the borrower, who process is done through a “substitution” of the defaulting company
merely acquires the rights of a user over the land. Such right of way by an entity nominated by the lenders, with the consent of the
may also be assigned to the lenders. relevant regulatory authority.

4.2 Do restrictions apply to foreign investors or creditors

in the event of foreclosure on the project and related
companies?

Under Indian law, a foreclosure suit in respect of a mortgage may be

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filed by a mortgagee to debar the mortgagor of his right to redeem Under the IBC, these include transactions that are “preferential” in
the mortgaged property in the event that the mortgagor is unable to nature (and pertain to an antecedent liability owed to a creditor,
pay the amounts due to the mortgagee. While foreclosure surety or guarantor), those that are “undervalued” (including gifts),
proceedings may be initiated under the provisions of the Civil those that defraud creditors (which must necessarily pertain to
Procedure Code, 1908, an overseas lender, i.e. a non-resident entity, undervalued transactions, which were entered into with the
is prohibited, under the Foreign Exchange Management deliberate intention to defraud creditors), and such credit
(Acquisition and transfer of immovable property in India) transactions that are “extortionate” in nature.

India
Regulations, 2018, from transferring any immovable property in Further, the Income Tax Act, 1961 provides for transfers or charges
India, unless permitted by the Reserve Bank of India (RBI). to be void against any tax claim where it is created during the
Additionally, foreclosure suits may only be filed under the Transfer pendency of any tax proceeding or outstanding tax demand, without
of Property Act, 1882 by a mortgagee by conditional sale or a prior permission of the tax department.
mortgagee under an anomalous mortgage. However, if the
mortgage creation is by way of an English mortgage, foreclosure
suits may not be filed. 5.3 Are there any entities that are excluded from
bankruptcy proceedings and, if so, what is the
applicable legislation?
5 Bankruptcy and Restructuring
Proceedings While the IBC provides for and governs bankruptcy of individuals,
partnership firms, limited liability partnerships and corporate
entities in India, the provisions pertaining to bankruptcy of
5.1 How does a bankruptcy proceeding in respect of the individuals have not yet been made operational. The regime,
project company affect the ability of a project lender however, does not extend to the bankruptcy of financial service
to enforce its rights as a secured party over the providers, which continue to be governed under the Companies Act,
security?
2013. The Banking Regulation Act, 1949 governs the winding up of
banking companies.
The IBC is the primary legislation governing insolvency of
corporate entities today. The initiation of a corporate insolvency
resolution process (CIRP) against the project company under the 5.4 Are there any processes other than court proceedings
terms of the IBC would result in the institution of a moratorium that are available to a creditor to seize the assets of
the project company in an enforcement?
prohibiting inter alia the initiation/continuation of any
suits/proceedings (including recovery proceedings) against the
project company or the enforcement/foreclosure of any security As noted in question 5.1 above, post the initiation of a CIRP under
interests created by the project company in respect of any of its the terms of the IBC, creditors are prohibited from enforcing their
creditors. This moratorium would remain in place until the security interests and seizing the assets of a company. However,
completion of the CIRP against the project company (which would outside the IBC framework, there are several ways in which a
ordinarily last at least 180 days, extendable by another 90 days, creditor can enforce its security and seize the assets of a project
exclusive of any time spent in litigation). Accordingly, the project company out of court. To illustrate, a creditor having security by
lender will be unable to enforce or exercise any rights in respect of way of an English mortgage has the right to sell such mortgaged
its security during this period. 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
In the event of a successful CIRP, the IBC permits the resolution
resorting to court proceedings, and to effect the sale of the pledged
plan to provide for, inter alia, the modification and release of pre-
goods, after having given due notice to the pledgor.
existing security interests created by the corporate debtor. In case a
successful resolution plan (approved by at least 66% of voting share Please also note that under the Securitisation and Reconstruction of
of committee of creditors and the National Company Law Tribunal Financial Assets and Enforcement of Security Interest Act, 2002,
(NCLT)) provides for any such modification/release, the project banks, notified financial institutions, asset reconstruction
lender will lose its right to enforce its security related rights post companies, debenture trustees and certain notified NBFCs are
approval of the resolution plan. conferred with private enforcement rights in respect of their security
interests, other than in respect of pledges and liens. However, such
rights do not extend to foreign creditors.
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? 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
Under the IBC, “insolvency resolution process costs” and
cramdown of dissenting creditors?
“liquidation costs” are accorded the highest priority. Besides this,
the payment of workmen’s dues for the period of 24 months
There are certain mechanisms that are available to companies to
preceding the liquidation commencement date is ranked pari passu
achieve a restructuring of its debts, outside of the formal insolvency
with the dues of secured creditors that have relinquished their
regime provided for under the IBC, including the cramdown of its
security interests to the liquidation estate. The IBC also contains
dissenting financial creditors. On February 12, 2018, the RBI had
protections in favour of creditors against antecedent transactions
issued a circular titled “Resolution of Stressed Assets – Revised
entered into by the corporate debtor during specified look-back
Framework” (which resulted in an overhaul of all previous
periods (calculated backwards from the insolvency commencement
restructuring schemes issued by the RBI), under which lenders were
date). Such provisions are equally applicable to transactions
obligated (either singly or jointly) to formulate a resolution plan
relating to security interests created over the assets of the company
which may provide for the change in ownership or restructuring of
as well.
the corporate debtor, the moment there is a default in the company’s

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account. However, the said circular was struck down by the Further, from a tax perspective, where any taxpayer, including a foreign
Supreme Court of India on April 2, 2019. The RBI Governor has, on company, acquires any property, i.e. shares or other instruments which
April 4, 2019, issued a statement stating that the RBI will take are characterised as security, then it must acquire such share or security
necessary steps, including issuance of a revised circular, as may be at a ‘fair market value’ as determined in accordance with a prescribed
necessary, for expeditious and effective resolution of stressed assets. rule for valuation. If the consideration paid is less than such fair market
In July 2018, a large majority of Indian banks have also entered into value, then the difference would be subject to tax in the hands of the
the Inter-Creditor Agreement for Resolution of Stressed Assets as foreign investor as ‘income from other sources’ at the rate of 40% (plus
India

part of Project Sashakt upon recommendations of the Sunil Mehta applicable surcharge and cess) in hands of a company or 30% (plus
Committee. Under the framework, the lead lender shall be applicable surcharge and cess) in case of other investors.
authorised to formulate the resolution plan, which shall be presented
to the other lenders for their approval. The decision-making shall be 6.2 Are there any bilateral investment treaties (or other
by way of approval of majority lenders, that is, the lenders with 66% international treaties) that would provide protection
share in the aggregate exposure. Once a resolution plan is approved from such restrictions?
by the majority, it shall be binding on all the lenders that are a party
to the inter-creditor agreement. There are several bilateral and multilateral investment treaties entered
into by India with various countries in order to promote trade and
5.6 Please briefly describe the liabilities of directors (if commerce within the country. India also has comprehensive Double
any) for continuing to trade whilst a company is in Taxation Avoidance Agreements (DTAA) with 88 countries, out of
financial difficulties in your jurisdiction. which 85 are presently in force. The Income Tax Act, 1961, provides
for relief for two types of taxpayers. One is for taxpayers who have
Under the IBC, upon the initiation of the CIRP against the corporate paid the tax to a country with which India has signed a DTAA, while
debtor, it is the resolution professional that takes on the role of the the other is for taxpayers who have paid tax to a country with which
management of the company, and the powers of the board of directors India has not signed a DTAA. The rates differ from country to
remain suspended during this period. In terms of Section 66(2) of the country. However, there are no treaties providing explicit protection
IBC, directors may be held personally liable to make contributions to to a foreign entity from the restrictions on exchange control.
the assets of the corporate debtor (on an application made by the
resolution professional to the NCLT), if such director knew or ought 6.3 What laws exist regarding the nationalisation or
to have known that “there was no reasonable prospect” of avoiding expropriation of project companies and assets? Are
the commencement of a CIRP against the corporate debtor under the any forms of investment specially protected?
terms of the IBC, and did not exercise the due diligence in minimising
the potential loss to the creditors during this period. The provisions of the Right to Fair Compensation and Transparency
Separately, under Section 66(1) of the IBC, such persons who are in Land Acquisition, Rehabilitation and Resettlement Act, 2013
knowingly party to the carrying on of the business of the company applies in relation to land acquisitions by the government for public
during its CIRP or liquidation, in a manner that demonstrates their purpose and compensation paid thereof. The Indian Constitution
intent to defraud the creditors of the company, or for any other also grants the government the right to compulsorily acquire any
fraudulent purpose, may be held liable to make contributions to the property for a public purpose, upon payment of compensation. The
assets of the corporate debtor (on an application made by the rights on the projects undertaken through public private partnerships
resolution professional to the NCLT). are automatically transferred to the concessioning authority at the
end of the concession period.

6 Foreign Investment and Ownership

Restrictions 7 Government Approvals/Restrictions

6.1 Are there any restrictions, controls, fees and/or taxes 7.1 What are the relevant government agencies or
on foreign ownership of a project company? departments with authority over projects in the typical
project sectors?

The foreign ownership of an Indian project company is subject to the

Each infrastructure sector in India has one or more regulators that
Foreign Exchange Management Act, 1999 (FEMA) and the rules
exercise jurisdiction over the particular sector. For example, the Airports
and regulations made thereunder. The Master Direction on Foreign
Authority of India and the Directorate General of Civil Aviation regulate
Investment in India read with the Foreign Exchange Management
the airports/aviation sector, while the roads sector is regulated by the
(Transfer or Issue of a Security by a Person Resident Outside India)
National Highways Authority of India (NHAI) or the Ministry of
Regulations, 2017 (FEMA Regulations, 2017) empowers the RBI to
Aviation and Ministry of Road Transport and Highways, amongst
prohibit, restrict or regulate the transfer or issue of any security by a
others. Concession agreements or power purchase agreements, for
person resident outside India. FEMA Regulations, 2017 provides: (i)
example, may also be entered into with state-specific utilities/agencies.
the limit of foreign investment in each sector in India which cannot
be exceeded; and (ii) the entry routes for foreign investment in
various sectors, which may be either automatic or with prior 7.2 Must any of the financing or project documents be
government approval. FEMA Regulations, 2017 also lists out the registered or filed with any government authority or
prohibited activities, which include real estate, agricultural activities, otherwise comply with legal formalities to be valid or
atomic energy and railway operations. enforceable?

Security documents are required to be filed and registered with

certain authorities, as set out in the response to question 2.6 above.

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under applicable law, except in limited circumstances, as set out in

7.3 Does ownership of land, natural resources or a the Foreign Exchange Management (foreign currency accounts by a
pipeline, or undertaking the business of ownership or person resident in India) Regulations, 2015. For instance, an Indian
operation of such assets, require a licence (and if so,
can such a licence be held by a foreign entity)?
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 government retains sovereign rights over ownership of natural
the Indian project company has impending foreign currency
resources, and the right to use such natural resources shall be subject

India
expenditure. In the instance referred to hereinabove, the account is
to the terms of the licences granted by the government. Land and
required to be closed immediately after the requirements are
licences in respect of natural resources cannot be directly held by a
completed and is not permitted to be operational for more than six
foreign entity; however, it may be held by an Indian entity owned
months from the date of the opening of such an account.
and/or controlled by such foreign entity, subject to the foreign
investment thresholds specified in the response to question 6.1
above. 7.8 Is there any restriction (under corporate law,
exchange control, other law or binding governmental
practice or binding contract) on the payment of
7.4 Are there any royalties, restrictions, fees and/or taxes dividends from a project company to its parent
payable on the extraction or export of natural company where the parent is incorporated in your
resources? jurisdiction or abroad?

Yes. Royalties are payable for the extraction or export of natural In addition to restrictions on declaration of dividend under the
resources, the amount for which will depend on the manner in which financing documents, the Companies Act, 2013 permits declaration
such concession was obtained and in accordance with the of dividend only out of the profits of the Indian company and after
stipulations set out under the applicable law. Further, income tax is maintaining reserves for depreciation. The payment of such
payable on income from the extraction or export of natural resources. dividend will be subject to the taxes set out in the response to
question 7.6 above.
7.5 Are there any restrictions, controls, fees and/or taxes
on foreign currency exchange? 7.9 Are there any material environmental, health and
safety laws or regulations that would impact upon a
Capital account transactions (which alter assets and liabilities), project financing and which governmental authorities
unless specifically permitted by the RBI or under FEMA, are administer those laws or regulations?
prohibited. Specified routes are available for equity investment,
borrowings, etc. Taxes on foreign currency exchange transactions Depending on the nature and size of the project, project developers
would be levied depending on whether it results in income or will be required to seek environmental clearances, approval of the
deemed income in India. The actual transaction of foreign currency resettlement and rehabilitation plan, consent to establish and
exchange may also be subject to the Goods and Services Tax. operate, forest clearances and wildlife clearances, amongst others.

7.6 Are there any restrictions, controls, fees and/or taxes 7.10 Is there any specific legal/statutory framework for
on the remittance and repatriation of investment procurement by project companies?
returns or loan payments to parties in other
jurisdictions? Any procurement by project companies may be governed by the
terms of the bid documents and the subsequent concession
Yes, tax is levied on remittance and repatriation of investment returns, agreements that may be signed by such a project company. That
levied by way of income tax or capital gains tax, depending on the being said, in certain instances, additional taxes or duties may also
nature of the return. No tax is levied on the shareholder in the Indian be levied (for instance – the recently introduced safeguard duty on
project company for distribution of dividends under the law currently in the import of solar panels from certain countries).
force. However, the Indian company distributing dividend is subject to
additional dividend distribution tax at the rate of 20.56% (including
applicable surcharge and cess). Capital gains would be taxed as short 8 Foreign Insurance
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 the
8.1 Are there any restrictions, controls, fees and/or taxes
hands of a foreign investor at the rate of 10% (plus applicable surcharge on insurance policies over project assets provided or
and cess). Short-term capital gains would be taxed at the rate of 40% guaranteed by foreign insurance companies?
(plus applicable surcharge and cess). However, a lower rate of 30% is
applicable on short-term capital gains in the case of a foreign portfolio Investment by foreign insurance companies are subject to regulatory
investor. Further, the short-term capital gains may be taxed at 15% restrictions on ownership by foreign players. Goods and Services
only, if the gains are realised upon sale of the security on the stock Tax will be applicable on such policies, based on the nature and
exchange and the securities transaction tax is paid, as prescribed. quantum of such policies.

7.7 Can project companies establish and maintain 8.2 Are insurance policies over project assets payable to
onshore foreign currency accounts and/or offshore foreign (secured) creditors?
accounts in other jurisdictions?

As noted in question 2.8 above, creation of security pursuant to an

Onshore and offshore foreign currency accounts are not permitted
external commercial borrowing would require the consent of the

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authorised dealer bank. As part of the enforcement proceedings that the First Schedule of the Customs Tariff Act. The levied rates
may be undertaken by or on behalf of the foreign creditors, the may either be standard or preferential as per the country of
foreign creditor may enforce security created over the insurance import.
policies and obtain the benefit of the same. (ii) Additional Customs Duty: any article which is imported into
India shall, in addition, be liable to a duty equal to the excise
duty for the leviable time on a like article, if produced or
9 Foreign Employee Restrictions manufactured in India.
(iii) Safeguard Duty: the government is empowered to impose a
India

safeguard duty on an article imported into India if it is

9.1 Are there any restrictions on foreign workers, satisfied that the article imported is in such increased
technicians, engineers or executives being employed quantities and under such conditions that may cause or
by a project company?
threaten to cause serious injury to the domestic industry.
(iv) Anti-dumping Duty: the government will also impose anti-
Typically, no specific restrictions exist under Indian labour and dumping duty on an article which is imported into India at a
employment laws but a foreign worker is required to comply with price lesser than its normal value.
the relevant immigration laws and visa requirements, to be
Import duties vary for different categories of goods and are
employed in India. A foreign employee will be required to get an
generally subject to the trading arrangements entered into between
employment visa which may be granted subject to fulfilment of
India and other countries.
certain conditions, inter alia, including: (a) the applicant should be
a highly skilled and/or qualified professional, who is being engaged
or appointed by a company/organisation/industry/undertaking in 11 Force Majeure
India on a contract or employment basis; (b) the employment visa
will not be granted for jobs for which qualified Indians are available
and also for routine, ordinary or secretarial/clerical jobs; and (c) the 11.1 Are force majeure exclusions available and
applicant’s salary should be in excess of USD 25,000 per annum enforceable?
(subject to certain exceptions). Further, foreign nationals visiting
India on long-term visas (more than 180 days) are required to get Yes, typically all project contracts contain force majeure clauses, the
themselves registered with the Foreigners Regional Registration extent of which is defined thereunder. The nature and reliefs
Officer/Foreigners Registration Officer within 14 days of their available upon occurrence of a force majeure event shall depend on
arrival. the commercial agreement between the parties. Such clauses may
also be present in financing arrangements.

10 Equipment Import Restrictions

12 Corrupt Practices
10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by 12.1 Are there any rules prohibiting corrupt business
construction contractors? practices and bribery (particularly any rules targeting
the projects sector)? What are the applicable civil or
criminal penalties?
The Foreign Trade Policy 2015–20 (FTP Policy) states that the
imports shall be free except when regulated by way of prohibition,
restriction or exclusive trading through State Trading Enterprises as The principal legislation dealing with corruption in India is the
laid down in the Indian Trade Classification (Harmonized System) of Prevention of Corruption Act, 1988. The act imposes strict penalties
Exports and Imports. Further, there are some items which are free on public officials accepting any form of illegal gratification. While
from import, but subject to conditions stipulated in other statutes or the definition of public servants was enlarged in 1988 to include
in law for the time being in force. The FTP Policy also states that the such public functionaries as Members of Parliament, corruption in
import for any of the goods/services that are restricted may be the private sector still falls outside the ambit of the Prevention of
imported only in accordance with an authorisation/permission or in Corruption Act, 1988. For corruption occurring in the private
accordance with the procedures prescribed in the notification/public sector, the charging provisions which will apply can be found in the
notice issued in this regard. The Customs Act, 1962 (“Customs Indian Penal Code, 1960 in sections dealing with fraud, cheating,
Act”) also states that the government may restrict or prohibit misrepresentation and criminal breach of trust.
importation of goods or services if it is necessary to do so for the Furthermore, in terms of Section 212 of the Companies Act, 2013,
purposes stated therein. 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
10.2 If so, what import duties are payable and are
exceptions available? governance standpoint, the Companies Act, 2013 mandates the
formation of audit committees, which are required to report any
inconsistencies with regards to a company’s finances. Additionally,
There are various custom duties levied on certain goods imported
the Companies Act, 2013 imposes penalties for fraud up to three
into the country. The Customs Act empowers the government to
times harsher than under the earlier regime. Lastly, various other
levy duties of customs at such rates as may be specified under the
statutes such as the Prevention of Money Laundering Act, 2002, the
Customs Tariff Act, 1975 (Customs Tariff Act) or under any other
Black Money (Undisclosed Foreign Income and Assets) and
law that, for the time being, is enforced. The import duties are
Imposition of Tax Act, 2015 and the Whistleblowers Protection Act,
divided into the following categories:
2011 seek to prohibit corrupt practices.
(i) Basic Custom Duty: it is applicable to all the goods that are
imported. The duties levied are as per the rates prescribed in

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Convention on the Execution of Foreign Arbitral Awards, 1958

13 Applicable Law
(Geneva Convention). If a party receives a binding award from a
country which is a signatory to the New York Convention or Geneva
13.1 What law typically governs project agreements? Convention and such award is made in a territory which has been
notified as a convention country by India, such award would be
enforceable in India.
Project contracts entered into amongst two or more Indian parties
are governed by Indian law. Where there is one (or more) foreign

India
counterparty, contracts may be governed by foreign law and such 15.3 Are any types of disputes not arbitrable under local
governing law choice is recognised by Indian courts. law?

While commercial disputes between parties are arbitrable, disputes

13.2 What law typically governs financing agreements?
pertaining to criminal matters, matrimonial disputes, tenancy
matters, guardianship disputes, insolvency and winding-up, and real
Where a borrower avails of a loan from a domestic lender, Indian
property, amongst others, cannot be settled by arbitration.
law is the governing law. However, in foreign currency borrowings
or borrowings from foreign lenders, typically English law is the
preferred governing law. 15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?

13.3 What matters are typically governed by domestic law?

There are no disputes which are subject to mandatory domestic
arbitration proceedings. However, most public procurement/PPP
Typically, creation and enforcement of security is governed by contracts with concessioning authorities (e.g. road and airport
Indian law. concessions) typically provide for domestic arbitration under the
concession document.
14 Jurisdiction and Waiver of Immunity
16 Change of Law / Political Risk
14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable?
16.1 Has there been any call for political risk protections
such as direct agreements with central government or
India is not a signatory to any international treaties for recognition political risk guarantees?
or enforcement of foreign judgments. However, Section 44A of the
Civil Procedure Code, 1908 (CPC) permits the Central Government No specific practice exists in India in this regard. However, for
to deem a judgment by a foreign court as enforceable in India. instance, the Solar Energy Corporation of India (SECI) has
However, the scope of the section is limited to monetary decrees not instituted the viability gap funding scheme, in terms of which SECI
in the nature of taxes, fines, levies, penalties or payments of such shall provide a viability gap funding to the project developer as an
nature. Further, in terms of Order XIIIA of the CPC, introduced incentive. This funding is released on the commercial operation
recently through the Commercial Courts, Commercial Division and date of the full project capacity of the developer. However, the
Commercial Appellate Division of High Courts Act, 2015, a party is Ministry of New and Renewable Energy will provide 100% viability
permitted to seek a summary judgment in any commercial dispute if gap funding to SECI to disburse to the solar park developer
it is able to convince the court that the plaintiff has no real prospect immediately, subject to availability of funds.
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. 17 Tax
However, the voluntary submission to the jurisdiction of a foreign
court as a contractual choice may be disregarded by Indian courts if
17.1 Are there any requirements to deduct or withhold tax
the court believes that such a submission is ‘unjust’ in nature.
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
15 International Arbitration security?

15.1 Are contractual provisions requiring submission of (a) Payment of interest to domestic lenders would be subject to
disputes to international arbitration and arbitral withholding tax at the rate of 10%. In the context of foreign lenders,
awards recognised by local courts? varying withholding tax rates would apply depending on whether
the loan given is designated in Indian rupees or in a foreign
Yes, subject to the disputes that are not arbitrable, as set out in the currency, the category of lender, as well as the rates prescribed
response to question 15.3 below, international arbitration clauses (where under the tax treaty applicable to the foreign lender, amongst other
there is a foreign party involved) are recognised by Indian courts. factors. While the general rate of tax on interest income ranges from
20% to 40% (plus applicable surcharge and cess), a special rate of
withholding tax of 5% (plus applicable surcharge and cess) may be
15.2 Is your jurisdiction a contracting state to the New York
available until June 30, 2020 in respect of debt instruments which
Convention or other prominent dispute resolution
conventions? satisfy certain criteria prescribed under the Income Tax Act, 1961.
(b) The nature and characterisation of payments with respect to
India is a signatory to the New York Convention and the Geneva proceeds of claim under a guarantee or enforcing security would

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need to be examined to determine the tax implications. If such amortisation; and (b) interest paid or payable to such related party.
payments are in the nature of interest payments, then the It also envisages a deeming provision under which a debt shall be
abovementioned withholding tax rates would be applicable. If they deemed to be treated as issued by a related party, where such related
are characterised as capital receipt, then, in certain circumstances, party provides any implicit or explicit guarantee to the lender, or
such capital receipt may not be taxable in India. deposits a corresponding and matching amount of funds with the
Withholding of tax is determined as per the Finance Act of the lender. The disallowed portion of interest payment can be carried
relevant year as well as the DTAAs that India may have entered into forward and set off within a period of eight years, as and when such
India

with several countries. Withholding of tax is at the rate of 5% in amounts fall within the 30% limit.
case of payment of interest to loans from domestic lenders. The
Income Tax Act further provides for withholding of tax on interest 18.2 Are there any legal impositions to project companies
payments made to foreign lenders at a rate which varies from 5%– issuing bonds or similar capital market instruments?
20% depending on the class of borrowers. Withholding tax shall be Please briefly describe the local legal and regulatory
deducted in a similar manner from the proceeds of a claim under a requirements for the issuance of capital market
guarantee or from the proceeds of enforcing security. instruments.

There are no restrictions in issuance of bonds or other market

17.2 What tax incentives or other incentives are provided
instruments. However, the end use of such bonds or instruments and
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages the investment amount may be restricted based on the nature of the
or other security documents, either for the purposes borrowing or the investor, such as under the Master Direction –
of effectiveness or registration? External Commercial Borrowings, Trade Credit, Borrowing and
Lending in Foreign Currency by Authorised Dealers and Persons
Please see our response to question 17.1 above. A lower rate of 5% Other than Authorised Dealers, and Investment by Foreign Portfolio
(plus applicable surcharge and cess) would be applicable when Investors (FPI) in Debt.
payments relate to certain specified borrowings in foreign currency,
interest rates are within a specified limit and such interest is paid on 19 Islamic Finance
or before June 30, 2020. Such a lower withholding tax rate is also
applicable to interest payments received by Foreign Portfolio
Investors on investments made by them in Rupee-denominated 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
bonds of Indian companies or a government security. Certain other instruments might be used in the structuring of an
benefits may be available to banks and other financial institutions Islamic project financing in your jurisdiction.
due to specific notifications issued by the Central Board of Direct
Taxes with respect to immunity from taxes or due to a lower rate At present, RBI regulations do not recognise Islamic finance
available under the relevant tax treaty. products. Interest rates for market borrowings are usually linked to
There are no specific tax incentives provided to foreign investors or LIBOR and MCLR.
creditors. However, there are certain tax-saving benefits that may
apply depending upon the nature of the investment. Further, as 19.2 In what circumstances may Shari’ah law become the
already mentioned above, due to the existence of DTAAs, the governing law of a contract or a dispute? Have there
foreign creditors that are a party to any of the DTAAs in force with been any recent notable cases on jurisdictional
India can avail benefits in accordance with the provisions of such issues, the applicability of Shari’ah or the conflict of
agreements. Shari’ah and local law relevant to the finance sector?

Typically, project contracts or financing contracts do not contain

18 Other Matters 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
18.1 Are there any other material considerations which
should be taken into account by either equity
disputes.
investors or lenders when participating in project
financings in your jurisdiction? 19.3 Could the inclusion of an interest payment obligation
in a loan agreement affect its validity and/or
India has detailed transfer pricing regulations under the domestic enforceability in your jurisdiction? If so, what steps
tax laws which require all payments to related parties to be made on could be taken to mitigate this risk?
an arm’s-length basis. Certain relationships and certain transactions
are ‘deemed’ related party and deemed ‘international transaction’, Provisions pertaining to payment of interest are generally the norm
attracting transfer pricing regulations. This advice must be sought in India, and are held to be valid and enforceable. That being said,
on a case-by-case basis. Additionally, Indian domestic tax laws there are also laws that restrict: (a) charging of interest by money
contain certain “thin capitalisation” rules. Under these provisions, lenders beyond certain set thresholds (in certain states); and (b)
interest expense claimed by an Indian entity in relation to payments loans being provided at interest rates lower than government
made to its non-resident related parties will be restricted to lower security rates, for certain companies (see Section 186 of the
than: (a) 30% of its earnings before interest, taxes, depreciation and Companies Act, 2013).

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Cyril Amarchand Mangaldas India

Santosh Janakiram Subhalakshmi Naskar

Cyril Amarchand Mangaldas Cyril Amarchand Mangaldas
Peninsula Chambers Peninsula Chambers
Peninsula Corporate Park Peninsula Corporate Park
Ganpatrao Kadam Marg, Lower Parel Ganpatrao Kadam Marg, Lower Parel
Mumbai 400 013 Mumbai 400 013
India India

India
Tel: +91 22 2496 4455 Tel: +91 22 2496 4455
Email: [email protected] Email: [email protected]
URL: www.cyrilshroff.com URL: www.cyrilshroff.com

Santosh Janakiram is a partner in and head of Cyril Amarchand Subhalakshmi Naskar is a partner in the Cyril Amarchand Mangaldas’
Mangaldas’ Projects Group and previously was a Partner in Projects Group. She was admitted to the Bar after receiving her B.A.,
Amarchand & Mangaldas & Suresh A. Shroff & Co. (AMSS), India’s LL.B. degree from the National Law School of India University in
largest and foremost law firm. He has worked in AMSS/the Firm’s Bangalore, and has worked in AMSS/the Firm’s Mumbai office since
Mumbai office since 2001. 2007. Subhalakshmi has extensive experience in infrastructure
projects, involving roads, power, airport and transmission assets and
Santosh has rich experience in banking, project financing, acquisition
represents developers, sponsors, lenders and contractors in
financing, structured financing, projects and private equity, and
infrastructure and project finance transactions. She advises key
represents developers, sponsors, lenders and contractors in
groups like GVK and Essel in their infrastructure projects. She also
infrastructure and project finance transactions. Santosh is involved in
advises lenders like ICICI Bank and the State Bank of India in their
various bond and structured debt financings. Santosh also leads the
financing and refinancing transactions in the infrastructure space.
Firm’s development of the renewable energy practice advising
developers, investors and lenders in this space, whereby the Firm has She recently advised Essel Infrastructure in the divestment of their
emerged as the pre-eminent Firm in the sector in India. entire transmission asset portfolio to Sekura Energy. She also advised
Adani Transmission in the acquisition of the generation, distribution
Santosh has acted on a number of landmark transactions, including
and transmission business of Reliance Infrastructure.
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
Renew Group in the acquisition of 1,108 MW of solar assets from the
Ostro group, advising AT Capital in the sale of its solar and wind assets
to Greenko and advising the International Finance Corporation in its
largest solar rooftop debt financing transaction with the Azure group.

Cyril Amarchand Mangaldas is a 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, Asia Pacific Legal 500, 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.

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 Chapter 20

Iran
Behnam Khatami

Sabeti & Khatami Hooman Sabeti

EUR 1,683,000,000 according to the Economic Council Directive

1 Overview
dated 10 February 2018.

1.1 What are the main trends/significant developments in 2 Security

the project finance market in your jurisdiction?

2018 proved to be a volatile year for project finance in Iran. Even 2.1 Is it possible to give asset security by means of a
prior to the US withdrawal from the Iran nuclear deal (otherwise general security agreement or is an agreement
known as the JCPOA), foreign banks were hesitant to finance Iran required in relation to each type of asset? Briefly,
projects due to a combination of difficulties in transferring funds, what is the procedure?
concerns over AML and CTF, and a heightened compliance stance.
In addition, many projects present bankability issues and a high A general security agreement is not possible under Iranian law as
commercial risk profile due to, inter alia, non-market concession security assets or properties must be clearly identified in the grant
agreements, unattractive output pricing and currency devaluation and the security regime depends on the asset type. A pledge of most
risk. Following the US withdrawal from the JCPOA and re- movable assets (such as project assets) may, but does not have to, be
imposition of nuclear-related secondary sanctions, international registered, but this does not apply to certain movable assets such as
banks generally no longer consider financing Iran projects, fearing vessels and aircraft, security over which must be registered.
US reprisal. In a new environment of constrained financial Mortgages over real properties must be registered with a public
resources, the prospect of project financing by local commercial notary. Security over shares of a listed company must be registered
banks or the government also remains uncertain. with the Central Securities Depository of Iran. Security over shares
of non-listed companies must be recorded in the share register of
From a legal perspective, approval of the Public Private Partnership
that company and signed by both pledgor and pledgee. Such
Decree (the PPP Decree) by the Council of Ministers has been a
registration or recording, as the case may be, of a security interest
major development. The PPP Decree allows the government to
perfects the rights of the secured party.
provide up to 25% of funding requirements for PPP projects. In
each case, the participation arrangement will be documented in an
agreement among the parties and in a financing agreement between 2.2 Can security be taken over real property (land), plant,
the private sector counterparty and a local commercial bank. The machinery and equipment (e.g. pipeline, whether
PPP Decree also provides for a number of assurances in favour of underground or overground)? Briefly, what is the
private counterparties such as, where applicable, guaranteed procedure?
purchase of the project’s output by public sector entities (including
an undertaking to open foreign currency or Iranian Rial letters of Such security interests may be created. In case of real property, a
credit for such purchases) and issuance of financial guarantees to mortgage is created through registration with a public notary, who
cover a minimum annual return. The government may also commit will first query the ownership status of the property from the
to pay contractual damages and purchase a project’s incomplete relevant Land Register, and upon confirmation of ownership issue a
portions from the private counterparty in the event of force majeure mortgage document creating security over the property. The
or termination of the contract due to the government’s breach of its security will then be registered in the records of the real property
undertakings. with the Land Register. This security provides a right in rem for the
secured party as well as priority against unsecured creditors.

1.2 What are the most significant project financings that

have taken place in your jurisdiction in recent years? 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
Although there is no reliable and complete market information, the
of the security? Briefly, what is the procedure?
directives of the Economic Council and press reports suggest that
the most notable project financings have been in the infrastructure
Iranian law does not allow security over receivables because a
(mainly, transportation and hospitals), energy and sewage sectors.
security asset must be a corporeal thing. While mortgage of a debt
In terms of monetary value, Bakhtiari Hydroelectric Power Plant
or benefit is void, an assignment of receivables is acceptable under
and Dam appears to be one of the largest projects with a value of

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Sabeti & Khatami Iran

Iranian law and is commonly used. Receivables are assigned required, from the concerned governmental organisation and, in
through a tripartite agreement among the payor, receiver and certain cases, from the Council of Ministers. Practically speaking,
assignee. security interest over public assets is rarely granted due to the
complications involved and the fact that government obligations are
usually backed by the Central Bank of Iran (CBI) or a sovereign
2.4 Can security be taken over cash deposited in bank
accounts? Briefly, what is the procedure? guarantee.

Iran
It is possible to create security over cash deposited in a bank. Such 3 Security Trustee
security interest may be created through private agreement and can
be perfected by recording it with the concerned bank.
3.1 Regardless of whether your jurisdiction recognises
the concept of a “trust”, will it recognise the role of a
2.5 Can security be taken over shares in companies security trustee or agent and allow the security
incorporated in your jurisdiction? Are the shares in trustee or agent (rather than each lender acting
certificated form? Briefly, what is the procedure? separately) to enforce the security and to apply the
proceeds from the security to the claims of all the
Creating security interest over shares of an Iranian company is lenders?
possible regardless of whether the shares are certificated or not.
Security over shares of a listed company must be registered with the While Iranian law does not recognise trusts, the rights and
Central Securities Depository of Iran. Security over shares of non- responsibilities of a security agent will be recognised if documented
listed companies must be recorded in the share register of the and agreed through contractual arrangements among the relevant
company and signed by both pledgor and pledgee. Registration or parties.
recording, as the case may be, of a security interest perfects the
rights of the secured party. 3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available
2.6 What are the notarisation, registration, stamp duty (such as a parallel debt or joint and several creditor
and other fees (whether related to property value or status) to achieve the effect referred to above which
otherwise) in relation to security over different types would allow one party (either the security trustee or
of assets (in particular, shares, real estate, the facility agent) to enforce claims on behalf of all the
receivables and chattels)? lenders so that individual lenders do not need to
enforce their security separately?

To be perfected, security interests over real property and movable

As mentioned in our response to question 3.1, an alternative mechanism,
assets must be registered with a notary who will charge a
whereby the parties, by contract and power of attorney, empower a party
registration fee, a notarial fee and value added tax (VAT). The fees
to take enforcement action on behalf of lenders, is possible.
are determined by the Judiciary. Currently, the registration fee is
fixed at 0.5% of the value of the security asset, while the notarial fee
varies depending on the nature of the security asset, up to 4% of the 4 Enforcement of Security
value. VAT is payable at 9% of the notarial fee.
Pledging shares of a non-listed company is free of charge, but
pledging shares of a listed company will incur a cost of IRR1 to 4.1 Are there any significant restrictions which may
impact the timing and value of enforcement, such as
IRR5 per share.
(a) a requirement for a public auction or the
availability of court blocking procedures to other
2.7 Do the filing, notification or registration requirements creditors/the company (or its trustee in
in relation to security over different types of assets bankruptcy/liquidator), or (b) (in respect of regulated
involve a significant amount of time or expense? assets) regulatory consents?

Registration of security interests can be done fairly quickly. Enforcement of security interests perfected with a notary
Creating security over movable assets requires listing the assets, registration must be through a notification procedure and auction
which may take some time. Perhaps most time-consuming is process (which includes appraisal by Judiciary experts). If the
creating security over real property, which normally involves an auction does not result in the sale of the asset, it will be transferred
ownership query by the notary from the relevant Land Register, to the secured party. Enforcement of security interests over shares
acknowledgment of ownership by the Land Register, registration of and enforcement of unperfected security interests requires a court
the security with the notary and recording with the Land Register. order, which can be cumbersome, costly and time-consuming. Any
This process normally takes seven to 21 business days. enforcement action may be blocked by a court order in certain
circumstances (e.g., absence of ground for enforcement).

2.8 Are any regulatory or similar consents required with

respect to the creation of security over real property 4.2 Do restrictions apply to foreign investors or creditors
(land), plant, machinery and equipment (e.g. pipeline, in the event of foreclosure on the project and related
whether underground or overground), etc.? companies?

No regulatory consent would be required if the underlying asset is In respect of enforcement actions, Iranian law does not generally
privately owned. If the underlying asset is public or government- differentiate between local and foreign investors or creditors, with
owned, or if the equipment (including pipeline) is located on or the exception that foreigners may not own real property. Therefore,
passes through or under public or government lands, consent may be enforcement of foreign creditors’ security interests over real

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 Sabeti & Khatami Iran

property can either be through receipt of sale proceeds or make a further claim at a later time for proceeds of any sale of
designating a local agent to take ownership on behalf of the foreign property in future, before the creditors who have consented to the
secured party. conciliation agreement are fully paid.

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

5.1 How does a bankruptcy proceeding in respect of the A company’s directors are required under the law to declare
project company affect the ability of a project lender bankruptcy where the company’s circumstances so warrant. A
to enforce its rights as a secured party over the failure to do so may result in what is called the company’s
security? “negligent bankruptcy”, which is a bankruptcy by fault of directors.
This would subject the directors to civil and criminal liability,
A bankruptcy procedure does not prevent a secured creditor from including imprisonment from six months to two years.
enforcing its rights against the project company. In a bankruptcy
procedure, a secured creditor has priority vis-à-vis other creditors
with respect to the secured property (but not the project company’s 6 Foreign Investment and Ownership
general assets, since the concept of a general security interest is not Restrictions
recognised), based on perfection and time of creation of the security
interests. Nevertheless, it is possible that a bankruptcy court could
6.1 Are there any restrictions, controls, fees and/or taxes
delay or block enforcement action by a secured party.
on foreign ownership of a project company?

5.2 Are there any preference periods, clawback rights or In industries such as power generation, mining, and downstream
other preferential creditors’ rights (e.g. tax debts, and mid-stream petroleum which are open to the private sector,
employees’ claims) with respect to the security?
there is no foreign ownership restriction and foreign investors can
take up to 100% of the project (subject to the sectoral and sub-
There is no preference period prior to bankruptcy – transfers during sectoral limits under FIPPA discussed below). Concession
which period may be voidable. There is no clawback under the law agreements in these sectors often have a BOO structure.
that would force a secured creditor to return proceeds of
Private investors, whether local or foreign, may not own projects
enforcement. There are no special classes of creditors that would
which fall within the exclusively public domain of the economy
override a secured party’s interest.
under the Constitution, as discussed in our response to question 7.3
(e.g., electricity transmission and upstream petroleum projects) and
5.3 Are there any entities that are excluded from these projects are often structured as BOTs.
bankruptcy proceedings and, if so, what is the
Under the Foreign Investment Promotion and Protection Act 2002
applicable legislation?
(FIPPA), foreign investment must not exceed (i) 25% in each
economic sector as a whole, and (ii) 35% in each sub-sector (or
All corporate vehicles including governmental companies are
field). It is not clear whether and how these aggregate ceilings are
subject to bankruptcy proceedings. There is also a narrow judicial
enforced.
reorganisation procedure available under Iranian law, which is not
mandatory and cannot prevent a bankruptcy procedure. In general, there are no other controls, fees or taxes arising from
foreign ownership of a project company, although Iran has foreign
currency control regulations in place which may affect repatriation
5.4 Are there any processes other than court proceedings of foreign investments or dividends therefrom.
that are available to a creditor to seize the assets of
the project company in an enforcement?
6.2 Are there any bilateral investment treaties (or other
international treaties) that would provide protection
Where a security interest is registered with a notary (as required for
from such restrictions?
all real property and for certain movable assets such as vessels and
aircraft), enforcement of security by secured parties may be initiated
and carried out through a notary with no involvement of courts. Iran is party to more than 50 bilateral investment treaties (BITs),
Self-help is not available to secured parties. which include standard protections such as national treatment, most-
favoured nation treatment and compensation in the event of
expropriation. Protections under these treaties are subject to
5.5 Are there any processes other than formal insolvency obtaining a foreign investment licence under FIPPA.
proceedings that are available to a project company
to achieve a restructuring of its debts and/or
cramdown of dissenting creditors? 6.3 What laws exist regarding the nationalisation or
expropriation of project companies and assets? Are
any forms of investment specially protected?
A borrower may enter into conciliation agreement with its creditors.
If such agreement is consented to by at least three-quarters of the
claims value, the borrower does not have to enter a bankruptcy The BITs, FIPPA and FIPPA’s implementing regulation provide
auction process for all of its assets and can continue its business protection for foreign investors against nationalisation and
subject to the conciliation agreement. Any creditor rejecting such expropriation. For foreign investments with a FIPPA licence,
conciliation agreement can receive proceeds of sale of the assets of nationalisation or expropriation is permitted only where: (i) it is
the insolvent borrower only in proportion to its claim, but cannot necessary for public purposes; (ii) it is carried out pursuant to the

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Parliament’s decision; and (iii) fair and appropriate compensation Natural resources
equal to the real value of the investment is given prior to the Under the Constitution of Iran, natural resources such as oil and gas
nationalisation or expropriation. or water are part of the “public wealth”, ownership of which as well
the right to control, preserve, and manage them have been
7 Government Approvals/Restrictions exclusively vested in the government. The government may grant
rights to the private sector subject to relevant laws and regulations
for the exploration and exploitation of such “public wealth”. In such

Iran
7.1 What are the relevant government agencies or cases, the government maintains ownership rights with respect to
departments with authority over projects in the typical these resources but provides the grantee (whether local or foreign)
project sectors? with exploration and exploitation licences in exchange for royalties.
Foreign investment with respect to “public wealth” is usually
With respect to government-sponsored projects, the Planning and through service agreements under which remuneration would be
Budget Organisation (PBO) as well as the Central Bank of Iran play limited to the cash flow of the project.
important roles in, respectively, budgeting and foreign currency Pipeline
allocations for the projects.
Using government-owned pipelines requires a licence from the
In both government- and privately-sponsored projects, various relevant government authorities. Construction and operating a
governmental authorities with licensing and regulatory powers may pipeline for transferring feedstock (such as gas, crude or water) to,
become involved. For instance, the Renewable Energy and Energy or the output from, the project may require a licence from
Efficiency Organization, which is affiliated with the Ministry of government authorities as well.
Energy, is the main authority for renewable projects and for
implementation of guaranteed purchase of the generated electricity
from such projects. The National Iranian Oil Company and its 7.4 Are there any royalties, restrictions, fees and/or taxes
payable on the extraction or export of natural
subsidiaries (all affiliated with the Ministry of Petroleum) are in
resources?
charge of upstream projects in the petroleum industry. Road,
railway, port and airport projects fall under the authority of the
There are various payments to be made to the government in
relevant departments within the Ministry of Road and Urban
relation to extraction of natural resources, but the nature of these
Development. Depending on the location of the project land,
payments depends on the project sector. For instance, “service fees”
various municipalities or the Natural Resources Organisation may
must be paid in upstream petroleum projects while in mining
have jurisdiction. Finally, the nature of the project may require
projects, “royalties” are paid to the government.
obtaining certain approvals from the Environmental Protection
Organisation. The government has an exclusive right to export natural resources,
but may exercise this right through marketing and export
agreements with private parties (whether local or foreign). The law
7.2 Must any of the financing or project documents be
prohibits the imposition of export duty and charges over non-
registered or filed with any government authority or
otherwise comply with legal formalities to be valid or petroleum goods other than raw and unprocessed minerals, which
enforceable? are subject to export duties and charges.

Allocation of lands classified as “natural resources” to projects must 7.5 Are there any restrictions, controls, fees and/or taxes
be done through a notarised lease agreement in a pre-approved form on foreign currency exchange?
and must be registered with a public notary. Other than the
foregoing, there is no specific requirement for registration or filing Iran currently has a rather complicated multi-rate foreign currency
of the financing or project documents, although the concession exchange regime in place. With respect to projects, foreign
agreements (which are usually in pre-approved forms) are usually currency exchange services are generally offered by banks and
registered with the relevant government organisation. For projects authorised exchange houses through a national platform (the Sana
benefitting from a sovereign guarantee certain formalities such as Platform) and through an auction procedure. Purchase of foreign
approval by the Economic Council and the CBI must be followed. currency on the Sana Platform is only allowed for certain uses such
as importing equipment and machinery, fulfilling payment
7.3 Does ownership of land, natural resources or a obligations to foreign contractors, or repatriation. Sellers of foreign
pipeline, or undertaking the business of ownership or currency on the Sana Platform are generally local exporters who
operation of such assets, require a licence (and if so, must repatriate their foreign currency earnings.
can such a licence be held by a foreign entity)?

7.6 Are there any restrictions, controls, fees and/or taxes

Land on the remittance and repatriation of investment
Foreign ownership of land is prohibited in Iran, but foreign nationals returns or loan payments to parties in other
can own private land through an Iranian corporate vehicle, which jurisdictions?
will be considered Iranian even if fully owned by foreign nationals.
Ownership of government lands cannot be transferred to private Repatriation of investments from Iran requires approval by an official
owners (whether local or foreign) but these lands can be leased for body called the Investment Board, affiliated with the Ministry of
specific purposes upon the approval of the relevant government Economic Affairs and Finance. For the purpose of repatriation, foreign
authority. Transfer or lease of private lands do not generally require currency must be purchased through the Sana Platform and remitted via
a government licence and can be done through private agreements a bank or authorised exchange house. The only fee applicable to
(although development, construction and operation of the project repatriation is the conversion fee, although the rates on the Sana
may require government licences as discussed before). Platform may not necessarily reflect open market rates for retail

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 Sabeti & Khatami Iran

transactions. Repayment of loans by government bodies requires

approval by the PBO and CBI for budget and foreign currency 8.2 Are insurance policies over project assets payable to
allocations, respectively. For repayment of interest on loans a foreign (secured) creditors?
withholding tax of 25% applies if the lender is a legal entity (or 15–25%
depending on the amount of interest, if the lender is a natural person). Receivables under insurance policies can be assigned to foreign
creditors, secured or otherwise.

7.7 Can project companies establish and maintain

Iran

onshore foreign currency accounts and/or offshore 9 Foreign Employee Restrictions

accounts in other jurisdictions?

Project companies can have onshore foreign currency accounts, as 9.1 Are there any restrictions on foreign workers,
well as offshore accounts anywhere. technicians, engineers or executives being employed
by a project company?

7.8 Is there any restriction (under corporate law, In order for a foreign employee to work in Iran, he or she must
exchange control, other law or binding governmental
secure a work visa, residency permit and work permit, which would
practice or binding contract) on the payment of
dividends from a project company to its parent
usually be available for skilled workers. To obtain the foregoing, an
company where the parent is incorporated in your Iranian entity usually acts as the employer for the foreign national
jurisdiction or abroad? and sponsors the visa and permits.

There is no statutory restriction on payment of dividends by a project 10 Equipment Import Restrictions

company and under general mandatory corporate law, at least 10% of
the annual profit of the company must be distributed among the
shareholders. Remittance of dividends offshore is subject to the 10.1 Are there any restrictions, controls, fees and/or taxes
currency conversion regime described, and, for projects with a on importing project equipment or equipment used by
foreign investment licence, clearance from the Investment Board construction contractors?
affiliated with the Ministry of Economic Affairs and Finance.
To import project or construction equipment, the importer must
obtain a commercial card and must register an import application
7.9 Are there any material environmental, health and
safety laws or regulations that would impact upon a with the Ministry of Industry, Mines and Trade (MIMT).
project financing and which governmental authorities Importation of goods (including equipment) is generally subject to
administer those laws or regulations? payment of import duties which include a customs tariff and
“commercial interest”. The customs tariff is set at 4% of the CIF
There are relevant environmental, health and safety laws and value of imported goods. Commercial interest is determined from
regulations, and all production, infrastructure, mining and civil time to time by the Council of Ministers and varies depending on the
projects are subject to an environmental impact study (EIS), which type of imported goods ranging from 0% to higher rates, such as
must be approved by the Environmental Protection Organisation (the 75%. Moreover, VAT of 9% applies to imported goods. Despite the
EPO). The EIS requirement applies to almost every industrial sector foregoing, importation of new equipment and machinery for
including petrochemical, oil and gas, power, industrial factories, production lines is exempted from import duties.
ports and airports. Upon approval of the EIS for a project, an Where local content requirements are triggered, the government
environmental licence will be issued by the EPO, which is usually may further impose restrictions on the types of equipment and
valid for one year but extendable with the consent of the EPO. machinery that may be imported. Finally, the government may,
from time to time, impose ad hoc restrictions on the importation of
equipment and machinery, for instance via foreign currency or
7.10 Is there any specific legal/statutory framework for
procurement by project companies? capital control measures.

The Law on the Manner of Conducting Tenders 2004 (the Tender 10.2 If so, what import duties are payable and are
Law) and the Public Accounts Act 1987 set the primary legal exceptions available?
framework for public procurement. Tender laws (including the
Tender Law) are triggered where the project is owned by the Please see our response to question 10.1.
government, and private sector transactions are not subject to public
procurement laws. Government-sponsored projects or projects using
government financial resources are also subject to local content laws. 11 Force Majeure

8 Foreign Insurance 11.1 Are force majeure exclusions available and

enforceable?

8.1 Are there any restrictions, controls, fees and/or taxes Iranian law recognises exclusion of liability upon occurrence of a
on insurance policies over project assets provided or force majeure event, provided that such event must be external and
guaranteed by foreign insurance companies? beyond the reasonable control of the affected person, unpredictable
and actually preventing performance. In addition, contractual
From the perspective of a project company, there is no restriction on agreements with respect to force majeure are honoured under
obtaining insurance coverage from a foreign insurance provider. Iranian law based on the principle of freedom of contract.

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Sabeti & Khatami Iran

foreign arbitral award may be enforced by Iranian courts if, inter

12 Corrupt Practices
alia: (i) there is a reciprocity with the country in which the award
was issued; (ii) the judgment is considered final where it was
12.1 Are there any rules prohibiting corrupt business handed down and a writ of enforcement was issued; (iii)
practices and bribery (particularly any rules targeting enforcement of the judgment is not considered as contrary to public
the projects sector)? What are the applicable civil or order or good morals in Iran; and (iv) there is no conflicting
criminal penalties? judgment handed down in Iran.

Iran
Despite the foregoing, arbitration of disputes in relation to public
Anti-bribery and anti-corruption laws are mainly set forth in the assets or public entities is only allowed if the arbitration agreement
penal code. Moreover, the Law Prohibiting Intervention by has been approved by the Council of Ministers and, in “important
Government Officers prohibits government officials from having an cases” (e.g. where the counterparty is a foreign national) by the
interest in projects. The extent and the type of civil and criminal Parliament. Otherwise, Iranian courts would not recognise or
punishments significantly vary depending on the nature of the enforce the arbitral award as contrary to public order. The foregoing
underlying offence, but punishments include imprisonment, fines restriction does not prevent enforcement of an arbitral award outside
and a ban from public service. Iran against government assets in foreign jurisdictions.

13 Applicable Law 15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
conventions?
13.1 What law typically governs project agreements?
Iran is a party to the 1958 New York Convention on Recognition and
Project agreements are typically governed by Iranian law. This is Enforcement of Foreign Arbitral Awards and passed the Convention
almost invariably the case in government-sponsored projects. into law in 2001. Iran is not a party to other multilateral dispute
resolution conventions.
13.2 What law typically governs financing agreements?
15.3 Are any types of disputes not arbitrable under local
Local financing agreements are governed by Iranian law. Foreign law?
financing agreements can be governed by foreign laws, among
which English law is most common. Disputes concerning bankruptcy are the most notable disputes
which are not arbitrable under Iranian law.

13.3 What matters are typically governed by domestic law?

15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
Matters pertaining to land lease, operation and maintenance of a
project, health, safety and environmental issues (HSE) and product
liability are inevitably governed by Iranian law. Legal disputes in the capital market, such as disputes amongst
brokers, issuers, investors and other market players, disputes
relating to contractor agreements with government entities and
14 Jurisdiction and Waiver of Immunity disputes in relation to government-sponsored projects must go
through special domestic arbitration proceedings.

14.1 Is a party’s submission to a foreign jurisdiction and

waiver of immunity legally binding and enforceable? 16 Change of Law / Political Risk

Submission to the jurisdiction of a foreign court is recognised under the

principle of freedom of contract, although exclusive submission may 16.1 Has there been any call for political risk protections
such as direct agreements with central government or
not be enforceable as Iranian courts can assert jurisdiction. A foreign
political risk guarantees?
judgment must be recognised by Iranian courts prior to enforcement;
this recognition is subject to certain criteria under the law.
There is a statutory protection mechanism against political risk
Waiver of immunity is legally binding and enforceable. Nonetheless,
through FIPPA. Foreign investors receiving FIPPA protections are
government properties enjoy some protections under the law against
shielded against the risk of nationalisation and expropriation
enforcement actions and, therefore, cannot be speedily attached.
(although FIPPA offers little protection against creeping
Following a judgment for enforcement against government property,
expropriation).
the property can only be attached in the following fiscal year if the
concerned government entity has not voluntarily complied. Change of law clauses are recognised under the principle of freedom
of contract. Therefore, contractual protections against such changes
(e.g. by locking taxes, price of feedstock, or purchase price of
15 International Arbitration project output) can be enforced.

15.1 Are contractual provisions requiring submission of

disputes to international arbitration and arbitral
awards recognised by local courts?

In general, foreign arbitration is recognised under Iranian law, and a

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 Sabeti & Khatami Iran

and tax and accounting implications. Furthermore, it is not clear

17 Tax
whether PPP has been introduced as an umbrella scheme covering
BOT, BOO, BLT and other models, or whether PPP is a new model
17.1 Are there any requirements to deduct or withhold tax supplementary to those already existing.
from (a) interest payable on loans made to domestic Proper assessment of bankability of projects, documentation and
or foreign lenders, or (b) the proceeds of a claim regulatory risk, and enforceability as well as designing the corporate
under a guarantee or the proceeds of enforcing structure, exit strategies and step-in rights to mitigate project,
security?
Iran

market and foreign currency risks should also be among the material
considerations for foreign investors and lenders.
Interest payable to foreign lenders is subject to income tax at the rate
of 25% for legal persons and 15% to 25% for natural persons, to be
withheld by the borrower upon each interest payment. No tax is 18.2 Are there any legal impositions to project companies
incurred with respect to the proceeds of a claim under a guarantee or issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory
with respect to proceeds of enforcing security.
requirements for the issuance of capital market
instruments.
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What Iranian law does not distinguish between project companies and
taxes apply to foreign investments, loans, mortgages other types of issuers when it comes to issuing capital market
or other security documents, either for the purposes instruments. Under the Securities Market Act (SMA), public
of effectiveness or registration?
offering of securities is subject to compliance with registration and
prospectus requirements unless an exception applies (e.g., private
“Production operations” (which may include production projects) placement). In addition, an issuer must comply with the listing
are subject to zero tax for a specified period of time: requirements of the relevant exchange. Public offering of securities
(a) lesser developed areas, as identified by tax authorities (for 10 must be carried out within the timeframe stipulated by the Securities
years); and Exchange Organisation of Iran (the SEO), the capital market
(b) special economic zones and industrial parks (for seven regulatory and supervisory body. Non-compliance with the
years); requirements under securities laws and regulation (e.g., failure to
(c) lesser developed special economic zones and industrial parks disclose material information or providing misleading information)
(for 13 years); and can lead to civil and criminal liabilities as well as disciplinary
(d) other areas (for five years). measures administered by the SEO. A number of tax benefits are
Projects that have attracted foreign investment will enjoy the available to companies that raise finance through the capital market.
following tax break after the expiry of the abovementioned Issuance of sukuk (or Islamic debt securities) is subject to specific
exemption period: rules and regulations. Sukuk must be issued via a special purpose
(a) In lesser developed areas: the applicable tax rate will be zero intermediary called nahad-e vaset (SPV). The SPV is set up in the
until the cumulative taxable income reaches double the form of a new limited liability company, established and managed
registered and paid-up capital of the project company (up to by the Capital Market Central Asset Management Corporation
the foreign investment made). (CMCAM), a quasi-regulatory body. CMCAM also acts as an asset
(b) In other areas: half of the tax will be calculated at a zero tax custodian and is charged with protecting the interests of sukuk
rate until the cumulative taxable income reaches the holders and ensuring the issuer’s proper allocation of funds,
registered and paid-up capital of the project company (up to maintenance of accounts and preparation of financial statements.
the foreign investment made).
No incentive is offered to foreign lenders, and no other tax is applied
19 Islamic Finance
on foreign investment (except for income and withholding tax on
interest payments to foreign lenders, mentioned above).
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
instruments might be used in the structuring of an
18 Other Matters Islamic project financing in your jurisdiction.

18.1 Are there any other material considerations which All domestic financing in Iran is Islamic. Common instruments
should be taken into account by either equity available for project financing are:
investors or lenders when participating in project Ijarah is a lease-based financing facility and ijarah sukuk are
financings in your jurisdiction?
certificates that evidence a pro rata ownership by the holders in
assets held by an SPV and leased on their behalf. Under these
Foreign investors should be mindful of the differences between arrangements, the underlying assets are leased to the ostensible
typical financing arrangements in Iran and standard international borrower in exchange for rental payments, which are structured to
financing models. In addition to particular practices and achieve the economics of a financing lease. Ijarah sukuk consists of
expectations in local financing, the absence of a comprehensive, an underlying ijarah (lease) agreement and a set of subsidiary
clear and consistent legal regime for financing has complicated agreements (such as agency and sulh agreements between the
project financing in Iran. For instance, the legal framework for originator and the sukuk holders or the SPV on behalf of them). The
public-private partnership (PPP) has only been recently introduced sulh agreement serves two functions: (i) the seller will be bound to
in Iran, but the PPP laws currently in force do not address all aspects supply the underlying asset, and make the payment in due time; and
of PPP projects. As of now, therefore, PPP schemes in Iran are, (ii) it brings the relationship between the lessor and the lessee to an
compared to other project financing, subject to considerable legal end once the project is completed.
uncertainty when it comes to their structure, procedure, execution,

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Sabeti & Khatami Iran

Istina’a is a made-to-order construction agreement used to finance

equipment or plant purchases, and istina’a sukuk is an asset-based 19.3 Could the inclusion of an interest payment obligation
sukuk under which the issuer issues certificates based on a in a loan agreement affect its validity and/or
enforceability in your jurisdiction? If so, what steps
construction agreement. Under the construction agreement, one could be taken to mitigate this risk?
party requires the other party to manufacture and deliver a specific
good within a specific period of time in exchange for a specific
Payment of interest on loans by a domestic borrower to a domestic
payment arrangement, which represents the commercial financing
lender may be considered riba (usury), which is prohibited under
arrangements. The underlying assets may be movable or

Iran
Iranian law. However, there are a range of domestic financing
immovable.
instruments which replicate the commercial characteristics of a
Murabaha is a simple financing arrangement whereby a financier conventional loan without falling foul of Sharia, and the restriction
purchases goods and sells them to the ostensible borrower on does not apply to offshore debt.
deferred payment terms that reflect the financier’s purchase price
plus financing costs over time. It can also be structured as a facility
whereby a commodity is purchased by the financier on a spot basis Acknowledgment
and sold to the ostensible borrower on deferred payment terms The authors would like to thank associates Amir Mirtaheri and
which reflect the economics of a financing (the borrower sells the Farshad Rahimi for their invaluable contributions to this chapter.
commodity to the market on a spot basis to raise immediate cash).
Murabaha sukuk are certificates that evidence pro rata ownership Amir Mirtaheri advises on a range of corporate and finance
by the holders in underlying assets being purchased through a matters. He received his JD (magna cum laude) from the University
murabaha contract; depending on the particular structure and assets of Ottawa and is admitted to the Ontario Bar. He was previously
chosen, they can be used to fund a purchase of equipment or raise legal counsel at Export Development Canada, Canada’s export
general purpose financing. The underlying asset could be movable credit agency, where he prepared and negotiated financing
or immovable, and acceptable assets include land, equipment and documents for multi-jurisdictional financings, as well as credit
machinery, buildings, vehicles and commodities. insurance and guarantee arrangements. As a seasoned cross-border
transactional lawyer, Amir is attuned to understanding the business
context of transactions and working closely with clients to devise
19.2 In what circumstances may Shari’ah law become the solutions that address their legal and business concerns while
governing law of a contract or a dispute? Have there mitigating the risks involved.
been any recent notable cases on jurisdictional
issues, the applicability of Shari’ah or the conflict of Tel: +98 21 8821 7107 / Email: [email protected]
Shari’ah and local law relevant to the finance sector? Farshad Rahimi advises on various corporate, securities and
finance matters. He previously served as legal counsel at the
The Iranian civil legal system is wholly Sharia-compliant by design, Securities and Exchange Organisation. Farshad completed an
so Sharia itself is not chosen or imposed as the governing law of a LL.M. in international business transactions at the University of
contract or dispute. Iranian laws are vetted by the Guardian Denver and another LL.M. in investment and finance law at the
Council, a body in charge of ensuring compatibility of the laws University of Michigan (where he held the highly selective Grotius
legislated by the Parliament with the Constitution and with Sharia Fellowship). He has co-authored a book on international sales law
principles. If the Guardian Council considers a law passed by the and authored a number of articles on contract law and international
Parliament to be non-compliant with Sharia principles, it will not investment law, including in the Virginia Journal of International
ratify it. In addition, the Sharia Board of the SEO is responsible for Law, the Florida Journal of International Law, the Uniform Law
ensuring that sukuk are Sharia-compliant. Once an instrument is Review (Oxford) and the Cambridge International Law Journal
permitted to be issued in the capital market, it is considered Sharia- Online.
compliant. Tel: +98 21 8821 7107 / Email: [email protected]

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 Sabeti & Khatami Iran

Behnam Khatami Hooman Sabeti

Sabeti & Khatami Sabeti & Khatami
4 West Zayandeh Roud Street (Unit 6) 4 West Zayandeh Roud Street (Unit 6)
North Shirazi Street, MollaSadra Avenue North Shirazi Street, MollaSadra Avenue
Tehran 1991614158 Tehran 1991614158
Iran Iran

Tel: +98 21 8821 7107 Tel: +98 21 8821 7107

Iran

Email: [email protected] Email: [email protected]

URL: www.sabeti-khatami.com URL: www.sabeti-khatami.com

Behnam Khatami is a co-founder of Sabeti & Khatami. Behnam has Hooman Sabeti is a co-founder of Sabeti & Khatami. Hooman has
been admitted to the Iranian Central Bar Association since 2005. For been a finance lawyer for over 20 years in major financial centres. He
the past 13 years, he has been advising clients, in particular foreign was a partner of Allen & Overy, practising in Singapore, London and
companies, in their business and investment activities in Iran, across New York, where he acted for various governments, major
different industries. He is well-versed in: infrastructure projects corporations and all the major global investment banks on a range of
(including railways, ports and airports); oil and gas and energy cross-border financings, including bond issuances, securitisations,
(including IPC and power – conventional and renewable); project equity offerings, private placements, Islamic financings, project
finance (PPPs and private financing schemes); as well as EPC financings, acquisition financings and private funds. He is particularly
matters. He has acted for project sponsors and assisted them on experienced in creating novel and complex financing instruments in
regulatory matters as well as in structuring their investment, and emerging markets. Many of his transactions were the first of their type
drafting and negotiating their project and financing agreements. globally or in the jurisdiction (such as the first international sukuk), and
over a dozen were recognised by industry awards as being particularly
innovative or significant. He brings broad geographic experience to
bear on solving the complex legal problems arising in cross-border
transactions, having worked on deals in the Americas, Europe, Middle
East and Asia.

Sabeti & Khatami is a legal practice offering clients first-rate advice, commercial awareness, effective solutions and outstanding service on matters
of Iranian law with an international element. Since establishment in 2017, the firm has grown rapidly and advised on complex project matters. The
firm offers a unique proposition in the market through our people: top-level international experience and reputation plus leading domestic expertise
and standing. Recent matters include:
■ Advising a major Chinese oil and gas company, alongside international counsel, on an IPC contract in relation to South Pars.
■ Advising a South Korean company developing a landfill gas-to-electricity project on the concession agreement, regulatory and licensing matters,
and sovereign guarantee matters.
■ Advising a prominent French renewables developer on acquisition of, and due diligence on, solar and wind projects, as well as on acquisition
structuring, domestic financing, local content, regulatory and corporate matters and foreign investment licence.
■ Advising a major Chinese solar power company on structuring of an investment in a solar project, regulatory matters, feed-in tariffs, public
procurement issues, EPC contract, and foreign exchange matters.
■ Advising a Spanish energy company on setting up four solar projects, investment and corporate structuring, regulatory matters, real estate issues
and lease agreements.

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Chapter 21

Ireland
Matt Dunn

Arthur Cox Charlotte Upton

transport projects. The National Development Plan 2018–2027

1 Overview
(NDP) sets out plans for investment of approximately EUR116
billion to meet Ireland’s infrastructure and investment requirements
1.1 What are the main trends/significant developments in over the above period. While government funding has been
the project finance market in your jurisdiction? allocated for the majority of the planned projects, the NDP states
that all large-scale projects included in the NDP should continue to
Historically, project finance activity in Ireland has been driven by be assessed for suitability for procurement by PPP and/or alternative
the needs of the energy sector and PPP programme; project finance financing, particularly in respect to concession-based projects
transactions tend to come in waves when supported by favourable which offer for the potential for user charges.
public policy. Various PPP transactions which were signed in the immediate
Onshore wind transactions have been one of the mainstays of the aftermath of the global financial crisis have been refinanced in
Irish project finance market over the past five years: there were 264 2016–2019 as the availability and commercial terms of debt
operational windfarms in Ireland by the end of 2018, with financing have improved significantly, enabling projects to take
approximately 3.5GW of installed capacity in aggregate. Domestic advantage of improved pricing available from incumbent financiers
and international commercial lenders have been active in financing or to agree new terms with an entirely new lender group, and to
onshore wind projects, with involvement from development release refinancing gains (to the extent available).
financial institutions such as the European Investment Bank (EIB)
and KfW. 1.2 What are the most significant project financings that
The Renewable Energy Feed-In Tariff (REFIT) schemes have have taken place in your jurisdiction in recent years?
supported the growth in renewable energy projects by incentivising
suppliers to enter into fixed (or floor) price PPAs by effectively Significant project financings in Ireland in recent years include:
providing such suppliers with a one-way hedge against market Oweninny Power: AIB, BNP Paribas and MUFG provided
prices falling below a particular level (depending on the REFIT commercial debt facilities alongside EIB financing to fund the
scheme, technology and project size) for a period of up to 15 years. development and financing of the 89MW Phase 1 of the Oweninny
The Irish government announced in July 2018 that the REFIT Windfarm, which will be, once developed, Ireland’s largest wind
schemes will be replaced by the new Renewable Energy Support development project being developed through a joint venture
Scheme (RESS) which will involve a series of auctions into which between ESB and Bord na Mona. Phase 2 will further increase the
“shovel-ready” energy projects will be able to bid their proposed installed capacity to 172MW, making it by far the largest windfarm
electricity price, with successful projects being those whose price is on the island of Ireland, with the potential for significant further
at or below the clearing price required to meet the capacity being development on the site. Oweninny Power is the first Irish wind
auctioned. project to be co-financed by the EIB, which is providing 50% of the
Once it is operational, the introduction of RESS is likely to result in funding part of the Investment Plan for Europe and backed by the
lower pricing for renewable energy projects, potentially giving rise European Fund for Strategic Investments.
to interest in using other types of debt (in addition to traditional Dublin Waste-to-Energy: this project, led by Covanta, entered
senior project financings) in order to enable sponsors to meet their commercial operation in early 2017 and was refinanced shortly
targeted returns on investment for new projects. The RESS scheme afterwards, with senior secured and junior secured facilities
is also expected to affect the project finance market in various other provided by commercial banks (AIB, Bank of Ireland, Helaba and
ways: for example, there will also be a focus from sponsors on Natixis) alongside institutional investors which made available
fixing financing costs prior to participating in auction processes as fixed and floating rate tranches, with all the facilities being subject
part of the process of modelling costs used for formulating their bids to a common terms agreement. The Dublin WtE facility is capable
offered in auctions. There will also be a requirement for developers of processing over 600,000 tonnes of municipal waste per annum as
to offer local communities the right to invest in renewable energy well as generating approximately 60MW of electricity. The project
projects. company has entered into waste supply contracts with multiple
Outside of renewable energy transactions, a range of PPP commercial waste collection companies alongside a concession
transactions have been financed in Ireland, primarily involving agreement with Dublin City Council (acting on behalf of four local
healthcare, social infrastructure (education and courts), energy and authorities) which will provide additional revenue support in certain

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 Arthur Cox Ireland

circumstances. This is a unique project in terms of the mixed behind fixed charges and preferential creditors in an insolvency. In
merchant/concession arrangement. order to ensure that any assignment takes effect as a legal, rather
Courts Bundle PPP: this project, for BAM PPP to construct, than equitable assignment, express written notice must be given to
refurbish and maintain seven court buildings, was financed by way the relevant debtors (in addition to such assignment being in writing
of secured bank debt arranged by MUFG, alongside private and absolute (rather than being expressed to be created by way of
registered notes provided by Talanx and constituted one of the first charge only)).
“bank/bond” PPP financings to be put in place in Ireland following
Ireland

the global financial crisis. There have since been further PPP 2.4 Can security be taken over cash deposited in bank
financings involving a mix of financing sources, including the accounts? Briefly, what is the procedure?
refinancing of the N17/N18 Roads PPP built and operated by the
Direct Route consortium (formed by Marguerite, Strabag, InfraRed, Yes, both fixed and floating security can be created over bank
John Sisk & Son, Lagan and Roadbridge) which involved accounts. When taking security over bank accounts, consideration
commercial loan facilities provided by Bank of Ireland, Natixis and should be given as to whether fixed security (precluding the chargor
Societe Generale alongside private placement financing provided by from dealing with the account) should be taken, or whether floating
Aviva, AG Insurance, Munich Re and Massachusetts security is to be taken (whereby the chargor is permitted to deal with
Mutual/Barings. the account). Where the bank account is held with the
chargee/security trustee, security is generally taken by way of
2 Security charge. In other cases, it is usually taken by way of assignment.

2.5 Can security be taken over shares in companies

2.1 Is it possible to give asset security by means of a incorporated in your jurisdiction? Are the shares in
general security agreement or is an agreement certificated form? Briefly, what is the procedure?
required in relation to each type of asset? Briefly,
what is the procedure?
Yes, the most common approach for taking security over shares is to
take an equitable charge, under which the chargor remains the
Yes, an Irish corporate obligor will typically grant an all-assets
registered shareholder, but must deliver its original share
debenture. Where the Irish obligor owns assets outside of Ireland,
certificates, together with signed but undated share transfer forms
applicable local law security is generally also taken. Both fixed and
(with the name of the transferee left blank for use on enforcement)
floating security can be taken from an Irish corporate obligor by
to the chargee/security trustee. It is also possible (but quite rare) for
way of an all-assets debenture. Security granted pursuant to a
a legal mortgage to be taken under which title to the shares is
debenture must be registered at the Companies Registration Office
transferred to the chargee/security trustee (and re-assigned to the
(CRO) (as detailed in question 2.6 below) with separate filings in
chargor once the secured liabilities have been repaid).
respect of security over real property being required with the
Property Registration Agency and with other asset registries in
respect of security over certain other classes of assets. 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
2.2 Can security be taken over real property (land), plant, of assets (in particular, shares, real estate,
machinery and equipment (e.g. pipeline, whether receivables and chattels)?
underground or overground)? Briefly, what is the
procedure?
Where a charge is created by an Irish company over most classes of
assets (subject to certain exceptions including charges created over
Security can be taken over real property (including land, buildings shares and/or bank accounts only (and not also over other classes of
and plant and machinery which are fixed or permanently attached to assets)), particulars of that charge must be filed with the CRO within
land). Security over registered or unregistered land can only be 21 days of the date of creation of such charge, using a Form C1 (the
done by way of charge by deed, and it is not possible to create a legal “one-stage” procedure) or a Form C1A and Form C1B (the “two-
charge over future-acquired real estate in Ireland. Future-acquired stage” procedure).
real estate should be the subject of a separate charge by deed when
Where the charge is created by a company incorporated outside
it is acquired.
Ireland, with a registered branch in Ireland, a similar requirement to
Security over tangible moveable property (such as plant, machinery deliver particulars of that charge to the CRO applies. In that case,
and equipment) may be created by way of a fixed or floating charge again both a “one-stage” and a “two-stage” procedure are available.
pursuant to a debenture (as described above). The relevant forms are a Form F8 (“one-stage” procedure) and
Forms F8A and F8B (“two-stage” procedure).
2.3 Can security be taken over receivables where the The CRO filing fee is EUR40 per Form C1, C1A, F8 and F8A.
chargor is free to collect the receivables in the There is no filing fee for a Form C1B or F8B.
absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure? 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.
A security interest over contractual rights is generally created by
way of a security assignment, and can be created by way of a fixed Where any person creates a charge over unregistered land in Ireland,
or floating charge where the rights are receivables. In the absence of that charge must be registered in the Registry of Deeds section of the
the security trustee/chargee exercising control over the proceeds of Property Registration Authority. The filing fee is EUR50.
any receivables, a charge over those receivables will be a floating If an Irish company creates a fixed charge security over book debts,
charge. As stated in question 5.2 below, floating charges will rank a notice under section 1001 of the Taxes Consolidation Act 1997

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Arthur Cox Ireland

should be served on the Irish Revenue within 21 days of the creation

4 Enforcement of Security
of the charge to avoid the chargee being held liable for any arrears
of VAT, pay-as-you-earn tax, local property tax and pay-related
social insurance that the company may have at that date. There is no 4.1 Are there any significant restrictions which may
fee payable in relation to such notice. impact the timing and value of enforcement, such as
Additional registration and filing requirements may be required in (a) a requirement for a public auction or the
relation to security granted over certain types of assets such as availability of court blocking procedures to other

Ireland
creditors/the company (or its trustee in
intellectual property, ships, aircraft or agricultural stock. bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?
2.7 Do the filing, notification or registration requirements
in relation to security over different types of assets There is no requirement for a security agent/charge to conduct a
involve a significant amount of time or expense? public auction for the purpose of enforcing security over the assets
of an Irish company, though common law duties will apply in
The fees payable for the main types of filings/registrations are as set respect to the manner of such enforcement action and the proceeds
out above. These requirements can generally be completed in short realised therefrom.
order, save that registrations of charges over registered land may be As set out in question 5.4 below, a security agent or chargee may
more time-consuming. avail to various out-of-court procedures to enforce its security.
Another creditor or other third party may seek injunctive relief from
2.8 Are any regulatory or similar consents required with the Irish courts to prevent a secured creditor exercising its
respect to the creation of security over real property enforcement rights, but where the relevant security has been validly
(land), plant, machinery and equipment (e.g. pipeline, granted and (where applicable) registered and the secured creditor
whether underground or overground), etc.? has complied with its common law duties and the requirements of
the Land and Conveyancing Law Reform Act 2009 (where
Generally, regulatory or similar consents are not required with applicable), the courts would be unlikely to grant such relief in
respect to the creation of such types of security interests in Ireland. relation to security over project company assets.
However, since a person must be licensed to own electricity Where creditors are seeking to exercise their power of sale over the
transmission and distribution assets (other than interconnectors) and shares of a project company, there may be a requirement to make a
only ESB is licensed to own them, enforcement of security over notification under the Competition Acts 2002 to 2014 (and comply
such assets is not possible, practically speaking. with the related merger control procedures) where the aggregate
turnover in Ireland of the undertakings involved in the transaction
3 Security Trustee exceeds certain thresholds (and comply with the relevant
competition legislation).
In certain cases, licences and permits awarded to project companies
3.1 Regardless of whether your jurisdiction recognises may be personal to such companies and not capable of being
the concept of a “trust”, will it recognise the role of a transferred to third parties.
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 4.2 Do restrictions apply to foreign investors or creditors
proceeds from the security to the claims of all the in the event of foreclosure on the project and related
lenders? companies?

Irish law recognises the concept of a “trust” as well as the role of a Foreclosure (being for the purposes of Irish law, the process of a
security trustee or security agent and will allow such person to chargee taking ownership of a secured asset free from the charger’s
enforce security on behalf of the group of creditors and apply the rights in respect of the secured asset (including its equity of
relevant proceeds in accordance with a contractually-agreed redemption)) is generally not available in Ireland following the
payment waterfall. Where the security has been registered, and the implementation of the Land and Conveyancing Reform Act 2009.
identity of the security trustee changes, there is a requirement to
make filings with the relevant registries to reflect such change of
security trustee. 5 Bankruptcy and Restructuring
Proceedings
3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available 5.1 How does a bankruptcy proceeding in respect of the
(such as a parallel debt or joint and several creditor project company affect the ability of a project lender
status) to achieve the effect referred to above which to enforce its rights as a secured party over the
would allow one party (either the security trustee or security?
the facility agent) to enforce claims on behalf of all the
lenders so that individual lenders do not need to
enforce their security separately? Please see question 5.5 below regarding the examinership regime
and schemes of arrangement.
Such alternative mechanisms are not required under Irish law, Under section 608 of the Companies Act 2014, the Irish High Court
though they may be included in Irish law intercreditor agreements or may order any person who appears to have “use, control or
security trust deeds to the extent required as a result of the use of possession” of the property (or the proceeds of sale of that property)
security documents governed by the laws of certain civil of a company that is being wound-up, where the property was
jurisdictions (such as security over offshore bank accounts). disposed of (including by way of security) and the effect of that

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disposal was to “perpetrate a fraud” on the company, its creditors, or by a chargee/security trustee on enforcement, or by a liquidator or a
its shareholders, to deliver that property to a liquidator, creditor or receiver on behalf of that chargee/security trustee.
contributory of the company, or to pay a sum to the liquidator in
respect of that property.
5.3 Are there any entities that are excluded from
Under section 602 of the Companies Act 2014, where a company is bankruptcy proceedings and, if so, what is the
being wound-up, a disposal of the company’s property after the applicable legislation?
winding-up process has started without the liquidator’s consent will
Ireland

be void unless the High Court orders otherwise. Public or private companies incorporated in Ireland are generally
not excluded from bankruptcy proceedings.
5.2 Are there any preference periods, clawback rights or
other preferential creditors’ rights (e.g. tax debts, 5.4 Are there any processes other than court proceedings
employees’ claims) with respect to the security? that are available to a creditor to seize the assets of
the project company in an enforcement?
■ Unfair preference
Under section 604 of the Companies Act 2014, any one of a A security document will generally give the chargee or security
variety of steps (including the making of a payment, or the agent the right, following a default, to appoint a receiver over the
granting of security) made by a company which is unable to secured assets. The receiver will take control of those assets and
pay its debts as they fall due in favour of one of its creditors, deal with them under powers deriving from the security document
with a view to giving that creditor a preference over the
and/or the intercreditor agreement or security trustee deed which
company’s other creditors, will be deemed to be an unfair
will also generally set out the order in which the proceeds of
preference and invalid if a winding-up of the company begins
within six months (where the creditor is a “connected realising the secured assets are to be applied.
person”, that six-month period is extended out to two years). A chargee or security agent may also exercise its right (subject to
■ Invalid floating charges that right being properly formulated in the security document) to
Under section 597 of the Companies Act 2014, a floating take possession of the secured assets rather than appointing a
charge created by a company will be invalid if it is created receiver; this will result in the chargee having a liability to strictly
within the 12 months prior to the beginning of the winding-up account to the chargor for amounts received while the chargee is in
of the company, unless it is demonstrated that the company possession. As such, it is more common for a receiver to be
was solvent immediately after it granted the charge. The 12- appointed.
month period is extended to two years if the floating charge is
Where the chargee or security agent is a bank and has a charge over
created in favour of a “connected person”. This provision
a deposit account held with it, it may (instead of appointing a
underlies the importance of obtaining representations as to
solvency from obligors in an acquisition financing. receiver) simply opt to exercise a right of bilateral set-off, subject to
this being properly provided for in the underlying contractual
■ Order of distribution of assets on insolvency and
documentation.
preferential creditors
On an insolvency, the liquidator appointed to the company is On the occurrence of an enforcement event relating to security over
under a statutory duty to collect and gather in the company’s financial instruments, a collateral taker has a right to realise its
assets, realise those assets, and distribute them in accordance financial collateral by sale or appropriation and by setting off the
with the ranking of creditors listed below. Assets that are instrument’s value against, or applying that value in discharge of,
subject to fixed security in favour of a creditor of the the relevant financial obligations. However, the definition of
company are not available to the liquidator for distribution. financial collateral does not include shares in a company whose
Instead, the company’s financial position in the lead up to the exclusive purpose is (a) to own means of production that are
liquidator’s appointment is likely to have triggered one or essential for the collateral provider’s business, or (b) to own real
more events of default under the facilities agreement,
property, meaning that this is not likely to assist in enforcing over
entitling the lender(s) to accelerate. In such circumstances,
the shares of a project company.
the security trustee (acting on behalf of the syndicate of
lenders) or, where there is no syndicate, the lender itself as In common with market practice in other jurisdictions, project
chargee, will appoint a receiver to realise the secured assets. financing transactions in Ireland will generally include contractual
Also excluded from the pool of assets available to the controls on key assets (for example, by way of payment cascades
liquidator for distribution are monies that must be set-off, and account bank agreements in respect of the bank accounts
provided that there is mutuality of debits and credits as established for the construction and operation of the project) and
between the company and the relevant creditor.
direct agreements which allow the creditors (or their
Regarding the priority of other creditors, the ranking on insolvency representative(s)) to “step-in” to key project agreements in place of
is as follows: the relevant obligor(s) in circumstances where the project
■ costs, charges and expenses incurred in the winding-up of the counterparties would otherwise be entitled to terminate such
company, including the liquidator’s remuneration; agreements by reason of the obligor’s non-performance or
■ preferential creditors (including the Irish Revenue for certain insolvency.
taxes, local authorities for certain rates, and employees of the
company in respect of certain amounts owing to them);
5.5 Are there any processes other than formal insolvency
■ holders of floating charges; proceedings that are available to a project company
■ unsecured creditors; and to achieve a restructuring of its debts and/or
■ members and contributories of the company. cramdown of dissenting creditors?

The Irish Revenue has an effective priority under section 571 of the
Examinership
Taxes Consolidation Act 1997 in respect of certain capital gains tax
(CGT) or corporation tax that may arise on the disposal of an asset Ireland has an examinership regime, which is a court

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moratorium/protection procedure introduced in 1990 with the aim wound up by way of creditors’ voluntary liquidation. Alternatively,
of enabling a company in serious financial difficulties, but with a if the company has a reasonable prospect of survival, the directors
reasonable prospect of survival, to agree a solution with its may decide to petition for the appointment of an examiner.
creditors, shareholders and employees which will enable it to return
to a financially-sound footing.
6 Foreign Investment and Ownership
Examinership tends to be availed of by active trading companies. A
Restrictions
petition to place a company in examinership can be presented to the

Ireland
Irish High Court by the company, by its directors, by a creditor or by
shareholders holding at least 10% of the paid-up voting share capital 6.1 Are there any restrictions, controls, fees and/or taxes
of the company. on foreign ownership of a project company?
The company then enters a court-protection period of 70 days
(which can be extended by 30 days), and an examiner is appointed There are no restrictions on foreign ownership of project companies
to formulate proposals for a compromise or scheme of arrangement in Ireland (subject to restrictions relating to compliance with
in relation to the company. A scheme of arrangement often involves sanctions and anti-money laundering legislation).
the writing down of creditors’ claims and the introduction of new
funds. Meetings must be held by the examiner with the company’s
6.2 Are there any bilateral investment treaties (or other
members and creditors, and a majority must approve the proposals
international treaties) that would provide protection
before the scheme is referred back to the High Court for approval. from such restrictions?
Rights of secured creditors are, for the most part, suspended during
the protection period, and enforcement action cannot be taken No, Ireland is not party to any bilateral investment treaties. As an
without the examiner’s consent. Payments in respect of pre-existing EU Member State, trade agreements entered into by the EU with
liabilities are also put on hold. The examiner may dispose of assets, certain countries apply to Ireland.
and borrow monies. Those monies will rank ahead of any floating
charge, but will rank behind any fixed charge. The examiner may
6.3 What laws exist regarding the nationalisation or
also take steps that the company would otherwise, under a negative
expropriation of project companies and assets? Are
pledge, have been prevented from taking. The examiner is entitled any forms of investment specially protected?
to dispose of secured property – the holder of a floating charge from
the company will have the same rights in respect of the proceeds as
The right to own, transfer and inherit property are embodied in the
it had in respect of the charged asset. Where the sold property was
Irish Constitution, which also acknowledges that these rights ought
subject to a fixed charge, the proceeds of sale must be applied
to be regulated by the principles of social justice. The State may
towards the debt owing to the holder of the fixed charge.
pass laws limiting citizens’ rights to private property in the interests
Schemes of arrangement of common good, but if it does so, it will likely be required to pay
Part 9 of the Companies Act 2014 provides a procedure for a compensation for this restriction. Examples of restrictions or
company to implement a compromise or other arrangement with limitations on the right to own property include town and regional
one or more classes of its creditors, which will be binding on all planning, compulsory acquisition of land and property taxes. Some
creditors in the relevant class(es), subject to being approved by a statutory bodies can (subject to legal process) take land by means of
majority in the number of creditors holding 75% of the value of the a compulsory purchase order in connection with the development of
relevant class of creditors which are present and voting at a properly public infrastructure. The proposed MetroLink project may require
convened scheme meeting. A scheme of arrangement may be used that a number of homes are acquired under compulsory purchase
to effect a debt restructuring or cramdown of dissenting creditors orders if the route proceeds as planned. Nationalisation of assets is
but must be proposed by the relevant company and the relevant generally rare in Ireland, but in 2009 the Irish government
classes of creditors must be properly constituted and sanctioned by nationalised the State-owned Anglo Irish Bank to secure the bank’s
the Irish High Court. The Irish High Court may stay proceedings viability.
and restrain further proceedings against a company in respect of
which one (or more) scheme meeting has been convened or has been
ordered by the court. 7 Government Approvals/Restrictions

5.6 Please briefly describe the liabilities of directors (if 7.1 What are the relevant government agencies or
any) for continuing to trade whilst a company is in departments with authority over projects in the typical
financial difficulties in your jurisdiction. project sectors?

