Singapore
There are no notable risks or issues around borrowing.
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.
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 Singapore law, directors must act bona fide for what they consider to be in the best interests of the company and not for any collateral purpose; 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 Singapore insolvency laws if the guarantee or security was granted by a company with 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 considerably less 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 six months (or two years for connected parties) before the presentation of a winding-up petition. Guarantees and security may also be challenged on other grounds relating to insolvency.
Financial assistance
It is unlawful for a public company to provide financial assistance for the purchase of its own (or of its holding company's) shares unless a whitewash resolution is obtained from the shareholders. The prohibition against financial assistance for private companies whose holding company or ultimate holding company is not a public company was abolished on 8 October 2014. 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. However, note that unlike a guarantee, the essential difference is that the obligation to pay is intended to be unconditional and independent of the underlying obligation. The essence of a ‘true’ performance bond is that it is an unconditional undertaking by a third party to pay the beneficiary upon demand, independent and irrespective of the underlying contract between the beneficiary and the principal. The issuer of a performance bond has primary liability, unlike a guarantor, who has secondary or collateral liability.
- 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.
Common forms of security
There are four basic types of security interest that can be created under Singapore law:
- a pledge;
- a lien;
- a charge; and
- a mortgage.
Different types of security are suitable for securing different types of assets.
Under Singapore law it is possible to grant security over all of the assets of a Singapore 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 sometimes executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements namely under seal under Singapore 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. Additionally, a guarantee can be vitiated by misrepresentation, unconscionability, mistake and other like factors such as duress.
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. Most charges created by a Singapore company must be registered at the Accounting and Corporate Regulatory Authority of Singapore within 30 days of its creation. Failure to register within this time will typically mean that the charge will be void against the liquidator and any creditor of the company.
There are no notarization requirements for security documents under Singapore law.
Like guarantees, for a period after a new security interest has been granted, it is at risk of being set aside in certain circumstances under insolvency laws. Reviewable transactions include those conducted at an undervalue, unfair preferences and invalid floating charges.
Vincent Seah
Partner
DLA Piper Singapore Pte. Ltd.
[email protected]
T +65 6512 9595
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