ENSURING CREDITOR PROTECTION IN ASIA PACIFIC CONSTRUCTION PROJECTS

Transcription

1 Asia Pacific Projects Update ENSURING CREDITOR PROTECTION IN ASIA PACIFIC CONSTRUCTION PROJECTS PART II: PROPERTY SECURITIES LAW IN THE ASIA PACIFIC REGION KEY CONTACTS Carolyn Dong Partner T carolyn.dong@dlapiper.com Jolyon Ellwood-Russell Partner T jolyon.ellwood-russell@dlapiper.com Koji Ishikawa Partner T koji.ishikawa@dlapiper.com Peter Faludi Special Counsel T peter.faludi@dlapiper.com INTRODUCTION Part I of this series discussed the impact of Australia's Personal Property Securities Act 2009 (Cth) (PPSA) on finance and security in the construction industry. It explained how creditors' interests in personal property should be registered as part of a new Australian legislative regime, and the implications that this holds for the construction industry. The Australian regime is broad, applies to all types of personal property, and uses a substance over form approach. Part II conducts a similar analysis of three further Asia Pacific jurisdictions; China, Hong Kong and Japan, providing a general overview of the relevant securities law in each jurisdiction. It outlines that only some security interests require registration, that there are no central registries, and that the schemes in these jurisdictions employ a form over substance approach. This part will then discuss the implications for the construction industry and will conclude with a final comparison between the four Asia Pacific jurisdictions. 1 Ensuring creditor protection in Asia Pacific Construction projects

2 AUSTRALIA The Australian PPSA aims to provide more certain and cheaper arrangements for personal property security through: Its application to any interest in personal property, whether tangible or intangible, that secures payment of a debt or the performance of an obligation, regardless of the form of the transaction. The introduction of a single online register dealing with registration of all security interests over personal property in Australia, with the implication that parties need only review one register in order to understand what registered security interests exist over the collateral. Accordingly, the breadth of the PPSA has some significant implications for the Australian construction industry. In Australia, the "perfection" of a security interest will affect its priority relative to other security interests in the secured property, and in the event of insolvency or bankruptcy of the grantor. Perfection is not satisfied by registration alone. Perfection requires that the security interest has attached, is enforceable against third parties, and has been registered on the personal property securities register or is in the possession or control of the secured party. 1 Each Asia Pacific jurisdiction has its own definition of registration or perfection. PEOPLE'S REPUBLIC OF CHINA (PRC) Introduction to security interests in China Under PRC laws regarding security interests in property, the holder of a security interest has statutory priority with respect to the secured property as against any third party to secure the repayment of a debt. However, the content of a security interest is defined by law and certain registration formalities must be completed before such security interest can be established and/or enforced as against bona fide third parties. Under PRC laws, the interests over property are classified into three different types: A mortgage, which is a security interest over property (movable or immoveable) that may be established without transferring the possession of the mortgaged assets but requires registration to be perfected for protection against bona fide third parties. A pledge, which is a security interest over movable property and intangibles (such as notes and securities), the establishment of which normally requires the transferring of the possession of the pledged assets or instruments to the creditor. A lien, which is a security interest established by operation of law that is granted to the creditor who is already in lawful possession of the debtor's movable assets in event the debtor defaults on its obligations. 2 Securities regulation in China is primarily set out in the PRC Property Law ( 物权法 ) of 2007 (Property Law) (available here). This statute supplements the previous PRC Security Interest Law ( 担保法 )which commenced in October 1995 (Security Interest Law) (available here). With respect to any discrepancies between the Property Law and the Security Interest Law, the Property Law is deemed to prevail. As China is a civil law jurisdiction, all security interests are created and regulated by statute. Unlike Australia, the Chinese legislation focuses on the form, rather than the substance of the transaction. 3 For specific interests identified as requiring registration, establishment of security interests in such property requires registration in order to validate such security interest and/or give it effect against bona fide third parties. Types of property interest and their registration requirements According to the Property Law, to establish a mortgage or pledge, the security provider (i.e., the owner of the property, which may either be the debtor or a third party security provider/guarantor) shall enter into a written contract. Mortgages For certain types of property, the Property Law requires registration before the mortgage or pledge will become validly established and enforceable, even as between the parties to the agreement. For certain other types of property, the security interest is created and enforceable as against the parties to the security agreement immediately upon execution of such agreement, but registration is required in order to protect the security interest as against third parties. The following types of assets may be mortgaged: Buildings and fixtures Construction land-use rights Contractual land-use rights, such as rights to use barren land that is obtained through a bidding process, auction or open negotiation Production equipment, raw materials, semimanufactured goods and/or products Buildings, vessels or aircraft that are under construction Transportation vehicles 2 Ensuring creditor protection in Asia Pacific Construction projects