In Ireland, a company is deemed insolvent where it is unable to pay The Department of Public Expenditure and Reform’s Central Unit
its debts. The Companies Act 2014 prescribes that a company will for PPP facilitates the process of implementing PPP transactions in
be deemed insolvent where: (a) it has failed to discharge a statutory Ireland, although financial responsibility for individual PPP projects
21-day demand letter delivered by a creditor within the requisite remains with the relevant government department or agency. The
period; or (b) where it is unable to pay its debts as they fall due National Development Finance Agency (which is itself part of the
taking into account contingent and prospective liabilities. National Treasury Management Agency) (NDFA) acts as the
Where directors of a company are aware (or ought to be aware) that statutory financial advisor to the Irish government in respect of
there is no reasonable prospect of the company avoiding an PPPs. The NDFA acts as procuring agent on behalf of government
insolvent liquidation, they have a duty to take every step available to departments for accommodation PPP projects. Other significant
them to minimise loss to creditors. Depending on the procuring authorities include Transport Infrastructure Ireland which
circumstances, the directors may decide to cease trading or is responsible for the national roads network and for the operation of
recommend to the members of the company that the company be light rail systems. The National Transport Authority has overall

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responsibility for developing public transport policy in Ireland 1. Land in the State: this includes not just actual land but any
particularly in light rail and bus sectors. interest in land such as buildings or leases of land.
Various ministries have responsibility for policy areas which are 2. Minerals in the State or any rights, interests or other assets in
relevant to projects: for example, the Department of relation to minerals or mining for minerals or searching for
Communications, Climate Action and Environment is the main minerals. In addition to mineral rights in the State,
exploration or exploitation rights in the Irish continental shelf
government ministry which is responsible for telecoms, energy
are deemed to be assets situated in the State.
policy and the related regulatory framework.
Ireland

3. Assets which are situated in the State and which were used in
The Commission for Regulation of Utilities is the independent or for the purposes of a trade carried on by the person in the
energy and water regulator in Ireland with responsibility, in State through a branch or agency.
conjunction with the Utility Regulator in Northern Ireland, for
CGT Withholding Tax
(amongst other things) the regulation of the all-island Integrated
Single Electricity Market. Where specified assets are disposed of for consideration of more than
EUR500,000, a buyer must deduct capital gains withholding tax at a
The Environmental Protection Agency is an independent public
rate of 15% from the purchase price and pay it over to the Revenue
body established under the Environmental Protection Agency Act
Commissioners unless the seller provides a CGT clearance certificate.
1992 and has a wide range of functions to protect the environment,
including environmental licensing, enforcement of environmental Corporation Tax Rate
law, environmental planning, research development, waste Operations involving dealing in or developing land (other than such
management and regulating Ireland’s greenhouse gas emissions. part of the activity that consists of construction operations or dealing
An Bord Pleanála is the national planning appeals board and is also by a company in qualifying land), working minerals and petroleum
the competent authority for EU Projects of Common Interest activities are subject to a tax at a rate of 25% as opposed to the
relating to trans-European energy infrastructure and is responsible standard corporation tax rate of 12.5%.
for planning cases relating to projects which are classified as Relevant Contract Tax (RCT)
strategic infrastructure development. RCT is a withholding tax that applies to certain payments by
principal contractors to subcontractors mainly in the construction,
7.2 Must any of the financing or project documents be forestry and meat-processing industries. The rates of tax are 0%,
registered or filed with any government authority or 20% and 35%. RCT can apply to activities involving the extraction
otherwise comply with legal formalities to be valid or of natural resources.
enforceable?
Petroleum Production Tax (PPT)
PPT applies to net income from oil and gas discoveries made under
Stamp duty is generally payable on documents effecting transfers of
petroleum authorisations granted on or after 18 June 2014. The tax
interests in real property. Otherwise registration and/or filing of
is payable in addition to the existing corporation tax rate of 25%
financings or project documents is not generally required, subject to
applicable to excepted trades. PPT payments are allowed as a
compliance with the applicable security perfection and registration
deduction in calculating the amount of corporation tax due.
requirements referred to in section 2 above.

7.5 Are there any restrictions, controls, fees and/or taxes

7.3 Does ownership of land, natural resources or a on foreign currency exchange?
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)? There are no exchange controls or similar restrictions on foreign
exchange transactions, except for any restrictions imposed as a
Various licences are required to own or operate certain land, natural result of sanctions legislation where applicable. Tax may be payable
resources or pipeline assets. There is no general prohibition on in respect of foreign exchange gains in certain circumstances.
foreign entities owing such licences.
For example, in order to construct or reconstruct a generating station, 7.6 Are there any restrictions, controls, fees and/or taxes
a person must have an Authorisation to Construct or Reconstruct. on the remittance and repatriation of investment
Similarly, a person must have a Licence to Generate in order to returns or loan payments to parties in other
jurisdictions?
generate electricity. It is the responsibility of the Commission for
Regulation of Utilities to grant, monitor the performance of, modify,
revoke and enforce these authorisations and licences. There are no restrictions, controls or fees which are generally
applicable to the remittance and repatriation of investment returns or
By way of a further example, under Irish statute the only entity
loan payments to parties in other jurisdictions. Withholding tax may
permitted to operate a transmission system in Ireland is Eirgrid (the
apply to dividends and/or interest payments made by companies in
Transmission System Operator) and the only entity permitted to operate
Ireland to parties in other jurisdictions, subject to certain
a distribution system is ESB (the Distribution System Operator).
exemptions (see questions 7.8 and 17.1 below).

7.4 Are there any royalties, restrictions, fees and/or taxes

7.7 Can project companies establish and maintain
payable on the extraction or export of natural
onshore foreign currency accounts and/or offshore
resources?
accounts in other jurisdictions?

CGT
Yes, subject to compliance with applicable domestic and
Gains on Irish specified assets will always be subject to Irish CGT international legislation regarding money laundering and sanctions.
regardless of the residence of the individual/company disposing of
them. The specified assets include:

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7.8 Is there any restriction (under corporate law, 7.10 Is there any specific legal/statutory framework for
exchange control, other law or binding governmental procurement by project companies?
practice or binding contract) on the payment of
dividends from a project company to its parent
Project companies are generally special purpose vehicles
company where the parent is incorporated in your
jurisdiction or abroad? established on a commercial basis. For this reason they are
generally not bound to observe public procurement law (which

Ireland
applies to public bodies and non-commercial entities) when making
There are no restrictions on the payment of dividends from a project
purchasing decisions.
company to its parent company, subject to compliance with
corporate law requirements including the restriction in the In some circumstances in the utility sector project companies are
Companies Act 2014 on companies making distributions except out performing regulated utility activities and where doing so are
of profits available for the purpose (being accumulated, realised required, when procuring supplies, services or works to observe
profits not previously utilised, less accumulated, realised losses to public procurement law applicable to those activities (as set out in
the extent not previously written off in a reduction or reorganisation Directive 2014/25/EU and transposing Irish regulations).
of capital duly made).
Financing documentation may impose contractual restrictions on 8 Foreign Insurance
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 8.1 Are there any restrictions, controls, fees and/or taxes
circumstances (for example, in terms of a requirement to share any on insurance policies over project assets provided or
“refinancing gain” with the relevant contracting authority). guaranteed by foreign insurance companies?

Dividends from Irish resident companies will be subject to dividend

Where foreign insurance companies are carrying on insurance
withholding tax, subject to applicable exemptions in respect of
business into Ireland, they will generally require authorisation to do
domestic and overseas shareholders (for example, in respect of
so from the Central Bank of Ireland (and will be required to comply
shareholders resident in EU Member States other than Ireland or
with the appropriate Central Bank of Ireland regulations) unless
other countries with which Ireland has a double taxation agreement,
they are appropriately authorised by the relevant regulatory
subject to compliance with other applicable conditions).
authority in another European Economic Area (EEA) Member State
and are able to “passport” such authorisation on a freedom of
7.9 Are there any material environmental, health and services basis.
safety laws or regulations that would impact upon a
Under the Insurance Act 1936 it is unlawful for any person to carry
project financing and which governmental authorities
administer those laws or regulations? on an assurance business in Ireland without a licence (where
“assurance business” is defined as including the “guarantee
insurance business” which in turn includes the “business of issuing
Proposed developments must be assessed to determine what effects
bonds or contracts of suretyship”). The Insurance (Amendment)
they may have on the environment. Before development consent is
Act 1978 (as amended by the Insurance Act 1989 and the European
granted, projects likely to have significant effects on the
Communities (Licensing and Supervision of Credit Institutions)
environment by virtue of their nature, size or location must undergo
Regulations 1992) provides that credit institutions which are
an environmental impact assessment (EIA). The developer will be
licensed in Ireland or another EEA Member State are not prohibited
required to submit an EIA to the competent authority (i.e. the
from issuing bonds, contracts of suretyship or guarantees in the
relevant local authority or the national planning authority, An Bord
course of their banking business. Other institutions may require to
Pleanála) when applying for development consent.
be licensed in order to issue guarantees or related products
In addition, where a proposed development is likely to have a (potentially including letters of credit) in Ireland.
significant effect on a designated European conservation site, an
There is a levy of 3% on the gross amount received by insurers in
appropriate assessment (AA) must be carried out under the Habitats
respect of certain non-life insurance premiums, subject to exceptions
Directive and the relevant national legislation transposing that
in relation to (amongst others) reinsurance, marine insurance,
Directive. Failure to carry out an adequate EIA or AA may result in
aviation and transit insurance and export credit insurance.
a proposed development being challenged in the courts by way of
judicial review.
The Environmental Protection Agency is the regulator tasked with 8.2 Are insurance policies over project assets payable to
the administration of Ireland’s environmental licensing regime. foreign (secured) creditors?
Projects involving certain specified industrial activities may require
an IE (Industrial Emissions) licence under the EU Industrial Foreign creditors may be co-insureds or named as loss payees under
Emissions Directive and relevant national legislation transposing insurance policies in respect of project assets.
the Directive, or an IPC (Integrated Pollution Control) licence under
the Environmental Protection Agency Act 1992.
9 Foreign Employee Restrictions
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 workplace 9.1 Are there any restrictions on foreign workers,
for employees. The legislation is enforced by the Health and Safety technicians, engineers or executives being employed
Authority. by a project company?

EEA and Swiss nationals do not need an employment permit to work

in Ireland. Following the UK’s exit from the EU, UK nationals

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should not need an employment permit to work in Ireland, given the outside of Ireland which if committed in Ireland would be an
expected continuation of the current bilateral arrangements between offence under the 2018 Act may be prosecuted in Ireland. The
the UK and Ireland. offences covered by the 2018 Act include (in very high-level terms):
There are various types of employment permits, including the ■ corruptly offering, giving, requesting or obtaining a gift,
general employment permit which requires the applicant to have a consideration or advantage as an inducement to, or reward
minimum annual remuneration of EUR30,000 (subject to for, doing an act in relation to one’s office, employment,
restrictions on certain ineligible occupations), the critical skills position or business;
Ireland

employment permits which are available for most occupations ■ corruptly offering, giving, requesting, accepting or obtaining
where the applicant will have an annual remuneration in excess of a gift, consideration or advantage to induce another person to
EUR60,000 and contracts for services employment permits which exert an improper influence over an Irish or foreign official;
are intended to allow non-EEA employees to work on an Irish ■ commission of an act, or use of confidential information, by
contract in Ireland while remaining on an employment contract an Irish official in relation to his/her office, employment,
position or business to corruptly obtain a gift, consideration
outside of Ireland (subject to meeting a labour market needs test).
or advantage;
Employees carrying out certain professional occupations in Ireland
■ giving a gift, consideration or advantage to a person knowing
will need to be registered with the appropriate body in Ireland. that it will be used to facilitate an offence under the 2018 Act;
■ corruptly creating or using a document knowing or believing
10 Equipment Import Restrictions 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 business to the prejudice of
10.1 Are there any restrictions, controls, fees and/or taxes that other person; and
on importing project equipment or equipment used by ■ threatening harm to a person with the intention of corruptly
construction contractors? influencing that person or another person to do an act in relation
to that person’s office employment, position or business.
The importation of project equipment or equipment used by Under the 2018 Act, a company is liable for the actions of directors,
construction contractors from another EU Member State are not officers, employees, agents or subsidiaries who commit a corruption
subject to such controls or taxes. Equipment imported into Ireland offence with the intention of obtaining or retaining business or a
from outside of the EU will be subject to compliance with the Irish business advantage for the company. If convicted, a company is liable
Revenue’s customs procedures. Customs duty may apply subject to to a fine of EUR5,000 on summary conviction or an unlimited fine on
any exemptions or reductions which may apply under applicable conviction on indictment. If convicted, individuals may be sentenced
trade treaties between the EU and the relevant country of origin. to up to 12 months in prison on summary conviction or up to 10 years
Excise duty (in relation to oil products) and VAT may also apply in (depending on the type of offence) on conviction on indictment.
relation to equipment imported into Ireland from outside the EU.

13 Applicable Law
10.2 If so, what import duties are payable and are
exceptions available?
13.1 What law typically governs project agreements?
Please see question 10.1 above.
Project agreements are generally governed by Irish law.
11 Force Majeure
13.2 What law typically governs financing agreements?

11.1 Are force majeure exclusions available and

Financing agreements for Irish projects are generally governed by
enforceable?
Irish law, though certain types of financings (such as private
placement notes subscribed for by US-based creditors may be
Force majeure exclusions are often included in project documents governed by New York law). English law may be used for widely
and such provisions are generally enforceable under Irish law where syndicated loan financings involving large numbers of international
the relevant contract defines what would constitute a force majeure creditors, though there has been increased use of Irish law on such
event. On the basis of Irish case law as to the meaning of the term financings in recent years.
“act of God”, it is not advisable to define force majeure events by
reference to this term.
13.3 What matters are typically governed by domestic law?

12 Corrupt Practices Agreements relating to the acquisition or use of real estate,

concession arrangements and governmental authorisations.
12.1 Are there any rules prohibiting corrupt business
practices and bribery (particularly any rules targeting 14 Jurisdiction and Waiver of Immunity
the projects sector)? What are the applicable civil or
criminal penalties?
14.1 Is a party’s submission to a foreign jurisdiction and
The Criminal Justice (Corruption Offences) Act 2018 (the 2018 Act) waiver of immunity legally binding and enforceable?
was commenced in July 2018 and repeals and replaces previous
legislation on anti-corruption and bribery. Irish citizens, companies Pursuant to Regulation (EU) No. 1215/2012 of the European
and other corporate bodies registered in Ireland who commit acts

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Parliament and of the Council (the Recast Brussels Regulation), the public policy. However, the Irish courts are generally strongly in
submission to the jurisdiction of the courts of other EU Member favour of enforcing arbitral awards. The Arbitration Act 2010 does
States will be upheld in the courts of Ireland and provided that not apply to certain employment and industrial relations disputes or
neither Article 45 nor Article 46 of the Recast Brussels Regulation to property valuation disputes.
applies, any judgment obtained in another EU Member State against
an Irish company would be recognised and enforced in Ireland
15.4 Are any types of disputes subject to mandatory
without retrial or examination of the merits of the case. domestic arbitration proceedings?

Ireland
Subject to the provisions of the Convention on Jurisdiction and the
Enforcement of Judgments in Civil and Commercial Matters signed No, generally arbitration is chosen as a means of dispute resolution
at Lugano on 30 October 2007 (the Lugano Convention), the Irish as a result of a consensual agreement to do so between the parties to
courts will uphold the submission to the jurisdiction of the courts of the arbitration.
Iceland, Norway and Switzerland unless an unconditional
appearance has been entered in another jurisdiction.
Where neither the Recast Brussels Regulation nor the Lugano
16 Change of Law / Political Risk
Convention apply, the Irish courts will enforce the submission by
the parties to the jurisdiction of the courts of another jurisdiction, 16.1 Has there been any call for political risk protections
and such a judgment will be enforced by the Irish courts, if the such as direct agreements with central government or
following general requirements are met: political risk guarantees?
■ the foreign judgment is for a definite sum;
■ the foreign court had jurisdiction in relation to the particular No, direct agreements with central government or political risk
defendant according to Irish conflict of law rules; and guarantees have not been requested in recent project finance
■ the foreign judgment is final and conclusive and the decree is transactions, though on PPP/PFI projects it would be common to
final and unalterable in the court which pronounced it. enter into a direct agreement with the relevant contracting authority
It was established by the Supreme Court in Byrne v Ireland and the (but not central government itself). There is a limited precedent in
Attorney General that the Irish State is a juristic person capable of offshore oil and gas fields for lenders to take the benefit of a limited
being sued and is vicariously liable for the tortious acts of its form of direct agreement from government in which the government
servants and agents. However, legislation may exempt sovereign acknowledged the security interest of the lenders and gave lenders
entities from liability either generally or in specific circumstances. step-in and cure rights before certain licences could be terminated.
A sovereign entity may waive immunity and accept jurisdiction by
way of an express contractual provision to such effect. As in other 17 Tax
jurisdictions, immunity will not attach to the extent the sovereign
entity is engaged in commercial or trading activities, as opposed to
“State” or “public” activities. 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
15 International Arbitration under a guarantee or the proceeds of enforcing
security?

15.1 Are contractual provisions requiring submission of In general, interest paid by a borrower incorporated in Ireland is
disputes to international arbitration and arbitral
subject to withholding tax at the standard rate of income tax
awards recognised by local courts?
(currently 20%). There are a number of withholding tax exemptions
enshrined in Irish domestic law, however, which can often remove
Yes, the Irish courts will generally enforce arbitral awards, save
the requirement to withhold. These include interest paid:
where there is a reason to deny enforcement on the grounds set out
■ to a bank carrying on a bona fide banking business in Ireland;
in the UNCITRAL Model Law and the New York Convention.
■ on commercial paper and certain listed bonds; or
■ by a company where the beneficial owner of the interest is a
15.2 Is your jurisdiction a contracting state to the New York
company that is resident for tax purposes in an EU Member
Convention or other prominent dispute resolution
State (other than Ireland), or in a country with which Ireland
conventions?
has entered into a double taxation agreement, where that
country imposes a tax that generally applies to foreign source
Ireland has been a contracting state to the New York Convention interest receivable in that country by companies. However,
since 1981. The Arbitration Act 2010 gives the force of law to the this exemption does not apply where the interest is paid to the
New York Convention and also to the UNCITRAL Model Law, the recipient company in connection with a trade or business
Geneva Protocol, the Geneva Convention and the Washington carried on in Ireland by it through a branch or agency.
Convention. Relief from withholding tax on Irish-source interest may also be
available under the terms of a double taxation agreement entered
15.3 Are any types of disputes not arbitrable under local
into with Ireland and the jurisdiction in which the lender, as
law? recipient of the interest, is resident for tax purposes.
The case law on the nature of guarantee payments is equivocal but
Enforcement or recognition of arbitral awards may be refused if the in summary and on the basis that guarantee payments take their
Irish High Court finds that the subject matter of the relevant dispute nature from the payment which they replace, a payment under a
is not capable of settlement by arbitration under Irish law or if guarantee in respect of interest on an advance should be treated as
enforcement of the relevant arbitral award would be contrary to being a payment of interest (and therefore subject to withholding tax

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 Arthur Cox Ireland

(unless any applicable exemptions apply)). The exemption outlined ■ An offer addressed to qualified investors only.
above for EU/DTA residents should also apply. ■ An offer addressed to fewer than 150 persons (other than
However, payments under a guarantee may be treated as having qualified investors).
their own nature, such that they would be subject to withholding tax ■ An offer addressed to investors who acquire securities for a
only if such payments were annual payments with an Irish source. total consideration of at least EUR100,000 per investor, for
each separate offer.
■ An offer whose denomination per unit is at least
Ireland

17.2 What tax incentives or other incentives are provided

EUR100,000.
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages ■ An offer with a total consideration in the EU of less than
or other security documents, either for the purposes EUR100,000, calculated over a 12-month period.
of effectiveness or registration? A public limited company can offer debt securities to the public, and
can apply to have those debt securities admitted to trading and
There are no tax or other incentives which are provided listed, whether on a regulated market or otherwise.
preferentially to foreign investors or creditors investing in project Under the Companies Act 2014, private companies (most
financing transactions in Ireland. commonly, private companies limited by shares and designated
There are no stamp duty or registration taxes which are generally activity companies) cannot offer securities to the public. However,
applicable to loans, mortgages or other security documents for the there are some exceptions under section 68(3) of the Companies Act
purpose of effectiveness or registration. 2014, under which the offer of certain types of securities by a private
company will not constitute an offer to the public.
18 Other Matters The Companies Act 2014, the Main Securities Market Listing Rules
and the Global Exchange Market Listing Rules and Admission to
Trading Rules, as appropriate, of the Irish Stock Exchange trading
18.1 Are there any other material considerations which as Euronext Dublin are generally applicable.
should be taken into account by either equity For the prospectus regime, the following legislation and regulation
investors or lenders when participating in project
is applicable:
financings in your jurisdiction?
■ Directive 2003/71/EC on the prospectus to be published
when securities are offered to the public or admitted to
On syndicated project financings, where an Irish borrower is a
trading (Prospectus Directive) (transposed into Irish law by
micro, small or medium-sized enterprise (within the meaning of the Irish Prospectus Regulations (SI No 324/2005)).
Commission Recommendation 2003/361/EC), if a syndicate
■ Regulation (EC) 809/2004 implementing the Prospectus
member that is an Irish regulated financial services provider, or a
Directive as regards prospectuses and dissemination of
financial services provider authorised in another EEA Member State advertisements (which is directly effective in Ireland).
to provide credit in Ireland transfers all or part of its commitment to
■ Central Bank of Ireland (Central Bank) Prospectus Handbook
an unregulated entity, that unregulated entity may require
(Prospectus Handbook).
authorisation from the Central Bank of Ireland as a credit servicing
■ Central Bank Prospectus Rules (contained in the Prospectus
firm and, if any activities that fall within the definition of “credit
Handbook).
servicing” set out in the Central Bank Act 1997 are carried on by the
facility agent of any other finance party, that party may also require ■ Central Bank Prospectus Regulatory Framework Q&A.
authorisation unless it is already regulated. For the transparency regime, the following are applicable:
The Irish tax code provides for the tax treatment of certain credit ■ Directive 2004/109/EC on transparency requirements for
sale, deposit and investment transactions (referred to in the securities admitted to trading on a regulated market and
amending Directive 2001/34/EC (transposed into Irish law by
legislation as “specified financial transactions”) with the aim of
the Irish Transparency Regulations (SI No 277/2007).
treating the return arising on a specified financial transaction as
■ Central Bank Transparency Rules.
interest for tax purposes and apply all relevant tax legislation
pertaining to interest to that return. ■ Central Bank Transparency Regulatory Framework Q&A.
For the market abuse regime, the following are applicable:
18.2 Are there any legal impositions to project companies ■ Regulation (EU) 596/2014 on market abuse (which is directly
issuing bonds or similar capital market instruments? effective in Ireland) and Directive 2014/57/EU on market
Please briefly describe the local legal and regulatory abuse (transposed into Irish law by the Irish Market Abuse
requirements for the issuance of capital market Regulations (SI No 349/2016)).
instruments. ■ Central Bank Market Abuse Rules.
■ Central Bank Guidance on Market Abuse Regulatory
A private company limited by shares cannot offer debt securities to Framework.
the public (see below). Such a company is also prohibited from ■ Central Bank Market Abuse Regulatory Framework Q&A.
applying to have, and from having, securities admitted to trading or
Issuers and debt securities listed on the Main Securities Market are
listed on any market (regulated or otherwise).
subject to the prospectus regime, the transparency regime and the
A designated activity company is subject to restrictions on offering market abuse regime.
debt securities to the public (see below). However, it can apply to
Issuers and debt securities listed on the Global Exchange Market are
have the following securities admitted to trading or listed on any
subject to the market abuse regime only.
market, regulated or otherwise:

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Although the Irish Revenue has confirmed that the legislation is

19 Islamic Finance
designed to cover certain Shari’ah-compliant structures, the
legislation applies to any financing arrangement falling within the
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha meaning of the term “specified financial transaction”, with the aim
instruments might be used in the structuring of an of treating the return arising on a specified financial transaction as
Islamic project financing in your jurisdiction. interest for tax purposes and applying all relevant tax legislation
pertaining to interest to that return.

Ireland
Although various Sukuk bonds have been listed in Ireland, we are
not aware of Istina’a, Ijarah, Wakala and Murabaha instruments 19.3 Could the inclusion of an interest payment obligation
having been used in the structuring of Islamic project financings in in a loan agreement affect its validity and/or
Ireland. It would be feasible to structure an Islamic project enforceability in your jurisdiction? If so, what steps
financing in Ireland, for example, by way of using an Istina’a could be taken to mitigate this risk?
instrument to finance the procurement or construction of assets
required in connection with a project and an Ijarah instrument to No, subject to ensuring that any default interest provision in a loan
lease operational assets from financiers, though there is no agreement do not conflict with case law restrictions regarding
established legislative framework for the use of Islamic finance unenforceable penalty clauses. In particular, lenders should ensure
instruments in Ireland (save as noted below in respect to tax that default interest clauses are agreed as part of commercial
legislation). negotiations and included in the relevant loan agreement (as would
generally be the case where the loan agreement is substantially
based on the Loan Market Association’s recommended forms)
19.2 In what circumstances may Shari’ah law become the
governing law of a contract or a dispute? Have there rather than cross-referring to the default interest provisions included
been any recent notable cases on jurisdictional in any lender’s standard terms of business.
issues, the applicability of Shari’ah or the conflict of The Irish Court of Appeal handed down judgments in the Sheehan v
Shari’ah and local law relevant to the finance sector? Breccia & others and Flynn & others v Breccia cases in 2018 which
found that a 4% per annum surcharge interest rate included in a
Irish law does not recognise Shari’ah law as a system of law which lender’s standard terms and conditions was an unenforceable
can be used as the governing law of a contract. There have been no penalty on the basis that it was not a genuine pre-estimate of the loss
recent notable cases on the applicability of Shari’ah law or the or damage that the lender would have suffered on a non-payment by
conflict of Shari’ah and local law which are relevant to the finance the borrower.
sector of which we are aware.
In the cases of Banco Santander v Demba and another and Cortes v
Part 8A of the Taxes Consolidation Act 1997 (as amended by the Banco de Sabadell, the European Court of Justice ruled in 2018 that
Finance Act 2018) provides for the tax treatment of certain credit national case law, whereby a non-negotiated contract term in a
sale, deposit and investment transactions (referred to in the consumer loan agreement is regarded as automatically unfair where
legislation as “specified financial transactions”) which achieve the the default interest rate exceeds the standard interest rate by more
same economic result in substance as comparable conventional than 200 basis points, is consistent with the Unfair Contract Terms
financing products. Directive.

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 Arthur Cox Ireland

Matt Dunn Charlotte Upton

Arthur Cox Arthur Cox
10 Earlsfort Terrace 10 Earlsfort Terrace
Dublin 2, D02 T380 Dublin 2, D02 T380
Ireland Ireland

Tel: +353 1 920 2020 Tel: +353 1 920 1113

Ireland

Email: [email protected] Email: [email protected]

URL: www.arthurcox.com URL: www.arthurcox.com

Matt specialises in project and infrastructure finance in the energy, Charlotte is a senior associate in the Finance Group at Arthur Cox,
utilities and infrastructure sectors, including PFI and PPP. He also has specialising in project finance. Charlotte has significant experience in
experience advising across a range of loan and bond financing advising both lender and developer clients on all financing aspects of
transactions, including some of the largest cross-border acquisition renewable and conventional energy projects, PPP projects and project
financings in Europe in recent years. acquisitions and disposals. Charlotte has recently worked on a
number of complex project financings, including transactions involving
Matt’s experience includes financing multiple windfarms and road and
the European Investment Bank, export credit cover-backed facilities,
social infrastructure PPP projects in Ireland, financings of powerships
hybrid financing structures and joint venture vehicles. Charlotte has
deployed to provide emergency electricity supplies in Ghana and
also advised on a number of acquisitions and disposals of renewable
Indonesia and financings for the acquisition of TDC A/S (Danish
energy and PPP projects in Ireland.
telecommunications network operator) and E.ON’s Spanish electricity
distribution and generation assets. Matt was previously a partner at Charlotte was admitted as a solicitor in England & Wales in 2008 and
Clifford Chance LLP in London where he advised on acquisition in Ireland in 2010. Prior to joining Arthur Cox in 2014, Charlotte trained
financings, infrastructure and project financings, margin loans and and worked at a large US law firm in London and subsequently worked
restructuring work, as well as advising the Loan Market Association on for four years at another large Irish law firm, advising on general
its suite of leveraged finance documentation. banking and project finance matters.

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
government 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 developments 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 thorough understanding of client requirements, sound judgment and a
practical approach to resolving commercial problems.

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Chapter 22

Italy
Riccardo Sallustio

Grimaldi Studio Legale Giuseppe Buono

such assets will remain in the possession of the grantor, who will be
1 Overview
able to utilise them for the purpose of carrying out its business.
A privilegio speciale can attach to a number of movable assets,
1.1 What are the main trends/significant developments in provided that they are used by the borrower/grantor to carry out its
the project finance market in your jurisdiction? business and the assets are not registered in the public registers.
A pegno non possessorio can attach to movable assets (other than
In the last few years in Italy we have noticed an increasing interest movable property registered in the public registers) pertaining to the
in investments in infrastructural (such as motorways, railways, business activity and is automatically extended to the products
subways, hospitals, public offices, sporting venues) and energy resulting from the transformation of such assets provided that they
projects (such as photovoltaic plants, wind farms and others). are determined or determinable also by reference to one or more
From a financing perspective, due to recent amendments in the product categories or to an overall value.
applicable regulatory, tax and public law, capital markets have In project finance transactions, lenders may also be secured by
become an alternative to project lending, through the issuance of means of a general privilege over the generality of the movable
project bonds or mini bonds by the relevant project company assets of the project company/concessionaire pursuant to Article
(opening the market to new domestic and foreign players). 186 of the Code of Public Contracts.

1.2 What are the most significant project financings that 2.2 Can security be taken over real property (land), plant,
have taken place in your jurisdiction in recent years? machinery and equipment (e.g. pipeline, whether
underground or overground)? Briefly, what is the
■ The financing of the Pedemontana Veneta motorway in procedure?
north-eastern Italy through the issuance of a €1.571 billion
project bond listed on the Irish Stock Exchange. This project Security over land can be created by way of (i) a “traditional”
bond issuance represents the first of its kind in Italy. mortgage (ipoteca), or (ii) in the context of a financing granted by
■ The financing of the Ospedali Civili di Brescia, the first banks or other financial intermediaries authorised to carry out
project bond issuance in the hospital sector after the approval lending activity vis-à-vis the public in Italy, by transfer of the
of the new code of public contracts (Legislative Decree ownership of such asset, in accordance with the so-called patto
50/2016, the “Code of Public Contracts”).
marciano (provided that the grantor is a corporate entrepreneur).
■ The first-ever project financing of a cross-border
Both the mortgage and the patto marciano are created by means of
Interconnector on a merchant basis (190 km structure
between Italy and France and a capacity of 1200 MW), a notarial deed and then registered with the relevant land registry.
defined as a project of “common interest” by the European Equipment and machinery (other than registered movable assets
Commission. which are subject to mortgages) may be charged either by way of a
“privilegio speciale” or by way of a pledge. However, the
“privilegio speciale” may only secure medium-long term bank loans
2 Security
(i.e. having a duration longer than 18 months) or corporate bonds
subscribed by qualified investors.
2.1 Is it possible to give asset security by means of a A pledge over such assets would be either:
general security agreement or is an agreement (i) a traditional possessory pledge, to be granted only asset by
required in relation to each type of asset? Briefly, asset and limited to identified existing assets. The possessory
what is the procedure?
pledge does not allow the pledgor to utilise such assets whilst
they are held by the secured creditor or a third-party
Italian law does not expressly provide for an instrument by which a custodian; or
general security can be created over all of the assets of an entity. (ii) a non-possessory pledge, as described above.
Absent such instrument, a special privilege (privilegio speciale) or a Perfection of a possessory pledge over movable assets will require a
non-possessory pledge (pegno non possessorio) may be created written agreement bearing a “certain date” and the delivery of the
over movable assets in a way which is similar to floating charges: pledged assets to the pledgee or a third-party custodian.

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Perfection of a non-possessory pledge requires a written agreement A pledge over quotas has to be executed by way of notarial deed and
identifying the key terms of the secured claims and the collateral then deposited with the companies’ register where the company has
and the registration of the pledge with the new register of non- its registered office. If the by-laws of the S.r.l. so provide, the
possessory pledges to be set up within the Italian tax authority pledge must be annotated by a director of the company on the quota-
(Agenzia delle Entrate). holders’ ledger.
A special privilege (privilegio speciale) agreement must be signed A pledge over shares has to be executed by way of a deed bearing a
before a notary public. A list of all assets subject to security must be “certain date”, after which either (i) the pledgor will have to endorse
Italy

included, amongst other details, in the security document. The the share certificates with a statement indicating that the shares
security document must then be lodged with the specific registry represented by those certificates are pledged in favour of the
held at the competent court. pledgee, (ii) a director of the company must annotate the share
certificates (with a statement similar to the one mentioned above)
2.3 Can security be taken over receivables where the
and, in each case, or (iii) a director of the company (the shares of
chargor is free to collect the receivables in the which are pledged) must annotate the pledge over the shareholders’
absence of a default and the debtors are not notified ledger (with a statement similar to the one mentioned above). The
of the security? Briefly, what is the procedure? share certificates must then be deposited with the pledgee or a third-
party custodian.
Under Italian law, receivables may be either pledged or assigned by In the case of shares of listed companies (held in dematerialised
way of security (the main difference is that only in case of assignment form by the national clearing system), the pledge is created by
by way of security the title of the receivables is transferred from the registering the shares into a special account (conto vincoli) held by
relevant assignor to the relevant assignee). In both cases, the the same intermediary where the shares are deposited.
pledgor/assignor is normally granted, by way of a mandate, the right
to collect the receivables in the absence of a default.
2.6 What are the notarisation, registration, stamp duty
The notification to, or acceptance by, the debtor is necessary for the and other fees (whether related to property value or
enforceability of the assignment/pledge vis-à-vis third parties otherwise) in relation to security over different types
(including a bankruptcy of the assignor). However, the parties do of assets (in particular, shares, real estate,
sometimes agree for the notification to occur only upon an event of receivables and chattels)?
default.
For the perfection of such security, the parties must execute a The notarisation, registration, stamp duty and other fees vary
written agreement bearing a “certain date” at law (data certa). The depending on the type of security interest granted.
notification to, or acceptance by, the relevant debtor must equally As a general rule, where a notarial deed is needed (e.g. for mortgage,
bear a “certain date” at law. pledge over quotas, privilegio speciale), notarial fees are to be
considered. They are usually calculated on the basis of the value of
2.4 Can security be taken over cash deposited in bank the transaction in accordance with a tariff.
accounts? Briefly, what is the procedure? In addition, certain security interests (e.g. mortgage, pledge over
quota, privilegio speciale, non-possessory pledge) must be
Under Italian law, bank accounts may be pledged, usually by way of registered and will therefore be subject to registration tax, which
a pledge over receivables, i.e. the credit towards the depositary bank amounts to: (i) €200, if the security only secures the obligations of
to reimburse any money deposited with it. the relevant grantor; or, where applicable, (ii) if the security (also)
To perfect this security the parties must execute a deed of pledge secures obligations of a third party, 0.5% of the lesser of: (a) the
bearing a “certain date” and the relevant pledge must be either (a) secured amount; and (b) the value of the relevant assets.
notified to the account bank by way of a notice, or (b) acknowledged A tax equal to 2% of the secured amount plus a nominal stamp duty
by the account bank by way of an acceptance, in both cases bearing and administrative fees are also payable in case of a mortgage.
a “certain date”. Other security interests (e.g. pledge over shares, bank accounts,
The rules set out under Legislative Decree of 21 May 2004, No. 170 receivables and assignment of receivables) could, in principle, be
(the “Decree 170”) may apply to cash collateral placed on a bank perfected without incurring any Italian registration taxes (and stamp
account, provided that the relevant security agreement is entered duties) to the extent they are entered into by way of exchange of
into between certain entities (e.g. banks, investment firms, correspondence or executed abroad.
insurance companies, collective investment schemes, corporates,
etc.). A pledge over the cash credited to the relevant account may
2.7 Do the filing, notification or registration requirements
therefore be granted subject to: (a) the execution of a written in relation to security over different types of assets
agreement bearing a “certain date”; and (b) the annotation by the involve a significant amount of time or expense?
account bank of the amount of cash pledged on the relevant account.
Timing varies depending on the type of security granted and if it
2.5 Can security be taken over shares in companies requires a notarial deed. In general:
incorporated in your jurisdiction? Are the shares in (i) according to Italian law, notaries and public officers
certificated form? Briefly, what is the procedure?
receiving any notarial deed are obliged to promptly register it
in the competent registry and they are subject to fines in case
Under Italian law, the most common limited liability companies the registration does not occur within 30 days from the date
take the form of: (i) Società a responsabilità limitata (“S.r.l.”), of the relevant deed; and
whose share capital is divided into quotas; and (ii) Società per (ii) the timing required for the actual registration by the relevant
Azioni (“S.p.A.”), whose share capital is divided into shares. A office varies depending on the relevant type and competent
security interest over either quotas or shares can be created by registry but in any case it could take days.
means of a pledge.

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procedure to the extent the borrower and/or the grantor of security

2.8 Are any regulatory or similar consents required with challenges the enforcement). The secured creditor may also request
respect to the creation of security over real property the court to dispose for a transfer of the pledged assets to the secured
(land), plant, machinery and equipment (e.g. pipeline,
creditor (by way of satisfaction pro tanto of its claims, based on an
whether underground or overground), etc.?
appraisal made by a third-party expert).

The taking of security generally does not per se require any licence In certain cases (e.g. pledge over financial instruments, such as listed
to be held by the secured party. shares, and pledge over cash), the enforcement procedure is

Italy
simplified and allows: (i) the sale of the pledged assets without
intervention of the court (following which the pledgor may retain a
3 Security Trustee portion of the price equal to the outstanding secured obligations); or
(ii) appropriation of the pledged assets by the secured creditors up to
an amount equal to the outstanding secured obligations (provided that
3.1 Regardless of whether your jurisdiction recognises the relevant agreement allows such appropriation and includes the
the concept of a “trust”, will it recognise the role of a
relevant criteria to assess the value of the pledged assets).
security trustee or agent and allow the security
trustee or agent (rather than each lender acting Assignments of receivables do not require a real enforcement
separately) to enforce the security and to apply the procedure as the receivable is effectively transferred as of the time
proceeds from the security to the claims of all the of creation of the security.
lenders?

The secured parties may authorise a security agent to exercise the 4.2 Do restrictions apply to foreign investors or creditors
in the event of foreclosure on the project and related
rights belonging to them. This can be achieved either: (i) by
companies?
granting the security agent/trustee a separate power of attorney; or
(ii) by including the provision conferring the mandate (mandato con
Foreign entities or creditors are not subject to restrictions in the event
rappresentanza) in a finance document – usually in the facility
of foreclosure on the project and related companies.
agreement or the intercreditor agreement (as well as in the relevant
security document).
5 Bankruptcy and Restructuring
3.2 If a security trust is not recognised in your Proceedings
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 5.1 How does a bankruptcy proceeding in respect of the
would allow one party (either the security trustee or project company affect the ability of a project lender
the facility agent) to enforce claims on behalf of all the to enforce its rights as a secured party over the
lenders so that individual lenders do not need to security?
enforce their security separately?
Italian law provides for an automatic stay of any enforcement action
The security agent is normally authorised to act in the name and on upon the commencement of court-supervised insolvency proceedings,
behalf of the secured creditors to protect their rights arising from the therefore the possibility to enforce a security is highly restricted unless
security documents. As such, the security agent will be able to such security is already normally enforceable by way of out-of-court
enforce the security in accordance with the mechanisms contained procedures.
in the relevant finance document (usually the facility agreement or
In case of insolvency liquidation of the relevant owner, the project
the intercreditor agreement), which might provide for certain
lender would, in principle, obtain priority in the distribution of the
majority thresholds to be achieved by the secured creditor in order
proceeds of the sale of the assets subject to the security. This would
to allow the security agent to enforce the security on their behalf.
apply – subject to the priority rights referred to below – to the extent
the relevant security grants an in rem right over the secured asset
4 Enforcement of Security (e.g. pledge, mortgage and privilegio speciale), exercisable by the
secure creditor against third parties, purchasers or transferees.
As to the lenders’ rights vis-à-vis other creditors already holding
4.1 Are there any significant restrictions which may security over the secured assets, a distinction shall be made between
impact the timing and value of enforcement, such as
competing “contractual” security (in which case the lender that has
(a) a requirement for a public auction or the
availability of court blocking procedures to other been secured first has priority over the second in line and so on) and
creditors/the company (or its trustee in security arising by operation of law.
bankruptcy/liquidator), or (b) (in respect of regulated Italian law provides for certain claims to be preferred by law and to be
assets) regulatory consents? secured by statutory security in the form of privilegi (liens), which can
be “general” or “special”, depending on whether they exist over the
The process to enforce security interests differs depending on the generality of the (movable and/or immovable) assets of the debtor or
type of security and the asset on which it was granted. only over certain specific assets. Such claims include, but are not
As a general rule, foreclosure procedures are court-supervised limited to, those relating to employees’ salaries, direct or indirect taxes,
procedures which are aimed at selling the asset through a public environmental clean-up, funeral expenses, alimony and legal expenses.
auction. This is the case, for example, for the enforcement of a Certain statutory liens prevail (securing certain legal expenses) over
mortgage and a “privilegio speciale”. Depending on the underlying all other statutory liens as well as over pledges and mortgages.
asset, the enforcement of pledges can also be made through an out- Please also note that, in case of an insolvency liquidation of the
of-court procedure (which in any case can trigger a court supervised grantor of security, certain claims (e.g. the fees and compensations

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of the receiver’s/estate’s lawyers and of the arbitrators, certain costs by the same court. The only exception is represented by the so-
arisen during the temporary carrying on of the business, etc.) would called restructuring agreement with financial intermediaries
be satisfied in priority to the proceeds of the disposal of the assets. (accordi di ristrutturazione con intermediari finanziari): this
agreement allows for cramdown without involvement of the court
but can be implemented only if the majority of the indebtedness of
5.2 Are there any preference periods, clawback rights or
other preferential creditors’ rights (e.g. tax debts, the financial intermediary involved is of a financial nature and
employees’ claims) with respect to the security? specific majority thresholds are met by the creditors.
Italy

Certain acts and transactions, if done or made during the so-called 5.6 Please briefly describe the liabilities of directors (if
suspect period, may be clawed back (revocati) vis-à-vis the bankruptcy any) for continuing to trade whilst a company is in
as provided for by Article 67 of the Italian Bankruptcy Law and be financial difficulties in your jurisdiction.
declared ineffective unless the other party proves that it had no actual
or constructive knowledge of the debtor’s insolvency. The suspect A director may face both criminal charges and civil liability if he
period varies depending on the type of transaction and it spans between delays the filing of the bankruptcy petition, if the latter is necessary
six months and one year preceding the insolvency declaration. to preserve the company’s assets in a situation of financial
Certain other acts and transactions may be clawed back (revocati) difficulties.
and declared ineffective if the bankruptcy receiver proves that the Criminal charges may lead to a minimum of six months and a
other party knew that the bankrupt entity was insolvent at the time maximum of two years in jail, if it is proven that the delay in filing
of the act or transaction, provided that they are entered into or made has caused the deterioration of the financial situation of the
in the six months preceding the insolvency declaration. company.
Claims relating to, inter alia, employees’ salaries or direct or As for the civil liability, the director may incur in a request for
indirect taxes are preferred by law and secured by statutory security compensation of the damages caused to the company’s assets, with
in the form of privilegi (liens). a view to the damage caused by his mismanagement to the creditors
in the context of the insolvency proceeding.
5.3 Are there any entities that are excluded from
bankruptcy proceedings and, if so, what is the 6 Foreign Investment and Ownership
applicable legislation?
Restrictions
According to the Italian Bankruptcy Law, public entities (enti
pubblici) cannot be subject to an insolvency proceeding. Ascertaining 6.1 Are there any restrictions, controls, fees and/or taxes
whether an entity can be deemed to be public is not a straightforward on foreign ownership of a project company?
analysis. According to case law, it is necessary to evaluate each
company on a case-by-case basis to assess the interests it serves and Generally, foreign investments are not subject to restrictions in Italy.
therefore its public entity nature for bankruptcy purposes. However, Italian law provisions on the so-called “golden power”
Italian law provides for special legislation and proceedings for and related procedure adopted in March 2012 (Law Decree of 15
companies (e.g. banks, companies with more than a certain number March 2012, No. 21, as amended by Law Decree of 16 October
of employees, etc.) whose insolvency might pose a systemic risk to 2017, No. 148) entitle the Italian Government to impose specific
the national economy. conditions or to exercise a veto right in relation to acquisitions of (or
Generally, investment funds are not considered to be subject to other extraordinary transaction concerning) stakes in Italian public
Italian insolvency law provisions and their winding-up would be and private companies which (i) carry out activities of “strategic
governed by the provisions in the relevant fund rules. relevance” in the defence and national security sector, or (ii) hold
“assets with strategic relevance” in the energy, transport,
communication and high-tech sectors. Golden power can also be
5.4 Are there any processes other than court proceedings exercised (exceptionally) on the occurrence of a threat of serious
that are available to a creditor to seize the assets of injury to national affairs.
the project company in an enforcement?

Please see above concerning the automatic stay provided for by the 6.2 Are there any bilateral investment treaties (or other
Italian Bankruptcy Law. The possibility to enforce a security is international treaties) that would provide protection
from such restrictions?
highly restricted unless such security is already normally
enforceable by way of out-of-court procedures. The latter would be
the case, for example, for security created pursuant to Decree 170, There are no specific investment treaties that protect foreign
or for the assignment of receivables by way of security (please refer investment in the projects field.
to section 4 for a description of the various out-of-court enforcement
procedures for each type of security). 6.3 What laws exist regarding the nationalisation or
expropriation of project companies and assets? Are
any forms of investment specially protected?
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 The Italian constitution permits expropriation of private property for
cramdown of dissenting creditors? “public purposes”, defined as essential services or measures
indispensable for the national economy, provided that compensation
Cramdown is typically possible only in case of court-supervised is paid by the state to the investors involved.
proceedings, which therefore require the appointment of a receiver

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for exploitation of the natural resources, which may depend on

7 Government Approvals/Restrictions
different factors. For example:
(i) on the extraction of gas and oil fields the applicable royalties
7.1 What are the relevant government agencies or may differ from 4% to 10% of value production. Rental
departments with authority over projects in the typical payment is also due to the Italian Government, calculated on
project sectors? the basis of the square km for operations; and
(ii) with reference to the use of water, different fixed taxes are
due to the relevant Regions.

Italy
Several government bodies may be involved in a project finance
transaction, either during the structuring or the operational phase. Environmental compensatory contributions to municipalities, as well
In PPP contracts, a key role is played by the Anti-Corruption Authority as territorial compensatory contributions to Regional administrations
(“ANAC”) which, inter alia, imposes transparency in management can apply.
matters and supervises activities connected to public contracts in order Export of natural resources should be subject to a case-by-case
to prevent corruption in Italian public administration. analysis taking into account the countries involved and the relevant
Furthermore, depending on the underlying sector of the PPP and natural resources (as it is regulated by different special laws which
related public interest to be protected, the relevant Ministry (such as can vary considerably from one to another).
the Ministry of Infrastructures and Transport and the Ministry of
Health) and their delegated local authorities may be involved. 7.5 Are there any restrictions, controls, fees and/or taxes
In the water and energy fields the main regulators are: on foreign currency exchange?
(i) the ARERA (Autorità di Regolazione per Energia, Reti e
Ambiente), which is the regulatory body for water and energy In accordance with EU directives and regulations, Italy has not
markets and has the role of supervising and determining tariffs implemented foreign currency exchange controls. There are no
and other regulatory aspects (while the activities related to restrictions on currency transfer, whilst there are reporting
planning water investments are handled by the municipalities); requirements for banks due to money laundering and terrorism
(ii) the GSE (Gestore dei Servizi Energetici), which is financing concerns.
responsible, inter alia, for the granting of incentive tariffs
and, in general, the management of revenues deriving from
renewable resources; and 7.6 Are there any restrictions, controls, fees and/or taxes
on the remittance and repatriation of investment
(iii) the GME (Gestore dei Mercati Energetici), which is the returns or loan payments to parties in other
regulator of the electricity, power and gas market. jurisdictions?

7.2 Must any of the financing or project documents be As a general rule, there are no restrictions, fees or taxes on the
registered or filed with any government authority or remittance and repatriation of investment returns or loan payments
otherwise comply with legal formalities to be valid or to non-resident parties. For the withholding taxes on income
enforceable?
(typically, interest), see section 17.

In order to assign to the lenders the receivables arising from the

feed-in tariffs, the parties must enter into an assignment agreement 7.7 Can project companies establish and maintain
onshore foreign currency accounts and/or offshore
on the basis of the form provided by the GSE (which is also the
accounts in other jurisdictions?
relevant assigned debtor). Generally, assignment/pledge of
receivables vis-à-vis public entities, such as the receivables arising
from concession agreements, must be expressly accepted by the Yes. However, it is common for project companies to open at least
relevant assigned/pledged debtor to be perfected. one domestic bank account.

7.8 Is there any restriction (under corporate law,

7.3 Does ownership of land, natural resources or a
exchange control, other law or binding governmental
pipeline, or undertaking the business of ownership or
practice or binding contract) on the payment of
operation of such assets, require a licence (and if so,
dividends from a project company to its parent
can such a licence be held by a foreign entity)?
company where the parent is incorporated in your
jurisdiction or abroad?
Generally, the ownership of land does not require a licence; however,
the state has title to minerals and other natural resources according to From a legal perspective, no restrictions apply to the payment of
Articles 822 and ff. of the Italian Civil Code and such resources dividends to a foreign parent. However, in a project finance
cannot be transferred. In this regard, private parties (including both transaction, finance documentation usually provides for limitations
national or foreign project companies) can acquire rights to natural to distribution/repayment of a shareholder’s loan by the borrower.
resources only through authorisations or concessions issued by the
Italian Government and the relevant Ministry, taking into account
that the holders of such authorisations or concessions remain liable 7.9 Are there any material environmental, health and
towards the public administration for their activities. safety laws or regulations that would impact upon a
project financing and which governmental authorities
administer those laws or regulations?
7.4 Are there any royalties, restrictions, fees and/or taxes
payable on the extraction or export of natural There are laws and regulations (national and/or regional) regarding
resources?
environmental, health and safety matters which may apply to a
PF/PPP project in Italy. This depends of course on the kind of
As a general rule, royalties are due to the government as compensation project and where it is located. For instance, Legislative Decree No.

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 Grimaldi Studio Legale Italy

152/2006 (Codice Ambientale), and/or Legislative Decree No. managers, directors or highly specialised workers) may apply to
81/2008 (Testo Unico sulla Sicurezza sul Lavoro) may both have an work in Italy even in excess of these quotas, subject to an “extra-
impact. quotas” procedure.

7.10 Is there any specific legal/statutory framework for 10 Equipment Import Restrictions
procurement by project companies?
Italy

Generally, in private project financings there are no specific 10.1 Are there any restrictions, controls, fees and/or taxes
procurement/tender regulations which apply and the project on importing project equipment or equipment used by
construction contractors?
company may subcontract part of the relevant works/services with
no restrictions. PPP projects have to comply with the Code of
Public Contracts, which provides a regulation on subcontracting and No specific restrictions apply on equipment importations. However,
on tender that the project company may be required (by the law or differences may exist between imports from EU countries (ruled by
by the original call for tender) to launch. the principle of free trade and free transit) and imports from extra-
EU countries, which are regulated by international bilateral treaties
between Italy and the relevant extra-EU countries to be considered
8 Foreign Insurance case by case.
Customs duty (including VAT, generally levied at the ordinary 22%
8.1 Are there any restrictions, controls, fees and/or taxes rate) is levied on the value of goods imported into Italy from outside
on insurance policies over project assets provided or the EU. There is no customs duty on equipment delivered within the
guaranteed by foreign insurance companies? EU, although a reporting system is currently in place in the EU in
order to monitor the intra-EU trade of goods and services.
To the extent the foreign insurance company is authorised to operate
in Italy by the Italian competent authority (“IVASS”) or through an 10.2 If so, what import duties are payable and are
European Passport (for insurance companies based in another EU exceptions available?
Member State) no restrictions apply.
Custom duties on goods imported from outside EU are determined
8.2 Are insurance policies over project assets payable to according to the common customs tariff applicable in all EU
foreign (secured) creditors? Member States (which is regulated at the EU level): the amount of
duties depends on the nature of the imported equipment and its
Yes. Insurance proceeds are usually paid to the project company as country of origin.
an insured entity but, pursuant to a loss payee clause and/or
assignment of receivables provisions, they might be payable to the 11 Force Majeure
secured creditors which may be local or foreign companies.

11.1 Are force majeure exclusions available and

9 Foreign Employee Restrictions enforceable?

9.1 Are there any restrictions on foreign workers, Although there is no definition of force majeure under the Italian
technicians, engineers or executives being employed Civil Code, the relevant concept is commonly applied under Italian
by a project company? law. Under the Italian Civil Code, should the performance of certain
obligations become impossible to be fulfilled (in whole or in part or
The immigration system in Italy varies depending on whether the even temporary) by the party obliged, the latter cannot be held liable
worker is an EU and EEA national or not. for breach of contract and the contract will be deemed automatically
As far as EU and EEA nationals are concerned, there are no terminated (respectively, in whole or in relation to such part, or until
numerical thresholds and workers are not subject to specific such impossibility ceases).
immigration procedures in accordance with the principle of free Notwithstanding the above, it is market standard to include a
movement and labour. However, an EU and EEA national working definition of force majeure in project contracts and financing
in Italy for a period in excess of three months must (i) register them agreements (which qualifies as an event of default under such
with the local Town Registrar in Italy, and (ii) apply to obtain their agreements) detailing relevant terms and events and usually
EU Residency Certificate; after five years of continuous and legal identified as being any circumstances beyond a party’s reasonable
residence, EU nationals get the right of permanent residence in Italy. control (and that a party cannot avoid by using its diligent effort).
Equivalent rules apply to Swiss citizens. With reference to public contracts, pursuant to Article 107 of the
If the social security contribution is paid for them in Italy and/or Code of Public Contracts, in case of force majeure events which
otherwise applicable, EU and EEA nationals must register them prevent the performance of the works (or of the services), only the
with the local public healthcare authority. portion of works (or services) not feasible will be suspended, while
Non-EEA nationals should comply with a very complex procedure the feasible portion shall be performed by the project company;
to obtain a work permit in Italy. In this regard, Italian authorities furthermore, if the works cannot be completed within the
establish specific quotas yearly (namely, the maximum number of contractual completion date for reasons not due to the project
“regular” work permits that may be applied for by non-EEA company, an extension of time may be required by the latter.
nationals). However, highly skilled individuals (e.g. executives,

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12 Corrupt Practices 14 Jurisdiction and Waiver of Immunity

12.1 Are there any rules prohibiting corrupt business 14.1 Is a party’s submission to a foreign jurisdiction and
practices and bribery (particularly any rules targeting waiver of immunity legally binding and enforceable?
the projects sector)? What are the applicable civil or
criminal penalties?
Subject to the applicable provisions of Law 218/1995 and EU

Italy
Regulation 1215/2012 (or specific bilateral conventions on a case-
Bribery is treated as a crime under the provisions of the Italian by-case basis), the submission by the parties to a foreign jurisdiction
Criminal Code, which refers to bribery of both Italian and foreign will generally be legal, valid and enforceable in Italy.
officials. The Italian anti-corruption system has been reformed with
Typically, Italian project companies are not subject to sovereign
Law of 28 November 2012, No. 190, which has extensively
immunity and the transaction documents do not provide for waivers of
amended the section of the Italian Criminal Code related to bribery,
immunity clauses (which can be found to conflict with public policy).
introduced a number of new bribery offences and increased the
penalties for existing offences.
It should be noted that, according to the Italian Criminal Code, 15 International Arbitration
Italian courts have jurisdiction over crimes committed by
foreigners, if such crimes are carried out within Italian territory.
15.1 Are contractual provisions requiring submission of
The punishments, both for the private briber and for the bribed disputes to international arbitration and arbitral
official, vary depending on the nature of the bribery offence awards recognised by local courts?
committed, spanning from a minimum of one year to a maximum of
12 years, without taking into account “aggravating” (or Yes. Pursuant to Article 824-bis of the Italian Code of Civil
“mitigating”) circumstances. If the offence is committed by an Procedure (applicable to arbitrations where the place of arbitration
entity, it can be punished with fines, disqualification and is Italy, even if dealing with international disputes), arbitral awards
confiscation. have, as from the date of signing, the same effect as court decisions.
Pursuant to Legislative Decree of 8 June 2001, No. 231, if a director In addition, under either Law 218/1995 and EU Regulation
of a project company commits a bribery offence, civil liability for 1215/2012, the jurisdiction of Italian courts can be derogated by
breach of fiduciary duties or liability of the company may arise. The contract in favour of foreign courts or foreign arbitration.
punishments include fines, prohibition orders and confiscation of
The recognition and enforceability of foreign arbitral awards is
proceeds.
governed by the 1958 New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the “NY Convention”).
13 Applicable Law
15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
13.1 What law typically governs project agreements?
conventions?

Typically, Italian law applies to project agreements; however, the Italy is part of the NY Convention. Italy has also signed the 1927
relevant parties may freely chose to apply a foreign law pursuant to Geneva Convention on the Execution of Foreign Arbitral Awards.
Law 218/1995 and EU Regulation 593/2008. The choice of a
foreign law will generally be legal, valid and enforceable in Italy,
and Italian courts would recognise such law provided that Italian 15.3 Are any types of disputes not arbitrable under local
overriding mandatory provisions are not restricted. law?

Disputes concerning non-disposable rights.

13.2 What law typically governs financing agreements?

Without prejudice to the “lex rei sitae” principle (see question 13.3 15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
for details), Italian law typically applies to financing agreements,
save for major financing transactions where a cross-border
syndication may be required. In such case, the financing No. However, certain types of disputes, in particular where public
agreements are usually subject to English law. parties are involved, are not subject to arbitration but to ordinary
court jurisdiction only.

13.3 What matters are typically governed by domestic law?

16 Change of Law / Political Risk
In case the counterparty of a project agreement is an Italian public
entity (particularly concession agreements and other PPP
16.1 Has there been any call for political risk protections
agreements), Italian law will always be applied and such agreements such as direct agreements with central government or
will usually be subject to the Code of Public Contracts. political risk guarantees?
Security interests on movable and immovable assets are broadly
governed by Italian law in compliance with the so-called “lex rei There are no specific laws or instruments in relation to protections
sitae” principle, pursuant to which the governing law of a security for political risk in Italy. However, in case of PPP projects, should
document is the law of the jurisdiction where the assets are located. events for which the project company/concessionaire is not

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 Grimaldi Studio Legale Italy

responsible for arise and affect the equilibrium of the business plan an exemption from Italian outbound withholding tax on interest
(piano economico finanziario) – including, for instance, change-in- payments on medium-long term loans granted to Italian-resident
law or revocation of the concession for public interest – the Code of enterprises. In addition, the same medium-term loan can benefit
Public Contracts, provides for some mitigants such as: from the favourable substitutive tax regime provided for by Articles
(i) a revision of the concession agreement, aimed at re-establishing 15 and ff. of Presidential Decree No. 601/1973, according to which
the “economic and financial equilibrium” of the project, in a 0.25% substitutive tax can apply to the loan agreement and the
order to maintain the project company/concessionaire as the related security package executed in Italy (instead of the ordinary
entity responsible for the risks already transferred to it in the registration, mortgage and cadastral taxes which usually apply with
Italy

original contract and to set forth the same conditions of rates ranging from 0.5% to 2% on the secured amount). This regime
economic financial equilibrium relating to the concession in the is particularly important in project finance transactions, as a
original situation; and mortgage on the real estate is generally included in the security
(ii) in case of early termination of the concession due to breach by package.
the public entity or for public interest, the right of the project
company/concessionaire to be (A) paid of the value of the works With reference to capital gain taxes on the disposal of the
carried out until that moment, (B) refunded the penalties to be investment, exemptions from Italian taxation may be available to
borne by the project company/concessionaire (here, including foreign investors both under domestic law and the relevant double
the hedging breakage costs), and (C) indemnified of 10% of the tax treaties and must be therefore verified on a case-by-case
value of the works/services to be carried out according to the scenario.
business plan (piano economico finanziario) of the concession. Since 2016, foreign investors who intend to implement new
investments for an amount of at least €30 million can file an advance
17 Tax tax ruling to the Italian tax authorities in order to obtain the
preventive opinion from the Italian Revenue Agency about the tax
treatment applicable to business plans and related extraordinary
17.1 Are there any requirements to deduct or withhold tax operations. The definition of “new investment” includes either
from (a) interest payable on loans made to domestic projects involving the realisation of a new economic initiative,
or foreign lenders, or (b) the proceeds of a claim having a lasting nature (such as those involving the introduction of
under a guarantee or the proceeds of enforcing new liquidity), and all operations involving the re-use of already
security?
available financial resources of the undertaking, aimed at
restructuring, optimising and streamlining an existing business. The
Interest payments made by an Italian company to a non-tax resident main aim is to give more certainty to the economic operators in the
lender are in principle subject to a 26% outbound withholding tax, determination of fiscal burdens connected to relevant investments in
which can be reduced under the applicable double tax treaty. Italy. The investment project must (i) be realised in Italy and have a
This being said, an exemption from withholding tax may apply in significant and long-lasting impact on employment levels, and (ii)
certain circumstances, such as: have as its target a company located in the state and may also entail
(i) under EU Directive No. 2003/49/EU (the so-called “interest- share deal transactions.
royalties” directive), where the lender owns a minimum
percentage in the share capital of the borrower and provided
that the relevant conditions are met; and 18 Other Matters
(ii) under Article 26 (5-bis) of Presidential Decree No. 600/1973,
where:
18.1 Are there any other material considerations which
(A) the lender is authorised to carry out lending activities in should be taken into account by either equity
Italy and is: (a) a bank established in the EU; (b) an investors or lenders when participating in project
insurance company established and authorised in financings in your jurisdiction?
accordance with the laws of a EU Member State; and (c)
certain institutional investors incorporated in countries
In general, most of the relevant issues have been covered in the
that allow an adequate exchange of information with Italy
and subject to prudential control therein; previous sections.
(B) the borrower is an Italian-resident enterprise; or
(C) the loan is a medium-term loan, i.e. a loan whose duration 18.2 Are there any legal impositions to project companies
is longer than 18 months plus one day. issuing bonds or similar capital market instruments?
Please briefly describe the local legal and regulatory
On the other hand, interest payments made by an Italian company to requirements for the issuance of capital market
an Italian-resident corporate lender (such as an Italian bank) are not instruments.
subject to withholding tax.
Interest payments made by an Italian-resident guarantor upon a claim Generally, Italian limited liability companies may not be legally
under a guarantee or an enforcement of a security may be subject to entitled to issue debt securities, while joint stock companies are
withholding tax as if they were made by the borrower and the subject to a quantitative limit depending on their level of equity and
application of exemptions shall be verified on a case-by-case scenario. reserve. Such limits should not apply in case of listed or convertible
bonds, as well as in case of debt securities (i) acquired by
institutional investors subject to prudential supervision, (ii) secured
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What by a mortgage on an issuer’s real estate property up to 2⁄3 of the
taxes apply to foreign investments, loans, mortgages property’s value, or (iii) authorised by the government on national
or other security documents, either for the purposes interest grounds.
of effectiveness or registration? Also project bonds issued by project companies in a PPP transaction
are excluded from the above limitations when acquired by
In certain circumstances foreign investors/lenders can benefit from

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professional investors in accordance with the provisions of the Code

of Public Contracts. 19.2 In what circumstances may Shari’ah law become the
governing law of a contract or a dispute? Have there
From a regulatory perspective, public placements usually require been any recent notable cases on jurisdictional
the publication of a prospectus approved by Consob prepared issues, the applicability of Shari’ah or the conflict of
according to national requirements or Directive 2003/71/EC Shari’ah and local law relevant to the finance sector?
(depending on the amount of the offering) and are subject to further
disclosure and supervision requirements. A more favourable There is no relevant case law in Italy regarding the application of

Italy
discipline applies in this respect to private placements (addressed to Shari’ah law as the governing law of a contract or dispute.
a limited number of qualified investors, with a limit on the total
issue amount, minimum amount of securities to be acquired per
19.3 Could the inclusion of an interest payment obligation
investor, and minimum unit par value of the securities).
in a loan agreement affect its validity and/or
enforceability in your jurisdiction? If so, what steps
19 Islamic Finance could be taken to mitigate this risk?

In Italy, the inclusion of interest payment obligations in a loan

19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha agreement is fully valid and enforceable and market standard, to the
instruments might be used in the structuring of an extent such obligations comply with Italian usury law and taking
Islamic project financing in your jurisdiction. into account the requirements for the capitalisation of interests and
the limits under the Italian Consumer Code (Codice del Consumo).
To the best of our knowledge, there is no experience of Islamic
project finance in Italy. Although Italian law provides for
instruments which are similar in nature (such as an EPC agreement Acknowledgment
for the Istina’a, an operating lease for the Ijarah, a mandate for the The authors would like to acknowledge the invaluable contribution
Wakala and a purchase of chattel property with deferred payment for of Federico Angelo De Pascale, an associate of the firm, in the
the Murabaha), alternative structuring needs to be put in place. preparation of this chapter.

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 Grimaldi Studio Legale Italy

Riccardo Sallustio Giuseppe Buono

Grimaldi Studio Legale Grimaldi Studio Legale
48 Gresham Street Corso Europa 12
EC2V 7AY, London 20122, Milan
United Kingdom Italy

Tel: +44 20 3745 6973 Tel: +39 02 3030 9309

Email: [email protected] Email: [email protected]
Italy

URL: grimaldilex.com URL: grimaldilex.com

Riccardo Sallustio has over 20 years of experience as a banking Giuseppe Buono is qualified in Italy and provides assistance in
lawyer in London and in Italy (as a counsel at the European Bank for banking and financial matters (including acquisition and leveraged
Reconstruction and Development and subsequently as a partner at finance, real estate finance, debt capital markets, project finance and
Allen & Overy and at Bonelli Erede Pappalardo). He has acquired debt restructuring) to major investors, insurance companies and
significant expertise in transactional banking and stock markets, banks. In this context, he has developed extensive experience in
including NPLs, acquisition finance, real estate finance, high-yield and drafting and reviewing all kinds of financial documents and project
private placement issues, project finance, debt restructuring and finance documents, as well as project contracts. Before joining the
M&As in the banking and financial sector. Riccardo provides firm, he has worked for other leading international and Italian law firms;
assistance to lenders and arrangers, borrowers and issuers, private namely, Allen & Overy and Bonelli Erede Pappalardo in Rome and
equity, hedge funds and debt funds in complex deals and his expertise London.
also enables him to assist clients in cross-border transactions.

Grimaldi Studio Legale is a leading, full-service, Italian law firm with offices in Milan, Rome, Bari, Brussels, London, New York and Lugano. With
almost 155 professionals, including 43 partners and over a hundred qualified lawyers and trainees, it is recognised (both by clients and professional
colleagues) for the quality and professionalism of its people. Its pedigree dates from 1993 when Grimaldi Clifford Chance was founded by Vittorio
Grimaldi and Michael Bray.
The Firm’s transactional practices (Banking and Finance and Corporate and M&A) are supported by strong litigation, tax, public and administrative
law and labour law practices.
The Banking and Finance practice is at the heart of the Firm embracing strong practices in project finance, financial regulation and real estate
finance, as well as general banking and finance.
Particularly, our project finance team assists clients – in all phases, from advice on structuring the project through its development and finally to its
application – on a wide range of complex project finance transactions, involving the public and private sectors, PPP and domestic and cross-border
transactions, in both the energy and infrastructure sectors.

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Chapter 23

Japan
Kunihiro Yokoi

Anderson Mōri & Tomotsune Wataru Higuchi

institutions, principally Development Bank of Japan, Inc. and

1 Overview
Mizuho Bank, Ltd. The name of the concessionaire company is
Fukuoka International Airport Co., Ltd., which is invested by
1.1 What are the main trends/significant developments in Fukuoka Airport Holdings Co., Ltd., Nishi-Nippon Railroad Co.,
the project finance market in your jurisdiction? Ltd., Mitsubishi Corporation, Changi Airports International, Pte.
Ltd., and Kyushu Electric Power Co., Inc.
After the introduction of a feed-in tariff for renewable energy in July
2012, photovoltaic (PV) power projects have been the main target 2 Security
for project finance in Japan. Since around the second half of 2014,
however, the momentum for such projects has subsided, mainly due
to the over-supply of PV power that led to decreased sales prices 2.1 Is it possible to give asset security by means of a
since 2012 and a newly enacted uncompensated and unlimited general security agreement or is an agreement
restriction on power supply. Recently, projects investing in required in relation to each type of asset? Briefly,
renewable energy other than PV power, such as wind power and what is the procedure?
biomass power, have started to attract attention.
It is possible to create security interests by means of a general
Since its introduction in 2011, the “concession right” scheme, in the
security agreement, as long as each asset is clearly specified therein.
field of public-private partnership (PPP) and private finance
However, the security interest in each type of asset must be
initiative (PFI) projects, has undergone further development. The
perfected separately.
concession right scheme is a scheme that enables a public entity to
confer upon a private entity concession rights to operate and
maintain existing facilities by financially relying on users’ fees. The 2.2 Can security be taken over real property (land), plant,
leading examples of where concession rights have been granted are machinery and equipment (e.g. pipeline, whether
Kansai and Osaka International Airports as well as Fukuoka Airport, underground or overground)? Briefly, what is the
further detail of which is set out in question 1.2 below. In 2018, the procedure?
Water Supply Act was amended to enable the concession right
scheme in the water supply services area to be utilised more easily. (1) Real property (land)
Expectations are that in the coming years water supply services, Under Japanese law, the typical security interest in real
sewage services and highways will also become subject to the property is a mortgage (teito-ken). For a revolving facility
concession right scheme. with a maximum claim amount (kyokudo-gaku), a revolving
mortgage (ne-teito-ken) is applicable.
A mortgage in respect of land or a building is created by an
1.2 What are the most significant project financings that agreement between a mortgagor and a mortgagee. In order to
have taken place in your jurisdiction in recent years? perfect the mortgage against a third party, the mortgage must
be registered with the Legal Affairs Bureau (LAB) having
As mentioned above in question 1.1 above, Kansai and Osaka jurisdiction over the property. There are approximately 500
International Airports were monumental transactions in terms of LABs throughout Japan.
their scale. The concession right to operate Kansai and Osaka It should be noted that the land and any building on the land
International Airports, for a term of approximately 44 years, was are treated independently of each other. It is, therefore,
conferred on a special purpose company (SPC) established by a important to separately create and perfect the mortgage as a
consortium consisting of ORIX Corporation and VINCI Airports first lien upon both the land and the building.
S.A.S. in December 2015 for a consideration of approximately JPY (2) Plant
2,200 billion in total, paid over the 44-year term. The SPC A typical “plant” consists of land, a building, machinery and
commenced operation in April 2016. equipment. As mentioned above, land and a building can be
Fukuoka Airport is another recent large-scale transaction which has collateralised by a mortgage (teito-ken or ne-teito-ken).
Machinery and equipment are classified as movables, and can
gained remarkable attention. In October 2018, a concessionaire
be collateralised by assignment as security (joto-tanpo)
company entered into loan-related agreements of approximately (discussed below).
JPY 170 billion for operating Fukuoka Airport with 12 financial

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In addition, Japanese law provides for two comprehensive pledge/assignment will become valid retroactively from the time of
security interests for property located in a factory. One is a the pledge/assignment (to the extent not harmful to a third party) if
factory mortgage (kojo-teito-ken), and the other is a factory the obligor of the target receivable consents to the pledge/
estate mortgage (kojo-zaidan-teito-ken). A factory mortgage assignment, even if there has been a prohibition agreement.
over land covers all machinery and equipment located in the
factory. A factory estate mortgage is a particularly strong The pledgee/assignee can assert the security interest against the
security interest that can actually eliminate pre-existing obligor of the target receivable upon (i) notice to the obligor from
security interests over movables in the factory estate. Notice the pledgor/assignor, or (ii) the acknowledgment of the obligor. The
Japan

regarding the factory estate mortgage is published in the pledgee/assignee can assert the security interest against a third party
Japanese official gazette and if an existing security interest (such as a double pledgee/assignee or bankruptcy trustee of the
holder fails to object within a certain period (specified as pledgor/assignor) upon (i) notice to the obligor of the target
being from one to three months), that party’s existing security receivable from the pledgor/assignor by a certificate with (a stamp
interest is extinguished. Both a factory mortgage and a of) a fixed date, (ii) the acknowledgment of the obligor of the target
factory estate mortgage require each piece of machinery and
receivable by a certificate with (a stamp of) a fixed date, or (iii)
equipment to be identified, and therefore require more
burdensome procedures and costs than normal mortgages. (only where the pledger/assignor is a legal entity (including a
The factory mortgage and factory estate mortgage are not company)) a claim pledge/assignment being registered with the
very common and are used mostly for large factories. special LAB located in Nakano Ward of Tokyo. The registration can
(3) Machinery and equipment be made with the LAB upon creation of the security interest without
notice to the obligor. In such a case, practically, the notice to the
Machinery and equipment are movables. Movables can be
obligor of the target receivable will be sent upon the event of default
collateralised by way of assignment as security (joto-tanpo).
This security interest can be created by a security agreement of the pledgor/assignor, and the notice must be accompanied by a
between an assignor and an assignee. In order to perfect this registration certificate (this notice can be sent by the
security interest, the target movable must be “delivered” from pledgee/assignee).
the assignor to the assignee. Delivery can be made by (i)
physical delivery, (ii) constructive delivery, or (iii) (where the
2.4 Can security be taken over cash deposited in bank
assignor is a legal entity (including a company)) if a movable
accounts? Briefly, what is the procedure?
assignment registration (dosan-joto-toki) is filed with the
LAB, the registration itself is deemed to be delivery from the
assignor to the assignee. The LAB located in the Nakano Yes, a pledge over cash deposits is commonly used. A pledge over
Ward of Tokyo is the exclusive designated LAB for any deposits is created by a pledge agreement between a depository
movable assignment registration. bank and a depositor and perfected by a notice to, or
In creating a joto-tanpo, it is necessary to identify the target acknowledgment by, a depository bank with a stamp of fixed date.
movable by whatever means is sufficient to specify it, such as The validity of a pledge over an ordinary deposit (futsu-yokin) has
the kind of movable, its location, number and so forth. This been debated but no Supreme Court decision addressing this issue
identification rule is also applicable to perfect the joto-tanpo exists. Despite this, such pledges are often used for project
by way of physical or constructive delivery. In perfection by financing.
movable assignment registration, there are two statutory
ways to identify the target movable: (i) specification by both
the kind of movable and by a definitive way to specify the 2.5 Can security be taken over shares in companies
target (such as a serial number); and (ii) specification by kind incorporated in your jurisdiction? Are the shares in
of movable and its location. The former is usually used for a certificated form? Briefly, what is the procedure?
fixed asset, and the latter is usually used for inventory
(aggregate movables). Shares of stock companies (kabushiki-kaisha) incorporated in Japan
can be pledged or assigned as security (joto-tanpo), and pledges are
2.3 Can security be taken over receivables where the relatively common. The articles of incorporation of the company
chargor is free to collect the receivables in the will specify whether the shares are represented by physical
absence of a default and the debtors are not notified certificates. If the shares are “certificated” (i.e., if physical
of the security? Briefly, what is the procedure? certificates representing the shares are issued or will be issued), then
a pledge can be created by physical delivery of the certificates to the
A security interest in receivables (claim) may be taken by a pledge pledgee, and perfected by continuous possession of the certificates
(shichi-ken) or assignment as security (joto-tanpo). These security by the pledgee.
interests can be created by a security agreement between the On the other hand, if the shares are not and will not be certificated,
pledgor/assignor and pledgee/assignee. a pledge may be created by a security agreement between the
In creating the security interest, it is necessary to sufficiently pledger and pledgee, and perfected by registration of the pledge on
identify the target receivable to specify it (such as kind of movable, the issuer’s shareholders’ list.
date of origination and other items to the extent applicable). If the It is not expected that a project company conducting project finance
target is a claim to be generated in the future (shorai-saiken, “future transactions would be a listed company. If it is listed, however, the
claim”), the period (the beginning and end dates of the period during shares of a listed stock company are managed in a book-entry
which the claim will be generated) must be specified in the security system electronically and the pledge over the shares are created and
agreement and in connection with perfection. If there is an perfected in the system.
agreement made between the debtor and the obligor of the target
In each case, the stock company’s approval is not necessarily
receivable which prohibits a pledge/assignment of the target
required upon creation of the pledge, but will be needed when the
receivable, the pledge/assignment is basically invalid, with two
pledge is to be enforced. For security assignments, the issuer
exceptions: (i) if the pledgee/assignee is unaware of the prohibition
company’s approval will be necessary at the time of its creation as
agreement without gross negligence on the part of the
well as its enforcement.
pledgee/assignee, the pledge/assignment shall be valid; and (ii) the

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2.6 What are the notarisation, registration, stamp duty 4 Enforcement of Security
and other fees (whether related to property value or
otherwise) in relation to security over different types
of assets (in particular, shares, real estate, 4.1 Are there any significant restrictions which may
receivables and chattels)? 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
Registration taxes are imposed on (i) mortgage registrations (0.4% creditors/the company (or its trustee in

Japan
of the claim amount (or, for a revolving mortgage, 0.4% of the bankruptcy/liquidator), or (b) (in respect of regulated
maximum claim amount)), (ii) movable assignment registrations assets) regulatory consents?
(JPY 7,500 per filing (up to 1,000 movables)), and (iii) claim
assignment registrations (JPY 7,500 per filing (up to 5,000 claims) In principle, security shall be enforced through a court-supervised
and JPY 15,000 per filing (exceeding 5,000 claims)). Creation of auction (keibai). However, it is possible and common to agree to
assignment as security (joto-tanpo) over claims may be subject to a enforce security without a court-supervised auction, such as by way
fixed stamp duty of JPY 200. of a private sale.

2.7 Do the filing, notification or registration requirements 4.2 Do restrictions apply to foreign investors or creditors
in relation to security over different types of assets in the event of foreclosure on the project and related
involve a significant amount of time or expense? companies?

No, except for the factory estate mortgage, which requires the No, there are no such restrictions.
procedures discussed in question 2.3 above.

5 Bankruptcy and Restructuring

2.8 Are any regulatory or similar consents required with
respect to the creation of security over real property Proceedings
(land), plant, machinery and equipment (e.g. pipeline,
whether underground or overground), etc.?
5.1 How does a bankruptcy proceeding in respect of the
project company affect the ability of a project lender
No regulatory consents are required to grant security, except for to enforce its rights as a secured party over the
general consents for transfers required by the terms of the asset itself security?
(such as licences).
There are three types of bankruptcy proceedings: bankruptcy
3 Security Trustee (hasan); civil rehabilitation (minji saisei); and corporate
reorganisation (kaisha kosei). Under both bankruptcy (hasan) and
civil rehabilitation proceedings (minji saisei), secured creditors can
3.1 Regardless of whether your jurisdiction recognises enforce their own security interests outside the proceedings
the concept of a “trust”, will it recognise the role of a (betsujoken) unless the court orders the deletion of the security
security trustee or agent and allow the security interest in response to the petition by a bankruptcy trustee under
trustee or agent (rather than each lender acting certain limited requirements. On the other hand, under corporate
separately) to enforce the security and to apply the
reorganisation proceedings (kaisha kosei), the enforcement of
proceeds from the security to the claims of all the
lenders? security interests is prohibited or suspended (kosei-tanpo-ken).

A security trustee is recognised under the Trust Law of Japan. In 5.2 Are there any preference periods, clawback rights or
practice, however, a security trust scheme is not commonly used, other preferential creditors’ rights (e.g. tax debts,
mainly due to a lack of precedents. employees’ claims) with respect to the security?

A bankruptcy trustee may exercise clawback rights (hinin-ken).

3.2 If a security trust is not recognised in your
With respect to the security, if a debtor repays its debts, or grants
jurisdiction, is an alternative mechanism available
(such as a parallel debt or joint and several creditor security to a specific creditor after becoming “unable to pay its
status) to achieve the effect referred to above which debts” and being aware of such situation, or after a bankruptcy filing
would allow one party (either the security trustee or (or grants security without obligation or repays debts before
the facility agent) to enforce claims on behalf of all the maturity within 30 days prior thereto), then such act may be avoided
lenders so that individual lenders do not need to by the bankruptcy trustees. Administrative expenses, pre-
enforce their security separately? bankruptcy adjudication taxes, certain labour costs, etc. are treated
as claims that have priority over general claims, but secured
See question 3.1 above. creditors have priority over the collateral irrespective of the
existence of these claims.

5.3 Are there any entities that are excluded from

bankruptcy proceedings and, if so, what is the
applicable legislation?

No, there are no such exclusions.

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transportation, electricity facilities and airlines) under the

5.4 Are there any processes other than court proceedings Compulsory Purchase of Land Act, with compensation provided.
that are available to a creditor to seize the assets of No form of investment is specially protected.
the project company in an enforcement?

As set out in question 5.1 above, secured creditors can enforce their 7 Government Approvals/Restrictions
own security interests outside bankruptcy (hasan) or civil
rehabilitation proceedings (minji saisei).
Japan

7.1 What are the relevant government agencies or

departments with authority over projects in the typical
5.5 Are there any processes other than formal insolvency project sectors?
proceedings that are available to a project company
to achieve a restructuring of its debts and/or
The relevant government agencies or departments will vary depending
cramdown of dissenting creditors?
on the types of projects over which regulatory bodies in the state or local
government have authority. Among the agencies and departments, the
Turnaround alternative dispute resolution (ADR) proceedings (or Ministry of Economy, Trade and Industry (METI) is the responsible
business turnaround ADR) are a method overseen by the Japanese authority in relation to matters such as energy, natural resources and
Association of Turnaround Professionals that can be used to restructure other industries, and the Ministry of Land, Infrastructure,
an insolvent business without involving courts. The process works by Transportation and Tourism (MLIT) is the responsible authority in
forming an agreement between the insolvent business and its creditors relation to matters such as construction, transportation and ports.
that includes debt write-offs and the rescheduling of debt payments.

7.2 Must any of the financing or project documents be

5.6 Please briefly describe the liabilities of directors (if registered or filed with any government authority or
any) for continuing to trade whilst a company is in otherwise comply with legal formalities to be valid or
financial difficulties in your jurisdiction. enforceable?

Directors are liable against the company if they breach their duty of care Financing or project documents do not generally require registration
as a good manager; however, this can be tempered by the application of or filing with any governmental authority. However, a guarantee
the business judgment rule to directors’ decisions. Also, directors are agreement must be executed in writing, and perfection of security
liable against third parties for any loss or damages incurred by a third rights may require registration with the relevant authority. Stamp
party due to a director’s wilful misconduct or gross negligence. duty may be imposed depending on the type of financing or project
Criminal liability would arise in certain limited cases where directors documents if they are executed in Japan.
intentionally breach their duty and cause damages to the company.

7.3 Does ownership of land, natural resources or a

6 Foreign Investment and Ownership pipeline, or undertaking the business of ownership or
Restrictions operation of such assets, require a licence (and if so,
can such a licence be held by a foreign entity)?

6.1 Are there any restrictions, controls, fees and/or taxes Ownership of land or a pipeline does not require a licence.
on foreign ownership of a project company? However, development or, in some situations, the acquisition of
land, as well as the instalment or operation of pipelines, are subject
A foreign investor is required to lodge a filing if it obtains shares in to various regulations such as agricultural land regulations and
a non-listed company, obtains more than 10% of shares in a listed pipeline business regulations. While these matters are regulated by
company, or conducts certain other activities under the Foreign various acts, a licence is generally required for the extraction of
Exchange and Foreign Trade Act. Investment in certain types of natural resources and the operation of pipelines. A licence under the
businesses (such as electricity, mining, oil, gas, water supply, Mining Act is given only to Japanese nationals. On the other hand,
transportation, telecommunication and shipbuilding) requires prior activities for quarrying and/or gravel gathering, subject to local
filing with the Japanese government. Investment in certain regulations, can be performed by a registered foreign entity.
industries (such as telecommunications, airlines and broadcasting) Acquisition of an oil pipeline or gas pipeline business is subject to a
is subject to maximum shareholding restrictions. pre-notice filing requirement under the general restrictions of the
Foreign Exchange and Foreign Trade Act and may also be subject to
a suspension order in case it disturbs public order.
6.2 Are there any bilateral investment treaties (or other
international treaties) that would provide protection
from such restrictions? 7.4 Are there any royalties, restrictions, fees and/or taxes
payable on the extraction or export of natural
While Japan has executed bilateral investment treaties with certain resources?
countries, these treaties do not provide protection from the
restrictions noted above. Fees apply depending on the mining activities. Certain prefectural
and municipal mining taxes are payable on the extraction of natural
resources, as applicable. The rates for these taxes may vary
6.3 What laws exist regarding the nationalisation or
depending on the location and the resource, but in general, a
expropriation of project companies and assets? Are
any forms of investment specially protected? prefectural tax is imposed on the area of the allotted mining area,
and a municipal tax, the standard rate of which is 1% of the relevant
mineral price, is also imposed.
Expropriation may be permitted for a limited public interest (such as

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There are no general export restrictions relating to natural resources,

8 Foreign Insurance
provided that they do not fall into the exceptional categories
regulated under the Export Trade Control Ordinance. No tax is
imposed on the export of natural resources. 8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or
guaranteed by foreign insurance companies?
7.5 Are there any restrictions, controls, fees and/or taxes
on foreign currency exchange?

Japan
Except for certain exceptions, foreign insurers are, in principle,
No, other than a post facto filing under the Foreign Exchange and required to obtain insurance business licences as a condition to
Foreign Trade Act. underwriting insurance relating to project assets located in Japan.

