Category Archives: Banking and Finance

Bank Guarantee can be released by an Additional Arbitration Award – Delhi High Court

One of the frequently encountered issue in arbitration proceedings is missing out of a claim and parties seeking remedy by way of an amendment to the award or by way of an additional award. Normally the scope of correction of the award under S.33 of Arbitration and Conciliation Act,1996 is limited to errors and if both the parties agree, an interpretation of an issue. But if a substantial issue is already decided in the arbitration award but a consequential prayer was missed out in the claim and hence arbitrator could not grant an award, then an application seeking additional arbitration award can be filed. In such situations, the opposite parties also raise the issue of limitation, without understanding the settled law that the consequential directions do not require to be raised within the limitation period, if the substantial issues are already raised within the limitation period.

Relating to an arbitration arising out of a supply contract between Motorola and Mahanagar Telecom Nigam Limited (MTNL), in a proceeding to challenge the arbitration award under S.34 of the Arbitration & Conciliation Act,1996, Delhi high court by a detailed judgment dated 31st March, 2017, in SCC Online Del 7736, upheld the sustainability of not only the main arbitration award but also an additional arbitration award. In this case MTNL challenged the Arbitration award which was in favour of the claimant on various grounds, before the High Court of Delhi.

Both the arbitral awards involved in this case were passed by a sole Arbitrator arising out of a Letter of intent dated 11th January 2000, for providing 50K lines of CDMA IS-95 A, WLL equipment project in Delhi MTNL on turnkey for survey, design and supply of equipment, installation, testing, commissioning, making over system consignee, training, providing AMC etc., in favour of Motorola. The arbitrator passed the final arbitration award in favour of Motorola, holding that the breaches to the contract are attributable to MTNL and not to Motorola.  But since there was no specific claim seeking the return of bank guarantees furnished by Motorola, the award did not have such a direction. Hence Motorola filed an application seeking an additional award, directing MTNL to return the Bank Guarantee. Hence Arbitrator passed an additional award directing MTNL to return the Bank Guarantees.

Hence MTNL challenged both the main award as well as additional award. The additional award was challenged under S.34 on two main grounds. The first was that the application was barred by law of limitation, hence it must be rejected. The 2nd ground was that in the absence of an issue relating to return of Bank guarantee and consequential findings in the main award, the arbitrator ought to have rejected the application for additional award. But in a detailed judgment, Justice Mr. Muralidhar of Delhi High Court upheld the award with a finding that the additional award is legal and no need to frame a separate issue for return of BG since the arbitrator has already found that the breach is committed by MTNL, in the main award and direction to return of BGs is just a consequential award.

Automatic Exchange of Information & the end of the Bank Secrecy era

International automatic exchange of financial account information (AEoI) – an issue of global importance[1] closely discussed and analyzed by professionals and market players during the last year – is constantly evolving, and, thus, requires further analysis and attention. We have already provided the basics of AEoI and its global standard in previous articles while in this article we would like to present a brief update hereof and implications for businesses, in light of the actual commencement of AEoI by countries in 2017.

As a reminder, a landmark Agreement introducing international AEoI, namely the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA) prepared by the OECD, was signed on October 29th, 2014 at the 7th meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes. Prior to the MCAA execution, in 2013, the G20 Finance Ministers and Central Banks’ Governors endorsed the European initiative of information exchange based on US FATCA codes (which gave rise to such international phenomena as the AEoI), and in September 2014 they proceeded to approve the global AEoI standard. This standard – called the ‘Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard’ (CRS) – will be used as the standard for reporting purposes, while the MCAA is the international agreement activating the OECD AEoI.

By the end of 2016 more than 101 jurisdictions had either signed MCAA or committed to implement AEoI via the CRS. Some of these jurisdictions (early adopters) have undertaken to commit first information exchanges in 2017 and the others (late adopters) will do so during 2018. The list of such jurisdictions is constantly growing. According to the latest news, Pakistan, Switzerland and Liechtenstein has ratified OECD Convention on Mutual Administrative Assistance in Tax Matters, thus soon we can expect those countries to join the Global Standard on AEOI. At the same time, a number of jurisdictions have neither signed MCAA nor officially committed to implement CRS, including in particular Armenia, Azerbaijan, Belarus, Georgia and some other countries.

In the official press release of the OECD dated 22 December 2016, it was stated that there are now more than 1,300 bilateral relationships in place across the globe, most of them based on the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the CRS MCAA). Thus, bilateral agreements based on the CRS MCAA are the most popular way of implementing the AEoI between a pair of jurisdictions. Besides, CRS can be also implemented by countries based on double tax treaties and bilateral tax information exchange agreements. The largest amount of bilateral information exchange relationships established, as well as CRS implementations, was made by and between EU countries.

In 2016, countries have only begun to collect the reportable financial account information to be automatically exchanged while the first such exchanges will take place during 2017.

In regards to Cyprus, on October 29, 2014, the Republic of Cyprus – following a Council of Ministers decision dated October 22, 2014 – signed the CRS MCAA, and determined September 2017 to be the first date of exchange (i.e. with respect to exchange of data pertaining to the year 2016). Cyprus banks have already started gathering the information for the CRS reporting. In January 2017, Cyprus banks commenced reporting to the local tax authorities. It is expected that by September 2017 the first exchange of information between tax authorities will take place. Information will be exchanged on automatic basis only with jurisdictions with which Cyprus has mutually agreed to exchange information based the relevant bilateral agreements.