3 Any other property that is not prohibited by the laws and administrative regulations to be mortgaged. To mortgage assets mentioned in items (1) to (3) above and for buildings under construction mentioned in item (5) above, the parties must apply to the authorities for registration. The mortgage is not valid (even as between the parties to the security agreement) until the registration is effected. To mortgage assets mentioned in items (4) and (6) above and for vessels and aircraft under construction mentioned in item (5) above, the mortgage will be validly established upon execution of the mortgage agreement and even before registration. However, such security interests are not enforceable against bona fide third parties unless and until they are registered. Pledges The following types of movable assets and intangibles may be pledged: Bank drafts, cheque, promissory notes Bonds, certificates of deposit Warehouse receipts, bills of lading Transferable fund units and equity Transferable intellectual property rights such as rights to the exclusive use of registered trademarks, patents, and copyrights Accounts receivable Any other rights that can be pledged as stipulated by laws and administrative regulations. Besides entering into a written agreement, the creation of a pledge requires transferring the possession of the pledged assets, and the pledge is effected upon the transfer of possession. For intangible assets or rights not evidenced in documentation (and thus the possession of which cannot be transferred), the parties must apply to register the pledge with the relevant authorities (e.g. a pledge of fund units or equity must be registered with a securities registration and clearing institution). Where registration is required, registration and a written pledge contract will be sufficient to give the interest priority. Where registration is not required, a written contract and the creditor's possession of the goods is sufficient to protect a security interest. 4 Registration authorities There is no central registry for securities in China. Different sorts of registrable securities are registered with different authorities depending on the type of property in which the interest arises. 5 Priority In China, the holder of a duly established security interest over property (such as a mortgagee, a pledgee or a lien holder) will have priority over the subject property in securing payment of debts. The priority rules as between multiple holders of security interests in the same property are as follows: A lien will take priority over a mortgage or pledge, even if that mortgage or pledge has been registered. 6 For mortgages, if the property is of a type that needs to be registered in order for the security interest to be effective between the debtor and the creditor, neither party will have a valid security interest until such interest is registered, and priority will depend on the sequence of registration. If the property is of a type that only needs to be registered to protect against the claims of third parties, then the first creditor to have entered into the security contract with the debtor shall have priority. As establishment of a pledge requires transferring the possession of movable property to the pledgee, multiple pledges would be unlikely to be established on the same property. Regulation of priority disputes Since there is no central registry or regulator of security interests, priority disputes are referred to a court or arbitration panel for a ruling on priority and enforcement of the security interests. All parties and relevant registration authorities (if applicable) must act in accordance with the order of the court or tribunal. Construction projects and personal property security In the Chinese construction industry, secured transactions are used to secure a financier's loan through a mortgage or pledge and to secure a contractor's right to receivables through a lien. Parties to construction transactions must follow the procedures set out in the Property Law. They must execute a written contract, and the creditor must possess the property to create a pledge or register to create a mortgage over the property mentioned in items (1) to (3) and buildings under construction in item (5) of the "Mortgages" section above, or to register to defend against bona fide third parties for mortgages over the types of property mentioned in items (4) and (6) and vessels and aircraft under construction in item (5). If registration is necessary, parties must register the percentage of the property's value and the scope of the indebtedness to be secured. 3 Ensuring creditor protection in Asia Pacific Construction projects