7.6 Are there any restrictions, controls, fees and/or taxes 8.2 Are insurance policies over project assets payable to
on the remittance and repatriation of investment foreign (secured) creditors?
returns or loan payments to parties in other
jurisdictions? Insurance policies over project assets can be generally payable to
foreign creditors.
Generally no, but a post facto filing is required under the Foreign
Exchange and Foreign Trade Act if the remittance exceeds JPY 30
million. Withholding of Japanese income tax at the rate of 20.42%
9 Foreign Employee Restrictions
(including special reconstruction income tax) will be taxed for
dividends and interest paid to foreign lenders, unless a double tax 9.1 Are there any restrictions on foreign workers,
treaty applies. technicians, engineers or executives being employed
by a project company?
7.7 Can project companies establish and maintain
onshore foreign currency accounts and/or offshore Foreign workers, technicians, engineers or executives may be
accounts in other jurisdictions? employed by a project company as long as it obtains an appropriate
visa (certificate of eligibility). The visa requirements vary
Yes, they can, but a report is required to be filed with the tax depending on the type of visa.
authority if the offshore assets exceed JPY 50 million.
10 Equipment Import Restrictions
7.8 Is there any restriction (under corporate law,
exchange control, other law or binding governmental
practice or binding contract) on the payment of 10.1 Are there any restrictions, controls, fees and/or taxes
dividends from a project company to its parent on importing project equipment or equipment used by
company where the parent is incorporated in your construction contractors?
jurisdiction or abroad?
Construction contractors may generally import project equipment,
No, there is no such restriction. except for limited restrictions such as goods that are deleterious to
health and safety under the Foreign Exchange and Foreign Trade
7.9 Are there any material environmental, health and Act. A licence is not generally required in order to import
safety laws or regulations that would impact upon a equipment. Contractors may be subject to customs duties and VAT
project financing and which governmental authorities (consumption tax).
administer those laws or regulations?

10.2 If so, what import duties are payable and are

There are various regulations including local prefectural or exceptions available?
municipal regulations that handle environment, health and safety
issues. The necessity of an environmental impact assessment under
Import duties may differ depending on product type, origin and
state or local regulations would have a big impact on the costs and
other relevant conditions.
schedule of a project financing. Regulations on certain areas (such
as forest areas and agricultural land) would also affect the project
financing. Environmental matters are generally handled by the 11 Force Majeure
Ministry of the Environment (MOE) and/or similar environmental
division at the local government level, and health and safety matters
are generally handled by the Ministry of Health, Labour and Welfare 11.1 Are force majeure exclusions available and
and similar divisions at the local government level. enforceable?

Force majeure provisions are set out in many project agreements.

7.10 Is there any specific legal/statutory framework for Generally, exclusions based on such provisions are enforceable as
procurement by project companies?
long as they are clearly defined in such agreements. Normally, force
majeure exclusions do not apply to payment obligations.
No, privately owned project companies are not subject to such
procurement regulations.

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12 Corrupt Practices 15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
conventions?
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 Yes, the Convention became effective from 1961 with a reservation
criminal penalties? of reciprocity. Japan is also a party to the Washington Convention
on the Settlement of Investment Disputes Between States and
Japan

Bribery is a criminal offence under the Criminal Code, with a Nationals of Other States (1965) (otherwise known as ICSID).
penalty of imprisonment for up to three years or a fine of up to JPY
2.5 million. Conducting corrupt business practices with foreign 15.3 Are any types of disputes not arbitrable under local
government officials is a criminal offence under the anti-bribery law?
provisions of the Unfair Competition Prevention Act, with a penalty
of imprisonment for up to five years and/or a fine of up to JPY 5 Unless otherwise provided by law, civil and commercial disputes
million (for the offender) and fine up to JPY 300 million (for the that may be resolved by settlement between the parties (excluding
corporate body). that of divorce or separation) are arbitrable (Art. 13.1 of the
Arbitration Act). Examples of matters which are generally
considered to not be “arbitrable” include: (i) the validity of
13 Applicable Law
intellectual property rights granted by the government; (ii)
shareholders’ actions seeking revocation of a resolution of the
13.1 What law typically governs project agreements? shareholders’ meeting; (iii) administrative decisions of government
agencies; and (iv) insolvency and civil enforcement procedural
decisions.
Project agreements are typically governed by the laws of Japan.

15.4 Are any types of disputes subject to mandatory

13.2 What law typically governs financing agreements?
domestic arbitration proceedings?

Financing agreements are typically governed by the laws of Japan.

No, they are not.
However, securities documents may be legally required to be
governed by the laws of the state in which the collateral is located.
16 Change of Law / Political Risk
13.3 What matters are typically governed by domestic law?
16.1 Has there been any call for political risk protections
The parties may generally choose the governing law. However, such as direct agreements with central government or
securities documents for collateral located in Japan are typically political risk guarantees?
governed by the laws of Japan. In addition, enforcement,
insolvency, consumer protection and employment matters will be There has been no call for political risk guarantees. Lenders will
subject to mandatory provisions of Japanese law. typically require direct agreements with governmental authorities if
the project is a PPP or PFI project. Lenders usually seek criteria to
approve the potential transferee of shares in the project company or
14 Jurisdiction and Waiver of Immunity
concession right since a transfer thereof requires a consent of the
relevant governmental authority under the PFI Act and its relevant
14.1 Is a party’s submission to a foreign jurisdiction and regulations.
waiver of immunity legally binding and enforceable?
17 Tax
A waiver of sovereign immunity is legally valid and enforceable
subject to the conditions in the Immunity Act. The Immunity Act is
based on the United Nations Convention on Jurisdictional 17.1 Are there any requirements to deduct or withhold tax
Immunities of States and Their Property (2004) and became from (a) interest payable on loans made to domestic
effective from April 1, 2010. or foreign lenders, or (b) the proceeds of a claim
under a guarantee or the proceeds of enforcing
security?
15 International Arbitration
Withholding of Japanese income tax is required on interest paid to
foreign lenders at the rate of 20.42% (including special
15.1 Are contractual provisions requiring submission of reconstruction income tax). This is subject to a double tax treaty
disputes to international arbitration and arbitral
between Japan and the country where the foreign lender resides,
awards recognised by local courts?
which in many cases will reduce withholding of such tax.

Generally, yes. Japan is a signatory to the New York Convention on The proceeds of enforcing security may be subject to income tax if
the Recognition and Enforcement of Foreign Arbitral Awards. it is categorised as Japanese-sourced income.

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17.2 What tax incentives or other incentives are provided 19 Islamic Finance
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
of effectiveness or registration? instruments might be used in the structuring of an
Islamic project financing in your jurisdiction.
Various tax or other incentives are available to foreign investors to

Japan
attract more foreign investment; however, such incentives are not To the extent of our knowledge, Islamic project finance has not been
intended specifically for project financing. used in Japan. However, Japanese law has a similar legal
framework corresponding to the Islamic finance concept. While
Registration tax is imposed on the registration of certain rights and
compliance with Shari’ah is required to be reviewed separately,
securities. Rates vary depending on the type of rights and securities
Japanese law would likely recognise: Istina’a as a procurement and
(e.g., 0.4% of the claim for mortgage). Stamp duty is imposed on
construction agreement (seizou itaku); Ijarah as a lease agreement
the execution of certain documents. The amount of stamp duty for
(chintaishaku); Wakala as an agency agreement (dairi or toiya); and
a loan agreement ranges from JPY 200 to JPY 600,000.
Murabaha as a sales agreement with an instalment payment (kappu
hanbai). Therefore, in a possible structure for a project financing,
18 Other Matters (i) an Istina’a arrangement may be used in order to provide funds for
the construction of the plant during the construction period, and (ii)
an Ijarah arrangement may be used in such a manner that the
18.1 Are there any other material considerations which financier leases the plant to a project company and receives the rent
should be taken into account by either equity during the operation period. In addition, (iii) a Wakala arrangement
investors or lenders when participating in project
may be used for syndication fund providers to provide funds to the
financings in your jurisdiction?
project company through a financing special purpose vehicle. Also,
(iv) Murabaha financing would in theory be permissible to make a
Foreign investors should take into account currency exchange risk, working capital facility or equity bridge finance available to the
since revenues generated by a project are generally paid in Japanese project company. Note that, in such cases, project participants may
yen. also be subject to their applicable regulatory restrictions (e.g., the
A wide variety of regulations will generally need to be considered Banking Act of Japan).
for the development of a project. Generally, applicable permits
and/or licences may differ depending on the site or facilities, and
19.2 In what circumstances may Shari’ah law become the
they are handled by the competent government and/or local
governing law of a contract or a dispute? Have there
government having regulatory oversight of the subject matter. been any recent notable cases on jurisdictional
Administrative officers sometimes have broad discretion on permits issues, the applicability of Shari’ah or the conflict of
and/or licence application procedures, and this may result in a Shari’ah and local law relevant to the finance sector?
certain degree of unpredictability.
If lenders to a project are not banks, loans for project financings will We doubt that a Japanese court would recognise Shari’ah law as the
generally be subject to the Money Lending Business Act, which governing law of a contract or dispute. No notable cases have been
requires registration with the authority and compliance with other determined in this area.
obligations.
19.3 Could the inclusion of an interest payment obligation
18.2 Are there any legal impositions to project companies in a loan agreement affect its validity and/or
issuing bonds or similar capital market instruments? enforceability in your jurisdiction? If so, what steps
Please briefly describe the local legal and regulatory could be taken to mitigate this risk?
requirements for the issuance of capital market
instruments. In general, inclusion of an interest payment obligation does not
affect the validity or enforceability of a loan agreement, although
Project bonds are considered securities and are therefore subject to usury laws will apply.
the Financial Instruments and Exchange Act. Offering securities to
the public will require filing securities registration statements and
following certain continuous disclosure obligations, unless exempt
under certain exceptions.

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 Anderson Mōri & Tomotsune Japan

Kunihiro Yokoi Wataru Higuchi

Anderson Mōri & Tomotsune Anderson Mōri & Tomotsune
Otemachi Park Building Otemachi Park Building
1-1-1 Otemachi, Chiyoda-ku 1-1-1 Otemachi, Chiyoda-ku
Tokyo 100-8136 Tokyo 100-8136
Japan Japan

Tel: +81 3 6775 1110 Tel: +81 3 6775 1142

Japan

Email: [email protected] Email: [email protected]

URL: www.amt-law.com URL: www.amt-law.com

Kunihiro Yokoi is a special counsel at Anderson Mōri & Tomotsune. He Wataru Higuchi is a partner at Anderson Mōri & Tomotsune. He has
regularly advises various project financing and engages in an been involved in a wide range of finance transactions, from structured
extensive range of legal matters for various domestic and international finance to capital markets. Mr. Higuchi has particular expertise in
clients, including energy and infrastructure projects, M&A, general various equity and bond offerings and structured finance transactions,
corporate matters, PFI/PPP, various financial transactions, and including real estate securitisation and project finance transactions. In
employment. Mr. Yokoi also has experience from secondments to addition to his professional experience at Anderson Mōri & Tomotsune,
both domestic and overseas firms in handling contract negotiation and Mr. Higuchi has also worked for the Tokyo Stock Exchange (from
project management. He lectures on domestic and international October 2012 to September 2013) as a secondee, where he was in
project development and project financing, and his recent publications charge of listings of both Japanese and non-Japanese companies,
include “The Energy Regulation and Markets Review (Seventh exchange-traded funds, and Japanese real estate investment trusts
Edition)” (Law Business Research Ltd, 2018) (co-author) and “Japan’s (J-REITs). He studied at Hitotsubashi University (LL.B.) and Columbia
Solar PV Market—Some Observations” (Pratt’s Energy Law Report Law School (LL.M.) and is admitted to the Bar in Japan and New York.
(Vol.17- No.9), 2017) (co-author). He has particular expertise in asset-based finance, syndicated loan,
securitisation and other structured finance transactions.
Mr. Yokoi is a graduate of the University of Tokyo (LL.B., 2002) and the
University of California, Los Angeles, School of Law (LL.M., 2010). He
is admitted to the Bar in Japan (2003) and New York (2011).

The Project Finance practice at Anderson Mōri & Tomotsune frequently advises all parties involved in projects, including sponsors, project
companies, domestic and international commercial lenders, export credit agencies, suppliers, contractors and governments. We provide
comprehensive and practical legal advice on the successful structuring and implementation of major infrastructure projects in all sectors, including
electricity, oil and gas, transport, water and telecommunications. We are able to draw on our firm’s expertise in complementary areas, such as
Japanese corporate law and regulation, tax-effective structured financing and capital markets. In addition to our commitment throughout the entire
duration of a project, we are able to exploit our international experience to recognise specific cultural, political or environmental issues, enabling the
successful implementation of major cross-border and transnational projects.
Our support also extends to energy and resources projects and PFIs, which are a relatively recent, but increasingly important, development in Japan.
Anderson Mōri & Tomotsune is a pioneer in these transactions and we have been involved in many of the major projects in this field in Japan.

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Chapter 24

Kenya
Pamella Ager

Oraro & Company Advocates James K. Kituku

2018 and will be undertaken in ten (10) sections. The projected

1 Overview
completion date is in six (6) years from the date of commencement.
It is jointly funded by the United States Export Credit Agencies,
1.1 What are the main trends/significant developments in United States Export Import Bank and the Overseas Private
the project finance market in your jurisdiction? Investment Corporation.
Kenya Power and Lighting Company signed a EUR 60,000,000
The year 2018 witnessed an improvement in Kenya’s economy, contract for the construction of new power lines and transformers to
buoyed by the cooling down of the political temperatures that had enable access to electricity in 626,700 homes. This project is jointly
marred the country the previous year. Economic growth was funded by the World Bank and the African Development Bank.
projected as between 5.4% and 5.6%, as compared to 2017 when it The Japanese government also extended a USD 116,700,000 loan to
ranged from 4.9% to 5%. As a result, key sectors such as tourism the Kenyan government for the construction of the Mombasa Port
recorded historical growth in terms of the number of visitors and Area Road Development Project. This loan is to be repaid over a
revenue generated. The resurgence was also influenced by the period of 30 years while attracting an interest of 1.2%.
national government’s launch of the Big 4 Agenda, on 12th December
The agreement to fund the extension of Olkaria I Geothermal Plant
2017, which is founded on four pillars, namely: enhancing the
for EUR 72,000,000 was also signed in 2017. The project consists
manufacturing sector from 9.2% to 20% of GDP by 2022; achieving
of the extension of the existing 140 MW Olkaria I Unit 4&5
100% food security; ensuring universal health care for all citizens;
geothermal plant with an additional 70 MW turbine. The aim of the
and constructing 500,000 affordable houses each year. Therefore,
project is to help meet the growing electricity demands in the
the project finance market is likely to improve going forward, as the
country.
government seeks to implement the Big 4 Agenda and other
infrastructural projects in line with its Vision 2030. Kenya Ferry Services also signed a USD 57,000,000 concession
agreement with Trapos Limited for the construction of cable cars
across the Likoni channel to enable the transportation of people
1.2 What are the most significant project financings that across the channel. This project is a public-private partnership and
have taken place in your jurisdiction in recent years?
is to be completed two (2) years from the commencement date. The
project financing will be 40% equity and 60% debt.
The Development Bank of South Africa has financed the
construction of a 530 kilometre highway between the towns of
Lamu and Isiolo in Kenya via Garissa. The KES 62,000,000,000 2 Security
project is projected to take four (4) years to complete.
The Japan International Cooperation Agency (JICA) and the 2.1 Is it possible to give asset security by means of a
European Investment Bank have financed a KES 34,000,000,000 general security agreement or is an agreement
geothermal power plant. The project launched by Kenya Electricity required in relation to each type of asset? Briefly,
Generating Company in late 2018 is known as Olkaria I Unit 6 and what is the procedure?
is expected to generate 83 MW into the national grid upon
completion in the year 2021. In Kenya, a general financing agreement would be used, either in
CMC di Ravenna and Itirenera both of Italy and Kerio Valley the form of a loan agreement or facility agreement. Security
Development Authority of Kenya have entered into a joint venture documentation would differ depending on the type of security a
agreement for the construction of two multi-purpose dams, namely financier has opted to obtain. For example, where the assets of a
Arror dam for KES 38,500,000,000 and Kimwarer dam for KES company include movable assets such as machinery and motor
28,000,000,000. The national government through the National vehicles, then the financier would have a charge by way of
Land Commission is in the process of acquiring 8,000 acres for the debenture registrable in the Companies Registry. On the other hand,
twin projects. The dams are expected to irrigate around 20,000 where the security was to be over immovable property, for example
acres of farmland once complete. land and/or buildings, then Kenyan law requires that a charge be
created over these particular immovable assets and be registered in
The proposed expansion of Nairobi-Mombasa Road covering 473
the Lands Registry. Third-party securities in the form of guarantees
kilometres into a dual carriage-way – the project commenced in
would entail the preparation of a separate security document.

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 Oraro & Company Advocates Kenya

For movable property, there is also an additional requirement of However, the legality of a charge over a cash deposit was not
registering the security online, by filing an Initial Notice under the accepted in the English case of Re Charge Card Services. This
Movable Property Security Rights Act of 2017. judgment 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
2.2 Can security be taken over real property (land), plant,
machinery and equipment (e.g. pipeline, whether depositor to sue the bank for its recovery, the debt cannot be
underground or overground)? Briefly, what is the assigned or taken as security, as a debtor – the bank – cannot sue for
Kenya

procedure? a debt it owes. The judge stated that it was “conceptually

impossible” for a debtor to take a charge over his own debt.
Yes. In the case of a company, requisite board resolutions would
need to be obtained from the company borrower authorising the 2.5 Can security be taken over shares in companies
creation of the security. A charge document would be prepared, incorporated in your jurisdiction? Are the shares in
securing the financial obligations of the borrower to the financier. certificated form? Briefly, what is the procedure?
This charge would then be executed by all the parties in the presence
of an Advocate. Thereafter, the stamp duty, based on the amount Yes. Shareholders (especially those in private companies) are
secured, would be paid to the Commissioner of Domestic Taxes. In usually granted share certificates in respect of the shares they own.
cases where the charge involves agricultural land, the consent of the If a company holds shares in another company and it wishes to offer
relevant land control board would have to be sought and obtained. these shares to a financier as security, then a charge may be prepared
Further, where the charge involves leasehold property, the consent of over these shares and registered in the Companies Registry. It
the lessor would need to be obtained. Where the charge is over a should, however, be noted that a company cannot create security
property belonging to a married individual, then the consent of the over its own shares. In the case of shares owned by a natural person,
spouse would be obtained. The charge would thereafter be submitted it has been the practice in Kenya by most financial institutions to
for registration at the relevant Lands Registry, accompanied by a require the borrower to surrender the relevant share certificate to the
rates clearance certificate from the relevant county government financial institution. In addition, the borrower is required to execute
(confirming that all land rates applicable have been paid in full) and, a blank share transfer form and give the financial institution
in the case that the property is leasehold, a rents clearance certificate authorisation to transfer the shares to any person in case of default.
(confirming that the applicable land rent has been paid in full). The lender is required to file an Initial Notice under the MPSR
Where the charge is created by a company, the charge would also concerning the security.
have to be registered in the Companies Registry. In the event that the
proposed security is already charged to a financier, the consent of the
financier is required. An Inter-lenders Agreement or a Security 2.6 What are the notarisation, registration, stamp duty
Sharing Agreement will be required in such circumstances, to govern and other fees (whether related to property value or
otherwise) in relation to security over different types
the relationship between the various lenders.
of assets (in particular, shares, real estate,
receivables and chattels)?
2.3 Can security be taken over receivables where the
chargor is free to collect the receivables in the The following are the charges payable in respect of a charge:
absence of a default and the debtors are not notified
■ Security documents are required to be prepared by an
of the security? Briefly, what is the procedure?
Advocate and legal fees at the rate set out in the Advocates
Remuneration Order are applicable. Attestation fees would
Security can be taken over receivables. It is the practice in Kenya to also be payable to any Advocate witnessing the execution of
either have a charge over the receivables or have a deed of assignment the security documents.
created over such receivables. Financiers are usually advised to place ■ The stamp duty payable is based on the amount secured by
an obligation on the borrower to notify the debtors of such security. The the charge or debenture at the rate of 0.1%, which is a fixed
financier will also be required to file an Initial Notice online at the rate regardless of the type or sequence of security. For
Moveable Properties Securities Registry (MPSR). The requirement for example, the stamp duty payable on a charge, further charge
filing under the MPSR is a new development which took place in 2017. or debenture is the same rate of 0.1% of the principal amount.
In the case of a guarantee, the stamp duty payable is the
nominal amount of KES 200.
2.4 Can security be taken over cash deposited in bank
■ Bank charges – KES 120.
accounts? Briefly, what is the procedure?
■ Lessor’s consent (if the relevant property is leasehold) – this
varies from lessor to lessor.
When a customer places a deposit with a bank, the deposit
■ Land Control Board Consent (if the property is agricultural)
represents a loan made to the bank. The bank is the debtor and the
– KES 1,000. In addition, the Land Control Act provides
customer is the creditor. It had generally been recognised by legal
that: an allowance of KES 500 inclusive of lunch shall be
practitioners that there was no difficulty in a bank taking a charge paid to each unofficial member of a land control board for
over a cash deposit held by it. It has generally been accepted that every meeting which he attends; an allowance of KES 1,300
with regard to a fixed deposit, the secured party must take control inclusive of lunch shall be paid to each unofficial member of
over the charged accounts and prevent the chargor from a provincial land control appeals board for every meeting
withdrawing monies from, or otherwise dealing with, the charged which he attends; and a mileage allowance at prevailing
accounts without consent from the chargee. government rates shall be paid to unofficial members of a
land control board.
The bank is also required to file an Initial Notice under the MPSR,
as noted under question 2.3 above. ■ Registration fees at the Lands Registry (if security is over
immovable property) – KES 500.
Where the borrower is a company, the charge instrument should also
■ Filing fees at the Companies Registry (if the chargor is a
be registered in the company’s records at the Companies Registry.
company) – KES 14,000.

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2.7 Do the filing, notification or registration requirements 4 Enforcement of Security

in relation to security over different types of assets
involve a significant amount of time or expense?
4.1 Are there any significant restrictions which may
impact the timing and value of enforcement, such as
Provided that the security documents have been duly executed and (a) a requirement for a public auction or the
consented to (where applicable) and the requisite stamp duty paid availability of court blocking procedures to other

Kenya
and rates and rents clearance certificates obtained, registration of creditors/the company (or its trustee in
securities at a Lands Registry may take a day, or even much longer. bankruptcy/liquidator), or (b) (in respect of regulated
There have, however, been instances where a file relating to a assets) regulatory consents?
particular property cannot be located, and this usually causes
significant delays in the registration process. It should be noted that Charges rank according to the order in which they are registered
time varies from registry to registry depending on how busy that unless so provided in the charge instrument.
particular registry usually is. There have also been instances where The Land Act sets out the remedies available to a charge in the event
different registries are closed by Executive Orders to pave way for of default. If a chargor fails to pay interest or any other periodic
urgent developments in various registries, such as digitalisation of payment due under any charge, and continues to be in default for
records or reorganisation of the registries. It has been our one month, the chargee may serve on the chargor a notice, in
experience that registration at the Companies Registry would take writing, to pay the money owing. If the chargor does not comply
approximately one week. within two (2) months after the date of service of the notice, the
chargee may:
2.8 Are any regulatory or similar consents required with (a) sue the chargor for any money due and owing under the
respect to the creation of security over real property charge;
(land), plant, machinery and equipment (e.g. pipeline, (b) appoint a receiver of the income of the charged land;
whether underground or overground) etc.?
(c) lease the charged land, or if the charge is of a lease, sublease
the land;
The Land Control Act requires that the consent of the relevant Land
(d) enter into possession of the charged land; or
Control Board be obtained in cases where the land is agricultural.
(e) sell the charged land.
The Matrimonial Property Act prohibits the alienation in any form
of matrimonial property during the subsistence of a marriage In the event that a charge opts to appoint a receiver, the chargee shall
without the consent of both spouses either by way of sale, gift, lease, serve a notice in the prescribed form on the chargor and shall not
mortgage or otherwise. proceed with the appointment until a period of 30 days, from the
date of the service of that notice, has elapsed.
Where the title is a lease from the Kenya Railways Corporation
(KRC), for example in some coastal areas of the country, the In the event that a chargee opts to exercise the power to sell the
consent of KRC is required to charge the property. charged land, the chargee shall serve on the chargor a notice to sell
in the prescribed form and shall not proceed to complete any
Where securities are to be shared between financiers, the existing
contract for the sale of the charged land until at least 40 days have
financier has to give consent for its collateral to be shared with
elapsed, from the date of the service of that notice to sell. The notice
another financier of the same borrower.
is required to be served on several people, including:
(a) the National Land Commission, if the charged land is public
3 Security Trustee land;
(b) the holder of the land over which the lease has been granted,
if the charged land is a lease;
3.1 Regardless of whether your jurisdiction recognises (c) a spouse of the chargor who had given the consent;
the concept of a “trust”, will it recognise the role of a
security trustee or agent and allow the security (d) any lessee and sub-lessee of the charged land or of any
trustee or agent (rather than each lender acting buildings on the charged land;
separately) to enforce the security and to apply the (e) any person who is a co-owner with the chargor;
proceeds from the security to the claims of all the
(f) any other chargee of money secured by a charge on the
lenders?
charged land of whom the chargee proposing to exercise the
power of sale has actual notice;
If the parties involved have an instrument recognising this role, then (g) any guarantor of the money advanced under the charge;
the provisions in the particular instrument will be binding on the
(h) any other person known to have a right to enter on and use the
parties, because this would be a contractual matter.
land or the natural resources in, on, or under the charged land
by affixing a notice at the property; and
3.2 If a security trust is not recognised in your (i) any other persons as may be prescribed by regulations, and
jurisdiction, is an alternative mechanism available shall be posted in a prominent place at, or as near as possible
(such as a parallel debt or joint and several creditor to, the charged land.
status) to achieve the effect referred to above which
A chargee shall, before exercising the right of sale, ensure that a
would allow one party (either the security trustee or
the facility agent) to enforce claims on behalf of all the forced sale valuation is undertaken by a valuer. The price at which
lenders so that individual lenders do not need to the charged land is sold should not be 25% or below the market
enforce their security separately? value at which comparable interests in land of the same character
and quality are being sold in the open market.
See question 3.1 above. 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

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 Oraro & Company Advocates Kenya

auction with reserve price. If a sale is to proceed by public auction, A creditor who fails to comply with the notice is taken to have
it shall be the duty of the chargee to ensure that the sale is publicly surrendered the charge to the bankruptcy trustee under option (c) for
advertised in such a manner and form as to bring it to the attention the general benefit of the creditors, in which case the creditor may
of persons likely to be interested in bidding for the charged land and prove as an unsecured creditor for the whole debt.
that the provisions relating to auctions and tenders for land are, as Further, the Insolvency Act provides that if property of a bankrupt is
near as may be, followed in respect of that sale. subject to a security, the bankruptcy trustee may make an
A chargee exercising the power of sale may, with leave of the court, application to the court for an order enabling the bankruptcy trustee
Kenya

purchase the property. A court shall not grant leave unless the to dispose of the property as if it were not subject to the security, but
chargee satisfies the court that a sale of the charged land to the only if it is satisfied that the disposal of the property would be likely
chargee is the most advantageous way of selling the land. to provide a better overall outcome for the creditors of the bankrupt.
The purchase money received by a chargee who has exercised the
power of sale shall be applied in the following order of priority: 5.2 Are there any preference periods, clawback rights or
(a) first, in payment of any rates, rents, taxes, charges or other other preferential creditors’ rights (e.g. tax debts,
sums owing and required to be paid on the charged land. The employees’ claims) with respect to the security?
Rating Act provides that any land rates due in respect of land
shall be a charge against the land on which the rate was The Insolvency Act provides that debts of a person who is adjudged
levied; and the charge shall take priority; bankrupt or of a company that is in liquidation are payable in the
(b) second, in discharge of any prior charge or other following order of priority:
encumbrance subject to which the sale was made;
(a) The expenses of the bankruptcy or liquidation will have first
(c) third, in payment of all costs and reasonable expenses priority.
properly incurred and incidental to the sale or any attempted
(b) The following debts will have second priority:
sale;
■ all wages or salaries payable to employees in respect of
(d) fourth, in discharge of the sum advanced under the charge or
services provided to the bankrupt or company during the
so much of it as remains outstanding, interests, costs and all
four (4) months before the commencement of the
other money due under the charge, including any money
bankruptcy or liquidation;
advanced to a receiver in respect of the charged land; and
■ any holiday pay payable to employees on the termination
(e) fifth, in payment of any subsequent charges in order of their
of their employment before, or because of, the
priority, and the residue, if any, of the money so received
commencement of the bankruptcy or liquidation;
shall be paid to the person who, immediately before the sale,
was entitled to discharge the charge. ■ any compensation for redundancy owed to employees that
accrues before, or because of, the commencement of the
bankruptcy or liquidation;
4.2 Do restrictions apply to foreign investors or creditors ■ amounts deducted by the bankrupt or company from the
in the event of foreclosure on the project and related wages or salaries of employees in order to satisfy their
companies? obligations to other persons (including amounts payable
to the Kenya Revenue Authority in accordance with the
See question 4.1 above. Income Tax Act);
■ any reimbursement or payment provided for, or ordered
by the Industrial Court under the Labour Institutions Act,
5 Bankruptcy and Restructuring 2007 to the extent that the reimbursement or payment
Proceedings does not relate to any matter specified in the Labour
Relations Act, 2007 in respect of wages or other money or
remuneration lost during the four (4) months before the
5.1 How does a bankruptcy proceeding in respect of the commencement of the bankruptcy or liquidation;
project company affect the ability of a project lender
■ amounts that are preferential claims under section 175(2)
to enforce its rights as a secured party over the
and (3); and
security?
■ all amounts that are, by any other written law, required to
be paid, in accordance with the priority established by this
The recently enacted Insolvency Act provides that if the property of subparagraph, by a buyer to a seller on account of the
a bankrupt is subject to a charge, the creditor who holds the charge purchase price of goods.
may choose either of the following options:
(c) The following debts will have third priority:
(a) to realise the property by having it sold (but only if the
■ tax deductions made by the bankrupt or company under
creditor is entitled to do so under the terms of the charge);
the “pay as you earn” rules of the Income Tax Act;
(b) to have the property valued and prove in the bankruptcy as an
■ non-resident withholding tax deducted by the company
unsecured creditor for the balance due (if any) after deducting
under the Income Tax Act; and
the amount of the valuation; or
■ resident withholding tax deducted by the company under
(c) to surrender the charge to the bankruptcy trustee for the
the Income Tax.
general benefit of the creditors and prove in the bankruptcy as
an unsecured creditor for the whole debt.
The bankruptcy trustee may at any time, by notice, require a creditor 5.3 Are there any entities that are excluded from
who holds a charge over a bankrupt’s property: bankruptcy proceedings and, if so, what is the
applicable legislation?
(i) within 30 days after receipt of the notice, to choose one of the
options above; and
No entities are excluded from bankruptcy proceedings.
(ii) if the creditor chooses option (b) or (c), to exercise the chosen
option within that period.

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Oraro & Company Advocates Kenya

director or secretary of any other company or companies, makes the

5.4 Are there any processes other than court proceedings person unfit to take part in the management of a company.
that are available to a creditor to seize the assets of
the project company in an enforcement?
6 Foreign Investment and Ownership
The Land Act, 2012 provides similar remedies to a chargee in the Restrictions
event that a chargor defaults. The statute gives a clear procedure to

Kenya
be followed in such circumstances. If a chargor fails to pay interest
or any other periodic payment due under any charge and continues 6.1 Are there any restrictions, controls, fees and/or taxes
to be in default for one month, the chargee may serve on the chargor on foreign ownership of a project company?
a notice, in writing, to pay the money owing. If the chargor does not
comply within two (2) months after the date of service of the notice, No. The government provides the right for foreign and domestic
the chargee may: private entities to establish and own business enterprises and engage
(a) appoint a receiver of the income of the charged land; in all forms of remunerative activity. However, a company whose
shareholders are not Kenyan cannot own agricultural land, freehold
(b) lease the charged land, or if the charge is of a lease, sublease
the land; land or leasehold property whose term exceeds 99 years. There are
also restrictions as to foreign shareholding in the banking, insurance
(c) enter into possession of the charged land; or
and telecommunications industries. In an effort to encourage
(d) sell the charged land. foreign investment, the government repealed some regulations that
imposed little foreign ownership limitation for firms listed on the
5.5 Are there any processes other than formal insolvency Nairobi Securities Exchange, allowing such firms now to be 100%
proceedings that are available to a project company foreign-owned, as reported by the UNCTAD World Investment
to achieve a restructuring of its debts and/or Report 2016. In 2015, the government established regulations
cramdown of dissenting creditors? requiring that Kenyans own at least 15% of the share capital of
derivatives exchanges, through which derivatives such as options
No, there are no other processes of this nature available. To this and futures can be traded.
extent, companies can only enter into private contractual When the Companies Act of 2015 came into force, foreign
negotiations which may then introduce new payment plans. Under companies seeking registration in Kenya were required, under
the Insolvency Act of 2015, the law provides for eligibility section 975 (2) (b) of the Act, to ensure that by the time they are
thresholds for companies that may or may not enter into moratoria making the application for registration at least 30% of their
under voluntary arrangements for payment of debt. For eligible shareholding is held by a Kenyan citizen. However, this
companies who wish to enter into such arrangements, a procedure is requirement has since been repealed.
followed.
The directors shall:
6.2 Are there any bilateral investment treaties (or other
(a) prepare: international treaties) that would provide protection
(i) a document setting out the terms of the proposal; and from such restrictions?
(ii) a statement of the company’s financial position containing
such particulars of its creditors and of its debts and other No, there are no such treaties with such protection provisions
liabilities and of its assets as may be prescribed by the ratified by Kenya. In the recent past, Kenya has received an
insolvency regulations for the purposes of this section, improvement in Foreign Direct Investment. Foreign investors
and such other information as may be so prescribed. seeking to establish a presence in Kenya generally receive the same
(b) unless a provisional supervisor has already been appointed in treatment as local investors, and multinational companies make up a
respect of the proposal, appoint as its provisional supervisor large percentage of Kenya’s industrial sector. Through its official
an authorised insolvency practitioner who has consented to bilateral trade promotion agency Ken Invest, Kenya has been
supervise it.
viewed favourably by the international trade community. According
After preparing the proposal and statement and, if appropriate, to the United Nations Conference on Trade and Development
making the appointment, the directors shall submit the proposal and (UNCTAD)’s Global Enterprise Registration Network, the Ken
statement to the provisional supervisor for consideration and Invest site makes Kenya one of only 25 countries to earn a perfect
comment. rating on its information portal. Further, before any laws touching
The directors shall then vote on the proposal. on foreign investment are passed, there are substantive reviews and
deliberations by stakeholders before any such laws are passed. As
there is no bilateral treaty protecting investors from harsh trade
5.6 Please briefly describe the liabilities of directors (if
restrictions, investors are made to feel secure by Kenya’s local
any) for continuing to trade whilst a company is in
financial difficulties in your jurisdiction. arrangements and foreign investment policies. However, Kenya has
signed 14 bilateral investment bilateral conventions. This shows the
commitment that Kenya has in advancing foreign investment.
Such directors are liable to imprisonment if convicted. Courts also
have the power to disqualify directors. Under section 218 of the
Companies Act, a court shall make a disqualification order against a 6.3 What laws exist regarding the nationalisation or
person if satisfied, on an application made to it, that the person is or expropriation of project companies and assets? Are
has been a director or secretary of a company that has at any time any forms of investment specially protected?
become insolvent, whether while the person was a director or
secretary or subsequently and in the circumstances where the There are no laws regarding the nationalisation and expropriation of
conduct of the person as a director or secretary of that company, project companies or assets. The Constitution protects the right to
either taken alone or taken together with the person’s conduct as a private property, save in the case where such property needs to be

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compulsorily acquired for the public benefit. Article 5 of the may be required in the particular economic sector. The KIA will
Foreign Investments Protection Act states that investments by process and grant approvals of new investment, once proposals are
investors of a Contracting Party in the territory of another submitted on a prescribed application form. Proof of company
Contracting Party shall not be expropriated, nationalised or registration must be attached to the application.
subjected to any other measures, direct or indirect, having an effect
equivalent to expropriation or nationalisation, except for a purpose
7.4 Are there any royalties, restrictions, fees and/or taxes
which is in the public interest, on a non-discriminatory basis, in payable on the extraction or export of natural
Kenya

accordance with due process of law, and against prompt and full resources?
compensation. Any compensation that may need to be made under
the Act shall be done at current commercial rates and shall be settled Yes. There are applicable fees which one must pay to obtain a
at freely convertible currencies. mining licence or a petroleum exploration licence. One must obtain
a licence from the relevant authorities in order to be allowed to
7 Government Approvals/Restrictions export extracted minerals or petroleum out of Kenya. There are also
royalties that are payable in respect of extracted natural resources.
For example, the Mining Regulations provide that “there shall be
7.1 What are the relevant government agencies or payable on all diamonds originating in Kenya an ad valorem royalty
departments with authority over projects in the typical of fifteen per centum of the gross value thereof as assessed by an
project sectors? approved valuer appointed under the Diamond Industry Protection
Regulations”.
The relevant agency is the Kenya Investment Authority (KIA), There is the National Resource Benefit Sharing Bill of 2014 which
whose role is to assist and facilitate investments in Kenya. Its main if passed will establish formulae in which proceeds from
functions are to promote investments in Kenya by local and foreign exploitation of natural resources shall be shared by the mining
business enterprises, to liaise with the relevant Ministries companies, national government, county governments and local
responsible for approving all new private sector projects and communities. This role shall be under the scope of the Benefit
expansion of existing projects, to assist business enterprises in Sharing Authority.
implementing the projects approved by the relevant Ministries and,
generally, to assist all business enterprises in overcoming
managerial, institutional and bureaucratic problems. 7.5 Are there any restrictions, controls, fees and/or taxes
on foreign currency exchange?

7.2 Must any of the financing or project documents be

Kenya does not operate a fixed exchange rate against any foreign
registered or filed with any government authority or
otherwise comply with legal formalities to be valid or
currency. Therefore, the exchange rate between the Kenyan Shilling
enforceable? and any other currency is determined by market forces, subject of
course to interventions from time to time by the Central Bank of
Kenya (the CBK). The CBK and the commercial banks usually
Financing and project documents would need to be stamped in
publish the exchange rates applicable on a day-to-day basis.
respect of the applicable stamp duty payable. Most mega projects
that need project financing usually involve development projects
that impact heavily on the community. As such, government 7.6 Are there any restrictions, controls, fees and/or taxes
agencies involved are usually involved in oversight roles. Since on the remittance and repatriation of investment
project financing involves a long string of contractual deals, lawyers returns or loan payments to parties in other
involved ensure all paperwork involving payment of duties is jurisdictions?
completed to the end.
Kenya does not have exchange control laws in force since the repeal
of the Exchange Control Act in December 1995. However, the CBK
7.3 Does ownership of land, natural resources or a
Act establishes the CBK. Under the CBK Act, the CBK is
pipeline, or undertaking the business of ownership or
operation of such assets, require a licence (and if so,
empowered to formulate and implement the monetary policy in
can such a licence be held by a foreign entity)? Kenya.
According to Central Bank Circular No. 12 of 1996 – “Revised
In the case of land and/or immovable property, an owner is usually Foreign Currency Transaction Guidelines to Authorised Banks”,
provided with a document of title, and this could either be a Grant, a commercial banks were assigned a monitoring role by the CBK and
Certificate of Title, a Title Deed or a Lease. There is a restriction on each commercial bank is required to submit returns to CBK on a
foreign ownership of freehold land, leases exceeding 99 years and regular basis. Foreign currency is freely repatriable from Kenya,
agricultural land. These leases can, however, be renewed with the provided there is written evidence of an underlying business
expiry of the 99-year period. transaction and the respective bank handling the repatriation is
satisfied as to the genuineness of the transaction. However, for any
The Constitution, the Mining Act and the Petroleum (Exploration
amount equivalent to USD 500,000 or more, the CBK has requested
and Production) Act all provide that natural resources in the form of
that a commercial bank first consult with them as to the amount and
minerals and petroleum belong to the Government of Kenya. An
purpose of the remittance. This is stated to be for statistical
interested party may obtain a prospecting right or licence from the
purposes. For any amount below the equivalent of USD 10,000,
Government in respect of such natural resources. There are
commercial banks are not required to obtain any documentary
currently no restrictions on foreign ownership of companies
evidence to back the transaction, although in certain cases banks
intending to undertake such businesses.
will nonetheless seek an explanation.
To undertake a business in Kenya, the business entity would need to
The Foreign Investments Protection Act provides that a foreign
apply for a single business permit in addition to the licences that
national who proposes to invest foreign assets in Kenya may apply

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to the Cabinet Secretary in charge of finance, for a certificate that National Environment Management Authority (NEMA) annually or
the enterprise in which the assets are proposed to be invested is an as NEMA may in writing require. NEMA is established under
approved enterprise. The Cabinet Secretary shall consider every section 7 of the EMCA with the mandate inter alia to coordinate and
application made and, in any case in which he is satisfied that the supervise environmental matters and serve as the principal
enterprise would further the economic development of or would be government institution for the implementation of environmental
of benefit to Kenya, he may in his discretion issue a certificate to the policies.
applicant. The holder of a certificate may, in respect of the approved The EMCA provides that no owner or operator of any trade or

Kenya
enterprise to which such certificate relates, transfer out of Kenya in industrial undertaking shall discharge any effluents or other
the approved foreign currency and at the prevailing rate of pollutants into the environment without an effluent discharge
exchange: licence issued by NEMA. The EMCA defines “effluent” to mean
(a) the profits, including retained profits which have not been “gaseous waste, water or liquid or other fluid of domestic,
capitalised, after taxation, arising from or out of his agricultural, trade or industrial origin treated or untreated and
investment in foreign assets, provided that any increase in the discharged directly or indirectly into the aquatic environment”.
capital value of the investment arising out of the sale of the
whole or any part of the capital assets of the enterprise or In line with Sustainable Development Goals No. 13 on climate
revaluation of capital assets shall not be deemed to be profit action, foreign investment companies that set up in Kenya are
arising from or out of the investment for the purposes of the required to strictly adhere to environment-friendly practices for
Foreign Investments Protection Act; realisation of sustainable development.
(b) the capital specified in the certificate as representing and
being deemed to be the fixed amount of the equity of the 7.10 Is there any specific legal/statutory framework for
holder of the certificate in the enterprise for the purpose of procurement by project companies?
this Act, provided that:
■ where any amendment or variation is made in the amount
This is governed by the Public Procurement and Disposal Act
of the said capital, the amended or varied amount shall be
(which establishes procedures for efficient public procurement and
substituted for the original amount; and
for the disposal of unserviceable, obsolete or surplus stores, assets
■ no additional amount or sum shall be added to the capital
and equipment by public entities) and the Public Private Partnership
specified in the certificate (as amended or varied) to
represent any increase in the capital value of the Act (which provides for: the participation of the private sector in the
investment since the issue of the certificate or since the financing, construction, development, operation, or maintenance of
last amendment or variation of the certificate; and infrastructure or development projects of the government through
(c) the principal and interest of any loan specified in the concession or other contractual arrangements; and the establishment
certificate. of the institutions to regulate, monitor and supervise the
implementation of project agreements on infrastructure or
development projects).
7.7 Can project companies establish and maintain
onshore foreign currency accounts and/or offshore
accounts in other jurisdictions? 8 Foreign Insurance

Yes, they can.

8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or
7.8 Is there any restriction (under corporate law, guaranteed by foreign insurance companies?
exchange control, other law or binding governmental
practice or binding contract) on the payment of
There are no restrictions against insurance policies over project
dividends from a project company to its parent
company where the parent is incorporated in your assets provided or guaranteed by foreign insurance companies.
jurisdiction or abroad? There may be VAT implications as the provision of insurance by a
foreign company may be deemed to be an imported service.
No, there is no such restriction.
8.2 Are insurance policies over project assets payable to
foreign (secured) creditors?
7.9 Are there any material environmental, health and
safety laws or regulations that would impact upon a
project financing and which governmental authorities Yes, they are.
administer those laws or regulations?

9 Foreign Employee Restrictions

Yes. The Environmental Management and Co-ordination Act (the
EMCA) requires a project proponent to carry out an environmental
impact assessment (EIA) study and submit a project report “before 9.1 Are there any restrictions on foreign workers,
financing, commencing, proceeding with, carrying out...or causing technicians, engineers or executives being employed
to be financed, commenced, proceeded with, carried out...” any by a project company?
undertaking of certain projects, including mining, activities out of
character with their surroundings, and major changes in land use. Such workers would need to apply for and obtain visas (where
The EMCA requires the owner of premises or the operator of a applicable) and any requisite work permits. Work permits and visas
project to take all reasonable measures to mitigate any undesirable are issued under different classes by the Department of
effects not contemplated in the EIA study report, and shall prepare Immigration. The general guiding principle for issuance of work
and submit an environmental audit report on those measures to the permits by the government is that these should issued to foreign

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workers, technicians, engineers or executives only where the tasks made for civil or criminal proceedings against the officer and under
cannot be undertaken by qualified Kenyans. Even where the work section 43, the matter may be referred to the Ethics and Anti-
permits are issued to foreigners, there is a general expectation by the Corruption Commission (established under the Ethics and Anti-
government that there should be knowledge transfer before the lapse Corruption Act No. 22 of 2011) or the Attorney-General, for civil
of the work permit. matters, the Director of Public Prosecutions, for criminal matters or
any other appropriate authority.

10 Equipment Import Restrictions Under section 49 of the LIA, where it is proved that a state officer
Kenya

obtained any property in breach of the Act, the officer shall subject
to any appeal, which he/she may make, forfeit the property and the
10.1 Are there any restrictions, controls, fees and/or taxes property shall be held by the Commission or an agent appointed by
on importing project equipment or equipment used by the Commission, in trust for the country, until it is lawfully disposed
construction contractors? of. The Commission may also order the state officer to compensate
such sum including interest, as may be determined by the
There are no restrictions on importing project equipment. Commission as just, having regard to the loss suffered by the
Applicable customs duty would, however, be payable. government and such order shall be deemed to be a decree under the
The Import Declaration Fee was recently lowered to 2% from Civil Procedure Act.
2.25% of Cost Insurance and Freight. The LIA further creates various offences and penalties. For
Goods and services for the construction of infrastructure works in example, under section 47, “any person who is convicted an offence
industrial and recreational parks of 100 acres or more in Nairobi, under this Act, for which no penalty is expressly provided, shall be
Nakuru, Kisumu, Mombasa and Eldoret are VAT-exempt. liable on conviction to a fine not exceeding five hundred thousand
shillings (KES 500,000), or to imprisonment for a term not
exceeding three years, or to both”.
10.2 If so, what import duties are payable and are
exceptions available?
The Anti-Corruption and Economic Crimes Act provides for the
prevention, investigation and punishment of corruption, economic
crime and related offences. There are several offences under this
The Customs and Excise Act contains an extensive list of the items
Act and each offence attracts a penalty. Penalties range from fines
attracting import duty. In terms of exceptions, the Customs and
of KES 300,000 to KES 2,000,000, to maximum prison sentences
Excise Act also contains quite an extensive list of the institutions
ranging from three (3) years to 10 years.
and persons that enjoy exemptions in respect of various items as
indicated in the Act. Government officials are also subject to Public Officer Ethics Act,
which regulates the conduct of public officers in the discharge of
their duties. The purpose of the Act is to advance the ethics of
11 Force Majeure public officers by providing for a code of conduct and ethics, and
requiring financial declaration from certain public officers. Under
this Act, where a person is found to have hindered or interfered with
11.1 Are force majeure exclusions available and others exercising their duties under the Act, they shall be liable
enforceable?
under the Act and may be convicted for a fine not exceeding KES
5,000,000 or to imprisonment for a term not exceeding five (5)
Yes. These would have to be set out in the applicable contracts. years.
Force majeure exclusions do not apply to payment obligation.

13 Applicable Law
12 Corrupt Practices

13.1 What law typically governs project agreements?

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 Project agreements are typically governed by contract, save in the
criminal penalties? case where one of the parties is the government, a state corporation
or a county government, in which case provisions of statutes such as
State officers and public officials are involved in major projects. the Constitution, the Government Contract Act, the State
Chapter 6 of the Constitution of the Republic of Kenya (which is the Corporations Act, the County Governments Act, Public Private
supreme law of the country) provides for Leadership & Integrity of Partnerships Act and the Public Procurement and Disposal Act
state officers. would need to be considered.

Chapter 6 clearly stipulates that such officers are required to take an

oath of office before assuming office and conduct themselves 13.2 What law typically governs financing agreements?
ethically. The Chapter further provides for financial probity of state
officers. Any officers found to have been engaged in unethical or Financing agreements are typically governed by contract law,
corrupt business practices is under the Constitution prohibited from banking law and debt finance law.
holding such offices in the future.
There is also the Leadership & Integrity Act No. 19 of 2012 (the 13.3 What matters are typically governed by domestic law?
LIA), which is a statute that gives effect to the provisions of Chapter
6 of the Constitution discussed above.
Contracting parties have the freedom to choose the governing law in
Under the LIA, where there have been investigations and a public respect of their contract. Parties would, however, still have to
officer is found to have committed an offence, a referral may be adhere to the laws of the land in respect of various aspects of their

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project, including but not limited to land. Land-related agreements, provides for their issuance, albeit vaguely. A guarantee may, in the
permits and consents, employment, etc. are normally governed by context of the present legal framework, be preferable and
the law of the location of the project. recommended. Once issued, the Public Finance Management Act
provides that no further parliamentary authorisation shall be
necessary for payment under a guarantee, and that the same shall be
14 Jurisdiction and Waiver of Immunity a charge on the consolidated fund. Under the Public Finance
Management Act, issuance of a guarantee is the prerogative of the

Kenya
Cabinet Secretary responsible for Finance. Once the guarantee is
14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable? issued, parliament is required to approve it. As to changes in law,
Kenya’s Constitution provides that any newly enacted law shall not
apply retroactively. To cushion any unfavourable changes in law,
Yes, it is. To this effect, bold pronouncements were made in the case
there is usually room for extensive deliberations by stakeholders
of Talaso Lepalat v The Embassy of the Federal Republic of
before such a law is passed.
Germany & 2 Others [2014].

15 International Arbitration 17 Tax

17.1 Are there any requirements to deduct or withhold tax

15.1 Are contractual provisions requiring submission of
from (a) interest payable on loans made to domestic
disputes to international arbitration and arbitral
or foreign lenders, or (b) the proceeds of a claim
awards recognised by local courts?
under a guarantee or the proceeds of enforcing
security?
Yes, they are.
Interest to be paid on loans from foreign lenders for the purposes of
15.2 Is your jurisdiction a contracting state to the New York investing in the energy or water sectors, or in roads, ports, railways
Convention or other prominent dispute resolution or aerodromes, are exempt from tax.
conventions?
Further, instruments (including charges, debentures and guarantees)
executed with respect to the transactions relating to loans from
Yes, it is. Kenya has also enacted the Investment Disputes foreign sources received by investors in the infrastructure (energy,
Convention Act which gives legal sanction to the provisions of the roads, ports, water, railways and aerodromes) development sector
Convention on the Settlement of Investment Disputes between shall be exempted from the provisions of the Stamp Duty Act.
States and Nationals of Other States.
However, for companies not falling in the above bracket, Kenya
imposes a withholding tax at the basic rate of 15% per annum. The
15.3 Are any types of disputes not arbitrable under local Income Tax Act prescribes how to compute withholding tax on
law? deemed interest.

Disputes involving matters that are criminal in nature are not

17.2 What tax incentives or other incentives are provided
generally arbitrable under local law. preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes
15.4 Are any types of disputes subject to mandatory
of effectiveness or registration?
domestic arbitration proceedings?

See question 17.1 above.

No, they are not.
Both fiscal and non-fiscal, incentives are available in Kenya. The
Kenya Revenue Authority implements the issuance of the fiscal
16 Change of Law / Political Risk (tax) incentives in collaboration with other regulators and
facilitators such as the Capital Market Authority, the Export
Processing Zones Authority, among others, as provided under the
16.1 Has there been any call for political risk protections
Income Tax Act, Laws of Kenya.
such as direct agreements with central government or
political risk guarantees?
18 Other Matters
Kenya has had no recent call for political risk protections for
companies investing in Kenya. Generally, letters of undertaking and
guarantees are the two most common commitments that the 18.1 Are there any other material considerations which
government formally issues to guarantee payments. The Public should be taken into account by either equity
Finance Management Act and the Public Private Partnerships Act, investors or lenders when participating in project
financings in your jurisdiction?
read together with the Constitution of Kenya, recognise guarantees
by the government subject to specified conditions prescribed
thereunder. The choice as to which one it issues will depend on the Equity investors and/or lenders should undertake due diligence
circumstances of each case. Although both can be binding in law, investigations on a particular project and/or project company before
there is some doubt over the enforceability of letters of undertaking, advancing any funds. The due diligence exercise should cover the
especially considering that the Public Finance Management Act is legal and financial status of the companies that the investors or
silent on the same, though the Public Private Partnerships Act lenders would be contracting with.

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Further, due diligence should extend to the nature of projects Murabaha – It is often referred to as “cost-plus financing” and
invested in. Each project financing has its own unique structure. frequently appears as a form of trade finance based upon letters of
For example, many financiers shy away from funding road credit. In its simplest form, this contract involves the sale of an item
construction projects because of its high income return risks. on a deferred basis. This could be used to finance the movable
Realistically, demand/traffic risk is often unavoidable. Financiers assets that may be used in a project; for example, motor vehicles.
should, as need be, conduct their own traffic projections to be in a
good position to assess this risk involved in financing these projects
19.2 In what circumstances may Shari’ah law become the
Kenya

as opposed to relying on traffic projections done by project governing law of a contract or a dispute? Have there
companies. This balancing of information is crucial in the steering been any recent notable cases on jurisdictional
of mega projects. issues, the applicability of Shari’ah or the conflict of
Shari’ah and local law relevant to the finance sector?

18.2 Are there any legal impositions to project companies

issuing bonds or similar capital market instruments? The Constitution is the supreme law of Kenya. Islamic finance
Please briefly describe the local legal and regulatory products, on the other hand, are to be governed by Shari’ah.
requirements for the issuance of capital market Article 170(5) of the Constitution states that the jurisdiction of a
instruments.
Kadhis’ court shall be limited to the determination of questions of
Muslim law relating to personal status, marriage, divorce or
There are legal impositions on project companies issuing bonds or inheritance in proceedings in which all the parties profess the
capital market instruments in Kenya. The local legal and regulatory Muslim religion and submit to the jurisdiction of the Kadhis’ courts.
requirements for the issuance of capital markets instruments are set As such, the jurisdiction of the Kadhis’ court does not extend to
out in the Capital Markets Act. The Capital Markets Act prohibits contractual relations. The Kadhis’ Courts Act further reiterates this
any person from carrying on business as a stockbroker, derivatives point by providing that a Kadhis’ court shall have and exercise
broker, real estate investment trust (REIT) manager, trustee, dealer, jurisdiction over the determination of questions of Muslim law
investment adviser, fund manager, investment bank, central relating to personal status, marriage, divorce or inheritance in
depository, authorised securities dealer, authorised depository, or proceedings in which all the parties profess the Muslim religion.
from holding himself out as carrying on such a business unless he
The Judicature Act provides the sources of law in Kenya which
holds a valid licence issued under the Capital Markets Act or under
include the Constitution, written laws, the substance of the common
the authority of the Capital Markets Act. However, foreign
law, the doctrines of equity and the statutes of general application in
companies can issue bonds even regionally according to part II
force in England on 12th August 1897, and African customary law. It
section 7 of the Capital Markets Securities Public Offers Listing and
should be noted that Shari’ah, Islamic or Muslim law is not referred
Disclosures Regulations of 2002.
to in the Judicature Act. Therefore, although a contract may be
prepared in accordance with Shari’ah, the governing law will be
19 Islamic Finance Kenyan, as Kenya does not recognise Shari’ah law as governing
contracts in Kenya.
To our knowledge, there have not been any notable cases to date
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
over jurisdictional matters pertaining to Shari’ah law.
instruments might be used in the structuring of an
Islamic project financing in your jurisdiction.
19.3 Could the inclusion of an interest payment obligation
Istina’a – In Islamic finance, Istina’a is generally a long-term in a loan agreement affect its validity and/or
contract whereby a party undertakes to manufacture, build or enforceability in your jurisdiction? If so, what steps
could be taken to mitigate this risk?
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 Islamic finance prohibits the charging or payment of interest.
infrastructure projects. Consequently, Kenya, in an attempt to regulate Islamic banking
operations and products, made slight changes to its Banking Act.
Ijarah – This contract represents a transaction in which a known
Initially, the Banking Act only made reference to “interest”. The
benefit (usufruct) associated with a specified asset is sold for a
Banking Act was subsequently amended in 2008 by adding the
payment. In the course of this sale of usufruct, ownership of the
phrase “or a return in the case of an institution carrying out business
asset is not transferred – the bank maintains ownership of the asset.
in accordance with Islamic law” when referring to interest
An Ijarah may be used in a construction project where the financier
chargeable on a savings account. It would be interesting to see what
would be involved in the construction of the development, then
Kenyan courts would determine in cases where an interest payment
subsequently lease out the property to the end consumer, with the
obligation was included in a loan agreement that is meant to be
end consumer’s last instalment being used as the amount required to
Shari’ah-compliant. In the English case of Dunlop Pneumatic Tyre
purchase the property.
Co Ltd v New Garages & Motor Co Ltd [1915] AC 79, the court held
Wakala – Describes an agency or a delegated authority where a that, generally, the inclusion of an interest payment obligation in a
principal appoints the agent to carry out a specific job on behalf of loan agreement would not affect its validity and/or enforceability
the principal. Wakala agreements are agency agreements where the unless that interest payment obligation is deemed a penalty
principal and the agent share in the profit and risk of loss of offending the rules laid down in that particular case. With the
investment. Any guarantee on minimum return is not Shari’ah- common law doctrine of precedent, this position may have a bearing
compliant. This can be used where a company acts as the agent for in future transactions in Kenya if Shari’ah law changes to allow
a financier or lender by investing the funds from that financier or charging or payment of interest.
lender. The company may choose to invest the funds in different
projects, and profits and losses would be shared equally by both
parties.

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Oraro & Company Advocates Kenya

Pamella Ager James K. Kituku

Oraro & Company Advocates Oraro & Company Advocates
ACK Garden Annex ACK Garden Annex
6th Floor, 1st Ngong Avenue 6th Floor, 1st Ngong Avenue
Nairobi Nairobi
Kenya Kenya

Kenya
Tel: +254 20 271 3636 Tel: +254 20 271 3636
Email: [email protected] Email: [email protected]
URL: www.oraro.co.ke URL: www.oraro.co.ke

As head of the Corporate & Commercial, Real Estate, Conveyancing James’ legal experience spans for a period of over five years. He has
and Securities teams, Pamella has been part of various Kenyan worked in several high-profile corporate and conveyancing briefs for
ground-breaking commercial transactions; for instance, the both local and foreign clients. He has also acted for developers and
privatisation of several government entities – including Mumias Sugar financial institutions in diverse property transactions and major project
Company and Kenya Electricity Generating Company. She also acted financing projects in Kenya. James has also advised on several
in a flotation exercise by KCB (Kenya’s biggest bank, in network terms), infrastructure projects.
two successful rights issues for KCB, the development of Kenya’s
Central Depository and Settlement Corporation, the Private Placement
of The Cooperative Insurance Company of Kenya (CIC). Pamella
specialises in the following areas: banking & finance; capital markets;
conveyancing; mergers & acquisitions; 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.

Established 39 years ago, by George Oraro SC (one of Kenya’s top litigators), 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.

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 Chapter 25

Malaysia
Dzuhairi bin Jaafar Thani

Rahmat Lim & Partners Syed Rashid bin Rahim Alsree

According to the Economic Outlook 2019 report issued by the

1 Overview
Ministry of Finance of Malaysia, Malaysia continues to be the
“main driver” in sukuk issuances, accounting for 50.9% of total
1.1 What are the main trends/significant developments in global issuances and 51.2% of total global sukuk outstanding. Of
the project finance market in your jurisdiction? note is the RM3 billion financial programme established by Exsim
Development Group in January 2019, which monetises progress
Against the backdrop of a growing economy – according to a billings for multiple development projects, comprising two sukuk
quarterly bulletin issued by the Central Bank of Malaysia (“BNM”), programmes of RM2 billion and RM1 billion, respectively. For the
for the fourth quarter of 2018, the Malaysian economy expanded by first tranche of the RM2 billion sukuk programme, the development
4.7% in 2018. With an unprecedented change in government, much projects securitised were residential projects located in Kuala
attention has been cast upon the fate of infrastructure projects Lumpur.
initiated by the previous administration. Notably, the new Malaysian Interest in Green Sustainable and Responsible Investment Sukuk
government has, based on publicly available reports, as of February (Green SRI Sukuk), for the development of green projects in
2019, cancelled or put on hold three China-backed mega-projects, Malaysia (including a renewable energy (“RE”) plant in the state of
i.e. a rail link project known as the East Coast Rail Link, and two Pahang by UiTM Solar Power Sdn. Bhd. and a solar photovoltaic
pipeline projects known as the Trans-Sabah Gas Pipeline and the facility in the state of Perak by Sinar Kamiri Sdn. Bhd.), does not
Multi-Product Pipeline, respectively. The Malaysian and Singapore appear to be waning either. Recently, Danajamin Nasional Berhad,
governments have also agreed to postpone the development of a a company wholly-owned by the Malaysian government,
high-speed rail project between the two countries until May 2020. announced that it is guaranteeing the first tranche of a Green SRI
Despite the above, the project finance market in Malaysia is far from Sukuk for an amount of RM17 million issued by Pasukhas Green
quiet – the Ministry of Works recently announced that 20 new Asset Sdn. Bhd., the proceeds of which will be used by the issuer for
infrastructure projects worth RM5.26 billion will be implemented in its hydropower plant in the state of Kelantan and for the exploration
2019, which include mega-projects such as the Central Spine Road of other RE assets in Malaysia. In a press statement on this matter,
in West Malaysia, the Pan-Borneo Highway in Sarawak and the Danajamin Nasional Berhad noted that its maiden foray into Green
Sarawak-Sabah link road projects. The federal government also SRI Sukuk is in line with the government’s initiative to maintain
recently opened bids for RM2 billion worth of solar energy projects, Malaysia’s position as the “main catalyst” of Green SRI Sukuk.
with tenders expected to be finalised by the end of 2019, in line with
the government’s target of having 20% of the country’s electricity 1.2 What are the most significant project financings that
generated from renewable sources by 2025. have taken place in your jurisdiction in recent years?
The oil and gas sector is also expected to receive more attention
from the government in 2019 in a bid to revive exploration and Notable project financings in Malaysia which kick-started or are
production activities in the sector. Generating interest in this area is continuing in 2019 include the following:
the USD27 billion Refinery and Petrochemical Integrated 1. Pan-Borneo Highway: Construction is still ongoing on this
Development (“RAPID”) project jointly developed by Petroliam federal government-funded mega-project, which has an
Nasional Berhad (“PETRONAS”) and the Saudi Arabian Oil estimated cost of RM29 billion, and is expected to complete
Company located in Johor, which is anticipated to be ready for in 2025. The 2,325 km highway will connect the states of
commercial operations by the final quarter of 2019. Sarawak and Sabah in East Malaysia.
In the real estate sector, the Tun Razak Exchange project (an RM40 2. Tun Razak Exchange: The RM40 billion mixed development
project located on 70 acres of land in Kuala Lumpur will
billion mixed integrated development in Kuala Lumpur) has also
receive development funding from the federal government
been given the go-ahead by the federal government. In February and financial institutions, and is slated for completion in
2019, its joint venture developers, TRX City Sdn. Bhd. and 2024.
Lendlease Corp Ltd, were reported to have secured an RM2.15
3. RAPID: The USD27 billion petroleum processing hub in
billion financing facility from a consortium of lenders for the Pengerang, Johor, which covers an area of 2,000 hectares,
project. was reported to have begun trial runs in January 2019. The
The issuance of sukuk, a Shari’ah-compliant financial instrument hub is expected to be ready for commercial operations by the
similar to bonds, remains popular with investors in the country. final quarter of 2019.

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4. Mass Rapid Transit Sungai Buloh-Serdang-Putrajaya Line debenture over such assets). It should be noted that under Malaysian
(“MRT2”): Construction commenced on this RM30.53 land law, fixtures are deemed to form part of the underlying land, and
billion government-funded MRT2 project in 2018. This would technically be subject to any charge over such land.
project, which is expected to be completed in July 2021, is for
the construction of a transit line running through several
areas in the Klang Valley which are currently lacking inter- 2.3 Can security be taken over receivables where the
city rail connectivity. chargor is free to collect the receivables in the

Malaysia
absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
2 Security
Yes, receivables may be assigned by way of an equitable assignment
in favour of the chargee.
2.1 Is it possible to give asset security by means of a
general security agreement or is an agreement Such an assignment would not be considered to be an absolute
required in relation to each type of asset? Briefly, assignment in law, but may still be valid in equity against the chargor.
what is the procedure? Under such an arrangement, the chargor may collect the receivables to
the extent commercially agreed between the chargor and the chargee,
Yes, in the form of an all-asset debenture creating a fixed, and where and the debtor need not be notified of the security. In such an
appropriate floating, charge over all assets of the chargor in favour instance, the chargor will generally hold legal title to the debt on trust
of the chargee. for the chargee, and any suit to recover the receivables would have to
Generally, the chargor may not deal with any assets subject to a be in the joint names of the chargor (the legal owner of the
fixed charge unless otherwise agreed by the chargee. On the other receivables) and the chargee (the beneficial owner of the receivables).
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 2.4 Can security be taken over cash deposited in bank
normal course of business. accounts? Briefly, what is the procedure?

2.2 Can security be taken over real property (land), plant, Yes, it is common for security to be taken over cash deposited in
machinery and equipment (e.g. pipeline, whether bank accounts. Such security can be in the form of a charge and/or
underground or overground)? Briefly, what is the assignment in favour of the creditor. Whilst it is commonplace for a
procedure? Malaysian bank to obtain an assignment and charge over a deposit
account held with the bank itself, it is technically not possible under
Yes. Malaysian law to assign a debt back to a debtor, as this would result
Security over real property (land) can be created by way of a charge in the destruction of the debt.
or, in some instances, an assignment of rights. Where the security is created over a fixed deposit, the original fixed
The typical form of security over real property held under an deposit certificates are typically deposited with the creditor for the
individual issue document of title is a statutory or “legal” charge duration of the security.
under the National Land Code 1965 (for real property situated in
Peninsular Malaysia), the Sarawak Land Code (for real property 2.5 Can security be taken over shares in companies
situated in the state of Sarawak) and the Sabah Land Ordinance (for incorporated in your jurisdiction? Are the shares in
real property situated in the state of Sabah) (collectively, the “Land certificated form? Briefly, what is the procedure?
Statutes”). Such a charge may be created by registering the
prescribed statutory form with the appropriate land authority in Yes.
accordance with the relevant Land Statute. Enforcement of a legal Shares in Malaysian companies are in registered (not bearer) form.
charge usually takes the form of a forced sale of the property in an Security over unlisted shares would typically be created by way of
auction run by the courts or the relevant land authority. an equitable mortgage which is constituted by deposit of the original
Another fairly common method of taking security over real property share certificates and signed transfer forms in blank.
owned by a corporation is by way of an equitable charge under a Security over the shares of a listed company can be created by:
debenture. One advantage of such an equitable charge is that a
(a) a legal mortgage. This would involve the actual transfer of
receiver may be appointed to sell the real property by way of a the dematerialised shares by the mortgagor from its own
private sale, as an agent of the chargor. securities account to a so-called “pledged securities account”
It is possible for a person to be the beneficial owner of, or have in the name of the mortgagee or its nominee as mortgagee.
rights to, a piece of property for which a separate issue document of The identity of the ultimate beneficial owner of the shares
title has not yet been issued, and which still forms part of a larger (unless exemptions such as those relating to exempt
piece of land held under a master title. As an example, a purchaser authorised nominees and omnibus accounts) and details of
“pledged securities accounts” holding substantial holdings in
may agree with a developer to purchase a piece of land forming part
a company will have to be disclosed based on the regulations
of a larger piece of land held under a master title in the name of the and to the relevant regulatory authorities (being Bursa
developer. In such an instance, it would be common for the Malaysia Securities Berhad, or the Securities Commission
purchaser to create security by assigning all of its rights to the Malaysia (“SC”), as applicable) if they so require; and
property under the relevant sale and purchase agreement. In order (b) charging the beneficial interest in the shares by way of an
for such an assignment to constitute an absolute assignment in law, equitable charge. It should be noted that an equitable charge
amongst other things, the assignment would have to be in writing will be subordinate to any prior equitable interest of a third
and notice of the assignment given to the relevant counterparty. party in the shares, and technically will be defeated by a
Security over plant, machinery and equipment would typically be in transfer of legal title to the shares to a subsequent bona fide
purchaser for value without notice of the equitable charge.
the form of a fixed charge (created, e.g., by way of a specific

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As mentioned above, for a legal mortgage, the shares would have to

be transferred to a separate “pledged securities account”. It would 2.8 Are any regulatory or similar consents required with
be customary for the parties to execute a charge document setting respect to the creation of security over real property
(land), plant, machinery and equipment (e.g. pipeline,
out the terms and conditions governing the mortgage. In the case of whether underground or overground), etc.?
an equitable charge, the parties would again typically execute a
charge document, but the shares would remain in the account of the
The restrictions on interest and express conditions of use running
chargor or its custodian.
Malaysia

with the land will be expressly stated on the issue document of title
of the real property. Such conditions may include that the approval
2.6 What are the notarisation, registration, stamp duty of the relevant state authority is required before any security may be
and other fees (whether related to property value or created over that real property. The application for such approval
otherwise) in relation to security over different types involves the submission of a prescribed form to the relevant land
of assets (in particular, shares, real estate,
office together with certain supporting documents, and the process
receivables and chattels)?
may take between two to six months depending on a number of
factors including where the real property is situated.
Where the security is created by a company incorporated under the
Companies Act 2016 (the “Companies Act”), the security would In addition, under the Malaysian foreign exchange administration
have to be registered with the Companies Commission of Malaysia rules (the “FEA Rules”) administered by BNM, a Malaysian
(the “CCM”) within 30 days from the date such security is created. resident may require the prior approval of BNM to grant financial
Insofar as a security created by a company incorporated under the guarantees (as defined in the FEA notices issued by BNM and
Labuan Companies Act 1990 is concerned, the security would need includes a security interest) in favour of, or obtain financial
to be registered with the Labuan Financial Services Authority (the guarantees from, non-residents under certain prescribed
“LFSA”) within 30 days from the date such security is created. circumstances. Although an application to obtain the prior approval
of BNM does not require any fee and can be done online vide
It is fairly common for a charge document to contain a power of
BNM’s online portal, the timeframe may take between two to six
attorney in favour of the chargee. The signing of the charge
months depending on the complexity of the financing and the
document by the chargor would have to be attested by certain
entities involved. Generally, where no prior approval was required,
prescribed persons in accordance with the Powers of Attorney Act
but the amount of the financial guarantee exceeds the equivalent of
1949. The charge document would also have to be registered with:
RM50 million, details of the financial guarantee would need to be
the High Court of Malaya to validly create a power of attorney
registered with BNM within seven business days from the date such
which has effect in West Malaysia; and the subordinate courts of
financial guarantee takes effect.
Labuan if it is in relation to property and is intended to be exercised
within Labuan.
The relevant charge document, and each power of attorney, would 3 Security Trustee
also need to be stamped in accordance with the Stamp Act 1949.
Where security is to be created over real property under a Land 3.1 Regardless of whether your jurisdiction recognises
Statute, as mentioned above, the charge documents together with the concept of a “trust”, will it recognise the role of a
certain prescribed supporting documents would need to be security trustee or agent and allow the security
presented to the appropriate land authority for the purposes of trustee or agent (rather than each lender acting
creating a legal charge under that Land Statute. separately) to enforce the security and to apply the
proceeds from the security to the claims of all the
lenders?
2.7 Do the filing, notification or registration requirements
in relation to security over different types of assets Yes, it is fairly common for a security trustee or agent to be
involve a significant amount of time or expense?
appointed to act on behalf of a syndicate of lenders in syndicated
financings or bondholders/sukuk-holders in issuance of private debt
Registrations of security with the CCM and the LFSA, and securities.
registrations of powers of attorney with the High Court of Malaya
The role, rights and obligations of the security trustee or agent may
and subordinate courts of Labuan, are fairly straightforward and do
be documented by way of a security agency agreement or security
not involve a substantial registration fee.
trust deed. The application of enforcement proceeds is typically
Insofar as stamping is concerned, where the loan is a Ringgit based on a pre-agreed waterfall.
Malaysia-denominated loan, the stamp duty payable on a principal
instrument would be stamped ad valorem, which currently is 0.5%
of the principal amount of the loan. If the loan is denominated in 3.2 If a security trust is not recognised in your
foreign currency, the stamp duty payable on a principal instrument jurisdiction, is an alternative mechanism available
(such as a parallel debt or joint and several creditor
would be capped at RM500.
status) to achieve the effect referred to above which
Any secondary instrument to be stamped in connection with the loan would allow one party (either the security trustee or
would attract nominal stamp duty in the amount of RM10 for each the facility agent) to enforce claims on behalf of all the
document stamped. In addition, stamp duty of RM10 would be lenders so that individual lenders do not need to
chargeable in relation to any power of attorney contained in such enforce their security separately?
document.
A parallel debt structure is not common in Malaysia as it creates
The stamping process would generally take between a day to two
separate debt obligations between the borrower and the security agent,
weeks depending on the mode of stamping and the number of
which may attract additional stamp duty, etc. Although a joint and
documents involved.
several creditor structure is doable, the preferred approach would be to
have a security agency or trust arrangement in place as discussed above.

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(a) an automatic moratorium on dispositions of property and

4 Enforcement of Security execution proceedings;
(b) the imposition of a six-month “clawback” period preceding
4.1 Are there any significant restrictions which may the commencement of winding-up, during which transactions
impact the timing and value of enforcement, such as may be set aside as “fraudulent preferences”; and
(a) a requirement for a public auction or the (c) a re-ordering of ranking in relation to floating charges and
availability of court blocking procedures to other certain categories of preferred debt.

Malaysia
creditors/the company (or its trustee in
In addition, under Malaysian insolvency law, a secured creditor is
bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents? not entitled to any interest in respect of his debt after the making of
a winding-up order against a corporate debtor, if the creditor does
not realise his security within six months from the date of the
The enforcement of security created over real property under a Land
winding-up order.
Statute would need to comply with the applicable 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 5.2 Are there any preference periods, clawback rights or
continuing for at least one month, the chargee may serve a statutory other preferential creditors’ rights (e.g. tax debts,
notice of default (which is in a form prescribed under the National employees’ claims) with respect to the security?
Land Code 1965) on the chargor specifying the breach in question
and requiring it to be remedied within a certain time period which Secured creditors can enforce their security and they generally stand
must not be less than one month therefrom. Where the breach has outside the winding-up process. In the event that their security is
not been remedied within the remedy period provided in such inadequate, the secured creditor can submit proof of their remaining
notice, the chargee may then apply for an order for sale of the debt to claim in priority over other creditors.
charged real property in accordance with the National Land Code In addition, proceeds derived from the enforcement of legal charges
1965. created over real property would need to be applied in accordance
with the provisions of the relevant Land Statute.
4.2 Do restrictions apply to foreign investors or creditors Insofar as clawback periods are concerned, under Malaysian
in the event of foreclosure on the project and related insolvency law, certain transactions (including the creation of
companies? charges and other security) within the six-month period prior to the
commencement of winding-up are vulnerable to being set aside as
Generally, a foreign entity may enforce security granted to it in “fraudulent preferences” which will be void against the liquidator of
accordance with the usual processes in Malaysia. However, there the company.
are restrictions which would apply where certain charged assets are
to be acquired by foreign entities.
5.3 Are there any entities that are excluded from
For instance, under section 433B of the National Land Code 1965, bankruptcy proceedings and, if so, what is the
the prior approval of the state authority is required for land or any applicable legislation?
interest therein (including a lease) to be sold to a foreign entity
unless the land is subject to the category “industry” or to any Yes, certain regulated entities are subject to industry-specific
condition requiring its use for industrial purposes. legislation which sets out the extent to which bankruptcy
Please note, however, that even if section 433B approval is not proceedings can be commenced against such entities.
required, the land may still be subject to an express condition or These include financial institutions, investment banks and insurers
restriction in interest requiring that the prior approval of the state licensed under the Financial Services Act 2013 (the “FSA”) or the
authority be obtained for a sale to foreign interests (or, in some cases, Islamic Financial Services Act 2013 and trust companies falling
to any party). Land searches need to be conducted to ascertain if under the purview of the Trust Companies Act 1949. In addition,
such conditions or restrictions in interest exist on the land. there are specific legislation to regulate the insolvency process of
In addition to the above, there may be foreign equity ownership specific institutions with a “public interest” element such as
restrictions in place in respect of assets within certain industry electricity licensees under the Electricity Supply Act 1990 and the
sectors as highlighted below. Stock Exchange under the Capital Markets and Services Act 2007.

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

5.1 How does a bankruptcy proceeding in respect of the Yes, in certain instances depending on the nature of the charged
project company affect the ability of a project lender assets and form of security created. For example, the enforcement
to enforce its rights as a secured party over the of an equitable mortgage over shares may be by exercise of a power
security? of attorney which entitles the attorney to sell the shares by way of a
private treaty, with the creditor typically looking towards the
Under the Companies Act, upon the issuance of a winding-up order original share certificates and signed transfer forms deposited by the
by the Malaysian courts, the winding-up of the company concerned chargor as part of the security. In any event, the exercise of such
will be deemed to commence upon the date of filing of the relevant remedies are subject to the equity of redemption once the liabilities
petition to wind up the company. have been paid in full.
The grant of a winding-up order has major implications on secured In addition, a debenture holder may possess the power to appoint a
creditors and security arrangements in three main areas: receiver or receiver and manager over the charged assets. Even after

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the winding-up of the company, the debenture holder would be over the years, foreign equity restrictions have been lifted to allow
entitled to enforce its charge over such charged assets. 100% foreign ownership of projects. However, foreign equity
restrictions are still in place to protect certain sectors of strategic
importance, including energy, oil and gas, information technology
5.5 Are there any processes other than formal insolvency
proceedings that are available to a project company and telecommunications.
to achieve a restructuring of its debts and/or In the oil and gas sector for example, any foreign company that
Malaysia

cramdown of dissenting creditors? wishes to participate in upstream or downstream activities in

Malaysia is required to submit a licensing or registration application
Yes. to PETRONAS through a local company appointed to act as its
A voluntary reorganisation may be carried out by way of a scheme exclusive agent or through a joint venture company formed with a
of arrangement in accordance with section 366 of the Companies local company or individual. Such local company or joint venture
Act. A scheme of arrangement is essentially a court-approved company must also comply with minimum Bumiputera
compromise or arrangement between a company and its creditors participation requirements. The percentage of participation required
(or any class of creditors). differs depending on the type of services to be provided.
PETRONAS has issued a list of standardised work and equipment
In addition, the Companies Act introduced two new corporate
categories where the minimum Bumiputera participation percentage
rescue mechanisms in the form of a corporate voluntary
ranges from 30% to 100%.
arrangement (the “CVA”) and judicial management. The CVA is
largely similar to a scheme of arrangement although the primary With the recent focus on RE, as announced by the Ministry of
difference lies in that there is minimal court supervision for the Energy, Science, Technology, Environment and Climate Change,
duration of the restructuring. Under the judicial management Malaysia targets to scale up the contribution of RE in the national
mechanism, a company, its directors or a creditor may apply to the power mix from 4% to 20% by year 2025, it is pertinent to note
Malaysian courts to place the management of the company in the foreign equity restrictions in this sector as well. The Feed-in Tariff
hands of an insolvency practitioner to act as the judicial manager. system, which is an economic policy that 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
5.6 Please briefly describe the liabilities of directors (if solar, and the Large-Scale Solar Photovoltaic Plant programme,
any) for continuing to trade whilst a company is in
which is Malaysia’s programme for solar photovoltaic plants with
financial difficulties in your jurisdiction.
capacities of between 1MWac and 100MWac, both restrict foreign
equity shareholding to a maximum of 49%. On the other hand, the
Although there are no express statutory provisions providing for the government has not restricted foreign equity shareholding for
interests of creditors to supersede those of the shareholders in the event companies registered as a Solar PV Investor for the Net-Energy
of insolvency, there is a common law rule that upon the insolvency of Metering scheme, which is a mechanism where excess RE is
the company, the interests of the creditors would override the interests exported to the Grid to offset part of the electricity bill, provided that
of the shareholders. Thus, the directors may be in breach of their duties certain conditions are complied with, such as appointing a 100%
to the creditors where they continue to commit acts that jeopardise the local contractor registered with the Sustainable Energy
financial position of the company in liquidation. Development Authority of Malaysia as the relevant Engineering,
When a company is subject to winding-up proceedings, any officer Procurement and Construction contractor.
of the company who is knowingly a party to a transaction, with no The fees payable by a foreign-owned company may vary depending
expectation that the company would be able to pay the resulting on the sector. For example, in the RE sector, the annual fees payable
debt, may be subject to civil and criminal liability. The officer may under the Net-Energy Metering Programme differ for local and
be subject to criminal prosecution for insolvent trading pursuant to foreign companies.
section 539(3) of the Companies Act. This is an offence which
attracts an imprisonment term not exceeding five years or a fine not Corporate taxation of companies in Malaysia also varies according
exceeding RM500,000 or both upon conviction. In addition, the to the foreign shareholding of the company. A foreign company
court on application of the liquidator or any creditor may, if the refers to a company with more than 50% shareholding owned by
court thinks proper so to do, declare that the officer be personally foreigners. Foreign companies are taxed at a flat rate while local
responsible without any limitation of liability for the payment of the companies are taxed on a sliding scale from a lower rate.
whole or part of the debt.
Separately, where any directors or officers of the company carry on 6.2 Are there any bilateral investment treaties (or other
business with the intent to defraud the creditors of the company or international treaties) that would provide protection
from such restrictions?
for any fraudulent purpose, they may be liable for fraudulent trading
under section 540 of Companies Act and made personally
responsible, without any limitation of liability, for all or any of the To date, Malaysia has executed approximately 61 bilateral
debts or other liabilities as the court may direct. investment treaties which are still in force to promote a conducive
environment for investments and to provide protection for foreign
investment.
6 Foreign Investment and Ownership The bilateral investment treaties serve, among other things, to
Restrictions 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 provide
6.1 Are there any restrictions, controls, fees and/or taxes
protection from the restrictions in question 6.1 above.
on foreign ownership of a project company?

Through progressive liberalisation of various sectors in Malaysia

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permits for the processing of crude petroleum, natural gas and

6.3 What laws exist regarding the nationalisation or manufacture of petroleum and petrochemical products while the
expropriation of project companies and assets? Are Ministry of Domestic Trade and Consumer Affairs is responsible for
any forms of investment specially protected?
regulating the marketing and distribution of such petroleum and
petrochemicals products.
Generally, the assets of project companies are protected under
Under the Gas Supply Act 1993, the EC is the primary regulator for
Article 13 of the Federal Constitution 1957 which provides that no

Malaysia
activities involving the supply of gas through pipelines and related
person shall be deprived of property save in accordance with the
matters, such as the importation into regasification terminals,
law, and no law shall provide for the compulsory use or acquisition
regasification, shipping, transportation, distribution, retail or use of
of property without adequate compensation.
gas.
For example, the Land Acquisition Act 1960 provides that a state
(c) Manufacturing
authority may acquire any land which is needed:
The Malaysian Investment Development Authority (“MIDA”) is the
(a) for any public purpose;
federal agency responsible for the promotion of the manufacturing
(b) by any person or corporation for an economic development
and services sectors in Malaysia. Some of MIDA’s key roles are the
which is deemed to be beneficial to the Malaysian public; or
issuance of manufacturing licences, implementation of tax
(c) for mining, residential, agricultural, commercial, industrial or incentives, and duty exemptions on raw materials, components,
recreational purposes,
machinery and equipment.
subject to payment of compensation in accordance with the market (d) Minerals
value.
The federal government is empowered pursuant to the Mineral
The bilateral investment treaties referred to in question 6.2 above Development Act 1994 (“MDA”) to inspect and regulate mineral
are typically referred to as “Investment Guarantee Agreements” in exploration and mining-related issues whereas each state pursuant
Malaysia. In general, such agreements would include a guarantee to its own legislation (i.e. State Mineral Enactment (“SME”)) is
against expropriation or nationalisation of foreign investments empowered to issue mineral prospecting and exploration licences
except if for public purpose and accompanied by adequate and mining leases.
compensation.
The MDA is enforced by the Department of Mineral and Geoscience
As such, there is no form of investment that is specially protected. of Malaysia whilst the administration of the SME is undertaken by
As long as there is provision of adequate compensation and it is for the office of the State Director of Land and Mines.
public purpose, the Malaysian government has the right to acquire
(e) Telecommunications
such assets. To date, there have been no reported cases of
nationalisation or expropriation of project companies and/or assets The telecommunications sector in Malaysia is regulated by the
in Malaysia. Malaysian Communications and Multimedia Commission (the
“Commission”) under the Communications and Multimedia Act
1998. Provision of network facilities and network services in Malaysia
7 Government Approvals/Restrictions would require individual and class licences issued by the Commission.

7.1 What are the relevant government agencies or 7.2 Must any of the financing or project documents be
departments with authority over projects in the typical registered or filed with any government authority or
project sectors? otherwise comply with legal formalities to be valid or
enforceable?
The relevant government agencies or departments having authority
over projects in Malaysia vary depending on the relevant sectors. Generally, no. However, there are certain approvals required or
legal formalities imposed by the legislation for sector-specific
(a) Energy (including RE)
project documents.
The Energy Commission (“EC”) is the primary regulator of the
For example, section 29(4) of the Electricity Supply Act 1990
energy sector in Peninsular Malaysia and Sabah while Tenaga
provides that any agreement made between licensees under section
Nasional Berhad is the distribution licensee holding exclusive rights
29(1) for the supply of electricity shall be approved by the EC.
to generate, transmit and distribute electricity in Peninsular
Therefore, project companies in the energy sector are to obtain such
Malaysia and Sabah. As for Sarawak, the exclusive licence to
EC approval prior to executing any agreement for the supply of
generate, transmit and distribute electricity is held by Syarikat
electricity in Malaysia.
SESCO Berhad which is wholly owned by Sarawak Energy Berhad,
the primary regulator of the energy sector in Sarawak.
For the RE sector, the Sustainable Energy Development Authority 7.3 Does ownership of land, natural resources or a
of Malaysia is a statutory body formed for the purpose of pipeline, or undertaking the business of ownership or
operation of such assets, require a licence (and if so,
implementing and managing RE schemes (i.e. Feed-in Tariff and can such a licence be held by a foreign entity)?
Net-Energy Metering programmes) created to reduce Malaysia’s
energy reliance on imported fuels.
Land
(b) Oil and Gas
Land acquisition by non-citizens or foreign companies is governed
PETRONAS has been vested with the ownership and control of by section 433B of the National Land Code 1965 which provides
petroleum resources in Malaysia pursuant to the Petroleum that all land acquisition of land in Peninsular Malaysia by non-
Development Act 1974 (“PDA”). For all upstream activities, citizens or foreign companies shall be subject to prior approval of
PETRONAS is the sole regulator responsible for issuance of the relevant state authority in which certain conditions may be
approvals whereas for downstream activities, the Ministry of imposed. Any dealings in contravention of section 433B will be
International Trade and Industry is responsible for the issuance of treated as null and void.