We would like to separately note several specific issues which are worth taking into account by actual businesses in view of the commencement of the global AEoI, and, if necessary, to take relevant timely measures in order to avoid respective negative consequences with this regard. In particular:

  • reporting under CRS shall be made by the reportable financial institutions which should report to relevant competent authorities of their respective jurisdictions about reportable persons accordingly. Once a financial institution is classified and determined as the “financial institution”, further its necessary to determine whether its reportable or not reportable. . Reportable institution shall be subject to relevant due diligence and reporting requirements. Accordingly, strong due diligence procedures and relevant technical infrastructure will need to be in place to facilitate the recognition of reportable accounts and gather the accountholder identifying information that needs to be reported for such accounts, and to also ensure the protection of personal information within the AEoI;
  • reportable persons under CRS will include any individual or entity that is resident in a reportable jurisdiction under the tax laws of such jurisdiction, other than a corporation, the stock of which is regularly traded on one or more established securities market; any corporation that is a related entity of a corporation described above; a governmental entity; an international organization; a central bank, a financial institution; and pre-existing entity accounts (those that are open on 31 December 2015, starting from 1 January 2016 – new accounts) the aggregate account balance of which does not exceed USD 250,000 as of December 31, 2015 or in any subsequent year. The accounts of financial institutions themselves are not reportable based on CRS. The above exemptions from reporting can be considered for purposes of businesses structuring or restructuring in the new global reality.
  • only passive Non-Financial entities (NFEs) will be obliged to disclose their controlling persons – which, in most cases, are the ultimate beneficiary owners (UBOs) of such entities. The criterion for determining whether the NFE is active or passive is the following: active NFE is an entity whose gross income for the preceding calendar year or other relevant reporting period consists of no more than 50% passive income (i.e. dividends, interests and royalties), and less than 50% of the assets held by the NFE during the preceding calendar year or other relevant reporting period are assets that produce or are held for the production of passive income. All the other NFEs which do not qualify as active ones are considered to be passive NFEs.
  • The controlling person (natural persons), to be reported automatically by passive NFEs, are the following persons:
  • for companies and cooperative societies: UBO(s), who ultimately owns or controls a legal entity through direct or indirect ownership of 10% and more shares in the company`s capital (for Cyprus – 25% and more). In case no natural person(s) can be identified as exercising control of the entity, the controlling person(s) of the entity will be the natural person(s) who holds the position of senior managing official, except for entities that are (or are majority owned subsidiaries) an entity listed on a stock exchange;

–      for unions, administrative committees, foundations, clubs, association and funds raising committees: members of the Board of Directors/Committee and administrators of accounts;

–      for trusts (if trust qualifies as passive NFI): the settlor(s), trustee(s), the protector(s) (if any), the beneficiary(ies) and any other natural persons exercising ultimate effective control over the trust. If trust qualifies as a financial institution, then different reporting requirements apply.

Despite the above mentioned strict requirements and rules, there is a number of legitimate, doable and practicable options of escaping reporting under CRS for the reason of being exempt therefrom, or not covered by the relevant requirements. In any case, regardless of whether you will be subject to AEoI under the CRS or will be excluded, the fact is that all businesses will be either directly or indirectly affected by new rules in the international tax sphere. As such, businesses will need to quickly adapt to the new reality.

We at Eurofast are ready to meet all your needs and assist you with any requests which you may have with respect to the introduction of AEoI and provide you with practical solutions which would meet your financial and business needs.


[1] AEoI is a global instrument for the prevention and fighting against tax avoidance and the hiding of taxable assets abroad. It has been first initiated by OECD in order to put dividends, interest, royalties, proceeds of the sale of financial assets, other income and account balances within the scope of AEoI.

A Venture Capital and Private Equity career of A Lawyer

As I worked my way through law school, I had worked for 5 different law firms so by my third year had concluded I wanted to go into business rather than practice law.  I chose consulting both because the major consulting firms were willing to hire lawyers and consulting seemed like a great way to get “fire hose” overview of the business world.

While on a flight from London to Amsterdam to look at a potential acquisition for a Bain & Co. client, I saw an article on the Apple IPO and the role of Arthur Rock as an investor and Board member. His partner at the time was Harvard Law School graduate Thomas Davis, who also founded Mayfield Fund.  I had found my inspiration.  I thought venture capital represented a field where the deal skills of a lawyer and the market intelligence of a consultant might be a good fit.  I began to interview in earnest and landed a job at Centennial Ventures in Colorado.

Over the next 32 years I became a voracious student of all things technology and healthcare.  I chose those two fields because in the first case it is the agent of change and in the second case because of the size of the markets and how it affects all of us personally.  Over time I began to focus on later stage deals.  This was due to the fact that I am not an engineer or a doctor or a PhD, but a business trained lawyer.  The fit was therefore best in companies where a particular formula could be applied, along with my cumulative experience.

Eventually in 2010 I focused exclusively on deals with the following characteristics: (1) profitable (2) small companies ($5.0-$10 million in revenue typically) below the radar screen of the private equity firms (3) software/SaaS/cloud or healthcare services where I had been investing all this time, (4) majority ownership, the so-called control transactions (5) a heavy value element where EBITDA multiples would be no higher than 7.5 in technology and no higher than 6.0 in healthcare services (6) a minimum of $1.5 million in EBITDA.

