M . P . J . S I N N I N G H E D A M S T É

3 2 8 9 8 2

1 4 J U N E 2 0 1 4

Director’s liability in securitization companies; a comparison between Luxembourg, Germany and China

Contents

1. Introduction

2. The concept of securitization

3. Legal aspects in securitization

4. Director’s liability per jurisdiction

5. Potential director’s liability issues in securitization companies

6. Questions?

1. Introduction

Securitization is an important method of financing

SPVs managed by corporate service providers Risks and complications underestimated by corporate service

providers

Often seen as ‘easy money’ and not handled as a separate type of business

Comparison of jurisdictions Luxembourg: issuer-friendly jurisdiction specialized in

financial services

Germany: largest European economy, solid asset base, mature legal system and large potential

PR China, emerging market, large potential for securitization

2. The concept of securitization

Definition:

Securitization is a device of structured financing, in which anentity seeks to pool together its interest in identifiable cashflows over time, transfer the same to investors either with orwithout the support of further collaterals, and thereby achievethe purpose of financing

In other words: a pool of assets is ‘repackaged’ viaan SPV into a security.

2. The concept of securitization

SPV

Stichting/trust

Originator / Servicer

Investors

Trustee

Portfolio of assets

Arranger

Sale Notes• Class A• Class B• Class C• Class X

(sub)

100%

Cash Manager

Servicing

2. The concept of securitization

Motivators

To isolate certain assets

To link securities to assets rather than a whole company

To improve liquidity and the balance position by liquidating future cash flows

To attract a broader range of investors by offering tailor-made risk profiles

2. The concept of securitization

Caveats

Costs (both transaction costs and risk premium in return for investors)

Data protection issues

Cherry picking

Liquidity threats

Moral hazard (the subprime crisis)

2. The concept of securitization

Types of transaction

Repackaging transactions (‘vanilla’ deals)

Synthetic transactions

CDO/CLO/CDO-square/etc.

Compartment- or ‘cell’ structures (multiple separated transactions in 1 SPV)

Islamic securitizations (sukuk)

Uncommon assets (royalties, insurance, wine)

Life settlements

Mortgage-backed securities (including subprime MBS)

3. Legal aspects in securitization

True sale

The must be a real, valid and irrevocable transfer of assets from the Originator to the SPV

Specific types of assets require specific method of transfer (receivables, real estate)

Ring fencing and bankruptcy remoteness of the SPV

Orphan structure

Limited recourse

Non-petition

Compartments or ‘cells’

3. Legal aspects in securitization

Events of Default (breach of contract)

Failure to pay

Losing the tax residence

Entering into insolvency

Non-compliance with information requirements towards the Trustee

If listed, losing the listing

Cross default

Choice of law

Most transaction documents are under English or New York law

3. Legal aspects in securitization

Tax aspects

Tax neutrality

Substance

Choice of SPV jurisdiction

Corporate aspects

Thin capitalization – loss of equity

3. Legal aspects in securitization

Luxembourg

Securitization Law 2004

Germany

No specific legislation but legal principles clear and worked out

China

Regulatory guidelines

Trust Law

4. Director’s liability per jurisdiction

Luxembourg Internal: article 59 Company Law of 1915

Liability based on contractual mandate

Damage, fault, causal link

External: article 1382 Civil Code.

This is seen as a tort

Damage, fault, causal link

In financial distress – Article 100 Company Law 1915

Liability if directors fail to convene a shareholder’s meeting in case of loss of >50% equity.

In bankruptcy

Article 491 Commercial Code: liability for specific cases

Article 495-1 Commercial Code: serious and blatant fault, with a causal link to the bankruptcy

4. Director’s liability per jurisdiction

Germany

Internal: 43-2 GmbHG and 93 AktG

‘Standards of a prudent business person’

External: article 823 BGB

This is seen as a tort

Damage, fault, causal link

Bankruptcy

Insolvency to be reported immediately, if not personal liability

4. Director’s liability per jurisdiction

China Internal: Article 148 Company Law

Obligation of loyalty and care towards company

Summary of situations (not exhaustive!)

External: Tort Law

This is seen as a tort

Infringement on civil right/interest, fault

Summary of remedies

Trusts: Trust Law

Mentions situations and remedies

Bankruptcy

Non-compliance with obligation of loyalty and care towards company

Trusts have no legal personality, can not go bankrupt!

4. Potential director’s liability issues in securitization companies

Main common rule: a company is a legal person and therefore responsible for its own obligations; nobody else!

Director’s liability is therefore an exception

Required elements

Non-compliance to a standard

Damage

A causal link

5. Potential director’s liability issues in securitization companies

Who can sue a director?

The company

The liquidator or administrator in bankruptcy

Third parties, notably

Shareholders

Note- or bondholders (investors)

Transaction counterparties

Who would be the most likely claimant in a securitization?

Investors, due to the large amount and subordination

Other parties: possible but unlikely

5. Potential director’s liability issues in securitization companies

SPVs are managed by corporate service providers

Unspecialized staff

(Too) many mandates per director

Almost everything is outsourced by the SPV, however…

The SPV remains responsible and has no shareholders or external directors

False sense of security: ‘The banks and agents are doing everything, the lawyers are looking at the documents, we only need to sign, what could possibly go wrong?’

5. Potential director’s liability issues in securitization companies

Possible errors which could result in liability Late filing of accounts

Non-compliance with local legal requirements

Non-compliance with listing requirements

Non-compliance with transaction covenants

Failing to inform the trustee or investors in case of a (potential) Event of Default

Late payment (especially large amounts)

Disrespecting fiscal substance

Fraud, wilful misconduct by directors or third parties (implying negligence in applying screening procedures)

Most likely small mistakes with large consequences

5. Potential director’s liability issues in securitization companies

Recommendations Specialized staff; securitization is not ‘easy pocket money’!

Smaller or unspecialized corporate service providers should not accept securitizations.

Thorough review of the documentation: the legal counsel is hired by the client and acts in their interest, not that of the corporate service provider or SPV!

Pro-activeness and critical dates / transaction covenant monitoring

Engage third parties (law firm, tax firm) if and when necessary (costs should count as transaction costs)

Respect tax substance

AML screening

D&O insurance

5. Questions?