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Natural Resources
7.7 Can project companies establish and maintain
Natural resources (except petroleum) are generally owned by each onshore foreign currency accounts and/or offshore
relevant state in Malaysia. A foreign entity may apply to the accounts in other jurisdictions?
relevant state authority for mineral prospecting, exploration or
mining leases. Each state authority has the right to impose
A resident entity is free to open and maintain a foreign currency
conditions along with the issuance of any leases. There are also
account with a licensed onshore bank or non-resident financial
Malaysia

restrictions in place for foreign entities to procure such licences.

institution.
Petroleum
Pursuant to the PDA, PETRONAS is the sole owner of all oil and 7.8 Is there any restriction (under corporate law,
gas resources in Malaysia. A foreign entity may explore, develop exchange control, other law or binding governmental
and produce such oil and gas resources owned by PETRONAS only practice or binding contract) on the payment of
via production sharing contracts entered into with PETRONAS. dividends from a project company to its parent
company where the parent is incorporated in your
Pipeline
jurisdiction or abroad?
Specific licences or permissions from the regulators may be required
depending on the purpose of the pipeline. For example, prior written Generally, there are no restrictions under Malaysian law provided that
permission from the Department of Occupational Safety and Health the parent company is not situated in a sanctioned jurisdiction and the
(“DOSH”) is required for the transportation of petroleum by repatriation does not contravene applicable anti-money laundering laws
pipelines under the Petroleum (Safety Measures) Act 1984 and its and regulations. In addition, it should be noted that, as per the
subsidiary legislation. Separate permissions are required for the Companies Act, dividends may only be paid out of available profits and
installation and operation of said pipelines, respectively. if the project company will remain solvent immediately after the
Another example is the licence required from EC under the Gas distribution is made. The project company would be regarded as solvent
Supply Act 1993 for, inter alia, transportation of gas via pipeline. if the company is able to pay its debts as and when the debts become due
However, section 11B(2)(b) of the Gas Supply Act 1993 provides within 12 months immediately after the distribution is made.
that such licence will not be granted to any person who is not In addition, it is fairly common for lenders to restrict the company
incorporated in Malaysia or does not have a place of business in from declaring dividends to its shareholders under the finance
Malaysia, except for a licence for the import into a regasification documents until such time the liabilities have been paid in full or
terminal. upon certain project milestones being achieved.

7.4 Are there any royalties, restrictions, fees and/or taxes

7.9 Are there any material environmental, health and
payable on the extraction or export of natural
safety laws or regulations that would impact upon a
resources?
project financing and which governmental authorities
administer those laws or regulations?
Typically, royalties and taxes payable on the extraction of natural
resources are revenue-based. For example, royalties payable in Environmental Law
respect of petroleum are based on the volume or value of petroleum
The Department of Environment is the federal agency responsible
extracted, and generally the royalties payable are 10% of the gross
for administering and enforcing the Environmental Quality Act
production for petroleum.
1974 (“EQA”) being the principal legislation relating to the
Further, mine operators also pay value-based royalty to the state prevention, abatement and control of pollution and enhancement of
where their mining operation is located. The royalty rate, in general, the environment.
is 5% of the value of the mineral extracted but may vary depending
Pursuant to the EQA, prior written permission of the Director
on the mineral commodity, and as assessed by the relevant state.
General of Environmental Quality is required for projects that may
involve:
7.5 Are there any restrictions, controls, fees and/or taxes (1) certain prescribed premises and prescribed conveyances;
on foreign currency exchange?
(2) the erection of an incinerator, fuel burning equipment and a
chimney;
Pursuant to the FEA notices, a resident and non-resident may
(3) the emission or discharge of any environmental hazardous
generally buy or sell Malaysian Ringgit against foreign currency substances; and
with a licensed money services business (e.g. a money changer) on
(4) disposing any scheduled wastes.
a spot basis or with licensed onshore banks.
In addition, there is a requirement on the project company to submit
an environmental impact assessment report (“EIA”) in order to
7.6 Are there any restrictions, controls, fees and/or taxes obtain an EIA approval from the Director General prior to the
on the remittance and repatriation of investment
commencement of any prescribed activity under the EQA. Failing
returns or loan payments to parties in other
jurisdictions? which, section 34A(8) provides that such persons would be liable to
a fine not exceeding RM500,000 or to imprisonment for a period not
exceeding five years or to both and to a further fine of RM1,000 for
A non-resident is allowed to repatriate funds from Malaysia,
every day that the offence is continued after a notice by the Director
including any income earned or proceeds from divestment of
General has been served upon him.
Malaysian Ringgit assets, provided that the repatriation is made in
foreign currency. In addition, the Director General may issue a prohibition or stop-
work order on prescribed activities that have commenced without
In addition, there may also be withholding tax considerations as
the approval of the Director General or when any condition of the
discussed below.
EIA approval has been violated.

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Health and Safety Law (4) Government Contracts Act 1949

DOSH is the federal agency responsible for administering and The Government Contracts Act 1949 empowers the respective
enforcing the Occupational Safety and Health Act 1994 (“OSHA”) Ministers in the respective ministries to enter into contracts and also
being the principal legislation for securing the safety, health and empowers the respective ministers to delegate powers to
welfare of persons at work, for protecting others against risks to safety Government Officers to enter into contracts on behalf of the
or health in connection with the activities of persons at work and to government.

Malaysia
establish the National Council for Occupational Safety and Health. (5) Treasury Circular Letters
Pursuant to the OSHA, every employer is to ensure the safety, health Treasury Circulars are issued from time to time to inform, clarify,
and welfare at work of all his employees and to notify the nearest implement, improve and amend certain policies, rules and procedures
occupational safety and health office of any accident, dangerous whenever required by the government and financial authorities.
occurrence, occupational poisoning or occupational disease which (6) Federal Central Contract Circulars
has occurred or is likely to occur at the place of work.
Federal Central Contract Circulars are issued to inform the users on
In the event an occupational safety and health officer is of the the availability of common user items which are centrally
opinion that a place of work, plant, substance or process is likely to purchased. The Central Contract Circulars normally contain details
cause immediate danger to life or property, he is empowered to such as items, names of suppliers, areas of supply and time of
serve a prohibition notice prohibiting the use or operation of the delivery. Apart from procurement principles and objectives, most
place of work, plant, substance or process until such time that any often the Central Contracts objectives are to promote local products
danger posed is removed and the defect made good to the and develop vendors.
satisfaction of the officer.
(7) Competition Act 2010
The stop-work order or prohibition notice under the EQA and OSHA
The Competition Act 2010 (“CA”) is administered and enforced by
respectively, if issued, would cause delays to a project which would
the Malaysian Competition Commission. Pursuant to section
potentially affect a project company’s ability to finance its debts.
4(2)(d) of the CA, any horizontal agreement between project
companies with the objective of bid rigging is strictly prohibited.
7.10 Is there any specific legal/statutory framework for
procurement by project companies?
8 Foreign Insurance
There is no specific legal/statutory framework governing procurement
in the private sector; however, the relevant government agencies may
8.1 Are there any restrictions, controls, fees and/or taxes
impose conditions, for example those relating to the use of local on insurance policies over project assets provided or
contractors and local content for materials and equipment under the guaranteed by foreign insurance companies?
relevant licences or permits.
As for public procurement by the government, project companies The insurance industry is regulated under the FSA which caters, inter
that wish to participate in the tender for government projects must alia, for the licensing and regulation of insurance business in Malaysia.
be registered with the Ministry of Finance and/or the Ministry of Section 8(1)(a) of the FSA provides that no person may carry on any
Works. Public procurement in Malaysia is decentralised whereby insurance business unless it is duly licensed under the FSA. In that
such procurement exercises are delegated to the relevant regard, whether or not a licence is required for a foreign insurance
procurement agencies. company to provide insurance coverage over a local project would
The legislations pertaining to public procurement are as follows: depend on the circumstances of the case and availability of
(1) Financial Authority sufficient insurance cover locally.
For the federal government, the financial authority is vested with the
Minister of Finance and the Secretary-General of the Ministry of 8.2 Are insurance policies over project assets payable to
Finance with directions from the Minister. In the case of State foreign (secured) creditors?
Governments, the financial authority is vested with the respective
Chief Ministers, and the respective State Financial Officers with Yes provided that, where the insurance proceeds are denominated in
directions from the respective Chief Ministers. The financial Malaysian Ringgit, such proceeds are converted into foreign
authority in Local Authorities and Statutory Bodies is vested with currency onshore before being remitted offshore.
the respective Chairpersons and the Councils or the Board of
Directors. All government agencies must comply with the
procurement laws and regulations pursuant to the acts, letters and 9 Foreign Employee Restrictions
circulars below.
(2) Financial Procedure Act 1957 9.1 Are there any restrictions on foreign workers,
The Financial Procedure Act 1957 (Revised 1972) provides for the technicians, engineers or executives being employed
control and management of the public finances of Malaysia and by a project company?
outlines financial and accounting procedures. It includes
procedures for the collection, custody and payment of the public Yes. Generally, foreign workers from certain countries may only be
monies of Malaysia and of the states, and also the purchase, custody employed in certain prescribed sectors in Malaysia. Skilled
and disposal of public property and related matters. professionals like engineers on the other hand may generally be
(3) Treasury Instructions employed provided the requisite work permits are obtained in
accordance with the Immigration Act 1959/63 of Malaysia.
The Treasury Instructions detail out financial and accounting
procedures and encompass the regulations that need to be adhered to In addition, the project company would need to comply with the
in the management of government funds including procurement. provisions of the Employment Act 1955 of Malaysia with respect to

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 Rahmat Lim & Partners Malaysia

foreign employees to which that Act applies (e.g. any person, multiple forms of corruption including corruptly procuring the
irrespective of his occupation, whose wages do not exceed withdrawal of tenders pursuant to section 20 of the MACCA. The
RM2,000 a month). MACCA also caters for extraterritorial jurisdiction where offences
of corruption committed outside of Malaysia by citizens or
permanent residents of Malaysia may be dealt with as if these were
10 Equipment Import Restrictions committed in Malaysia pursuant to section 66 of the MACCA. The
penalty for an infringement of the Act typically results in
Malaysia

imprisonment or a fine or a combination of both.

10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by In addition, the Malaysian Penal Code makes it an offence for a
construction contractors? public servant to obtain any gift from a person involved in any
proceeding or business transacted by him or her. A public servant
Import duty may be levied on importation of project equipment commits an offence if he or she accepts any gratification other than
pursuant to the Customs Act 1967 and Customs Duties Order 2017. his or her legal remuneration in respect of an official act. Taking a
Pursuant to the Customs (Prohibition of Imports) Order 2017, gratification by corrupt or illegal means to influence a public servant
certain project equipment may require certificates of approval or or taking gratification for the exercise of personal influence with a
exemption letters issued by either the Construction Industry public servant is equally an offence.
Development Board or the Ministry of International Trade and The provisions of the Anti-Money Laundering, Anti-Terrorism
Industry. Financing and Proceeds of Unlawful Activities Act 2001 provides
for the tracing of corruption proceeds. This Act is extraterritorial as
10.2 If so, what import duties are payable and are it applies to any property, whether it is situated in or outside of
exceptions available? Malaysia. The offence of money laundering is punishable by a fine
not exceeding RM5 million or imprisonment not exceeding five
The Customs Duties (Exemption) Order 2017 provides the list of years or both.
persons and goods exempted from paying duty. An importer will be
exempted for customs duty provided that: 13 Applicable Law
(1) the goods are imported for supply to any Federal or State
Government Department;
(2) they are used solely by the Government Department 13.1 What law typically governs project agreements?
concerned and are not sold or otherwise disposed of except as
sanctioned by the head of the department concerned; Project agreements relating to projects located in Malaysia are
(3) their cost is charged to a departmental vote appearing in the typically governed by the laws of Malaysia.
Federal or State Estimates and are not purchased out of any
other funds; and
13.2 What law typically governs financing agreements?
(4) every application for exemption is accompanied by a
certificate from the head of the relevant department that the
goods are authorised to be imported on his behalf and are for The financing agreements would be typically governed by the laws
supply to his department at a price exclusive of customs duty of Malaysia.
in accordance with the terms of contract.
13.3 What matters are typically governed by domestic law?
11 Force Majeure
For enforcement purposes, issues as to the creation and existence of
interests in assets located in or registered in Malaysia, and as to the
11.1 Are force majeure exclusions available and transfer of such assets, would generally stand to be determined by
enforceable?
Malaysian law. In addition, the applicable Land Statute would be
determined on where the real property is situated.
There is no general concept of force majeure in Malaysia. However,
the common law doctrine of frustration is recognised in Malaysia
and is governed by the Contracts Act 1950. Section 57(2) of the 14 Jurisdiction and Waiver of Immunity
Contracts Act 1950 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, 14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable?
becomes void when the act becomes impossible or unlawful”.

Yes, provided that the submission and waiver is made in good faith
12 Corrupt Practices and is not contrary to public policy. In any event, where the
Malaysian courts have jurisdiction over a dispute, the Malaysian
court may in appropriate cases nonetheless exercise its residual
12.1 Are there any rules prohibiting corrupt business jurisdiction to determine the matter if it determines that Malaysia is
practices and bribery (particularly any rules targeting
a more appropriate forum for determination of the matter and the
the projects sector)? What are the applicable civil or
criminal penalties? ends of justice will be better served by the dispute being determined
in Malaysian courts.
Yes. The Malaysian Anti-Corruption Commission Act 2009 (the
“MACCA”) is the principal legislation which deals with the

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investing in the manufacturing sector, high technology companies

15 International Arbitration
and strategic projects amongst others, and applications for incentives
are generally assessed by the Malaysian Industrial Development
15.1 Are contractual provisions requiring submission of Authority. As part of Malaysia’s effort to further develop green
disputes to international arbitration and arbitral technology, Malaysia has also introduced various tax incentives for
awards recognised by local courts? the green sector such as investment tax allowance for the purchase of
green technology assets, income tax exemption and tax incentive for

Malaysia
Yes, provided that the provisions comply with the Arbitration Act green technology services.
2005. 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 Malaysian courts or
15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution acted on by any public officer unless such instrument has been duly
conventions? stamped.

Yes, Malaysia is a contracting state to the New York Convention as 18 Other Matters
well as the Vienna Convention on the Law of Treaties.

18.1 Are there any other material considerations which

15.3 Are any types of disputes not arbitrable under local
should be taken into account by either equity
law?
investors or lenders when participating in project
financings in your jurisdiction?
Generally, under the Arbitration Act 2005, any dispute which the
parties have agreed to submit to arbitration under a valid and Generally, depending on the nature of the project, various licences,
binding arbitration agreement may be determined by arbitration consents or approvals from the relevant public authorities and bodies
unless the agreement is contrary to public policy. would need to be obtained by the project company over the course of
the project. In that regard, equity investors and lenders would have to
15.4 Are any types of disputes subject to mandatory take into account the time required for the project company to liaise
domestic arbitration proceedings? and engage with such authorities and bodies, and ensure that such
licences, consents or approvals are obtained as and when required.
No, there are not.
18.2 Are there any legal impositions to project companies
issuing bonds or similar capital market instruments?
16 Change of Law / Political Risk
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market
instruments.
16.1 Has there been any call for political risk protections
such as direct agreements with central government or
political risk guarantees? The Malaysian capital markets fall within the purview of the SC,
which is a self-funded statutory body entrusted with the
There have been no such measures that have been made publicly responsibility to regulate and develop the Malaysian capital market.
available in recent times. The SC has wide regulatory functions including:
(a) approving authority for corporate bond issues;
(b) regulating all matters relating to securities and futures
17 Tax contracts;
(c) licensing and supervising all licensed persons; and
17.1 Are there any requirements to deduct or withhold tax (d) ensuring proper conduct of market institutions and licensed
from (a) interest payable on loans made to domestic persons.
or foreign lenders, or (b) the proceeds of a claim Issuances of private debt securities are regulated by the Capital
under a guarantee or the proceeds of enforcing
Markets and Services Act 2007 as well as the guidelines issued by
security?
the SC from time to time.

All payments by a Malaysian tax resident to a person who is not tax

resident in Malaysia may be subject to withholding tax at a rate of 19 Islamic Finance
15% or such other rate having effect by virtue of any applicable tax
treaty. A company is tax resident in Malaysia if its management and
control are exercised in Malaysia. 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.
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What Generally, an Istisna’a instrument coupled with an Ijarah
taxes apply to foreign investments, loans, mortgages
arrangement is the common form of structure used in large-scale
or other security documents, either for the purposes
of effectiveness or registration? project financings in Malaysia. 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 specifications on
Malaysia offers a wide range of investment incentives for companies
an agreed date at a pre-determined sale price.

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 Rahmat Lim & Partners Malaysia

In a typical structure (particularly for sukuk issuances), the project

company would enter into an Istisna’a arrangement with the 19.2 In what circumstances may Shari’ah law become the
financiers (which may be vide a special purpose vehicle depending governing law of a contract or a dispute? Have there
been any recent notable cases on jurisdictional
on the mode of financing) whereby the project company would issues, the applicability of Shari’ah or the conflict of
agree to procure the completion of the project assets and deliver the Shari’ah and local law relevant to the finance sector?
project assets to the financiers at a pre-determined time and price.
The financiers (as lessor) and project company (as lessee) would
Malaysia

In Malaysia, although Shari’ah principles generally fall under the

then enter into an Ijarah arrangement whereby the project company
jurisdiction of the Malaysian Shari’ah courts, the law relating to
would lease the relevant project assets from the financiers for a pre-
finance, trade, commerce and industry falls within the jurisdiction
determined period with the payment of an agreed lease rental.
of the Malaysian civil courts. In that regard, although a commercial
In a Wakala structure, the financiers would appoint the project contract may not be expressed to be governed under Shari’ah law
company to act as their agent (Wakeel) to procure the construction per se, to the extent the subject matter of that contract relates to
and delivery of the project assets. The project company (as matters involving Shari’ah concepts, such matters may be
customer) would utilise the financing obtained from the financiers determined in accordance with recognised Shari’ah principles as
to arrange for the construction of the project. Profits derived from construed in accordance with Malaysian civil law.
the project assets would be distributed between the project company
In addition, with respect to proceedings before the courts of
and the financiers based on a pre-agreed rate, with the proceeds paid
Malaysia, the courts may refer queries concerning Islamic financing
to the financiers being applied towards the financing. Once the
to the Shari’ah Advisory Council of BNM, and queries concerning
financing has been paid in full, the project assets would be
Islamic capital market business or transactions to the Shari’ah
transferred to the project company based on a pre-agreed
Advisory Council of the SC, for determination. Any ruling made by
arrangement.
the relevant Shari’ah Advisory Council would be binding on the
On the other hand, Murabaha instruments, which are typically parties to that proceeding.
structured in Malaysia to include a Tawarruq arrangement, involves
a sale and purchase arrangement whereby goods are sold with an
19.3 Could the inclusion of an interest payment obligation
agreed profit margin. Such structures are usually used in other
in a loan agreement affect its validity and/or
forms of financing (such as for acquisition or working capital enforceability in your jurisdiction? If so, what steps
facilities) as the subject matter of the Murabaha transaction would could be taken to mitigate this risk?
have to be identified upfront and in existence at such time. An
Istisna’a arrangement, as discussed above, would be a more
The inclusion of an interest payment obligation is generally
appropriate structure particularly where the project is still in its
common in conventional financing arrangements.
development phase.
However, the imposition of Riba (Usury) is prohibited for Shari’ah-
compliant financings. Fee-based, profit-based or sale-based
arrangements are alternative structures which may be used in
Shari’ah-compliant financings.

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Rahmat Lim & Partners Malaysia

Dzuhairi bin Jaafar Thani Syed Rashid bin Rahim Alsree

Rahmat Lim & Partners Rahmat Lim & Partners
Suite 33.01 Level 33 Suite 33.01 Level 33
The Gardens North Tower, Mid Valley City The Gardens North Tower, Mid Valley City
Lingkaran Syed Putra, 59200 Kuala Lumpur Lingkaran Syed Putra, 59200 Kuala Lumpur
Malaysia Malaysia

Malaysia
Tel: +603 2299 3808 Tel: +603 2299 3861
Email: [email protected] Email: [email protected]
URL: www.rahmatlim.com URL: www.rahmatlim.com

Dzuhairi has extensive experience advising on railway and highway Rashid is a Partner in the Financial Services Department of Rahmat
infrastructure projects, and the development and construction of Lim & Partners.
buildings, including oil and gas-related infrastructure and facilities.
His principal area of practice is banking and finance. He has acted for
He has advised on various engineering, procurement, construction financial institutions and major corporates on a wide spectrum of
and commissioning contracts, including those for railway systems, financing transactions including domestic and cross-border bilateral
refinery and petrochemical plants, and other oil and gas-related and syndicated loans, acquisition and project financing, aviation
facilities, and has also advised on the development and construction of financing, Islamic financing and debt restructuring. He also advises on
commercial buildings. companies and securities laws, as well as assisting financial
institutions in the development of a variety of structured products.
He has also advised on civil aviation laws and regulations, including
those pertaining to the purchase, sale and leasing of commercial Prior to joining Rahmat Lim & Partners, he was a practising accountant
passenger aircraft. and was an associate member of the Association of Chartered
Certified Accountants. He also holds a Diploma in Islamic Finance
Dzuhairi has been recognised as a Leading Individual in Real Estate
certified by the Chartered Institute of Management Accountants.
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 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.

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 Chapter 26

Mozambique
Teresa Empis Falcão

Vieira de Almeida and

Guilherme Daniel & Associados Guilherme Daniel

terms of real GDP growth, in 2018, real GDP grew from about 3.5%
1 Overview
to 4%; in 2019, the real GDP is expected to grow from about 4% to
4.5%. This recovery is expected to be supported by additional
1.1 What are the main trends/significant developments in reductions in interest rates in the face of the favourable inflation
the project finance market in your jurisdiction? scenario. Inflation is expected to decline to 5.5% in 2019 (inflation
remained low at 6.5% in 2018). Moreover, the exchange rate is
Mozambique expects to see the announcement of the final expected to remain stable in 2019, with the dollar costing between
investment decision (FID) for one of the biggest gas projects in the MT 58 and MT 60.
Rovuma basin in the second quarter of 2019. The LNG project Unfortunately, this slow recovery is still not enough to attract
developed by the US oil company Anadarko will become the largest foreign direct investment, which fell by 26% in 2017 to USD 2.3
project finance carried out to date in Mozambique and one of the billion. Thus, the country’s ability to attract new investments will be
largest on the African continent. based almost exclusively on its capacity to explore its potential in
Relevant changes were introduced to the legal framework related to natural resources.
the financing of projects with the enactment at the end of 2018 of
Law no. 19/2018, of 28 December 2018, that establishes the legal 1.2 What are the most significant project financings that
framework for security over movables and creates the Central have taken place in your jurisdiction in recent years?
Registry for Security over Movables (Central Registry Office).
This law is aimed at promoting access to financing through the The most significant project financings in Mozambique in recent
institutionalisation of a framework that clarifies and broadens the years are the Nacala Corridor Railway and Port Project (the Nacala
scope of security over movable assets and rights, on the one hand, Project), the Coral South Floating LNG Project (the Coral Project)
and that improves legal safety and ensures a greater publicity of the and the Moatize-Macuse Railway and Port Project (the Moatize
information on such security, on the other hand. Railway and Port Project).
The government also amended the Petroleum Operations The Nacala Project was signed in November 2017 by and between
Regulation to exempt international concessionaires from registering the Japanese Mizuho Bank, Ltd. alongside the Japan Bank for
with the Mozambique Stock Exchange, this obligation applies only International Cooperation, the African Development Bank and nine
to national concessionaires and, in view of the devaluation of the other private financial institutions and the four project companies
metical (MT), updates the required value to equal to or higher than established in Mozambique and Malawi by Vale S.A. and Mitsui &
MT 40 million for the purposes of a public tender, with the required Co, Ltd. in connection with project finance loans in the total amount
value for the execution of operations now amended to MT 80 of USD 2.73 billion. The project connects the Moatize coal mine
million. developed by Vale S.A. and Mitsui & Co, Ltd. in the northern
In general, similar to last year, Mozambique has not witnessed any Mozambican province of Tete to the port of Nacala through a part of
other relevant developments in the project finance area. This was Malawi and will enable rail and ship transport of produced coal up
due to the IMF maintaining its position regarding the suspension of to a volume of 18 million tonnes per annum (MTPA).
financial assistance to Mozambique, which has had a major impact The Coral Project is the first project to reach the FID in the
on the economy, leading to the country being unable to initiate its development of the gas resources discovered in the Rovuma basin.
recovery process. On a recent visit to Mozambique, the IMF said The USD 4.675 billion financing of the Coral South Floating
the suspension will continue for as long as there are no significant Liquefied Natural Gas (FLNG) project in offshore Mozambique to
developments or at the conclusion of the investigation related to be developed by Italian oil and gas firm Eni and its partners closed in
illegal debts. It is important to note that relevant progress was made May 2017. In this co-venture partnership, ExxonMobil owns a
by the Attorney General Office (“Procuradoria Geral da 35.7% interest in Eni East Africa S.p.A. (to be renamed Mozambique
República”) in recent months with regard to the aforementioned Rovuma Venture S.p.A.), which holds a 70% interest in Area 4, and
investigations. is co-owned by Eni (35.7%) and CNPC (28.6%). The remaining
The Mozambican economy maintained its gradual recovery. interests in Area 4 are held by Empresa Nacional de Hidrocarbonetos
Inflation declined rapidly, from a peak of 26% in November 2016 to E.P. (10%), Kogas (10%) and Galp Energia (10%). The FLNG unit
about 6% in June 2018, reflecting the tight monetary policy, will have a capacity of around 3.4 MTPA and will be the first FLNG
exchange rate stability and the slowdown in food price increases. In in Africa. The construction of the FLNG facilities will be financed

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under a project finance structure covering around 60% of its entire Specific perfection requirements may apply depending on the type
cost. The financing agreement has been subscribed by 15 major of movable at stake.
international banks and guaranteed by five export credit agencies. The Movables Security Law also creates the Central Registry
The Moatize Railway and Port Project was awarded to Thai Office, which is tasked with recording the information in connection
Moçambique Logística, a joint venture between Thailand-based with the security over movables and centralising the information in

Mozambique
Italian-Thai Development Company with a 60% share, the local connection with certain property and rights subject to registration.
State-owned ports and railways company Portos e Caminhos de The Central Registry Office has not yet started to operate.
Ferro de Moçambique (better known as CFM) with a 20% share and Note that, as ruled by Decree-Law no. 29 833, of 17 August 1939, in
a local private-sector consortium Corredor do Desenvolvimento the case of mercantile pledge (penhor mercantil) granted as security
Integrado do Zambeze (Zambeze Integrated Development Corridor, of banking credit facilities, the physical possession of the pledged
generally known by the acronym CODIZA) with a 20% share. The goods is not required in order for the pledge to be fully valid and
project, which would originally connect Moatize and Macuse and effective.
would run for 500 kilometres, was amended in November 2017 to
Real estate assets are subject to mortgages which need to be granted
extend the railway for a further 120 kilometres west of Moatize to
by public deed before a notary and must be registered with the
Chitima. The Macuse port will be designed to accommodate ships
competent registration office.
of up to 80,000 tonnes, and annual exports are expected to start at 25
MTPA, eventually increasing to 100 MTPA.
The projected cost of the project is around USD 2.7 billion (USD 2.2 Can security be taken over real property (land), plant,
machinery and equipment (e.g. pipeline, whether
810 million for the port and the remainder for the railway) and the
underground or overground)? Briefly, what is the
financing package is expected to complete during the course of procedure?
2018.
Under the laws of Mozambique, land cannot be privately owned
2 Security and, accordingly, cannot be mortgaged. Land and its associated
resources are the property of the State.
The Land Law (Law no. 19/97 of 1 October), however, grants
2.1 Is it possible to give asset security by means of a
private persons the right to use and benefit from the land known as
general security agreement or is an agreement
required in relation to each type of asset? Briefly,
Direito do Uso e Aproveitamento da Terra (DUAT). Although the
what is the procedure? land itself cannot be owned, all assets built on the land in association
with the DUAT can be owned and consequently mortgaged (in case
of immovable assets) and pledged (movable assets), including any
It is indeed possible to give security over movable assets and rights
machinery or equipment.
(movables) by means of a general security agreement.
Even though the Mozambican Civil Code does not expressly
The legal framework of security over movables changed
provide for the possibility of creation of factory mortgages,
considerably with the enactment of Law no. 19/2018, of 28
reference to those mortgages is made in the Land Register Code and
December 2018 (the Movables Security Law). The Movables
there are precedents of factory mortgages having been successfully
Security Law applies to pledges, mortgages over vehicles subject to
created and registered in Mozambique, covering project facilities
registration, assignments of credits by way of security, financial
and all machinery, equipment and other movable property located
leases, conditional bills of sale/equitable charges, retention of title
therein.
clauses and to other legal transactions tantamount to creating
security over movables located in Mozambique by a Mozambican
security provider. 2.3 Can security be taken over receivables where the
Under the Movables Security Law, any type of movables, parts or chargor is free to collect the receivables in the
absence of a default and the debtors are not notified
ideal fractions of a movable or all movables owned by a security
of the security? Briefly, what is the procedure?
provider, either specific or generic, present or future (in this later
case, security only becomes effective when the security provider
According to the Movables Security Law, security can be taken over
acquires rights over the relevant movable or becomes entitled to
current and future receivables by means of a written agreement
dispose of it), tangible or intangible, may be given in security,
between the security provider and the secured creditor under which,
provided that they can be disposed of for consideration at the time of
in order to ensure effectiveness of the security against third parties,
the creation of security.
the possession of the receivables must be transferred to the secured
The security interests must be created by means of a written creditor. Security over receivables shall be registered with the
agreement between the security provider and the secured creditor. Central Registry Office.
No public deed is required. Security interests may also be created
It is common for the secured creditor to authorise the security
verbally, when publicity is completed upon transfer of possession.
provider to continue to collect the receivables in the absence of a
The security interests become effective as between the parties
default and the third-party debtor to continue to carry out the
immediately upon being created. As for the effectiveness of security
relevant payments to the security provider until notice to the
against third parties, the new framework sets forth three publication
contrary.
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 2.4 Can security be taken over cash deposited in bank
movable to the creditor or a third party; or (iii) through a control accounts? Briefly, what is the procedure?
agreement, if the security is created over a bank account, a securities
and brokered financial assets account, as defined in a separate Security can be taken over cash deposited in bank accounts by
regulation. means of a written agreement between the security provider and the

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secured creditor. The execution of a control agreement will be

required in order for it to be effective against third parties. 2.8 Are any regulatory or similar consents required with
Generally, the secured creditors will grant a mandate to the security respect to the creation of security over real property
(land), plant, machinery and equipment (e.g. pipeline,
provider for him to operate the relevant bank account in the absence whether underground or overground), etc.?
of a default.
Mozambique

Security over cash deposited in bank accounts shall be registered Generally, the creation of security over assets which are in the
with the Central Registry Office. The bank records should also private domain does not require any regulatory or similar consent.
record the security interest and the mandate in favour of the security Conversely, the creation of security over assets in the public domain
provider. is prohibited.
It should be noted that restrictions may be imposed regarding the
2.5 Can security be taken over shares in companies creation of security over concession or regulated assets, notably
incorporated in your jurisdiction? Are the shares in through specific regulations or the relevant concession agreements.
certificated form? Briefly, what is the procedure?

In a limited liability company by shares (sociedade anónima), the 3 Security Trustee

creation of security is made by written agreement between the
parties and, where shares are represented by physical certificates,
3.1 Regardless of whether your jurisdiction recognises
requires the endorsement of the share certificates by the security
the concept of a “trust”, will it recognise the role of a
provider, the registration of the pledge in the company’s share security trustee or agent and allow the security
register book and the deposit of the share certificates with the trustee or agent (rather than each lender acting
financial intermediary used by the company to register itself and its separately) to enforce the security and to apply the
shares. If the shares are bearer shares, the creation and perfection of proceeds from the security to the claims of all the
security is made by delivery of the shares to the secured creditor. lenders?
Security must be registered at the Central Securities Depository
(Central de Valores Mobiliários) operating in the Stock Exchange The concept of a “trust” is not recognised in Mozambique. It is,
and at the Central Registry Office. however, common to have security granted to a security agent on
In a limited liability company by quotas, where the shareholding is behalf of the lenders; in which case, even if the relevant agreements
not materialised in share certificates (sociedade por quotas), expressly spell out that the security agent holds security for the
security is created by means of a written agreement between the benefit of a given lending syndicate, the security agent shall appear
parties and prior consent of the company in which quotas are being as the sole beneficiary of the security entitlements and shall be the
given in security is required. Security must be registered at the sole entity with the authority to file enforcement procedures in
Legal Entities Register Office and at the Central Registry Office. respect thereof (unless all lenders are disclosed as holders thereof).
Hence, in the context of the enforcement procedures, the security
agent may be required to prove before a court that it holds title to the
2.6 What are the notarisation, registration, stamp duty secured obligations.
and other fees (whether related to property value or
otherwise) in relation to security over different types
of assets (in particular, shares, real estate, 3.2 If a security trust is not recognised in your
receivables and chattels)? jurisdiction, is an alternative mechanism available
(such as a parallel debt or joint and several creditor
The costs of public notary and registration fees, if and when status) to achieve the effect referred to above which
would allow one party (either the security trustee or
applicable, vary according to the secured amount and number of
the facility agent) to enforce claims on behalf of all the
pages of the deed or private document. lenders so that individual lenders do not need to
Stamp duty on security is charged at 0.3% of the total amount enforce their security separately?
secured, unless those security interests are ancillary and created
simultaneously with a loan, and the loan has already been subject to The only way to have all the lenders recognised as beneficiaries of a
a similar taxation (no duplication of tax applies). given security interest is to name them as holders of the secured
The stamp duty rate on loans vary, as follows: 0.03% for loans with obligations and corresponding security. However, this makes it
a maturity of less than a year; 0.4% for loans with a maturity of more necessary to amend the relevant agreement (or execute a new
than a year; and 0.5% for loans with a maturity equivalent to or more notarial deed) each time the lenders assign, buy or sell part of the
than five years. loans, which may not be a practical solution. Alternatives may be
put in place, as is the case where the security agent is made the
registered beneficiary of the security and either benefits from a
2.7 Do the filing, notification or registration requirements parallel debt or is made contractually bound to assign the secured
in relation to security over different types of assets
obligations to all the lenders prior to enforcement of the security.
involve a significant amount of time or expense?
Other alternatives include having the entire lending syndicate
registered as secured creditors but with proper intercreditor
Filing, notification and registration procedures before the competent
arrangements in place (setting up the rules for action by individual
authorities normally do not take more than 20 days.
creditors and for allocation of the proceeds of security
Expenses vary in accordance with the value of the asset but, in any enforcement).
event, the amount is not significant.

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4 Enforcement of Security 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?
4.1 Are there any significant restrictions which may
impact the timing and value of enforcement, such as
The declaration of insolvency results in all debts being accelerated

Mozambique
(a) a requirement for a public auction or the
availability of court blocking procedures to other and all assets being collected and sold to pay creditors. The
creditors/the company (or its trustee in creditors are paid with the proceeds of the sale in the following
bankruptcy/liquidator), or (b) (in respect of regulated order: (i) labour credits; (ii) secured credits; (iii) tax credits; (iv)
assets) regulatory consents? ordinary credits; (v) contractual and tax penalties; and (vi)
subordinated credits.
The enforcement of a mortgage by the creditor can only be achieved When different security interests are granted over the same asset, the
through a judicial proceeding. first (older or higher ranking) creditor shall be paid first, except in
As for security over movables, the sale can be completed judicially the case of the right of retention which entitles creditors to hold
or, if previously agreed by the parties, through a private sale. The certain assets in their possession until their credit is paid. Credits
new Movables Security Law allows for appropriation or foreclosure with a right of retention have preference over common credits
of movables by the secured creditors. secured by pledges and mortgages regardless if the pledges and
It is common practice to grant an irrevocable power of attorney to mortgages were created first.
the creditor pursuant to which the creditor is authorised to sell the
secured asset on behalf of the security provider and be paid from the 5.3 Are there any entities that are excluded from
proceeds of the referred sale. bankruptcy proceedings and, if so, what is the
Court procedures usually take several months or in certain cases applicable legislation?
more than a year. That period may be further extended if the
complexity of the legal arguments at stake leads to court appeals. The insolvency regime is applicable to all persons or legal entities,
except for public companies and entities, insurance companies,
Please refer to section 5 below for restrictions concerning
credit institutions, as well as financial corporations which are
insolvency/bankruptcy and restructuring proceedings.
subject to specific insolvency rules and proceedings in the
respective regimes.
4.2 Do restrictions apply to foreign investors or creditors
in the event of foreclosure on the project and related
companies? 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?
All transactions with and/or between Mozambican and non-
Mozambican persons or legal entities is subject to either registration
As referred to in the answer to question 5.2 above, a creditor may
or prior authorisation with the Bank of Mozambique or both,
retain possession of the assets pertaining to a certain entity if it is in
depending on the transaction at stake. In case of foreclosure, the re-
the possession of such assets and if the claim arises from expenses
exportation of the invested capital is subject to authorisation by the
or damages caused by such assets.
Bank of Mozambique.

5.5 Are there any processes other than formal insolvency

5 Bankruptcy and Restructuring proceedings that are available to a project company
Proceedings to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?

5.1 How does a bankruptcy proceeding in respect of the The Insolvency Law also provides for the judicial and extrajudicial
project company affect the ability of a project lender
recovery processes (Decree-Law no. 1/2013, of 4 July).
to enforce its rights as a secured party over the
security? The judicial recovery can only be initiated by the debtor by filing a
petition with the court. If accepted by the court, the debtor must
The Insolvency Law (Decree-Law no. 1/2013, of 4 July) in submit a recovery plan to the court showing evidence of the viability
Mozambique establishes a suspension regarding all ongoing claims of the business, a detailed description of the recovery process and
against the debtor, following the opening of an insolvency the proposed recovery measures. If the plan is accepted by the court
proceeding. This means that all proceedings that were ongoing are and not challenged by any creditor, the plan is approved and the
suspended when the insolvency/judicial recovery is declared. In the restructured claims of the company (i.e. new rights and obligations
case of judicial recovery, the law establishes a 180-day “stay set out in the plan, after sale of assets, if applicable) shall be binding
period”, after which the right of creditors to start or continue their on the debtor and creditors. If, on the other hand, the plan is
actions and executions, regardless of the court decision, is challenged, a general meeting of creditors must be convened and the
reinstated. plan approved by more than 50% of all creditors to bind all
creditors.
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 The extrajudicial recovery is also initiated by the debtor. This
insolvency proceedings by either the judge in the new proceedings procedure is a special mediation procedure in which the recovery
or by the debtor himself. However, those new proceedings can plan is negotiated with the creditors, according to the rules of
never be other insolvency proceedings, because the law prohibits conciliation and mediation provided for in Law no. 11/99, of 8 July
the filing of new insolvency proceedings against the same debtor. – the Arbitration, Conciliation and Mediation Regime. If the plan is

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approved by creditors representing 3/5 or more of the total amount

7 Government Approvals/Restrictions
of credits, a recovery agreement is deposited in a judicial court and
such agreement shall in effect constitute an enforcement order,
subject to specific performance and grounds for declaring 7.1 What are the relevant government agencies or
insolvency should the credits not be paid. departments with authority over projects in the typical
Mozambique

project sectors?
5.6 Please briefly describe the liabilities of directors (if
any) for continuing to trade whilst a company is in The governmental agencies or departments with authority over
financial difficulties in your jurisdiction. projects depend mainly on the relevant sector of activity of a project.
In general terms, the respective Ministries (energy, infrastructure,
Directors may remain in office, supervised by the insolvency transport, health, etc., and, when applicable, environment) are
administrator, whilst the insolvency proceedings are pending. They responsible for the launch, licensing and major regulation of the
may, however, be dismissed where they have contributed to the projects, either directly or through their governmental departments.
worsening of the economic situation of the company. In this context, the most relevant authorities with authority over
projects are: the National Institute of Mining (INAMI); the National
Institute of Petroleum (INP); the Ministry of Land Environment and
6 Foreign Investment and Ownership Rural Development (MITADER); the Agency for the Promotion of
Restrictions Investments and Exports (APIEX); and the Bank of Mozambique.

6.1 Are there any restrictions, controls, fees and/or taxes 7.2 Must any of the financing or project documents be
on foreign ownership of a project company? registered or filed with any government authority or
otherwise comply with legal formalities to be valid or
enforceable?
The Mozambican Commercial Code does not require companies to
reserve a percentage of their shareholdings to local partners.
Obligations set out in financing or project documents of a private
However, for compliance purposes with the rules on local content in
nature are only enforceable before the courts after being
certain sectors such as oil and gas and mining regarding hiring
authenticated or certified by a notary or by any competent authority.
nationals, only companies with most of the share capital held by
Financing contracts entered into with foreign entities are subject to
Mozambican persons or legal entities (i.e. 51% or more of share
prior authorisation of the Bank of Mozambique.
capital) are considered Mozambican companies.
An exception is made to finance contracts for amounts equivalent or
less than USD 5 million and which satisfy the following conditions:
6.2 Are there any bilateral investment treaties (or other (i) the interest rate is less than the base lending rate for the relevant
international treaties) that would provide protection
currency; (ii) the sum of the relevant rate and margin is not more
from such restrictions?
than the rate used in Mozambique; and (iii) the repayment period is
at least three years or more. Those financings are treated as pre-
Even though Mozambique is a party to several bilateral investment authorised and subject only to registration.
treaties with other nations (South Africa, Germany, Algeria,
Belgium, China, Cuba, Denmark, Egypt, USA, Finland, France, Shareholder and intercompany loans made by non-residents to their
Italy, Mauritius, the Netherlands, Portugal, Sweden, the United resident subsidiaries or affiliates will also be treated as pre-
Kingdom, Vietnam, India, Switzerland, Spain and Zimbabwe), none authorised and subject only to registration if: (i) they are interest-
of those treaties provide protection from foreign ownership free, the repayment period is at the latest three years and no fees and
restrictions imposed under sector-specific legislation. other charges apply; or (ii) the interest rate is lower than the base
lending rate for the relevant currency, the repayment period is a at
least three years and the loan amount is a maximum of USD 5
6.3 What laws exist regarding the nationalisation or million. Note that, in those cases, registration relates to each
expropriation of project companies and assets? Are disbursement amount received by the entity in Mozambique within
any forms of investment specially protected?
the pre-authorised finance contract and to each repayment of
principal made thereunder. Payments of interest and fees or charges
Nationalisation is governed by Decree-Law no. 5/76, of 5 February under or in connection with finance contracts qualify as current
1976, which determines the reversion to the State of all income from transactions and are not subject to registration.
buildings as well as those that were abandoned. With the
Financing or project documents executed by public entities may be
implementation of this law, the Mozambican State began to provide
subject to approval by the Administrative Court to become effective.
housing to citizens for very low prices, as symbolic amounts. Even
though this piece of legislation has not been revoked, it has only Special rules apply in case of the exploration and production
been applied immediately after national independence as it does not concession contracts in the Rovuma basin under Decree-Law no.
conform to the current reality in Mozambique. 2/2014, of 2 December 2014.
The Constitution of Mozambique provides that any property right
may be expropriated in case of public necessity, utility and interest, 7.3 Does ownership of land, natural resources or a
and compensation shall be payable to the property owner. pipeline, or undertaking the business of ownership or
operation of such assets, require a licence (and if so,
Also, the Land Law establishes that DUAT may be revoked on can such a licence be held by a foreign entity)?
grounds of public interest, upon payment of a compensation to the
DUAT holder. In those cases, all assets and improvements that exist
In general terms, the performance of economic activities in
on the land revert in favour of the State.
Mozambique is subject to licensing. Also, the granting of the right

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of use of an asset in the public domain is admissible through a

concession regime. 7.7 Can project companies establish and maintain
onshore foreign currency accounts and/or offshore
It should be noted that certain activities in sectors such as oil and gas accounts in other jurisdictions?
and mining are kept to companies in which the majority of the share
capital is held by Mozambican persons or legal entities (i.e. 51% or
The opening and operation of onshore foreign currency and offshore

Mozambique
more of the capital).
bank accounts is authorised for exporters, companies or organisations,
Please note that there is no private ownership of land in employees of international companies or organisations and all entities
Mozambique. that generate or receive foreign currency. The opening of bank
accounts by any other legal entities requires prior authorisation by the
7.4 Are there any royalties, restrictions, fees and/or taxes Bank of Mozambique.
payable on the extraction or export of natural
resources?
7.8 Is there any restriction (under corporate law,
exchange control, other law or binding governmental
The extraction or export of natural resources are subject to the practice or binding contract) on the payment of
payment of Corporate Income Tax, Value-Added Tax and other dividends from a project company to its parent
taxes levied under the tax regime applicable to mining and oil and company where the parent is incorporated in your
jurisdiction or abroad?
gas activities, as applicable.
Petroleum Production Tax is levied on oil and gas produced in each
Dividend payments are subject to a 20% withholding tax, unless
concession area and is due by corporate entities performing
said dividends concern shares listed on the Mozambique Stock
petroleum operations under a concession agreement. The tax rate is
Exchange, in which case the withholding tax is 10%. These tax
10% for oil and 6% for gas and is levied on the value of the oil and
rates may be reduced by the application of a tax treaty and are not
gas produced and may be paid in cash or in kind.
applied in case of dividends paid to a Mozambican company that
The following rules and taxes apply to mining activities: (i) Tax of has held 25% or more of the share capital in an associated company
Mining Production (IPM); (ii) Surface Tax (ISS); (iii) Tax in Income in Mozambique for at least two years. Mozambique has tax treaties
Deriving from Mineral Sources (IRRM); and (iv) special rules to with Portugal, Mauritius, the United Arab Emirates, South Africa,
determine the taxable income under Personal Income Tax Corporate India and others.
Income Tax. IPM taxes rates vary between 8% for diamonds, 6% for
precious metals, precious and semi-precious stones and heavy sands,
3% for basic metals, charcoal, ornamental rocks, etc. and 1.5% for 7.9 Are there any material environmental, health and
safety laws or regulations that would impact upon a
sand and stone, and are levied on the value of the extracted mineral
project financing and which governmental authorities
product after treatment. ISS is due annually and is levied on the administer those laws or regulations?
mining area of exploration. The rate varies between MT 17.50/ha (MT
per hectare) and MT 105,00.00/ha, depending on the whether they
Pursuant to Decree 54/2015, of 31 December 2015, any activity
relate to the first year of prospecting and research or the sixth year
which may affect the environment is subject to an evaluation of the
onwards of the mining concession, respectively, and are levied on the
potential impact (an environmental impact assessment) to determine
number of hectares of the area subject to a mining title (prospering
its environmental feasibility, which concludes with the issuance of
licence, research, mining concession or mining certificate).
an Environmental Licence.
The IRRM tax rate is 20% on the cash earnings accumulated during
Occupational health and safety in Mozambique is governed, in
the year, determined according to specific rules.
general terms, by the Constitution and the Labour Law. Special
legislation may apply to specific activities, e.g. Legislative Diploma
7.5 Are there any restrictions, controls, fees and/or taxes 120/71, of 13 November 1971 (for Civil Engineering), Legislative
on foreign currency exchange? Diploma 48773, of 5 July 1973, Provincial Decree 61/ 73, of 20
November 1973 (for Industrial Establishments), Decree 61/2006, of
All transactions between resident and non-resident entities in 26 December 2006 (for geological and mining activities), Decree
Mozambique, which result or may result in payments or receipts 13/2015, of 3 July 2015 (for mining activities), and Decree 28/2016,
from abroad, are subject to the exchange control legislation which of 18 July 2016 (for production, transportation and commercialisation
may or not require prior authorisation of the Bank of Mozambique of cement).
depending on the nature of the relevant transaction.
7.10 Is there any specific legal/statutory framework for
7.6 Are there any restrictions, controls, fees and/or taxes procurement by project companies?
on the remittance and repatriation of investment
returns or loan payments to parties in other Mozambique’s general procurement terms from the Regulation on
jurisdictions?
the Contracting of Public Works, and Procurement of Goods and
Services by the State (Decree 5/2016, of 8 March 2016), are
Approved foreign investments projects can remit and repatriate applicable to all State bodies and institutions, including local
investment returns. Such remittances are concluded through the government and companies owned by the State. The Regulation
local banking system and upon obtaining tax clearance from the includes a general mechanism (public tender) and an exceptional
Ministry of Finance. contracting mechanism (limited call for tenders by prior
A 20% withholding tax is charged on both interest and fees paid to qualification, limited call for tenders, two-stage tender, tender by
non-resident lenders. Where applicable, Value-Added Tax is also auction, small tender, tender by means of quotes and direct award).
due at the rate of 17% on the total income from services rendered for Sector-specific legislation (mainly in natural resources) and the
consideration in Mozambique. mega-projects legislation also include procurement rules and

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principles of mandatory application, generally accommodating

10 Equipment Import Restrictions
similar procurement rules or contracting methods (public tender,
restricted tender, two-stage tender and direct award).
Special rules apply for activities and services under the exploration 10.1 Are there any restrictions, controls, fees and/or taxes
and production concession contracts in the Rovuma basin in on importing project equipment or equipment used by
Mozambique

accordance with Decree-Law no. 2/2014, of 2 December 2014. construction contractors?

Goods entering into Mozambique for use in the country must be

8 Foreign Insurance cleared through the appropriate customs procedures such as (i)
temporary importation, (ii) temporary exportation, (iii) re-
importation, (iv) re-exportation, (v) customs transit, (vi) storage,
8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or (vii) industrial free zones, and (viii) customs warehousing.
guaranteed by foreign insurance companies? Certain products are excluded from entry under some of these regimes.
This is the case for the importation of left-hand drive vehicles used for
Mozambican law generally requires insurance to be provided by commercial purposes in Mozambique which is prohibited.
local insurers. Because of the small local insurance market, entities Other prohibitions and import restrictions apply based on health and
can obtain insurance with foreign insurers where it is not possible to moral grounds and in compliance with international conventions to
insure with local insurance companies and provided that prior notice which Mozambique is a party, including prohibitions under the
is given to the regulator – Instituto de Supervisão de Seguros de multilateral environmental agreements to which Mozambique is a party.
Moçambique (ISSM).
Special rules apply for imports in connection with the exploration
Special rules apply for insurances in connection with the and production concession contracts for the Rovuma basin under
exploration and production concession contracts in the Rovuma Decree-Law no. 2/2014, of 2 December 2014.
basin under Decree-Law no. 2/2014, of 2 December 2014.

10.2 If so, what import duties are payable and are

8.2 Are insurance policies over project assets payable to exceptions available?
foreign (secured) creditors?
All goods imported into Mozambican territory are subject to the
Payment of insurance policies contracted offshore by the insured payment of customs duties set forth in the Customs Tariff Book, which
person requires presentation, by the interested parties, of evidence include ad valorem charges, service charges, Specific Consumption
that the necessary approval has been obtained from the competent Tax and Value-Added Tax. Specific rules can be applied to SADC
authority in the country in which the insurance has been taken out, countries. Authorised investment projects and activities under certain
in accordance with applicable legislation. sector-specific legislation may benefit from import duties on the
importation of capital assets (equipment and machinery).
9 Foreign Employee Restrictions Goods imported under the temporary importation regime benefit from a
grace period payment of the relevant customs duties and other import
charges and require the delivery of a bond (the amount varies depending
9.1 Are there any restrictions on foreign workers, on the amount of the customs duties and charges suspended).
technicians, engineers or executives being employed
by a project company?
11 Force Majeure
The regimes for the employment of foreign workers in Mozambique
which generally apply are (i) the quota regime, (ii) the work permit
11.1 Are force majeure exclusions available and
regime, and (iii) the investment projects regime approved by the enforceable?
government.
Under the quota regime, the allowed quotas for foreign employees Even though there is no specific legal provision on the issue, force
are 5% for all workers in large companies, 8% off all workers in majeure is accepted and enforceable in Mozambique under the Civil
medium-sized companies, and 10% of all workers in small Code. In general, project contracts provide for detailed provisions
companies. In all cases, prior notice from the Ministry of Labour of in relation to force majeure events and terms under which the parties
15 days is required. Please note that in case of the exploration and have agreed to mitigate the effects of force majeure, and exclude
production concession contracts for the Rovuma basin under liability for breach of contract resulting from a force majeure event.
Decree-Law no. 2/2014, of 2 December 2014, the quota is the one The terms agreed between the parties in this respect are generally
established in the workforce plan. accepted and enforceable in Mozambique.
The work permit regime (out of quota) will only apply if there are no
Mozambican workers who have the necessary academic or
professional qualifications, or there are qualified but insufficient 12 Corrupt Practices
Mozambican workers.
In the case of investment projects approved by the government, the 12.1 Are there any rules prohibiting corrupt business
quota allowed for foreign workers is that approved for the project. practices and bribery (particularly any rules targeting
The work permit is not required, and notice given within 15 days of the projects sector)? What are the applicable civil or
the date of entry of the foreign workers in the country is sufficient. criminal penalties?

There are no specific rules which apply to corruption and bribery

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Vieira de Almeida and Guilherme Daniel & Associados Mozambique

activities in the projects sector. Nevertheless, entities are subject to requirements and procedures for enforcement of arbitration awards
general criminal law. stated in the New York Convention on the Recognition and
According to the Mozambican Criminal Code and Law no. 6/2004, Enforcement of Foreign Arbitral Awards and provided that they are
extortion, attempted corruption and bribery are prohibited. issued in the territory of another contracting State.
The penalties for bribery and corruption are: imprisonment for up to

Mozambique
eight years; and payment of pecuniary fines. 15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
conventions?
13 Applicable Law
Mozambique is a contracting State to the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards since 1998.
13.1 What law typically governs project agreements?
The Constitution states that international conventions are recognised in
the internal judicial system and have the same force as internal
The Mozambican Civil Code establishes that contracts are governed legislation. Also, the Arbitration Law states that the international
by the law elected by the parties, if such election has a connection with conventions do prevail over the Law and other internal provisions.
the contract or is supported by an interest in good faith of the parties.
Mozambique is also a contracting State to the Washington
If a foreign law is elected in accordance with those rules it will not Convention regarding the Settlement of Investment Disputes
be acceptable if it violates the fundamental principles of between States and Nationals of Other States and the International
Mozambican public policy, and certain Mozambican principles and Centre for the Settlement of Investment Disputes between States
rules that are mandatory for the projects sector. and Nationals of Other States (ICSID), as well as to the Additional
Concession contracts and other project agreements entered with Facility Rules of ICSID approved on 27 September 1978 and is a
public entities are typically governed by general laws and member of the International Chamber of Commerce.
regulations of the Republic of Mozambique and by specific laws
and regulations applicable for the sector where the project will be
15.3 Are any types of disputes not arbitrable under local
implemented. Construction contracts relating to works to be carried
law?
out in Mozambique must always be governed by Mozambican law.
Special rules apply in case of the exploration and production Mozambican law establishes that all disputes are arbitrable, except
concession contracts for the Rovuma basin under Decree-Law no. disputes of a personal nature (e.g. family matters) or disputes that
2/2014, of 2 December 2014. are expressly subject to the exclusive jurisdiction of a judicial court.

13.2 What law typically governs financing agreements? 15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
Financing agreements are typically governed by English law.
Disputes about labour rights and disputes arising out of or in connection
13.3 What matters are typically governed by domestic law? with administrative agreements are subject to domestic arbitration.
Special rules apply in case of the exploration and production
The Mozambican conflict-of-laws rules regulate that rights regarding concession contracts for the Rovuma basin under Decree-Law no.
possession, ownership and other related rights over movable or 2/2014, of 2 December 2014.
immovable assets are governed by the law of where the property is
located. This includes the creation of security over those assets.
16 Change of Law / Political Risk

14 Jurisdiction and Waiver of Immunity

16.1 Has there been any call for political risk protections
such as direct agreements with central government or
political risk guarantees?
14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable?
While direct agreements with the government (in its capacity as
Submission to a foreign jurisdiction and waiver of immunity are grantor in a concession contract) are common, those agreements do
valid and enforceable in Mozambique to the extent permitted by not offer any particular political risk protections.
law. Submission to a foreign jurisdiction is prohibited, regardless of Change-in-law risk is normally addressed by contract in the
contractual provisions, if, in accordance with the Mozambican standard terms for international project finance deals.
mandatory procedural rules, the Mozambican courts have
jurisdiction to decide on a certain matter.
17 Tax

15 International Arbitration
17.1 Are there any requirements to deduct or withhold tax
from (a) interest payable on loans made to domestic
15.1 Are contractual provisions requiring submission of or foreign lenders, or (b) the proceeds of a claim
disputes to international arbitration and arbitral under a guarantee or the proceeds of enforcing
awards recognised by local courts? security?

Arbitral awards are recognised by local courts subject to the A 20% withholding tax is levied on both interest and fees paid to

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 Vieira de Almeida and Guilherme Daniel & Associados Mozambique

non-resident lenders, except where there is a double taxation treaty parties). Other concepts within this framework include the stock
in force between Mozambique and the lender’s home country. The market and over-the-counter market, the latter being a market in
enforcement of security, in general terms, does not trigger any taxes. which supply and demand are dealt with outside the stock market,
However, this must be analysed on a case-by-case basis (e.g. the with the involvement of authorised financial intermediaries.
enforcement of a mortgage, with the subsequent transfer of A limited liability company by shares (sociedades anónimas) may
ownership over real estate property may trigger a 2% Property
Mozambique

issue bonds (designated as corporate bonds) up to the value of their

Transfer Tax – SISA). share capital inscribed in the most recent balance sheet and income
statement, subject to authorisation by general meeting or the board
17.2 What tax incentives or other incentives are provided of directors, as stipulated in the articles of association.
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes 19 Islamic Finance
of effectiveness or registration?

19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha

Mozambique has an attractive regime for foreign investors
instruments might be used in the structuring of an
established in the Mozambican Investment Law, its regulation and Islamic project financing in your jurisdiction.
the Tax Benefits Code. These laws provide a wide range of tax
incentives to attract foreign investment to the country and for which
To the best of our knowledge, there is no experience of Islamic
foreign investors may be eligible, such as deductions from the
project finance in Mozambique, nor are there any finance
amount of tax assessed, accelerated depreciation, tax credits,
instruments structured in accordance with Islamic law.
exemption from tax and the reduction in tax rate and other tax
payments, the deferment of the payment of taxes and other special
tax measures. 19.2 In what circumstances may Shari’ah law become the
governing law of a contract or a dispute? Have there
For the costs and taxes to create any type of securities, please see been any recent notable cases on jurisdictional
question 2.6 above. issues, the applicability of Shari’ah or the conflict of
Shari’ah and local law relevant to the finance sector?

18 Other Matters
See question 19.1 above.

18.1 Are there any other material considerations which

19.3 Could the inclusion of an interest payment obligation
should be taken into account by either equity
in a loan agreement affect its validity and/or
investors or lenders when participating in project
enforceability in your jurisdiction? If so, what steps
financings in your jurisdiction?
could be taken to mitigate this risk?

We believe that the most relevant issues have been addressed. The inclusion of interest payment obligations in a loan agreement is
valid and enforceable in Mozambique.
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 Acknowledgment
requirements for the issuance of capital market
The authors would like to acknowledge the invaluable contribution
instruments.
of Lorna Guilande, an Associate at Guilherme Daniel & Associados,
for her invaluable assistance in the preparation of this chapter.
The capital market in Mozambique covers a primary market (the
Tel: +258 21 498 770 / Email: [email protected]
market for new issues of securities) and a secondary market (the
trading market for previously issued securities between third

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Vieira de Almeida and Guilherme Daniel & Associados Mozambique

Teresa Empis Falcão Guilherme Daniel

Vieira de Almeida Guilherme Daniel & Associados
Rua Dom Luís I, 28 Torres Rani, Av. Tenente Osvaldo Tazama
1200-151 Lisboa Marginal Torre 1, Piso 02, Fracção 05
Portugal Maputo

Mozambique
Mozambique
Tel: +351 21 311 3584
Email: [email protected] Tel: +258 21 498 770
URL: www.vda.pt Email: [email protected]
URL: www.guilhermedaniel.com

Before joining VdA in 2008, Teresa was an Associate with the project Founded Guilherme Daniel & Associados in 2016. As the Founder, he
department at Allen & Overy (London) where she acquired expertise in is actively involved in several matters mainly in Corporate, Energy and
the financing of projects in various jurisdictions. Teresa is a Partner in Natural Resources (particularly, Oil and Gas) and Infrastructure.
VdA’s Infrastructures & Mobility practice and from 2011 to 2014
Provided support to the Ministry of Energy, participated in the drafting
acquired reputation as deputy at the Cabinet of the Secretary of State
of key legal instruments in the downstream petroleum sector
for Infrastructure, Transports and Communications, being responsible
regulation since 2006.
for drafting and reviewing legislation concerning these sectors as well as
leading negotiation teams in the context of the infrastructure PPP review Guilherme holds a Law Degree from the Faculty of Law Eduardo
requested by the bail-out arrangements applying in Portugal between Mondlane (UEM) University, and a Post-graduate Degree in Corporate
2011–2014. Teresa is frequently sought for leading-edge national and Law from the Higher Institute of Science and Technology of
international transactions on project finance transactions and capital Mozambique (ISCTEM).
markets, mainly focused on the infrastructure and energy sectors, due
Guilherme is admitted to the Mozambique Bar Association and is an
to her high expertise. She has extensive experience in overseas
Industrial Property Agent.
markets, particularly in Portuguese-speaking African countries, namely
Mozambique.

Vieira de Almeida (VdA) is a leading international law firm with more than 40 years of history, recognised for its innovative approach and impressive
track record 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 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
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 jurisdictions, 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-Leste
www.vda.pt

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 Chapter 27

Nigeria
Patrick C. Abuka

Abuka & Partners Sunday Edward, Esq.

security agreement. An example of this is All Assets Debenture

1 Overview
which is secured on a floating charge over the whole or a specified
part of a company’s undertaking and assets. Parties can also enter
1.1 What are the main trends/significant developments in separate agreements on each of the assets. The decision whether or
the project finance market in your jurisdiction? not to use a general security agreement for each type of the asset is
that of the parties. Procedurally, there is a need to conduct a search
The main trend/significant development in the project finance market on the asset in question at the appropriate Registry so as to be sure
in Nigeria is the Public Private Partnership (PPP) initiative which is that the asset is unencumbered. If the outcome of the search is
receiving more attention and is seen as the fastest way of resolving satisfactory, parties can then put their understanding in an
social and infrastructure deficit. The Federal and State Governments agreement form and have the agreement signed, sealed and
are calling for PPP collaboration in developing the country. The delivered. Furthermore, if the security is by way of a legal
Kaduna State Government has just signed an MOU with OCIP of mortgage, the same has to be registered with the appropriate
Morocco for the development of a fertilizer plant. Also, the Ondo State Registry.
Government has signed an MOU with Crown Refinery and Petrol
Chemical Ltd for the construction and management of a US$500m 2.2 Can security be taken over real property (land), plant,
modular refinery which will have a capacity of 30,000 barrels per day machinery and equipment (e.g. pipeline, whether
of crude oil. A new deep-seaport is under construction in the Lekki underground or overground)? Briefly, what is the
Free Trade Zone in Lagos and was established through a PPP. Nigeria procedure?
is building the said seaport (and considering two additional facilities)
to ease congestion at the Apapa seaports which currently handle about Yes, security can be taken over real property such as land, plant,
80% of all shipping traffic in the country. Furthermore, the Nigerian machinery and equipment. However, Nigerians prefer to take
National Petroleum Corporation (NNPC) is seeking to realise the security over immovable property, such as landed property, because
Abuja-Kaduna-Kano (AKK) gas pipeline project and is open to the value of this property often appreciates. Security over real
partnerships with State Governments and other stakeholders to ensure property is usually by way of a mortgage. A mortgage can be legal
the fast delivery of the project. or equitable. The procedure for a legal mortgage includes the
creation of the legal mortgage by deed, obtaining the consent of the
Governor of the concerned State to the mortgage, registering the
1.2 What are the most significant project financings that
mortgage with the appropriate Land Registry and having the same
have taken place in your jurisdiction in recent years?
stamped at the Stamp Duties Office of the Federal Inland Revenue
Service (FIRS). The document, in so far as it affects land, must be
Apart from the projects mentioned in question 1.1 above, other
registered with the appropriate Land Registry within six months
significant project financings include Total Nigeria Plc’s Egina oil
from the date thereof otherwise it will be void by law. The
project, which is producing about 150,000 barrels of oil per day, the
mortgagor must also register the particulars of the mortgage with the
₦40bn facility upgrade of Transcorp Hotels Plc, Abuja and the
Corporate Affairs Commission (CAC) (within 90 days), where the
US$9bn integrated refinery and petrochemical complex being
mortgagor is a company. Where there is a failure to register the
constructed by Dangote Group in the Lekki Free Trade Zone, Lagos
same, the mortgage may be held void against any liquidator that
to double Nigeria’s refining capacity and boost activities in the
may be appointed to wind up the company. An equitable mortgage,
downstream sector.
on the other hand, requires no formality and there is no need to
obtain the Governor’s consent thereto.
2 Security
2.3 Can security be taken over receivables where the
chargor is free to collect the receivables in the
2.1 Is it possible to give asset security by means of a absence of a default and the debtors are not notified
general security agreement or is an agreement of the security? Briefly, what is the procedure?
required in relation to each type of asset? Briefly,
what is the procedure?
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
Yes, it is possible to give asset security by means of a general

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Abuka & Partners Nigeria

debtor will normally be notified concerning the security. Whether Deed of Assets – ₦100,000. Vesting Deed – ₦100,000.
the debtor is notified or not concerning the security, the chargor Stamp duty – 0.375% of the secured sum.
cannot become entitled to the receivables unless there is default on
Registration fee for a mortgage or charge at the CAC – 1% of the
the part of the debtor.
secured sum.
Filing of Deed of Release by a public company at the CAC –
2.4 Can security be taken over cash deposited in bank ₦10,000. Filing of Deed of Release by a private company – ₦5,000.
accounts? Briefly, what is the procedure?

Nigeria
Lien fee on shares – 0.25% of the total market value of the shares.
Lien fee subsists for a two-year period from the date of the lien and
Yes, security can be taken over cash deposited in bank accounts.
is renewable from time to time.
This can be by way of an account charge, the terms and conditions
of which are normally contained in an agreement which is to be duly
executed by the parties. The terms and conditions for financing a 2.7 Do the filing, notification or registration requirements
project can include having the debtor’s account domiciled with a in relation to security over different types of assets
given bank and made subject to a charge. The essence of an account involve a significant amount of time or expense?
charge is to assure the creditor of the safety of the receivables and to
guarantee the return of his capital and interest thereon. 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 registration
2.5 Can security be taken over shares in companies
requirements in relation to security over different types of assets
incorporated in your jurisdiction? Are the shares in
certificated form? Briefly, what is the procedure? involve a significant amount of time and expense.

Yes, security can be taken over shares in companies incorporated in 2.8 Are any regulatory or similar consents required with
Nigeria, although banks are not allowed to grant any advances, respect to the creation of security over real property
bonus or credit facilities against the security of their own shares. (land), plant, machinery and equipment (e.g. pipeline,
whether underground or overground), etc.?
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, Yes, the consent of the Governor of the State where the property is
however, that only the shares of public liability companies located is required. There is also a need to register the mortgage or
registered in Nigeria and quoted on the Nigerian Stock Exchange charge with the appropriate Land Registry and to have the same
are acceptable as security for a loan. The shares of private limited stamped at the Stamp Duties Office of the FIRS. The document is
liability companies and public limited liability companies not to be registered with the appropriate Land Registry within six
quoted on the Nigerian Stock Exchange are not acceptable because months from the date thereof. Also, the particulars of the mortgage
they are not freely transferable on the Stock Exchange. or charge must be registered with the CAC (within 90 days), where
the mortgagor is a company. An equitable mortgage, on the other
The procedure for using shares as security or collateral for a loan
hand, requires no formality and there is no need to obtain the
includes creating the said security by way of a mortgage, an
Governor’s consent thereto. See question 2.2 above for more
assignment or a charge, surrendering the original share certificate to
details.
the creditor and having the mortgage, assignment or charge
reflected in the company’s register of members. Where the share
certificates have been dematerialised and their value has been 3 Security Trustee
lodged with the Central Securities System Limited (CSCS), notice
of the assignment or charge must be given to CSCS. The creditor
and debtor must avail CSCS with a copy of their agreement on the 3.1 Regardless of whether your jurisdiction recognises
security. The debtor must also instruct CSCS (in writing) to place a the concept of a “trust”, will it recognise the role of a
lien on the shares and also to transfer the same to the creditor in the security trustee or agent and allow the security
trustee or agent (rather than each lender acting
event of default on his part. The debtor must also give irrevocable
separately) to enforce the security and to apply the
instructions (in writing) to his stockbroker to process the transfer of proceeds from the security to the claims of all the
the shares to the creditor in the event of his default, and the said lenders?
stockbroker must also write a letter of consent to carry out the
debtor’s instructions. Yes. The Nigerian law will allow the security trustee or agent to
enforce the security and to apply the proceeds from the security to
2.6 What are the notarisation, registration, stamp duty the claims of all the lenders, provided the security trustee or agent
and other fees (whether related to property value or follows due process and acts within the confines of the law.
otherwise) in relation to security over different types
of assets (in particular, shares, real estate,
receivables and chattels)? 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
Notarisation of security documents is optional and it attracts a status) to achieve the effect referred to above which
minimal fee. would allow one party (either the security trustee or
Legal mortgage – AGIS (Abuja): registration fee – 1% of the the facility agent) to enforce claims on behalf of all the
lenders so that individual lenders do not need to
consideration; consent fee – ₦10,000; processing fee – ₦10,000;
enforce their security separately?
and counterpart copy – ₦2,000 each.
Legal mortgage at the Land Registry, Lagos: registration fee – 0.5%
This is not applicable in our jurisdiction.
of the consideration.

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 Abuka & Partners Nigeria

who, in any such case, would be entitled to prove for and receive
4 Enforcement of Security
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
4.1 Are there any significant restrictions which may they respectively are entitled to.
impact the timing and value of enforcement, such as Section 37 of the Bankruptcy Act 1979 makes a provision for
(a) a requirement for a public auction or the preferential claims in the case of apprenticeship, meaning that an
availability of court blocking procedures to other apprentice is a preferential creditor in the winding-up of an
Nigeria

creditors/the company (or its trustee in

bankruptcy/liquidator), or (b) (in respect of regulated
insolvent company registered in Nigeria.
assets) regulatory consents? Furthermore, by section 495 of CAMA, preference periods,
drawback rights and other acts relating to the security, such as
Mortgagors, in a bid to stop mortgagees from enforcing the security mortgage, execution and so on, which would, if done by or against
or auctioning the same, always institute actions against the an individual, be deemed in his bankruptcy a fraudulent preference,
mortgagees for a declaration that the mortgagors do not owe the shall, if made or done by or against a company, be deemed, in the
mortgagees up to the amount being claimed by the latter. In a event of its being wound-up, a fraudulent preference of its creditors
situation of this sort, the position of the law is that the action is and be invalid accordingly. Suffice to say that there are no
lacking in merit and one without any reasonable cause. Even though preference periods and the only known clawback or preferential
mortgagors who defaulted in the settlement of their mortgage debts creditors’ right with respect to the security is the preferential claims
may not be entitled by law to restrain the mortgagees from of the apprentice. Section 494 of CAMA only makes provisions for
exercising their right of sale, the mortgagors, by their resort to preferential payments in priority to all other debts of a company in
litigation, may still succeed in delaying the enforcement of the winding-up. These debts include:
security knowing full well that enforcement cannot be carried out a. all local rates and charges due from the company at the
when there is a pending suit. relevant date, and having become due and payable within 12
months before that date, and all pay-as-you-earn tax
deductions, assessed taxes, land tax, property or income tax
4.2 Do restrictions apply to foreign investors or creditors assessed on or due from the company up to the next annual
in the event of foreclosure on the project and related day of assessment before the relevant date, and in the case of
companies? pay-as-you-earn tax deductions not exceeding deductions
made in respect of one year of assessment and, in any other
There are no restrictions except where a court makes an order to stop case, not exceeding the whole one year’s assessment;
enforcement. b. deductions under the Nigeria Social Insurance Trust Fund
Act;
c. all wages or salary of any clerk or servant in respect of
5 Bankruptcy and Restructuring services rendered to the company; and
Proceedings 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.
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 5.3 Are there any entities that are excluded from
security? bankruptcy proceedings and, if so, what is the
applicable legislation?
Once a bankruptcy proceeding is initiated (whether by the debtor or
the creditor), the project lender has to suspend the enforcement of Entities created by legislation, such as the NNPC and the Nigerian
his right as a secured party over the security. Section 413 of the Ports Authority (NPA), are excluded from bankruptcy proceedings.
Companies and Allied Matters Act (CAMA), Cap.C20, Laws of the The applicable legislation is the legislation that created such entities
Federation of Nigeria (LFN) 2004, renders void (unless the court and other legislation that may be passed by the National Assembly
orders otherwise) the disposition of the property of a company that in relation to the entities. Other applicable laws include the
is under winding-up by the court. Section 414 of CAMA further judgments of courts of competent jurisdiction.
provides that where a company is being wound up by the court, any
attachment, sequestration, distress or execution put in force against
5.4 Are there any processes other than court proceedings
the estate or effects of the company after the commencement of the
that are available to a creditor to seize the assets of
winding-up shall be void. the project company in an enforcement?

5.2 Are there any preference periods, clawback rights or Even though schemes of arrangement and compromise under
other preferential creditors’ rights (e.g. tax debts, sections 538 and 539 of CAMA and sections 119–150 of the
employees’ claims) with respect to the security? Investments and Securities Act are available to a creditor in an
enforcement bid, the creditor cannot seize the assets of the project
First and foremost, it is clear from section 493 of CAMA that in the company if the latter chooses not to be bound by the scheme of
winding-up of an insolvent company registered in Nigeria the same arrangement or compromise agreed upon. In that situation,
rules prevail with regard to the respective rights of secured and resorting to litigation and/or court proceedings is the only way out
unsecured creditors and to debts provable and so on as are in force for the creditor. Seizing the assets of the project company amounts
for the time being under the law of bankruptcy in Nigeria with to self-help which is condemnable by law.
respect to estates of persons adjudged bankrupt; and all persons

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Abuka & Partners Nigeria

(production of arms and ammunition and service uniforms,

5.5 Are there any processes other than formal insolvency production and dealing in drugs and so on).
proceedings that are available to a project company
to achieve a restructuring of its debts and/or Furthermore, the Nigerian law, specifically the National Office for
cramdown of dissenting creditors? Technology Acquisition and Promotion Act, requires registration
with the National Office for Technology Acquisition and Promotion
Apart from the formal insolvency proceedings and/or schemes of of all contracts and agreements for the transfer of foreign technology
to Nigerian partners. The contract or agreement is registrable if its

Nigeria
arrangement and compromise in sections 18 and 19 of the
Bankruptcy Act, sections 538 and 539 of CAMA and sections 119– purpose or intent is, in the opinion of the National Office, wholly for,
150 of the Investments and Securities Act that are available to a partially for or in connection with any of the following purposes:
project company to achieve a restructuring of its debts and/or (a) the use of trademarks;
cramdown of dissenting creditors, resorting to litigation, especially (b) the right to use patented inventions;
by way of originating summons or originating application, is (c) the supply of technical expertise in the form of the
another available option for a project company. preparation of plans, diagrams, operating manuals or any
other form of technical assistance of any description
whatsoever;
5.6 Please briefly describe the liabilities of directors (if
any) for continuing to trade whilst a company is in (d) the supply of basic or detailed engineering;
financial difficulties in your jurisdiction. (e) the supply of machinery and plant; and
(f) the provision of operating staff or managerial assistance and
A company is a separate legal entity distinct from its directors and the training of personnel.
the latter, generally, cannot be held liable if the company continues The taxes payable by a foreign company include companies income
to trade whilst in financial difficulties. However, from section 506 tax, withholding tax, value-added tax and education tax.
of CAMA, if the company is in the course of 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 6.2 Are there any bilateral investment treaties (or other
international treaties) that would provide protection
purpose, the court, on the application of the Official Receiver, or the
from such restrictions?
liquidator or any creditor or contributory of the company, may, if it
thinks proper to do so, declare that any persons, including the
We are not aware of any bilateral investment treaties that provide
directors, who were knowingly parties to the carrying on of the
protection from restrictions. However, section 54 (3) (b) of CAMA
business in the manner aforesaid shall be personally responsible,
anticipates that such treaties will come into force when it provides
without any limitation of liability for all or any of the debts or other
thus: “Nothing in this section shall affect the status of any foreign
liabilities of the company.
companies exempted under any treaty to which Nigeria is party.”
Also, from section 503 of CAMA, officers, including directors, of a
company being wound up may be held guilty if, with intent to
defraud or deceive any person, they destroy, mutilate, alter or falsify 6.3 What laws exist regarding the nationalisation or
any books, papers or securities belonging to the company. expropriation of project companies and assets? Are
any forms of investment specially protected?
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 By section 25 (1) of the Nigerian Investment Promotion
of the company’s winding-up or the period between the Commission Act, Cap.N117, LFN 2004, no Government in Nigeria
incorporation of the company and the commencement of the is allowed to nationalise or expropriate project companies. Project
winding-up, whichever is shorter, the directors or other officers of companies, as per section 25 (2) of the Act, are only to be acquired
the company may be held guilty of an offence and be liable upon if their acquisition is in the national interest or for a public purpose
conviction. and under a law which makes provision for:
a. a payment of fair and adequate compensation; and
b. a right of access to the courts for the determination of the
6 Foreign Investment and Ownership investor’s interest or right and the amount of compensation to
Restrictions which he is entitled.
Section 25 (3) of the Act provides further as follows: “Any
compensation payable under this section shall be paid without
6.1 Are there any restrictions, controls, fees and/or taxes
on foreign ownership of a project company? undue delay, and authorization for its repatriation in convertible
currency shall where applicable, be issued.”
Yes. According to section 54 of CAMA, a foreign company There is no investment that is specially protected.
intending to carry on business in Nigeria, except where granted an
exemption, must take steps to obtain incorporation as a separate
7 Government Approvals/Restrictions
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 documents as matters preliminary 7.1 What are the relevant government agencies or
to incorporation. departments with authority over projects in the typical
Also, from the provisions of sections 17 and 18 of the Nigerian project sectors?
Investment Promotion Act, a non-Nigerian may invest and
participate in the operation of any enterprise in Nigeria except The relevant Government agencies and departments with authority
petroleum enterprise and enterprises in the “Negative List” over projects in the typical projects sectors include:

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a. Nigerian Communications Commission: granting licences to Furthermore, many States in the Federation have laws that prescribe
companies to operate telecommunication services. Section that written approval of the Governor must be obtained by an alien
10 of the Nigerian Communication Commission Act, before acquiring an interest or right over land situated and lying in
Cap.N97, LFN 2004. the State.
b. Department of Petroleum Resources: granting licences to As to the question of whether such a licence can be held by a foreign
construct or operate refineries. Section 2 of the Petroleum
entity, a licence can be held by a foreign entity if the foreign entity
Act, Cap.P10, LFN 2004.
is incorporated in Nigeria.
Nigeria

c. NNPC: granting and issuing permits and licences for all

activities connected with petroleum exploration, refinery,
storage, marketing, transportation and distribution. Section 7.4 Are there any royalties, restrictions, fees and/or taxes
10 of the NNPC Act, Cap.N123, LFN 2004. payable on the extraction or export of natural
d. Nigerian Electricity Regulatory Commission: granting resources?
licences for electricity generating, electricity transmission,
system operation, electricity distribution, or trading in Royalties are payable on the extradition or export of natural
electricity in Nigeria. Section 62 of the Electricity Power resources. Apart from the taxes listed in question 6.1 above, other
Sector Reform Act, Cap.E7, LFN 2010. payable taxes and fees include petroleum profit tax and licence fees
e. Infrastructure Concession Regulatory Commission: ensuring under the Minerals and Natural Resources Act.
the efficient execution of any concession agreement or
contract entered into by the Government, amongst other
things. Section 20 of the Infrastructure Concession 7.5 Are there any restrictions, controls, fees and/or taxes
Regulatory Commission (Establishment) Act, Cap.I25A, on foreign currency exchange?
LFN 2010.
By section 10 of the Foreign Exchange (Monitoring and
Miscellaneous Provisions) Act, Cap.F34, LFN 2004, the
7.2 Must any of the financing or project documents be
registered or filed with any government authority or transactions in respect of which foreign currency is being exchanged
otherwise comply with legal formalities to be valid or must be an eligible transaction that is adequately supported by
enforceable? appropriate documentation. Investment in any enterprise with
foreign currency or capital imported into Nigeria is done through an
Yes. The Infrastructure Concession Regulatory Commission, under Authorised Dealer and is to be converted into Naira in the
the Infrastructure Concession Regulatory Commission Autonomous Foreign Exchange Market pursuant to section 15 (1) of
(Establishment) Act, is required to take custody of every concession the Foreign Exchange (Monitoring And Miscellaneous Provisions)
agreement made under the Act and monitor compliance with the Act. Transactions in the Autonomous Foreign Exchange Market are
terms and conditions of such agreement. Also, the National Office normally conducted in any convertible foreign currency and also
for Technology Acquisition and Promotion Act requires registration through the usual money market instruments, such as foreign bank
with the National Office for Technology Acquisition and Promotion notes, travellers’ cheques, bank drafts and mail or telegraphic
of all contracts and agreements for the transfer of foreign transfers. The Authorised Dealer is by law required to issue a
technology to Nigerian partners. See questions 2.2, 2.5 and 2.6 certificate of capital importation to the investor within 24 hours of
above for further details. the foreign currency or capital importation. The Authorised Dealer
is also, by section 15 (2) of the Act, required to make (within 48
hours thereafter) returns to the Central Bank of Nigeria giving such
7.3 Does ownership of land, natural resources or a information as the Central Bank may from time to time require.
pipeline, or undertaking the business of ownership or
operation of such assets, require a licence (and if so, The Central Bank of Nigeria, by section 15 (3) of the Act, is also
can such a licence be held by a foreign entity)? required to furnish to the Minister, on a quarterly basis, detailed
reports on the returns furnished to the Central Bank for information
Yes, a licence is required. and statistical purposes only.
By section 1 of the Land Use Act 1978, all land comprised in the By section 15 (4) of the Act, foreign currency or capital imported
territory of each State of the Federation is vested in the Governor of into Nigeria and invested in any enterprise is guaranteed
that State and such land is to be held in trust and administered for the unconditional transferability of the funds, through an Authorised
use and common benefit of all Nigerians. The Governor of each State Dealer in freely convertible currency, relating to dividends or profits
of the Federation has the power to grant Statutory Right of Occupancy (net of taxes) attributable to the investment, payments in respect of
to any person who is interested in being allocated land in the urban a loan servicing where a foreign loan has been obtained, and the
area of the State and such Statutory Right of Occupancy is evidenced remittance of proceeds (net of all taxes) and other obligations in the
by a Certificate of Occupancy duly issued by the Governor. event of sale or liquidation of the enterprise or any interest
attributable to the investment.
Concerning natural resources and/or pipelines, from section 6 of the
Minerals and Natural Resources Act, Cap.M12, LFN 2004, no
person is allowed to prospect or conduct mining operations without 7.6 Are there any restrictions, controls, fees and/or taxes
holding a licence or lease granted by the Minister. Also, the on the remittance and repatriation of investment
Department of Petroleum Resources is empowered to grant a licence returns or loan payments to parties in other
jurisdictions?
to construct or operate a refinery (section 2 of the Petroleum Act,
Cap.P10, LFN 2004).
Remittance and repatriation of investment returns and loan
The NNPC is to grant and issue permits and licences for all activities
payments are guaranteed unconditional transferability. Taxes are
connected with petroleum exploration, refinery, storage, marketing,
not payable on a loan. They are payable on the profits of companies
transportation and distribution (section 10 of the NNPC Act, Cap.
and on the dividends and interests on a loan.
N123, LFN 2004).

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All the above Acts are Federal laws that are being administered by
7.7 Can project companies establish and maintain relevant Government agencies including the FEPA, the National
onshore foreign currency accounts and/or offshore Environmental Standards and Regulations Enforcement Agency and
accounts in other jurisdictions?
the Standards Organization of Nigeria. The violation of any of the
provisions of the above Acts is an offence punishable under the Act
Yes. However, project companies, by section 2(1) of the Money in question.
Laundering (Prohibition) Act 2011, must report (to the Central Bank
State and local Government councils in Nigeria, with the

Nigeria
of Nigeria and the Securities and Exchange Commission) any
responsibility of protecting and developing their environments,
transfer to or from a foreign country of funds or securities of a sum
have also made laws for the effective control of the disposal of toxic
exceeding US$10,000 or its equivalent.
and hazardous wastes in their environments, amongst other things.
An example of State laws include the Lagos State Environmental
7.8 Is there any restriction (under corporate law, Protection Agency (LASEPA) Law, Cap.L27, Laws of Lagos State
exchange control, other law or binding governmental of Nigeria 2015, which is being administered by the LASEPA.
practice or binding contract) on the payment of
dividends from a project company to its parent
company where the parent is incorporated in your 7.10 Is there any specific legal/statutory framework for
jurisdiction or abroad? procurement by project companies?

Apart from the fact that withholding tax is payable on dividends, The specific legal/statutory framework for procurement by project
there is generally no restriction on the payment of dividends from a companies are the Public Procurement Act, Cap.P44, LFN 2010,
project company to its parent company, whether or not the parent and the Infrastructure Concession Regulatory Commission Act,
company is incorporated in Nigeria. However, where there are Cap.I25A, LFN 2010. The provisions of the Public Procurement
reasonable grounds for believing that the project company is or Act apply to all procurement of goods, works and services carried
would be after the payment unable to pay its liabilities as they out by the Federal Government of Nigeria and all procurement
become due, the project company will not declare or pay its entities. The provisions also apply to all other entities which derive
dividend to its parent company (section 381 of CAMA). at least 35% of the funds appropriated or proposed to be
appropriated for any type of procurement distributed in the Act from
7.9 Are there any material environmental, health and
the Federation share of the Consolidated Revenue Fund.
safety laws or regulations that would impact upon a
project financing and which governmental authorities
administer those laws or regulations?
8 Foreign Insurance

Yes. The laws include the Federal Environmental Protection 8.1 Are there any restrictions, controls, fees and/or taxes
Agency (FEPA) Act, Cap.F10, LFN 2004 (which prohibits, amongst on insurance policies over project assets provided or
other things, the discharge of harmful quantities of any hazardous guaranteed by foreign insurance companies?
substance into the air or upon the land and the waters of Nigeria or
at the adjourning shorelines), the Environmental Impact Assessment In Nigeria, a person cannot conduct insurance or reinsurance
Act, Cap.E12, LFN 2004 (which prohibits the public or private business with a foreign insurer or reinsurer in respect of any life,
sector from undertaking or embarking on or authorising projects or asset, interest or other properties in Nigeria businesses classified as
activities without prior consideration, at an early stage, of their domestic insurance unless with a company registered under the
environmental effects and requires the public or private sector to Insurance Act (section 72 of the Insurance Act, Cap.I17, LFN
undertake an environmental impact assessment of any proposed 2010).
project or activity that is likely to significantly affect the
From section 72 (2) of the Act, domestic insurance or reinsurance
environment), the Factories Act, Cap.F1, LFN 2004 (which requires
business includes fire insurance and reinsurance business, motor
existing and new factories to register with the Director of Factories
insurance and reinsurance business, liability insurance and
and makes provisions for the cleanliness and safety of factories,
reinsurance business, life insurance and reinsurance business,
amongst other things), the Harmful Waste (Special Criminal
accident insurance and reinsurance business and other insurance and
Provisions, etc.) Act, Cap.H1, LFN 2004 (which prohibits all
reinsurance business as the Commission may from time to time
activities relating to the purchase, sale, importation, transit,
prescribe. The National Insurance Commission may, however, in
transportation, deposit and storage of harmful wastes), the
writing permit a person to effect such insurance or reinsurance with
Standards Organization of Nigeria Act, Cap.S9, LFN 2004 (which
an insurer or reinsurer registered outside Nigeria where in any
established the Standards Organization of Nigeria whose functions
particular circumstances the person satisfies the Commission that by
include to designate, establish and approve standards in respect of
reason of exceptional nature of the risk in or emanating from
metrology, materials, commodities, structures and processes for the
Nigeria or any other exceptional circumstances, such risk cannot be
certification of products in commerce and industry throughout
placed with an insurer or reinsurer registered under the Act (section
Nigeria and to enter any building or premises to obtain information
72 (4) of the Act).
on such matters that may be specified by the organisation), the
National Environmental Standards and Regulations Enforcement
Agency (Establishment) Act 2007 (which established the National 8.2 Are insurance policies over project assets payable to
Environmental Standards and Regulations Enforcement Agency foreign (secured) creditors?
whose functions include to enforce compliance with laws,
guidelines, policies and standards on environmental matters, Yes, they are payable.
amongst other things).