A key characterization of these companies is that they are typically run by Baby Boomer-aged management who are looking to retire.  Usually there had been no outside money or just friends and family.  The entrepreneur wanted to get liquidity, diversify his holdings, and retire or semi-retire.  This meant that we as a sponsor group had to have the new management already selected and groomed by the original entrepreneur or bring our own new top management.

Management transition is a key issue in these deals. Roughly 10,000 Baby Boomers will turn 65 today, and about 10,000 more will cross that threshold every day for the next 19 years.  Most haven’t founded businesses, but this generation is the richest ever, forecast to have assets of about $54 trillion by 2030.

Our management is often younger, but more importantly either trained by a top MBA school or having extensive management experience or both.  The classic 21st century analytical management with familiarity with dashboards, key operating metrics or ratios, and internal operating software has a different perspective than the seat of the pants entrepreneur.  This is positive in terms of risk reduction and visibility to key levers of growth.  What are often missing are the industry contacts and the natural selling skills of the original CEO.

Think of these small buyouts, what we call micro-buyouts, as the bargain basement of technology deals, healthcare deals and many other industries. These are not the type of technology deals appealing to venture capitalist.  In fact, if these companies have ever received VC then we know they are “ruined” either because they became very successful or are of the size and valuation that we cannot afford, or they have burned through a lot of equity and don’t have much to show for it.  Either way, it makes the companies ill suited for a value-oriented majority control investor.

Still we have proven we can produce venture style investment returns without taking venture risk.  No, we are not going to hit a 100 to 1 return.  But we have produced 5X-realized returns since 2010 across 8 exits from 26 investments.   These returns come from 4 basic sources: (1) leverage (2) efficiencies (3) revenue growth (4) multiple expansion.  The large buyouts depend primarily on the first two.  They have the stability of operations to take on relatively high leverage and they can produce efficiencies by application of analytics, metrics, and internal software.

In our small buyouts the opposite is true.  The gains come primarily from growth.  We do leverage our companies, but the leverage is typically not more than 3X EBITDA or 50:50 equity/debt and often smaller.  We do not look for efficiencies in the classic sense of making EBITDA margin growth the primary goal.  We instead try to preserve as much as possible the typically high margins enjoyed by the original entrepreneur.

We instead often add expenses initially to drive growth.  The higher growth brings with the hope of eventually higher EBITDA margins from economies of scale.  Most important, by creating higher critical mass, we bring the company into the scale necessary to attract a much broader buying audience.  A $10 million company with $2.0 million of EBITDA might attract a 6X EBITDA multiple while a $20 million company with $4.0 million of EBITDA might attract an 8X EBITDA margin. This EBITA multiple expansion is critical to our returns.

Some who are lawyers might wonder whether they can be successful in technology businesses competing with engineers, or in general competing with MBA’s.  But the investment field is full of lawyers who first observe the business world, and then enter it successfully.  Deal skills are highly attractive to investment firms.  Analytical skills necessary to decide upon the attractive markets and the attractive business models are held by many lawyers.  The opportunities are there and the most important ingredient is a curious mind and an attraction to the field.


Banking Regulation in India – In The Midst of A Paradigm Shift or Regulator Interrupted?

Since 2014, India has seen a spate of changes centred on improving the banking regulatory environment in India and trimming the proverbial “fat” in the system. To its credit, the Reserve Bank of India (RBI) identified the upcoming crisis on non-performing assets (NPAs) in the banking system, and compelled Indian banks to recognise and to provide for faulty loans – bitter medicine which initially hurt banks’ profit margins, but which markedly strengthened their ability to absorb losses from bad loans. The RBI has also made various moves to diversify the pool of financial sector entities – some of its measures include allowing diversified bank licensing for the first time in the form of payment bank licenses (banks which cannot provide loans, have restrictions on accepting deposits, and whose primary function is to enable processing of payments) and small finance bank licenses (banks which provide basic banking services and which are intended to improve penetration of banks into the unbanked portions of India). In a departure from a previously unsaid and uncodified understanding, the RBI has also issued guidelines allowing granting of universal bank licenses “on tap” as opposed to previous instances where banking licenses were granted only once every few years. The RBI has also taken steps to reduce the dependence of providing finance on the banking system and has taken steps to improve the bond market in India (which is still at a nascent stage of development). The measures taken include allowing foreign portfolio investors (FPIs) to invest in unlisted debt securities, issuing a discussion paper on partial credit enhancements of bonds (followed by guidelines on partial credit enhancements and an amendment to these guidelines to increase limits for participation by banks), and issuing a discussion paper on making borrowing by large borrowers more expensive thus incentivising such borrowers to access the bond market. This article will consider some of the regulatory measures taken by the RBI to improve India’s banking regulatory environment.

