New Zealand
Lending in New Zealand can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as agents and trustees which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, e.g. term loans, working capital loans, equity bridge facilities, project facilities and letter of credit facilities etc.
Loan durations
The duration of a loan can also vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
- an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed or limited resource. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can also be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).
Are there any restrictions on giving and taking guarantees and security?
Some of the key areas affecting the giving of guarantees and security are as follows.
There are no general restrictions in New Zealand on the giving and taking of guarantees. Guarantees are usually taken in the form of a deed, with appropriate witnessing, to avoid the need for the guarantor to receive consideration or benefit in order to enforce the guarantee.
Lender responsibility principles
Lender responsibility principles exist when giving and taking guarantees in relation to a consumer credit contract. Every creditor that takes a guarantee of a consumer credit contract has disclosure obligations to the guarantor as part of this obligation.
Capacity
It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under New Zealand law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.
Insolvency
Guarantees and security may be at risk of being set aside under New Zealand insolvency laws if the guarantee or security was granted by a company or individual within a certain period of time prior to the onset of insolvency. This would be the case if the company giving the guarantee or security received inadequate consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within two years of the onset of insolvency of the affected party. Guarantees and security may also be challenged on other grounds relating to insolvency.
Major transactions
In respect of companies incorporated in New Zealand, if the amount guaranteed is greater than half the value of the gross assets of the company, the approval of 75% of the shareholders of the company is generally required before the grant of the guarantee, unless the grant is conditional on later approval in that manner.
Financial assistance
It is unlawful for a company to provide financial assistance for the purchase of its own (or of its holding company's) shares unless relevant shareholder and director approvals are obtained and a certificate from directors relating to solvency given. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.
What are common types of guarantees and security?
Common forms of guarantees
Guarantees can take a number of forms.
A particular distinction worth remembering is between a performance guarantee and a payment guarantee:
- A performance guarantee is a term used to describe both performance bonds (in the context of trade finance) and ‘see to it’ guarantees (in other contexts):
- A performance bond describes a financial undertaking used to protect a buyer against the failure of a supplier to deliver goods or perform services in accordance with the terms of a contract. The issuer of the bond undertakes to pay to the buyer a sum of money if the seller fails to deliver the goods or perform the contracted services on time or in accordance with the terms of the contract.
- A ‘see to it’ guarantee is a promise by the guarantor to see to it that the primary obligor fulfils its obligations under the primary contract. If the primary obligor fails to fulfil its obligations under the primary contract, the guarantor will be in breach of its obligations under the guarantee.
- A payment guarantee is narrower in scope than a performance guarantee as it only covers the payment of money rather than other contractual obligations.
Other types include rental guarantees, advance payment bonds, collateral guarantees, bid, tender, warranty bonds, custom bonds and shipping guarantees.
Common forms of security
Common forms under New Zealand law include:
- a mortgage over interest in land;
- a security interest over personal (i.e. non-land) assets; such as inventory, goods, plant and investment securities such as shares;
- possessory security such as a pledge; and
- rights of set-off.
Different types of security are suitable for securing different types of assets.
Under New Zealand law it is possible to grant security over all of the assets of a New Zealand company or individual assets. Granting security over all of a company's assets will tend to be achieved by way of a debenture which will include:
- a mortgage over real estate;
- a fixed charge over assets which are identifiable and can be controlled by the creditors (such as equipment);
- a floating charge over fluctuating and less identifiable assets (such as stock); and
- an assignment by way of charge over receivables and contracts.
Are there any other notable risks or issues around giving and taking guarantees and security?
Giving or taking guarantees
To be valid, a guarantee needs to be in writing, signed by the guarantor and provided for good consideration.
Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. Also it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender. As a result, guarantees are often executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements under New Zealand law which need to be observed.
Additionally, there is a risk that a guarantee may be set aside if it was procured by undue influence by a borrower or lender. A party being provided with a guarantee should be alive to this issue and take steps to avoid claims of undue influence by, for example, requiring the guarantor to take separate legal advice.
Lender responsibility principles exist when taking guarantees. Failure to abide by these could result in issues for the guarantor. Every creditor that takes a guarantee of a consumer credit contract has disclosure obligations to the guarantor as part of this obligation.
Giving or taking security
A security document may need to be executed as a deed if it:
- contains a mortgage over land;
- confers a statutory power of sale and power to appoint a receiver; or
- contains a power of attorney.
Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the security and notice being given to third parties. Mortgages over land are registered on on-line electronic land titles register - Land Information New Zealand, also known as LINZ. Security interests over non-land assets are protected by registering a finance statement on the New Zealand Personal Property Securities Register.
There are no general notarization requirements for security documents under New Zealand law.
Like guarantees, for a period after a new security interest has been granted (known as the hardening period), it is at risk of being set aside in certain circumstances under insolvency laws. Reviewable transactions include those conducted at an undervalue and preferences and invalid floating charges.
Michael Thompson
Partner
DLA Piper New Zealand
[email protected]
T +64 9 300 3866
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