4 Retention of title By operation of law, contractors in China have a lien over property under construction. As indicated above, the registration of a mortgage or pledge cannot exclude the priority of a lien. Registration is therefore not required for the contractor's retention of the secured property. Suppliers, on the other hand, are not entitled to a lien or any other type of security over property they supply. Accordingly, suppliers would be well-placed to require payment before supplying goods or equipment. Leases and bailments The registration requirements in Australia apply to goods under lease or bailment. This is not the case in China, where the lessor or bailor must rely on legal title for protection. Thus, as there is no registration scheme for property under bailment, a bona fide third-party purchaser will have priority over the lessor or bailor, who may only seek damages against the seller. 7 Please note that China is developing a centralised registration system for leases and bailments. In 2008 the Credit Reference Centre of the Peoples Bank of China established an online registration platform, which is available for registration of financing leases or operating leases with a term of more than one year. However, the registration system in China is still under development and registration of leases on this platform serves only the purpose of publication but lacks clear legal effect. Other types of property interests in construction projects In Australia, a security interest in any property requires registration to ensure priority. This has broad implications for construction projects because of the variety of property over which security can be claimed. Such property includes unfixed plant and materials, 8 free issue materials, 9 commingled goods 10 and accessions. 11 There is no requirement to register a pledge over these types of property in China and accordingly, general priority rules apply, i.e. a written contract and the creditor's possession of the goods would be required to create priority in these cases. Mortgages over immovable property and transportation vehicles normally require registration to create the security interest while mortgages over movable property require registration to defend against third parties. Where a party pays for goods over which they have no possession, (e.g. where a principal has paid for materials that are to be installed, but where the contractor has possession), it is difficult for an owner to claim title over a bona fide third party. This is because, in principle, PRC laws value reliance and trust between parties to a transaction over the protection of the actual owner's title. HONG KONG Introduction to security interests in Hong Kong Security interests in personal property in Hong Kong can be created by agreement, by operation of law, by a completed transfer of ownership (i.e. mortgage), or by a delivery of possession (i.e. pledge). Types of property interest and their registration requirements Similar to Australia, in Hong Kong the types of personal property security include liens, mortgages, charges and retention of title clauses. Mortgages and charges can be sub-divided into legal mortgages, equitable mortgages, fixed charges and floating charges. As in Australia, these security interests are products of both statute and common law. Registration requirements for individuals In Hong Kong, individuals must register their interests in land. 12 It is otherwise very uncommon for individuals to take security. Where security is taken over personal chattels to secure a loan, and where the instrument confers a right on the creditor to seize the chattel in the event of default, such interests may fall under the Bills of Sale Ordinance. Subject to certain conditions and exceptions stated in the Bills of Sale Ordinance, they are required to be in a particular form with particular contents and must be duly attested and registered at the High Court Registry. 13 Registration requirements for companies The statutory provisions applicable to companies are found in the Companies Ordinance, Chapter 32, entitled "Registration of Charges" which commenced in mid It should be noted that the Hong Kong Legislative Council passed the Companies Bill (available here) on 12 July 2012, which replaces the current Companies Ordinance and will come into operation in The provisions of the Companies Ordinance apply to local and non-local companies registered under Part XI of the Companies Ordinance and their associated charges and mortgages. The legislation takes a form over substance approach, and applies only to certain types of charge, rather than all types of security interests. 14 Registration requirements In Hong Kong, security interests can be registered on the Index of Register of Charges kept by the Registrar of Companies (available here). This registry allows searches by the company's register number and exact company name. The register will show a list of registered charges. Pursuant to Part III of the Companies Ordinance, companies must register the following charges and 4 Ensuring creditor protection in Asia Pacific Construction projects

5 mortgages within five weeks of the date of their creation: 15 A charge for the purpose of securing any issue of debentures A charge/mortgage on uncalled share capital of the company A charge/mortgage created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale A charge/mortgage on book debts of the company A floating charge on the undertaking or property of the company A charge/mortgage on calls made but not paid A charge/mortgage on a ship or any share in a ship A charge on goodwill, a patent or licence under a patent, a trademark or copyright or licence under copyright. Parties registering interests in Hong Kong will need to deliver to the Registrar the particulars of the charge and the instrument by which the charge is created or evidenced. Consequences of failure to register Failure to register a charge within five weeks of its creation will result in the charge being void as against the liquidator or any creditors of the company. 