Framework for Revitalising Distressed Assets

One of the first regulatory moves that signaled a change in the approach of the RBI was the issuance of the “Framework for Revitalising Distressed Assets in the Economy” (the Framework). The Framework was issued on 30 January, 2014 and  followed the issuance of a discussion paper in December 2013 on tackling the growing incidence of NPAs in the Indian financial system. The measures prescribed by the Framework include continuous monitoring and classification of accounts at various levels of “stress”, and the formation of a joint lenders’ forum (JLF) for early resolution of a stressed account before it turns into an NPA. As part of banks’ continuous monitoring obligations under the Framework, banks’ now have to identify accounts that show “incipient stress” as special mention accounts (SMAs), and also classify such accounts as: (a) SMA-0, where principal or interest payment is not overdue for more than 30 days, (b) SMA-1, where principal or interest payment is overdue between 31 and 60 days, and (c) as SMA-2, where principal or interest is overdue between 61 and 90 days.

As soon as a borrower’s account is classified as SMA-2, its lenders will need to come together to form a JLF if the aggregate exposure to the borrower exceeds INR 1 billion (USD 14.97 million approx.). Banks also have the option of forming a JLF when the aggregate exposure is below INR 1 billion (USD 14.97 million approx.) and the account is not reported as SMA-2. Borrowers too can request that lenders form a JLF on the grounds of “imminent stress”.

The aim of constituting a JLF is to explore various options to resolve a stressed account and to formulate a corrective action plan (CAP). The resolution options for a CAP formulated by a JLF include obtaining specific commitments from the borrower to regularise its account so that it does not become an NPA, restructuring the borrower’s account, and initiating recovery proceedings against the borrower.

Timelines for Regulatory Approvals

The Financial Sector Legislative Reforms Commission (FSLRC) was constituted under the chairmanship of retired Supreme Court justice BN Shrikrishna, to comprehensively review, rewrite and clean up the laws governing India’s financial system “to bring them in tune with current requirements“. The FSLRC submitted its report to the Central Government in March 2013. One of the non-legislative recommendations of the report of the FSLRC was that all financial sector regulators should move to a time-bound approvals process for providing permissions to conduct business as well as for the launch of new products and services.

Following this recommendation, and in a bid to demystify the inner workings of the RBI and to increase transparency, on  23 June 2014, the RBI released timelines within which its approval could be expected for matters such as licences for private banks, the issuance of licences to non-banking financial companies (NBFCs) and external commercial borrowings (ECBs) not covered under the automatic route. In parallel, the RBI also placed a “Citizens’ Charter” on its website, providing timelines within which various departments would be able to provide services for matters such as permission for waiver of forms for exports and overseas investment not covered under the automatic route. The timelines provided vary from seven days for trade credits under the approval route, to one hundred and eighty days for compounding of contraventions under the (Indian) Foreign Exchange Management Act, 1999.

Partial Credit Enhancements

In the Second Quarter Review of Monetary Policy 2013-14, the RBI observed that the lack of depth and liquidity in India’s corporate bond market is leading to “significant dependence on bank financing“. The review proposed the issuance of guidelines to allow banks to offer partial credit enhancements (PCEs) to corporate bonds by way of credit facilities and liquidity facilities (and not by way of a bank guarantee). On 24 May, 2014, the RBI issued draft guidelines allowing banks to provide PCEs to corporate bonds issued by companies and special purpose vehicles for financing infrastructure projects. On 24 September, 2015, the RBI issued guidelines on banks providing PCEs for corporate bonds issued for a project. These guidelines allow banks to offer PCE (in aggregate) up to 20% (twenty percent) of the bond issue size in the form of a non-funded irrevocable contingent line of credit. This limit has been raised to 50% of the bond issue subject to a limit of 20% for each bank. The providing of PCEs (together with the enhancement of limit) is intended to increase the credit ratings of lesser rated issuers and special purpose vehicles, and make bonds offered by them more attractive for bond market investors.

Overhauling NBFC Regulations

The global financial crisis of 2008 turned a stark spotlight on “shadow banking”. Minimisation (if not removal) of the risk posed by these entities to the financial system came into sharp focus. Shadow banking, in rudimentary terms, can be described as the exposure of non-regulated financial entities to the financial system. In India, the activities of NBFCs which traditionally enjoyed “light touch” regulatory oversight became an increasing cause for concern. The regulatory advantages enjoyed by NBFCs over banks also led to concerns of “regulatory arbitrage”. For instance, while banks had to declare an asset as “non-performing” at the end of 90 days, for NBFCs this period was 180 days and 12 months in certain cases. Similarly, guidelines for the restructuring of advances by NBFCs were only issued in January 2014.

In November 2014, the RBI overhauled the regulatory framework for NBFCs bringing about many seminal changes in the way NBFCs conduct business. While some are transitional – for instance, the declaration of assets as non-performing after 90 days will only commence from 2018 – others had earlier application, such as 31 March, 2015 for the tightening of the application of the “fit and proper criteria” for directors of systemically important NBFCs. Enhanced corporate governance disclosures, such as registrations/licences obtained from other financial sector regulators, penalties levied by any regulator, extent of financing of parent company products, and details of securitisation and assignment transactions, are now required from all non-deposit-taking systemically important NBFCs and all deposit-taking NBFCs.

While criticised in some circles as disadvantaging NBFCs, the overhaul of the regulatory regime for NBFCs was largely welcomed in industry circles. The alignment to a large extent of regulations applicable to NBFCs and banks has markedly reduced the possibility of regulatory arbitrage that may have led to systemic financial instability.