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9 Foreign Employee Restrictions 11 Force Majeure

9.1 Are there any restrictions on foreign workers, 11.1 Are force majeure exclusions available and
technicians, engineers or executives being employed enforceable?
by a project company?
Yes, they are available and enforceable.
Nigeria

Yes. A foreign employee, by section 8 (1) (a) of the Immigration

Act, Cap.I1, LFN 2004, is prohibited from accepting employment
(not being employment with the Federal Government or a State 12 Corrupt Practices
Government) without the consent in writing of the Director of
Immigration. A non-Nigerian cannot also, on his own account or in
12.1 Are there any rules prohibiting corrupt business
partnership with another person, practise a profession or establish or practices and bribery (particularly any rules targeting
take over any trade or business whatsoever or register or take over the projects sector)? What are the applicable civil or
any company with limited liability for any such purpose, without the criminal penalties?
consent in writing of the Minister given on such conditions as to the
locality of operations and persons to be employed by or on behalf of There are rules in different statutes prohibiting corrupt business
such person as the Minister may prescribe (section 8 (1) (b) of the practices and bribery. The statutes include the Criminal Code and
Act). the Penal Code (that are applicable to the Southern and Northern
Before entering Nigeria for any of the aforementioned purposes, the Regions of Nigeria, respectively) (sections 98–116 of the Criminal
foreign employee in question must produce the required consent to Code and sections 115–122 of the Penal Code, respectively), the
an immigration officer and failure to produce the required consent Recovery of Public Property (Special Provision) Act (Cap.R4, LFN
will amount to an offence which, upon conviction, can lead to the 2004), the Economic and Financial Crimes Commission
deportation of the non-Nigerian as a prohibited immigrant (section 8 (Establishment) Act (Cap.E1, LFN 2004), the Constitution of the
(2) of the Act). Federal Republic of Nigeria 1999 and the Corrupt Practices and
A project company that is interested in employing foreign workers Other Related Offences Act 2000.
requires an expatriate quota which indicates the maximum number The Corrupt Practices and Other Related Offences Act has a wider
of expatriates to be employed by the company and specifies the focus when compared to other enactments before it. The Act
duration of their stay. Once the approval is granted, the employee prohibits corruption both in public and private organisations. The
must obtain a Combined Expatriate Residence Permit and Aliens’ Act also condemns corrupt practices of any sort including
Card, which is the authorisation that enables an expatriate to reside gratification by an official, corrupt offers to Public Officers, corrupt
and work in Nigeria. demands by persons, fraudulent acquisition of property, fraudulent
In Nigeria, there are also restrictions for foreign employees in the receipt of property, bribery of Public Officers and so on (sections 8–
area of entry requirements and/or conditions. A foreign employee is 13).
required to apply to the appropriate diplomatic Nigerian Mission or The applicable criminal penalties are stated in each of the Acts. The
any other appropriate authority established for the entry permit in civil penalties will depend on the reliefs that will be granted by the
his country (section 9 (1) (c) of the Act). court in the civil suit brought before it.

10 Equipment Import Restrictions 13 ApplicableLaw

10.1 Are there any restrictions, controls, fees and/or taxes 13.1 What law typically governs project agreements?
on importing project equipment or equipment used by
construction contractors?
Project agreements, being agreements entered into or to be
performed in Nigeria, are typically governed by the Nigerian law of
There are no restrictions for the importation of project equipment or contract which is founded on the Common Law of England,
equipment used by construction contractors, provided the Doctrine of Equity and Statutes of General Application. Project
equipment is of standard quality. Import duties are, however, agreements are also typically governed by other domestic laws
payable on such project equipment. including local statutes and judicial precedents.

10.2 If so, what import duties are payable and are 13.2 What law typically governs financing agreements?
exceptions available?

Financing agreements are also governed by the Nigerian law of

The payable import duties are as specified in the Nigerian Customs
contract and other relevant statutory laws. Parties can also agree to
Service’s common tariff. The exception is that machinery,
make a foreign law applicable to their matter but they cannot, by
equipment or spare parts imported into Nigeria by an industrial
their contract, deny the Nigeria courts of jurisdiction over the
establishment engaged in exploration, processing or power
matter.
generation through the utilisation of Nigerian gas, for its operation,
are exempted from the payable customs duties.
13.3 What matters are typically governed by domestic law?

Matters relating to land, land mortgages and other forms of

securities are typically governed by domestic law.

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UK, Northern Ireland, Canada, France and Belgium. These

14 Jurisdictionand Waiver of Immunity
countries are granted a reduced rate of withholding tax fixed at
7.5%. Withholding tax is not payable on the proceeds of a claim
14.1 Is a party’s submission to a foreign jurisdiction and under a guarantee or the proceeds from the enforcement of security.
waiver of immunity legally binding and enforceable?
17.2 What tax incentives or other incentives are provided
Yes, it is binding and enforceable. preferentially to foreign investors or creditors? What

Nigeria
taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes
15 International Arbitration of effectiveness or registration?

The tax incentives or other incentives provided preferentially for

15.1 Are contractual provisions requiring submission of
foreign investors or creditors include three years of tax relief for a
disputes to international arbitration and arbitral
awards recognised by local courts? pioneer company and the relief period may be extended by the
President for another two years (section 10 of the Industrial
Development (Income Tax Relief) Act, Cap.I7, LFN 2004) and tax
Yes, they are recognised.
exemption for the first three years of a new company’s operation in
the mining of solid minerals. The period may be extended by the
15.2 Is your jurisdiction a contracting state to the New York Minister for one further period of two years (section 22 (2) of the
Convention or other prominent dispute resolution Minerals and Mining Act, Cap.M12, LFN 2004, and section 36 of
conventions? the Companies Income Tax Act).
The following profits are exempted from tax:
Nigeria is a contracting State to the New York Convention on the
i) profits of a company other than a Nigerian company brought
Recognition and Enforcement of Foreign Arbitral Awards and the
into or received in Nigeria;
International Centre for Settlement of Investment Dispute Convention.
ii) dividend, interest, rent, or royalty derived by a company from
a country outside Nigeria and brought into Nigeria through
15.3 Are any types of disputes not arbitrable under local Government-approved channels, for example, through the
law? Central Bank of Nigeria and so on;
iii) the interest on deposit accounts of a foreign non-resident
Election petition disputes, matrimonial disputes and criminal company: provided that the deposits into the account are
matters are some of the disputes or matters that are not arbitrable transfers wholly of foreign currencies to Nigeria on or after 1
under the Nigerian law. 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
15.4 Are any types of disputes subject to mandatory Tax Reliefs under the Companies Income Tax Act).
domestic arbitration proceedings?
Duty Drawback/Suspension Scheme:
There are none. The scheme provides for the refund of import duties on:
i) Raw materials including packaging materials used in
manufacturing goods that are exported – 100% of import
16 Changeof Law / Political Risk duty.
ii) Paper used for the manufacture of goods supplied for
educational purposes to educational establishments
16.1 Has there been any call for political risk protections recognised by the Federal Adviser on Education – 100% of
such as direct agreements with central government or
import duty.
political risk guarantees?
iii) Goods exported in the same State as that in which they were
imported.
Yes. Companies involved in large capital projects especially in the
iv) Export incentives under the Export (Incentives and
areas of oil and gas and infrastructure finance always insist on
Miscellaneous Provisions) Act, Cap.EI9, LFN 2004.
signing political risk protection agreements with Governments.
The taxes payable by a foreign investment include companies
income tax, withholding tax, value-added tax and education tax.
17 Tax Tax is not payable on a loan.

17.1 Are there any requirements to deduct or withhold tax 18 Other Matters
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 18.1 Are there any other material considerations which
security? should be taken into account by either equity
investors or lenders when participating in project
By section 78 of the Companies Income Tax Act, Cap.21, LFN financings in your jurisdiction?
2004, a company making payment on any interest which has fallen
due is required to deduct or withhold 10% therefrom at the date Equity investors or lenders should do a background check on the
when payment is made or credited, whichever first occurs. Nigeria other party to the project finance and ensure that all the fundamental
has treaty agreements with about eight countries which includes the terms of the contract have been agreed upon and put into writing.

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(muwakkil) appoints an agent (wakeel) to carry out a specific task on

18.2 Are there any legal impositions to project companies its behalf. With Murabaha, the seller provides the cost and profit
issuing bonds or similar capital market instruments? margin of an asset. It is an acceptable form of credit sale agreement,
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market
even though it is not an interest-bearing loan. The instruments are
instruments. not commonly mentioned because Islamic project finance is not a
common practice in Nigeria.
Nigeria

Project companies that are interested in issuing bonds or similar

capital market instruments must be registered as public companies 19.2 In what circumstances may Shari’ah law become the
and must obtain approval from the necessary authorities (including governing law of a contract or a dispute? Have there
SEC) to do so. 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 Islamic Finance
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 applicability
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha of Shari’ah law or the conflict between Shari’ah law and local law
instruments might be used in the structuring of an
relevant to the finance sector.
Islamic project financing in your jurisdiction.

The instruments are all forms of contracts in Islamic finance. An 19.3 Could the inclusion of an interest payment obligation
Istina’a is a contract that allows a party to undertake to produce an in a loan agreement affect its validity and/or
enforceability in your jurisdiction? If so, what steps
asset according to certain agreed specifications at a specific price
could be taken to mitigate this risk?
and for a fixed date of delivery. Ijarah allows a party to use or take
possession of an asset for a specified period in return for a
consideration. For example, a tenancy agreement. Wakala is a An interest payment obligation is unknown to Islamic financing in
contract of an agency or delegated authority where the principal Nigeria.

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Abuka & Partners Nigeria

Patrick C. Abuka Sunday Edward, Esq.

Abuka & Partners Abuka & Partners
10th Floor, Western House Adamawa Meeting Room
8/10 Broad Street Transcorp Hilton Hotel
Lagos Maitama, Abuja
Nigeria Nigeria

Nigeria
Tel: +234 803 305 4371 Tel: +234 806 645 1985
Email: [email protected] Email: [email protected]
URL: www.abukapartners.com.ng URL: www.abukapartners.com.ng

Founding and Managing Partner, Abuka & Partners, Legal Head of Chambers and Partner, Abuka & Partners, Legal
Practitioners. Admitted in 1974 as a Solicitor and Advocate of the Practitioners. Born on 19 October 1969. Studied law at the University
Supreme Court of Nigeria. Education: the University of Ife; the of Ibadan, Ibadan, Oyo State – LL.B. Degree, 1997. Admitted to the
University of Lagos; and the Nigerian Law School (LL.B. Hons., 1973; Nigerian Bar, as Solicitor and Advocate of the Supreme Court of
B.L., 1974; M.B.A., 1975; LL.M., 2000). Lecturer, MBA Class, Nigeria, in 1998 after obtaining the qualifying BL certificate at the
University of Lagos, 1976–1978. Member: the Nigerian Bar Nigerian Law School in 1997. Obtained an LL.M. degree at the
Association; the International Bar Association; the American Bar University of Ife now known as Obafemi Awolowo University, Ile-Ife,
Association (International Associate Member); the Lagos Chamber of Osun State in 2004. Member of a number of professional associations
Commerce; the Nigerian-American Chamber of Commerce, Hon. Life including the Nigerian Bar Association, the Business Recovery &
Vice President, the Nigerian-British Chamber of Commerce; and the Insolvency Practitioners Association of Nigeria (BRIPAN) and the
Nigerian-German Business Association. International Association of Restructuring, Insolvency & Bankruptcy
Professionals. A Notary Public and a litigator to the core.

Abuka & Partners emerged from the restructuring of the law firm popularly known as Abuka, Ajegbo, Ilogu & Nwaogu which was founded in Lagos
on 28 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 multinational 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.

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 Chapter 28

Portugal
Teresa Empis Falcão

Vieira de Almeida Ana Luís de Sousa

■ The financing of a 25 MW photovoltaic project, based on a

1 Overview corporate “PPA” logic. It was the first bank financing of a
renewable energy project in the Iberian Peninsula with no
guaranteed remuneration (feed-in tariff).
1.1 What are the main trends/significant developments in
the project finance market in your jurisdiction? ■ The acquisition of the share capital of a Portuguese company,
granted with a concession of 30 years for the management of
the infrastructure of one of the biggest hospitals in the Lisbon
The Portuguese market continues to show signs of increasing area. This company also laterally operates the concession for
confidence from investors as a significant number of greenfield the provision of medical services at the facility which was
projects are being discussed and planned for the near future, both in granted to another Portuguese company.
the infrastructure and the energy sectors. ■ The financing (arranged under Portuguese law and secured
Alongside a new wave of merchant solar power plants under by Portuguese law and Luxembourg law collateral) regarding
development and the launch of a new public-private partnership the acquisition of the share capital of a significant Portuguese
(“PPP”) in the health sector, the ports sector has also been attracting road concessionaire by a Portuguese subsidiary of a dominant
the attention of investors. company incorporated under the laws of Luxembourg.
■ The financing of the construction of a new university campus
The activity in secondary market sales of participations in project
in Lisbon under a project finance regime. This is an
companies in the road, ports, water and energy sectors continues,
innovative project as far as project finance structures in
with construction companies and other original shareholders in Portugal are concerned, since the Borrower is a private law
those companies seeking to free up capital to invest in other foundation and part of the financial flows financing the
geographies or to focus on their core businesses. Investment funds project arises from donations to be made to the Borrower.
keep seeking to enhance their position in the market, replacing to a ■ The financing of an innovative biomass energy production
certain extent the traditional banking groups and the investors. project, including all relevant phases, from construction to
The maturity of the projects combined with an increase of liquidity operation and maintenance, comprising two biomass power
in the financing market increased the number of refinancings of plants in the north of Portugal with a combined installed
project debt transactions, some of which within the context of capacity of 30 MW, under a project finance regime.
merger and acquisition deals, with recourse to bond issues by ■ The acquisition and refinancing of a windfarm portfolio to be
Portuguese issuers and registered with Interbolsa, the Portuguese implemented through the issuance of bonds in the amount of
clearing and settlement house. This type of structure has been €210,000,000.
favoured by both sponsors and lenders, as it has proven very ■ The acquisition of part of the former ENEOP portfolio
efficient not only from a contractual perspective but also from a tax (which had resulted from the ENEOP Split of Assets in 2015)
point of view. and the subsequent refinancing under a project finance
structure, of the current 322 MW windfarm portfolio owned
by the purchaser – one of the most significant international
1.2 What are the most significant project financings that groups operating in the energy sector.
have taken place in your jurisdiction in recent years? ■ The project finance by issuance of two sets of bonds in the
aggregate amount of €340,000,000 for the acquisition and
The most relevant deals which have taken place in Portugal in recent refinancing of major companies operating in the gas sector.
years include greenfield and brownfield transactions, among which ■ The refinancing by an international syndicate of commercial
we would highlight the following: banks and the European Investment Bank of six ports
■ The sale of the shareholding stakes of the concessionaires of concessionaires held by Grupo Yildirim, in the amount of
road shadow toll concessions in Madeira, financed under a €279,806,000.
project finance regime. ■ The refinancing by an international syndicate of commercial
■ The acquisition of the shareholding stakes of the banks of a windfarm portfolio, by means of the introduction
concessionaires and operating companies of Beira Interior of changes to an existing bond issuance, in the amount of
and Transmontana road shadow toll concessions, financed €579,900,000.
under a project finance regime. ■ The project finance of the first offshore floating windfarm
■ The sale of the shareholding stakes of a water and sewage project in Portugal (25 MW) financed by the European
concessionaire financed under a project finance regime. Investment Bank in the amount of €60,000,000.

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■ The financing by Banco BPI (CaixaBank) of a portfolio of 40 difficulties arising from the joint payment requirement, it is
small-generation solar projects owned by the same sponsor. common 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
2 Security
agreement as a financial collateral arrangement, in accordance with
the Directive on Financial Collateral Arrangements.

Portugal
2.1 Is it possible to give asset security by means of a
general security agreement or is an agreement 2.4 Can security be taken over cash deposited in bank
required in relation to each type of asset? Briefly, accounts? Briefly, what is the procedure?
what is the procedure?

A pledge over cash deposited in bank accounts is deemed a pledge

The concept of a fixed charge is the only form of security interest
of credits (see above). Generally, the taking of security over bank
generally admissible in Portugal and the terms and formalities
accounts by financial institutions is made through financial pledges
required for security creation vary depending on the type of assets at
allowing the beneficiary to use and dispose of the deposited funds.
stake.
Despite the non-recognition of the “floating charge” concept under
Portuguese law, there is the possibility of creating security over 2.5 Can security be taken over shares in companies
incorporated in your jurisdiction? Are the shares in
different assets through a single security agreement. certificated form? Briefly, what is the procedure?
As an exception to the above principles, Portuguese law on financial
collateral (which implemented the Directive on Financial Collateral In companies, the capital of which is represented by immaterial
Arrangements) allows for pledges similar to floating charges on nominative participations (“quotas”), creation of security requires a
money and securities in bank accounts. written agreement and registration of the same with the relevant
Commercial Registry Office.
2.2 Can security be taken over real property (land), plant, On the other hand, in companies the capital of which is represented
machinery and equipment (e.g. pipeline, whether by shares, security is created by means of a pledge in accordance
underground or overground)? Briefly, what is the with the following formalities:
procedure?
i. nominative shares represented by certificates, a pledge
declaration written by the chargor on the certificates and a
Security on immovable assets or rights relating thereto, or on request for registration of the pledge in the issuer’s share
movable assets subject to registration (such as automobiles, ships ledger book; and
and planes), is created by means of mortgages, executed through ii. dematerialised shares: by means of an entry as to the creation
notarial deeds and subject to registration as a condition for the of the pledge in the chargor’s bank account.
validity thereof.
It is common practice to have a written contract governing the terms
The creation of security interests over plant and machinery may be of the relevant pledge.
made by means of a specific type of mortgage which is called a
“factory mortgage”, which covers the factory’s land, as well as the
equipment and movable assets used in the factory’s activity 2.6 What are the notarisation, registration, stamp duty
and other fees (whether related to property value or
identified in an inventory attached to the mortgage deed.
otherwise) in relation to security over different types
Pledges may be created over movable (non-registered) assets or of assets (in particular, shares, real estate,
credits and shall be effected by written agreement, and require the receivables and chattels)?
transfer of possession over such assets to the pledgee or to a third
party. Exceptions to this transfer of possession requirement are: the The creation of security interests over assets located in Portugal
creation of a pledge having as its beneficiary a credit institution (including share pledges) attracts Stamp Duty, levied on the secured
authorised to carry out business in Portugal, in which case-specific amount. Stamp Duty shall not be payable in the case of security
rules apply; and the creation of financial pledges under the interests that are ancillary and created simultaneously with a loan,
legislation for financial collateral arrangements. provided that the loan has already been subject to a similar taxation
(no duplication of tax applies).
2.3 Can security be taken over receivables where the
chargor is free to collect the receivables in the 2.7 Do the filing, notification or registration requirements
absence of a default and the debtors are not notified in relation to security over different types of assets
of the security? Briefly, what is the procedure? involve a significant amount of time or expense?

A pledge over receivables qualifies as a pledge of credits. The The registration before the local Registry Offices of the creation of
validity of a pledge of credits is subject to (i) the pledgor’s pledges over quotas will involve a cost of €100 per quota, and for
counterparty being served notice thereof, and (ii) the pledgee the creation of mortgages there will be a cost of €250 per request
coming into possession of the documents required to enforce the plus €50 per additional item of real. Mortgage urgency fee is of the
rights arising from the relevant contract directly against the same amount of the respective request.
pledgor’s counterparty.
As for the time involved, the registration of pledges over quotas
A pledge of credits covers all payments to be made under the generally takes one business day to be completed, and that of
contractual relationship underlying such credits. After the debtor is mortgages up to 10 business days (or, if an urgency fee is paid, one
notified such payments must nevertheless be made jointly to the business day).
pledgor and the pledgee. As a means of circumventing practical

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2.8 Are any regulatory or similar consents required with 4 Enforcement of Security
respect to the creation of security over real property
(land), plant, machinery and equipment (e.g. pipeline,
whether underground or overground), etc.? 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
The creation of security over assets which are in the private domain availability of court blocking procedures to other
Portugal

does not, in general, require any regulatory or similar consents. creditors/the company (or its trustee in
However, the creation of security over public domain assets is bankruptcy/liquidator), or (b) (in respect of regulated
prohibited and some restrictions in respect of the creation of security assets) regulatory consents?
over concession/regulated assets may be imposed, notably through
specific regulations or the relevant concession contracts. 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.
3 Security Trustee
Appropriation or foreclosure of the asset is generally not available
to the beneficiaries of mortgages or pledges other than in the case of
3.1 Regardless of whether your jurisdiction recognises financial pledges or pledges granted by a business entity or person
the concept of a “trust”, will it recognise the role of a in security of a commercial obligation.
security trustee or agent and allow the security Court procedures usually take several months or even more than a
trustee or agent (rather than each lender acting
year if the complexity of the legal arguments at stake leads to court
separately) to enforce the security and to apply the
proceeds from the security to the claims of all the appeals.
lenders? Please refer to section 5 below for restrictions concerning
insolvency/bankruptcy and restructuring proceedings.
Trusteeship is generally not recognised by Portuguese law. Thus,
even if the relevant agreements indicate that the security agent holds 4.2 Do restrictions apply to foreign investors or creditors
security for the benefit of a given lending syndicate, unless all in the event of foreclosure on the project and related
lenders are disclosed as holders thereof, the security agent shall companies?
appear as the sole beneficiary of the security entitlements and shall
be the sole entity with authority to file enforcement procedures in No different rules apply to domestic or foreign investors in this
respect thereof. respect.
Hence, in the context of the enforcement procedures, the security
agent may be required to prove before a court that it holds title to the
secured obligations.
5 Bankruptcy and Restructuring
Proceedings
3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available 5.1 How does a bankruptcy proceeding in respect of the
(such as a parallel debt or joint and several creditor project company affect the ability of a project lender
status) to achieve the effect referred to above which to enforce its rights as a secured party over the
would allow one party (either the security trustee or security?
the facility agent) to enforce claims on behalf of all the
lenders so that individual lenders do not need to
enforce their security separately? 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
The only prima facie way to have all the lenders recognised as
shall be made in accordance with the Portuguese Insolvency and
beneficiaries of a given security is to name them as holders of the
Company Recovery Code (“CIRE”) rules.
secured obligations and corresponding security. However, this
entails the need to amend the relevant agreement (or execute a new Furthermore, the insolvency order delivered by the court suspends
notarial deed) each time the lenders assign, buy or sell part of the any outstanding executory proceedings having as an object the
loans, which is not a practical solution. For this reason, attempts attachment or seizure of the insolvent’s assets, and prevents the
have been made to set up alternatives and to put in place more bringing of any new executory proceedings or the enforcement of
lender-friendly solutions, as is the case where the security agent is any security against the insolvent entity. Any lawsuits related to
made the registered beneficiary of the security and either benefits such assets are attached to the bankruptcy proceedings.
from a parallel debt or is made contractually bound to assign the In addition, all claims from creditors of the insolvent entity must be
secured obligations to all the lenders prior to enforcement of the lodged within the insolvency proceedings. Therein the creditor
security. Other alternatives include having the entire lending shall mention the amount of its claim as well as any security from
syndicate registered as secured creditors but with proper which it may benefit over the assets of the insolvent entity.
intercreditor arrangements in place (setting up the rules for action by
individual creditors and for allocation of the proceeds of security
5.2 Are there any preference periods, clawback rights or
enforcement).
other preferential creditors’ rights (e.g. tax debts,
employees’ claims) with respect to the security?

The insolvency administrator is entitled to terminate agreements

which may be qualified as detrimental to the insolvent estate by

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notice to the relevant counterparty. The counterparty may either

accept termination of the contract and return to the insolvency estate 5.5 Are there any processes other than formal insolvency
the consideration received or, alternatively, challenge the proceedings that are available to a project company
to achieve a restructuring of its debts and/or
termination of the contract in court. cramdown of dissenting creditors?
There are certain acts and transactions which are legally deemed to
be detrimental to the insolvent company’s estate. Other than these, The Portuguese insolvency law provides for a special recovery

Portugal
acts performed within two years prior to the opening of the proceeding which aims to promote the rehabilitation of debtors
corporate bankruptcy proceedings that generally diminish, facing financial difficulties (Processo Especial de Revitalização –
jeopardise or delay the rights of the debtor’s creditors may be “PER”). These proceedings are available to a debtor which finds
qualified as detrimental to the insolvent estate, provided bad faith of itself in a distressed financial situation who is not technically
the relevant parties is proven. Bad faith is presumed by law in the insolvent yet.
case that the counterparty or the beneficiary of the act is related to
The plan approved within a PER is binding on all creditors,
the insolvent entity.
including those which did not take part in the negotiations.
Upon payment of the insolvency procedure costs (which must be Therefore, when a plan is approved by the legally-prescribed
settled prior to all other claims), claims shall be paid in the majority of creditors and further confirmed by the judge, the
following order: provisions contained therein are enforceable against non-voting or
(a) employees’ claims over the specific company premises where dissident creditors.
they carry out their activity;
Moreover, the plan approved by the majority of the creditors and
(b) property taxes; confirmed by the judge by a definitive order allows the debtor and
(c) secured claims (those with security over assets which are part its creditors to benefit from a specific and more favourable tax
of the insolvent estate up to the value of those assets); regime set forth in sections 268 to 270 of the Portuguese Insolvency
(d) preferential claims, including: Code.
i. general creditors’ preferential claims over the assets in the Portuguese law further provides for an out-of-court procedure
insolvent estate up to the value of the assets over which (Regime Extrajudicial de Recuperação de Empresas – “RERE”),
such preferential claims exist and where the claims are not which has entered into force on 3 March 2018. RERE corresponds
extinguished in consequence of the declaration of
to a non-judicial procedure that aims to obtain a settlement between
insolvency;
a company in financial distress or in an imminent insolvency
ii. certain debts to the tax and social security authorities; situation and its creditors. It involves a voluntary arrangement
iii. claims by creditors which have provided capital to finance between the company and all or part of its creditors, whose content
the insolvent’s activity during the PER procedure (see is freely established by the parties and typically confidential.
question 5.5 below) over all movable assets of the
insolvent; The effects of the RERE are restricted to the participating creditors
and their claims, and securities may be only modified to the extent
iv. claims by the party that applied for the opening of the
insolvency proceedings; therein agreed; therefore, and contrary to what happens in respect of
a plan approved and confirmed within a PER, there is no cramdown
(e) unsecured claims; and
on dissident creditors.
(f) subordinated claims (e.g. the credits of related parties).
Should the parties to the agreement expressly decide to deposit the
agreement with the Commercial Registry Office and provided that
5.3 Are there any entities that are excluded from an auditor formally certifies that through that agreement the debtor
bankruptcy proceedings and, if so, what is the restructures at least 30% of its non-subordinated liabilities and that,
applicable legislation? as a result of such agreement, it achieves positive equity and its
equity results superior to its share capital, it will benefit from the
Bankruptcy proceedings are generally applicable to all persons or more favourable tax treatment applicable to PER as mentioned
legal entities, except for the Republic of Portugal and above.
public/administrative entities and companies. In addition, insurance
Although the RERE is primarily addressed to non-insolvent
companies, credit institutions and other financial corporations are
companies, exceptionally and temporarily, within the 18 months
subject to specific insolvency rules (and not to the CIRE).
after the entering into force of the RERE regime, a debtor that is
technically insolvent may still make use of this special regime,
5.4 Are there any processes other than court proceedings instead of filing for its insolvency.
that are available to a creditor to seize the assets of
the project company in an enforcement?
5.6 Please briefly describe the liabilities of directors (if
any) for continuing to trade whilst a company is in
A creditor may, without filing a judicial proceeding, retain financial difficulties in your jurisdiction.
possession of the assets pertaining to a certain entity if it is in the
possession of such assets and if the claim arises from expenses or
Directors may continue to trade even if a company is facing
damages caused by such assets.
financial difficulties provided that they act with a special duty of
Creditors may also enforce security over assets of the project care and do not violate their legal duties and legal principles
company outside the court, provided such security was granted applicable to the management of companies.
under the Directive on Financial Collateral Arrangements.

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Within insolvency proceedings, the insolvent entity’s directors may There are no distinctions between domestic and foreign investors in
be found liable if they fail to meet their legal obligation to file for this respect.
corporate insolvency proceedings within 30 days of the debtor
becoming insolvent or if the insolvency situation has been created or
aggravated as a consequence of a felonious or gross fault during the
7 Government Approvals/Restrictions
period of three years before the opening of the corporate insolvency
proceedings.
Portugal

7.1 What are the relevant government agencies or

Directors may be subject to ancillary penalties – prohibition from departments with authority over projects in the typical
performing commercial activities – and/or ordered to pay amounts project sectors?
unduly received from the insolvent company, and may be deemed
jointly and severally liable with the company in certain The governmental agencies or departments with authority over
circumstances. projects depend mainly on the relevant sector of activity of a project.
Where the debtor is declared insolvent by the court, directors may In general terms, the respective Ministries (energy, infrastructure,
also be held criminally liable for fraudulent insolvency, negligent transport, health, etc., and – when applicable – environment) are
insolvency and the unlawful favouring of creditors. 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
6 Foreign Investment and Ownership Mobilidade e dos Transportes, I.P. (roads); and Administração
Restrictions Regional de Saúde (health), etc.
The approval of the Ministry of Finance may also be required where
a project involves public investment or, more generally, where the
6.1 Are there any restrictions, controls, fees and/or taxes
on foreign ownership of a project company?
PPP legal framework applies.
In this respect, reference should be made to the Unidade Técnica de
Under general Portuguese law, there are no restrictions on foreign Acompanhamento de Projetos (“UTAP”), an administrative entity
direct investment or foreign ownership of a project company. under the supervision of the Ministry of Finance, recently created
However, the exercise of an economic activity within the regulated for the follow-up of PPP projects.
sectors (such as energy, water and waste management, telecoms,
postal services, railways, commercial aviation and financial 7.2 Must any of the financing or project documents be
services) may require authorisation from the regulator to both registered or filed with any government authority or
Portuguese and foreign investors. otherwise comply with legal formalities to be valid or
enforceable?
Restrictions may apply under the Law on Money Laundering and
the Financing of Terrorism, which transposed the EU Money
Laundering regulations into Portuguese law. There may also be Project documents are valid and enforceable without any need for
temporary embargo situations applying to persons or entities registration, authentication or filing with any governmental
residing in non-EU states. authority, save for certain pledge arrangements which need to be
authenticated by a Notary or by any competent authority.
There are no currency controls under Portuguese law and money can
be freely transferred into or out of Portugal. Also, there are no Private agreements with acknowledgment of a payment obligation
restrictions on the remittance of profits or investments abroad. 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.
6.2 Are there any bilateral investment treaties (or other
international treaties) that would provide protection
from such restrictions? 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,
No particular restrictions in relation to foreign direct investment
can such a licence be held by a foreign entity)?
apply.

Other than assets in the public domain (e.g. the hydro domain,
6.3 What laws exist regarding the nationalisation or mineral resources, roads and railways) which may not be
expropriation of project companies and assets? Are appropriated by private entities, the ownership of land or other
any forms of investment specially protected?
assets does not require a licence.
However, the exercise of a specific economic activity by use or
The protection of private property is upheld by the Constitution.
operation of such assets may require a licence and, in the case of an
Accordingly, the nationalisation, expropriation or requisition of
asset in the public domain, the attribution of a right of use (of the
private property can only take place on the grounds of public
relevant asset, normally through a concession regime).
interest and provided that private entities are duly compensated.
There is no distinction between national and foreign entities in this
While there is a legal framework setting out the terms for the
respect.
expropriation process and calculation of indemnification payable in
relation to immovable assets, there is no general framework for
nationalisation processes. 7.4 Are there any royalties, restrictions, fees and/or taxes
payable on the extraction or export of natural
There is, nevertheless, a specific legal regime setting out the
resources?
framework for the public appropriation of share capital, in whole or
in part, from private legal persons for public interest reasons.
There is no specific tax regime applicable to the extraction or export

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of natural resources, other than in respect of the extraction of oil (but to the payment of dividends to a foreign parent company. Regarding
not applicable to natural gas). dividends paid to a resident parent company, exclusion from
Additionally, Portuguese oil legislation foresees that the agreements taxation is also available provided some requirements are met
for the prospection, research and production of oil shall include an (namely, a certain level of shareholding – currently 10% held for at
annual fee (“renda de superfície”) calculated by reference to the least 12 months).
area of the concession. Other fees and royalties may be agreed in

Portugal
the relevant concession agreements or licences. 7.9 Are there any material environmental, health and
Portugal has implemented excise duties on petroleum and energy safety laws or regulations that would impact upon a
products, in line with EU legislation, which are triggered when project financing and which governmental authorities
administer those laws or regulations?
products are released for consumption.
The extraction and/or export of natural resources may also be subject to
Environmental impact assessments are generally required for
the general taxes applicable within the Portuguese tax system; namely,
infrastructure projects. The PPP law establishes that PPP
Corporate Income Tax (“CIT”) and Value-Added Tax (“VAT”).
procurement procedures shall only be launched after approval of the
relevant environmental impact declaration. Financing documents
7.5 Are there any restrictions, controls, fees and/or taxes also normally include this environmental impact declaration as a
on foreign currency exchange? condition precedent (“CP”) to the disbursement of funds.
Depending on the sector in question, a project may also be subject to
Income derived from foreign currency exchange may be subject to the European Integrated Pollution Prevention and Control (“IPPC”)
CIT. Commission fees payable to a financial credit institution for rules. The environmental licence (which is required, in particular,
foreign currency exchange may trigger Stamp Duty. for industrial projects) must be obtained before operation
In general terms, Portugal does not apply controls on foreign commences, and must be successively renewed during the entire
currency exchange, without prejudice to money laundering controls period of operation of the relevant plant.
in line with those applicable in other EU Member States. Specific titles for the use of water resources (e.g. discharge of waste
Furthermore, reporting obligations to the Bank of Portugal may also water and extraction of water) and for emissions in the air, as
apply to certain transactions. applicable, must also be obtained in addition to the obtainment of
the environmental licence.
7.6 Are there any restrictions, controls, fees and/or taxes Furthermore, in the context of the EU emissions trading system, for
on the remittance and repatriation of investment projects in certain industrial sectors and meeting certain conditions
returns or loan payments to parties in other and/or thresholds, operators must hold a permit to emit greenhouse
jurisdictions?
gases, and be the holder of emission allowances.
Depending on the sector of activity, health and safety laws may
Interest or dividends paid by Portuguese-resident companies to non-
apply in terms consistent with European directives in this respect.
resident entities are, as a general rule, subject to withholding tax at
a rate of 25% (this rate may, under certain circumstances, be
increased to 35%). 7.10 Is there any specific legal/statutory framework for
procurement by project companies?
With respect to interest or dividend payments, the withholding tax can
be waived or reduced under the EU Interest and Royalties Directive,
the EU Parent-Subsidiary Directive or under bilateral double tax In general terms, project companies are not subject to specific
treaties signed by Portugal, as long as certain conditions are met. procurement rules. There are, however, some specific cases where
a project company may be subject to the regime set forth in
Note that the CIT legislative reform implemented a participation
Portuguese public procurement law, namely: (i) if the project
exemption regime for dividends (and capital gains), which
company has been established for the specific purpose of meeting
considerably extended the cases in which dividends paid to other
general interest needs and is controlled by public entities or financed
jurisdictions (e.g. with whom Portugal has signed a double tax treaty
mainly from the public budget; (ii) if the project company, having
and there is administrative cooperation in tax matters) are not
been created for the specific purpose of meeting general interest
subject to withholding tax.
needs or not, operates in the energy, water, transport or postal
services, and a public entity exercises a dominant influence over it;
7.7 Can project companies establish and maintain and (iii) if a project company has been granted, without an
onshore foreign currency accounts and/or offshore international public procurement process, special or exclusive rights
accounts in other jurisdictions? in the public energy, water, transport or postal services sectors,
affecting the ability of third parties to exercise activities on those
There are no restrictions or limitations regarding the establishment sectors.
and maintenance of onshore foreign currency accounts or offshore Moreover, public procurement rules shall also apply to construction
accounts in other jurisdictions. contracts and services agreements entered into by a project company
(i) which is in more than 50% directly financed by a public entity,
7.8 Is there any restriction (under corporate law, and (ii) whose contractual price equals or exceeds €5,548,000 and
exchange control, other law or binding governmental €221,000, respectively.
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?

Please see question 7.6 above concerning withholding taxes related

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regarding exclusion of liability in case of force majeure, the principle is

8 Foreign Insurance
generally accepted and enforceable in Portugal. In general, project
contracts provide for detailed provisions in relation to force majeure
8.1 Are there any restrictions, controls, fees and/or taxes events and the terms under which the parties have agreed to mitigate the
on insurance policies over project assets provided or effects of force majeure, and exclude liability for breach of contract
guaranteed by foreign insurance companies? resulting from a force majeure event. The terms agreed between the
parties in this respect are generally accepted and enforceable in Portugal.
Portugal

Portuguese law does not foresee any restrictions, controls, fees or taxes
on the granting of insurance policies by a foreign insurance company.
12 Corrupt Practices

8.2 Are insurance policies over project assets payable to

foreign (secured) creditors? 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
Yes. No limitation applies under Portuguese law regarding payment criminal penalties?
of insurance to foreign secured creditors.
No specific rules apply on corruption and bribery activities in the
9 Foreign Employee Restrictions projects sector. Nevertheless, entities are subject to general criminal
law, which sets forth corruption and bribery as criminal offences
which may be punished with fines or imprisonment up to a
9.1 Are there any restrictions on foreign workers, maximum of eight years (without prejudice to the possibility of
technicians, engineers or executives being employed aggravated penalties in specific cases).
by a project company?
We also refer to the provisions of the Law on Money Laundering
and the Financing of Terrorism, which transposed the EU Money
In general, no restrictions apply to the employment of foreign
Laundering regulations into Portuguese law.
workers. However, citizens of non-EU countries must obtain a
work, visa residence or equivalent permit to live in Portugal.
13 Applicable Law
10 Equipment Import Restrictions
13.1 What law typically governs project agreements?

10.1 Are there any restrictions, controls, fees and/or taxes

on importing project equipment or equipment used by Project agreements are typically governed by Portuguese law. A
construction contractors? different applicable law may be chosen (provided that the choice of
law observes the requirements set out in Portuguese law or in the
In general, the import of goods is a taxable event for the purposes of applicable international conventions). We note, however, that
VAT and customs duties. VAT and customs duties are payable by the concession contracts and other project agreements entered into with
importers (whether or not a taxable person) at the time the goods public entities are mandatorily governed by Portuguese law.
pass the customs control. In some circumstances, VAT may be self-
assessed by importers in their VAT return. 13.2 What law typically governs financing agreements?

10.2 If so, what import duties are payable and are The parties may freely choose the law which will govern the
exceptions available? financing agreements with observation of the requirements set out
in Portuguese law or in the applicable international conventions.
VAT is charged on importation of goods at the rate that applies to a Although financing agreements in project finance deals in Portugal
supply of similar goods within the Portuguese territory. The taxable are commonly subject to Portuguese law, it is not uncommon for
value of imports is determined in accordance with customs international lending syndicates to require finance agreements to be
legislation, excluding VAT itself but including customs duties and submitted to English law.
any other taxes or charges levied on imports, as well as incidental
expenses such as commissions, packaging, transport and insurance
13.3 What matters are typically governed by domestic law?
expenses incurred up to the first destination within Portugal.
Customs duties are calculated, on an ad valorem basis, as a
In the context of project finance deals, the creation of security interests
percentage of the value of the goods being declared for importation.
over assets which are located in Portugal is, according to the applicable
The level of that percentage depends on the kind of product
conflict of laws rules, mandatorily governed by Portuguese law.
imported and the country of origin.

14 Jurisdiction and Waiver of Immunity

11 Force Majeure

14.1 Is a party’s submission to a foreign jurisdiction and

11.1 Are force majeure exclusions available and waiver of immunity legally binding and enforceable?
enforceable?

Portuguese courts recognise the parties’ autonomy to select the

Although Portuguese law does not provide for a specific provision
forum of their disputes, even when the selected forum has no

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Vieira de Almeida Portugal

particular connection with the dispute, and have consistently (c) the New York Convention, which entered into force in
recognised the provisions of the Brussels Regulation as prevailing Portugal on 16 January 1995;
over the Portuguese Code of Civil Procedure, under which the parties (d) the Inter-American Convention on International Commercial
are required to establish a significant interest in the designated Arbitration, adopted in Panama on 30 January 1975; and
jurisdiction to select it as the appropriate forum for their disputes. (e) the Washington Convention on the Settlement of Investment
Notwithstanding, Portuguese courts may ignore foreign jurisdiction Disputes between States and Nationals of Other States, which
entered into force in Portugal on 1 August 1984.

Portugal
clauses and assume jurisdiction in special cases where they may
claim to hold exclusive jurisdiction, e.g. actions relating to local On a bilateral level, Portugal has signed Judiciary Cooperation
land, in proceedings related to the validity of the incorporation or Agreements with Guinea-Bissau, Mozambique, Angola, São Tomé
the dissolution of companies domiciled in Portugal, in proceedings and Príncipe, the Special Administrative Region of Macao (People’s
relating to the validity of entries in public registers, or in Republic of China) and Cape Verde. These bilateral agreements
proceedings related to the registration or validity of patents. entered into between Portugal and other Portuguese-speaking
In addition, a waiver of immunity is recognised and enforceable in countries equate arbitral awards to national courts’ judgments and
Portugal. Although there is no specific national act or international subject both decisions to the same legal regime.
convention entered into by Portugal in this regard, Portuguese law
gives immunity from jurisdiction of the Portuguese courts to 15.3 Are any types of disputes not arbitrable under local
sovereign states (and to other public entities) by virtue of a general law?
principle of customary international law. State immunity is,
however, given a strict extent and is limited to acts involving the Unless the matter is subject to the exclusive jurisdiction of national
exercise of sovereign authority. 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 economic interest is arbitrable.
15 International Arbitration Portuguese law also extends arbitrability to non-pecuniary rights
under which the parties can enter into agreements.
15.1 Are contractual provisions requiring submission of Only a few types of disputes, namely some disputes related to
disputes to international arbitration and arbitral insolvency proceedings, are subject to the exclusive jurisdiction of
awards recognised by local courts? national courts and thus considered non-arbitrable.

Major project contracts typically provide that the parties shall resort
15.4 Are any types of disputes subject to mandatory
to arbitration for the resolution of disputes. Where international domestic arbitration proceedings?
contractors are involved, the parties often choose to apply the rules
of international centres such as the International Chamber of
Disputes concerning collective labour rights and sports regulation
Commerce (“ICC”), the London Court of International Arbitration
are subject to mandatory domestic arbitration.
(“LCIA”) and the Rules of Arbitration of the United Nations
Commission on International Trade Law (“UNCITRAL”).
International arbitration clauses are widely recognised by Portuguese 16 Change of Law / Political Risk
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
16.1 Has there been any call for political risk protections
of enforceability of an arbitral award is likely to vary greatly such as direct agreements with central government or
depending on the applicable legal regime. An international arbitral political risk guarantees?
award rendered in Portugal is immediately enforceable in Portuguese
territory under the rules of the Portuguese Arbitration Act and of the Although it is common in project finance deals to have direct
Portuguese Code of Civil Procedure. Foreign arbitral awards are agreements with the government (in particular, in its capacity as
recognised and enforced in Portugal under the applicable international grantor in a concession contract), those agreements are normally
treaty or bilateral agreement (see question 15.2 below), generally designed to address step-in rights of financial institutions and do not
under the 1958 Convention on the Recognition and Enforcement of provide any particular political risk protections.
Foreign Arbitral Awards (“the New York Convention”).
Change-in-law risk is normally addressed by contract in the
Foreign arbitral awards that are not covered by any of these standard terms for international project finance deals.
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 UNCITRAL Model Law 17 Tax
and by the New York Convention.
17.1 Are there any requirements to deduct or withhold tax
15.2 Is your jurisdiction a contracting state to the New York from (a) interest payable on loans made to domestic
Convention or other prominent dispute resolution or foreign lenders, or (b) the proceeds of a claim
conventions? under a guarantee or the proceeds of enforcing
security?

In the context of international arbitration, Portugal is a party to the

following international conventions: Under certain circumstances (e.g. interest paid to financial
institutions), withholding tax on interest payments may be waived.
(a) the Geneva Protocol on Arbitration Clauses of 1923;
Under the EU Interest and Royalties Directive and since 1 July
(b) the Geneva Convention on the Execution of Foreign Arbitral
Awards of 1927; 2013, no withholding tax is due on interest payments made by
resident companies, provided the following conditions are met: (i)

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 Vieira de Almeida Portugal

the paying and beneficiary entities are subject to (and not exempt full and which have been registered with the relevant Commercial
from) corporate tax and take one of the legal forms listed in the Registry Office for at least one year. This requirement may be
annex of this directive; (ii) both entities are considered EU residents waived if the issuer makes available to investors financial
for the purposes of double tax treaties; (iii) a direct 25% information on the company, with reference to a date not later than
shareholding is held by one of the companies in the other’s capital, three months prior to the issue date, audited by an independent
or both are sister companies (i.e. are both held, in at least 25%, by auditor, registered with the Portuguese Securities Market
the same direct shareholder and in either case the shareholding must Commission, and prepared in accordance with the applicable
Portugal

be held for at least a two-year period); and (iv) the entity receiving accounting rules.
the interest payment should be its effective beneficiary. Under the In accordance with new legislation published in February 2015, a
provisions of the double tax treaties signed by Portugal, the company may only issue bonds if, after the issuance, it has a ratio of
domestic withholding tax rates foreseen for interest payments can financial autonomy equal to or higher than 35%, to be calculated in
be reduced to rates ranging from 5% to 15% (no withholding applies accordance with a certain legally set formula. This limit does not
in the case of long-term loans extended by US banking or financial apply to (i) companies listed on a regulated market, (ii) companies
institutions). enjoying a credit rating or bond issues enjoying a credit ratio
Withholding tax may apply depending on the taxable construction attributed by a rating agency registered with the European Securities
of the claim under the guarantee. and Markets Authority (“ESMA”) or with the Portuguese central
bank (Banco de Portugal), (iii) issuances the repayment of which is
specially secured in favour of the bondholders, (iv) bond issues with
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What a nominal or subscription amount equal to or higher than €100,000,
taxes apply to foreign investments, loans, mortgages or (v) issuances subscribed by qualified investors (and without
or other security documents, either for the purposes subsequent placement to non-qualified investors).
of effectiveness or registration?

19 Islamic Finance
Portugal has tax regimes applicable until 2020 aimed at fostering
investment, particularly foreign investment. These comprise tax
incentives to investment made in Portugal in specific business 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
sectors (e.g. the mining and manufacturing industry), such as (i) CIT instruments might be used in the structuring of an
deductions or tax credits, and (ii) exemptions or reductions in Real Islamic project financing in your jurisdiction.
Estate Tax, Real Estate Transfer Tax and Stamp Duty.
The tax exposure of a foreign investment in Portugal will depend on To the best of our knowledge, there is no experience of Islamic
how such investment is structured (e.g. if it involves a direct project finance in Portugal, nor are there any finance instruments
presence in Portugal or not). For instance, if such foreign structured in accordance with Islamic law in the Portuguese
investment is made through a local subsidiary, this affiliate will be financial sector.
subject to the taxes which are typically applicable to national
companies; namely (among others), CIT, VAT, Stamp Duty and 19.2 In what circumstances may Shari’ah law become the
property taxes. Loans, mortgages and other security documents governing law of a contract or a dispute? Have there
may be subject to Stamp Duty in Portugal, at rates that vary between been any recent notable cases on jurisdictional
0.04% per month or fractions thereof up to 0.6% (one-off), issues, the applicability of Shari’ah or the conflict of
depending on the maturity of the loan or the term of the guarantee, Shari’ah and local law relevant to the finance sector?
as applicable.
The current Stamp Duty Code provides for exemptions applicable to See question 19.1 above.
certain loans (e.g. shareholders’ loans, under certain conditions) and
guarantees (e.g. those granted to financial or credit institutions, 19.3 Could the inclusion of an interest payment obligation
under certain conditions). in a loan agreement affect its validity and/or
enforceability in your jurisdiction? If so, what steps
could be taken to mitigate this risk?
18 Other Matters
The inclusion of interest payment obligations in a loan agreement is
18.1 Are there any other material considerations which
common practice and fully valid and enforceable in Portugal.
should be taken into account by either equity Although civil law foresees maximum rates of interest, those
investors or lenders when participating in project provisions are not applicable to loans provided by financial
financings in your jurisdiction? institutions in relation to which only very specific limitations (e.g.
for consumer credit or a surplus interest rate for overdue amounts)
In general, the most relevant issues have been addressed. may apply.

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.

In general terms, bonds may only be issued by limited liability

companies incorporated in Portugal whose share capital is paid up in

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Vieira de Almeida Portugal

Teresa Empis Falcão Ana Luís de Sousa

Vieira de Almeida Vieira de Almeida
Rua Dom Luís I, 28 Rua Dom Luís I, 28
1200-151 Lisboa 1200-151 Lisboa
Portugal Portugal

Tel: +351 21 311 3584 Tel: +351 21 311 3422

Portugal
Email: [email protected] Email: [email protected]
URL: www.vda.pt URL: www.vda.pt

Before joining VdA in 2008, Teresa was an Associate with the project Ana is a Partner in the Energy & Natural Resources practice. She is
department at Allen & Overy (London) where she acquired expertise in widely recognised as an expert in the development and financing of
the financing of projects in various jurisdictions. Teresa is a Partner in cross-sector projects.
VdA’s Infrastructures & Mobility practice and from 2011 to 2014
Over the past 15 years, Ana has been involved in several road
acquired reputation as deputy at the Cabinet of the Secretary of State
infrastructures, PPP in the health sector, water and waste
for Infrastructure, Transports and Communications, being responsible
concessions, as well as energy (including renewable energies)
for drafting and reviewing legislation concerning these sectors as well as
projects, in Portugal and in all of VdA Legal Partners’ jurisdictions,
leading negotiation teams in the context of the infrastructure PPP review
acting as legal adviser to the administrative authorities, sponsors and
requested by the bail-out arrangements applying in Portugal between
financial institutions.
2011–2014. Teresa is frequently sought for leading-edge national and
international transactions on project finance transactions and capital Lately, Ana has focused particularly on the energy sector. She is
markets, mainly focused on the infrastructure and energy sectors, due admitted to the Portuguese Bar Association.
to her high expertise. She has extensive experience in overseas
Areas of Practice: Energy & Natural Resources.
markets, particularly in Portuguese-speaking African countries, namely
Mozambique.

Vieira de Almeida (VdA) is a leading international law firm with more than 40 years of history, recognised for its innovative approach and impressive
track record 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 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
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 jurisdictions, 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-Leste
www.vda.pt

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 Chapter 29

Serbia
Tijana Arsenijević

Zajednička advokatska kancelarija Marić &

Mujezinović in cooperation with Kinstellar Branislav Marić

a PPP, with French Suez and Japanese Itochu I-Environment as the

1 Overview
main sponsors. In addition, the largest wind park in Serbia with a
total capacity of 158MW, developed by Masdar (UAE) as the lead
1.1 What are the main trends/significant developments in sponsor, is in the commissioning process (financing closed in spring
the project finance market in your jurisdiction? of 2018).
In the area of infrastructure, one of the most important projects is the
Recently, investments involving project financing in Serbia were planned modernisation and reconstruction of the Belgrade-Budapest
mainly focused on infrastructure, energy, and a wide array of real high-speed railway which is developed by the Serbian and
estate projects (residential, office spaces, retail parks and shopping Hungarian governments and supported by Chinese funds.
malls). Although investment strategies differ depending on the Also, in 2018, VINCI Airports signed a 25-year concession contract
sector, the profile of the investors seems to remain unchanged. with the Serbian government for Nikola Tesla Airport with the
Namely, standard market players in the development of road and estimated total value in excess of EUR 1 billion.
bridge infrastructure projects are predominantly Chinese investors Finally, Gazprom’s Turkish Stream, which is the substitute for the
which develop such projects partially under the framework of abandoned South Stream project, may potentially enter the
bilateral state treaties concluded between the Republic of Serbia and construction phase as early as in the second half of 2019.
the People’s Republic of China. Further, the most active investors in
developing large real estate projects are from Israel, South Africa
and the UAE. Also, in the renewable energy sector, the most 2 Security
common lenders were IFIs (e.g. EBRD and IFC), while the sponsors
typically originate from Europe and the Middle East.
2.1 Is it possible to give asset security by means of a
general security agreement or is an agreement
1.2 What are the most significant project financings that required in relation to each type of asset? Briefly,
have taken place in your jurisdiction in recent years? what is the procedure?

Investments in the real estate sector have seen exponential growth The concept of a “floating charge” is not recognised under Serbian
recently. In this respect, the biggest project in Serbia in terms of law. Due to the principle of the specialty of a pledge, security
value is the Belgrade Waterfront (Beograd na vodi) which is being interest over each type of asset needs to be provided in the form of a
developed jointly by the Republic of Serbia and Eagle Hills, a UAE separate pledge agreement. The Serbian Pledge Law recognises the
investor. This project envisages at least EUR 3 billion of investment pledge of a “movable generic item” (stvar određena po vrsti), such
in residential, leisure, retail, hotel and office spaces on a prime as the pledge over the pledgor’s commodities held in a warehouse,
location in Belgrade. Other notable examples predominantly as well as a pledge of future items or rights (including receivables).
include Israeli investments in luxury residential and office spaces in However, a pledge of future receivables and movable assets may be
Belgrade, such as the projects: Skyline Belgrade; and Central perfected on the basis of an annex containing an updated list of the
Garden. In addition, MPC Properties, a JV between a domestic current pledgor’s receivables and movable assets. Security interest
investor and South African investors, continues to invest in office over movables and immovables is perfected once registered with the
spaces and shopping malls. On the other hand, the hospitality sector competent register.
is expanding whereby several international hotel franchises have got
their hotels in Belgrade in 2018 (e.g. Hilton), based on investments 2.2 Can security be taken over real property (land), plant,
made by domestic and foreign investors. Additionally, IKEA and machinery and equipment (e.g. pipeline, whether
Lidl opened their first retail facilities in Serbia in the course of the underground or overground)? Briefly, what is the
last two years. procedure?
In terms of energy projects, a notable example is the development of
the Vinča landfill project, aimed at partial closing and remediation Yes, security may be taken over real property, land, and each type of
of the largest landfill in Serbia (near Belgrade) and construction of a movable asset and right. A mortgage over immovable assets and a
waste-to-energy cogeneration facility to produce heat and electricity pledge over movables and rights are the two main types of security
from non-recyclable waste. This project is developed in the form of interest used in Serbia. Bills of exchange are also frequently used in

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Zajednička advokatska kancelarija Marić & Mujezinović Serbia

creditor-debtor relations. Legal framework provides for the right A pledge of shares in a joint-stock company is based on a written
for registration of the right of ownership and a pledge over the pledge agreement with notarised signatures of the parties and is
overground and underground pipelines in the separate cadastre of perfected upon its registration with the Central Securities
lines. However, this cadastre is still not fully operational. Depository and Clearing House (pursuant to the authorisation of the
In practice, a pledge over movable assets and rights is established on registered owner of such shares).
the basis of a written agreement entered into between the pledgor and
pledgee. The signatures of the parties on the share pledge agreement 2.6 What are the notarisation, registration, stamp duty

Serbia
should be notarised. Each pledged movable must be specified in the and other fees (whether related to property value or
pledge agreement. A pledge is perfected upon its registration with otherwise) in relation to security over different types
the Pledge Register. The right of pledge over securities in a joint- of assets (in particular, shares, real estate,
stock company is registered in the pledge account maintained by the receivables and chattels)?
Central Securities Depository and Clearing House.
The execution of a relevant pledge and mortgage agreement/statement
Contractual and unilateral mortgages are currently the market
triggers notarisation costs, which are, on average, not a significant
standard in Serbia and relatively similar both in terms of form and
amount. However, for a mortgage agreement/statement executed in
content, as well as in terms of registration requirements. A
the form of a notarial deed, the relevant fee shall be calculated as per
contractual mortgage is concluded on the basis of a written contract
value of the respective real estate and it can be up to the maximum
entered into between the owner of the real property and the creditor.
amount of the Serbian Dinar equivalent of approx. EUR 6,000. Also,
Such mortgage agreement must stipulate the property over which
there are administrative fees for registration of mortgages/pledges but
the mortgage is being established and the secured receivable. The
they are not significant (ranging between RSD 2,000 (approx. EUR
mortgage agreement must be notarised. The same formal
15) to RSD 10,000 (approx. EUR 85) for a pledge and up to RSD
requirements apply to a unilateral mortgage. Mortgages are
159,200 (approx. EUR 1,350) for a mortgage.
established once they have been duly registered with the competent
Real Estate Register. Based on the latest amendments to the law, the
registration of the mortgage may also be ex officio effected by the 2.7 Do the filing, notification or registration requirements
notary public who notarised the mortgage agreement or unilateral in relation to security over different types of assets
mortgage in the electronic form via the electronic information involve a significant amount of time or expense?
system of the Republic Geodetic Authority.
Generally, no. A pledge over movables is registered within five
business days. Registration of the mortgage was historically more
2.3 Can security be taken over receivables where the
chargor is free to collect the receivables in the
time-consuming. However, based on the recent amendments to the
absence of a default and the debtors are not notified relevant rules, the Real Estate Cadastre is obliged to adopt a ruling on
of the security? Briefly, what is the procedure? registration of the mortgage within five business days as of the date of
submission of the complete documentation in the electronic form via
As a rule, the chargor (i.e. the pledgor) may collect pledged receivables the electronic information system of the Republic Geodetic Authority.
until the debtor is notified of the pledge. However, following such
notification, the debtor can pay the debt only to the chargee (i.e. the 2.8 Are any regulatory or similar consents required with
pledgee), unless the chargee gave different instructions. In practice, respect to the creation of security over real property
the parties agree that the chargor is entitled to collect receivables from (land), plant, machinery and equipment (e.g. pipeline,
the debtor until default. The pledge over receivables is established on whether underground or overground), etc.?
the basis of the pledge agreement and perfected pursuant to registration
in the Pledge Register. As a general matter, there is no such requirement. However, the
right of pledge or other security interest may not be established over
certain assets, including immovables which are utilised in any
2.4 Can security be taken over cash deposited in bank
accounts? Briefly, what is the procedure?
manner by the state bodies, bodies of autonomous provinces or
municipal bodies. Such restrictions may make this type of collateral
unattractive to future financiers. Also, according to the PPP and
Yes. However, due to the conservative practice of the Pledge Register,
Concession Law, a private partner may establish a pledge or other
a pledge on future funds/cash in a bank account cannot be registered.
security interest on assets that are the subject of a public contract
Therefore, in order to perfect the pledge over future funds, the pledge
and/or share in the SPV, if envisaged by the public contract and
agreement needs to be subsequently annexed. The pledge over the
subject to a prior approval of the public partner.
bank account is established on the basis of the pledge agreement and
perfected pursuant to registration in the Pledge Register.
3 Security Trustee
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? 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
Yes. However, the shares are not in certificated form and the right trustee or agent (rather than each lender acting
of ownership and pledge is perfected following registration in the separately) to enforce the security and to apply the
relevant registers. proceeds from the security to the claims of all the
lenders?
A pledge of an ownership interest in a limited liability company is
based on a written pledge agreement with notarised signatures of the
parties. The pledge is perfected when it is registered in the Pledge The concept of a security trustee is recognised both under the Law on
Register. Pledge over Movables and the Mortgage Law, and is widely used in

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practice. A security trustee may undertake legal actions for protection

and enforcement of the secured receivable on behalf of the creditors. 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?
3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available The following is an overview of some of the transactions undertaken
(such as a parallel debt or joint and several creditor
by the debtor that can be contested in the bankruptcy proceeding by
status) to achieve the effect referred to above which
the bankruptcy administrator and/or creditors:
Serbia

would allow one party (either the security trustee or

the facility agent) to enforce claims on behalf of all the ■ granting to the creditor security or compensation in the
lenders so that individual lenders do not need to manner and at the time that is in accordance with its rights,
enforce their security separately? provided that the insolvency debtor was insolvent at the time
of the payment and the creditor in question knew or must
This is not applicable in our jurisdiction. have known of such insolvency. The clawback period is six
months prior to the bankruptcy petition filing;
■ granting to one creditor security or compensation that the
4 Enforcement of Security latter was not entitled to or was entitled to but not in the
manner and at the time when the security or compensation
was granted. The clawback period is 12 months prior to the
4.1 Are there any significant restrictions which may bankruptcy petition filing;
impact the timing and value of enforcement, such as ■ a transaction concluded after the filing of the request for the
(a) a requirement for a public auction or the
opening of the insolvency proceeding, in the course of which
availability of court blocking procedures to other
the insolvency debtor’s contracting party knew or must have
creditors/the company (or its trustee in
known that the insolvency debtor was insolvent or knew that
bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?
the request for opening of the insolvency proceeding was
made. The clawback period is six months prior to the
bankruptcy petition filing;
Both under the Law on Pledge over Movables and the Mortgage Law the
■ repayment of a loan to an affiliated company/person by the
parties may agree in advance to enforce the right of the pledge and insolvency debtor in the final year before the opening of
mortgage in an out-of-court procedure which is the prevailing practice in insolvency, except to the person who is, within its regular
project financing. In case of extra-judicial enforcement, there are certain activities, engaged in the granting of credit or loans; and
formalities to be followed (e.g. notification to the pledgor/mortgagor ■ actions without any or with a negligible compensation. The
about the intention to sell the pledged/mortgaged asset, registration of clawback period is five years prior to the bankruptcy petition
the commencement of the enforcement in the Pledge Register/Real filing.
Estate Cadastre). The sale of the pledged/mortgaged asset in the course
Preferential payments, payable on the bankruptcy of a company,
of the out-of-court procedure may be done through public auction or
include unpaid net employee and former employee compensations
direct sale, at the choice of the pledgee/mortgagee.
in the amount of minimum compensation for the year prior to the
On the other hand, according to the rules regulating public opening of the bankruptcy proceedings, unpaid pension and
ownership, enforcement over immovables which are utilised in any disability insurance contributions accrued within the last two years
manner by the state bodies, bodies of autonomous provinces or prior to the opening of the bankruptcy proceedings, and unpaid
municipal bodies is not allowed. taxes accrued within three months prior to the opening of the
bankruptcy proceedings.
4.2 Do restrictions apply to foreign investors or creditors
in the event of foreclosure on the project and related 5.3 Are there any entities that are excluded from
companies? bankruptcy proceedings and, if so, what is the
applicable legislation?
Foreign investors and creditors enjoy the same rights as domestic
investors and creditors. However, they may need to open non- The Bankruptcy Law does not apply to, inter alia, the Republic of
resident bank accounts in the country for the purpose of collecting Serbia, autonomous provinces and municipalities and companies
enforcement proceeds. established by such entities that are exclusively or predominantly
financed through public income or the budget of such entities, as
well as pension, social, disability and health insurance funds.
5 Bankruptcy and Restructuring
Founders/owners/shareholders of such entities are jointly and
Proceedings severally liable for liabilities of these entities. However, it seems
that enforcement of such provision in practice may be difficult.
5.1 How does a bankruptcy proceeding in respect of the
project company affect the ability of a project lender 5.4 Are there any processes other than court proceedings
to enforce its rights as a secured party over the that are available to a creditor to seize the assets of
security? the project company in an enforcement?

Secured creditors may settle their claims prior to other bankruptcy Court decisions are enforced by public bailiffs exclusively, except in
creditors from the realisation of sale of collateral. Secured creditors cases in which the court has exclusive jurisdiction. This type of
will satisfy the portion of their claim not covered by the value of the enforcement has been introduced relatively recently in Serbia and
relevant assets serving as security as (ordinary) bankruptcy creditors provides for more efficient enforcement.
(i.e. without priority and pro rata from the bankruptcy estate).

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funds and disposal of the company’s assets with negligible

5.5 Are there any processes other than formal insolvency compensation as well as in case of fraudulent depreciation of the
proceedings that are available to a project company value of the company’s assets in order to avoid settlement of a
to achieve a restructuring of its debts and/or
creditor’s claims.
cramdown of dissenting creditors?

The Bankruptcy Law regulates a separate process of reorganisation 6 Foreign Investment and Ownership
conducted in case it can enable more beneficial collection of claims Restrictions

Serbia
to the creditors than the insolvency. Reorganisation is based on a
reorganisation plan which may be proposed by the insolvency
administrator, its shareholders, or its creditors. A variety of measures 6.1 Are there any restrictions, controls, fees and/or taxes
for the reorganisation of the debtor company may be proposed, on foreign ownership of a project company?
which include write-offs, transformation of debt into equity, granting
a grace period for debts, partial sale of property, etc. In order to be In principle, there are no such restrictions as the foreign investors
accepted, a proposed plan has to be adopted by the simple majority of enjoy safeguards in the form of national treatment and preferential
the total amount of claims in each of the creditors’ classes. The treatment. However, certain obstacles exist in specific industries.
reorganisation plan confirmed by the ruling issued by the court is For example, certain utility services, such as the supply of drinking
treated as an execution title and a multilateral contract between all water and public transportation may exclusively be performed by
creditors. A failure to act in accordance with such plan is a reason for public utility companies founded by local municipalities, limited
the initiation of a new insolvency procedure. liability companies and joint-stock companies whose sole owner is
Also, the Law on Arranged Financial Restructuring regulates the a public company or local municipality as well as subsidiaries of
possibility of the companies in financial difficulty to negotiate the such entities.
restructuring of its liabilities towards certain creditors. A pre-
condition to these out-of-court proceedings is that at least two 6.2 Are there any bilateral investment treaties (or other
creditors of the relevant debtor must be domestic or international international treaties) that would provide protection
banks. In the course of these proceedings, the debtor and creditors from such restrictions?
may firstly enter into a standstill agreement that prohibits the
commencement and continuation of any enforcement proceedings or There are no such treaties. However, the aforementioned statutory
settlement (initiated by these creditors) against the debtor. During restrictions may, to a certain degree, be overcome or eliminated
the standstill agreement, parties negotiate restructuring of the through the creation of a project company in Serbia.
liabilities of the debtor – such process is concluded by execution of
the financial restructuring agreement. Under the agreement, various
6.3 What laws exist regarding the nationalisation or
restructuring measures may be negotiated and implemented (such as
expropriation of project companies and assets? Are
alteration of the repayment schedule, sale of assets of the debtor, any forms of investment specially protected?
debt-to-equity swaps, provision of the new collateral by the debtor or
the third parties, etc.). However, this arrangement is valid only
Foreign investors’ rights cannot be subject to expropriation and
between the creditors that concluded such agreement. The Serbian
similar measures, except in cases determined in the relevant law.
Chamber of Commerce acts as a mediator in these proceedings.
Nevertheless, the Law on Expropriation defines various bases for
expropriation, such as transport, power and public utility
5.6 Please briefly describe the liabilities of directors (if infrastructure, national defence, local/national government needs,
any) for continuing to trade whilst a company is in environmental protection, protection from weather-related damage,
financial difficulties in your jurisdiction. geological exploration for, or exploitation of, minerals. As a general
matter, note that under Serbian law only real estate can be the
Directors are obliged to exercise a duty of care to the company. A subject of expropriation against the market price compensation.
failure of a director to comply with such obligation which causes
damage to the company may result in a claim for damage
compensation initiated by the company. 7 Government Approvals/Restrictions
Also, directors that authorised payments in contradiction to the rules
elaborated under the answer to question 7.6 below, bear unlimited 7.1 What are the relevant government agencies or
joint and several liability with the company for the return of such departments with authority over projects in the typical
payments. Making such payments constitutes a commercial project sectors?
misdemeanour for which monetary fines may be imposed onto the
responsible person in the company. In addition, a responsible officer The bodies in charge of foreign investments comprise in the most
of a company who, knowing that insolvency is imminent, facilitates general sense, inter alia, the Ministry of Trade, Tourism and
a payment of debt or otherwise deliberately puts a particular creditor Telecommunications, the Ministry of Commerce, and the
in a more favourable position and thereby significantly damages Development Agency of Serbia (RAS). Additionally, there are over
other creditors shall be criminally punished by imprisonment. 100 specialised governmental agencies (e.g. the Energy Agency, the
Directors may be criminally sanctioned by imprisonment if, Agency for Energy Efficiency and the Regulatory Agency for
following the opening of the bankruptcy proceeding, he/she Electronic Communications and Postal Services). Further, the
disposes with the assets and rights in the bankruptcy estate without authority over certain tasks, such as issuing the construction
compensation or with compensation that does not correspond to the permits, is divided between the competent ministry, provincial
market value. secretariat and municipalities depending on the type and location of
In addition, directors may be criminally sanctioned for causing the relevant real estate.
insolvency due to, inter alia, irrational spending of the company’s

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7.2 Must any of the financing or project documents be 7.5 Are there any restrictions, controls, fees and/or taxes
registered or filed with any government authority or on foreign currency exchange?
otherwise comply with legal formalities to be valid or
enforceable?
Foreign currency sale and purchase may be conducted only by the
local entities licensed by the National Bank of Serbia. Companies
Cross-border loan agreements must be notified to the National Bank may purchase and/or keep foreign currency on their accounts only
of Serbia and comply with mandatory forex rules. In addition,
Serbia

for the purpose of payment of the obligations denominated in a

security documents must contain essential elements regulated by the foreign currency. The official currency in Serbia is Serbian Dinar –
Serbian rules and be registered in the competent registers in order to RSD and the exchange rates are not fixed.
be enforceable. Further, PPP/concession agreements should be
approved by the competent body, i.e. the government, autonomous
province or municipality prior to execution. 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
7.3 Does ownership of land, natural resources or a jurisdictions?
pipeline, or undertaking the business of ownership or
operation of such assets, require a licence (and if so, Yes. These payment restrictions apply not only to the distribution of
can such a licence be held by a foreign entity)?
profit but also to any other payments from limited liability companies
to their (direct) shareholders, save as those under employment
The main limitation is the principle of “reciprocity”, whereby contracts to individuals who are also shareholders. Such payments
foreign persons may purchase real property in Serbia, provided that would be prohibited if either of the below conditions are met:
Serbian citizens have an equal right to acquire and own real property
■ based on the most recent financial statements, net assets of
in the respective foreign country. A further limitation on the ability the company are lower or would become lower than the paid-
of foreigners to acquire real property in Serbia is if such property is in capital as a result of such payments, increased for reserves
located in those parts of the country that are designated as zones in the company is required to maintain in accordance with the
which foreign natural and legal persons may not acquire real law or the articles of association, if such reserves exist,
property (typically in border areas). In addition, foreigners can still except in the case of share capital reduction; and
not formally acquire and own agricultural land in Serbia. ■ the total amount of payments to shareholders in a business
Also, the law reserves the right of ownership over, inter alia, water, year may not exceed the profit at the end of that business year,
mineral resources, geological resources and mineral reserves to the increased for any undistributed profit from earlier periods and
reserves available for distribution to shareholders and reduced
Republic of Serbia.
for uncovered losses from earlier periods and reserves the
In terms of conducting the relevant business activity, note that company is required to maintain in accordance with the law or
energy activities designated as activities of the so-called public the articles of association, if such reserves exist.
interest, such as transport and operation of a natural gas Further, forex rules contain restrictions with respect to repayment of
transmission network, transport of electricity and operation of an the loans provided by the lenders that do not have their seat in an EU
electricity transmission network, distribution of electricity and country. Namely, in such case, a Serbian debtor could not repay a
operation of the related distribution network, as well as distribution cross-border financial loan prior to the expiry of one year plus one
and supply of heat, may be performed by domestic companies only day as of the date of disbursement of such loan. If the loan was to
pursuant to authorisation of the Republic of Serbia, an autonomous be repaid in instalments, the repayment could commence following
province, or the relevant local municipality. the expiry of six months as of each utilisation of such loan. The
While acquisition and operation of real property does not trigger a repayment instalments should be proportionate.
need to obtain a licence (construction, on the other hand, requires Withholding tax (WHT) at the rate of 20% is payable in case of
obtaining a number of licences), activities related to energy and payment of interest or dividend to a foreign entity. The lower WHT
natural resources typically require obtaining a number of licences. rate may be prescribed by the applicable DTT.

7.4 Are there any royalties, restrictions, fees and/or taxes 7.7 Can project companies establish and maintain
payable on the extraction or export of natural onshore foreign currency accounts and/or offshore
resources? accounts in other jurisdictions?

The relevant mining framework does not appear to provide for any Applicable rules contain a very restrictive list of cases in which a
restrictions on the exploitation of mineral resources that apply Serbian resident may open and maintain an account abroad. Serbian
solely to foreign entities. On the other hand, the export and import companies may open an account with foreign banks only in certain
of silver (unprocessed, raw, semi-manufactured, or as dust) and gold cases (e.g. for financing of investment works abroad) and only
(unprocessed, semi-manufactured, or as dust) is subject to a prior subject to a prior approval by the National Bank of Serbia.
approval by the relevant ministry. Further, uranium and thorium
alloys and compounds, and other elements identified as sources of
ionising radiation may only be imported or exported with the 7.8 Is there any restriction (under corporate law,
permission of the competent authority. exchange control, other law or binding governmental
practice or binding contract) on the payment of
One-off administrative fees are payable for the issuance and dividends from a project company to its parent
extension of exploration licences. In addition, various fees are company where the parent is incorporated in your
payable for, inter alia, geological explorations and use of mineral jurisdiction or abroad?
resources and reserves.
See our answer to question 7.6 above.

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in order to work in Serbia, a foreigner must obtain a temporary

7.9 Are there any material environmental, health and residence permit and a work permit. Foreigners who are directors of
safety laws or regulations that would impact upon a local companies or are staying in Serbia for business meetings and
project financing and which governmental authorities
administer those laws or regulations?
to prepare for the establishment of a local company do not need to
obtain a work permit, if they will not spend more than 90 days in
Serbia within a period of six months after the first entry into Serbia.
Depending on the industry to which the project pertains, various
laws may apply. However, the projects in general should comply

Serbia
with the: laws regulating the management of air quality and the 10 Equipment Import Restrictions
determination of measures to protect and improve air quality;
measures for maintaining necessary water quality levels and
protecting water from contamination; and management of 10.1 Are there any restrictions, controls, fees and/or taxes
construction waste and energy efficiency. Each piece of the on importing project equipment or equipment used by
construction contractors?
aforementioned legislation is supervised by the competent ministry,
territorial units and relevant inspections. Likewise, relevant health
and safety rules apply irrespective of the industry. Serbia has concluded a number of treaties that enable the customs-
free import from certain countries, such as EU countries. Import
conditions are relatively standard and harmonised with the EU rules.
7.10 Is there any specific legal/statutory framework for However, there is a ban on the import of products that represent
procurement by project companies?
danger to the environment, such as second-hand cars which do not
have a Euro 3 standard.
The procurement of private projects is not specifically regulated by
law. However, the investors intending to apply for the private or IFI
financing may be asked to comply with certain procurement rules of 10.2 If so, what import duties are payable and are
exceptions available?
such entities.
On the other hand, public construction projects are subject to a
The amount of payable customs duty depends on the type of
public tender procedure which is strictly regulated by the applicable
equipment and the country of origin of the equipment. For example,
law.
20% of VAT is payable on the import of the equipment for
performing a business activity, with a right to deduct such VAT as
8 Foreign Insurance input tax. However, the import of equipment for performing a
business activity which represents a contribution to the equity of the
project company may be exempted from customs duties (under
8.1 Are there any restrictions, controls, fees and/or taxes certain conditions and up to certain maximum amounts).
on insurance policies over project assets provided or
guaranteed by foreign insurance companies?
In case equipment is imported temporarily, customs duty should be
paid monthly in the reduced amount (3% of the amount of customs
duties that should have been paid in case goods were not imported
The main obstacle is the prohibition for local entities/persons to
temporarily).
obtain insurance from foreign insurance companies for the risks that
may be insured in Serbia. In practice, project companies
predominantly use local insurance. 11 Force Majeure

8.2 Are insurance policies over project assets payable to

11.1 Are force majeure exclusions available and
foreign (secured) creditors?
enforceable?

Due to a very conservative interpretation of the forex rules by the Based on the applicable rules, it seems that parties may agree to
National Bank of Serbia, the transfer of receivables arising between contractually exclude liability in certain cases, which may
two resident entities to a foreign entity is not possible. A solution to encompass force majeure events. However, the Serbian courts
this issue may be the appointment of the local security trustee and traditionally allow for exclusion of the liability in case of force
assignment of the insurance policy to such security trustee. majeure events in very limited cases, conditioned upon the force
majeure events being unforeseeable, extraordinary, unexpected and
9 Foreign Employee Restrictions if they could not be eliminated. Such interpretation leads to the
exclusion of liability in cases that mainly encompass natural
disasters.
9.1 Are there any restrictions on foreign workers, Certain special rules regulating power purchase agreements (PPA)
technicians, engineers or executives being employed
in the energy sector extend the definition of force majeure to certain
by a project company?
political force majeure events, such as war, terrorism, public
demonstration, strike or labour disruption, expropriation or
There are generally no prohibitions against foreigners becoming nationalisation of a power plant or a part of it and events when, due
executives or employed otherwise in Serbian companies. However, to an act of a public body, a relevant licence/permit necessary for the
performance of the PPA is revoked/not issued/modified.

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12 Corrupt Practices 15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution
conventions?
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 Serbia is a party to the New York Convention.
criminal penalties?
Serbia

15.3 Are any types of disputes not arbitrable under local

The Criminal Code defines as crimes both active and passive law?
bribery in performing business activities. Applicable sanctions
comprise seizing of the asset used for such criminal act and severe Disputes over which domestic courts have an exclusive jurisdiction
imprisonment (i.e. ranging from one to eight years in case of active are not arbitrable. For example, these are disputes related to
bribery and three months to three years in case of passive bribery). ownership rights and lease of immovables, bankruptcy, and disputes
Trading in influence is also criminalised and sanctioned by related to rights established by registration with the competent
imprisonment which, depending on the type of activity of the Serbian register.
perpetrator, ranges from six months to eight years (additionally, an
intermediary may be sanctioned by imprisonment in certain cases).
15.4 Are any types of disputes subject to mandatory
Serbia has ratified the United Nations Convention Against domestic arbitration proceedings?
Corruption and introduced an institutional network to combat
against corruption (including a special Anti-corruption Agency). No, there are no types of disputes subject to mandatory domestic
arbitration proceedings.
13 Applicable Law
16 Change of Law / Political Risk
13.1 What law typically governs project agreements?
16.1 Has there been any call for political risk protections
In principle, project agreements may be governed by a foreign law such as direct agreements with central government or
which is in practice usually English law. However, mandatory rules political risk guarantees?
of Serbian law must be observed in any event (e.g. regulating the
limitation of liability and contractual penalties). No, to the best of our knowledge. As a rule, foreign investors are
guaranteed that rights granted at the moment of the incorporation of
13.2 What law typically governs financing agreements?
its entity in Serbia cannot be restricted by the subsequent
amendments of the relevant laws and by-laws.
Financing agreements involving international financiers in the
project finance setting are often governed by English law. However, 17 Tax
the relevant financing agreement has to be carefully reviewed from
the point of view of compliance with the restrictive Serbian forex
rules and other mandatory norms of the Serbian law. 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
13.3 What matters are typically governed by domestic law? under a guarantee or the proceeds of enforcing
security?
As a rule, collateral documentation is governed by Serbian law.
No WHT on interest is payable if the lender is a Serbian entity. If
the lender is a non-resident entity, payment of interest is subject to
14 Jurisdiction and Waiver of Immunity WHT (for more details, please see the answer to question 7.6
above).
14.1 Is a party’s submission to a foreign jurisdiction and There is no special tax in case of collection of receivables through
waiver of immunity legally binding and enforceable? the guarantee or the enforcing security.

Yes. However, see our answer to question 4.1 above regarding the 17.2 What tax incentives or other incentives are provided
impossibility for enforcement with respect to public property. preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
or other security documents, either for the purposes
15 International Arbitration of effectiveness or registration?

There are no special tax incentives provided preferentially to the

15.1 Are contractual provisions requiring submission of
foreign investors or creditors. Also, there are no relevant taxes on
disputes to international arbitration and arbitral
awards recognised by local courts? foreign investments in addition to those that would apply to a
Serbian investor.
Yes, they are recognised.

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However, Serbia has developed a range of incentives and safeguards

19 Islamic Finance
designed to attract foreign direct investments, including tax
incentives in the form of tax credits and reduced corporate tax rates.
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
instruments might be used in the structuring of an
18 Other Matters Islamic project financing in your jurisdiction.

Serbia
18.1 Are there any other material considerations which To the best of our knowledge, instruments of Islamic project
should be taken into account by either equity financing have not been used in Serbia. Theoretically, these
investors or lenders when participating in project concepts may be used to the extent they are not against the
financings in your jurisdiction? mandatory rules of Serbian law.

Financing should be carefully structured around very conservative

19.2 In what circumstances may Shari’ah law become the
forex rules. Relevant restrictions include prohibition for a Serbian governing law of a contract or a dispute? Have there
company to provide collateral to a non-resident creditor that does been any recent notable cases on jurisdictional
not have its seat in a Member State of the EU in case of loans issues, the applicability of Shari’ah or the conflict of
granted by a non-resident creditor to a non-resident company, Shari’ah and local law relevant to the finance sector?
except in case the non-resident debtor is majority-owned by the
Serbian company. Also, the provision of foreign parent guarantees Serbian rules seem to primarily allow the parties to choose the law
is limited to securing the import of goods and services into Serbia, and courts of a certain state to govern a contract/dispute. However,
performing investment works by non-residents in the country and it seems that the choice of Shari’ah law may theoretically be
residents abroad, and domestic transactions between legal entities. possible in case the parties agree on the jurisdiction of domestic
arbitration involving a foreign element as the Arbitration Law also
18.2 Are there any legal impositions to project companies allows the parties to agree on the rules which will govern their
issuing bonds or similar capital market instruments? dispute. This may also be possible in case the parties choose foreign
Please briefly describe the local legal and regulatory arbitration as the relevant forum, subject to its rules. Note, however,
requirements for the issuance of capital market that the recognition and enforcement of the arbitral award may be
instruments. rejected in Serbia if such award is not compliant with the Serbian
public order.
Although allowed, in practice, the issuing of corporate bonds and
similar debt instruments by Serbian companies in Serbia has been
19.3 Could the inclusion of an interest payment obligation
seldom to date. The issuing of corporate securities may be done in in a loan agreement affect its validity and/or
the form of a public or private offer (i.e. an offer aimed at a closed enforceability in your jurisdiction? If so, what steps
number of investors such as qualified investors and those investing could be taken to mitigate this risk?
a minimum of EUR 50,000). In the latter case, the investor is not
obliged to publish a prospectus. After the process for payment and No, as interest-bearing loans are standard in Serbia.
inscription of the relevant securities is completed by investors, an
issuer requests inclusion of such securities at the relevant organised
market (i.e. currently the Belgrade Stock Exchange).

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 Zajednička advokatska kancelarija Marić & Mujezinović Serbia

Tijana Arsenijević Branislav Marić

Zajednička advokatska kancelarija Marić & Zajednička advokatska kancelarija Marić &
Mujezinović in cooperation with Kinstellar Mujezinović in cooperation with Kinstellar
Danube Business Center Danube Business Center
Bulevar Mihaila Pupina 10L 9th Floor Bulevar Mihaila Pupina 10L 9th Floor
11000 Belgrade 11000 Belgrade
Serbia Serbia
Serbia

Tel: +381 11 321 0200 Tel: +381 11 321 0200

Email: [email protected] Email: [email protected]
URL: zakmmlaw.rs URL: zakmmlaw.rs

Tijana Arsenijević is a Senior Associate with experience in general Branislav Marić is a Partner with extensive experience in corporate,
corporate law, banking and finance matters. She has advised, M&A, banking, energy and project-related matters, actively advising
amongst others, Skechers USA on debt-restructuring arrangements clients both in Serbia and other republics of the former Yugoslavia. He
with their debtors in CEE, as well as several foreign funds in relation to advised investors on major investments in banking, insurance,
a potential purchase of sovereign and quasi-sovereign debt in Serbia, industrial and other sectors in Serbia, Croatia and Bosnia, including,
which included a need to come up with innovative solutions under the inter alia, the EUR 70 million equity investment by EBRD into
relatively conservative foreign-exchange and payment frameworks in Komercijalna banka a.d. Beograd, the largest state-owned bank in
Serbia. Tijana also participated in a detailed due diligence review of Serbia. Branislav also advised Goldman Sachs Lending Partners LLC
Serbia Broadband (SBB), the largest cable TV provider in the Balkans, as the security agent, on establishing a collateral package in Serbia in
focusing on complex financing arrangements as well as various relation to a US$ 9 billion credit facility granted to a major international
regulatory matters. She has been actively assisting foreign clients pharmaceutical group. He also has an established track record
with respect to cross-border financing of borrowers in Serbia and other working on matters related to capital markets, including IPOs and
countries of the former Yugoslavia. She is also active on various large- takeovers, as well as on various banking regulatory matters. Branislav
scale financing projects that our office works on and advises banks is qualified to practise law in Serbia and New York and is fluent in
and other financial institutions on a multitude of regulatory issues in Serbian and English.
the banking and payment services sectors. Tijana is a member of the
Serbian Bar Association and speaks Serbian and English.