16 However, failure to register will not render the interest void against the debtor, nor will it affect the debtor's obligation to repay. Provided that an interest is registered in the five-week period, it has priority according to the date of its creation. This is the case despite the fact that a grantee of a later interest has no means of discovering the prior charge during the five-week period. A charge created first but not registered within the five-week period will lose its priority to a later charge created and registered within time over the same asset. Where a court is satisfied that the omission to register a charge in due time was accidental, or due to inadvertence or to some other sufficient cause or is not of a nature to prejudice the position of creditors or shareholders of the company, or that on other grounds it is just and equitable to grant relief, it may extend the time for registration on such terms and conditions as it considers just and expedient. The order giving leave to register out of time does not itself perfect the charge. This comes about only when registration has been effected in accordance with the order, so that if the company goes into liquidation before registration, the charge will become void against the liquidator and creditors notwithstanding the order. The standard condition now imposed by an order extending time for registration is that the order is to be without prejudice to the rights of the parties acquired during the period between the date of creation of the charge and the date of its registration. Construction projects and personal property security There are few property rules in Hong Kong that are specific to the construction industry. The property law and the corporate registration requirements outlined above apply to construction transactions generally. As a matter of common law, the parties can agree to what security to provide and the lender will make a decision about whether to provide funding based on the security provided. Retention of title For goods subject to a retention of title clause, registration is generally not necessary. However, with complex transactions, there is a risk that such clauses could be recharacterised as security interests. In this case, if the interest is created by a company registered in Hong Kong, the interest must be registered. Commingled goods and unfixed plant and materials Where security is taken over commingled goods or unfixed plant and materials, the interest will need to be registered pursuant to the general statutory regime. Companies are to register their interests pursuant to the Companies Ordinance and, where an individual has taken security over such goods, it must be registered pursuant to the Bills of Sale Ordinance. Other types of property interests in construction projects In Hong Kong, there is no requirement to register security interests over free-issue materials, accessions, property subject to bailment or performance security. These types of property security are dealt with pursuant to contract. There are, however, other instances in which a party to a construction contract may obtain a security interest in personal property. These include: Full mortgage debenture given by a borrower. This will usually comprise a first fixed charge on the property, possibly a fixed charge over some other assets of the borrower and a floating charge over all the assets and undertakings of the borrower A charge over the whole issued share capital of the borrower or a full-share mortgage Assignment of the benefit of, or a charge over, a construction contract and any connected performance bond or parent company guarantee 5 Ensuring creditor protection in Asia Pacific Construction projects

6 Assignment of the benefit of the agreement for the appointment of each professional consultant and project manager (if applicable) and the assignment of the benefit of any other relevant agreements, e.g. management agreements Loan subordination agreements Cost overrun guarantee Completion guarantee Assignment of insurances Pledges over goods and other movable property Trust receipts over goods and the proceeds of sale Charges over deposits and accounts. To the extent that a security interest falls under the list of "specified charges" in section 80(2) of the Companies Ordinance it will need to be registered as mentioned above. JAPAN Introduction to security interests in Japan There are multiple types of security interest under Japanese law, governed primarily by the Civil Code, among other legislation. With the exception of the security assignment (discussed below), all security interests are created by statute. Types of property interest and their registration requirements Hypothec (or mortgage) (teitou-ken) A hypothec (or mortgage) is a property interest that allows the debtor to retain possession, use and title in the secured property. 17 Security over land is usually effected by way of hypothec, but a pledge can also be used. A hypothec generally cannot exist over movable property such as machines and tools, although there are some exceptions for certain types of construction equipment. 18 A factory hypothec can secure an interest in the land as well as a factory's machinery. 19 The creation of a hypothec does not require a special contract, nor is registration required between the parties. However, registration will be required where a creditor wishes to enforce its interest over that of third parties. Registration of factory hypothecs over construction equipment occurs at the Legal Affairs Bureau in the jurisdiction where the equipment itself was first registered. Priority of registered hypothecs is determined by the order of registration. 