Strategic Debt Restructuring

As a follow-up to the Framework and the JLF-CAP mechanism, through its circular of 8 June, 2015, the RBI introduced the “Strategic Debt Restructuring” (SDR) scheme, to allow banks to convert a part of their debt to a delinquent borrower into equity so as to facilitate a change in management and exit from exposure to such borrower. The intent behind the SDR scheme is to resolve borrowers which cannot be turned around due to inherent operational and managerial inefficiencies.

The SDR scheme requires the scheme of a JLF to include provisions in the agreement with a borrower for conversion of the restructured debt into equity if prescribed conditions are not fulfilled. The JLF must obtain all appropriate authorisations for such conversion upfront at the time of restructuring of the borrower. Further, conversion of debt into equity must result in the JLF holding at least 51% of the shareholding of the borrower and such conversion must take place within 30 days of the review being conducted by the JLF for the borrower’s non-compliance with the conditions prescribed by the JLF. The detailed prescriptions of the SDR scheme also include the price at which conversion of the debt into equity must take place.

Rupee Denominated Bonds

The report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets submitted in February 2015 included a recommendation that the market for local currency denominated bonds should be encouraged as it provides an alternative source of debt financing for private and public sector borrowers which does not expose them to currency fluctuation risk. The report also rationalised that by reducing currency mismatches and lengthening the duration of debt, such bonds could also augment financial stability. In its bi-monthly monetary policy statement of 7 April, 2015, the RBI mentioned that it intended to allow Indian bodies corporate to raise ECBs through Rupee Denominated Bonds. This was followed up by the release of the draft framework for the issuance of Rupee Denominated Bonds on 9 June, 2015 for public comments.

The RBI notified the framework for the issuance of Rupee Denominated Bonds under the overall ECB framework on 29 September, 2015. While the draft framework had received a lukewarm reception, the notified framework received a warm welcome as it appeared to have rectified many shortcomings of the draft framework. For instance, the notified framework allows all bodies corporate including real estate investment trusts and infrastructure investment trusts to raise debt under the ECB policy by issuing rupee denominated bonds. The only end-use restrictions in the notified framework are that funds raised cannot be used for real estate activities (other than for development of integrated township/affordable housing projects), capital market and domestic equity investment, activities prohibited under the foreign direct investment policy, on-lending for any of the above, and the purchase of land. Further, the only all-in-cost restriction is that the all-in-cost should be “commensurate with prevailing market conditions“.

The framework on Rupee Denominated Bonds was further liberalised  by the RBI through its circular of 13 April, 2016, which reduced the minimum maturity for Rupee Denominated Bonds from 5 years to 3 years.


It is possible to attribute some of the steps that the RBI has taken since 2014 to the dynamism of former Governor Raghuram Rajan. However, due care should be taken on this count, as the RBI has previously shown itself to be proactive (albeit somewhat conservative). It is quite possible that these steps were already in the offing, and were merely accelerated due to the presence of Governor Rajan.

This article covers only a few regulatory moves that have been made by the RBI and is not exhaustive. There are also many background steps and relatively minor regulatory tweaks that the RBI has made to operationalise these steps. For instance, along with the government and the Securities and Exchange Board of India, the RBI is also considering measures for improving the secondary market for bonds (by making bond-trading easier) and also the tertiary market for bonds (by introducing/improving existing instruments such as the GMRA). Notably, as part of a shift in the regulatory rulemaking mindset, the RBI appears to be shifting from prescriptive rulemaking to a mix of principle-based and prescriptive rulemaking, thereby more closely aligning itself with regulatory rulemaking in more developed economies.

While these steps have stoked a quiet revolution in the banking regulatory environment in India, much still remains to be achieved. We watch and we wait.

Leaving the EU – what this means for you and your business

Now that the dust is settling on the UK’s decision to leave the EU, our clients are asking what this means for them.  We are the first member state ever to  leave the European Union and as such, the result has ignited much uncertainty and debate about what lies ahead.

Change always brings opportunities, as well as challenges, and we are focused on helping our clients understand how these changes can benefit their business during the period of transition ahead.

A recent survey we commissioned suggests that only 20% of businesses had set in place a continuity plan for the leave vote. In the public sector, there is concern about what will happen to staffing arrangements as well as EU-funded collaboration projects.  We understand that there is much uncertainty at present, but we will continue to support and provide innovative solutions to help our clients invest and grow.

Of course, it’s not only businesses that are affected.  Exit from the EU will likely have a knock-on effect on a range of private and family law matters which are currently governed by a system which in many areas combines both EU and domestic legislation into an integrated European framework.

Whilst it is not clear what the exit will look like or how we will take forward the laws that the UK has adopted over the last 40 years, we do know that there will be opportunities coming out of these changes and we will be supporting our clients in understanding how these can be used to their advantage.

In this article, I explore some of our key sectors and what the implications may be for them of leaving the EU.

Real Estate

Real Estate markets, whether commercial or residential, always prefer certainty. The last few months have led to a slowdown in transactions while people awaited the outcome of the Referendum. In some recent cases, transactions have been entered into with options to determine depending on the result of the vote, and those agreements may now be determined. Now that we know that the Leave vote has won, we expect to see the Real Estate markets to pick up rapidly. Banks are still in the market to lend to the right product, and there is a significant amount of private equity cash available for property transactions. However, there may be some weakness in areas involving prime offices if companies start relocating their HQs.