Kinstellar has been present in Serbia since 2010, and operates through its affiliated Serbian joint law office Zajednička advokatska kancelarija Marić
& Mujezinović. Our experts have advised on many of the most significant deals in Serbia in the past decade.
Our senior team of Serbian and U.S.-qualified lawyers combine international experience with in-depth understanding of the local business and
regulatory landscape to provide joined-up assistance across the full spectrum of Kinstellar’s regional practice. We have hands-on experience
managing cross-border transactions with implications in Serbia and other former Yugoslav republics and work with a growing number of international
law firms across the Balkan region.
Our clients are leading international and domestic investors active across Serbia’s main business sectors, including automotive, banking and
financial services, energy and utilities, food and beverages, infrastructure, manufacturing, mining, and telecommunications. We also represent state
agencies and institutions.

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Chapter 30

Singapore
Kok Chee Wai

Allen & Gledhill LLP Kelvin Wong

If the plant and machinery constitute fixtures to a piece of land, a

1 Overview
mortgage of that land would also create security over such plant and
machinery. Similarly, if any pipelines are securely attached to the
1.1 What are the main trends/significant developments in land, such pipelines would generally be considered part of the land,
the project finance market in your jurisdiction? and any mortgage of the land would include such pipelines.
To the extent that the plant, machinery or pipelines do not constitute
Singapore has a fairly mature project finance market with a mix of fixtures and are considered chattels, separate security is usually taken
public-private partnerships (“PPPs”) financing and traditional via a fixed or floating charge. Security over plant, machinery and
project financing for other industrial infrastructure. Singapore also equipment can also be via a pledge, which, as a matter of Singapore law,
plays a key role in arranging financing for regional infrastructure gives a creditor a possessory right over chattels or documents of title.
projects. To this end, the Singapore government has established
Infrastructure Asia, an agency to coordinate stakeholders, promote
2.3 Can security be taken over receivables where the
information flow and facilitate access relating to infrastructure
chargor is free to collect the receivables in the
investment and financing opportunities in Asia. absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
1.2 What are the most significant project financings that
have taken place in your jurisdiction in recent years? Security over receivables can be taken via a general security
agreement or a standalone security agreement. Such security
A transaction in Singapore was the financing of the TuasOne waste- document may provide that the chargor may collect the receivables
to-energy PPP plant that was completed in May 2016. When in the absence of default and the debtors need not be notified.
completed, the plant will be the largest and most energy-efficient However, the security in such a case may be characterised as a
WTE plant in Singapore. Our firm acted for the commercial banks floating charge and will rank behind any other security, prior notice
providing a S$654 million loan facility to the project company to of which has been given to the debtor.
finance the development, construction and start-up costs of the plant.
2.4 Can security be taken over cash deposited in bank
2 Security accounts? Briefly, what is the procedure?

Security over cash deposited in bank accounts can be taken via a

2.1 Is it possible to give asset security by means of a general security agreement or a standalone security agreement. If
general security agreement or is an agreement
required in relation to each type of asset? Briefly, the account bank is not the lender, notice of assignment should be
what is the procedure? given to, and an acknowledgment should be received from, the
account bank in order to preserve priority.
It is possible for security to be granted via a general security agreement,
which can effect different types of security over different assets, 2.5 Can security be taken over shares in companies
although security over certain assets must be in prescribed forms (such incorporated in your jurisdiction? Are the shares in
as mortgages of real property). Generally, security documents are certificated form? Briefly, what is the procedure?
executed by way of deed, although certain assets also have specific
perfection requirements, as set out in the following paragraphs. Shares in Singapore can be scripless or scrip.
Scripless shares are shares of a local or foreign company listed on
2.2 Can security be taken over real property (land), plant, the Singapore Exchange (SGX) held either directly with the Central
machinery and equipment (e.g. pipeline, whether Depository (Pte) Limited or in a nominee account with a depository
underground or overground)? Briefly, what is the agent. In the former case, security can be created over those shares
procedure?
by way of statutory assignment or charge in the prescribed form. In
the latter case, security is often taken under common law, with
Security can be taken over land and will need to be in a prescribed perfection requirements such as serving notice of charge/assignment
form and comply with other legal formalities. on the depository agent.

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 Allen & Gledhill LLP Singapore

Security can be taken over scrip shares by way of legal mortgage or Consents are usually not required for security over plant, machinery
equitable charge. In the former case, the shares are registered in the and equipment unless these are agreed contractually with the
mortgagee’s name with the mortgagor retaining an equity of relevant governmental body. A typical PPP agreement will contain
redemption. In the latter case, which is more conventional, the restrictions on creating security over the assets of the project
physical share certificates are delivered to the chargee alongside company.
share transfer forms executed by the chargor in blank. The terms of
Singapore

the share charge will often provide that the chargee may complete
the share transfer forms upon enforcement.
3 Security Trustee

2.6 What are the notarisation, registration, stamp duty 3.1 Regardless of whether your jurisdiction recognises
and other fees (whether related to property value or the concept of a “trust”, will it recognise the role of a
otherwise) in relation to security over different types security trustee or agent and allow the security
of assets (in particular, shares, real estate, trustee or agent (rather than each lender acting
receivables and chattels)? separately) to enforce the security and to apply the
proceeds from the security to the claims of all the
lenders?
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 Singapore law recognises and accepts the concept of security trusts
company or a Singapore-registered foreign company must be where security is granted to a security trustee or agent who holds the
registered with the Accounting and Corporate Regulatory Authority security on behalf of a group of lenders and, following enforcement,
of Singapore (the “ACRA”) within 30 days (if executed in applies enforcement proceeds to the lenders’ claims.
Singapore) or 37 days (if executed outside Singapore) after the
creation of the charge. 3.2 If a security trust is not recognised in your
Security interests over certain assets may also need to be registered jurisdiction, is an alternative mechanism available
(such as a parallel debt or joint and several creditor
with the relevant registries. A legal mortgage for registered land
status) to achieve the effect referred to above which
must be registered with the Land Titles Registry while a grant or would allow one party (either the security trustee or
assignment of security in intellectual property such as trademarks the facility agent) to enforce claims on behalf of all the
and patents must be registered with the Intellectual Property Office lenders so that individual lenders do not need to
of Singapore. enforce their security separately?
For registration of a charge with ACRA, a fee of S$60.00 is
currently payable. For the registration of a mortgage with the This is not applicable in our jurisdiction.
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 4 Enforcement of Security
shares of Singapore-incorporated companies or immovable property
in Singapore.
For intellectual property, a fee of S$50.00 is currently payable in 4.1 Are there any significant restrictions which may
impact the timing and value of enforcement, such as
respect of a trademark or patent over which security is to be created
(a) a requirement for a public auction or the
over. availability of court blocking procedures to other
creditors/the company (or its trustee in
2.7 Do the filing, notification or registration requirements bankruptcy/liquidator), or (b) (in respect of regulated
in relation to security over different types of assets assets) regulatory consents?
involve a significant amount of time or expense?
There are generally no significant restrictions which impact the
Filing, notification or registration requirements relating to security timing and value of enforcement, but the following should be noted:
are fairly straightforward in Singapore. For instance, registration of (a) Please see our response to question 5.1 below on court
security with the ACRA and the Land Titles Registry can be effected blocking procedures affecting enforcement.
electronically. (b) Under Singapore law, mortgagees have a duty to obtain the
The fees involved are nominal, as set out in our response to question best price possible and this may entail an auction, although it
is not a requirement as such.
2.6 above.
(c) In certain industries (e.g. telecommunications, power), the
transfer of assets (e.g. licence, rights over PPP agreements) of
2.8 Are any regulatory or similar consents required with the project company may require the consent from the
respect to the creation of security over real property relevant governmental authority.
(land), plant, machinery and equipment (e.g. pipeline,
whether underground or overground), etc.?
4.2 Do restrictions apply to foreign investors or creditors
in the event of foreclosure on the project and related
Governmental consents may be required to create security over real
companies?
property where the lessor is a governmental authority in Singapore.
For example, creating security over land leased from the Jurong
Under Singapore law, foreclosure results in a mortgagee becoming
Town Corporation, which is the statutory body responsible for the
the owner of the mortgaged property absolutely and beneficially.
leasing of industrial land in Singapore, would require the prior
Foreclosure requires judicial approval and is uncommon.
written consent from the Jurong Town Corporation.

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Generally, while there are no specific restrictions on foreign from the general insolvency regime. For example, banks licensed in
investors or creditors exercising the remedy of foreclosure, there are Singapore that are in financial difficulty are subject to intervention
certain restrictions on the enforcement powers on foreign by the Monetary Authority of Singapore (the “MAS”). There are
mortgagees who have taken mortgages over certain kinds of also entities that are excluded from parts of the scheme of
property. For instance, where land subject to a mortgage is a arrangement regime under Singapore law and these entities include
residential property (as defined in the Residential Property Act, banks, electricity licensees and licensed insurers.

Singapore
Chapter 274 of Singapore (the “RPA”)), foreign mortgagees are However, there is no special insolvency regime applicable to a
restricted in exercising their enforcement powers. special purpose vehicle in a usual project finance transaction.

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

5.1 How does a bankruptcy proceeding in respect of the A project lender may appoint a receiver and manager if such a right
project company affect the ability of a project lender has been provided for by the relevant security document. The
to enforce its rights as a secured party over the purpose of appointing a receiver is to remove the management of the
security?
secured assets from the hands of the project company and to place it
in the hands of a person chosen by the project lender.
There is a moratorium on legal proceedings after the commencement
Secondly, the express terms of the security document may give the
of winding-up in respect of a project company. However, a project
creditor the right to enter into possession.
lender that is a secured creditor will still be able to enforce its
security through self-help remedies by exercising their contractual Thirdly, a secured creditor may exercise power of sale granted under
rights as set out in the security documents to dispose of the security. law or the security document. When exercising the power of sale, a
mortgagee has a duty to act in good faith and to take reasonable
Where an application for judicial management is made in respect of
steps to obtain the best price reasonably obtainable at the time.
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 5.5 Are there any processes other than formal insolvency
management order is granted, a similar statutory moratorium and proceedings that are available to a project company
restriction on the enforcement of security will apply. to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?
The project company may also file an application to commence a
scheme of arrangement with its creditors. In applying for a scheme,
Under Section 210 of the CA, a company may make a scheme of
the project company may also apply for a moratorium which prevents
compromise or arrangement with its creditors or any class of them.
the enforcement of security. Depending on the circumstances, the
Such a scheme will be binding on all creditors in each class if a
court may also declare that the moratorium has extra-territorial effect.
majority in number representing three-fourths in value of each class
of creditors present and voting, either in person or by proxy,
5.2 Are there any preference periods, clawback rights or approves at a meeting of creditors the relevant scheme of
other preferential creditors’ rights (e.g. tax debts, compromise or arrangement. Provided that such approval is
employees’ claims) with respect to the security? obtained, the court may sanction the scheme in question, upon
which the scheme becomes binding.
Under Section 330 of the CA, where a floating charge has been
Under Section 211H(2) of the CA, the court may exercise its power
created within six months of the commencement of winding-up,
to cram down on a dissenting class of creditors, provided that the
unless it is proved that the project company was solvent
relevant majority approvals have been obtained for the scheme and
immediately after the creation of the charge it shall be invalid except
that the scheme not only does not discriminate unfairly between two
as to the amount of any cash paid to the company at the time of or
or more classes of creditors, but is also fair and equitable to each
subsequently to the creation of and in consideration for the charge.
dissenting class.
Undervalue transactions are susceptible to clawback if entered into
A project company may also enter into a consensual restructuring of
within five years ending on the date of the winding-up application.
its debts. Whether dissenting creditors can be “cramdowned” will
Unfair preference transactions are susceptible to clawback if entered
depend on the terms of the financing agreements governing the
into within two years (for persons connected to the company except
project financing.
employees) or, as the case may be, six months (for other persons)
ending on the date of the winding-up application.
Under Section 328(5) of the CA, certain preferential debts have 5.6 Please briefly describe the liabilities of directors (if
any) for continuing to trade whilst a company is in
priority over claims secured by floating charges if the assets of the
financial difficulties in your jurisdiction.
companies are insufficient to meet the preferential debts, including
liquidation expenses, unpaid employees’ salaries and superannuation
Generally, where a company is in financial distress or insolvent, the
or provident fund contributions.
usual fiduciary duties owed by directors to the company will require
the directors to take into account and give primacy to the interests of
5.3 Are there any entities that are excluded from creditors as a whole.
bankruptcy proceedings and, if so, what is the
Additionally, statutory liabilities exist for directors who continue to
applicable legislation?
trade whilst a project company is in financial difficulty. If a director
of the company contracts a debt which he, at the time of contracting,
There are various entities under Singapore law that are excluded
had no reasonable ground of expecting that the company will be

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able to pay, he will be personally liable for the payment of that debt Project Sector Government Agency /
under Section 339(3) of the CA (read with Section 340(2) of the Department
CA). Building and Construction Building and Construction
Authority and Urban
Redevelopment Authority
6 Foreign Investment and Ownership Transportation Land Transport Authority
Restrictions Energy Energy Market Authority
Singapore

Water and Sanitation Public Utilities Board

Telecommunications Info-communications Media
6.1 Are there any restrictions, controls, fees and/or taxes Development Authority of
on foreign ownership of a project company? Singapore

Singapore law does not generally impose any restriction on the 7.2 Must any of the financing or project documents be
foreign ownership of Singapore-incorporated project companies, registered or filed with any government authority or
save for companies operating in specific industries. Such industries otherwise comply with legal formalities to be valid or
include the banking, media, broadcasting and certain utility enforceable?
(electricity and gas transmission) industries. These restrictions may
be imposed by legislation that restricts the quantity or type of shares In general, financing or project documents need not be registered to
that a foreign entity may hold in the Singapore-incorporated be valid or enforceable. However, certain types of security interests
company, or through the system of licensing implemented by the may require registration, as per our response to question 2.6 above.
relevant regulatory authority.
There is no additional fee or tax imposed on the foreign ownership 7.3 Does ownership of land, natural resources or a
of a project company as such. However, Singapore tax resident pipeline, or undertaking the business of ownership or
companies may enjoy certain additional tax benefits (e.g. under the operation of such assets, require a licence (and if so,
Avoidance of Double Taxation Agreements that Singapore has can such a licence be held by a foreign entity)?
concluded with other jurisdictions).
Certain businesses or undertakings require a licence from the
relevant authorities under Singapore law (see our response to
6.2 Are there any bilateral investment treaties (or other
question 7.1 above).
international treaties) that would provide protection
from such restrictions? Foreign ownership of land in Singapore does not generally require
licences or approvals, save in respect of “residential property” as defined
Singapore has entered into a number of bilateral investment treaties under the RPA. Foreign ownership of non-residential properties (such as
and free trade agreements that set out certain standards of protection commercial or industrial properties) is generally permitted.
for investments made in Singapore by investors from other While there are generally no licensing requirements imposed on the
jurisdictions. ownership of pipelines, there are certain licensing requirements
Such treaties and agreements do not generally provide protection imposed on the operation of such pipelines. For example, a pipeline
from the restrictions set out in our response to question 6.1 above. owner may not convey any class of petroleum or any flammable
material through any pipeline in relation to which he is the pipeline
owner except under the authority of and in accordance with the
6.3 What laws exist regarding the nationalisation or provisions of a pipeline licence from the Commissioner of Civil
expropriation of project companies and assets? Are
Defence. In addition, under the Gas Act, Chapter 116A of
any forms of investment specially protected?
Singapore (“GA”), no person may convey gas through a gas
pipeline or gas pipeline network to any premises unless he is
Singapore does not have any specific legislation that specifically
authorised to do so by a gas licence (i.e. a gas transporter’s licence)
provides for the nationalisation and expropriation of foreign
or is exempted under the GA.
investments. However, certain legislation in Singapore allow the
government to compulsorily acquire or requisition certain property. There are no express prohibitions on entities which are foreign-
owned from holding such petroleum or gas licences. However,
For instance, the Land Acquisition Act, Chapter 152 of Singapore
regulatory approvals may need to be obtained for the acquisition of
(“LAA”) provides for the compulsory acquisition of land by the
an equity interest in a licensee.
government for public and other specified purposes. This right to
compulsorily acquire land is subject to certain processes and the
payment of market-value compensation for the acquired land in 7.4 Are there any royalties, restrictions, fees and/or taxes
accordance with the provisions of the LAA. payable on the extraction or export of natural
resources?

7 Government Approvals/Restrictions Singapore has very limited natural resources and there is very
limited activity in extracting natural resources.

7.1 What are the relevant government agencies or

departments with authority over projects in the typical 7.5 Are there any restrictions, controls, fees and/or taxes
project sectors? on foreign currency exchange?

A table of various government agencies or departments in typical There are generally no restrictions, controls, fees and/or taxes in
project sectors is set out below. Singapore applicable on the exchange of the local currency to
foreign currencies, or vice versa.

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7.6 Are there any restrictions, controls, fees and/or taxes 7.10 Is there any specific legal/statutory framework for
on the remittance and repatriation of investment procurement by project companies?
returns or loan payments to parties in other
jurisdictions?
The main legislation governing public procurement in Singapore is
the Government Procurement Act, Chapter 120 of Singapore
There are generally no restrictions, controls, fee and/or taxes

Singapore
(“GPA”), which was passed to give effect to Singapore’s obligations
applicable on the remittance and repatriation of investment returns under the World Trade Organisation’s Agreement on Government
(other than payments of interest and similar payments in respect of Procurement and several other free trade agreements. There are
any loan or indebtedness) to parties outside Singapore. three pieces of subsidiary legislation made under the GPA, namely
Please refer to our response to question 17.1 below on withholding the Government Procurement (Application) Order (“GP Order”),
taxes applicable in Singapore on certain payments made to non- the Government Procurement (Challenge Proceedings) Regulations,
residents in relation to interest and other payments to parties in other and the Government Procurement Regulations 2014 (“GP
jurisdictions. Regulations”).

7.7 Can project companies establish and maintain 8 Foreign Insurance

onshore foreign currency accounts and/or offshore
accounts in other jurisdictions?
8.1 Are there any restrictions, controls, fees and/or taxes
Yes, they can. on insurance policies over project assets provided or
guaranteed by foreign insurance companies?

7.8 Is there any restriction (under corporate law,

A foreign insurance company intending to insure or guarantee a
exchange control, other law or binding governmental
practice or binding contract) on the payment of project asset should be aware of restrictions in relation to carrying
dividends from a project company to its parent on insurance business in Singapore (see Section 3(1) of the
company where the parent is incorporated in your Insurance Act, Chapter 142 of Singapore (the “IA”)), reinsurance
jurisdiction or abroad? (see Section 3(1A) of the IA) and solicitation for insurance business
(see Section 6 of the IA).
There is generally no such restriction. There are no specific fees and/or taxes on insurance policies over
project assets provided or guaranteed by foreign insurance
7.9 Are there any material environmental, health and companies. However, any insurance services, whether provided by
safety laws or regulations that would impact upon a a foreign or domestic company, may be subject to goods and
project financing and which governmental authorities services tax (“GST”).
administer those laws or regulations?

8.2 Are insurance policies over project assets payable to

Various environmental, health and safety laws may be applicable to foreign (secured) creditors?
a project, depending on the particular nature of the project and/or
whether the project involves the use, storage, import, manufacture
Insurance proceeds are generally payable to foreign creditors
or sale of hazardous substances. This may include certain licensing
assuming that they are entitled to the insurance proceeds as an
or approval requirements.
assignee or as a loss-payee.
A table setting out some of the more salient regulations is set out
below.
Law / Regulation Description 9 Foreign Employee Restrictions
Environmental Protection and Relates to the protection and
Management Act, Chapter 94A of management of the environment
Singapore and resource conservation. Also 9.1 Are there any restrictions on foreign workers,
regulates (a) the discharge of trade technicians, engineers or executives being employed
effluent, (b) the importation, by a project company?
manufacture and sale of hazardous
substances, and (c) air impurities.
Foreign workers
Environmental Public Health Act, Relates to environmental public
Chapter 95 of Singapore health as well as the disposal and The Employment of Foreign Manpower Act, Chapter 91A of
treatment of industrial waste. Singapore provides that no person shall employ a foreign employee
Workplace Safety and Health Act, Relates to workplace safety, health (i.e. an employee that is not a citizen or permanent resident of
Chapter 354A of Singapore and welfare. Imposes duties on Singapore) without a valid work pass. Various types of work passes
various persons (including
may be issued by the Ministry of Manpower, depending, inter alia,
employers) to ensure the adequacy
of workplace safety measures, on the qualifications of the foreign workers and the monthly salaries
workplace training and of the relevant jobs.
supervision and procedures for
Quotas and levies may apply in relation to certain categories of
workplace emergencies.
foreign workers.
Fire Safety Act, Chapter 109A of Relating to environmental, health
Singapore and/or safety aspects of projects. Foreign engineers
Sewerage and Drainage Act, Only engineers registered under the Professional Engineers Act,
Chapter 294 of Singapore
Chapter 253 of Singapore (“PEA”) may engage in a prescribed
Energy Conservation Act, Chapter
branch of engineering work in Singapore (e.g. chemical
92C of Singapore

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engineering, civil engineering, electrical engineering and for want of reasonableness. Examples of such legislation include
mechanical engineering). the Unfair Contract Terms Act, Chapter 396 of Singapore and the
Foreign engineers not registered under the PEA may seek authorisation Misrepresentation Act, Chapter 390 of Singapore.
to engage in engineering work in collaboration with a registered
professional engineer possessing a practising certificate authorising 12 Corrupt Practices
him to engage in that prescribed branch of engineering work.
Singapore

12.1 Are there any rules prohibiting corrupt business

10 Equipment Import Restrictions practices and bribery (particularly any rules targeting
the projects sector)? What are the applicable civil or
criminal penalties?
10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by
construction contractors? The Prevention of Corruption Act, Chapter 241 of Singapore (the
“PCA”) is the principal legislation on bribery. The prohibitions
The import of goods into Singapore is subject to the Customs Act, thereunder are broad, and both the giver and taker of bribes (whether
Chapter 70 of Singapore, the Goods and Services Tax Act, Chapter as principal or agent) may be guilty of an offence. The general
117A of Singapore (the “GST Act”), and the Regulation of Imports punishment upon conviction is a fine not exceeding S$100,000 or a
and Exports Act, Chapter 272A of Singapore. jail term not exceeding five years or both. In addition, where a court
convicts any person of a PCA bribery offence, the court may order
Prior to the import of any goods into Singapore, the importer must, that person to pay a penalty equal to the amount or value of the
amongst other things, activate its Customs Account and appoint a gratification.
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 Bribery of Members of Parliament or members of certain public
the importer is importing controlled goods, the importer will also be bodies is punished more severely, with givers and/or takers of such
required to obtain the proper licence from the competent authority in bribes liable upon conviction to a fine not exceeding S$100,000 or a
Singapore. Controlled goods include steel helmets, flammable jail term not exceeding seven years or both. This increased
materials and certain batteries. punishment shall apply where the subject matter of the offence was a
contract, proposal for a contract, or subcontract to execute work under
such contract, with the Singapore government or any public body.
10.2 If so, what import duties are payable and are Further public servant bribery offences are set out in Sections 161 to
exceptions available? 165 of the Penal Code, Chapter 224 of Singapore (the “Penal Code”).
Separately, under the Corruption, Drug Trafficking and Other
Imports into Singapore are generally subject to GST and/or duty Serious Crimes (Confiscation of Benefits) Act, Chapter 65A of
payment. Currently, the prevailing rate of GST is 7% of the Singapore (the “CDSA”), a person must lodge a Suspicious
aggregate of cost, insurance and freight (“CIF”) value, all duties Transaction Report as soon as practicable where he knows or has
payable and commission and other incidental charges. A list of reasonable grounds to suspect that any property represents the
goods which are dutiable is set out on the Singapore Customs proceeds of, was used in connected with, or is intended to be used in
website at: http://www.customs.gov.sg. connection with “criminal conduct” (which is defined in the CDSA
However, certain exceptions to the payment of GST on imports are to include the bribery provisions under the PCA and the Penal
available. Imports of investment precious metals are exempt from Code). From 1 April 2019, it is an offence under the CDSA for any
GST, though importers will still need to apply for an exemption person to possess or use any property reasonably suspected of being
permit to carry out such imports. or representing any benefits of “criminal conduct”, if such person is
Certain GST suspension schemes are also available on imports. unable to satisfactorily account for such possession or use.
Goods imported and stored in Free Trade Zones are not subject to
GST, unless removed into customs territory for local use. Similarly,
13 Applicable Law
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 13.1 What law typically governs project agreements?
described below are generally not subject to duty and GST. GST
suspension schemes under the GST Act include: (i) the major
Project agreements in relation to projects undertaken or located in
exporter scheme; (ii) the zero-GST/licensed warehouse scheme; (iii)
Singapore are typically governed by Singapore law.
the approved third-party logistics company scheme; (iv) the
approved contract manufacturer and trader scheme; (v) the
approved refiner and consolidator scheme; and (vi) the import GST 13.2 What law typically governs financing agreements?
deferment scheme.
Financing agreements for Singapore projects are typically governed
by Singapore law.
11 Force Majeure
13.3 What matters are typically governed by domestic law?
11.1 Are force majeure exclusions available and
enforceable?
Agreements relating to the sale and purchase and/or grant of
security interests over land and local assets are matters that are
Force majeure exclusions are generally available and enforceable, typically governed by Singapore law.
subject to legislation rendering contractual clauses unenforceable

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client or the provision of services by a registered private education

14 Jurisdiction and Waiver of Immunity
institution to students.

14.1 Is a party’s submission to a foreign jurisdiction and 16 Change of Law / Political Risk
waiver of immunity legally binding and enforceable?

Singapore
The irrevocable submission of the borrower to a foreign jurisdiction 16.1 Has there been any call for political risk protections
is generally legally binding and enforceable under the laws of such as direct agreements with central government or
Singapore, save where the Singapore courts have jurisdiction over a political risk guarantees?
dispute, Singapore is a more appropriate forum and the ends of
justice will be better served by the dispute being determined in To our knowledge, there has been no such call for any projects.
Singapore courts, or a Singapore court may exercise its residual
jurisdiction to determine the matter.
17 Tax
Singapore law will generally uphold any provisions waiving
sovereign immunity by a Singapore entity.
17.1 Are there any requirements to deduct or withhold tax
from (a) interest payable on loans made to domestic
15 International Arbitration or foreign lenders, or (b) the proceeds of a claim
under a guarantee or the proceeds of enforcing
security?
15.1 Are contractual provisions requiring submission of
disputes to international arbitration and arbitral
awards recognised by local courts?
Under Section 12(6) of the ITA, the following payments are deemed
to be derived from Singapore:
Assuming that the subject matter for arbitration is arbitrable, the (a) any interest, commission, fee or any other payment in
connection with any loan or indebtedness or with any
relevant dispute falls within the scope of the arbitration clause, and
arrangement, management, guarantee, or service relating to
the relevant agreement to arbitrate is not null and void, inoperative any loan or indebtedness which is (i) borne, directly or
or incapable of being performed, Singapore courts will generally indirectly, by a person resident in Singapore or a permanent
recognise contractual provisions requiring submission of disputes to establishment in Singapore (except in respect of any business
international arbitration. carried on outside Singapore through a permanent
The Singapore High Court may grant permission to enforce foreign establishment outside Singapore or any immovable property
arbitral awards subject to certain procedural requirements. Where situated outside Singapore), or (ii) deductible against any
income accruing in or derived from Singapore; or
the arbitral award is made in a state party to the New York
Convention, the Singapore High Court will only refuse enforcement (b) any income derived from loans where the funds provided by
on limited grounds, including where arbitral authority or procedure such loans are brought into or used in Singapore.
is defective or enforcement contravenes public policy. Where the Such payments, where made to a person not known to the paying
arbitral award is made in a state not party to the New York party to be a resident in Singapore for tax purposes, are generally
Convention, the Singapore High Court has a discretion whether to subject to withholding tax in Singapore. The rate at which tax is to
enforce the arbitral award, but will consider similar factors as if that be withheld for such payments (other than those subject to the 15%
state were party to the New York Convention. final withholding tax described below) to non-resident persons
(other than non-resident individuals) is currently 17%. The
applicable rate for non-resident individuals is currently 22%.
15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution However, if the payment is derived by a person not resident in
conventions? Singapore unless from any trade, business, profession or vocation
carried on or exercised by such person in Singapore and is not
Yes, it is a contracting state. effectively connected with any permanent establishment in Singapore
of that person, the payment is subject to a final withholding tax of
15%. The rate of 15% may be reduced by applicable tax treaties.
15.3 Are any types of disputes not arbitrable under local
law? Therefore, payments of interest and other income falling within
Section 12(6) of the ITA made by borrowers in Singapore to a lender
not tax resident in Singapore (including payments of interest under
There is no exhaustive list on non-arbitrable disputes under
a guarantee or the proceeds of enforcing security) are subject to
Singapore law. However, matters containing a strong public interest
withholding tax at the above rates.
aspect, such as criminal matters, the winding up of companies,
clawback claims, antitrust regulatory issues and consumer However, such payments to a lender tax resident in Singapore (or a
protection may not be arbitrable. Singapore branch of a foreign company) are not subject to
withholding tax.

15.4 Are any types of disputes subject to mandatory

domestic arbitration proceedings? 17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What
taxes apply to foreign investments, loans, mortgages
Disputes arising from infrastructure projects will generally not be or other security documents, either for the purposes
subject to mandatory domestic arbitration proceedings. Disputes of effectiveness or registration?
subject to mandatory domestic arbitration proceedings include those
relating to the provision of services by a licensed estate agent to a
Under the Approved Foreign Loan Incentive, a company can apply

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to the Minister for Finance (the “Minister”) for withholding tax Singapore (“SFA”). The SFA requires all offers of debentures to be
rates on interest payments to be reduced or exempted with respect to accompanied by a prospectus, unless any of the exemptions under
a loan of not less than S$20 million from a non-resident person Part XIII of the SFA are applicable, which include exemptions
which is utilised to acquire productive equipment including plant or relating to institutional and accredited investors, small offers,
machinery which would generally qualify for capital allowances. private placements, and where an offer information statement is
The Minister may, in his absolute discretion, approve such used. With the introduction of the Securities and Futures (Offers of
Singapore

application and impose any conditions, if he is satisfied as to the Investments) (Exemption for Offers of Post-seasoning Debentures)
bona fides of such application and that it is expedient in the public Regulations 2016 and the Securities and Futures (Offers of
interest to do so. Investments) (Exemption for Offers of Straight Debentures)
For stamp duty payable on security documents, please refer to our Regulations 2016, debentures may also be offered to retail investors
response to question 2.6 above. without the need for a prospectus if the issuer meets a certain size,
and credit and listing requirements.
If the debt securities are listed on the SGX-ST, issuers will also have
18 Other Matters to comply with the applicable listing rules in the SGX-ST Listing
Manual.
18.1 Are there any other material considerations which
should be taken into account by either equity 19 Islamic Finance
investors or lenders when participating in project
financings in your jurisdiction?
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
As mentioned in our response to question 1.1 above, Singapore instruments might be used in the structuring of an
plays an important role in arranging infrastructure projects in the Islamic project financing in your jurisdiction.
region and many experienced project finance advisers are based in
Singapore. Apart from infrastructure fund managers and Singapore- It is possible to use a combination of some or all of the Shari’ah-
based banks with extensive regional networks, multilateral compliant financing principles of Istina’a, Ijarah, Wakala and
development banks have also established a significant presence in Murabaha in structuring an Islamic project financing.
Singapore. By way of illustration, during the construction phase of a project,
Where disputes are concerned, Singapore is well-known for its rule Istisna’a could be used as the financing principle for the purpose of
of law, good governance and reliable legal system, making funding such construction. Subsequently, when the project has
Singapore a preferred venue for international parties to settle project achieved commercial operation, Ijarah could then be used as the
financing disputes. There are also various dispute resolution financing principle based on the revenue receivable from the
institutions located in Singapore, including the Singapore project.
International Arbitration Centre, which ranks among the top
arbitration institutions globally.
19.2 In what circumstances may Shari’ah law become the
All of the foregoing give confidence to equity investors or lenders governing law of a contract or a dispute? Have there
participating in project financings in and out of Singapore. 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?
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 It is not the norm for the transaction documents of an Islamic
requirements for the issuance of capital market financing transaction in Singapore to be governed by Shari’ah law.
instruments.

19.3 Could the inclusion of an interest payment obligation

Project companies issuing bonds or similar capital market in a loan agreement affect its validity and/or
instruments are subject to the same regulatory requirements, save enforceability in your jurisdiction? If so, what steps
for any potential tax exemptions for project bonds used to fund could be taken to mitigate this risk?
infrastructure projects.
The main legislation governing the issuance of debentures in The inclusion of an interest payment obligation in a loan agreement
Singapore is the Securities and Futures Act, Chapter 289 of would not affect its validity and enforceability under Singapore law.

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Allen & Gledhill LLP Singapore

Kok Chee Wai Kelvin Wong

Allen & Gledhill LLP Allen & Gledhill LLP
One Marina Boulevard #28-00 One Marina Boulevard #28-00
Singapore 018989 Singapore 018989
Singapore Singapore

Singapore
Tel: +65 6890 7724 Tel: +65 6890 7644
Email: [email protected] Email: [email protected]
URL: www.allenandgledhill.com URL: www.allenandgledhill.com

Chee Wai is Co-Head of the Financial Services Department and, Kelvin is Co-Head of the Corporate & Commercial Department and
separately, Co-Head of Allen & Gledhill’s regional Energy, Head of the Energy, Infrastructure & Projects Practice.
Infrastructure & Projects Practice, and Co-Head of the Firm’s Banking
Kelvin regularly acts as counsel to key global and local players in the
& Finance Practice.
energy, gas, petrochemical and specialty gas production, waste
Chee Wai has broad and deep experience in domestic and treatment and disposal, water treatment and supply sectors. Kelvin
international financing. His general banking and finance practice has considerable experience advising on project development and
includes acting for lenders and major corporates on domestic and structuring, and complex regulatory and transactional issues. Kelvin
cross-border syndicated loans, structured and acquisition financing possesses extensive knowledge of the energy and gas sectors in
and debt restructuring. Singapore and is widely regarded as one of the leading lawyers and a
trusted legal advisor in infrastructure projects in the region. His
He also regularly acts for banks and sponsors on limited recourse
practice also encompasses district cooling, storage and terminalling,
project financing in various sectors and has acted in many of the PPP
tolling, contract manufacturing, outsourcing and other service
and other infrastructure projects in Singapore and in the region.
arrangements. He regularly advises on a broad range of general
Chee Wai is noted for his Banking & Finance and Projects & Energy commercial transactions, including public and private procurement
expertise in international legal directories such as Chambers Global, (including PPPs), cross-border sale of goods, distribution and agency
Chambers Asia-Pacific and The Legal 500 Asia Pacific. arrangements, equipment securitisation and leasing arrangements.

Allen & Gledhill is an award-winning full-service South-east Asian commercial law firm which provides legal services to a wide range of premier
clients, including local and multinational corporations and financial institutions. Established in 1902, the Firm is consistently ranked as one of the
market leaders in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which
are first of its kind. The Firm’s reputation for high-quality advice is regularly affirmed by the strong rankings in leading publications, and by the various
awards and accolades it has received from independent commentators and clients. The Firm is consistently ranked band one in the highest number
of practice areas, and is one of the firms with the highest number of lawyers recognised as leading individuals. Over the years, the Firm has also
been named ‘Regional Law Firm of the Year’ and ‘SE Asia Law Firm of the Year’ by many prominent legal awards. With a growing network of
associate firms and offices, Allen & Gledhill is well-placed to advise clients on their business interests in Singapore and beyond, in particular, on
matters involving South-east Asia and the Asia region. Our network comprises Rahmat Lim & Partners, our Malaysian associate firm in Kuala
Lumpur, our local office in Yangon, Myanmar and Soemadipradja & Taher, our alliance firm in Jakarta, Indonesia. Allen & Gledhill has over 550
lawyers in the region, making it one of the largest law firms in South-east Asia.

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 Chapter 31

South Africa

TGR Attorneys Phologo Pheko

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

1.1 What are the main trends/significant developments in

the project finance market in your jurisdiction? See question 1.1 above.

In the last several years the South African project finance market has 2 Security
been defined by the Renewable Energy Independent Power
Producer Programme which has successfully closed four rounds of
projects on a project-financing basis, with over R201.8 billion of 2.1 Is it possible to give asset security by means of a
investment facilitated. As at March 2018, 62 projects connected to general security agreement or is an agreement
required in relation to each type of asset? Briefly,
the grid, with a combined capacity of 3776 MW, are contributing to
what is the procedure?
the balancing of the system and saving the country from load
shedding.
Under South African law, the basic types of security that can be
We anticipate a number of government infrastructure projects in the
granted over movable and immovable property (including
short to medium term primarily by way of public private
intangible assets) are as follows:
partnerships (PPPs) at municipal, provincial and department level.
■ mortgage bonds registered in respect of immovable property;
This is informed by the South African government’s intent to
establish the South African Infrastructure Fund. Contribution from ■ pledges of movable, tangible property;
the fiscus towards the infrastructure fund is set to be in excess of ■ notarial mortgage bonds registered over movables (general:
R400 billion. President Cyril Ramaphosa said the aim of the all the movables of the debtor; special: specifically identified
infrastructure fund was to reduce fragmented infrastructure spend movables only);
and promote the efficient use of resources. The R400 billion will be ■ cessions of personal rights in securitatem debiti (namely, as
used to leverage additional resources from developmental finance security for a debt) (now treated as pledge of incorporeal
institutions, multilateral development banks and private lenders and assets);
investors. To ensure the funds are used effectively, and projects are ■ tacit hypothecs (arising by operation of law, rather than by
completed on time and within budget, an Infrastructure Execution agreement): landlord’s hypothec for unpaid rent; and seller’s
Team will oversee implementation. The team will identify and hypothec under an instalment sale transaction;
quantify projects, like roads and dams, and engage the private sector ■ judicial pledge (arising on attachment under a writ of
to support the activities. As part of the reprioritisation of spending, execution); and
additional infrastructure funding will be directed towards provincial ■ rights of retention or liens (arising by operation of law):
and national roads, human settlements, water infrastructure, enrichment liens; and debtor and creditor liens.
schools, student accommodation and public transport. Immovable property is the most common type of asset used to
Gauteng Finance MEC Barbara Creecy, in March 2019, expressed secure debt. This includes land and buildings comprising capital
optimism that the province’s experience in developing a pipeline of projects (such as power stations, roads, mining operations, office
blended-finance projects would position it well to tap into the new buildings, factory buildings, warehouses and shopping centres).
infrastructure fund being developed by the national government. Certain mining rights are also capable of being mortgaged although
Creecy noted that the Gauteng Infrastructure Finance Agency had the ability to dispose of such mining right when foreclosed upon
already developed a portfolio of 20 projects, some of which would may be limited by the terms of the mining licence or the law.
seek support from the proposed fund. Creecy listed the R7.8 billion Furthermore, securities such as shares, debentures, bonds, treasury
Kopanong Precinct, as well as the R7 billion Gauteng Schools certificates can be used as collateral. Insurance policies taken over
Project as two large provincial infrastructure initiatives that could any insurable assets or interest, or both, of the borrower can also be
benefit from the fund, which President Cyril Ramaphosa unveiled in used as collateral to the extent that if and when the borrower claims
2018 as part of a larger Economic Stimulus and Recovery Plan. in terms of those policies the proceeds thereof shall settle the debt
owing to the lender first before any other use. The same applies to
bank accounts or any cash standing to the credit of the borrower and
any future receivables of the borrower.

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TGR Attorneys South Africa

General notarial bond

2.2 Can security be taken over real property (land), plant,
machinery and equipment (e.g. pipeline, whether
The DRA does not prescribe a form for a general notarial bond. The
underground or overground)? Briefly, what is the bond must be prepared by a notary public, and is executed either:
procedure? ■ by the owner of the movable property subject to the bond; or
■ by a notary public under a formal power of attorney granted

South Africa
Tangible Movable Property to him by the mortgagor.
Movable property is anything which can be moved from place to Typically, a bond contains both:
place without damage to itself. Generally, all property which is not ■ An acknowledgment of debt by the borrower for the amount
immovable property is classified as movable property. A further of the bond.
distinction is drawn between: ■ A declaration binding the borrower’s movable property in
■ Tangible movable property, which can be handled or touched. favour of the lender as security for the debt acknowledged.
■ Intangible movable property, which cannot be handled or A general notarial bond must be registered at the deeds registry
touched (for example, intellectual property, book debts and within three months after the date of its execution.
shares).
Special notarial bond
Common Forms of Security
A special notarial bond for tangible movable property must identify
The most common forms of security that can be granted over and describe the property secured in a manner which makes the
tangible movable property are outlined below. property readily recognisable. The DRA does not prescribe a
Pledge particular form for this bond. It must be registered in the manner
A pledge is a type of mortgage of movable property given by a prescribed in the DRA and must be registered at the deeds registry
borrower (pledger) in favour of a lender (pledgee) as security for a within three months after the date of its execution.
debt or other obligation. A pledge can be used as security for both Landlord’s hypothec
tangible and intangible movable property. There are no formalities.
General notarial bond
A general notarial bond is a mortgage by a borrower of all of its 2.3 Can security be taken over receivables where the
tangible movable property in favour of a lender as security for a debt chargor is free to collect the receivables in the
or other obligation. However, a general notarial bond does not (in absence of a default and the debtors are not notified
the absence of attachment of the property before insolvency) make of the security? Briefly, what is the procedure?
the lender a secured creditor of the borrower. Consequently, it is not
a true mortgage of movable property, but is a means of obtaining a Claims and receivables include book debts and other rights under
limited statutory preference above the claims of concurrent creditors contracts and security can be granted in respect of them in South
in the borrower’s insolvent estate. Africa.
Special notarial bond Common forms of security
A special notarial bond is a mortgage which: Security over claims and receivables is usually created by a cession
■ is created over the tangible movable property (which can be in security.
specifically identified) of a borrower as security for a debt or Formalities
other obligation;
There are no specific perfection requirements for a cession in
■ meets the requirements outlined in the Security by Means of security, as the act of cession itself is sufficient to perfect the
Movable Property Act 1993; and
security.
■ is registered under the Deeds Registries Act 1937 (DRA).
A special notarial bond (once registered) constitutes real security in
2.4 Can security be taken over cash deposited in bank
the mortgaged property as effectively as if it had been expressly accounts? Briefly, what is the procedure?
pledged and actually delivered to the lender. Title to the movable
property remains with the borrower, subject to the lender’s security
Security over cash deposits is usually created by a cession in
interest. Since property subject to a special notarial bond must be
security of the borrower’s bank account
specifically identified, it is not appropriate for creating security over
changing (fungible) assets. Formalities
Landlord’s hypothec There are no specific perfection requirements for a cession in
security, as the act of cession itself is sufficient to perfect the
If rent is due and payable, but has not been paid, the lessor has a
security.
hypothec (an encumbrance giving a creditor a security interest in a
debtor’s movable property for so long as the movable property is on the
leased property), unless the contrary is agreed. The hypothec provides 2.5 Can security be taken over shares in companies
the lessor with a real right of security, allowing the lessor to attach and incorporated in your jurisdiction? Are the shares in
execute the lessee’s property to satisfy payment of the arrears. certificated form? Briefly, what is the procedure?

Formalities
Financial instruments
Pledge
The most common types of financial instruments over which
An agreement must be created between the lender and the borrower security can be granted are shares and debt securities.
together with delivery of the pledged movable property to the lender
Common forms of security
(or its agent). Title to the movable property remains with the
borrower, subject to the lender’s security interest. There are no Security over financial instruments is usually created by either a
registration or notification requirements for a pledge. pledge or a cession in security (or a combination of these).

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 TGR Attorneys South Africa

A cession in security is a way of granting security over intangible in favour of several creditors. This is because in order for security
movable property. It is created by the debtor (cedent) granting to be valid, a principal obligation must be owed to the secured
security by way of a cession over intangible movable property in the creditor. A trust lacks this requirement. The concept of agency is
creditor’s (cessionary’s) favour. It can be structured as either: also problematic because section 54 of the DRA expressly prohibits
■ A cession in securitatem debiti where title to the property the registration of a mortgage bond or notarial bond in favour of any
remains with the cedent (as with a pledge). person as the agent of a principal.
South Africa

■ An out-and-out cession, where title to the property is Where there are several creditors, security may be granted in favour
transferred to the cessionary, subject to the cedent’s right to of a Security Special Purpose Vehicle (Security SPV), which is a
have the property transferred back to it by the cessionary shelf company created for such purpose. This structure is the norm
once the debt, or other obligation secured, is discharged. for most project finance transactions in South Africa. The Security
Formalities SPV guarantees the obligations of the borrower under the loans in
Where financial instruments are evidenced by certificates, those favour of the creditors. In turn, the borrower indemnifies the
certificates are usually delivered with a transfer form (in blank) to Security SPV for any loss that it may suffer under the guarantee and,
evidence the security and facilitate its easy enforcement, where as security for its indemnity obligations, the borrower grants all
necessary. Where financial instruments are uncertificated, the security in favour of the Security SPV. This allows security to be
security is perfected by recording its existence on the securities effectively held by one entity in relation to numerous secured claims
account of the borrower where the financial instrument is registered. and, in turn, also simplifies the process of syndication.
There are no formalities for a cession in security, which is validly
created once the agreement to grant security has been reached. 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
2.6 What are the notarisation, registration, stamp duty status) to achieve the effect referred to above which
and other fees (whether related to property value or would allow one party (either the security trustee or
otherwise) in relation to security over different types the facility agent) to enforce claims on behalf of all the
of assets (in particular, shares, real estate, lenders so that individual lenders do not need to
receivables and chattels)? enforce their security separately?

See question 2.2 above. See question 3.1 above.

2.7 Do the filing, notification or registration requirements 4 Enforcement of Security

in relation to security over different types of assets
involve a significant amount of time or expense?
4.1 Are there any significant restrictions which may
There are no “hard and fast rules” as far as the amount of time for impact the timing and value of enforcement, such as
registering the different forms of security is concerned. The time (a) a requirement for a public auction or the
period associated therewith is dependent on the circumstances. availability of court blocking procedures to other
creditors/the company (or its trustee in
The registration fees, court fees and sheriff’s fees that are charged bankruptcy/liquidator), or (b) (in respect of regulated
for the granting or taking of security are not prohibitively expensive. assets) regulatory consents?
Where there is a bond with a large secured sum, the fee charged by
the conveyancer or notary public (once calculated at the prescribed With certain types of security (such as security conferred by way of
tariff) can be prohibitively expensive. In these instances, it is usual a cession in security, a pledge and a special notarial bond), the
for the lender to request a discount on the fee. Discounts of 50% are secured creditor can, without prior judgment against, or pursuit of,
commonly negotiated. the security provider, procure the sale of the secured assets and
apply the proceeds to satisfy the principal obligation.
2.8 Are any regulatory or similar consents required with For mortgage bonds or general notarial bonds, the secured creditor
respect to the creation of security over real property must first perfect the security by taking possession of the secured
(land), plant, machinery and equipment (e.g. pipeline, assets. The secured creditor must obtain a court order directing the
whether underground or overground), etc.? sheriff of the High Court to attach the relevant asset. The secured
creditor can then procure a sale of the assets, and apply the proceeds
See question 2.2 above. of the sale to discharge the principal obligation.
In some cases the secured creditor can simply agree with the
3 Security Trustee borrower that the secured assets are sold without the need for
judicial execution. This is known as parate executie (the right of a
creditor to realise a borrower’s property without first obtaining a
3.1 Regardless of whether your jurisdiction recognises court order). An agreement of parate executie concerning movables
the concept of a “trust”, will it recognise the role of a pledged and delivered to the secured creditor is valid provided there
security trustee or agent and allow the security is no prejudice to the security provider. However, an agreement of
trustee or agent (rather than each lender acting this nature is invalid in relation to security over:
separately) to enforce the security and to apply the
proceeds from the security to the claims of all the ■ Immovable property.
lenders? ■ Secured assets not in the possession of the secured creditor at
the time it wishes to enforce its rights.
Although a trust can be validly created under South African law, it is
unclear as to whether a trust can be validly created to hold security

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TGR Attorneys South Africa

disposition is not made for value. A court will set aside such a
4.2 Do restrictions apply to foreign investors or creditors disposition if the liquidator proves that either at any time:
in the event of foreclosure on the project and related
companies? ■ more than two years before the liquidation of the insolvent’s
estate, the insolvent made a disposition of property and that,
immediately after the disposition was made, the insolvent’s
As a first step, there must be default of the principal obligation. This liabilities exceeded its assets and the disposition was not

South Africa
is because security is an accessory obligation which is dependent on made for value; or
the existence or coming into existence of a principal obligation. The ■ within two years of the liquidation of the insolvent’s estate
secured creditor may procure the sale of the secured property and the insolvent made a disposition of property not for value,
apply the proceeds toward satisfaction of the principal obligation. unless the person claiming under or who benefited by the
In respect of mortgage bonds and general notarial bonds, the disposition proves that, immediately after the disposition was
secured creditor must first perfect the security by taking possession made, the insolvent’s assets exceeded its liabilities.
of the property. This can only be done after instituting judicial In either case, if proved that at any time after the making of the
proceedings against the borrower and obtaining a court order disposition the insolvent’s liabilities exceeded its assets by an
directing the sheriff to take possession of the property. amount less than the value of the property disposed of, the
In respect of other security (namely, special notarial bonds, security disposition may be set aside to the extent of such excess.
cessions and pledges), the secured creditor may contractually agree Voidable preferences
with the borrower to procure the sale of the property without prior Section 29 of the Insolvency Act provides for the setting aside of a
judgment (known as an agreement of parate execute). disposition of an insolvent person or entity’s property made within
six months before the date of liquidation and has the effect of
preferring one creditor above another, if, immediately after the
5 Bankruptcy and Restructuring
disposition, the liabilities of the insolvent person or entity exceed
Proceedings the value of its assets. In these circumstances, a court can set aside
the disposition. The setting aside of such a disposition may be
5.1 How does a bankruptcy proceeding in respect of the avoided if the person or entity in whose favour the disposition was
project company affect the ability of a project lender made can prove that the disposition was made in the ordinary course
to enforce its rights as a secured party over the of the insolvent person or entity’s business, and that the disposition
security? was not intended to prefer one creditor above another.
Undue preference to creditors
Once insolvency proceedings have commenced, a secured creditor
Section 30 of the Insolvency Act provides that if an insolvent
holding property as security cannot realise that security itself. It
person/entity, prior to its liquidation, made a disposition of its
must deliver the secured property to the liquidator for realisation.
property at a time when the insolvent’s liabilities exceeded its
The Insolvency Act prescribes certain instances under which a
assets, with the intention of preferring one of its creditors above
secured creditor can procure the sale of movable property itself.
another, that disposition can be set aside.
Section 83 of the Insolvency Act provides for alternative procedures
Collusive dealings
regarding the realisation of certain types of property held as security.
After realising the property, the secured creditor must forthwith pay Section 31 of the Insolvency Act provides for the setting aside of
the net proceeds to the liquidator. Provided that the secured creditor dispositions under which the insolvent person/entity, prior to its
can prove a valid claim against the insolvent’s estate, the secured liquidation, and in collusion with another person, disposed of its
creditor will be entitled to a payment out of the proceeds of such assets in a manner prejudicing the insolvent’s creditors or preferring
realisation. one creditor over another.

Section 35B of the Insolvency Act imposes a statutory netting of all Preferential creditors
obligations arising under certain master agreements. Obligations The Insolvency Act creates preferences regarding the following
incorporated in the netting would include those of a transferee of claims over an insolvent estate (amongst others):
security to return the security to the transferor. We note that security ■ Costs of liquidation (section 97).
that is pledged, mortgaged or bonded to a secured party cannot be ■ Costs of execution (section 98).
included in the netting.
■ Salary or remuneration of employees (section 98A).
■ Statutory obligations (section 99).
5.2 Are there any preference periods, clawback rights or ■ Income tax (section 101)
other preferential creditors’ rights (e.g. tax debts,
employees’ claims) with respect to the security? ■ Claims of holders of general notarial bonds and certain
special notarial bonds (section 102).

Under section 32 of the Insolvency Act, a court can, at the

liquidator’s insistence, set aside certain transactions entered into by 5.3 Are there any entities that are excluded from
an insolvent person/entity prior to its liquidation. These are referred bankruptcy proceedings and, if so, what is the
to as impeachable dispositions. A disposition is any transfer or applicable legislation?
abandonment of rights to property, and can include a mortgage over
immovable property, a cession, a pledge or a special notarial bond, Certain entities, such as banks, pension or provident funds, long-
among others. The Insolvency Act provides for the following term and short-term insurers, or companies in which the government
impeachable dispositions: has the sole shareholding or an interest, are subject to specific rules
and to the supervision of certain bodies regulating the particular
Disposition without value
industry, and may be excluded from bankruptcy proceedings in
In terms of section 26 of the Insolvency Act, a court may set aside an certain instances.
insolvent company’s disposition of property provided such

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It is not possible in this medium in the space provided to detail each to enter into a compromise with its creditors as an alternative to
and every such entity and it is suggested that prior to dealing with liquidation. This procedure is set out in section 155 of Companies
such an entity careful investigation is conducted to determine the Act No. 71 of 2008. The majority of the provisions of section 155
specific legislation applicable. relate to formal and procedural requirements, and once the requisite
majority vote has been obtained at a meeting convened for this
purpose, there is little left for a disgruntled creditor to do. The only
South Africa

5.4 Are there any processes other than court proceedings

that are available to a creditor to seize the assets of option available to such creditor is to oppose the sanctioning of the
the project company in an enforcement? scheme of compromise by the court, which is required to make it
final and binding on all the creditors of the company. To be
Under the Companies Act 2008, two new company rescue successful with such opposition, a creditor must show that it would
procedures are available. This is an arrangement between the be just and equitable for the court to reject the scheme – not an easy
company and its creditors, or certain classes of creditors. The board burden to meet. The consequences of a compromise are not too
of a company or a liquidator can propose an arrangement or a different from that of the adoption of a business rescue plan, being
compromise of the financial obligations of the company to all of its that creditors in both instances, if they vote in favour of the
creditors or to all of the members of a class of its creditors. The compromise or business rescue plan, will compromise their claims
proposal will be adopted if it is supported by a majority in number against the debtor company and will have no further claims against
representing at least 75% in value of the creditors or class who are the debtor company in terms of that specific debt. One major
present and voting at a meeting called for that purpose. disadvantage of a compromise is the loss of a creditor’s right to hold
officers and directors liable for any contravention of the Act. A
Business rescue proceedings (sections 128 to 154 of the Companies compromise is, however, in one instance more beneficial than
Act 2008) can be used where a company is financially distressed, business rescue: the Act makes provision for a creditor to retain its
including where a company anticipates being unable to pay its debts right to go against the surety of the debtor company.
in six months’ time. It includes the sale of the whole business to
generate a better return than a liquidation dividend would achieve.
A company can invoke business rescue by filing a resolution at the 5.6 Please briefly describe the liabilities of directors (if
Companies Office. To dispute this, a creditor must then make a any) for continuing to trade whilst a company is in
financial difficulties in your jurisdiction.
court application and prove that the proposed business rescue would
fail.
Directors are obligated to report financial distress – failure to do so
Once business rescue proceedings are commenced, a moratorium is
might result in personal liability.
imposed on all claims (secured and unsecured). The moratorium
runs from the date the board resolution is filed (and, consequently, Section 77, as read with section 22 of Companies Act No. 71 of
before notice is given to creditors and other affected persons). If a 2008, penalises and holds directors personally liable for any loss
shareholder or creditor applies to the court to have the company incurred through knowingly carrying on the business of the
placed into business rescue, the moratorium applies as soon as the company recklessly or with the intent to defraud creditors and other
application is issued. Following the board resolution, or court stakeholders. Section 214 creates criminal liability for those
application, for business rescue, the board of directors stay in office directors trading a company in a manner which is calculated to
throughout the business rescue period. The company must appoint defraud a creditor. Section 77(3) (b) and (c) states that any director
a business rescue practitioner. The practitioner can both: of a company is liable for any loss, damages or costs sustained by
the company as a direct or indirect consequence of the director:
■ Suspend (entirely, partially or conditionally), for the duration
of business rescue proceedings, any obligation of the ■ having acquiesced to the carrying on of the company’s
company arising from any pre-commencement contracts business despite knowing that it was being conducted in a
(even if that obligation arises post-commencement). manner prohibited by section 22(1) of the Act; or
■ Apply urgently to a court to cancel (entirely, partially or ■ being party to an act or omission by the company despite
conditionally), on any terms that are just and reasonable in knowing that the act or omission was calculated to defraud a
the circumstances, any agreement to which the company is a company creditor, employee or shareholder, or had another
party. A business plan must be prepared and voted on by the fraudulent purpose.
company’s creditors. The plan must be approved by creditors Consequently, a director would have a duty to pass a resolution for
whose aggregate claims against the company comprise at a company’s business rescue or alternatively resolve to wind up or
least 75% of the total value of all amounts owed by the liquidate the company as soon as he or she becomes knowingly
company to all its creditors. At least 50% of this 75% above
aware that the company is either financially distressed or is trading
must be amounts owed to independent creditors (that is,
creditors who are neither related to the company, nor to any in insolvent circumstances (both factually, in that its liabilities
of its directors (this excludes shareholders’ loans)). Voting is exceed its assets, or commercially, in that it cannot pay its debts to
weighted depending on the size of the claim, and employees creditors as and when they fall due).
are considered to be independent 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 6 Foreign Investment and Ownership
proceedings, or be put into liquidation. Restrictions

5.5 Are there any processes other than formal insolvency 6.1 Are there any restrictions, controls, fees and/or taxes
proceedings that are available to a project company on foreign ownership of a project company?
to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?
Generally speaking, there are no restrictions on a foreign company
having ownership in a South African project company. However,
South African law offers companies and corporations a process
the requirements of specific projects (such as under the Renewable
known as a compromise. In some instances, a company may wish

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Energy IPP Procurement Programme) frequently place foreign ■ The Department of Trade and Industry.
ownership restrictions on the project company and require project ■ The Department of Environmental Affairs.
companies to be held (to some extent) by South African citizens. ■ The Department of Finance (National Treasury).
■ The Department of Transport.
6.2 Are there any bilateral investment treaties (or other ■ The Department of Mineral Resources.

South Africa
international treaties) that would provide protection
from such restrictions? 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 which approvals
There are currently no bilateral investment treaties to which South
or other participation may be required.
Africa is a party that provide the protection referred to above.

7.2 Must any of the financing or project documents be

6.3 What laws exist regarding the nationalisation or
registered or filed with any government authority or
expropriation of project companies and assets? Are
otherwise comply with legal formalities to be valid or
any forms of investment specially protected?
enforceable?

State ownership
There are no requirements to file or register project documents with
Under the South African Constitution (Constitution) read together a regulatory authority or other government body. In some
with the Expropriation Act 63 of 1975, the South African circumstances, there may be a requirement for registration of
government is authorised to expropriate land or rights in land from security in the South African Deeds Registry.
anyone in South Africa. However, land or rights in land can be
However, sections 66 and 70 of the Public Finance Management Act
expropriated only for a public purpose or in the public interest. This
1999 (PFMA) places restrictions on organs of state in relation to
prohibits expropriation for reasons that are not truly for the benefit of
borrowings, guarantees and other commitments. These sections
all South Africans. The Constitution, however, provides that all
should be considered if ever any organ of state seeks to bind itself to
expropriations are subject to the payment of just and equitable
a future financial commitment under any project document.
compensation. There are several guidelines that have been
Absence of compliance would render such commitment invalid and
developed by the courts over time, and there is also a list of factors in
non-binding on the organ of state concerned.
the Constitution that must be taken into account by the courts when
determining what “just and equitable” means in any given situation.
7.3 Does ownership of land, natural resources or a
However, on November 2018 the Joint Constitutional Review
pipeline, or undertaking the business of ownership or
Committee of South Africa adopted a recommendation that the operation of such assets, require a licence (and if so,
Constitution should be amended to allow for expropriation without can such a licence be held by a foreign entity)?
compensation. This follows from a policy resolution of the ruling
party to that effect and a public participation process. The
Foreign participation in mining and production-related rights is
implications of this policy will only become clearer once the
permitted. However, sector-specific charters will require, among
amendments giving effect thereto have been enacted into law. The
other things, that holders of rights have participation by historically
current President of the Republic of South Africa, Mr. Cyril
disadvantaged South Africans (HDSAs).
Ramaphosa, has made numerous public pronouncements that such
expropriation will not be wholesale expropriation without
compensation as people feared. He mentioned that: “It is going to 7.4 Are there any royalties, restrictions, fees and/or taxes
be done in line with the decision taken at [the African National payable on the extraction or export of natural
resources?
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 Royalty Act 28 of 2008
(Royalty Act) imposes a royalty on the transfer of a “mineral
The Mineral and Petroleum Resources Development Act 2002
resource” (as defined in the Royalty Act, and which applies
(MPRDA) removed the possibility of private ownership of mineral
regardless of whether the mineral resource includes processing or
rights and vested ownership of minerals and petroleum in the people
manufacturing (for example, metals)). The royalty is payable for
of South Africa under the custodianship of the state.
the benefit of the National Revenue Fund by an extractor.

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

7.1 What are the relevant government agencies or

departments with authority over projects in the typical In general, South African-resident companies may maintain a
project sectors? foreign currency account with a local bank provided the company:
■ provides a service from South Africa to non-residents and
The relevance of any government department to a project is largely receives payment in foreign currency in South Africa; or
dependent on the nature of the project in question. Government ■ receives foreign commissions or profit in foreign exchange.
departments that are common role-players in the project finance Authorised dealers may approve the opening of foreign bank
industry include the following (to name a few): accounts by South African-resident companies subject to certain
■ The Department of Water Affairs. conditions.
■ The Department of Energy (with the National Energy
Regulator of South Africa (NERSA), the electricity, oil and
gas regulator).

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■ an environment that is not harmful to their health or

7.6 Are there any restrictions, controls, fees and/or taxes wellbeing;
on the remittance and repatriation of investment
■ have the environment protected, for the benefit of present and
returns or loan payments to parties in other
future generations, through reasonable legislative and other
jurisdictions?
measures that:
■ prevent pollution and ecological degradation;
South Africa

Under the South African Exchange Control Regulations, transfers of

dividends, profits and income distributions to non-resident ■ promote conservation; and
shareholders can be made in proportion to their percentage ■ secure ecologically sustainable development and use of
shareholding or ownership, or both, provided certain requirements natural resources while promoting justifiable economic
are met. and social development.

In relation to shareholder loans, the all-in rate that can be levied is The inclusion of an environmental right in the Constitution has
limited to the South African prime overdraft rate for rand resulted in the promulgation of many pieces of environmental
denominated loans, or the relevant base-lending rate for foreign legislation which seek to give effect to this right. Of particular
currency loans. Prior approval from the South African Reserve importance is the National Environmental Management Act 107 of
Bank is also required in respect of the terms of repayment of the 1998 (NEMA), which is the overarching umbrella piece of
capital portion of the loan. legislation in South Africa.

The following can be remitted abroad: A number of environmental management principles are enshrined
under NEMA, which must inform all decisions affecting the
■ dividends declared by South African subsidiaries of foreign
environment and guide the interpretation of NEMA and other
companies; and
environmental management legislation. One such principle is the
■ profits distributed by a branch of a foreign company
principle of sustainable development, which requires development
operating in South Africa.
to be socially, economically and environmentally sustainable. The
South Africa levies a 20% withholding tax on dividends paid by a principle of sustainable development has been included in the
South African company to a non-resident, although this may be environmental right in the Constitution and is a common thread
reduced or eliminated under a tax treaty. throughout South African environmental legislation.
Additional primary environmental management legislation which is
7.7 Can project companies establish and maintain of particular importance to project development in South Africa
onshore foreign currency accounts and/or offshore include the:
accounts in other jurisdictions?
■ National Water Act 36 of 1998 (National Water Act).
■ National Environmental Management: Waste Act 59 of 2008
In general, South African-resident companies can maintain a foreign (Waste Act).
currency account with a local bank provided the company either:
■ National Environmental Management: Air Quality Act 39 of
■ provides a service from South Africa to non-residents and 2004 (Air Quality Act).
receives payment in foreign currency in South Africa; or
■ National Environmental Management: Biodiversity Act 10 of
■ receives foreign commissions or profit in foreign exchange. 2004 (Biodiversity Act).
In other circumstances, under the Exchange Control Regulations, ■ Environmental Conservation Act 73 of 1989 (ECA).
South African companies are generally not permitted to establish
Environmental Impact Assessments (EIAs) are required under
and maintain a foreign currency account in other jurisdictions,
NEMA in order to obtain environmental authorisation to undertake
export capital from South Africa, hold foreign currency in excess of
activities which are listed under NEMA’s listing notices. The EIA
certain limits or incur indebtedness denominated in foreign
process and requirements are governed by NEMA’s EIA
currencies without the prior approval of the South African Reserve
Regulations. The requirements of the EIA process will depend on
Bank.
what activities are triggered. The EIA Regulations prescribe
specific timeframes within which EIAs must be conducted.
7.8 Is there any restriction (under corporate law, Timeframes are also prescribed for the competent authorities.
exchange control, other law or binding governmental
The primary environmental licence in South African environmental
practice or binding contract) on the payment of
dividends from a project company to its parent
law is the environmental authorisation, which must be obtained
company where the parent is incorporated in your under NEMA. It is likely that additional environmental licences
jurisdiction or abroad? will be required for project developments. The main types of
licences typically required for project development activities are:
See question 7.6 above. ■ a water use licence to undertake specific water uses outlined
in the National Water Act;
■ a waste management licence in respect of listed waste
7.9 Are there any material environmental, health and
management activities in the Waste Act; and
safety laws or regulations that would impact upon a
project financing and which governmental authorities ■ an atmospheric emission licence in order to undertake listed
administer those laws or regulations? activities in the Air Quality Act.
NEMA has far-reaching provisions regarding liability for significant
All environmental policy and law must be consistent with the pollution or degradation of the environment, which include a
Constitution and the principles upon which the Constitution is provision for director liability. Liability may be imposed on a wide
based. The cornerstone of environmental law and policy in South range of persons for failing to comply with the general duty of care
Africa is the environmental right, which was included in section 24 required under NEMA to take reasonable measures to prevent,
of the Bill of Rights chapter of the Constitution, which states that mitigate or remediate environmental harm. Section 28 of NEMA
everyone has the right to: places a duty of care on every person who causes, has caused or may

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cause significant pollution or degradation to the environment to take The Immigration Act
such reasonable measures. Although the provision is broad enough In terms of Immigration Act No. 13 of 2002, companies are entitled
to hold any person liable, NEMA specifically mentions land or to employ permanent residents, provided that their employment is
property owners, persons in control of land or premises (such as not in contravention of any restrictions that may be placed on their
landlords) and persons with the right to use land or premises permanent residence status. For example, permanent residency may
(generally tenants) as carrying primary responsibility. Negligently

South Africa
be obtained on the basis of an offer of permanent employment that
or intentionally causing significant pollution or degradation of the provides for work in a specific field of employment and for a
environment is a criminal offence, for which substantial penalties prescribed period.
may be imposed upon conviction.
Visas and the Immigration Process
A foreign national is obliged to obtain a work permit by applying in
7.10 Is there any specific legal/statutory framework for the prescribed manner to the South African consular office in the
procurement by project companies?
foreign national’s country of origin or ordinary residence. In
exceptional cases, where it is necessary to apply within South
The central legislation governing PPPs for national and provincial Africa, a foreign national is obliged to apply at the office of the
government is Treasury Regulation 16 issued under the PFMA. Due Department of Home Affairs, which has jurisdiction over the area in
to this legislation, South Africa has established a firm regulatory which the foreign national intends to work and good cause must be
framework under which national and provincial government shown for the application being brought locally.
institutions can enter into PPP agreements. The regulations have
Application times vary greatly, depending on the type of permit
been amended since they were first issued in May 2000 to take
applied for and the country in which the application is lodged.
account of experience in implementing PPPs.
Although applications at most consular offices take 30 days to
PPPs for municipal government are governed by the Municipal process, it can take between five days and two months to obtain a
Systems Act 2000, and the Municipal Finance Management Act permit. UK, US, Canadian and EU applications are generally
2003. Municipalities are not subject to the PFMA or to Treasury processed within 10 to 14 days, while countries in the Far East
Regulation 16 (South African National Treasury’s Public Private usually take six to eight weeks to process an application. The
Partnerships Manual 2004). processing time of the Department of Home Affairs in South Africa
is between 30 days and 10 months.
8 Foreign Insurance A foreign national is not permitted to hold more than one permit at a
time. A company may employ an unlimited number of foreign
nationals who all hold different categories of work permit, provided
8.1 Are there any restrictions, controls, fees and/or taxes that each foreign employee holds the appropriate work permit. One
on insurance policies over project assets provided or of the requirements of a work permit includes a motivation from the
guaranteed by foreign insurance companies?
company regarding the reasons for employing a foreign national
rather than a South African citizen or permanent resident.
The issuance of credit insurance or guarantees by foreign
Immigration Permit Types
institutions or non-resident entities to residents, including to RSA
banks, does not require prior SARB approval. There are various categories of work permits provided for in the
Immigration Act.
Visitor’s visa
8.2 Are insurance policies over project assets payable to
foreign (secured) creditors? For a placement of under three months, a visitor’s visa with
permission to conduct work activities may be applied for in terms of
Such policies may be paid to foreign secured creditors and no local section 11(2) of the Immigration Act.
insurance involvement is required. 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
9 Foreign Employee Restrictions considered as a one-off, non-renewable visa/permit that addresses
an immediate short-term or urgent need for a limited duration of
9.1 Are there any restrictions on foreign workers, work activity that cannot be met by an application for a work permit.
technicians, engineers or executives being employed Those foreign nationals who are “visa exempt” (which includes UK,
by a project company? US, Canadian, European and Australian nationals) are permitted to
obtain a visitor’s visa with permission to conduct work by applying
Any foreign national who is not a permanent resident of South in writing to the Director-General of the Department, at least a week
Africa and who wishes to render services in South Africa needs to prior to the foreign national’s departure, to confirm why the foreign
obtain a work permit in order to do so. national cannot apply for a work permit and the reasons why the
limited duration work is necessary and urgent.
“Work” is very broadly defined in Immigration Act No. 13 of 2002
as “conducting any activity normally associated with the running of Spousal visa
a specific business or being employed or conducting activities Spouses of South African citizens or permanent residents are
consistent with being employed or consistent with the profession of entitled to apply for a spousal work or business permit in terms of
the person, with or without remuneration or reward within the section 11(6) of the Immigration Act.
Republic”. The effect of this is that the requirement to obtain a work Work permits
permit is applicable not only to “employees” as defined in our
Section 19 of the Immigration Act makes provision for various
employment law legislation, but also to independent contractors and
categories of work permits, for example, quota permits, general
consultants.
work permits, intra-company transfer permits and exceptional skills

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permits, each of which have particular requirements that need to be parties have failed to cater for force majeure in their contractual
complied with. arrangements. Project finance documents typically expressly
The quota work permit system was designed to secure foreign skills regulate the parties’ rights and obligations with force majeure
in areas where South Africa is experiencing a skills shortage. The events. A force majeure event will generally excuse a party from
greatest advantage of quota permits over general work permits is liability for failure to perform its obligations. In a force majeure
event it is not customary for either party to claim damages for loss
South Africa

that the position need not be advertised and that one need not be in
possession of an offer of employment to obtain the permit. suffered as a result of a force majeure event.
Applicants can initially obtain a three-month permit during which
time they can secure employment. 12 Corrupt Practices
Any applicant not falling within the category or classes
contemplated under the quota permit section may apply for a
general work permit in terms of section 19(2) of the Immigration 12.1 Are there any rules prohibiting corrupt business
Act. The process is cumbersome, but the greatest advantage of a practices and bribery (particularly any rules targeting
the projects sector)? What are the applicable civil or
general work permit is that it can be issued for up to five years.
criminal penalties?
Exceptional skills permits may be granted to candidates who
possess special expertise and know-how in relation to the market in
The primary legislation in South Africa is the Prevention and
which they operate. The advantage with an exceptional skills permit
Combating of Corrupt Activities Act, which creates the general
is that it is not employer-specific. Such permits are granted for three
offence of corruption with a very wide ambit. Broadly, any person
years and are renewable.
who directly or indirectly accepts or agrees to accept any
An intra-company transfer work permit may be issued to a foreign gratification from any other person, or gives or agrees or offers to
national who is employed abroad by a business operating in the give any gratification to any other person in order to act, personally
Republic in a branch, subsidiary or affiliate relationship, and who by or by influencing another person to so act, in a manner designed to
reason of his or her employment is required to work in the Republic achieve an unjustified result, is guilty of the offence of corruption.
for a period not exceeding two years and is not renewable. The The Act also creates a number of specific offences, including
requirements for the intra-company work permit are the simplest corruption relating to tenders, contracts and public officials.
and easiest to obtain.
A person convicted of committing any of the statutory corruption
A company wishing to employ a number of foreign workers may offences may be liable to a fine and imprisonment of up to a period
also apply for a corporate permit in terms of section 21 of the of life imprisonment.
Immigration Act. Corporate permits are suited to corporate
Section 34 of the Act imposes a duty to report known or reasonably
applicants who intend to employ a number of foreign nationals in
suspected corruption and fraud to the value of approximately
specific positions.
R100,000 or more.

10 Equipment Import Restrictions 13 Applicable Law

10.1 Are there any restrictions, controls, fees and/or taxes

13.1 What law typically governs project agreements?
on importing project equipment or equipment used by
construction contractors?
Typically, projects in South Africa are governed by South African
All goods imported into South Africa must be declared to customs law. To the extent that there is any security in a foreign jurisdiction,
within seven days of the date on which the goods are imported. The security documents in relation thereto will be governed by the law
rate of duty payable on any goods imported is governed by the of that jurisdiction.
provisions of the Schedules to the Customs and Excise Act 91 of
1964 (Customs and Excise Act). 13.2 What law typically governs financing agreements?

10.2 If so, what import duties are payable and are See question 13.1 above.
exceptions available?
13.3 What matters are typically governed by domestic law?
The rate of duty payable on any goods imported is governed by the
provisions of the Schedules to the Customs and Excise Act. It must
See question 13.1 above.
also be noted that all persons that participate in any activities
regulated by the Customs and Excise Act may be required to register
with South African Revenue Services (SARS). 14 Jurisdiction and Waiver of Immunity

11 Force Majeure 14.1 Is a party’s submission to a foreign jurisdiction and

waiver of immunity legally binding and enforceable?

11.1 Are force majeure exclusions available and

Waivers of immunity are effective and enforceable.
enforceable?

Force majeure exclusions are available and enforceable in our law.

Common law recognises force majeure exclusions even where

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15 International Arbitration 16 Change of Law / Political Risk

15.1 Are contractual provisions requiring submission of 16.1 Has there been any call for political risk protections
disputes to international arbitration and arbitral such as direct agreements with central government or
awards recognised by local courts? political risk guarantees?

South Africa
South Africa is a signatory to the UN Convention on the The issue of political risk is normally addressed in finance
Recognition and Enforcement of Foreign Arbitral Awards 1958 documents concluded between the project company and the debt
(New York Convention). providers. For example, any form of government intervention by
The enforcement of foreign court judgments are dealt with in South way of nationalisation or expropriation of the project company’s
Africa by common law and applicable legislation and generally assets or its shares is treated as an “event of default” under the
foreign judgments are enforceable, subject to certain standards of finance documents. The consequence thereof is, amongst other
review. The present position applied by South African courts is not things, that the rights of the debt providers under the security
dissimilar to that under the standards of review under the New York documents may be activated, the assets that are the subject matter of
Convention, being that a foreign judgment will be enforced by those documents realised and the proceeds used to discharge the
South African courts provided: project company’s obligations under the finance documents. This
measure discourages government intervention or reduces the
■ the court which pronounced the judgment had jurisdiction to
entertain the case according to the principles recognised by potential of political risk.
South African law with reference to the jurisdiction of The issue of government intervention can also trigger a default
foreign courts; under an agreement between the organ of state and the project
■ the judgment is final and conclusive in its effect and has not company, which would entitle the project company to call a
become superannuated; “default” under the agreement concerned. This obviously depends
■ the recognition and enforcement of the judgment by the on the terms of the agreement between the organ of state and the
South African courts would not be contrary to public policy; project company.
and From experience, the above is the extent of protections normally
■ the judgment was not obtained by fraudulent means. afforded for political risk in our jurisdiction and it is unlikely that
The judgment does not involve the enforcement of a penal or there will be a departure therefrom in the short term.
revenue law of the foreign state.
Enforcement of the judgment is not precluded by the provisions of 17 Tax
Protection of Businesses Act 99 of 1978, as amended.

17.1 Are there any requirements to deduct or withhold tax

15.2 Is your jurisdiction a contracting state to the New York
from (a) interest payable on loans made to domestic
Convention or other prominent dispute resolution
or foreign lenders, or (b) the proceeds of a claim
conventions?
under a guarantee or the proceeds of enforcing
security?
Yes, South Africa is a signatory to the New York Convention.
The registration fees, court fees and sheriff’s fees that are charged
15.3 Are any types of disputes not arbitrable under local for the granting or taking of security are not prohibitively expensive.
law? Where there is a bond with a large secured sum, the fee charged by
the conveyancer or notary public (once calculated at the prescribed
Very few matters are not arbitrable in South Africa, provided the tariff) can be prohibitively expensive. In these instances, it is usual
parties agree to the arbitration. Status matters (such as matters for the lender to request a discount on the fee. Discounts of 50% are
relating to legal standing or capacity), matrimonial matters and commonly negotiated.
matters incidental to these are not arbitrable (section 2 of Arbitration
Act 42 of 1965). This section simply codifies the public policy
17.2 What tax incentives or other incentives are provided
grounds that are already recognised by common law, and therefore it preferentially to foreign investors or creditors? What
is not possible to resolve these disputes through private arbitration. taxes apply to foreign investments, loans, mortgages
Matters incidental to a matrimonial cause include disputes relating to or other security documents, either for the purposes
interests of children and proprietary rights of spouses. of effectiveness or registration?
Criminal matters are also not arbitrable because the Constitution
requires that these be resolved in the ordinary courts. Similarly, The South African government and the revenue authorities do not
claims under the Promotion of Administrative of Justice Act (that is, provide any specific foreign investment incentives or stabilisation
administrative law reviews) can only be heard in the High Court. regimes and such investors participating in the South African
market will be treated equitably with all other market participants
(including local participants). Various schemes are open to the
15.4 Are any types of disputes subject to mandatory
participation of foreign investors and these are largely regulated and
domestic arbitration proceedings?
facilitated by the Department of Trade and Industry.

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 Commission
for Conciliation, Mediation and Arbitration.

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The central legislation governing PPPs for national and provincial

18 Other Matters
government is Treasury Regulation 16, issued under the PFMA. In
general, if the project is procured or being implemented by a
18.1 Are there any other material considerations which government department or entity, the PFMA applies in respect to the
should be taken into account by either equity expenditure related to the project and the security to be provided by
investors or lenders when participating in project the government (among other aspects).
South Africa

financings in your jurisdiction? If the project is being developed by the private sector, the approvals
required will depend on the relevant sector. For example, if the
South Africa has a relatively sophisticated construction sector, and project involves the extraction or production of mineral products,
construction risks are dealt with by use of turn-key EPC contracts the MPRDA will apply.
with performance bonds and liquidated damages for delay and
performance, especially by project sponsors bidding for projects
under South Africa’s REIPPP. 19 Islamic Finance
Given the requirement for participation of HDSAs in project equity
(who tend to be undercapitalised), it is common to use separate 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
funding structures to ensure that these entities will be able to meet instruments might be used in the structuring of an
their equity contribution and sponsor support obligations as required Islamic project financing in your jurisdiction.
(see the section in relation to project structuring above).
Projects are typically funded in South African rand, which reduces Islamic finance is becoming an important player in the finance
the risk of a currency mismatch between the revenue stream and the sector. In South Africa, the market share of Islamic finance is still
debt service. The project company is typically required to enter into small in comparison with conventional banking, but this is expected
comprehensive hedging arrangements, both for currency risk during to change in the near future.
the construction period and interest rate risk thereafter.
19.2 In what circumstances may Shari’ah law become the
18.2 Are there any legal impositions to project companies governing law of a contract or a dispute? Have there
issuing bonds or similar capital market instruments? been any recent notable cases on jurisdictional
Please briefly describe the local legal and regulatory issues, the applicability of Shari’ah or the conflict of
requirements for the issuance of capital market Shari’ah and local law relevant to the finance sector?
instruments.
Generally, under South African law, contracting parties may select
In South Africa, the project finance sector is not governed by a any law as the governing law of the contract, as long as it is
single broad regulatory framework. The regulatory approvals and sufficiently defined and capable of enforcement. However, there is
process required for each project depend on the relevant sector and limited case law and no conclusive rulings by South African courts
type of infrastructure being procured or financed. For renewable on whether Shari’ah law would be recognised as a system of law
energy projects, for example, there is an established framework capable of governing a contract.
under section 46 of the Electricity Regulation Act 2006 (ERA),
which requires the Minister of Energy to make a determination in
19.3 Could the inclusion of an interest payment obligation
relation to the procurement of new generation capacity from in a loan agreement affect its validity and/or
renewable energy sources, including the: enforceability in your jurisdiction? If so, what steps
■ Technologies. could be taken to mitigate this risk?
■ Number of megawatts (MW).
■ Identity of the procurer. Generally, no.
■ Buyer of the electricity generated.

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TGR Attorneys South Africa

Phologo Pheko
TGR Attorneys
Vdara 6th Floor
41 Rivonia Road
Sandhurst, Sandton, 2196

South Africa
South Africa

Tel: +27 11 243 5027

Email: [email protected]
URL: tgrattorneys.co.za

Phologo is a Partner in TGR Attorneys and specialises in banking and

finance, with a focus on infrastructure, project finance and other forms
of finance. He has particular expertise in public private partnerships,
public procurement, black economic empowerment and infrastructure
finance in the sectors of energy, road, transport, mining and
telecommunications. Phologo has advised lenders, sponsors and
subcontractors in these areas both locally and internationally.

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 fraternity. 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 enterprises
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.

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 Chapter 32

Spain
Héctor Bros

Cuatrecasas Javier Vivas

schemes), the light rail systems of Malaga and Bilbao, and the
1 Overview
financing of some of the civil engineering works behind the impressive
high-speed rail network. Some of these projects have now been the
1.1 What are the main trends/significant developments in object of major divestments by the original sponsors, with institutional
the project finance market in your jurisdiction? infrastructure funds taking the bulk of the equity stakes.
Other significant deals have been closed in the context of the
The Spanish economy has continued to show a robust growth pace in acquisition of various portfolios of car parking facilities (most
2018, just above 2.5%. The country maintains a healthy flow of notably, Parkia and Empark in 2016 and 2017, respectively), in
foreign investment, spreading across-the-board to all types of projects. some cases as a result of joint ventures with publicly controlled
In 2018, a number of ever larger scale renewable projects have companies (e.g. the €200m financing of Bamsa) or in the context of
featured in the investment landscape. Good examples of these are tender processes sponsored by governmental entities, such as the
Forestalia’s 300 MW and 800 MW greenfield wind projects railway management company Adif.
respectively known as Project Goya and Project Fenix, or Grupo In the waste treatment business, the country has also seen interesting
Jorge’s combined 100+ MW wind projects in Aragon. investments in waste treatment plants (e.g. the Ecoparks of
Political instability has nevertheless frustrated most of the prospects Zabalgarbi or Zubieta), which in some cases have been at the mercy
in the infrastructure field, by paralysing some far-reaching of unexpected political changes.
governmental initiatives such as the Extraordinary Plan for Roads
Investment (Plan Extraordinario de Inversión en Carreteras), a 2 Security
scheme of up to €5bn of public-private partnership (PPP)-based
investments on highway and other high-capacity roads, including
both construction and maintenance, which was expected to be on 2.1 Is it possible to give asset security by means of a
track in 2018 and which has instead collapsed (at least temporarily) in general security agreement or is an agreement
the midst of the political turmoil. Notwithstanding this, required in relation to each type of asset? Briefly,
infrastructure-based funds and generally long-term institutional funds what is the procedure?
continue their landing in the country, not only on the equity side but
increasingly as fresh debt providers. Spanish law does not provide for a so-called “universal security”
over the entire debtor’s assets, nor does it generally admit the
creation of a “floating” or “adjustable” lien or encumbrance (except
1.2 What are the most significant project financings that
for certain mortgages and pledges over cash-like instruments).
have taken place in your jurisdiction in recent years?
Therefore, a specific security agreement is usually required in order
to grant security over each type of asset.
In addition to the above-referred large-scale wind renewable
Typically, the security package in a project finance transaction in
greenfield projects, in the area of transport, most of the new projects
Spain comprises a variety of security over assets, among which the
have been located in the northern regions, such as the €320m project
most frequent are: a pledge over the shares of the project company;
financing of the N-636 Gerediaga–Elorrio road, in Vizcaya, or the
one or more pledges over bank accounts and receivables arising from
€900m project financing of the hard-toll highways AP-1/AP-8 and GI-
project agreements (EPCs, operation and maintenance agreements;
632, in Guipuzcoa, which included the €500m refinancing of the
hedging agreements; insurance policies, etc.); and, eventually, actual
European Investment Bank tranche. Project finance structures have
or contingent security over the project’s physical assets (whether by
also been used to permit the acquisition of hard-toll highways, such as
means of a pledge or a mortgage, depending on the type of asset).
the privatised tunnels of Vallvidrera and Cadí, acquired by Abertis and
BTG in 2012 and recently reshuffled to accommodate a new investor.
Equally, other road-based project refinancings include Autovía de 2.2 Can security be taken over real property (land), plant,
Arlanzón (A-1) and Autovía de La Mancha (A-4), both closed in 2018. machinery and equipment (e.g. pipeline, whether
Aside from roads, a number of interesting and fairly innovative deals underground or overground)? Briefly, what is the
have been implemented for underground, tram and other railway- procedure?
based infrastructure, such as the three concessions for the huge
underground Line 9 of Barcelona (totalling more than €3bn in PPP Real property is taken as security by means of a real estate mortgage

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(hipoteca inmobiliaria). Under Spanish law, real estate mortgages The formal requirements which apply are identical to those of any
cover: (i) the plot of land and the buildings built on it; (ii) the other possessory pledge over receivables. The creation of the
proceeds from any insurance policies covering such property; and pledge does not imply, unless otherwise agreed by the parties, the
(iii) the improvement works carried out on the property and natural freezing of the account.
accretions. Should the parties agree to it, such mortgage may also On a different note, in the event of pledges over bank accounts
include movable items located permanently in the mortgaged securing cash settlements of financial instruments (such as netting-
property. based financial agreements), it may be possible to subject the pledge

Spain
Security over machinery and equipment may be created by means of to a specific regime regulated under Royal Decree 5/2005. The
a chattel mortgage (hipoteca de maquinaria industrial) or a non- pledge created under this regime would not require notarisation.
possessory pledge (prenda sin desplazamiento de maquinaria
industrial). The choice will depend on whether the specific asset
2.5 Can security be taken over shares in companies
meets certain legal requirements. incorporated in your jurisdiction? Are the shares in
Further formalities for the abovementioned security involve the certificated form? Briefly, what is the procedure?
registration of such security with the corresponding Spanish
registries: the Property Registry (Registro de la Propiedad) with Yes, it is certainly possible, and it is one of the most common and
regards to the mortgages; and the Chattel Registry (Registro de frequent types of security in Spanish project finance transactions.
Bienes Muebles) with regards to the non-possessory pledge. If the shares to be pledged belong to a private limited company
(sociedad limitada), and taking into account that quota units
2.3 Can security be taken over receivables where the (participaciones) are not represented by issued certificates (contrary
chargor is free to collect the receivables in the to shares (acciones) of public limited companies (sociedad
absence of a default and the debtors are not notified anónima)), possession is transferred by means of the entry into a
of the security? Briefly, what is the procedure? notarial deed of pledge and, eventually, registration of the pledge in
the Registry Book of Shareholders (Libro Registro de Socios) of the
In Spain, security over receivables can be taken in two different relevant pledged company.
ways: When the shares belong to a public limited company (sociedad
(i) Through a possessory pledge: Although the use of this form anónima), transfer of possession is achieved as follows: (i) if the
of security for receivables is not expressly contemplated share certificates (títulos múltiples or resguardos provisionales)
under the applicable law (the Spanish Civil Code), it has
have been issued, by endorsing the relevant title certificate and
traditionally been admitted by case law and widely applied in
registering the pledge in the Registry Book of Shares (Libro
practice. Under this pledge, the pledgor would be entitled to
collect the receivables in the absence of a default, unless Registro de Acciones); or (ii) if no share certificates have been
agreed otherwise. However, the obligation to notify the issued, by means of the registration of the pledge in the Registry
debtor about the creation of the pledge is, in the opinion of Book of Shares.
the majority of scholars and certain case law, a requisite for In both cases, it is also advisable (and market standard practice) for
the effective transfer of possession under the relevant pledge the pledgee to request and obtain a certificate issued by the
(although some hold the opinion that such notification is not
company’s secretary representing that the pledge has been
a perfection requirement but a precautionary measure to
registered in the Registry Book of Shareholders or the Registry
avoid the relevant debtor of the receivables being released
from its payment obligation by paying the original creditor, Book of Shares (as applicable), which will also comply with the
i.e. the pledgor). As a matter of practice, it is sometimes requirement of notifying the pledge to the company whose shares
agreed that notice to the relevant debtors shall only be given are being pledged.
upon potential or effective default, or if certain covenants When the pledged company’s shares are represented by means of
(e.g. financial ratios) are not met (on those occasions where it book entries (anotaciones en cuenta), the pledge must be registered
is important from a commercial perspective for the pledgor in the relevant account, becoming enforceable against third parties
that its debtors are not aware of such pledge unless
once registered in the book entry register. In the case of shares
necessary).
traded on a Spanish secondary market, the book entry register will
(ii) Through a non-possessory pledge (prenda sin desplazamiento
be held by a central clearing house. On request, the entity
de la posesión): Under this form of pledge, no notification to
responsible for the book entry register will issue a certificate stating
the relevant debtor would be required (unless such debtor is a
public authority), on the basis that the filing of such pledge that the pledge has been entered.
with the relevant Chattel Registry would give it the necessary
publicity vis-à-vis third parties. As with the possessory pledge, 2.6 What are the notarisation, registration, stamp duty
unless otherwise agreed, this form of security would not and other fees (whether related to property value or
prevent the pledgor from collecting the receivables in the otherwise) in relation to security over different types
absence of enforcement. Nevertheless, it is to be taken into of assets (in particular, shares, real estate,
account that this type of pledge is not granted over those receivables and chattels)?
receivables which are represented by securities or considered
financial instruments.
For possessory pledges to be opposable before third parties, a
notarised agreement (póliza notarial) or, as the case may be, a deed
2.4 Can security be taken over cash deposited in bank (escritura pública) must be entered into. This is due to the fact that
accounts? Briefly, what is the procedure? it is presumed that these public documents verify the date and the
terms and conditions of the pledge (other than pledges under Royal
The pledge over bank accounts is simply a pledge over the Decree 5/2005; see question 2.4 above).
receivables arising in favour of the holder of a bank account vis-à- Some other types of security are subject to compulsory notarisation
vis the bank, which should typically correspond or be equal to the and registration on public registries (particularly mortgages and
account balance.