20 There are roughly 50 regional registers. There is no central registry for the listing of hypothecs. Pledge (shichi-ken) A pledge is commonly made over personal property. 21 Under a pledge, a creditor receives the right to possess the property, to the exclusion of the debtor. 22 Pledges in Japan are not normally used to secure an interest in immovable property due to certain restrictions. A pledge over immovable property cannot endure beyond 10 years, 23 nor can a pledgee demand interest on the amounts secured by the pledge. 24 No special contract or form is required for the creation of a pledge. Rather, the pledge is created upon delivery and handover of the property to the creditor. 25 The creditor is protected against a third party if he or she is in continuous possession of the property. 26 If multiple pledges are created over a single movable object, the earliest pledge created takes priority. 27 There is no registration of pledges on movable property. Perfection is evidenced by continuous possession. Security Assignment (joto-tanpo) Under a security assignment, title in property is transferred to the creditor, whilst possession and use remain with the debtor. This type of interest is not found in the Civil Code, but is nevertheless recognised by law. 28 Because a security agreement is created solely by the contract between the parties and is not expressly acknowledged by the Civil Code, the parties must be clear that it is their intention to create a security agreement and not simply transfer title to property. To make such an agreement clear, a well-drafted security agreement will have the following: A clause that transfers title in the property from debtor to creditor whilst providing that the debtor maintains possession A clause requiring the debtor to possess and maintain the property with care An insurance clause covering accidental damage to the property in the debtor's possession. There is no ability to register security assignments on movable property unless the debtor is a corporation, 29 in which case the interest is registered on a single national registry at the Tokyo Legal Affairs Bureau. Right of retention (ryuchi-ken) A right of retention (which is not to be confused with a retention of title clause) allows a creditor who possesses a piece of property belonging to a debtor the right to retain the property until the debtor has discharged his or her obligation. This security right is not created through agreement, but through statute. 30 There is no registration system for rights of retention. 6 Ensuring creditor protection in Asia Pacific Construction projects

7 Statutory liens (sakidori-tokken) A statutory lien 31 exists by operation of law and takes priority over unsecured property interests. The Civil Code sets out a variety of circumstances in which a statutory lien may arise. 32 For example, a lien may arise over immovable property (i.e. real estate, buildings, and fixtures) in favour of a person who designs, supervises, or carries out construction on the property. 33 A lessor may also be able to assert a statutory lien over the movable properties of a lessee, where there is a lease for immovable property and the lessee defaults under that lease. 34 There is no registration system for statutory liens on movable property. Priority and the consequences of a failure to register As noted above, registration is not often required or possible for personal property. There is a single national central registry located at the Tokyo Legal Affairs Bureau for registrable movable property (i.e. security assignments made by corporations), but no central registry for factory or construction equipment hypothecs. For parties wishing to identify security interests, there is an unofficial website at which searches for registrable movable property can be performed. Searches are available to the public for a fee. The results of a search performed at this website are not necessarily conclusive, and courts will require a registry search from the pertinent Legal Affairs Bureau. In circumstances where registration is required, if a security interest has not been validly perfected, the security holder is treated as an unsecured creditor and is subject to standard bankruptcy procedures. Although perfection is not necessary for a secured party to assert its security interest against a debtor, perfection is required to assert a security interest against a bankruptcy administrator or other insolvency officers. The general, the order of priority of creditors in bankruptcy procedure is as follows: Perfected security interests collected prior to bankruptcy procedures. Hypothecs, pledges, security assignments, and statutory liens regarding movable property are included in this set. Taxes. Tax arising before the beginning of bankruptcy procedure the payment of which has not yet come due or the due date is less than one year prior to the date of bankruptcy is collected prior to unperfected interests. Unperfected security interests and other general credit. Construction projects and personal property security The Civil Code applies to construction projects generally, but there are certain provisions that are of particular relevance to the industry. Retention of title Registration is not required. Generally, title in goods rests with a party in accordance with the terms of a contract, however, a supplier or head contractor cannot assert title or a security interest over property that has passed to a subcontractor where a third party has purchased the property in good faith. 