Private Law

Since 17 August 2015, we have been coming to terms with new EU legislation for succession (known as Brussels IV). Paradoxically, this system is intended to unify the succession laws which apply to an estate, and now, we have voted to leave just at the point when the member states choose to change things for good!

That said, the UK opted out of the full implementation of the legislation, along with Ireland and Denmark, so the impact strangely has been simplified as there was some uncertainty as to how the legislation applied to the UK. The intention is that EU citizens are able to make an election of the law of the jurisdiction of their nationality to govern the whole of their estate (including foreign property located in another EU state). Post-Brexit the UK is clearly a ‘third state’ under the Regulation, like the USA

This means less flexibility in the choice of succession rules and potentially more tax, although double taxation treaties should continue to apply. Our EU neighbours mainly favour a succession system which includes forced heirship, and we could find ourselves in a position where there is less choice on the ultimate distribution of foreign immovable assets.


Employment law is unlikely to see too many dramatic changes as the UK leaves the EU. Despite the claims that businesses are stifled by EU labour laws, the fact is that many Employment law rights either originated in the UK or have become deeply embedded in UK law as the UK’s attitudes to social issues have evolved. A move to scale back all but the most minor Employment law rights would, in all likelihood, be politically unpopular.

In addition, potential changes could be severely limited by the subsequent trade deal negotiated – other non-EU countries such as Norway and Switzerland have not in practice been able to free themselves of many EU labour laws. In several areas, such as data protection, we are likely to produce laws that mirror EU legislation to ensure we can conduct business effectively.

Such changes as there are could be seen in the areas of collective consultation rights, clarification on Working Time rights such as paid holiday and a repeal of the 48-hour limit, tweaks to the Transfer of Undertakings (Protection of Employment) Regulations 2006, and potentially more significant changes to/removal of the Agency Workers Regulations 2010.

As well as the immediate impact on markets and the business outlook for employers, the referendum result will also throw up longer-term issues, such as the migration of staff in and out of the UK and a potential re-run of the Scottish referendum. Unfortunately, the lack of a clear indication as to what any exit deal would look like makes it very difficult for businesses to plan for it in any practical way at the present time.

Banking and Finance

The financial markets and the banking sector hate uncertainty. The government needs to move quickly to reassure the business community by setting out a clear plan to replace existing trade and other arrangements with the EU and the world as a whole.

Particularly in the short term, the role of the Bank of England will be key. At a time when the monetary tools available to them are already limited, they need to find a way to protect the pound and keep interest rates at a level that enables companies to continue to borrow and invest in what will hopefully be a prosperous economic future for the UK.


The Referendum campaign highlighted a fundamental lack of objective data regarding the impact of EU membership on our healthcare system, and therefore the effects of an exit. However, staffing is likely to be impacted as the NHS, and social care are reliant on overseas migrants to help alleviate intense staffing pressure.

The London location of the EU Medicines Agency has been cited as a positive factor in the NHS’s successful positioning of its R&D capabilities, attracting overseas investment and funding. If the EMA must now relocate, the long-term impact on trials revenue and participation will depend on the strength and depth of relationships already established.

European systems have influenced several of the new models of care programmes in the NHS.  Many independent healthcare operators have pan- European activities. Uncertainty in the short term about implications of an exit could impact collaboration and appetite for financial risk in organisations supporting the NHS.


It is impossible to ignore the fact that the higher education sector, which is presently reliant on the EU as a reliable source of funding, in the form of students, research grants, and capital finance, faces a challenging future, given the uncertain nature of the relationship between the UK and the EU. In the next five years, we may well see a more innovative approach to funding and collaboration required, with institutions looking further afield for support, or collaborations with the private sector.

Intellectual Property

For the moment it is business as usual and trade mark and design owners should not panic – European Union Trade Marks and Registered Community Designs remain valid in the UK, and there is no immediate loss of IP protection.

Once the UK formally gives notice to exit, the EU negotiations will begin on the status of EU marks in the UK and whether any transitional provisions will be required to grandfather across EU trade mark and registered design rights into the UK.


There maybe harmful consequences for major infrastructure projects as much of the funding comes from Europe including Crossrail and HS2.  How such projects will be funded in the future will apparently be included in the Brexit negotiations.

It is impossible, though, to predict what the wider impact will be on our economy or the property market at this stage but if migration is reduced, then the pressure on housing should be reduced and the housing needs assessed more accurately.

Information Governance

Most of the laws in information governance are derived from European legislation. The Data Protection Act, the Privacy and Electronic Communications Regulations, the Re-use of Public Sector Information Regulations, the Environmental Information Regulations – all of these are examples of UK laws derived from EU directives.  For primary legislation, such as the DPA, leaving the EU will have no immediate effect.  For secondary legislation, such as the EIRs, the situation is more complicated.  These were made under powers derived from the European Communities Act 1972, which is the statute that governs our membership of the EU.

Family Law

Leaving the EU will have a knock-on effect on a range of family matters governed by the current system, which pulls together strands of EU and domestic legislation into a single Family law regime. Changes are likely to be felt most keenly by international families.

In terms of jurisdiction in divorce matters, the current rule of “first in time” as to where proceedings will be dealt with will disappear. Parties will therefore potentially be afforded greater flexibility as to where they choose to divorce. However, matters could become increasingly costly if the proposed jurisdiction is contested and, in these circumstances, parties may well find themselves litigating over jurisdiction issues before the main proceedings are dealt with at all.