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non-possessory pledges, as mentioned in question 2.2 above), which and case law are inconsistent regarding the role of an agent acting on
has certain implications in terms of cost, mainly due to: (i) behalf of a syndicate of lenders upon enforcement.
registration fees, which vary in accordance with the amount of the
secured liability (approximately 0.02% of the secured liability); and
3.2 If a security trust is not recognised in your
(ii) stamp duty of 0.5% to 1.5% of the secured liability (principal, jurisdiction, is an alternative mechanism available
interest and any related costs), depending on the region where the (such as a parallel debt or joint and several creditor
collateral is located. status) to achieve the effect referred to above which
Spain

Notarial fees are calculated on the basis of fixed criteria, which would allow one party (either the security trustee or
the facility agent) to enforce claims on behalf of all the
provide a means to calculate the amount of their fees and which vary
lenders so that individual lenders do not need to
in accordance with the amount of the secured liability enforce their security separately?
(approximately 0.03% of the secured liability), although in
transactions with an aggregate value over six million euros
The structure of “parallel debt” between lenders and a special
(€6,000,000), such fees may be reduced if negotiated with the
purpose vehicle (SPV) is not specifically recognised under Spanish
notary.
law. Should this structure be adopted in a transaction where the
secured obligations are governed by Spanish law, there is a risk that
2.7 Do the filing, notification or registration requirements it would be considered to be a fiduciary relationship unsupported by
in relation to security over different types of assets a real credit of the agent against the project company. If the secured
involve a significant amount of time or expense? obligation is governed by foreign law, there should be no problem
for the Spanish security to secure such parallel debt, to the extent the
For security documents that need to be filed within a public registry, same is valid and enforceable under the applicable law.
the expected elapsed time from the date the documents are notarised Notwithstanding this, there are clearly insufficient judicial
to the actual registration by the public registry is usually from two precedents to assure that this will always be validated by the courts.
(2) to six (6) weeks. Nevertheless, on occasions public registries
consider that necessary amendments need to be made to the relevant
security document in order to comply with registration criteria, 4 Enforcement of Security
which may delay registration and increase the previously mentioned
term. As to registry fees, see question 2.6 above.
4.1 Are there any significant restrictions which may
impact the timing and value of enforcement, such as
2.8 Are any regulatory or similar consents required with (a) a requirement for a public auction or the
respect to the creation of security over real property availability of court blocking procedures to other
(land), plant, machinery and equipment (e.g. pipeline, creditors/the company (or its trustee in
whether underground or overground), etc.? bankruptcy/liquidator), or (b) (in respect of regulated
assets) regulatory consents?

Regulatory or other consents with respect to the creation of security

over real property or machinery would apply only in very limited The timing and value of enforcement will depend very much on the
cases, depending on the exact location of the asset, its nature and the type of security enforced and the enforcement proceedings chosen
parties involved. by lenders.
Enforcement of collateral security is typically carried out through a
public auction, either in the context of judicial or notarial
3 Security Trustee proceedings. For notarial enforcements, see question 5.4 below.
The rights derived from the relevant security may be judicially
3.1 Regardless of whether your jurisdiction recognises enforced either through declaratory civil proceedings or through
the concept of a “trust”, will it recognise the role of a summary proceedings. The latter action is faster and more effective,
security trustee or agent and allow the security while the former is costly and time-consuming. However, to start
trustee or agent (rather than each lender acting summary proceedings, certain requirements must be met. In
separately) to enforce the security and to apply the particular, the lender will be required to: (i) specify the agreement
proceeds from the security to the claims of all the
giving rise to the claim and the final due amount, with a full break-
lenders?
down of each concept; (ii) provide a notarial deed (or notarised
agreement) where a Notary Public confirms that calculations have
Spanish law does not recognise trusts as a legal concept. Therefore, been made in accordance with the terms and conditions of the
security trustees, although used in transactions where foreign lenders relevant agreement; and (iii) present a copy of the notarial request
are involved, are seldom used for a Spanish security package. Instead, (requerimiento notarial) for payment addressed to the debtor.
lenders tend to appoint an agent for the Spanish security, which holds
the security in its own name and on behalf of the other lenders. In order to proceed: (i) to the enforcement of a pledge, the court will
request the deposit of the pledged assets; or (ii) to the enforcement of
It is possible for a security agent to enforce claims on behalf of the a mortgage, the court will give notice of the foreclosure to any other
lenders and the other secured parties, as long as each party grants a mortgage creditor. Once the above actions have been carried out, the
notarised power of attorney in favour of the security agent. Such court will publish a date for auction. The debtor will only be able to
power of attorney must expressly authorise the security agent to oppose enforcement under limited circumstances, such as prior
carry out the enforcement proceedings on behalf of the lenders. extinction of the pledge, full payment of the secured obligation or
This system nevertheless has two issues: (i) from a practical existence of a material error on the calculation of the due amounts.
perspective, Spanish banks are reluctant to grant powers of attorney The time schedule for the actual recovery of amounts through
to other banks, and prefer to appear themselves throughout the enforcement will depend on each case, since there is no time limit
enforcement proceedings; and (ii) from a legal perspective, authors for the court to complete the proceedings.

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The enforcement of pledges over receivables may also be achieved Refinancing agreements achieved before the date of insolvency
through set-off. which meet certain requirements (substantial increase in the
Restrictions on enforcement of security regarding regulatory available credit, extension of the maturity date, general
consents are very specific, usually related to energy transactions, enhancement of the financing obligations of the relevant debtor) and
and will ultimately depend on the kind of project and the assets on which result in a general improvement of the prospects of the debtor
which security is enforced. in the short and medium term shall not be challengeable during the
two-year clawback period, provided that: (i) the refinancing

Spain
agreement is entered into with creditors representing at least 60% of
4.2 Do restrictions apply to foreign investors or creditors debtor’s liabilities as of the date of the agreement; (ii) the terms of
in the event of foreclosure on the project and related
the agreement allow the future viability of the company; and (iii) the
companies?
refinancing agreement is formalised as a notarial deed. Irrespective
of the above, if a refinancing agreement meets all the following
Generally, there is no distinction between domestic and foreign requirements it shall also not be challengeable during the two-year
entities when it comes to foreclosing. clawback period if: (a) it increases the ratio of assets over liabilities;
(b) the current assets exceed the current liabilities; (c) the value of
5 Bankruptcy and Restructuring security does not exceed 90% of the existing debt for such creditors,
Proceedings nor the percentage of the existing debt covered by security prior to
the refinancing agreement; (d) the applicable interest rate has not
increased by more than 33% over the prior applicable interest rate;
5.1 How does a bankruptcy proceeding in respect of the and (e) the refinancing agreement is formalised as a notarial deed.
project company affect the ability of a project lender If the refinancing agreement: (i) has been ratified by creditors which
to enforce its rights as a secured party over the represent at least 51% of the debtor’s financial liabilities; and (ii)
security?
substantially increases the available credit, extends the maturity
date, or enhances the financing obligations of the relevant debtor,
As a general rule, as from the declaration of insolvency of the such agreement may be sanctioned by the insolvency judge, in
project company, secured lenders will be prevented from enforcing which case it may also bind dissident lenders (subject to such
their security until the earlier of the following: a composition of refinancing agreement having been entered into by certain
creditors is approved; or at least one year has elapsed since the reinforced majorities, ranging from a minimum threshold of 60% to
declaration of insolvency, provided that during this period no 80%, depending on whether or not the particular dissident lenders
liquidation proceedings have been commenced. are secured and the scope of the cramdown).
Exceptionally, the above standstill period will not apply if the
insolvency judge determines that the assets which constitute the
5.3 Are there any entities that are excluded from
object of security are not devoted to the business activity of the
bankruptcy proceedings and, if so, what is the
insolvent company, do not constitute a productive unit of such applicable legislation?
company or, eventually, such asset is not necessary for the
continuation of the business operations.
Governmental entities of any type (whether territorially based –
At any time during the standstill period, the insolvency administrator such as national, regional or municipal authorities – or those of a
may decide to satisfy immediately any due amounts to the secured functional nature) will not be subject to the Insolvency Act.
lenders, in order to avoid the relevant security being enforced. However, companies directly or indirectly controlled by
governmental entities will also be subject to general bankruptcy
5.2 Are there any preference periods, clawback rights or laws.
other preferential creditors’ rights (e.g. tax debts, Additionally, certain types of companies (such as banks and other
employees’ claims) with respect to the security? credit entities, financial services companies or insurance
companies) are subject to specific insolvency regulations, although
Any claims of secured creditors will be qualified as “privileged the composition, appointment and operation of the insolvency
claims” up to the value of the collateral on which they fall; any administration will still be regulated by the Insolvency Act.
excess being qualified as an “ordinary claim” or, in the case of
interest claims, a “subordinated claim”. As a general rule, no third
5.4 Are there any processes other than court proceedings
parties may benefit from the value of the secured assets insofar as
that are available to a creditor to seize the assets of
the secured creditor has not been paid (whether by enforcement of the project company in an enforcement?
the relevant security or at the request of the insolvency administrator
– see question 5.1 above). In connection with this, secured creditors
Yes; out-of-court foreclosure, available for certain types of security,
will not be affected by the contents of the creditors’ composition
is typically carried out by a Notary Public and takes the form of a
agreement unless they agree otherwise.
public auction. The terms and conditions of such auction are loosely
It may be possible to challenge security created “to the detriment of regulated under Spanish law and hence the guidelines and
the insolvency estate” within the two years preceding the provisions by means of which such enforcement is carried out are
declaration of insolvency, even in the absence of fraudulent intent. usually agreed upon by the parties beforehand in the relevant
In particular, there is a presumption of prejudice to the insolvency security document. For any unregulated aspects, the Notary Public
estate in the event: (i) that the security was granted for pre-existing tends to follow equivalent provisions applicable to judicial
debts or for new debt incurred to cancel pre-existing, unsecured enforcements. Should the auctioned assets not be acquired by a
debt; or (ii) of any prepayments or other acts of early cancellation of bidder after the first two auctions, lenders are given the option to
secured payment obligations. acquire ownership over such assets. Nevertheless, in such case, the
secured obligation is understood as paid or compensated, and

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therefore lenders shall not be able to sue the security provider for broadcasting, telecoms or national defence, foreign investment is
any outstanding amounts under the secured obligations. widely liberalised. However, non-resident investors must notify the
In the case of security granted over bank accounts or listed Foreign Investment Registry of the amount, destination and form of
securities, particularly when the secured obligation consists of cash investment, mainly for statistical purposes. The obligation to notify
settlement agreements or derivative contracts, secured lenders may does not restrict the ability of the foreign investor to remit income
appropriate directly and immediately the secured assets, without coming from investment outside Spain.
conducting a public auction. Equally, certain regional laws (such as Exchange controls are also liberalised, so that, as a general rule,
Spain

Catalan law) expressly permit private sales of the secured assets or, currency is freely transferable through a registered bank account
in the case of highly liquid security, appropriation by set-off. from Spain to any country and vice versa, although certain
information must be provided periodically (monthly, quarterly or
annually) depending on the amounts of foreign transactions carried
5.5 Are there any processes other than formal insolvency
proceedings that are available to a project company out over a calendar year.
to achieve a restructuring of its debts and/or Recently enacted anti-money laundering regulations now provide
cramdown of dissenting creditors? that any company shall have a Spanish Tax Identification Number
when entering into potentially taxable transactions (e.g. execution
Section 5bis of the Spanish Insolvency Act provides companies with of notarial deeds with tax implications). The aforementioned
a way to achieve restructuring of their debts without having to identification does not have any impact on the residence for tax
request a formal declaration of insolvency. purposes of non-resident entities.
The directors of a company may submit to the relevant court a In addition, a Spanish or foreign entity entering into a notarial deed
notification that the company has initiated negotiations in order to or other equivalent agreement shall identify its “real owner” (titular
achieve the restructuring of its debt, which the company has three real), i.e. whether there is any individual ultimately owning 25% or
(3) months to achieve (and where during such period the insolvency more of the share capital of the foreign entity, and if there is not, the
of the company may not be requested by its creditors). If identities of the members of the board of directors.
negotiations fail after such time, the company has a month to request
a formal declaration of insolvency.
6.2 Are there any bilateral investment treaties (or other
international treaties) that would provide protection
5.6 Please briefly describe the liabilities of directors (if from such restrictions?
any) for continuing to trade whilst a company is in
financial difficulties in your jurisdiction. This is not applicable. See question 6.1 above.

In accordance with the Spanish Insolvency Act, the insolvency

6.3 What laws exist regarding the nationalisation or
situation of a company may be considered by the court to be either expropriation of project companies and assets? Are
“fortuitous” or, alternatively, “guilty”. The insolvency will any forms of investment specially protected?
necessarily be considered “guilty” in certain scenarios specifically
described by the Spanish Insolvency Act, which mainly consist of Expropriation of private property must be based on public utility or
situations where the directors of the insolvent company failed to social interest. These concepts and the procedure for expropriation
carry out their obligations with the necessary diligence (i.e., are strictly regulated, with very limited, if any, room for
amongst others, keeping separate accounting books, embezzling governmental discretion. No distinction is made between national
assets of the company, fraudulently detracting assets from the and foreign ownership.
company or failing to request the declaration of insolvency within
two months after the directors knew or should have known that the Generally, governmental authorities shall have no pre-emption
company was insolvent). rights for the sale of property, other than in the case of protected
natural areas and certain regulated businesses.
If the insolvency is considered to be “guilty”, the consequences for
the directors may include:
(i) prohibition to manage third parties’ assets and to act on 7 Government Approvals/Restrictions
behalf of third parties for a period ranging from two (2) to
fifteen (15) years;
7.1 What are the relevant government agencies or
(ii) the loss of any rights they may have as creditors of the
departments with authority over projects in the typical
insolvent company;
project sectors?
(iii) the obligation to return any funds or assets which they may
have unduly obtained; and
The agencies and departments with authority over a project greatly
(iv) eventually, the liability to refund all or part of the unpaid depend on the kind of project. In energy projects, the responsible
debts of the insolvent company.
authority would be the state’s government to authorise any
construction, transfer or modification of premises for the
6 Foreign Investment and Ownership production, transport or distribution of energy when the project
Restrictions affects more than one region or the energy is transported or
distributed outside the region where it is produced. Regional
governments have competences regarding electricity generation and
6.1 Are there any restrictions, controls, fees and/or taxes distribution inside their respective region and therefore depending
on foreign ownership of a project company? on the size and location of the project, they may also have a role.
Another relevant agency in the energy sector is the National
With the exception of certain special sectors, such as air transport, Markets and Competition Commission (CNMC), operating since

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October 7, 2013, which includes within the same entity different Additionally, there are other regional and local royalties payable on
supervisory responsibilities for each regulated sector (energy, the extraction of natural resources based on the environmental
postal, transportation, competition, etc.). Therefore, nowadays the impact the project may cause. Those royalties vary depending on
scope of the CNMC spans all energy sectors (electric power, fuel, the kind of natural resource and the region where the extraction
gas, etc.) and also acts as a consultant for the Spanish and regional takes place.
government in all matters regarding energy sectors and is strongly Finally, project companies in the extraction and exploitation of
involved in the applicable regulation. hydrocarbons sector will be subject to company income tax at a

Spain
special rate of 30% (instead of the general tax rate which is 25%).
7.2 Must any of the financing or project documents be
registered or filed with any government authority or
7.5 Are there any restrictions, controls, fees and/or taxes
otherwise comply with legal formalities to be valid or
on foreign currency exchange?
enforceable?

There are no currency, exchange control or other regulatory

Generally, security instruments are notarised and, in the case of
restrictions that limit the availability or transfer of funds for the
mortgages and certain forms of pledges over chattel property, filed
project company to make any payments due, subject to the
at the relevant public registry, such registry typically being the
notification requirements provided in question 6.1 above.
property registry in the case of real estate and the chattel property
registry in the case of machinery, IPRs, receivables and other forms
of chattel property. See section 2 above. 7.6 Are there any restrictions, controls, fees and/or taxes
on the remittance and repatriation of investment
We refer to question 6.1 above for notification requirements to the
returns or loan payments to parties in other
Foreign Investment Registry or to the Bank of Spain, as the case may be. jurisdictions?
Specially regulated sectors, such as energy or telecommunications,
may require specific supervision from regulatory bodies. Equally, Other than withholding taxes (see section 17), there are no
administrative concessions and mortgages upon such concessions restrictions on the repatriation of investment returns or loan
need to be approved by the relevant concession granting entity and payments to non-resident parties, except for the obligation to notify
subsequently filed with the land registry. the Foreign Investments Registry or, in the case of loans and other
forms of debt financing, the Bank of Spain, as described in question
7.3 Does ownership of land, natural resources or a 6.1 above.
pipeline, or undertaking the business of ownership or Section 18 of the Spanish Corporate Income Tax Act provides for a
operation of such assets, require a licence (and if so, general limitation on the tax deductibility of financial expenses. Net
can such a licence be held by a foreign entity)?
financial expenses exceeding 30% of the operating profits of a
company – as defined by the Spanish tax legislation – are not tax-
Although the actual ownership of land or natural resources (other deductible.
than water, mineral resources, natural gas and oil) does not require a
For that purpose, net financial expenses are defined as the difference
licence, developing a business or project related to such land or
between the financial expenses (except those not deductible under
resources may require certain permits or authorisations granted by
article 15 g), h) and j) of the Spanish Corporate Income Tax Act) and
authorities at national or regional level depending on the size and
the interest obtained.
location of the project, which may be related to the nature of the
industry or its environmental impact. Local licences (for example, In all cases, net financial expenses up to one million euros
for construction) may also be required. (€1,000,000) are tax-deductible. The net financial expenses which
were not tax-deductible in a particular tax year can be carried
forward with no time limitation. In the event that the financial
7.4 Are there any royalties, restrictions, fees and/or taxes expenses do not exceed the 30% threshold, the difference between
payable on the extraction or export of natural
such 30% and the percentage of the operating profit of a tax year can
resources?
be added up to the limit of the subsequent five tax years.

Under Spanish law, there are several state taxes payable on the
exploitation of electricity generation projects and on the processing 7.7 Can project companies establish and maintain
of energy products (oil, gas, etc.) when those are used as fuel. Some onshore foreign currency accounts and/or offshore
accounts in other jurisdictions?
of these taxes are harmonised with EU Directives and are called
special taxes on electricity and on hydrocarbons.
Yes. However, bank accounts held by Spanish companies outside
Generally speaking, these special taxes are not actually paid by the
Spain and operations carried out through such accounts are subject
project company but its payment (if all legal requirements are met)
to regular filings with the Bank of Spain.
is suspended until the electricity or energy product reaches the final
consumer, who will be the actual payer.
There is also a state tax on oil and gas extraction and exploitation 7.8 Is there any restriction (under corporate law,
exchange control, other law or binding governmental
based on the extension of land used for such purposes and the
practice or binding contract) on the payment of
amount of years the project company will be authorised to operate dividends from a project company to its parent
on such land. company where the parent is incorporated in your
Moreover, since January 1, 2013, there is another state tax on jurisdiction or abroad?
electricity generation based on the production of electricity either on
renewable or conventional electricity production installations which In addition to the withholding tax described in section 17 below, the
will be subject to a tax rate of 7%. following restrictions may apply:

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 Cuatrecasas Spain

(i) under Spanish corporate law, there are certain requirements

regarding the payment of dividends, which are common to
8 Foreign Insurance
many other jurisdictions, such as the need to set off losses
from previous years or to assign 10% of the profits to a
statutory reserve until the reserve reaches 20% of the share 8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or
capital, as well as other requirements intended to avoid the
guaranteed by foreign insurance companies?
payment of dividends by a company that is not financially
viable; and
Spain

(ii) from a contractual perspective, project financing agreements Generally not, although in the case of concessions and other
will typically restrict the distribution of dividends. Standard administrative contracts it might be necessary to complete a case-
restrictions would include: (a) meeting certain financial by-case analysis of the relevant concession terms.
covenants; (b) reaching a certain percentage of repayment of
senior debt; (c) ensuring that the project has been operating
8.2 Are insurance policies over project assets payable to
for a number of years; and (d) cash sweep provisions.
foreign (secured) creditors?
Additionally, minority shareholders may be entitled to have their
shares purchased by the project company if the shareholders decide Generally yes, although for the avoidance of any doubt it would be
not to distribute any dividends notwithstanding the fact that the advisable to review the relevant insurance policy.
company has operational profits.
Finally, under certain concessions or other administrative contracts,
public authorities establish minimum percentages of equity 9 Foreign Employee Restrictions
throughout the project, which could also act as a restriction on the
payment of dividends.
9.1 Are there any restrictions on foreign workers,
technicians, engineers or executives being employed
7.9 Are there any material environmental, health and by a project company?
safety laws or regulations that would impact upon a
project financing and which governmental authorities Foreign workers (nationals outside of the European Union and
administer those laws or regulations? Switzerland) generally need to obtain a work permit for stays of
over ninety (90) days in Spain, irrespective of their professional
There are certainly environmental, health and safety regulations level (worker, technician, engineer or executive).
potentially applicable to a project financing, which may vary
The two main kinds of work permit are: (i) a work permit for
substantially depending on the type of project and the region where
transnational rendering of services, which is used by companies
the project is developed, since part of the legal competences in such
which transfer an employee who remains hired by a foreign
aspects correspond to regional governments.
company, hence subject to the social security and tax regulations of
From an environmental point of view, before commencing any the foreign company and generally lasts for a maximum period of
large-scale construction work potentially affecting the environment, one year, which can be extended to an additional year; and (ii) a
it will likely be required to obtain the previous approval of the regular work permit, which allows the individual to work in Spain
relevant regional environmental authority, by means of an for a period between ninety (90) days to five (5) years, if the person
environmental impact assessment issued by the project company, in question is hired by a Spanish company.
which the relevant authority will need to review and approve,
Despite all the above, depending on the origin country, the
usually subject to the fulfilling of certain regulations and measures
application for a visa might also be required for stays shorter than
aimed at assessing and subsequently mitigating the environmental
ninety (90) days in order to allow the international worker access to
risks associated with the project.
the country and the possibility to render services.
In conclusion, the federal nature of the Spanish administration and
In terms of Social Security, employees in the EU and Switzerland
the complexity and dispersion of regulations make it necessary to
benefit from an EU regulation enabling employees to work
carry out a case-by-case analysis.
throughout the different countries while maintaining their Social
Security benefits in the country of origin. Similar regimes are
7.10 Is there any specific legal/statutory framework for foreseen for other countries through bilateral treaties (a treaty
procurement by project companies? having been recently signed with the People’s Republic of China).
In addition, under settled case law, if certain requirements are met,
As long as they do not use governmental funds or subsidies, there is bilateral treaties subscribed between EU Member States improving
no specific legal framework for procurement by privately-held the current EU Regulation shall be applicable.
project companies, except in the case of entities operating in Finally, case law has also stated that EU Regulation will apply to
regulated sectors such as energy or water. non-EU Member State nationals who lawfully render services in the
However, as a matter of practice, it is relatively common that project EU and transfer within the EU Regulation geographical scope.
companies wishing to subcontract large works (mainly construction
and civil engineering) set out a procurement system resembling that
10 Equipment Import Restrictions
applied by governmental entities, particularly with regard to the
hiring principles (transparency, non-discrimination, concurrence
and equal treatment). In some cases, notably infrastructure 10.1 Are there any restrictions, controls, fees and/or taxes
concession contracts, this contracting framework may be imposed on importing project equipment or equipment used by
by the concession granting authorities in order to ensure that part of construction contractors?
the concession works are subcontracted to competitors of the
concessionaire. Customs duties may apply on imported project equipment from

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Cuatrecasas Spain

outside the EU, as established by EU regulations and trade treaties act that is against the duties inherent to his or her office, or in order
between the EU and third countries. In addition, the European for him or her not to carry out such act, or to delay what he or she
Commission has powers to impose anti-dumping measures in line should carry out. The same prison sentences and fines are foreseen
with World Trade Organization (WTO) principles. for the corrupt authority, officer or person. This is without prejudice
to the additional punishment for the act perpetrated, omitted or
delayed due to the remuneration or promise, if such act also
10.2 If so, what import duties are payable and are
exceptions available? constitutes a felony (which may imply criminal penalties of up to

Spain
nine million euros (€9,000,000) or two to five times the profit
obtained).
This will be determined by the common customs tariff uniformly
applied by the EU Member States for imports which originate in These penalties shall also be applicable when charges are brought
third countries, and will depend on the nature of the imported against, or the acts concerned affect, officers of the European Union
equipment and its country of origin. As with anti-dumping or civil servants who are nationals of another Member State of the
measures, the duty, product and producers affected are established Union.
by a Council Regulation. The Criminal Code also prohibits influence-peddling, described as
influencing a civil servant or authority by taking advantage of any
situation arising from his personal relation with him/her or with
11 Force Majeure another public officer or authority, to obtain a result that may
directly or indirectly generate a financial benefit for him/her or for a
11.1 Are force majeure exclusions available and
third party, which shall be punished with imprisonment for six (6)
enforceable? months to two (2) years and a fine of one to two times the benefit
intended or obtained.
Article 1.105 of the Spanish Civil Code sets out as a general rule the Spanish jurisdiction would also apply to crimes committed abroad
absence of liability of any party for damages caused by a situation of against the Spanish public administration. Perpetration of an act
force majeure. However, parties to an agreement may contractually defined by law as a felony or misdemeanour shall entitle the victim
waive the application of this general liability exclusion regime. to reparation for the damages and losses caused thereby.
Accordingly, most project financing agreements and other project
contracts include as a specific event of default the occurrence of a
13 Applicable Law
force majeure event, which is usually defined in detail in the
relevant contract. It is nevertheless unclear whether Spanish courts
would recognise acceleration of a project facility on the grounds of 13.1 What law typically governs project agreements?
force majeure, unless there is a substantial impact on the ability of
the project company to meet its payment obligation under the
Typically, project documents are governed by Spanish law
relevant facility, or the viability of the construction or operation of
(particularly when project counterparties consist of Spanish
the project is seriously in danger as a result of such force majeure.
entities), although the relevant parties can choose to apply a foreign
Lenders are typically excluded from any contractual liability if they law, in accordance with the provisions of Regulation (EC) No.
fail to provide the required funds due to force majeure. In the 593/2008 of the Parliament and the Council on the Law Applicable
current economic turmoil, market disruption clauses are widely to Contractual Obligations (Rome I). The selection of a foreign law
used. will be valid and legally binding in Spain, and a Spanish court
In administrative contracts, such as concessions with public would apply such law provided that the contents of the relevant
authorities, force majeure is a regulated term related to natural provisions of the chosen laws may be duly proved before the
disasters or major alteration of public order, and is one of the Spanish court without contravening the principles of Spanish public
circumstances which would entitle the concessionaire to benefit policy.
from an indemnity from the public authorities, in the event that the
situation of force majeure renders the performance of the contract 13.2 What law typically governs financing agreements?
uneconomical for the concessionaire. Such indemnity may take
different forms; typically, higher tariffs or longer concession terms.
Financing agreements are also typically governed by Spanish law,
If the force majeure event impairs the continuation of the project,
although as a matter of practice, when the group of lenders is
public authorities may choose to terminate the concession and
dominated by foreign banks or international institutions, English or
indemnify the relevant concessionaire.
New York law may be the preferred option. Again, a foreign law
may be chosen by the parties to govern financing agreements in
12 Corrupt Practices accordance with the provisions of the Rome I Regulation (see
question 13.1 above).
Security documents must, however, comply with the “lex rei sitae”
12.1 Are there any rules prohibiting corrupt business
principle existing under Spanish law, which determines that the
practices and bribery (particularly any rules targeting
the projects sector)? What are the applicable civil or governing law of a security document must be the law of the
criminal penalties? jurisdiction where the asset is located. Specific fiction location
rules may apply to non-tangible assets (for example, in the case of
receivables, location will be determined by the place of payment or
The Spanish Criminal Code prohibits the bribery of national and
the nationality of the debtor) and, for registrable assets, the
foreign government officials. This is defined as the conduct of a
governing law will be that of the place of the public registry where
private individual who offers or delivers a handout or remuneration
the asset is filed.
of any kind to an authority, civil servant or person who participates
in the exercise of public duties in order for the latter to perpetrate an

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13.3 What matters are typically governed by domestic law? 15.3 Are any types of disputes not arbitrable under local
law?
Generally, security documents relating to assets located in Spain,
and personal guarantees granted by Spanish entities (particularly The Spanish Arbitration Law does not list the matters which cannot
when the assets of the relevant Spanish guarantor are mainly located be subject to arbitration. Instead, such law establishes that a dispute
in Spain), are governed by domestic law. may be arbitrable “if the parties may dispose of” the subject matter
of obligation. Examples of disputes which are not arbitrable will
Spain

In concession agreements and other PPP agreements, the contractual

relationship between the concessionaire and the public authorities mainly be related to family law (e.g. parental authority, marital
will always be subject to the Spanish administrative laws. status, filiation) and matters in which the Public Prosecutor’s Office
has to intervene (e.g. criminal procedures).

14 Jurisdiction and Waiver of Immunity

15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable? Arbitration is only possible if the parties involved have expressly
agreed to it in the relevant agreement or in a separate document. To
Under Spanish law, waiver of immunity is legally valid and solve a dispute through arbitration, the express will of the parties to
enforceable unless it relates to certain entities which are affected by submit their disputes to arbitration is legally required. Such will
special immunities, such as: (i) persons or entities under public law, shall be verifiable in writing, contained in a document signed by the
and assets owned by such entities; (ii) autonomous organisations, parties or in an exchange of communications (letter, fax, telex,
semi-public entities or agencies; (iii) diplomatic and consular telegram or other means) evidencing such express agreement.
entities; and (iv) certain cooperatives. Further, the assets connected
to a public service (such as the assets of an administrative 16 Change of Law / Political Risk
concession) may also be subject to immunity even if they are
operated by private entities.
Submission by the parties to a foreign jurisdiction is valid, binding 16.1 Has there been any call for political risk protections
and enforceable in Spain: (i) in the case of foreign courts covered by such as direct agreements with central government or
political risk guarantees?
conventions, in accordance with the provisions of Council
Regulation (EC) No. 593/2008 of 17 June 2008 on Jurisdiction and
the Recognition and Enforcement of Judgments in Civil and Political risk clauses are very unusual in Spanish project finance. In
Commercial Matters or the applicable bilateral convention; and (ii) those cases where there are serious concerns regarding future
in the case of foreign courts not covered by Brussels/Lugano or changes in government policy which could affect the existing
bilateral conventions, in accordance with the domestic conflict of agreements between a project company and a public authority, the
law regulations, which would reject the selection of foreign courts project company (or its lenders) would typically seek that the
in cases where the exclusive jurisdiction of the Spanish courts under project be backed by a specific government resolution. Direct
the Spanish Law of the Judiciary is violated. agreements with public authorities are very unusual.

15 International Arbitration 17 Tax

15.1 Are contractual provisions requiring submission of 17.1 Are there any requirements to deduct or withhold tax
disputes to international arbitration and arbitral from (a) interest payable on loans made to domestic
awards recognised by local courts? or foreign lenders, or (b) the proceeds of a claim
under a guarantee or the proceeds of enforcing
security?
Yes, the express submission by the parties to international
arbitration and arbitral awards contained in an agreement will be
Generally speaking, interest paid by a Spanish borrower under a
recognised by Spanish courts in accordance with the provisions of
loan to a domestic lender (other than a financial institution) is
the 1958 United Nations Convention on Recognition and
subject to withholding tax at a 19% rate. Likewise, interest income
Enforcement of Foreign Arbitral Awards (the “New York
paid to a non-EU tax resident is subject to withholding tax at a 19%
Convention”), of the 1961 European Convention on International
rate, unless a lower rate applies under a tax treaty (treaty rates
Commercial Arbitration (the “Geneva Convention”) and of
ranging between 5% and 15%). Interest payments to EU residents
Spanish Law 60/2003 of 23 December 2003 on Arbitration (the
or EU permanent establishments (other than those residing in tax-
“Spanish Arbitration Law”).
haven jurisdictions) are not subject to withholding tax (irrespective
of whether payments are made to a financial institution or a regular
15.2 Is your jurisdiction a contracting state to the New York company).
Convention or other prominent dispute resolution
On the other hand, proceeds of a claim under a guarantee or the
conventions?
proceeds of enforcing security are generally subject to withholding
tax as if such payments were made by the borrower.
Spain ratified the New York Convention in 1977. Also, Spain
ratified the Geneva Convention in 1975.

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Cuatrecasas Spain

double its net equity (such quantitative limitation disappears when

17.2 What tax incentives or other incentives are provided such issue is secured by an in rem or personal guarantee). With
preferentially to foreign investors or creditors? What regards to public limited companies (sociedades anónimas), all
taxes apply to foreign investments, loans, mortgages
quantitative restrictions have been removed.
or other security documents, either for the purposes
of effectiveness or registration? In the context of certain PPP projects, the issue of bonds may be
subject to prior consent by the relevant governmental authority,
As a member of the European Union, Spain benefits from the free although the general regulations on concessions are permissive on

Spain
transit of goods within the EU, including exchange rate fluctuations the issue of bonds.
and transaction costs. Therefore, Spain’s EU membership Capital market instruments may be structured as private or public
represents an important part of its foreign policy. placements (depending on the type of investors addressed, number
Additionally, Spain has more than 75 income tax treaties currently of retail investors addressed, total issue amount, minimum amount
in force, as well as a remarkable treaty network with Latin American of securities to be acquired per investor, and minimum unit par
countries which reduces or eliminates the Spanish taxes payable to value of the securities). Private placements have no disclosure or
residents of treaty countries. supervision requirements with the Spanish Securities and Exchange
Commission (to the extent that the relevant instruments are not
The main tax incentive is the Spanish international holding
intended to be listed in an official market). Nevertheless, except for
company (ETVE) regime, which nowadays is a well-established
private placements exclusively addressed to qualified investors,
legal framework that has turned Spain into one of the most
private placements require the intervention of an authorised
favourable jurisdictions within the EU to channel and manage
financial entity in order to promote the allocation of securities.
international investments. ETVEs can benefit from an exemption
on inbound and outbound dividends and capital gains, as long as
certain requirements are met. Since ETVEs are Spanish regular 19 Islamic Finance
entities, they are treated like regular limited liability companies, and
can therefore benefit from tax treaties signed by Spain, as well as
EU Directives. 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
instruments might be used in the structuring of an
Under Spanish law, there are no relevant taxes on foreign
Islamic project financing in your jurisdiction.
investments in addition to those that would apply to a Spanish
investor.
Istina’a, Ijarah, Wakala and Murabaha are not instruments
expressly recognised under Spanish law. However, it is sometimes
18 Other Matters possible to structure project finance transactions in compliance with
Shari’ah law using other instruments recognised under Spanish law
which, although they do not have the same characteristics as the
18.1 Are there any other material considerations which original Islamic instruments, are similar in nature; such as an EPC
should be taken into account by either equity agreement for the Istina’a, an operating lease for the Ijarah, a
investors or lenders when participating in project
mandate for the Wakala or the purchase of chattel property with
financings in your jurisdiction?
deferred payment for the Murabaha.

Most of the relevant issues have already been covered in the

previous sections. 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
18.2 Are there any legal impositions to project companies issues, the applicability of Shari’ah or the conflict of
issuing bonds or similar capital market instruments? Shari’ah and local law relevant to the finance sector?
Please briefly describe the local legal and regulatory
requirements for the issuance of capital market
There is no relevant case law in Spain regarding the application of
instruments.
Shari’ah law as the governing law of a contract or dispute.
However, it is unlikely that Spanish courts will accept its
Until recently, companies bearing the legal form of a private limited
application, unless the governing law of the relevant agreement is
company (sociedad limitada) were not legally entitled to issue,
set as the law of a country with legislation based on Shari’ah law
guarantee or secure bonds and other debt securities. Nevertheless,
(see also question 13.1 above).
due to a reform brought about by the Financing Incentive Law (Ley
de Fomento de la Financiación) in 2015, article 401 of the
Companies Law (Ley de Sociedades de Capital) was amended in 19.3 Could the inclusion of an interest payment obligation
order to allow all companies to issue, guarantee and secure bonds in a loan agreement affect its validity and/or
and other debt securities (albeit certain restrictions and enforceability in your jurisdiction? If so, what steps
could be taken to mitigate this risk?
requirements).
The issue of bonds by private limited companies (sociedad
Under Spanish law, the inclusion of an interest payment obligation
limitada) is subject to certain quantitative limitations, as these kind
in a loan agreement is fully valid and therefore there is no risk of it
of companies may not issue unsecured bonds for an amount equal to
affecting its validity and/or enforceability.

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 Cuatrecasas Spain

Héctor Bros Javier Vivas

Cuatrecasas Cuatrecasas
Av. Diagonal 191 Av. Diagonal 191
08018 Barcelona 08018 Barcelona
Spain Spain

Tel: +34 932 905 447 Tel: +34 932 905 500
Email: [email protected] Email: [email protected]
Spain

URL: www.cuatrecasas.com URL: www.cuatrecasas.com

Héctor Bros is a partner at Cuatrecasas, with broad experience in Javier Vivas is an associate in the Banking & Finance Department at
banking and finance. He has provided advice on multiple corporate Cuatrecasas, with extensive experience in project finance
and project financing transactions, asset financing, complex and transactions, particularly in PPP and infrastructure financing in both
innovative public-private partnership (PPP) and private finance domestic and cross-border transactions. He also has experience in
initiative (PFI) structures for transportation and social infrastructure representing both lenders and sponsors in a variety of energy
(prisons, hospitals, public buildings), other forms of structured finance transactions and leveraged buyouts, with a particular focus on
and cross-border acquisition finance. He regularly assists a number of European project finance and cross-border acquisition finance, as a
national and international banks and is a leading reference for top result of prolonged exposure to such market.
sponsors operating in the Iberian market.
Amongst other transactions, Héctor Bros advised lenders in the
€2.5bn financing of Tranches I, II and IV of the Barcelona Metro Line 9,
the €900m financing of the AP-1, AP-8 GI-632 hard-toll highways in the
Basque Country, the €400m project debt restructuring of the
Vallvidrera and Cadí tunnels and the €1.4bn regional infrastructure
debt restructuring of the Generalitat de Catalunya, or the acquisition
by several investment funds of the bank debt of the distressed Madrid
toll roads. He has also participated in high-profile international project
finance transactions, such as the $19bn Sadara petrochemical project
in Saudi Arabia, where he advised the Spanish Corporate
Internationalisation Fund (FIEM), and the €600m non-recourse
financing to Abertis in connection with the acquisition of the Italian A-
19 “Serenissima” toll road.
Héctor Bros has been recommended by several directories, including
Chambers Europe, Who’s Who Legal, Best Lawyers and The Legal
500, in Banking & Finance, Project Finance and Public Law.

With 1,000 lawyers, Cuatrecasas is present in 12 countries, with a strong focus on Spain, Portugal and Latin America. We advise on all areas of
business law, applying a sectoral approach and covering all types of business. We combine maximum technical expertise with business vision. We
have 16 offices on the Iberian Peninsula and 11 international offices, as well as five international desks and 20 country groups. We have a solid track
record working side by side with leading companies, advising them on their day-to-day activity and on major transactions. In 2018, we have been
considered the “Most innovative law firm (outside UK)” in the FT Innovative Lawyers Awards. We are also acknowledged by international directories
such as Chambers or The Legal 500 as number 1 in the main legal practices.
The firm’s Finance Practice consists of over 60 lawyers based in Madrid, Barcelona, Lisbon, London, Mexico City and Bogotá, with expert knowledge
and extensive experience in complex national and international financial transactions. The firm’s lawyers work seamlessly from different locations,
ensuring a wide coverage for their clients, wherever they are based. The team has extensive expertise advising sponsors and banks in all types of
domestic and foreign, corporate and structured, financial and debt capital markets transactions. Among other aspects, such transactions consist of:
structured and project finance facilities; refinancing, acquisition finance and other sorts of repackaging; synthetic and mortgage-backed
securitisation; credit assignments; issuance of fixed-interest securities and other financial instruments; and consumer credits. We also deal with
bankruptcy issues in order to efficiently ensure bankruptcy remoteness and an adequate security package structure, extending the scope of our
advice to the restructuring of debt. In addition, we advise on matters and relevant issues related to equity requirements for credit institutions, as well
as for other entities.

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Chapter 33

Switzerland
Daniel Hayek

Prager Dreifuss Ltd. Mark Meili

The valid creation of a security requires a security agreement and

1 Overview
the perfection of the security interest. In the security agreement, the
security provider undertakes to pledge or transfer/assign for security
1.1 What are the main trends/significant developments in purposes certain assets to the secured party. Depending on the kind
the project finance market in your jurisdiction? of asset, perfection is achieved through a declaration of
pledge/assignment or delivery of the movable asset. Security
Infrastructure projects in the areas of leisure and property, transport, interests over certain assets (real estate property, railroads, airplanes
energy and the water sector continue to be significant. The projects and ships) require registration.
are usually financed by public funds, but due to projected increases In order to obtain security over all assets of a Swiss company, a
of investments, private funds will likely become more important in combination of a share pledge agreement and of security agreements
the future. over the company’s assets is required.

1.2 What are the most significant project financings that 2.2 Can security be taken over real property (land), plant,
have taken place in your jurisdiction in recent years? machinery and equipment (e.g. pipeline, whether
underground or overground)? Briefly, what is the
procedure?
The market has been dominated by transport and leisure/property
projects; for example, the Lugano Congress Center.
For real property (which includes land, buildings and other
constructions that are connected to the ground, whether overground
2 Security or underground, e.g. pipelines), security is taken by way of
mortgage or mortgage note. Both types of security require the
conclusion of a mortgage agreement in the form of a notarised deed.
2.1 Is it possible to give asset security by means of a The mortgage or mortgage note has to be registered in the land
general security agreement or is an agreement
registry for perfection. For certified mortgage notes the secured
required in relation to each type of asset? Briefly,
what is the procedure? party also needs to have possession of the mortgage note. Mortgage
notes (whether certified or not) may be pledged or transferred for
security purposes.
Asset security can be given by pledge or by assignment or transfer
for security purposes. Movable assets like machinery and equipment may be pledged or
transferred for security purposes. A security agreement specifies the
A pledge gives the secured party possession of the security while the
assets to be pledged or transferred. Since the security holder needs
security provider retains ownership of the security. A pledge can be
to be in possession of the pledged assets during the security period
obtained over movable assets, real estate property and claims and
(Faustpfandprinzip), security over plants, machinery, equipment or
rights. Because of the principle of accession (Akzessorietätsprinzip),
inventory is possible, but is usually not taken.
which is applicable to pledges, each of the secured parties would
need to be a party to the relevant pledge agreement. In a security
trustee or security agent structure, Swiss pledge agreements therefore 2.3 Can security be taken over receivables where the
provide that the secured parties – represented by the security agent or chargor is free to collect the receivables in the
trustee – are parties to the agreement. absence of a default and the debtors are not notified
of the security? Briefly, what is the procedure?
The parties may favour creating security by assignment (for claims
and rights) or transferring for security purposes (for movable
Security over receivables can be taken either through pledge or
assets), which gives the secured party full ownership of the asset.
assignment for security purposes (receivables are considered to be
The secured party is contractually obliged to re-assign or re-transfer
rights and claims).
the asset to the security provider. An assignment is a non-accessory
security which means that a security agent or trustee may hold the Assignments for security purposes, which are more common,
security as fiduciary in its own name and for the benefit of all require a written agreement in which the assignor and the assignee
secured parties. specify the receivables to be assigned. Under certain circumstances,
it is also possible to assign future receivables.

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 Prager Dreifuss Ltd. Switzerland

The debtor does not have to be notified of the assignment.

However, before such a notification, bona fide payments by the 2.8 Are any regulatory or similar consents required with
debtor to the assignor will release the debtor from its payment respect to the creation of security over real property
(land), plant, machinery and equipment (e.g. pipeline,
obligations. whether underground or overground), etc.?
Switzerland

2.4 Can security be taken over cash deposited in bank Generally, no. However, a pledge over real property may require a
accounts? Briefly, what is the procedure? Lex Koller permit if the pledge is in favour of a foreign party.
Further, pledges over railway and navigation companies operating
Security over cash deposited in bank accounts can be taken through under a federal concession require the consent of the federal council.
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 3 Security Trustee
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
3.1 Regardless of whether your jurisdiction recognises
in practice. 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
2.5 Can security be taken over shares in companies
separately) to enforce the security and to apply the
incorporated in your jurisdiction? Are the shares in
proceeds from the security to the claims of all the
certificated form? Briefly, what is the procedure?
lenders?

Security over shares in companies incorporated in Switzerland can

Switzerland does not have its own legislation on trusts. However,
be taken through assignment for security purposes or, more
Switzerland is party to The Hague Convention on the Law
commonly, through a pledge of the shares. The pledge or assignment
Applicable to Trusts and their Recognition and therefore recognises
of shares requires a security agreement. The perfection of uncertified
foreign trusts.
shares requires a written declaration of the pledge or assignment.
Switzerland also recognises the role of security agents or trustees to
In practice, it is recommended to issue physical share certificates to
enforce the security and apply the proceeds from a security to the
strengthen the secured party’s position in case of enforcement. To
claims of the lenders. However, the principle of accession may
perfect the security over certified shares, the pledgee or assignee
cause challenges (see question 2.1).
needs to have physical possession of the shares. For registered
certified shares (in contrast to bearer shares), the shares also require
an endorsement or assignment. 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
2.6 What are the notarisation, registration, stamp duty status) to achieve the effect referred to above which
and other fees (whether related to property value or would allow one party (either the security trustee or
otherwise) in relation to security over different types the facility agent) to enforce claims on behalf of all the
of assets (in particular, shares, real estate, lenders so that individual lenders do not need to
receivables and chattels)? enforce their security separately?

In relation to security over shares, receivables and chattels there are Sometimes parallel debt structures are used in order to facilitate
generally no notarisation, registration, stamp duty or other fees that changes to the secured parties. Under a parallel debt structure, the
apply. Stamp tax of up to 0.3% may be levied on the transaction borrower owes to the security agent in its individual capacity an
value in a transfer of ownership of securities if a Swiss bank or amount equal to the aggregate of the amounts owed by the borrower
securities dealer is involved. The Swiss legislator is currently to all lenders under the financing documents. However, this concept
discussing the repeal of this tax. remains untested in Switzerland.
Security over real estate requires a notarised deed for which
notaries’ fees may incur. The registration of the mortgage or
4 Enforcement of Security
mortgage note with the land registry may incur registration fees as
well as cantonal and communal taxes.
The voluntary registration of a security over intellectual property 4.1 Are there any significant restrictions which may
with the intellectual property register incurs registration fees, but impact the timing and value of enforcement, such as
protects the holder of the security from a bona fide third party (a) a requirement for a public auction or the
availability of court blocking procedures to other
acquiring the intellectual property right.
creditors/the company (or its trustee in
bankruptcy/liquidator), or (b) (in respect of regulated
2.7 Do the filing, notification or registration requirements assets) regulatory consents?
in relation to security over different types of assets
involve a significant amount of time or expense? A transfer or assignment for security provides the secured party with
full ownership of the asset which he may privately enforce. This can
Filings, notifications or registrations in relation to security over be done even after the opening of bankruptcy proceedings.
assets (only required for certain assets, see question 2.1) can usually Receivables and claims may be collected from the third-party
be completed within a few days. During certain times of the year, in debtors or may be sold to a third party.
particular before the summer and Christmas break, it may take In the case of a pledge, the secured party may only privately enforce
longer because registries may be overloaded with work. the asset if this has been agreed beforehand in the security agreement.

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Otherwise, the pledge has to be enforced through enforcement to harm its creditors or to favour certain creditors to the
proceedings with an insolvency official. A public auction, which is detriment of the remaining creditors and the contracting party
the standard procedure of realisation, can be time-consuming and was aware of such intent.
create substantial costs. Under certain circumstances, i.a., if all
parties agree or securities or other items with a market or stock 5.3 Are there any entities that are excluded from
exchange price are to be realised, the debt collection office may allow bankruptcy proceedings and, if so, what is the

Switzerland
the public auction to be replaced with a private sale. applicable legislation?

4.2 Do restrictions apply to foreign investors or creditors The bankruptcy of certain entities is governed by specific
in the event of foreclosure on the project and related bankruptcy regimes, the most important special regime deals with
companies? the insolvency of banks, security dealers and mortgage bond
institutions. The proceedings are managed by the supervisory
In general, the same rules will be applied to foreign investors and authority (FINMA) itself.
creditors as to domestic ones.
5.4 Are there any processes other than court proceedings
that are available to a creditor to seize the assets of
5 Bankruptcy and Restructuring the project company in an enforcement?
Proceedings
Please see question 4.1.
5.1 How does a bankruptcy proceeding in respect of the
project company affect the ability of a project lender 5.5 Are there any processes other than formal insolvency
to enforce its rights as a secured party over the proceedings that are available to a project company
security? to achieve a restructuring of its debts and/or
cramdown of dissenting creditors?
Firstly, it is to be noted that bankruptcy proceedings over a project
company do not affect collateral which has been transferred or Swiss bankruptcy law provides for composition proceedings, which
assigned to the secured party for security purposes, as such are aimed at enabling a debtor to reach a restructuring agreement
collateral is no longer part of the assets of the security provider. The with its creditors. It was introduced in the revised DEBA of 1
secured creditors are not required to hand the collateral over to the January 2014 and facilitates companies’ access to protection under a
bankruptcy administrator and can, if permitted by the security moratorium for mere restructuring purposes.
agreement, liquidate the collateral privately.
Where security is granted in the form of a pledge, ownership however 5.6 Please briefly describe the liabilities of directors (if
remains with the security provider. If bankruptcy proceedings are any) for continuing to trade whilst a company is in
opened over the security provider, he is no longer entitled to dispose financial difficulties in your jurisdiction.
of such assets and must hand the pledged assets over to the
bankruptcy administration for liquidation with other assets. Swiss Under Swiss corporate law, the board of directors has a general duty
law guarantees the secured creditors’ right to preferential satisfaction. to safeguard the interests of the company, which includes the
responsibility to ensure that the company remains financially sound
5.2 Are there any preference periods, clawback rights or and to take appropriate restructuring measures, should it be in
other preferential creditors’ rights (e.g. tax debts, financial difficulties. Depending on the balance sheet situation of
employees’ claims) with respect to the security? the company, the directors are legally obliged to take specific
measures, which depend on the level of losses the company has
Security given by a bankrupt entity may become subject to claw- incurred.
back actions under the following conditions: Taking timely action is a key component of a director’s duty to
■ Article 286 DEBA: if the debtor did not receive adequate perform his tasks with due care. Failing to do so incurs the risk of
compensation for any gifts, gratuitous acts or dispositions, becoming personally liable to anyone suffering losses, if an
these acts become voidable if they were made within one year intentional or negligent breach of duty of care can be established.
prior to the commencement of bankruptcy proceedings or one The relevant damage consists of the increase in the company’s
year prior to the notification of the debt moratorium against losses occurring between the point in time, in which the board
said debtor.
learned about the situation of over-indebtedness (and failed to notify
■ Article 287 DEBA: the granting of collateral for existing the bankruptcy judge) and the date on which the company is
obligations, to which the debtor was not obligated, the declared bankrupt. In a series of decisions, the Swiss Federal Court
settlement of monetary debt by unusual means and the
held that subordinated debts should be included in the calculation of
payment of undue debt is voidable, if carried out by an over-
the damage caused to a company in a director’s liability claim as
indebted debtor within one year prior to the opening of the
bankruptcy proceedings or one year prior to the notification subordination does not constitute a waiver and thus not diminish the
of the debt moratorium against said debtor. company’s damage. The decisions have been subject to criticism,
■ Article 288 DEBA: all acts carried out by a debtor within five arguing that company law encourages subordination as a last
years prior to the initiation of the bankruptcy proceedings or attempt to save the company and that the use of this instrument
five years prior to the notification of the debt moratorium should not negatively affect directors, if the company subsequently
against said debtor are voidable, if carried out with the intent has to file for bankruptcy.

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Further, the Swiss Penal Code may be applicable in case of reckless

bankruptcy or mismanagement. 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
6 Foreign Investment and Ownership enforceable?
Restrictions
Switzerland

Basically, no. However, exceptions may apply for legal transactions

involving real estate, as in most cases notarial certification is
6.1 Are there any restrictions, controls, fees and/or taxes required. If the specific project involves acquisition of non-
on foreign ownership of a project company? commercial property by a foreigner, Lex Koller should be consulted
and concession requirements may have to be met. The acquisition
Few legal restrictions exist in relation to foreign ownership of a of rural real estate is controlled by rural land legislation. Should
project company. either legislation apply, a permit or a ruling of the competent
Foreign ownership may be restricted in public monopoly sectors or authority must be obtained. Special licensing or approvals by the
where licence or concession requirements apply (i.e. rail transport, competent agency may be required with construction projects or
energy supply and postal services). projects in the area of public service.
For the acquisition of non-commercial property, Lex Koller should
be consulted and concession requirements may have to be met. The 7.3 Does ownership of land, natural resources or a
acquisition of rural real estate is controlled by rural land legislation. pipeline, or undertaking the business of ownership or
operation of such assets, require a licence (and if so,
Domicile requirements apply in certain areas, such as air and can such a licence be held by a foreign entity)?
maritime transport, hydroelectric and nuclear power or operation of
oil and gas pipelines.
Generally, the ownership of private land does not require a licence
Regarding control of a project company, depending on the company (see question 7.2 for exceptions). The same applies to the
type, certain restrictions as to the composition of the board of a undertaking of business on private land. However, the exploitation
Swiss company may apply. of natural resources, even if located on the land of the interested
party, may require a governmental permit or licence.
6.2 Are there any bilateral investment treaties (or other For state-owned land, the extraction and exploitation rights as well
international treaties) that would provide protection as the operation of a pipeline require a licence or concession and the
from such restrictions? payment of fees. In general, a foreign applicant needs to have a
legal domicile or a branch in Switzerland during the tenure of the
Switzerland is bound by the WTO’s General Agreement on Trade in licence or concession to ensure compliance with Swiss law.
Services and its Agreement on Trade-Related Investment Measures.
Under the OECD’s Code of Liberalisation of Capital Movements,
7.4 Are there any royalties, restrictions, fees and/or taxes
Switzerland has undertaken to refrain from discriminatory practices
payable on the extraction or export of natural
against foreign investments made by OECD investors. Further, resources?
more than 120 bilateral investment promotion and protection
agreements (BITs) protect foreign investments. Dispute settlement
With the exception of ground water that belongs to the cantons,
mechanisms are often provided for in the BITs.
natural resources belong to the owner of the land. However, their
extraction may require a permit or licence. For state-owned land,
6.3 What laws exist regarding the nationalisation or please see question 7.3. Export restrictions apply in the energy
expropriation of project companies and assets? Are sector.
any forms of investment specially protected?

7.5 Are there any restrictions, controls, fees and/or taxes

Under the Swiss Constitution, expropriation is only permissible if it
on foreign currency exchange?
is based on law, is in the public interest, is commensurate and the
expropriated owner is fully compensated.
No, there are not. However official exchange offices may charge a
fee for their services.
7 Government Approvals/Restrictions
7.6 Are there any restrictions, controls, fees and/or taxes
on the remittance and repatriation of investment
7.1 What are the relevant government agencies or
returns or loan payments to parties in other
departments with authority over projects in the typical
jurisdictions?
project sectors?

There are no restrictions, controls or fees with the exception of

Switzerland’s federal structure gives federal, cantonal and communal
applicable taxes (see question 17.1).
authorities legal competence to authorise projects. With regard to
legislation and approvals of projects in the aviation, railway, transport,
power generation, energy, telecommunication/radio and television 7.7 Can project companies establish and maintain
sectors, the Federal Department of the Environment, Transport, onshore foreign currency accounts and/or offshore
Energy and Communications (DETEC) is the main competent organ. accounts in other jurisdictions?
Cantonal and communal authorities will become involved if affected
by a specific project. On the other hand, sectors like water Yes, this is possible.
management and mining are regulated by cantonal legislation.

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residence permits are strictly controlled and only granted if (i)

7.8 Is there any restriction (under corporate law, he/she is a highly-qualified worker, and (ii) his/her skills are
exchange control, other law or binding governmental urgently required and the Swiss or EU/EFTA labour markets do not
practice or binding contract) on the payment of
have suitable people available.
dividends from a project company to its parent
company where the parent is incorporated in your Following Brexit, the Agreement on Free Movement between
jurisdiction or abroad? Switzerland and the UK will no longer be applicable. According to

Switzerland
a new agreement between Switzerland and the UK, employees who
Restrictions do not apply, as long as dividends are only paid from are already employed in the other country may remain there. The
the disposable profit (after the mandatory allocation of profits to the countries are still negotiating a solution for the future transfer of
legal reserve of the project company). employees.
On 9 February 2014, the Swiss electorate voted in favour of an
7.9 Are there any material environmental, health and initiative limiting immigration into Switzerland by setting
safety laws or regulations that would impact upon a quantitative limits and quotas. Since these restrictions are not
project financing and which governmental authorities compatible with the Agreement on Free Movement, the agreement
administer those laws or regulations? with the EU is (still) being renegotiated.

Before a competent authority authorises a public project, it will

examine the compatibility of such project with Swiss
10 Equipment Import Restrictions
environmental, health and safety laws. However, these laws would
generally not affect the financing part of a project. 10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by
7.10 Is there any specific legal/statutory framework for construction contractors?
procurement by project companies?
Importation of goods into Switzerland depends on the purpose and
Switzerland is a signatory to the General Procurement Agreement the value of the goods. For foreign professional equipment and
dated 15 April 1994 (GPA) and has concluded a bilateral agreement contractor equipment, specifically imported for a project and for a
with the EU. These international treaties provide the legal limited period of time, the temporary admission procedure may
framework for both federal legislation and cantonal procurement apply. However, in some cases permanent importation could be less
legislation, of which there are 26 different ones. The fundamental expensive and less time-consuming. Furthermore, VAT may apply.
principles of public procurement regulation are equal treatment,
transparency and competition. 10.2 If so, what import duties are payable and are
exceptions available?

8 Foreign Insurance
Customs tariffs are available on the website of the Swiss Federal
Customs Administration (www.tares.ch). Besides temporary
8.1 Are there any restrictions, controls, fees and/or taxes imported goods, exceptions exist for commercial samples and
on insurance policies over project assets provided or specimens as well as for goods intended for non-profit organisations.
guaranteed by foreign insurance companies?

According to the Federal Insurance Supervision Act, foreign

11 Force Majeure
insurance companies that insure risks situated in Switzerland are
obliged to obtain a licence for their business activities from FINMA. 11.1 Are force majeure exclusions available and
Foreign companies must have a branch in Switzerland and appoint a enforceable?
general agent.
In general, yes. Force majeure risks are, in practice, often covered
8.2 Are insurance policies over project assets payable to by insurances.
foreign (secured) creditors?

12 Corrupt Practices
Yes, they are.

9 Foreign Employee Restrictions 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?
9.1 Are there any restrictions on foreign workers,
technicians, engineers or executives being employed
by a project company? The Swiss Penal Code provides regulations to combat corruption in
the public as well as in the private sector. A maximum of five years
The restrictions depend on the country of origin of the employees. of imprisonment or a fine may be indicted on a member of a judicial
Foreign workers from EFTA/EU states enjoy unrestricted access to or another Swiss or foreign authority who (i) offers, promises or
the Swiss labour market due to the Agreement on Free Movement grants an advantage, or (ii) requests or accepts a promise or a bribe.
entered into between the EU and Switzerland in 1999. For workers In the private sector, active and passive bribery is punishable by a
from all other countries – so-called third countries – work and maximum sentence of three years in prison or a fine. Criminal

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prosecution of corrupt business practices may also be extended to

the employer company, should it not have undertaken all requisite 15.3 Are any types of disputes not arbitrable under local
and reasonable organisational precautions required to prevent the law?
bribery of public officials or persons in the private sector by its staff.
The responsible company can receive a fine of up to CHF 5 million. Only disputes regarding monetary claims are arbitrable under Swiss
law.
Switzerland

13 Applicable Law
15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?
13.1 What law typically governs project agreements?
Not applicable in the area of project finance.
Swiss project agreements will usually be governed by Swiss law.
16 Change of Law / Political Risk
13.2 What law typically governs financing agreements?

16.1 Has there been any call for political risk protections
Financing agreements will usually be governed by the law of the such as direct agreements with central government or
jurisdiction where the arranger of the financing is located. political risk guarantees?

13.3 What matters are typically governed by domestic law? No, we have not seen calls for political risk protections.

The security agreements will usually be governed by the law of the

17 Tax
country where the security is located to ensure their validity and
enforceability in the case of insolvency. For assets located in
Switzerland that means that security agreements creating a security 17.1 Are there any requirements to deduct or withhold tax
interest over these assets will be governed by Swiss law. 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
14 Jurisdiction and Waiver of Immunity security?

While interest paid on a loan granted to a Swiss non-bank is

14.1 Is a party’s submission to a foreign jurisdiction and
generally free from taxes, interest payments may become subject to
waiver of immunity legally binding and enforceable?
35% Swiss withholding tax if the loan qualifies as a bond for Swiss
withholding tax purposes. A syndicated loan is treated as a bond and
Switzerland recognises and enforces waivers of immunity. Swiss
subject to a withholding tax charge if (i) a Swiss tax resident
courts also recognise the choice of jurisdiction in civil law matters.
borrower of one syndicated facility (providing for identical
However, certain matters are subject to mandatory exclusive
conditions) owes interest-bearing money of more than CHF 500,000
jurisdiction rules (such as disputes related to property or disputes in
to more than 10 lenders which are not banks (10 Non-Bank Rule), or
public law matters).
(ii) a Swiss tax resident borrower under debt relationships with
different conditions owes interest-bearing money of more than CHF
15 International Arbitration 500,000 to more than 20 lenders which are not banks (20 Non-Bank
Rule).
For interest payments secured by Swiss real estate, withholding tax
15.1 Are contractual provisions requiring submission of at a rate of 13%–33% (federal and local tax) may be levied unless
disputes to international arbitration and arbitral
there is a double tax treaty for the foreign tax resident lender.
awards recognised by local courts?
The granting of an upstream or cross-stream security may trigger a
As provided for in the PILA and the New York Convention, a Swiss 35% dividend withholding tax if not granted on arm’s-length terms
court must decline its competence in favour of an arbitral tribunal if (so-called constructive dividend). For non-Swiss lenders, a refund
a valid arbitration clause has been agreed on between the disputing may be granted only pursuant to a double tax treaty between
parties and if the dispute is arbitrable pursuant to Swiss law. Switzerland and the country of residence of the lender.

17.2 What tax incentives or other incentives are provided

15.2 Is your jurisdiction a contracting state to the New York
preferentially to foreign investors or creditors? What
Convention or other prominent dispute resolution
taxes apply to foreign investments, loans, mortgages
conventions?
or other security documents, either for the purposes
of effectiveness or registration?
Switzerland is a party to the New York Convention and is a member
of the International Centre for the Settlement of Investment Industrial companies and production-related service providers that
Disputes (ICSID). are located in specifically determined economic development areas

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and that are creating new jobs through a new venture or are
19 Islamic Finance
preserving existing jobs through a substantial realignment of their
existing business can get a Swiss federal tax holiday for a period of
up to 10 years. In order to obtain a federal tax holiday, the canton 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
must also have granted a cantonal tax holiday for the same type of instruments might be used in the structuring of an
business activity. The federal tax holiday can lead to an annual tax Islamic project financing in your jurisdiction.

Switzerland
credit of up to CHF 95,000 for each newly created job and CHF
47,500 for each maintained job. 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
18 Other Matters
structures can be used in Switzerland.

18.1 Are there any other material considerations which 19.2 In what circumstances may Shari’ah law become the
should be taken into account by either equity governing law of a contract or a dispute? Have there
investors or lenders when participating in project been any recent notable cases on jurisdictional
financings in your jurisdiction? issues, the applicability of Shari’ah or the conflict of
Shari’ah and local law relevant to the finance sector?
No, there are not.
Although Swiss contract law is based on the principle of contractual
18.2 Are there any legal impositions to project companies freedom, it is disputed whether the parties can choose a non-
issuing bonds or similar capital market instruments? governmental law as the governing law of a contract or a dispute.
Please briefly describe the local legal and regulatory To our knowledge, there have not been any recent notable cases
requirements for the issuance of capital market involving Shari’ah law in the finance sector.
instruments.

19.3 Could the inclusion of an interest payment obligation

To begin with, bonds will be placed directly with investors or in a loan agreement affect its validity and/or
indirectly via banks with no involvement of a stock exchange. If enforceability in your jurisdiction? If so, what steps
trading on a stock exchange is desired, SIX Swiss Exchange is the could be taken to mitigate this risk?
main equity exchange in Switzerland. The listing process involves
the duty to publish a prospectus, the subscription period, the lodging Generally, no.
of a listing application with the stock exchange and the issuer must
meet various requirements set out in the Listing Rules. In order to
remain listed, the issuer has to carry out certain duties such as
publication of price-sensitive data.

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 Prager Dreifuss Ltd. Switzerland

Daniel Hayek Mark Meili

Prager Dreifuss Ltd. Prager Dreifuss Ltd.
Muehlebachstrasse 6 Muehlebachstrasse 6
CH-8008 Zurich CH-8008 Zurich
Switzerland Switzerland
Switzerland

Tel: +41 44 254 5555 Tel: +41 44 254 5555

Email: [email protected] Email: [email protected]
URL: www.prager-dreifuss.com URL: www.prager-dreifuss.com

Daniel Hayek is a member of the management committee and head of Mark Meili is a member of the Corporate and M&A and Dispute
the Insolvency and Restructuring team as well as the Corporate and Resolution teams of Prager Dreifuss. He mainly advises companies
M&A team of Prager Dreifuss. Daniel has been a partner with Prager with regard to commercial and corporate law matters. His main areas
Dreifuss since 2001. His practice focuses on all aspects of insolvency of practice include M&A, corporate finance as well as contract,
and restructuring matters, including representing creditors in corporate and commercial law matters. Mark further advises clients in
bankruptcy-related litigation, registering or purchasing claims or in matters of insolvency and restructuring law. In these fields he also
enforcing disputed claims before courts. His longstanding expertise represents clients in court and before arbitration tribunals.
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 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 undertaken
personally or in the context of our interdisciplinary practice groups, ensures the highest degree of competence even in highly dynamic times.

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Chapter 34

Taiwan
Hsin-Lan Hsu

Lee and Li, Attorneys-at-Law Pauline Wang

that can be securitised in the case of a private participation in the

1 Overview
construction and operation of a new infrastructure project in
accordance with the PPP Act. Therefore, the rights over income
1.1 What are the main trends/significant developments in derived from the operation of the infrastructure project during its
the project finance market in your jurisdiction? operation period obtained by the private institution according to the
concession agreement can be securitised. The purpose of the
In Taiwan, project finance primarily applies to infrastructure projects amendment is to attract long-term private capital into infrastructure
developed by the private sector or through a public-private partnership. investment.
The major legislation that governs private participation in
infrastructure projects is the Act for Promotion of Private Participation 1.2 What are the most significant project financings that
in Infrastructure Projects (the “PPP Act”), last amended in 2018. The have taken place in your jurisdiction in recent years?
PPP Act provides 14 categories of public works for private sector
participation, including, among others: transportation facilities; The most significant project financing transaction in Taiwan in recent
sewerage treatment facilities; water supply, flood control and drainage years is the Taiwan High Speed Rail project (a NT$323.3 billion
facilities; hygienic and medical facilities; recreation/tourism facilities; (US$10.5 billion) multi-tranche syndicated loan) in 2000 which was
power supply facilities; sports facilities; industrial, commercial, restructured to NT$381.06 billion (US$12.7 billion) in 2009. Project
technical and agricultural facilities; and government office buildings. financing was also adopted for other large-scale projects, such as:
A project company under the PPP Act may apply for mid- and long- Taipei 101 Tower (NT$35.3 billion (US$1.2 billion)), which opened
term loans from domestic banks at preferential interest rates. Also, in 2004; Taipei Port Container Terminal (NT$16 billion (US$533
foreign banks may participate in the syndication of loans. In million)), which began operation in 2009; Kaohsiung Kuo Ming
addition, there is further deregulation regarding the issuing of new Container Terminal (NT$16.2 billion (US$540 million), which began
shares and corporate bonds to facilitate the project company’s operation in 2011; and Taipei Dome Complex (NT$15.4 billion
financing. (US$513 million)), which consists of a main dome building used as a
Among the 14 categories, transportation facilities have the lion’s baseball ground and for other sporting and cultural activities
share of the project finance projects. However, green energy has (construction commenced in 2012 but was suspended in 2016) and
been the industry in focus for the government. In recent years, we shopping malls, cinemas and hotels nearby (construction of the
have seen some small project financings for independent power nearby buildings has not yet commenced). For green energy, which is
plants and wind farms. also a hot topic in recent years in project financing, the significant
project financings that have concluded include the Formosa 1 Wind
In 2016, the Equator Principles were adopted for the first time in
Power project, Taiwan’s first commercial-scale offshore wind farm,
Taiwan by a bank in their project finance for a wind farm.
which consists of a NT$2.5 billion (US$83 million) syndicated loan in
In order to stimulate economic growth and drive industrial 2016 to finance the first phase of the wind farm (8MW, which
transformation, the Taiwanese government approved the Special Act commenced operations in April 2017) and a NT$18.7 billion
for Forward-Looking Infrastructure in July 2017. The Forward- (US$627 million) syndicated loan in 2018 that will be used to
looking Infrastructure Development Program (2017–2024) will refinance the 2016 syndicated loan and fund the development of the
expand investments in major infrastructure (including railways, second phase (120MW, due to be completed in late 2019).
aquatic environments, green energy, digital technology, and urban
and rural facilities). The government investment in this large-scale
infrastructure programme will total NT$882.49 billion (US$28.56 2 Security
billion), and is expected to spur public and private enterprise
investment of NT$1.78 trillion (US$57.53 billion). In addition, the
2.1 Is it possible to give asset security by means of a
Ministry of Economic Affairs (“MOEA”)’s InvesTaiwan Service
general security agreement or is an agreement
Center will provide every project with one-stop services by dedicated required in relation to each type of asset? Briefly,
staff to help resolve problems to rally investments for Taiwan. what is the procedure?
The Financial Supervisory Commission (“FSC”) amended the
Enforcement Rules of the Financial Asset Securitization Act in As a general rule, the security provider and the security interest
September 2016 and allows future creditor claims to be the assets holder should enter into an agreement to identify the specific asset

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subject to the security interest. A general security agreement, where the pledge. To deal with this issue, the pledgor, in practice, will be
such specific asset, such as a floating charge, is not identified, is not required to periodically confirm with the account bank the amount
enforceable under Taiwan law. In addition, different types of assets of cash in the bank account to ensure that the pledge also covers the
may be subject to different requirements, such as registration or cash deposited after the creation of the pledge.
filing with the competent authorities, on the perfection of the
security. Such requirements are discussed briefly in our answers to
2.5 Can security be taken over shares in companies
questions 2.2 to 2.5 below. incorporated in your jurisdiction? Are the shares in
Taiwan

certificated form? Briefly, what is the procedure?

2.2 Can security be taken over real property (land), plant,
machinery and equipment (e.g. pipeline, whether Yes. According to the Company Act, a pledge could be created over
underground or overground)? Briefly, what is the shares in a Taiwanese company. A private Taiwanese company may
procedure? determine at its discretion whether it will issue share certificates to
its shareholders, and if yes, the share certificates will be in
Yes. In order to create a valid mortgage over the land, buildings and certificated or scripless form. On the other hand, a public company
plants, the mortgagor and the mortgagee should enter into a written is obligated to issue share certificates to its shareholders.
agreement, and a registration with the competent authority is To create a pledge over shares in certificated forms, a written
required. agreement is required. The certificates of the pledged shares shall
As for machinery and equipment, the security to be created may be be duly endorsed and delivered by the pledgor to the pledgee.
a pledge or a chattel mortgage. Both security interests (pledge and Furthermore, the company issuing the shares shall be notified of the
chattel mortgage) give the security interest holder first priority over creation of a pledge in order to register such pledge on the
the machinery and equipment. To create a pledge, the pledgor and shareholders’ roster. The creation of a pledge is valid between the
the pledgee have to enter into a written agreement and the pledgor pledgee and the pledgor when the certificates of the shares have
should deliver the possession of the machinery and equipment to the been endorsed and delivered to the pledgee. However, the creation
pledgee, but registration with the competent authority is not of the pledge cannot be claimed against the company unless the
required. To create a chattel mortgage, the mortgagor need not company is notified of the creation of the pledge.
deliver the possession thereof to the mortgagee; however, To create a pledge over shares in scripless form which are
registration with the competent authority would be necessary in transferred through the book-entry system of the Taiwan Depository
order for the mortgagee to claim the chattel mortgage against a bona and Clearing Corporation (“TDCC”), the pledgor and the pledgee
fide third party. have to sign a form prescribed by the TDCC and have the pledge
For projects subject to the PPP Act, approval of the authority in registered with the TDCC.
charge of the PPP project is required before project assets are
encumbered for the purpose of project finance.
2.6 What are the notarisation, registration, stamp duty
and other fees (whether related to property value or
2.3 Can security be taken over receivables where the otherwise) in relation to security over different types
chargor is free to collect the receivables in the of assets (in particular, shares, real estate,
absence of a default and the debtors are not notified receivables and chattels)?
of the security? Briefly, what is the procedure?
No notarisation or stamp duty is required for the creation of security
To create a pledge over receivables, the pledgee and the pledgor over different types of assets. Whether registration is required
must enter into a written agreement and, with the pledgee’s consent, depends on the type of assets provided as security (please see the
the pledgor (or chargor) is free to collect the receivables in the answers to questions 2.2–2.5 above).
absence of a default. In addition, the receivables must be The registration fee for creating a chattel mortgage over a movable
identifiable according to the content of the pledge agreement. asset is NT$900. The registration fee for creating a mortgage over
Further, the debtor should be notified of the creation of the pledge in real property is equivalent to 1/1,000 of the total amount secured by
order for the pledgee to be able to claim the pledge against the the mortgage.
debtor. The pledgor should provide the pledgee with documentary
evidence of the receivables. Usually, the pledgor and the pledgee
will, in the pledge agreement, require the debtor to remit the 2.7 Do the filing, notification or registration requirements
in relation to security over different types of assets
outstanding receivables to a bank account designated by the pledgee
involve a significant amount of time or expense?
in the event that the debtor is informed of the pledgor’s default.

Regarding the registration fee, please refer to our answer to question

2.4 Can security be taken over cash deposited in bank 2.6 above. The authority in charge of the registration will only
accounts? Briefly, what is the procedure? conduct a formality review and it is not expected that the
registration will take a significant amount of time.
Yes. To create a pledge over cash deposits, the pledgee and the
pledgor must enter into a written agreement. The pledge shall not
2.8 Are any regulatory or similar consents required with
become effective against the account bank taking the cash deposits
respect to the creation of security over real property
unless the account bank is notified of the creation of the pledge. (land), plant, machinery and equipment (e.g. pipeline,
Nevertheless, please note that the concept of a floating charge is not whether underground or overground), etc.?
recognised under Taiwan law. In other words, the pledge covers
only the cash in the bank account when such pledge is created and In addition to the requirement of registration for certain types of
notified to the account bank. The pledge will not cover the cash security interests as mentioned above, generally the creation of the
deposited in the bank account after the account bank is notified of security interests does not require a regulatory or similar consent,

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unless the individual or private entity has made any contractual Pursuant to the Civil Code, a mortgage/pledge would not be validly
commitment with the government agencies. In Taiwan, facilities of created in favour of the creditor/mortgagee/pledgee if there is no
public utilities such as pipelines are usually owned by the state or underlying credit owned by the mortgagee/pledgee against the
state-owned enterprises, and thus the chance of them being provided debtor.
as security are remote.
A project company under the PPP Act shall not transfer, lease out, or 3.2 If a security trust is not recognised in your
create any encumbrance on the concession rights obtained under the jurisdiction, is an alternative mechanism available

Taiwan
concession agreement, nor shall it make such concession rights an (such as a parallel debt or joint and several creditor
object for enforcement in a civil action, unless otherwise declared status) to achieve the effect referred to above which
by the authority in charge of the PPP project that such an act is would allow one party (either the security trustee or
the facility agent) to enforce claims on behalf of all the
necessary in accordance with relevant provisions under the PPP Act.
lenders so that individual lenders do not need to
According to a ruling issued by the competent authority in charge of enforce their security separately?
the PPP Act, the concession rights refer to the rights to build and
operate the infrastructure.
As advised in question 3.1 above, in practice, if the lenders’ claims
However, a project company may, with the prior consent of the against the borrowers are joint and several, one of the lenders may
authority in charge of the PPP project, transfer, lease out, or create be appointed as the agent bank by syndicated banks to act for and on
any encumbrance on any operating asset and/or equipment obtained behalf of all the syndicated banks, including registering the agent
from the building and/or the operation of infrastructure. bank as, for instance, a mortgagee and foreclosing the mortgaged
Any transfer, lease, or creation of any encumbrance in violation of property.
any of the preceding two paragraphs shall be null and void.
It is worth noting that, before the amendment of the Company Act 4 Enforcement of Security
on August 1, 2018 which took effect from November 1, 2018, a
foreign company which has not been recognised by the Taiwan
competent authorities and has not accordingly established a branch 4.1 Are there any significant restrictions which may
in Taiwan has no capacity to act as a security interest holder. Since impact the timing and value of enforcement, such as
the amendment to the Company Act last year, a foreign company is (a) a requirement for a public auction or the
not required to be recognised and set up a branch in Taiwan in order availability of court blocking procedures to other
creditors/the company (or its trustee in
to have the same legal capacity as a local company and thus legally
bankruptcy/liquidator), or (b) (in respect of regulated
speaking should be able to act as a security interest holder unless assets) regulatory consents?
otherwise provided by law. However, according to a ruling issued
by the Ministry of Interior dated December 17, 2018, the foreign
A secured creditor may exercise its rights over security through
company who wishes to obtain a real estate mortgage as security
compulsory enforcement despite the ongoing bankruptcy
still needs to register and have a branch in Taiwan. Although there
proceeding or liquidation. The standard steps for initiating
is no similar ruling in connection with chattel mortgage, it is likely
compulsory enforcement are: (1) filing a petition with the court for
that the authority in charge of the chattel mortgage would adopt the
a writ of execution; (2) court officials seizing the security; and (3)
same approach as the Ministry of Interior and request that a foreign
the court holding an auction for the sale of the security and
company who wishes to obtain a chattel mortgage as security still
distributing the proceeds to the secured creditor. Unless other
needs to register and have a branch in Taiwan.
creditors have priority over the underlying security, the proceeds
should be paid to the secured creditor first.
3 Security Trustee
4.2 Do restrictions apply to foreign investors or creditors
in the event of foreclosure on the project and related
3.1 Regardless of whether your jurisdiction recognises companies?
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 The restrictions explained in question 4.1 above also apply to foreign
separately) to enforce the security and to apply the investors and creditors in the event of foreclosure on the project
proceeds from the security to the claims of all the company’s operating assets or machinery or concession right.
lenders?

As general practice for a syndicated loan, syndicated banks will 5 Bankruptcy and Restructuring
appoint an agent bank to act for and on behalf of the syndicated Proceedings
banks, including registering the agent bank as, for instance, a
mortgagee and foreclosing the mortgaged property. In addition,
5.1 How does a bankruptcy proceeding in respect of the
there will be a clause in the syndicated loan agreement to the effect
project company affect the ability of a project lender
that the syndicated banks’ claims against the borrower under the to enforce its rights as a secured party over the
syndicated loan agreement are joint and several. Given this, the security?
agent bank may claim the whole amount of the loan from the
borrower and enforce the security and apply the proceeds from the
If the project company enters a bankruptcy proceeding, the security
security to the claims of all the lenders.
owned by the project company will become a part of the bankruptcy
Nevertheless, under Taiwanese law, it is questionable whether or not estate and all enforcement actions against the project company will
a third party, who is not a creditor/lender, could validly hold the be stayed and all unsecured creditors must follow the bankruptcy
collateral as a trustee or a security agent for other creditors/lenders. proceeding. A secured project lender has a preferential right to

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claim proceeds from the sale of the underlying security through the company is in financial difficulties, ceases its business or is likely to
bankruptcy proceeding while it still retains the right to initiate a cease operations but is able to be re-established. The company or its
compulsory enforcement action during the bankruptcy proceeding. shareholder(s) or creditors meeting the qualification requirements
In addition, if the sale proceeds (from court auction through provided under the Company Act may apply to the court for a
compulsory enforcement proceedings) are insufficient to repay the reorganisation proceeding. A reorganisation plan, which normally
claims in full, it may participate in the bankruptcy proceeding to get contains a restructuring of the company’s debts, will be prepared by
additional distribution pari passu with the unsecured creditors. the reorganisation administrators and should be agreed by the
Taiwan

secured creditors’ meeting, unsecured creditors’ meeting and

shareholders’ meeting and then approved by the court. The
5.2 Are there any preference periods, clawback rights or
other preferential creditors’ rights (e.g. tax debts, shareholders’ meeting will not have a voting right if the company
employees’ claims) with respect to the security? does not have any net assets. The reorganisation plan approved by
the court is binding on the company and all its creditors and
There are no preference periods with respect to the security. The shareholders.
bankruptcy administrator may, within six months of the bankruptcy
adjudication, apply to the court for the invalidation of the following 5.6 Please briefly describe the liabilities of directors (if
acts of the debtor: (1) provision of security for outstanding debts within any) for continuing to trade whilst a company is in
six months prior to the bankruptcy adjudication; and (2) repayment of financial difficulties in your jurisdiction.
the debts not yet due. In addition, the bankruptcy administrator shall,
within two years after declaration of the bankruptcy proceeding, file If a company is in financial difficulties and its assets are insufficient
with the court to rescind the transaction which the bankrupt conducted to repay its debts, directors are obligated to apply for reorganisation
with or without consideration before the bankruptcy proceeding if such proceedings (if the company is still able to be re-established) or
transaction is deemed detrimental to the rights of the bankrupt’s bankruptcy proceedings instantly. Failure to do so would make
creditor and is revocable under the Civil Code. directors subject to an administrative fine of NT$20,000 to
As for preferential creditors’ rights, below are certain examples: NT$100,000 and would possibly entail personal liability for failure
to perform their fiduciary duty.
(i) land value incremental tax, land value tax and house tax
levied on the sale of the real property which will rank prior to
the mortgagee and the unsecured creditors; 6 Foreign Investment and Ownership
(ii) labour wages due and payable by the employer but overdue Restrictions
for a period of up to six months which will rank prior to
unsecured creditors; and
(iii) fees and debts incurred for the benefit of the bankruptcy 6.1 Are there any restrictions, controls, fees and/or taxes
estate which will rank prior to unsecured creditors. on foreign ownership of a project company?