35 This is because, under the Civil Code, a "good faith acquirer" includes a party that has "peacefully and openly begun to possess personal property and acted in good faith". To protect its security interest, the security holder may take steps to identify itself as the titleholder such as placing signage on or near the property in question. This will reduce the chance that a third-party acquirer would be considered to have acted in good faith. Perfection by way of security assignment can occur in favour of the vendor. Registration is possible where the vendor is a corporation, 36 but such perfection will not be effective against a good faith third-party purchaser. Construction equipment Hypothecs can be created over certain standard types of construction machinery once the main ownership has been registered. 37 This may be useful where the seller of construction equipment is the creditor or financier of the purchaser. Registration of a hypothec is not required to retain priority as between the purchaser and the seller. However, it is required to enforce priority against third parties. Free-issue materials, unfixed plant and materials, and bailments Where a contract provides that title to unfixed materials transfers to the principal immediately upon payment and the contractor or supplier is a corporation, then perfection of the security assignment is possible through registration. Once again, however, such perfection will not be effective against a good faith acquirer. Commingled goods and accessions Property in commingled goods is treated differently according to whether it is classified as "principal property" or "non-principal property". These terms are not defined, and are determined on a case-by-case basis. According to the Civil Code, (though alterable by contract), title in commingled goods lies with the possessor of the "principal property" that was added to the commingled goods. Conversely, a possessor of 7 Ensuring creditor protection in Asia Pacific Construction projects

8 "non-principal property" will not receive title to the property created when the non-principal property is commingled with other goods. Similarly, security interests in non-principal property disappear upon commingling. 38 The former possessor of the non-principal property incorporated into a commingled property is entitled to compensation from the possessor of the commingled goods for loss of property. A party that had a security interest in the non-principal property that was commingled may establish a security interest over such compensation. 39 When the physical properties of commingled goods prevent one property from being considered "principal" and the other "non-principal" (i.e. they are essentially equal in their contribution to the commingled property), the possessor of each personal property co-owns the commingled property in proportion to the value of the possessor's respective goods. Any security interests will remain in accordance with this ratio. 40 Table 1: Overview Accessions are goods affixed to other goods, but that retain their identity (e.g. an engine installed on a piece of plant). Under the Civil Code, such goods are treated as commingled goods where excessive expense would be required to separate the goods from each other. There is generally no registration for security interests in movable property, including commingled goods or accessions. COMPARISON OF SECURITY INTERESTS IN THE ASIA PACIFIC REGION The following table sets out the key differences in the personal property security regimes, between the Australia, China, Hong Kong, and Japan. Jurisdiction Substance over form approach? Relevant legislation (date commenced/date last amended) Central registry? Australia Yes Personal Property Securities Act (2009/2011) Yes, the Personal Property Securities Register China No Property Law ( 物权法 ) 2007 No central registry, but multiple registers are kept depending on type of property. See above for a list of registries Hong Kong No Part III of the Companies Ordinance, Cap 32 Japan No Note: a new Companies Ordinance scheme will commence in 2014 Civil Code (1896/2006) Real Property Registration Act (1890/2011) Perfection Act (1998/2007) Factory Hypothec Act (1905/2010) Construction Machinery Hypothecation Act (1954/2006) Yes, the Index of Register of Charges No (although some types of property may be registered at the local Legal Affairs Bureau) As indicated, there is a difference between jurisdictions as to whether a substance or a form approach is taken. In Australia, the need to perfect a security interest (either by registration, possession or, in the case of certain limited financial assets, control) is generally determined by reference to the substance of the transaction for all types of personal property collateral. In the context of construction, security interests for the performance of obligations, for the payment of debt, for the retention of title, and for a lease can be registered. In China and Hong Kong and Japan, the focus is on the form of the transaction. However each of these Asian jurisdictions takes a different approach to form. In China and Hong Kong, the need for registration depends heavily upon the type of property to be secured, with different registries for different types of collateral (e.g. motor 8 Ensuring creditor protection in Asia Pacific Construction projects