Enforcement of existing domestic Orders concerning maintenance, child contact, and domestic violence will also be affected. EU legislation currently works with domestic legislation to provide a relatively simple framework for enforcement of such Orders in other EU member states. Brexit means that the system will not operate as such any longer, thereby potentially undermining the current system of mutual co-operation between Courts.

The law governing international child abduction would also see some changes, albeit that these would be less significant. This is because the main international legislation governing this area is found in the 1996 Hague Child Protection Convention and the 1980 Luxembourg Convention, which will remain in force. However, changes incorporated into these Conventions by later EU Regulations will fall away, leaving gaps to be filled at a later stage. The child abduction regime may be weakened in the interim until a comparable system is put back into place through re-negotiation of bilateral agreements with different states to replicate the lost provisions.

For more information on what leaving the EU will mean for your business visit or email [email protected]

Forced Conversion of Consumer Loans in Croatia – Care About Consumers or Just a New Issue?

In expectation of parliament elections, Croatian financial market and its participants experienced a dynamic end of 2015 with the latest amendments to the Consumer Lending Act and the Credit Institutions Act. The amendments introduced a legal framework for forced conversion of loans denominated in CHF („CHF Loans“) and loans denominated in HRK and indexed to CHF („HRK/CHF Loans“)

The amendment had been welcomed by the majority of population that saw this as an opportunity to decrease their over indebtedness, whereas it had fallen under scrutiny of expert-public eye. Expectedly, the latter saw the amendments rather as an increased risk factor for banking operations in Croatia, than a fair and equitable solution in overcoming consumer indebtedness.

Being aware of practical importance and great complexity of an issue for banking operations in Croatia, the authors will cope with the issue in a limited manner – to give a glance as to how the amendment was structured and how it impacts certain constitutional principles. Having this in mind, the authors will start by taking a closer look at the measure introduced by the amendments, and mentioning briefly certain structural issues. Furthermore, the authors will briefly present certain procedural solutions that had been considered so far.

  1. Background

Swiss franc denominated or indexed loans (the “Swiss Loans”) were very attractive in Central and Eastern Europe during the credit boom in the 2000s, including Croatia, as they offered lower rates than those in national or euro currencies. It is estimated that 55,000 holders of loans are denominated in CHF and worth roughly HRK 25 billion. A majority of those loans were granted in the 2000s and were primarily used for mortgages or buying commercial property. Accordingly, it is estimated that 38% of mortgages in Croatia were denominated or indexed in CHF. When the Swiss National Bank lifted its cap on the value of Swiss franc allowing the currency to surge, many borrowers were caught out and forced to fork out more Croatian Kuna to cover payments. After the Swiss National Bank announced on 23 January 2015 it will no longer hold the Swiss franc at a fixed exchange rate against the Euro (a decision from 2011), the Swiss franc dramatically appreciated making the Swiss loans far more expensive to service, especially for consumers in countries such as Croatia which are relying on income in Croatian Kuna.

Although there were some legislation measures introduced in Croatia from 2013 onwards[1], the latest amendment enjoyed the greatest public attention. In September 2015, Croatia adopted additional amendment No. 102/2015 entered into force on 30 September 2015 (the “Amendment”). Based on the Amendment, the lenders were obligated to convert the CHF loans to EUR denominated loans and HRK/CHF loans to EUR indexed HRK loans according to the exchange rates applicable on the disbursement date or the date of entry into the loan agreement, as the case may be. The idea of the Amendment was to put borrowers of the CHF Loans and HRK/CHF Loans in the same position that they would have been had their loans, from the start, been denominated in EUR or EUR index.

Reflecting this basic purpose, the Amendment obliged banks to convert CHF Loans to EUR denominated loans and the HRK/CHF loans to EUR indexed HRK loans, and to provide respective consumer with the new repayment schedule within 45 days as of the Amendment entering into force. The consumers had 30 days to notify the lenders whether they opt to accept the loan conversion calculation by way of accepting the annex to the loan agreement; otherwise the loans continued to subsist.

The cost of the exchange rate fluctuations was expected to be absorbed by the banks whereas the financial loss that banks might incur from such conversion shall be tax deductible. The Amendment has a retroactive effect having an impact on the loans entered into prior to the entry in the force of the Amendment.

The Amendment for sure had both legal and financial adverse impact. As for the former, the measure invasively intruded into contractual relationship leaving behind certain consistency gaps. For instance, the Amendment applies to all types of Swiss Loans, regardless of their purpose, i.e. to loans granted for acquisition of second homes, property for investment purposes or even luxury goods. On the other hand, no relief is offered to consumers who have repaid the loans prior to this Amendment being introduced or who are subject to the enforcement proceedings conducted against them.

As for the financial side, the Croatian National Bank estimated the measure will incur costs of HRK 8.5 billion ($1.26 bln) on Croatian banks, which is equivalent to their combined profits over three years.

The European Central Bank (the “ECB”) anticipated that the conversion of the loans as envisaged by the Amendment may result in a decline in the international reserves of the Republic of Croatia, which may in turn have undesired consequences on the country’s macroeconomic stability. Moreover, a lower level of international reserves as a result of the conversion might impair the functional independence of Croatian National Bank, in particular the central bank’s ability to set its policy instruments with the aim of achieving its objectives. According to the ECB, the Amendment might also have some negative effects if it were to lead to a deterioration of foreign investor sentiment due to a perceived increase in legal uncertainty and country risk.