5.3 Are there any entities that are excluded from Foreign investors who wish to make direct investments in a
bankruptcy proceedings and, if so, what is the Taiwanese private company, regardless of the industry, are required
applicable legislation? to obtain prior approval from the Investment Commission of the
Ministry of Economic Affairs (“IC”). In addition, Taiwan maintains
The following may apply for bankruptcy adjudication: (1) natural a list of industries in which foreign investment is prohibited or
persons; (2) juristic persons; and (3) partnerships and any other restricted up to a certain percentage (the “Negative List”). For
incorporated association with a representative or an administrator. investors from the People’s Republic of China (“PRC”), only those
An unincorporated association without a representative or industries that are announced in the “Positive List” by the
administrator is excluded from a bankruptcy proceeding, and there government are open for PRC investments. PRC investors are
is no special legislation applicable to such entity. prohibited from investing in the industries which are not in the
Positive List.

5.4 Are there any processes other than court proceedings

that are available to a creditor to seize the assets of 6.2 Are there any bilateral investment treaties (or other
the project company in an enforcement? international treaties) that would provide protection
from such restrictions?
A creditor and the project company may sign an agreement whereby
the ownership of the mortgaged or pledged security will be None of the bilateral or multinational investment treaties signed by
transferred to the mortgagee or pledgee automatically when the Taiwan provides any exemption from the restrictions stated in
project company defaults. However, in the case of a mortgaged question 6.1 above.
security, such agreement to transfer cannot be enforced against a
bona fide third party, unless the mortgage is registered with the 6.3 What laws exist regarding the nationalisation or
competent authorities. expropriation of project companies and assets? Are
any forms of investment specially protected?
5.5 Are there any processes other than formal insolvency
proceedings that are available to a project company Generally speaking, the Taiwanese government may expropriate
to achieve a restructuring of its debts and/or land in accordance with the Land Expropriation Act, under which
cramdown of dissenting creditors? the owners of the expropriated land are entitled to reasonable
compensation. Pursuant to the Statute for Investment by Foreign
Taiwanese law provides for a reorganisation proceeding which is Nationals, the government may expropriate or acquire an invested
slightly similar to the “chapter 11 proceedings” used in the US if a company for national security and defence reasons by paying a

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reasonable compensation, provided that the total foreign investment

in such invested company is less than 45% of the total capital 7.5 Are there any restrictions, controls, fees and/or taxes
amount of the invested company. If the total foreign investment in on foreign currency exchange?
an invested company has never accounted for less than 45% of its
total capital amount, the invested company will be immune from Taiwan has foreign exchange restrictions and controls. Generally
expropriation for 20 years from its establishment. speaking, a Taiwanese corporate entity or individual has an annual
foreign exchange quota of US$50 million (or its equivalent) or

Taiwan
US$5 million (or its equivalent), respectively, and may therefore
7 Government Approvals/Restrictions remit sums of foreign currency within the quota into or out of
Taiwan without prior approval from the Central Bank of the
Republic of China (Taiwan) (“CBC”). The CBC has the sole
7.1 What are the relevant government agencies or
discretion to grant or withhold its approval on a case-by-case basis
departments with authority over projects in the typical
project sectors? if the Taiwanese corporate entity’s or individual’s quota would be
exceeded for such conversion. No government fee or tax is payable
purely on foreign currency exchange transactions.
Various central and local government authorities are authorised to
implement projects under the PPP Act. The Department of
Promotion of Private Participation under the Ministry of Finance is 7.6 Are there any restrictions, controls, fees and/or taxes
responsible for administering the PPP Act and overseeing projects in on the remittance and repatriation of investment
the typical project sectors. returns or loan payments to parties in other
jurisdictions?

7.2 Must any of the financing or project documents be Any remittance and repatriation of funds to a party in another
registered or filed with any government authority or
jurisdiction will be subject to foreign exchange control in Taiwan if
otherwise comply with legal formalities to be valid or
enforceable? it involves exchange settlements against New Taiwan Dollars. For
example, any remittance of over US$1 million (or its equivalent)
into or out of Taiwan by a company should be declared by the
In general, Taiwanese laws do not require that specific financing or
remitting company to the bank handling foreign exchange, with
project documents be registered or filed with government
supporting documents.
authorities for validity (or enforceability); nor do the laws require
that such documents be in conformity with specific formalities. As to tax treatment, the remittance of dividends to foreign
shareholders is subject to withholding tax at 20% or lower if there is
a tax treaty between Taiwan and that jurisdiction, while the
7.3 Does ownership of land, natural resources or a remittance of loan payments is not taxable except for interest, which
pipeline, or undertaking the business of ownership or
is subject to a 20% withholding tax or a lower tax treaty rate.
operation of such assets, require a licence (and if so,
can such a licence be held by a foreign entity)?
7.7 Can project companies establish and maintain
Foreign entities may not own forest land, land with mineral onshore foreign currency accounts and/or offshore
deposits, water sources or other pieces of land with similar accounts in other jurisdictions?
resources. Other than the above, a foreign entity with a branch in
Taiwan may acquire pieces of land in Taiwan, provided that its home A project company may open and maintain a foreign currency
country grants reciprocity to Taiwanese nationals and entities. account as long as it provides all the documents required by the bank
The extraction of natural resources requires a licence under the for opening an account. Taiwanese law does not prohibit a
Mining Act and the operation of pipelines (for water, electricity, gas, Taiwanese company from opening an offshore account in another
and so on) also requires a licence under relevant laws and jurisdiction.
regulations governing such public utilities. A project company
incorporated in Taiwan and awarded the concession right pursuant 7.8 Is there any restriction (under corporate law,
to the PPP Act should generally be eligible for such licence. exchange control, other law or binding governmental
practice or binding contract) on the payment of
dividends from a project company to its parent
7.4 Are there any royalties, restrictions, fees and/or taxes company where the parent is incorporated in your
payable on the extraction or export of natural jurisdiction or abroad?
resources?
Under the Company Act, a company should not pay dividends
Under the Mining Act, only Taiwanese nationals, whether natural or unless and until its losses have been covered, a legal reserve has
judicial persons, can own mineral rights to extract natural resources. been set aside, and there are surplus earnings left. If a company
A mineral rights holder needs to pay the government mineral pays dividends in violation of the above requirements, creditors of
royalties and mineral rights fees twice a year. Mineral royalties are the company may request nullification of the dividend distribution
calculated at 2% to 50% of the price for petroleum and natural gas, and demand compensation for losses incurred, and the statutory
2% to 20% for metallic minerals, and 2% to 10% for other minerals, representative of the company will be sentenced to up to one year’s
while the amount of mineral rights fees depends on the kind of imprisonment and/or a fine of NT$60,000 (about US$2,000). If the
minerals and the terms of the concession. Tariffs may be imposed dividends are paid to a foreign parent company, they will be subject
on the export of natural gas and petroleum, but there is no tariff for to withholding tax as explained in question 7.6 above.
exporting natural gas and petroleum to a WTO member or a country
which has a free trade agreement with Taiwan.

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7.9 Are there any material environmental, health and 9 Foreign Employee Restrictions
safety laws or regulations that would impact upon a
project financing and which governmental authorities
administer those laws or regulations? 9.1 Are there any restrictions on foreign workers,
technicians, engineers or executives being employed
by a project company?
Taiwan has various environmental, health and safety laws and
Taiwan

related administrative regulations. The impact that they may have

on a project financing depends on the nature and the contractual The hiring of foreign workers is subject to certain restrictions under
terms of the project. If a project involves substantial environmental the Employment Services Act. A permit from the competent labour
issues or may create hazardous worksites or substances with a risk authorities is required in order to hire technicians, engineers or
of significant liabilities (e.g., soil and groundwater pollution and executives. Application procedures and government administrative
clean-up), the lenders may be cautious about providing project measures are provided under the Employment Services Act and the
finance or may demand the inclusion of repayment acceleration regulations promulgated by the Council of Labour Affairs.
clauses in the loan agreement. The Environmental Protection
Administration under the Executive Yuan is currently the highest 10 Equipment Import Restrictions
governmental authority supervising all environment-related
matters, and the local environmental protection bureau would
oversee projects located in its jurisdiction. 10.1 Are there any restrictions, controls, fees and/or taxes
on importing project equipment or equipment used by
construction contractors?
7.10 Is there any specific legal/statutory framework for
procurement by project companies?
Certain equipment and components used by construction contractors
such as cranes, cables and wires are subject to inspection during import
As long as over 50% paid-in capital or issued shares of a company
clearance procedures for public safety reasons. The government
is owned by the private sector and not characterised as a state-
authorities in charge of inspecting such imports and labour safety are
owned enterprise, its procurement should not be subject to any
the Bureau of Standards, Metrology and Inspection and the Council of
special legal/statutory framework such as the Government
Labour Affairs. In general, importation of goods for sale or other
Procurement Act. According to the PPP Act, where the government
commercial use is subject to import duties and a 5% sale tax; the
or any government-owned enterprise makes any equity investment
importation of certain commodities such as tyres, vehicles, gasoline
in, or makes any donation to, a project company, the total equity
and machineries is subject to commodity tax. The PPP Act provides:
investment or donation from the government and such government-
(i) an import duty exemption for certain qualified equipment used by
owned enterprise shall not exceed 20% of the total capital or the
construction contractors; and (ii) a deferred (until one year after
total assets of the project company. If a project company enters into
commercial operations) instalment payment of import duty on
an investment contract with the competent government authorities
operating equipment to be used by a project company.
under the PPP Act, its procurement may be subject to the special
requirements under the investment contract.
10.2 If so, what import duties are payable and are
exceptions available?
8 Foreign Insurance
Products are classified in accordance with the Customs’
Classification of Commodities of the R.O.C. Codes (“CCC Codes”)
8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or with corresponding import duty rates. The CCC Codes are
guaranteed by foreign insurance companies? published on the website of the Directorate General of Customs. To
encourage the development of certain industries, the importation of
Foreign insurance companies may not sell insurance policies in some equipment and key parts required by such industries may
Taiwan unless they obtain a licence to do so from the FSC. In addition, enjoy zero import duty. Exemptions from import duties are
insurance companies must submit the terms and conditions of their generally provided under Article 49 of the Customs Act. See also
insurance policies to the FSC for approval before selling them in the the import duty exemption explained in question 10.1 above.
market. Once licensed and approved, they will not be subject to any
special restrictions or controls on their sale of insurance policies over 11 Force Majeure
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 may have to bear the tax withholding obligation. 11.1 Are force majeure exclusions available and
enforceable?

8.2 Are insurance policies over project assets payable to

foreign (secured) creditors? 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
A foreign company may be named as a payee or receive an
Code, an obligor is generally not held liable for non-performance if
insurance payment through a pledge of the insurance policy in
the non-performance is through no fault of the obligor.
Taiwan. Since the newly amended Company Act taking effect from
November 1, 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.

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a foreign court or an arbitral tribunal located outside of Taiwan,

12 Corrupt Practices
even if one of the parties is a government agency. Taiwanese courts
generally honour such an agreement on the basis of party autonomy
12.1 Are there any rules prohibiting corrupt business in the absence of any of the following circumstances:
practices and bribery (particularly any rules targeting (a) it will be unfair for the subject matter to be adjudicated by the
the projects sector)? What are the applicable civil or chosen jurisdiction;
criminal penalties? (b) the consent of a party to submit to the chosen jurisdiction is

Taiwan
obtained by fraud, duress or other unlawful means;
Bribing a public official in exchange for certain favours constitutes (c) the parties are not on an equal footing when they enter into
a criminal offence in Taiwan. According to the Statute of the submission to jurisdiction agreement;
Punishment for Corruption, a person may be sentenced to: one to (d) it will be inappropriate or inconvenient for the chosen
seven years’ imprisonment and fined up to NT$3 million if he offers jurisdiction to adjudicate the subject matter; and
a bribe or other unjust enrichment to a government official in return
(e) the country of the chosen jurisdiction does not recognise and
for his breach of duty; or up to three years’ imprisonment and/or a enforce judgments of the Taiwanese courts on a reciprocal
NT$500,000 fine for bribing a government official in return for a basis.
favour which does not entail a breach of the government official’s
The principle of sovereign immunity does not apply to projects in
duty.
Taiwan.
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 15 International Arbitration
contract, the bid bond may be confiscated, and the contract may be
terminated or rescinded. Furthermore, the bidder may be barred
15.1 Are contractual provisions requiring submission of
from bidding for government procurement projects for one year.
disputes to international arbitration and arbitral
awards recognised by local courts?
13 Applicable Law
Taiwanese courts recognise arbitration agreements requiring
submission of disputes to arbitration institutions or ad hoc
13.1 What law typically governs project agreements? arbitration outside of Taiwan. The arbitral awards rendered under
such arbitration agreements are generally recognised and
With regard to the PPP projects, the PPP Act shall prevail. Unless enforceable unless any of the grounds for denial of recognition or
otherwise specified in the PPP Act, the rights and obligations enforcement prescribed under the Arbitration Act applies.
between the authority in charge and the project company shall be
governed by the concession agreement and for matters not specified
15.2 Is your jurisdiction a contracting state to the New York
in the concession agreement, the relevant provisions under the Civil Convention or other prominent dispute resolution
Code shall apply. conventions?
In Taiwan, parties to a contract are generally free to choose the
governing law of the contract. In practice, it is common for the Taiwan is not a party to the New York Convention. However,
parties to choose Taiwanese law as the governing law for projects in provisions similar to Article 5 of the New York Convention are
Taiwan; in particular, the government counterpart to an investment provided under the Arbitration Act. For example, Taiwanese courts
agreement under the PPP Act is not likely to accept a foreign law as may dismiss a petition for the recognition and enforcement of a
the governing law. However, for EPC contracts involving foreign arbitral award on certain grounds, including that the
international contractors, we have seen contracts governed by New recognition or enforcement of the arbitral award is contrary to the
York law or English law. public order or good morals of Taiwan, or the dispute is not
arbitrable under Taiwanese law, or there is no reciprocity of
13.2 What law typically governs financing agreements?
recognition of arbitral awards.

Most infrastructure projects in Taiwan are locally financed. Thus, 15.3 Are any types of disputes not arbitrable under local
Taiwanese law typically governs financing agreements. law?

Under the Arbitration Act, disputes that can be resolved through

13.3 What matters are typically governed by domestic law?
arbitration are limited to “those which may be settled in accordance
with the law”. A good example of a matter that may not be settled
Investment agreements, off-take agreements, financing agreements, or arbitrated is a dispute over the validity of intellectual property
project insurance policies and land acquisition agreements are rights because it can only be decided by the Intellectual Property
typically governed by domestic law. Office or the Intellectual Property Court.

14 Jurisdiction and Waiver of Immunity 15.4 Are any types of disputes subject to mandatory
domestic arbitration proceedings?

14.1 Is a party’s submission to a foreign jurisdiction and

Some types of disputes are subject to mandatory arbitration under
waiver of immunity legally binding and enforceable?
Taiwanese law, e.g., a dispute between the Stock Exchange
Corporation and a securities firm, no matter whether there is an
Under Taiwanese law, parties may agree to submit their disputes to

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 Lee and Li, Attorneys-at-Law Taiwan

arbitration agreement between them. In addition, in a dispute over a Under Taiwanese law, no tax is required to be paid in order for
government procurement contract for construction works or technical foreign investments, loans, mortgages or other security documents
services, if the government agency refuses to accept mediation to take effect or to be successfully registered.
suggestions or resolutions proposed by the Public Construction
Commission under the Executive Yuan, and the contractor files for
arbitration, the dispute must be resolved by arbitration.
18 Other Matters
Taiwan

16 Change of Law / Political Risk 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?
16.1 Has there been any call for political risk protections
such as direct agreements with central government or
political risk guarantees? The risk allocation under many project agreements with a government
counterpart may not necessarily be in line with international practice
Political risk protections such as direct agreements with the central and may be more protective of the government party. Thus, risk
government or political risk guarantees are rare in Taiwan because control or mitigation measures would be especially important.
the legal framework and political regime are relatively stable, and Legal entities in which the PRC investors hold, directly or
the government generally does not feel the need to offer such indirectly, more than 30% shares or capital in total or which are
protections. In some exceptional cases, the government has agreed controlled directly or indirectly by PRC natural or juristic persons
to buy back the project assets to facilitate project finance. are considered PRC investors. Their investments in Taiwan are
limited to certain businesses and are subject to special approval
from the IC.
17 Tax

18.2 Are there any legal impositions to project companies

17.1 Are there any requirements to deduct or withhold tax issuing bonds or similar capital market instruments?
from (a) interest payable on loans made to domestic Please briefly describe the local legal and regulatory
or foreign lenders, or (b) the proceeds of a claim requirements for the issuance of capital market
under a guarantee or the proceeds of enforcing instruments.
security?
The issuance of corporate bonds by a project company in Taiwan is
Interest paid to foreign lenders is subject to withholding tax as subject to the regulatory requirements and restrictions under the
explained in question 7.6 above. However, exemption may be Company Act and the Securities and Exchange Act, including the
available for interest derived from: (1) loans given by a foreign financial conditions, the limitation on the total issuance amount and
government or financial institution for economic development; (2) the reporting to the competent authorities for effective registration
financing facilities offered to its own branch or other Taiwanese of the issuance.
financial institutions by a foreign financial institution; (3) loans
However, the criteria of the financial conditions and the limitation
extended by foreign institutions to legal entities within Taiwan for
amount applicable to the issuance of corporate bonds by a Taiwan
important economic construction projects approved by the Ministry of
project company can be exempted to a certain extent if the Taiwan
Finance; or (4) favourable-interest export loans or guarantees to legal
project company involved in an infrastructure project is a public
entities within Taiwan from foreign government institutions or foreign
company and the proceeds resulting from such bonds issuance will
financial institutions specialising in export lending or guarantee.
only be used for the infrastructure project concerned.
Proceeds from exercising a claim under a guarantee or proceeds
from enforcing security will not be subject to withholding tax.
19 Islamic Finance
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
taxes apply to foreign investments, loans, mortgages instruments might be used in the structuring of an
or other security documents, either for the purposes Islamic project financing in your jurisdiction.
of effectiveness or registration?

The development of Islamic finance in Taiwan is still in its

While tax incentives were offered to foreign investors in the past, embryonic stage. To date, there are no known examples of Islamic
the current tax regime generally does not treat foreign and local projects that have been financed in the jurisdiction of Taiwan.
investors and creditors differently, except that no withholding tax However, under Taiwanese law, Istina’a, Ijarah, Wakala and
applies to the profits repatriated to a foreign company by its branch Murabaha instruments may be used in the structuring of an Islamic
office in Taiwan and that certain interest income of a foreign project financing in Taiwan.
company is exempt from withholding tax, as explained in question
17.1 above.
19.2 In what circumstances may Shari’ah law become the
A foreign investor subscribing for shares issued by a qualified
governing law of a contract or a dispute? Have there
project company under the PPP Act and holding the shares for at been any recent notable cases on jurisdictional
least four years may enjoy tax credits of up to 20% of its investment issues, the applicability of Shari’ah or the conflict of
amount. Such tax credits, which are also offered to domestic Shari’ah and local law relevant to the finance sector?
investors, may be applied against the withholding tax on the
dividends expatriated by a project company to its foreign Under the Law Governing the Application of Laws to Civil Matters
shareholders.

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Lee and Li, Attorneys-at-Law Taiwan

Involving Foreign Elements, parties to a contract are free to select

the governing law of their contract. We doubt that ordinary courts 19.3 Could the inclusion of an interest payment obligation
would acknowledge Shari’ah as governing law. No precedents have in a loan agreement affect its validity and/or
enforceability in your jurisdiction? If so, what steps
been seen so far. could be taken to mitigate this risk?
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 The inclusion of an interest payment obligation in a loan agreement
favour of Islamic financing in Taiwan.

Taiwan
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 Islamic law applies to
the contract and the intention is to execute such provision in Taiwan.

Hsin-Lan Hsu Pauline Wang

Lee and Li, Attorneys-at-Law Lee and Li, Attorneys-at-Law
7F, 201 Tun Hua N. Road 7F, 201 Tun Hua N. Road
Taipei, 10508 Taipei, 10508
Taiwan Taiwan

Tel: +886 2 2715 3300 ext. 2551 Tel: +86 2 2715 3300 ext. 2137
Email: [email protected] Email: [email protected]
URL: www.leeandli.com URL: www.leeandli.com

Hsin-Lan Hsu graduated from National Taiwan University (LL.B.). She Pauline Wang graduated from National Taiwan University and
served as a notary public at Keelung and Taipei District Courts for obtained an LL.M. from Columbia University. She also passed the
nearly two years. She then won a scholarship from the Ministry of New York Bar Examination.
Education to study International Economic Law in France, where she
Pauline is a partner in the Corporate Investment Department. Pauline
obtained a DEA at Paris I University.
specialises in government procurement and private participation in
Hsin-Lan is a partner in the Banking and Capital Market Department. infrastructure projects, and has vast experience in assisting clients in
Hsin-Lan’s major practice areas are banking, capital markets, finance, handling project planning, bidding processes, contract negotiation,
M&A and general corporate law. contract management and dispute resolution. She assisted the
Promotion of Private Participation at the Ministry of Finance in drafting
Hsin-Lan has advised on many offshore and onshore fund raising
and modifying the model contracts for various private participation
projects, finance projects, mergers and acquisitions, and asset sale
modes (such as BOT, BOO, OT, ROT, BTO, etc.). She also acted as
and purchases. In addition to transactions, Hsin-Lan has provided
counsel to the Taipei City Government for negotiating the concession
general advice in the field of financial, investment, data protection and
agreement with the President Group for the Taipei Bus Terminal BOT
corporate-related inquiries.
Project; her efforts were recognised with an Eminent Contribution
Award for Consulting Firms in 2007.

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 professional
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 consistently 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.

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 Chapter 35

USA
Daniel J. Michalchuk

Milbank LLP Richard M. Hillman

Texas Intermediate at Cushing was deep in the double digits for

1 Overview
many months in 2018.
The global crude oil industry is expected to face challenges and
1.1 What are the main trends/significant developments in opportunities in 2019 from U.S. policy. The U.S. government has
the project finance market in your jurisdiction? now fully implemented its sanctions programme against Iran (subject
to waivers for certain nations, which the U.S. has indicated will not
The project finance market in the United States remains active, with be reissued), and has initiated sanctions against PDVSA, the
transactions continuing to be executed across a diverse range of Venezuelan State-owned oil company. Gulf Coast refineries have
industries and asset classes. In 2019, we are expecting the generally prepared for shortfalls in availability of Venezuelan heavy
infrastructure build-out in the oil and gas sector to continue as the crude, with increased demand from other sources in Canada, Mexico
shale oil and gas boom continues and major LNG export facilities and Iraq. Steel tariffs on most non-U.S. steel have increased the
reach final investment decisions and seek to tap markets for debt delivery costs of pipeline and rail infrastructure and, at the beginning
capital. In electricity markets, innovation and the growing demand of 2019, trade tensions with China are being closely watched across
by States and energy consumers for a diverse and clean energy mix industries. For the first seven months of 2018, China imported an
is driving investment into new areas, including offshore wind and average of 377,700 barrels of U.S. crude oil per day, according to the
battery storage. Consumers are influencing new business models as EIA, and surpassed Canada as the biggest foreign buyer of U.S.
corporates continue to enter into distributed generation, distributed product during that period. Exports suddenly halted on August 1, as
storage and wholesale power contracts. On the policy side, market part of the ongoing trade dispute between the nations. Although
participants are closely watching U.S. trade policy, key decisions China ultimately did not impose a tariff on U.S. oil imports, and
will be made (or not made) at FERC, environmental matters remain deliveries recommenced in December 2018, Chinese buyers remain
at the forefront of regulatory discussions and industries continue to wary that tariffs may be imposed in an escalation of the trade
adapt to the revised Federal tax laws. conflict, and have pursued diversity in their crude supply mix.
I. U.S. Crude Oil Exports Continue to Set Record Levels To alleviate transportation bottlenecks, substantial investment is
2018 set another record for annual U.S. crude oil exports, planned or committed to optimisation, expansion and greenfield
continuing the trend from the removal of the U.S. crude export ban projects. Tallgrass Energy is developing the Seahorse Pipeline, a
in December 2015. This growth has been spurred by the U.S. shale new 800,000 bbl/day crude pipeline from Cushing to St. James,
oil boom, relatively flat domestic demand, increased demand from Louisiana that is expected to start commercial operations in the third
Asia and reductions in supply from other sources. The U.S. Energy quarter of 2021 and a binding open season was announced for the
Information Administration (“EIA”) estimated that net imports fell Capline reversal project in January 2019, which would connect
from an average of 3.8 million bbl/day in 2017 to an average of 2.4 Patoka, Illinois to St. James. Both projects move volumes directly
million bbl/day in 2018, with the United States briefly becoming a into Louisiana, where the Louisiana Offshore Oil Port (“LOOP”),
net exporter during the last week of November. EIA projections are which was previously a crude import terminal, became the first U.S.
for net imports to continue to fall over the next two years with the port to load oil into a Very Large Crude Carrier in February 2018.
United States becoming a net exporter in the fourth quarter of 2020. Other deep-water terminals are under development throughout the
Gulf Coast, although none are expected to be operational before late
The record export growth has placed considerable strain on
2019. Where sanctions and other factors have caused increased
midstream oil infrastructure, particularly key transportation
demand for alternative supply of heavy crude oil, this has also
pipelines and storage terminals. These bottlenecks are particularly
resulted in the development of infrastructure solutions to deal with
acute in the Permian Basin, the engine of growth in U.S. crude
capacity constraints. In January 2019, Tallgrass and Kinder Morgan
production, where the pipelines to the Gulf Coast and northbound to
announced a joint venture to develop the Rockies Crude Oil
the storage hub in Cushing, Oklahama are operating close to full
Transportation Service, capable of delivering up to 800,000 bbl/day
capacity. In some cases, rather than shutting in wells, producers
of light crude oil and 150,000 bbl/day of heavy crude oil from points
without firm pipeline capacity have sought to take advantage of
in Wyoming and Colorado that connect into the Williston Basin and
higher prices by continuing production and transporting their crude
Western Canada to Cushing (where it is intended to link up with the
by rail and trucking. Rail lines are also backed up with capacity
Seahorse Pipeline).
substantially devoted to moving in sand required for hydraulic
fracturing. The differential discount between the West Texas II. Continued Development of U.S. LNG Exports
Intermediate at the Midland Hub in the Permian Basin and the West Over the last decade, the shale gas boom in the U.S. has propelled

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Milbank LLP USA

the country from net LNG importer to exporter and the U.S. LNG a proposal for a “Green New Deal” has been announced, which
export market remains firmly in a build-out mode. Dominion proposes moving the entire U.S. energy system to renewable
Energy’s Cove Point LNG Terminal in Maryland entered resources by 2030. As the current administration reportedly mulls
commercial operation in April 2018 and the first train of Cheniere’s executive actions to encourage fossil fuel production and exports,
Corpus Christi project commenced LNG production in November including action to limit State discretion on water permitting, we
2018. These projects join Cheniere’s Sabine Pass as the only anticipate this to be a continuing area of controversy in 2019.
facilities currently producing LNG in the contiguous United States. FERC, which is the lead agency for the environmental review under
They represent the tip of the wave with Elba Island, Cameron,

USA
the National Environmental Policy Act (“NEPA”), has been placed
Freeport and additional trains for Corpus Christi and Sabine Pass all under pressure to undertake more comprehensive reviews and
expected to come online in 2019 and four FERC-approved projects further scrutinise new pipeline projects, including fulsome reviews
subject to financial investment decisions this year as well. of the climate change effects of pipeline projects. On August 22,
Each of Sabine Pass, Corpus Christi and Cove Point have utilised 2017, the D.C. Circuit Court of Appeals issued an order (Sierra
project finance facilities, with Cove Point closing a $3 billion three- Club, et al., v. FERC, Nos. 16-1329 and 16-1387) finding that
year term loan facility in September to refinance intercompany FERC’s assessment of the environmental impact of the $3.5 billion,
loans provided for construction. The scale of capital required in 685 mile-long Southeast Market Pipelines Project (“SMP Project”)
respect of these LNG projects is anticipated to generate considerable was inadequate in that FERC’s environmental impact statement
demand for additional project financing in 2019 which, given the (“EIS”) did not contain sufficient information on the greenhouse-
amounts required, can be expected to result in challenges and capital gas emissions that would result from burning the gas that the
constraints in securing commitments for the LNG pipeline. pipelines would transport. The Court also vacated FERC’s approval
The ability of export facilities to secure long-term offtake of the SMP Project and required FERC prepare a conforming EIS.
arrangements will underpin the viability of new construction and the FERC’s ultimate approval of the certificate in that case, and its order
availability of capital. Certain offtakers overcommitted to volumes denying rehearing in respect of Dominion Transmission’s New
in contracts executed from 2011–2013 and, with those contracts up Market Project in New York, demonstrated a 3-2 partisan split on
for renewal, buyers are increasingly seeking more flexibility on the question as to FERC’s responsibility to evaluate the carbon
take-or-pay arrangements and shorter tenors. The new and emission impacts from building the pipelines. In the New Market
anticipated U.S. export capacity has also fuelled concerns about Project approval, FERC’s majority ultimately determined that an
how the market will absorb the increasing supply. Competitively analysis of indirect carbon emissions associated with a project’s
priced U.S. shale gas has traditionally been attractive to buyers in impact on production and consumption of natural gas was
Asia, however alternative new capacity has recently come online in speculative and that only direct emissions impacts would be
Australia and Asia, including from the $40 billion Ichthys project, accounted for in the FERC review. The Democratic-appointed
and the world’s biggest producer Qatar is expanding its production. commissioners have dissented on this point and FERC’s
Although China has announced plans to substantially ramp-up its determination is under challenge in the D.C. Circuit (Otsego 2000,
intake of LNG, U.S. exports to China have significantly declined as Inc. v. FERC, No. 18-1199).
a result of the ongoing trade dispute between the two countries, with Environmental groups have had successes in challenging the grant
a 10% tariff on United States LNG imposed in September 2018. of key permits, particularly with respect to water crossings. A string
These trade tensions have already impacted the infrastructure build- of 2018 court decisions in the 4th U.S. Circuit Court of Appeals have
out. Australia’s LNG Limited announced in 2018 that it was resulted in permits being set aside for the Atlantic Coast and
delaying its final investment decision on its Magnolia LNG project Mountain Valley pipelines in Appalachia. In September 2018, EQT
in Louisiana as a result of the difficulties it faced in securing a final Midstream announced the anticipated cost of the Mountain Valley
commitment from its prospective Chinese offtakers. Despite the pipeline had increased from $3.7 billion to $4.6 billion and in
uncertainty regarding access to markets in China, there are new February 2019 Dominion Energy announced its projection of
opportunities arising in Europe, with Poland’s PGNiG executing a project costs had increased by $1 billion from its original projection
long-term offtake agreement with Cheniere in November 2018 and to between $7 to $7.5 billion with the expected commercial
Germany announcing plans to build an LNG import terminal. operation date delayed to early 2021 from an original expected date
Perhaps reflecting the competitive nature of large capacity LNG of late 2019. In each case a substantial portion of the delay and
offtakes, there has been renewed interest among sponsors in looking increased cost has been attributed to the continued court challenges.
to smaller-scale LNG export terminals, including offshore floating Although FERC is the co-ordinating agency for interstate pipelines,
options. Sponsors must also navigate State and local approval processes.
III. Challenges for the Natural Gas Infrastructure Sector Section 401 of the Federal Clean Water Act requires a State water
The Marcellus/Utica shales in Appalachia have been the cornerstone quality permit to be granted for the construction of facilities that
of the natural gas boom in the United States, although in recent may result in a discharge of pollution in that State. The success of
years the growth of these natural gas heavy fields has been new build pipelines in any particular State may depend on that
constrained by limitations on pipeline takeaway capacity. Some of State’s view on shale-sourced gas. New York has been one
these limitations were alleviated in 2018 as the Rover, Atlantic challenging jurisdiction where the State government has taken a
Sunrise and Nexus lines were placed into service, although there is negative view of new gas pipeline construction. In February 2019,
a continuing need for pipeline infrastructure in the region and in the 2nd U.S. Circuit Court of Appeals ruled that the New York’s
other major shale plays in the Permian Basin, Bakken shale, Department of Environmental Conservation did not provide
Anadarko Basin and Haynesville shale. Siting and building natural sufficient information to support its denial of a water quality permit
gas infrastructure has nevertheless become increasingly contentious for the Northern Access pipeline. Similar denials from the New
and challenging. Some local opposition to energy infrastructure York regulator have impacted the Constitution pipeline and a lateral
projects is generally anticipated, however the debate over energy line from the Millennium pipeline to CPV’s Valley project in New
infrastructure is now firmly on a national level, as interest groups York only had its water quality certification granted after the 2nd
opposed to the continued use of fossil fuels have stepped up U.S. Circuit Court of Appeals determined that the regulator had
challenges to energy infrastructure projects. In the political sphere, waived its authority to rule on the water quality permit by failing to

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 Milbank LLP USA

act within the statutory period. The controversy is not confined to of the DOE’s grid resiliency pricing measure in January 2018 (the
New York State. In December 2018, the State Water Control Board DOE proposal would benefit plants that can demonstrate 90 days’
in Virginia voted 4-3 to reconsider a certification for the Mountain worth of fuel on site, such as coal and nuclear facilities).
Valley pipeline, in the midst of enforcement action brought by Additionally, State regulatory authorities in Texas have voiced
Virginia’s environmental regulators for alleged violations of erosion concern that the continued independence of Texas’ grid operator, the
and sediment control measures. Pennsylvania’s Department of Electric Reliability Council of Texas (“ERCOT”), from FERC
Environmental Protection announced in February 2019 that it is not jurisdiction is also currently under threat. ERCOT has remained
approving any further clean water permits for Energy Transfer independent because its synchronous electrical interconnections are
USA

Partners until it complies with an October 2018 order related to an contained wholly intrastate, however commentary by FERC in EP
explosion on the Revolution pipeline. Energy Partners, Inc., 164 FERC 61,056 (Docket No. TX18-1-000)
IV. Deadlock as Key Decisions Fall to FERC suggests that developments outside Texas, which ERCOT has no
control over, could create the potential to commingle power with
For most of 2018 FERC operated normally with a full complement
other States through Mexico’s national grid.
of five commissioners, three Republicans and two Democrats, under
the leadership of Kevin J. McIntyre (R) as Chairman. However, in In June 2018, FERC issued an order, on a split 3-2 vote, responding
October, Chairman McIntyre notified President Trump that he could to PJM’s proposed revisions to its capacity market that would
no longer serve as FERC Chairman due to health issues, and the address State-subsidised generating resources (e.g. nuclear power
President promptly named Commissioner Neil Chatterjee (R) as his plants receiving zero emissions credits, and wind and solar projects
replacement. Kevin McIntyre passed away on January 2, 2019. At backed by a State renewable portfolio standard). PJM had presented
the start of 2019, FERC has four commissioners, with two from FERC with a choice between two alternative proposals, either of
each political party. A split vote of 2:2 would fail to advance a which, PJM argued, would satisfy the “just and reasonable” standard
FERC order. In addition, FERC Commissioner Bernard McNamee of review under the Federal Power Act. In its order, FERC rejected
(R), a former Department of Energy Office (“DOE”) of Policy both proposals, and took the additional step of declaring the existing
Executive Director, assumed office on December 11, 2018 after a structure of PJM’s capacity market as “unjust and unreasonable”.
difficult Senate confirmation process, culminating in a 50-49 vote. FERC proposed a new plan and ordered that PJM develop a new
In early FERC meetings, Commissioner McNamee declined to vote market design. FERC’s proposal would give State-subsidised
on matters for decision and agreed to recuse himself from any generating resources a choice between participating in the capacity
discussions regarding the DOE’s grid resiliency pricing measure, market under a stringent minimum offer price rule that would
although he received ethics clearance to participate in proceedings effectively negate the bidding advantages of the State subsidy, or
that do not closely resemble the DOE proposal. Faced with two withdrawing from capacity market participation altogether. PJM has
voting commissioners of the opposition party, Chairman Chatterjee had difficulty reaching a consensus on the capacity market revisions
has removed many controversial items, including natural gas under its stakeholder process and FERC has agreed to delay the
pipeline orders, from the FERC agenda. capacity auction for the 2022–2023 delivery year to August 2019, to
allow implementation of the new rules for generators.
Such turmoil at the top has challenged the ability of FERC to reach
consensus and issue orders on energy infrastructure, markets and FERC has been embroiled in another heavily scrutinised
policy. The deadlock has generated some controversy, with the jurisdictional battle arising out of the bankruptcy of two large
Democratic commissioners Cheryl Glick and Richard LaFleur utilities, PG&E and FirstEnergy Solutions Corporation. Prior to
publicly criticising FERC’s failure to act on an emergency request PG&E’s bankruptcy filing, FERC ruled on petitions filed by
by Vineyard Wind to stay ISO-New England’s February 2019 NextEra and Exelon, finding that it has “concurrent jurisdiction”
capacity auction for the 2022–2023 commitment period. Vineyard with Federal Bankruptcy Courts on the question whether bankrupt
Wind was seeking a waiver to allow its planned offshore wind farm utilities can reject FERC-jurisdictional power purchase agreements.
to enter the primary auction as a renewable technology resource, At the time of that ruling, a similar question was the subject of a
despite not being located within the physical borders of a New pending appeal arising from the bankruptcy of FirstEnergy
England State. Offshore wind, which has greater consistency of Solutions Corporation in the U.S. Court of Appeals for the Sixth
wind resource and is generally located closer to load centres, is Circuit. That appeal concerns the Bankruptcy Court’s decision to
expected to expand significantly in the United States as developers grant a preliminary injunction barring FERC from ruling on the
leverage technical expertise from Europe (the first US offshore wind matter. PG&E is seeking similar relief in its case, including an
project, Deepwater Wind’s 30 MW Block Island Wind Farm, has injunction and order that the Bankruptcy Court has exclusive
demonstrated a good operational record and was refinanced in jurisdiction over the rejection of PG&E’s executory contracts.
spring 2018). The challenges in delivering and financing these On February 15, 2018, FERC issued Order No. 841 – “Electric
capital intensive projects, including the lengthy and multi-faceted Storage Participation in Markets Operated by Regional
construction process, a heavy European supply chain and a multi- Transmission Organizations and Independent System Operators”.
contract procurement model, are compounded where there is a lack The FERC order requires each RTO and ISO to revise its tariff in
of clarity on available revenue sources. order to facilitate the participation of electricity storage resources in
There are a number of other contentious matters upon which FERC organised markets for energy, capacity and ancillary services.
is expected to grapple with in 2019, and any nomination of a new Storage solutions, such as pumped-storage hydro and battery
commissioner by the current administration will be closely watched. storage, can operate as alternatives to gas-peaking plants in periods
Key matters expected to come before FERC in 2019 include: (1) of peak demand, enhancing reliability and assisting to manage the
price formation issues in energy and capacity markets administered continual integration of intermittent renewable energy into the grid.
by Regional Transmission Organizations (“RTOs”) and Independent The FERC order seeks to institute a consistent legal framework for
System Operators (“ISOs”); (2) natural gas pipeline certificate storage projects within energy markets and follows an increasing
reform under Section 7 of the Natural Gas Act; (3) review and level of investment in battery storage projects as the costs of
possible revision to the Commissions’ regulations implementing the lithium-ion batteries falls and movements are made towards the
Public Utility Regulatory Policies Act of 1978; and (4) the ongoing large-scale commercialisation of business models for these projects.
proceeding on grid resilience which follows from FERC’s rejection

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In implementing Order No. 841, FERC granted liberal deadlines for resulted in a transition of renewable project capital sources towards
tariff amendments to be submitted and additional time after that for greater debt, which is usually lent in a “back-leverage” loan that is
implementation of the tariff revisions. In the meantime, battery structurally subordinated to the tax equity investment.
projects have progressed supported by revenues from utility and Among the revenue raising provisions in the TCJA is the “Base
corporate customers and capacity markets. In December 2018, Erosion and Anti-Abuse Tax” (the “BEAT”), which is a minimum
Macquarie Capital raised a $100 million debt financing to support a tax imposed on certain large taxpayers that make certain tax-
52.5 MW / 315 MWh behind-the-meter battery storage portfolio deductible payments to non-U.S. based related parties. The way the
developed by Advanced Microgrid Solutions and backed by

USA
BEAT is calculated may cause an equity investor otherwise subject
contracted revenue with Southern California Edison. These to the BEAT to permanently lose a portion of the tax credits it
distributed storage projects demonstrate some similarities with the claimed with respect to its investments in renewable projects. The
successful distributed solar generation model, as they are located at BEAT is measured at the end of the tax year, making it difficult for
customer facilities where they provide energy efficiencies to the investors to definitively predict whether it would apply, and to what
host. On February 5, 2019, an aggregate residential distributed extent, particularly early in the year when investors are committing
generation solar-plus-storage bid by Sunrun for 20 MW of to fund projects. Some large investors have been cautious about
distributed grid capacity was accepted into ISO-NE’s capacity committing to project financing investments until they determine
auctions for the 2022–2023 commitment period. This was followed, their potential exposure to the BEAT and those investors most likely
on February 25, 2019, by FERC’s acceptance of revisions to ISO- to be impacted have generally built certain protections into their tax
NE’s tariff that expand energy storage resources’ ability to provide equity investment documents against the application of the BEAT.
capacity, energy and ancillary services in ISO-NE’s markets.
IV. Impact of the Tax Cuts and Jobs Act (“TCJA”) and Other Tax
Decisions 1.2 What are the most significant project financings that
have taken place in your jurisdiction in recent years?
The TCJA enacted at the end of 2017 has resulted in the most
significant changes to Federal tax law since the Tax Reform Act of
See the financings referred to in question 1.1 above. We expect the
1986. The headline policy takeaway from the TCJA is a cut in the
Block Island Wind Farm financing (and the aborted Cape Wind
highest corporate income tax rate from 35% to 21% and the highest
financing) and recent LNG financings to prove to be useful
individual income tax rate from 39.6% to 37%. In implementing
reference points for the larger project financings expected to hit the
this policy, the TCJA has also made fundamental changes to
market in the coming year.
available deductions and the manner in which the United States
taxes income of U.S. taxpayers generated outside of the United
States. Certain of the more important changes affecting project 2 Security
financing in the United States are summarised below.
The TCJA included favourable treatment for infrastructure, with certain
2.1 Is it possible to give asset security by means of a
regulated transmission assets granted an exemption from a new
general security agreement or is an agreement
limitation on the deductibility of interest expense against taxable required in relation to each type of asset? Briefly,
income. The implications of the legislation were nevertheless not what is the procedure?
universally favourable. Although not a direct policy objective of the
TCJA, regulated infrastructure assets faced a significant challenge from Several different tools are typically used to provide lenders security
the implementation of the TCJA following the 2016 decision of the in the project assets, including a security agreement covering
D.C. Circuit in United Airlines v. FERC (No. 11-1479), where the court personal property of the project company.
vacated FERC’s approval of the tariff for the SFPP pipeline, finding that
The Uniform Commercial Code (“UCC”) provides a well-
the pipeline operator was receiving a “double recovery” of income tax
developed and predictable framework for lenders to take a security
costs. On March 15, 2017, to address the United Airlines decision and
interest in personal property assets. Each U.S. State has adopted
a need to re-evaluate pipeline revenue requirements for tax costs as a
Article 9 of the UCC, which governs secured transactions, with
result of the income tax reductions provided by the TCJA, FERC stated
some non-uniform amendments. Under the UCC, a security
that it would no longer allow a master limited partnership (“MLP”) to
agreement must, among other elements, describe the collateral and
include tax distributions (a hypothetical tax amount reflecting a
the obligations being secured in order for the lender’s security
distribution to the MLP’s equity owners for the payment of income tax)
interest in the collateral to attach to a grantor’s personal property
as a cost for ratemaking purposes. In making its order, FERC also
assets. Filing a UCC-1 financing statement describing the collateral
commented that other partnership and pass-through entities must, if
in the appropriate filing office perfects the lender’s security interest
claiming an income tax allowance, address the double-recovery
in most personal property assets owned by the applicable grantor.
concern. The final rule was issued on July 19, 2018. The rule has seen
pipeline companies elect to be treated as corporations for tax purposes, Lenders usually also require the direct owner(s) of the project
in order to preserve their expected rate base (which may be crucial for company to grant a pledge of its ownership interests. The grant of
project economics, for example, where anchor shippers have a “most an equity pledge allows lenders to exercise remedies over the
favoured nation” provision in respect of their negotiated rates). ownership and governance rights in the project company in addition
to the assets owned by that company.
The United States renewables market has relied on a substantial
amount of tax equity investment, where financial institutions and large
corporates invest capital in renewable energy transactions (principally 2.2 Can security be taken over real property (land), plant,
wind and solar projects) based largely upon the tax benefits (tax credits machinery and equipment (e.g. pipeline, whether
and depreciation deductions) expected from their investment. By underground or overground)? Briefly, what is the
reducing the Federal income tax payable by those investors the TCJA procedure?
has reduced the value of the tax benefits associated with tax equity
investments (for example, the economic value of depreciation and A lien may be taken over real property, subject to the real property laws
interest deductions has declined from $0.35 to $0.21). This shift has of the State in which the real property is located, through a mortgage,

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deed of trust, deed to secure debt, leasehold mortgage or leasehold perfected by possession of a certificate and transfer power. If an
deed of trust. In most States, the recording of these instruments will ownership interest is an “uncertificated security”, then the lender
also perfect a security interest in fixtures; however, depending on the can achieve a priority position through a control agreement with the
jurisdiction, a UCC-1 fixture filing may also be required. issuer and holder of the ownership interest.
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 2.6 What are the notarisation, registration, stamp duty
borrower; (ii) describe the obligations being secured by such and other fees (whether related to property value or
USA

instrument; (iii) contain a granting clause describing the secured otherwise) in relation to security over different types
property; (iv) contain a legal description of the land being of assets (in particular, shares, real estate,
mortgaged; and (v) be signed and notarised. Such instrument must receivables and chattels)?
be recorded in the recorder’s office of the county where the real
property is located in order to provide notice to third parties of the Depending on the relevant State, city and county laws, recording
existence of the lien created thereby and to perfect the security fees and taxes for perfecting a security interest in certain property
interest in the fixtures described therein. For pipeline, electric may apply.
transmission, railway and similar financings it is also customary For transactions involving a real estate mortgage, lenders will almost
practice to file a central “transmitting utility” filing with the always require the borrower to purchase a title insurance policy
Secretary of State in the applicable State where the real property is insuring the lien and priority of the mortgage as shown on a report
located. This filing perfects a security interest in fixtures with prepared by a private title company. Title insurance rates are set on a
respect to transmitting utilities throughout the applicable State and statutory basis and vary from State to State but are generally the most
affords certain other benefits under the UCC. significant cost incurred by borrowers in relation to security over
project assets. A real estate mortgage (or comparable instrument
2.3 Can security be taken over receivables where the depending on the jurisdiction) needs to be notarised, and in some
chargor is free to collect the receivables in the jurisdictions signed by one or more witnesses, and recorded in the
absence of a default and the debtors are not notified county and State in which the real property is located. In addition,
of the security? Briefly, what is the procedure? some States impose mortgage recording taxes, intangibles taxes,
stamp taxes or other similar taxes, in addition to per page recording
Yes, depending on the nature of the receivable. A security interest in fees, in connection with the recording of the mortgage, which are
assets classified under the UCC as “accounts”, “chattel paper”, generally calculated based on the amount secured by the mortgage.
“commercial tort claims” and “general intangibles” is generally The amount secured by a mortgage is generally capped at the lesser
perfected by filing a UCC-1, although for “commercial tort claims” the of the fair market value of the property and the loan amount.
claims subject to the security interest must be specifically identified. A
security interest in “letter of credit rights” must be perfected by control 2.7 Do the filing, notification or registration requirements
and requires the consent of the issuer of the letter of credit. There are in relation to security over different types of assets
provisions in the UCC that override certain (but not all) restrictions on involve a significant amount of time or expense?
assignment and specific statutory requirements may apply in respect of
the assignment of receivables from governmental entities (the Please see question 2.6 above. A UCC-1 financing statement is
Assignment of Claims Act applies in respect of Federal claims). typically filed on the same day as closing, and may be filed prior to
that date. For transactions involving a real estate mortgage, the
2.4 Can security be taken over cash deposited in bank longest lead-time item is typically the process of obtaining a real
accounts? Briefly, what is the procedure? estate survey and preliminary title report and obtaining certain
deliverables necessary for the title insurance company to provide
Yes. Perfection of rights in deposit accounts and money deposited requested endorsements. This process can take one to two months
in those accounts is achieved by control rather than by the filing of depending on how large the property is or the location of the property.
a UCC-1 (subject to special rules that apply to proceeds of collateral
in which the secured party had a perfected interest). Control in 2.8 Are any regulatory or similar consents required with
accounts is generally achieved by the secured party entering into an respect to the creation of security over real property
agreement with the debtor and the depositary bank under which the (land), plant, machinery and equipment (e.g. pipeline,
depositary bank agrees to comply with the secured party’s whether underground or overground), etc.?
instructions on disbursement of funds in the deposit account without
further consent by the debtor. Requirements for regulatory consents are specific to the location
and nature of the project and the identity of the project parties.
2.5 Can security be taken over shares in companies
incorporated in your jurisdiction? Are the shares in 3 Security Trustee
certificated form? Briefly, what is the procedure?

Yes. Filing of a UCC-1 can perfect a security interest in the shares 3.1 Regardless of whether your jurisdiction recognises
of a company; however, it is common for the lender to take the concept of a “trust”, will it recognise the role of a
possession of a stock certificate and a signed blank transfer power to security trustee or agent and allow the security
trustee or agent (rather than each lender acting
ensure it has priority over other secured creditors. In respect of
separately) to enforce the security and to apply the
limited liability companies or limited partnerships (as distinct from proceeds from the security to the claims of all the
corporations), the applicable entity would need to “opt in” to Article lenders?
8 of the UCC under its organisational documents to elect to have the
ownership interests in that entity treated as a “security” that can be
Yes. Under New York law-governed security documents where

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there are multiple lenders or syndication is contemplated, a Any foreclosure or enforcement action is also subject to: (i) the
collateral agent is nearly always appointed to act on behalf of the possible imposition of the automatic stay under the Federal
lenders with respect to the collateral. Bankruptcy Code, Title 11 of the United States Code (“Bankruptcy
Code”), if the title-holder commences a case under the Bankruptcy
Code; and (ii) more generally, for any non-judicial foreclosure, the
3.2 If a security trust is not recognised in your
jurisdiction, is an alternative mechanism available obtaining of a specified injunction halting the auction or other
(such as a parallel debt or joint and several creditor proceeding. The consummation of collateral disposition transactions
may require notification under the Hart-Scott-Rodino Antitrust

USA
status) to achieve the effect referred to above which
would allow one party (either the security trustee or Improvements Act of 1976 (as amended) and expiration or termination
the facility agent) to enforce claims on behalf of all the of a waiting period prior to completion. An exemption applies to
lenders so that individual lenders do not need to certain acquisitions by a creditor in the ordinary course of business
enforce their security separately?
(such as in connection with an acquisition in foreclosure, default, or a
bona fide debt workout). There are certain restrictions on the
See question 3.1 above. New York law recognises the concept of a exemption’s applicability to sales out of bankruptcy and subsequent
security trust, although a collateral agent is customarily appointed to disposals by the creditor.
hold collateral for the benefit of lenders.
Finally, note that certain incentives or benefits in favour of a project
company may be affected by enforcement action. For example, in
4 Enforcement of Security California, newly constructed solar systems benefit from a one-time
exclusion from property tax reassessment, which can greatly reduce
property taxes payable because, for local property tax purposes, the
4.1 Are there any significant restrictions which may subject property’s value is determined without reference to its
impact the timing and value of enforcement, such as improvement by the newly added solar system. The benefit of this
(a) a requirement for a public auction or the
property tax exclusion may be lost where, as a result of a
availability of court blocking procedures to other
creditors/the company (or its trustee in foreclosure, a person or entity directly or indirectly obtains more
bankruptcy/liquidator), or (b) (in respect of regulated than 50% of the project company’s capital and more than 50% of the
assets) regulatory consents? project company’s profits (or more than 50% of the voting shares if
the project company is a corporation). Lenders to back-leverage
The cost and time required to execute enforcement decisions renewable energy transactions upstream of a tax equity investment
depends on the location and nature of the project and the identity of also need to be familiar with the potential consequences of certain
the project parties. For example, a direct or indirect change in tax-exempt and other disqualified persons taking an indirect
control over electric power assets subject to the jurisdiction of ownership interest in the project company, which can result in a
FERC must be approved by FERC. FERC has jurisdiction over partial recapture of the tax credits and a corresponding reduction in
most sellers into wholesale electric markets and electric power cash flows received from the tax equity investment.
transmission facilities in the contiguous U.S. States other than in the
ERCOT region, which is subject to the jurisdiction of the State of 4.2 Do restrictions apply to foreign investors or creditors
Texas. Certain small power generators known as “qualifying in the event of foreclosure on the project and related
facilities” may qualify for exemption from FERC approval of companies?
changes in control. Moreover, if the remedies to be exercised
involve direct taking of assets subject to FERC hydroelectric See section 6 below. As noted in question 4.1 above, foreign
licensing rules, or an interstate natural gas pipeline or underground investors or creditors may also need to structure their holdings to
gas storage facility that holds a FERC certificate of public avoid adverse consequences of taking a direct or an indirect
convenience and necessity, transfer of the licence or certificate may ownership interest in any tax equity investment.
be required. Certain State laws and regulations may also require
approvals, such as New York State, which generally parallels FERC
regulations. Most States, however, require approval only if the 5 Bankruptcy and Restructuring
assets are in the nature of a “traditional” public utility serving Proceedings
captive customers under cost-based rates or are subject to a
certificate of public convenience and necessity issued under State
law. 5.1 How does a bankruptcy proceeding in respect of the
project company affect the ability of a project lender
Similar considerations arise with nuclear facilities, for which the to enforce its rights as a secured party over the
operator will hold a licence from the Nuclear Regulatory security?
Commission (“NRC”), and any transfer of such licence that might
need to accompany an enforcement action would require separate Once a bankruptcy case is commenced under the Bankruptcy Code
NRC approval, recognising that only the licensed operator may in respect of a project company, the Bankruptcy Code imposes an
operate a nuclear power plant. It should be noted that foreign “automatic stay”, or statutory injunction, which immediately stops
entities are not allowed to hold an NRC nuclear power plant all enforcement actions outside of the Bankruptcy Court against the
operating licence or to exercise control over the licensee. Many debtor project company or its property. The automatic stay applies
energy facilities include a radio communication system licensed by to secured creditors, although it is possible for a secured creditor to
the Federal Communications Commission (“FCC”), and a transfer obtain relief from the automatic stay in certain circumstances, but
of ownership of the FCC licence related thereto will require prior only through an order of the Bankruptcy Court. In addition, in
approval from the FCC. In addition, there are restrictions on the certain limited circumstances, the Bankruptcy Court may extend the
grant of a security interest in an FCC licence; generally, such automatic stay to protect entities that are not debtors in a bankruptcy
security interests are limited to an interest in the proceeds thereof case, or assets of such non-debtor entities.
rather than the licence itself.

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A secured creditor is not, however, without protection in a case of a present or antecedent debt of the project company will generally
under the Bankruptcy Code. For instance, a secured creditor is constitute reasonably equivalent value (although it may be an
generally entitled to “adequate protection” of its interest in a avoidable preference). Under the Bankruptcy Code, the look-back
debtor’s collateral, and there are limits on the ability of the project period for constructive fraudulent transfer claims is two years before
company to use some types of collateral, or to dispose of collateral, the commencement of the bankruptcy case. Under State laws, the
without the secured creditor’s consent. In particular, the project look-back period can vary, depending on the State, and can be up to
company will not be permitted to use cash collateral (cash and cash six years. If a transfer is avoidable as either a preference or a
equivalents) without the agreement of the secured party or an order fraudulent transfer, the project company may be able to cancel the
USA

of the Bankruptcy Court. In any sale of collateral (other than security interest and force a return of the property, which may be
ordinary-course-of-business sales, such as sales of inventory in used to pay all creditors. It should be noted that not all transfers
normal business operations) during a bankruptcy case, the secured made during the applicable look-back period are avoidable, and
creditor generally has the right to “credit-bid” its claim against the these inquiries are generally fact-intensive.
debtor, although that right can be limited by the Bankruptcy Court
for cause. The determination of cause is fact-intensive, and in
5.3 Are there any entities that are excluded from
several recent cases Bankruptcy Courts have found that such cause bankruptcy proceedings and, if so, what is the
existed, in order to facilitate an auction with active, competitive applicable legislation?
bidding. It should also be noted that in the context of a plan of
reorganisation, a secured creditor cannot be compelled to accept a The Bankruptcy Code excludes from the category of entities that are
plan through a “cramdown” when the plan provides for the auction eligible to be debtors in a bankruptcy case: governmental entities
of the secured creditor’s collateral without giving the secured (other than municipalities); domestic insurance companies;
creditor the right to credit-bid. But it is still possible to cramdown a domestic banks; foreign insurance companies engaged in such
secured creditor by providing it with the indubitable equivalent of business in the U.S.; and foreign banks with a branch or agency in
its secured claim, which can include substitution of collateral. the U.S. In addition, the Bankruptcy Code has special provisions for
particular types of eligible entities, such as railroads, municipalities,
5.2 Are there any preference periods, clawback rights or stockbrokers and commodity brokers.
other preferential creditors’ rights (e.g. tax debts,
employees’ claims) with respect to the security?
5.4 Are there any processes other than court proceedings
that are available to a creditor to seize the assets of
Generally speaking, the holder of a perfected security interest is the project company in an enforcement?
entitled to payment from its collateral ahead of all other creditors
(other than the holder of a security interest that is prior in right to it). Outside of court proceedings, creditors may be permitted to exercise
Although particular creditors, such as taxing authorities or self-help remedies depending upon the nature of the collateral,
employees, may be entitled to priority claims under the Bankruptcy provisions of the applicable security agreements, and the governing
Code, such claims do not come ahead of a secured claim with regard law. For example, the UCC generally authorises a secured creditor,
to the collateral. Under certain circumstances, a debtor (or trustee) after default, to take possession of, to collect on, and to dispose of
may surcharge collateral for the costs of preserving or disposing of it. (such as by public or private sale), personal-property collateral
Under the Bankruptcy Code, the term “transfer” is broadly defined, without first commencing a court proceeding, provided that the
and includes the grant or perfection of a security interest. The grant secured creditor complies with particular formalities and proceeds
of a security interest to a lender may be “avoided”, or set aside, if the without breach of the peace.
security interest is unperfected. In addition, a lender’s perfected
security interest may be avoided as either a “preference” or a
5.5 Are there any processes other than formal insolvency
“fraudulent transfer”. It is important to note that there is no
proceedings that are available to a project company
requirement for there to be actual fraud or wrongdoing for a transfer to achieve a restructuring of its debts and/or
to be avoided under either of these theories. A lender’s security cramdown of dissenting creditors?
interest in a project company’s property may be avoided as a
preference if (i) the lender perfects the security interest during the One possibility is a consensual, out-of-court debt restructuring,
90 days (or one year, if the lender is an “insider” of the project which can be used to recapitalise or reorganise the capital structure
company) preceding the commencement of the project company’s (debt and/or equity) of an entity and its subsidiaries outside of a
bankruptcy case, (ii) that transfer is made for or on account of an bankruptcy case. Under such a debt restructuring, cramdown of
antecedent debt owed by the project company to the lender, (iii) the dissenting creditors is not available.
transfer enables the lender to receive more than it otherwise would
have received in a liquidation of the project company, and (iv) the
lender has no affirmative defence (which include that the transfer 5.6 Please briefly describe the liabilities of directors (if
was a contemporaneous exchange for new value, that the lender any) for continuing to trade whilst a company is in
financial difficulties in your jurisdiction.
gave subsequent new value, or that the transfer was in the ordinary
course of business) to such preference. Under the Bankruptcy Code
and applicable State laws, a constructive fraudulent transfer claim The United States does not impose personal liability on directors for
can be asserted to avoid a transfer that the project company made to insolvent trading. Under the law of some States, however, directors
the lender if both (i) the project company made the transfer in of an insolvent company may be found to have fiduciary duties not
exchange for less than reasonably equivalent value, and (ii) the only to the company’s shareholders, but also to its creditors, and a
project company at the time of the transfer was, or was thereby director’s breach of those fiduciary duties may give rise to personal
rendered, insolvent, inadequately capitalised, or unable to pay its liability.
debts as they matured. For this purpose, the securing or satisfaction

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States is bifurcated between Federal and State authorities. State

6 Foreign Investment and Ownership
regulatory authorities retain jurisdiction over the siting of electric
Restrictions power generation, transmission and distribution facilities. In most
of the United States, FERC has authority over wholesale sales of
electric power, and power may not be sold at wholesale until FERC
6.1 Are there any restrictions, controls, fees and/or taxes
on foreign ownership of a project company? has granted authority to sell at negotiated, “market-based rates”
(“MBR Authority”). The owners of certain small (not larger than 20
MW) qualifying facilities are exempted from the need to obtain

USA
While the United States generally has a liberal policy toward foreign
MBR Authority, although owners of facilities larger than 1 MW
direct investment, there are certain restrictions with respect to
must file a form with FERC in order to qualify. As noted in question
ownership of land with energy resources, as well as energy production
4.1 above, FERC lacks jurisdiction in the non-contiguous States
facilities, assets and transmission infrastructure, under both State and
(Alaska and Hawaii) and in the intrastate-only ERCOT region.
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 Dams and hydroelectric facilities on navigable waters are also
land sold by the Federal government. Ownership and control of nuclear subject to licensing by FERC, subject to exemption for very small
power facilities and leasing of geothermal steam and similar leases of projects. Interstate natural gas pipelines and underground natural
Federal land, or licences to own or operate hydroelectric power gas storage projects are subject to FERC certificate authority.
facilities, are also generally restricted to U.S. persons only. However, a FERC has jurisdiction over the rates charged by petroleum pipelines
U.S.-registered corporation that is foreign-owned or -controlled may for interstate shipments. The States retain jurisdiction over
own hydroelectric power facilities. petroleum pipeline permitting and over rates for intrastate
Under the Exon-Florio Act of 1988, as amended (“Exon-Florio”), which shipments. A separate Federal authority, the Pipeline and Hazardous
is administered by the Committee on Foreign Investment in the United Materials Safety Administration, under the Department of
States (an inter-agency committee co-ordinated by the Department of Transportation, has jurisdiction over pipeline safety regulation for
Treasury), the President may block an investment or acquisition (or both natural gas and petroleum pipelines.
order that such investment or acquisition be unwound) after conducting Nuclear energy projects and the operators of such projects are
an investigation that establishes that a foreign interest exercising control subject to licensing by the NRC.
or influence on relevant U.S. resources, assets, infrastructure or The Environmental Protection Agency (“EPA”) governs the
technology “might take action that impairs the national security” that issuance and enforcement of most Federal environmental permits.
cannot be adequately addressed by any other provision of law. Environmental permits can also be required by State, local and other
As noted above in question 4.1 above, a foreign entity cannot hold a Federal governmental authorities.
U.S. nuclear plant operating licence issued by the NRC or otherwise
control the licensee. A foreign entity cannot directly hold a FERC
7.2 Must any of the financing or project documents be
hydroelectric licence, but may own or control a U.S. company that registered or filed with any government authority or
holds such a licence. otherwise comply with legal formalities to be valid or
enforceable?
6.2 Are there any bilateral investment treaties (or other
international treaties) that would provide protection There are a number of registration and filing requirements for
from such restrictions? financing or project documents that depend on the nature of the
project and identity of the parties. For example, pursuant to Section
The United States has concluded a number of bilateral treaties that protect 204 of the Federal Power Act, FERC requires approval of issuances
investor rights to establish and acquire businesses, freedom from of securities or assumptions of liabilities (e.g. incurrence of debt),
performance requirements, freedom to hire senior management without subject to certain exceptions, for companies subject to its electric
regard to nationality, rights to unrestricted transfer in convertible currency power jurisdiction. FERC customarily grants electric power
of all funds related to an investment, and, in the event of expropriation, the generators with MBR Authority blanket approval for jurisdictional
right to compensation in accordance with international law. financings, and the owners of certain qualifying facilities are
exempt from FERC regulation of financings. It should be noted that
FERC will not regulate such financing approvals if a State
6.3 What laws exist regarding the nationalisation or
regulatory authority with jurisdiction actively regulates the
expropriation of project companies and assets? Are
any forms of investment specially protected? proposed financing.
Please refer to question 18.2 below for SEC-related requirements.
Under the doctrine of eminent domain, the U.S. Federal government
or any of the U.S. State governments may take private property 7.3 Does ownership of land, natural resources or a
without the property owner’s consent, so long as just compensation pipeline, or undertaking the business of ownership or
is paid to the property owner. operation of such assets, require a licence (and if so,
can such a licence be held by a foreign entity)?

7 Government Approvals/Restrictions Please see questions 4.1, 6.1 and 7.1 above. In addition, the
operation of certain U.S. telecommunications infrastructure that is
7.1 What are the relevant government agencies or licensed by the FCC may be subject to direct or indirect foreign
departments with authority over projects in the typical ownership restrictions, and, with the exception of broadcast radio
project sectors? and television assets, in many cases waivers of such foreign
ownership restrictions are available for investors that are domiciled
Regulatory jurisdiction over the electric power sector in the United in countries that provide reciprocal market access for U.S. investors
to own or invest in similar telecommunications infrastructure.

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7.4 Are there any royalties, restrictions, fees and/or taxes 7.8 Is there any restriction (under corporate law,
payable on the extraction or export of natural exchange control, other law or binding governmental
resources? practice or binding contract) on the payment of
dividends from a project company to its parent
Federal, State and private royalties are payable on the extraction of company where the parent is incorporated in your
jurisdiction or abroad?
natural resources, as applicable.
In general, no specific Federal taxes are imposed on the extraction
USA

Corporate law restrictions will depend upon the laws of the State in
of natural resources, although income taxes are imposed on profits
which the project company is incorporated or formed and its
from sales. Domestic crude oil used in or exported from the United
corporate form. In most project finance transactions, project
States is also subject to Federal tax. Income taxes may apply to
companies are pass-through entities and typically the organisational
sales outside of the United States to the extent such sales are related
form used is a Delaware limited liability company. Delaware
to business conducted in the United States.
limited liability companies are subject to a restriction under the
Delaware Limited Liability Company Act (the “Delaware Act”) on
7.5 Are there any restrictions, controls, fees and/or taxes paying distributions where the liabilities of the limited liability
on foreign currency exchange? company to third parties exceed the fair value of its assets.
However, this protection does not effectively extend to creditors, as
The United States does not generally impose controls or fees on the Delaware Act limits standing to bring derivative claims against
foreign currency exchange. However, U.S. persons, which include the manager of the limited liability company to its members (i.e. the
U.S. companies and their foreign branches, are generally prohibited owners) and their assignees (see CML V, LLC v. Bax, 6 A.3d 238
from engaging in transactions with foreign individuals or entities that (Del.Ch. 2010)).
are, or are owned or controlled by one or more individuals or entities Apart from the withholding taxes discussed under question 17.1
that are, (i) designated on U.S. sanctions-related restricted party lists below, New York law financing documents, which often impose
(including the Specially Designated Nationals and Blocked Persons restricted payment conditions on the issuance of dividends, and
List maintained by the Office of Foreign Assets Control of the U.S. shareholders’ agreements, typically contain restrictions. In addition,
Department of the Treasury (“OFAC”)), (ii) organised or resident in a project companies subject to FERC regulation of issuances of
country or territory against which the United States has imposed securities and assumption of liabilities under Section 204 of the
comprehensive sanctions (currently, the Crimea region of Ukraine, Federal Power Act, other than blanket authority under MBR
Cuba, Iran, North Korea and Syria), or (iii) otherwise the subject or Authority (discussed at question 7.2 above), are subject to certain
target of economic or financial sanctions imposed by the U.S. restrictions, such as restrictions requiring parent debt obligations to
government (including the OFAC and the U.S. Department of State), follow up to the parent company if a project company borrows at the
subject to limited exceptions. In addition, U.S. persons and foreign public utility level and “dividends up” the proceeds to its non-public
persons engaged in business in the United States are subject to U.S. utility parent.
Federal and State income taxes on foreign currency exchange gains.
Additionally, under the Currency and Foreign Transactions Reporting
Act of 1970 (as amended by the USA PATRIOT Act of 2001) and the 7.9 Are there any material environmental, health and
implementing regulations issued thereunder (collectively referred to as safety laws or regulations that would impact upon a
project financing and which governmental authorities
the “Bank Secrecy Act”), U.S. financial institutions are required to
administer those laws or regulations?
establish and implement an effective anti-money laundering (“AML”)
compliance programme. Elements of an effective AML compliance
programme include, among others, establishing effective policies and The Clean Air Act and the Clean Water Act are generally the most
procedures to manage AML risks, detecting and reporting suspicious material Federal statutes that would impact power project
activity, and complying with reporting and recordkeeping construction and operation. Permits related to air emissions and
requirements with respect to currency transactions that exceed certain water discharges under these statutes and similar State laws may be
monetary thresholds. In addition, U.S. persons and foreign persons required by the EPA or by State or local governmental authorities
engaged in business in the United States are subject to U.S. Federal and prior to the start of construction and for operation. In addition,
State income taxes on foreign currency exchange gains. known or likely contamination could be governed by the Federal
Superfund statute and other laws.
Any major Federal action or decision, including the granting of
7.6 Are there any restrictions, controls, fees and/or taxes
on the remittance and repatriation of investment certain permits by the U.S. Fish and Wildlife Service and the U.S.
returns or loan payments to parties in other Army Corps of Engineers, or the approval of a loan guarantee by the
jurisdictions? DOE, is subject to a comprehensive environmental review under
NEPA. Some States, notably California, require a similar State-
Other than the withholding taxes discussed in question 17.1 below, level comprehensive environmental review of discretionary
there are no such generally applicable restrictions. However, under governmental actions relating to power project permitting and
the BEAT, described above, restrictions may apply to certain very siting. There are opportunities for public notice, comment and
large U.S. companies that make payments of interest, which are challenge in the application process for some permits and pursuant
deductible against their U.S. income, to foreign affiliates. to NEPA.
In terms of international frameworks, the Equator Principles are
7.7 Can project companies establish and maintain voluntary and would only be used with respect to a project if
onshore foreign currency accounts and/or offshore required by the applicable financial institution and for certain types.
accounts in other jurisdictions? As of January 1, 2019, 94 financial institutions in 37 countries have
adopted the Equator Principles. Since the U.S. has comprehensive
Yes, they can. environmental laws and is considered a designated country,

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covenants to comply with environmental law in conjunction with

10 Equipment Import Restrictions
the performance of standard due diligence are often deemed
sufficient for projects located in the U.S. As a result, representations
and warranties and covenants expressly related to the Equator 10.1 Are there any restrictions, controls, fees and/or taxes
Principles are often either not included in the applicable project on importing project equipment or equipment used by
agreement or limited to a general statement of material compliance construction contractors?
with the Equator Principles. However, the Equator Principles are
currently under review for amendment by the Equator Principles

USA
There may be customs duties on imported project equipment, which
Association and can potentially, at least in part, result in additional are determined based upon the country of origin of the equipment
obligations related to domestic projects, which, in turn, could unless a relevant trade agreement eliminates or reduces certain of
increase the scope and extent of related covenants and these tariffs.
representations in applicable project agreements.

10.2 If so, what import duties are payable and are

7.10 Is there any specific legal/statutory framework for exceptions available?
procurement by project companies?
The Harmonized Tariff System provides duty rates based on the
Outside of the nuclear industry, privately owned and financed classification of the imported equipment.
project companies are not subject to governmental oversight for
procurement.
11 Force Majeure
8 Foreign Insurance
11.1 Are force majeure exclusions available and
enforceable?
8.1 Are there any restrictions, controls, fees and/or taxes
on insurance policies over project assets provided or Yes, force majeure exclusions are available and enforceable and are
guaranteed by foreign insurance companies?
applied such that one or both parties are excused from performance
of the project agreement, in whole or in part, or are entitled to
Such restrictions are applicable on a case-by-case basis depending suspend performance or claim an extension of time for performance.
on the location and nature of the project, the type of project and the Invocation of a force majeure clause can trigger force majeure
identity of the project parties. across other related project agreements, and thus it is important to
ensure that the force majeure provisions “mesh” with those found in
8.2 Are insurance policies over project assets payable to related project agreements. Force majeure provisions typically do
foreign (secured) creditors? not excuse parties from any monetary payments that mature prior to
the occurrence of the force majeure event.
Such restrictions are applicable on a case-by-case basis depending A typical force majeure provision will set forth a non-exhaustive list
on the location and nature of the project, the type of project and the of events that constitute force majeure, which often include natural
identity of the project parties. 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.
9 Foreign Employee Restrictions

12 Corrupt Practices
9.1 Are there any restrictions on foreign workers,
technicians, engineers or executives being employed
by a project company? 12.1 Are there any rules prohibiting corrupt business
practices and bribery (particularly any rules targeting
Generally, and subject to State law, foreign persons may be the projects sector)? What are the applicable civil or
appointed as corporate officers or directors of a project company. criminal penalties?
To be employed by a project company or receive a salary or
compensation for services provided within the United States as a Yes, the Foreign Corrupt Practices Act of 1977 (“FCPA”) contains
foreign person, there is a requirement to have work authorisation in two sets of relevant provisions: (i) its anti-bribery provisions
accordance with U.S. immigration laws. This can be achieved via prohibit U.S. persons and persons otherwise subject to U.S.
various “non-immigrant” or temporary visa categories, which are jurisdiction from making corrupt payments (including bribes, kick-
typically based on employer sponsorship. In addition, work backs and other improper payments) to officials and agents of
authorisation might be obtained via permanent resident status (also foreign governments and State-owned enterprises; and (ii) its
known as green card or immigrant status), often through accounting provisions require companies whose securities are listed
sponsorship from an employer (which can be a difficult and lengthy on stock exchanges in the United States to (a) make and keep books
process) or from sponsorship by an immediate family member who and records that accurately and fairly reflect the transactions of the
is a U.S. citizen (which may be less difficult than employer company (including transactions involving foreign government
sponsorship but is generally a lengthy process). officials or agents), and (b) devise and maintain an adequate system
Note that for most project finance transactions, project companies of internal accounting controls.
do not typically hire employees, who are often engaged by the
operator and asset manager.

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Among other penalties, (i) for violations of the FCPA’s anti-bribery made in other States, subject to reciprocity and commercial
provisions, the U.S. Department of Justice (“DOJ”) may impose reservations. The United States made a reservation that it will apply
criminal penalties of up to $2 million against offending companies the New York Convention only to awards made in the territory of
and fines of up to $250,000 and imprisonment for up to five years another Contracting State and only to disputes arising out of legal
for offending officers, directors, stockholders, employees and relationships (whether contractual or not) that are considered
agents, and (ii) for violations of the FCPA’s accounting provisions, commercial under the relevant national law.
the DOJ and the Securities and Exchange Commission (“SEC”) The United States is also party to: (i) the Inter-American Convention
may bring civil and criminal actions, which include criminal
USA

on International Commercial Arbitration (“Panama Convention”),

penalties of up to $25 million against offending companies and of up which governs international arbitral awards where expressly agreed
to $5 million and imprisonment for up to 20 years for offending by the parties or where “a majority of the parties to the arbitration
directors, officers, employees or agents of such firm. agreement are citizens of a state or states that have ratified or acceded
to the Panama Convention and are member States of the
13 Applicable Law Organization 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
13.1 What law typically governs project agreements? entity and a national of another Signatory State.

Project agreements may be governed by the law of any State but 15.3 Are any types of disputes not arbitrable under local
may be subject to the doctrine of lex situs (i.e. the rule that the law law?
applicable to proprietary aspects of an asset is the law of the
jurisdiction where the asset is located). Yes, certain disputes involving family law and criminal law are not
arbitrable. Claims under securities laws, Federal antitrust laws and the
13.2 What law typically governs financing agreements? civil provisions of the Racketeer Influenced and Corrupt Organizations
Act have been found by the U.S. Supreme Court to be arbitrable.
New York law typically governs financing documents given the
status of New York City as a major financial centre that provides for 15.4 Are any types of disputes subject to mandatory
a reasonably settled and certain application of commercial laws and domestic arbitration proceedings?
legal precedents and that permits liberal enforcement of the choice
of New York law. Certain security documents, such as a real estate With few exceptions, such as small disputes at the local court level,
mortgage, may be legally required to be governed by the law of the there are no broad categories of commercial disputes that must be
State in which the collateral is located. resolved by arbitration, absent an agreement of the parties to that effect.

13.3 What matters are typically governed by domestic law? 16 Change of Law / Political Risk

Please see questions 13.1 and 13.2 above.

16.1 Has there been any call for political risk protections
such as direct agreements with central government or
14 Jurisdiction and Waiver of Immunity political risk guarantees?

Generally, no.
14.1 Is a party’s submission to a foreign jurisdiction and
waiver of immunity legally binding and enforceable?
17 Tax
Yes, foreign law may govern a contract. However, the Foreign
Sovereign Immunities Act provides an exception to immunity
through waiver, which may be explicit or implicit. 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
15 International Arbitration under a guarantee or the proceeds of enforcing
security?

15.1 Are contractual provisions requiring submission of Withholding of U.S. Federal income tax at a rate of 30% is generally
disputes to international arbitration and arbitral required on payments of interest, dividends, royalties and other
awards recognised by local courts? amounts (not including principal on loans or distributions by
corporations that are treated as returns of capital) to foreign persons
Yes, they are typically recognised by local courts. unless attributable to a branch office maintained by the recipient
within the United States. The United States maintains treaties with
numerous jurisdictions that reduce or eliminate these withholding
15.2 Is your jurisdiction a contracting state to the New York
Convention or other prominent dispute resolution taxes on amounts paid to qualified residents of the counterparty
conventions? treaty country. In addition, interest paid to foreign persons, other
than banks on loans made in the ordinary course of business, is
Yes, the United States is a Contracting State to the New York exempt from this withholding tax if certain requirements are
Convention, which requires courts of Contracting States to give satisfied, including that the loan is not in bearer form and the lender
effect to arbitration agreements and recognise and enforce awards is unrelated to the borrower.

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Milbank LLP USA

Even where an exemption may be available, under the Foreign 1934). Under the Securities Act, securities in the United States must
Account Tax Compliance Act (“FATCA”), interest paid to a foreign be sold pursuant to an effective registration statement filed with the
financial institution (whether such foreign financial institution is a SEC or pursuant to an exemption from filing. Very few, if any,
beneficial owner or an intermediary) may be subject to U.S. Federal project bonds are sold in SEC-registered offerings. The most
withholding tax at a rate of 30% unless: (x) (1) the foreign financial common exemptions are offerings pursuant to Section 4(a)(2) of the
institution enters into an agreement with the U.S. Internal Revenue Securities Act and Rule 144A and Regulation S thereunder. Rule
Service to withhold U.S. tax on certain payments and to collect and 144A project bond offerings require a comprehensive offering
provide to the U.S. Internal Revenue Service substantial document that describes in detail the project, the project and finance

USA
information regarding U.S. account holders of the institution (which documents, the risks associated with the project along with a
includes, for this purpose, among others, certain account holders summary of the bond terms, a description of project modelling,
that are foreign entities that are directly or indirectly owned by U.S. limited information about the sponsors and offtakers and various
persons), or (2) the institution resides in a jurisdiction with which other disclosures. The underwriters and their legal counsel perform
the United States has entered into an intergovernmental agreement due diligence (in order for counsel to provide 10b-5 statements) to
(“IGA”) to implement FATCA, and complies with the legislation mitigate securities law fraud liability. Offerings solely under
implementing that IGA; and (y) the foreign financial institution Regulation S and Section 4(a)(2) typically have much less
provides a certification to the payor for such amounts that it is disclosure and diligence and the disclosure is more similar to that
eligible to receive those payments free of FATCA withholding tax. used in a typical bank deal.
The legislation also generally imposes a U.S. Federal withholding
tax of 30% on interest paid to a non-financial foreign entity
(whether such non-financial foreign entity is a beneficial owner or
19 Islamic Finance
an intermediary) unless such entity (i) provides a certification that
such entity does not have any “substantial United States owners”, or
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha
(ii) provides certain information regarding the entity’s “substantial instruments might be used in the structuring of an
United States owners”, which will in turn be provided to the U.S. Islamic project financing in your jurisdiction.
Internal Revenue Service.
From a U.S. tax perspective, amounts received from a guarantor or While Islamic project financing is relatively new to the U.S. market,
from the proceeds of property pledged as collateral are characterised there are generally three types of financing structures used in
and taxed in the same manner as amounts paid on the underlying Islamic project financing globally: (i) Istisna’a (or Istina’a)-Ijarah
claim would have been taxed. (construction contract-lease); (ii) Wakala-Ijarah (agency-lease); and
(iii) Sharikat Mahassa-Murabaha (joint venture-bank purchase and
sale) structures.
17.2 What tax incentives or other incentives are provided
preferentially to foreign investors or creditors? What Under the Istisna’a-Ijarah structure, which is believed to be the
taxes apply to foreign investments, loans, mortgages more popular structure in Islamic project financing, an Istisna’a
or other security documents, either for the purposes instrument (similar to a sales contract) is usually applied to the
of effectiveness or registration? construction phase and an Ijarah instrument (similar to a lease-to-
own agreement) is usually applied to the operations phase. During
There are very few Federal incentives targeted at foreign investors the construction phase, the borrower procures construction of
or lenders other than the broad exemption from withholding tax on project assets and then transfers title to assets to the lenders. As
interest payment described in question 17.1 above. consideration, a lender makes phased payments to the borrower
No Federal taxes are required for the effectiveness or registration of (equivalent to loan advances). During the operations phase, the
an agreement. Various documentary recording and transfer taxes lenders lease project assets to the borrower. The borrower, in turn,
apply at the State level. makes lease payments (equivalent to debt service). Unlike in
traditional project financing, the lender, as the owner of the
underlying assets, can be exposed to a number of potentially
18 Other Matters significant third-party liabilities, including environmental risk.
The Wakala-Ijarah structure differs from the Istisna’a-Ijarah
18.1 Are there any other material considerations which structure as the borrower is employed as the lender’s agent per an
should be taken into account by either equity agency (Wakala) agreement. The borrower/lender relationship is
investors or lenders when participating in project different from the Istisna’a-Ijarah structure in that the borrower
financings in your jurisdiction? procures the construction as the lender’s agent.
A less commonly used structure is the Sharikat Mahassa-Murabaha
The above questions and answers address most of the main material structure. Under this structure, the borrower and the lenders enter
considerations for project financings governed by New York law in into a joint venture (Sharikat Mahassa) agreement which is not
the United States. disclosed to third parties. A Murabaha transaction is one in which a
bank finances the purchase of an asset by itself purchasing that asset
18.2 Are there any legal impositions to project companies from a third party and then reselling that asset at a profit to the
issuing bonds or similar capital market instruments? borrower pursuant to a cost-plus-profit agreement, akin to a loan.
Please briefly describe the local legal and regulatory Each member of the joint venture holds Hissas (shares) in the joint
requirements for the issuance of capital market venture purchased by capitalising the Sharikat Mahassa. The
instruments. Murabaha portion of the transaction involves sales of Hissas from
time to time by the lenders to the borrower in compliance with
Project bonds are securities and therefore are subject to the various Shari’ah law.
U.S. securities offering and fraud laws (principally the Securities
Act of 1933 (“Securities Act”) and the Securities Exchange Act of

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clerics and scholars. However, the precedential value of the

19.2 In what circumstances may Shari’ah law become the Arcapita Bankruptcy Court’s refusal to consider whether the
governing law of a contract or a dispute? Have there financing was Shari’ah-compliant may be limited, given that the
been any recent notable cases on jurisdictional
district court dismissed the objector’s appeal of the Bankruptcy
issues, the applicability of Shari’ah or the conflict of
Shari’ah and local law relevant to the finance sector? Court’s approval of the financing (along with an appeal asserted by
the objector of confirmation of the debtors’ chapter 11 plan of
reorganisation) as equitably moot.
Generally, under U.S. State and Federal law, contracting parties may
USA

select any law as the governing law of the contract so long as it is

sufficiently defined and capable of enforcement. However, there is 19.3 Could the inclusion of an interest payment obligation
limited case law and no conclusive rulings by U.S. courts on in a loan agreement affect its validity and/or
whether Shari’ah law would be recognised as a system of law enforceability in your jurisdiction? If so, what steps
capable of governing a contract. could be taken to mitigate this risk?

In the U.S. Bankruptcy Court case of In re Arcapita Bank, B.S.C.(c),

No, subject to State usury laws restricting excessive interest.
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 Acknowledgment
the financing was not Shari’ah-compliant. In statements made on
the record, the court noted that the financing agreement was The authors would like to thank James C. Liles
governed by English law and expressly provided that no obligor was ([email protected]) for his substantial assistance in preparing this
permitted to bring a claim based on Shari’ah compliance of the chapter. James is a regulatory advisor based in the Washington,
finance documents. The court then appeared to adopt the English D.C. office of Milbank LLP and is a member of the firm’s Global
courts’ approach of avoiding ruling or commenting on compliance Project, Energy and Infrastructure Finance Group. The authors
of an agreement with Shari’ah law, citing a recent English court would also like to thank Matthew Ahrens, Javad Asghari, Drew
case that found that, irrespective of Shari’ah compliance, Shari’ah Batkin, Lisa Brabant, Bijan Ganji, Lafayette Greenfield, Sean
law was not relevant in determining enforceability of a financing Heiden, James Kong, Joseph Rafferty, Fiona Schaffer and Alan
agreement governed by English law, and that Shari’ah principles are Stone for their input on specific areas of this chapter.
far from settled and subject to considerable disagreement among

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Milbank LLP USA

Daniel J. Michalchuk Richard M. Hillman

Milbank LLP Milbank LLP
55 Hudson Yards 55 Hudson Yards
New York, NY 10001 New York, NY 10001
USA USA

Tel: +1 212 530 5079 Tel: +1 212 530 5326

Email: [email protected] Email: [email protected]

USA
URL: www.milbank.com URL: www.milbank.com

Daniel J. Michalchuk is a partner in the New York office of Milbank LLP Richard M. Hillman is a special counsel in the New York office of
and a member of the firm’s Global Project, Energy and Infrastructure Milbank LLP and a member of the firm's Project, Energy and
Finance Group. Mr. Michalchuk represents project sponsors and Infrastructure Finance Group. Mr. Hillman’s experience includes
financial institutions in numerous domestic and international project advising lenders, sponsors and other project participants on a range of
financings. Mr. Michalchuk received a B.A. from Queen’s University, U.S. and international project and structured finance transactions. Mr.
Canada, an M.A. in International Relations from Carleton University, Hillman received a LL.B. (Hons) and B.Com (Hons) from The
Canada, an LL.B. from University of Ottawa, Canada and an LL.M. in University of Western Australia and a Master of Banking and Finance
International and Comparative Law from Georgetown University Law Law from The University of Melbourne. He is admitted to practise in
Center. He is top ranked by Chambers USA in Projects-Nationwide. New York and Victoria, Australia. Mr. Hillman has published papers in
Mr. Michalchuk is admitted to practise in New York. the Company and Securities Law Journal and the Australian
Resources and Energy Law Journal and was a student editor at The
University of Western Australia Law Review.

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, D.C.
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 100 dedicated 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.

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