9 vehicles or aircraft), and not all collateral needing to be registered. In Hong Kong, there are specific exceptions to general registration rules (e.g. companies are able to register interests in unfixed plant and material and commingled goods, regardless of the type of collateral used). In Japan, registration is more dependent upon the type of transaction, which is similar to Australia. Hypothecs over real property (as well as those over construction equipment) are registrable. Goods subject to retention of title, as well as those forming free issue and unfixed plant and material are also registrable in certain situations. The following table compares for each of the jurisdictions examined in this paper, the types of collateral over which parties may be able to register a security interest in a construction context. Where registration is possible, we can advise you on whether it is appropriate in your circumstances. Table 2: Registrability of security interests in collateral in the construction industry Type of collateral Australia 41 China Hong Kong Japan 42 Collateral subject to retention of title * * Unfixed plant and material e.g. uninstalled elevator * * * * Free issue materials e.g. a piece of custom-made equipment that takes a long time for the purchaser to receive it after ordering it * * x * Commingled goods e.g. a concrete beam which has been reinforced with a steel rod * * * x Accessions e.g. a motor in a piece of plant * * x * Collateral subject to a bailment or lease Performance security Interest is registrable x Interest is not registrable * x x * x x x * Interest is registrable in certain situations. In the case of Australia, unless the security interest is perfected by possession, we recommend registration. Refer to body of Part II for more information. THIS UPDATE WAS AUTHORED WITH INPUT FROM: Australia Kylie Fitzpatrick, Celeste Koravos, Neil Thomson China Kai Wang, Jason Zhang, Gulong Ren, Peter Li, Chi Yao Hong Kong Eugenie Hui Japan Jonathan Brooks, Ryo Takizawa, Tatsuya Imamura, Mayu Igarashi 9 Ensuring creditor protection in Asia Pacific Construction projects

10 1 Personal Property Securities Act 2009 (Cth) s Where the debtor and creditor are individuals, such obligations must arise in connection with the secured assets. However, no such requirement exists where the debtor and creditor are both companies. 3 Ibid s Ibid ss 24, 226, 227, The relevant securities and corresponding registration authorities are as follows: mortgages over motor vehicles shall be registered with local Traffic Management Office of Public Security; mortgages over aircrafts shall be registered with Civil Aviation Administration of China; mortgages over equipment, raw materials, and semi-finished products shall be registered with the State Administration of Industry and Commerce; mortgages over forestry resources shall be registered with the Forestry Administration Bureau; pledges of public-traded fund units and stocks shall be registered with China Securities Depository and Clearing Corporation Limited; pledges of non-publicly traded shares shall be registered with the local Administration of Industry and Commerce; pledges of copyrights shall be registered with National Copyright Administration of China; pledges of trademarks shall be registered with Trademark Bureau under the State Administration of Industry and Commerce; pledges of patents shall be registered with State Intellectual Property Office; pledges of receivables shall be registered on the online registration system of People s Bank of China; and floating charges shall be registered at the State Administration of Industry and Commerce. 6 Ibid s Ibid s Unfixed plant and materials are goods for which the principal has made payment that are either off-site or on-site but not affixed to the works. These goods can include lifts and transformers, and are still in the possession of the contractor. 9 Free issue materials are those that are purchased directly by the principal and "freely issued" to the contractor for installation as part of the works. 10 Some goods are "commingled". This means that they are mixed with other goods of the same kind for the purpose of manufacturing, making them difficult to identify. Examples of commingled goods include steel reinforcement in concrete. 11 An "accession" is a good that is affixed to another good without losing its identity. Examples include a motor installed in a piece of plant. 12 Land Registration Ordinance (Hong Kong) cap 128, s Bills of Sale Ordinance (Hong Kong) cap Companies Ordinance (Hong Kong) cap 32, s 80(2). 15 Ibid. 16 Ibid s 80(1). 17 Civil Code (Japan) arts Construction Machinery Hypothecation Act (Japan). 19 Factory Hypothec Act (Japan). 20 Construction Machinery Hypothecation Act (Japan) art 14(1). 21 Civil Code (Japan) arts Ibid Ibid Ibid Ibid Ibid Ibid See, e.g. Great Court of Judicature, 12 Minshu 767, April 26, See the Act on Special Provisions of the Civil Code regarding Perfection on Transfer of Movables and Claims (Perfection Act) (Japan) art 3(1). 30 Civil Code (Japan) art Ibid Ibid 306, 311, Ibid Ibid Ibid Perfection Act (Japan) art 3(1). 37 Construction Machinery Hypothecation Act (Japan) art Civil Code (Japan) arts 243, 247(1). 39 Ibid 247(2), Ibid 244, 247(2). 41 In the case of Australia, where collateral secures performance of an obligation or payment of a debt, an interest in that collateral may be registrable. 42 In the case of Japan, generally no security interests in movable goods are registrable other than in the case of a security assignment (see section 5.2.3). Such registration is technically possible but is not generally undertaken in practice. DLA Piper is a global law firm operating through various separate and distinct legal entities. For further information, please refer to Copyright 2013 DLA Piper. All rights reserved This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication 10 Ensuring creditor protection in Asia Pacific Construction projects