  1. Remedies

Given the nature of the issue – serious constitutional concerns and widespread effects of the challenged legislation – there was a possibility of Amendment to be challenged before the Croatian Constitutional Court by invoking a breach of certain rights and principles guaranteed under the Constitution of the Republic of Croatia (the “Constitution”), such as, for example, principle of legal certainty and prohibition of retroactive effect, breach of free enterprise and market and property ownership. Moreover, the applicants were entitled to request suspension of the Amendment due to possible irreversible losses that might occur for the bank concerned and the Croatian banking system as a whole in the period before the final decision on constitutionality of the Amendment is brought.

Given the specific conversion mechanism envisaged by the Amendment and the fact that no individual act of competent bodies will be required to perform conversions, banks could hardly benefit from the remedies that are usually available to the applicants when the act is repealed i.e. possibility to repeal the individual acts that are based on the repealed general act. In other words, the main goal of the constitutionality review procedure in the matter at hand was to suspend the Amendment i.e. to suspend the forced conversion to be performed under the Amendment, and ultimately, to repeal the Amendment.

To this date, several Croatian banks have submitted requests to the Constitutional Court to assess the constitutionality of the Amendment. The Constitutional Court had not suspended the Amendment before it entered into force (30 September 2015). Therefore, some of the banks found ways to mitigate the risks of uncertainty of the subsequent effects of the repealing decision on the conversions carried out in the period between the date on which the Amendment entered into force and the date as of which the Amendment will be repealed, by inserting certain limitation language in the amendments to the loan agreements.

  1. Conclusion

Unequivocally, the Amendment appears to be of significant practical importance for banking business, and introduced several issues that are yet to be resolved by the Constitutional Court. It admittedly has its pitfalls, standing at the edge, or even over the edge, of constitutional boundaries. Apart from the potential unconstitutionality of the Amendment, and potential adverse financial effects it might have for the bank system and the state budget, the Amendment seems to endanger one of the basic principles of every modern and civilized legal system – the principle of legal certainty.

As from the consumer perspective, looking at a greater picture, it may be noted that the loss which banks might incur due to the conversion shall be tax deductible. That being said, it might be expected that the measure will leave the state budget without the inflow it would have normally received had there been no amendment in place. Therefore, the measure that may appear as a benefit for some consumers, may in the long run potentially adversely affect a larger number of other consumers (those who were not indebted in CHF), which brings the consumer care in question.

It yet remains to be seen whether the Amendment has been introduced having in mind only the short-sighted goals, or not.

[1] Even before the Swiss National Bank unpegged the Swiss franc, Croatia started to deal with the consumer loans. Consequently, in November 2013 introduced an amendment (No. 143/2013) to the Consumer Lending Act in a way of fixing the maximum interest rate for CHF denominated loans. Furthermore, upon the announcement of the Swiss National Bank in January 2015, Croatia introduced another amendment (No. 9/2015) to the Consumer Lending Act which fixed the CHF/HRK exchange rate in loans with a currency clause for a period of 12 months despite of the fact that the Croatian courts[1] assessed the currency clauses in loan contracts as valid. The rate was fixed considerably below the market exchange rate with the lenders bearing the difference between the market exchange rate and the fixed rate.

Equity Driven Crowdfunding in Lebanon

Crowdfunding, an alternative means of financing for individual projects and companies, has become an increasingly popular concept in recent years. It emerged in response to the financial crisis of 2007–08, but didn’t officially appear in Lebanon until 2013 with the launching of Zoomaal and has grown throughout the surrounding region. Fundamentally, financing through crowdfunding relies on a large number of relatively small investments from a variety of individuals often facilitated with internet based platforms.

Crowdfunding can follow a few different models but all are based on the funders’ expectations of return being either financial or non-financial. Those providing the funding can donate based on a desire to help without financial expectations, give money in exchange for some benefit or reward, loan the money, or receive a loyalty interest or some sort of equity instrument, such as shares.  Crowdfunding platforms, like Zoomaal, typically use some combination of these models to attract more investors. These platforms earn money through some combination of fixed upfront fees in exchange for listing a request for funds, contingency fees payable upon successful funding and other means. The Lebanese Capital Markets Authority (CMA) took measures to regulate the equity based crowdfunding model.

In 2011, the CMA issued a decree regulating the formation and operation of companies offering crowdfunding through equity instruments in Lebanon as well as the procedures to request capital increases through these Lebanese crowdfunding companies.

Formation and Operation of Crowdfunding Company

Decision no. 3 lays out the requirements and processes for any company, Lebanese or non-Lebanese, to operate a platform that facilitates the raising of funds by small and medium sized enterprises and start-ups through the sale of shares of equity to many individual investors (“Platform”) in Lebanon.

First, a request to form a company that will offer the Platform must be submitted to the CMA along side a feasibility study that outlines the projected profits and losses, financial balance statements and cash flow for the upcoming three years.

Once this approval is obtained, the company must be formed as a Lebanese joint stock company, otherwise known as a Société anonyme libanaise, with a minimum capital of 1,000,000,000 Lebanese Pounds, roughly equivalent to 666,666 United States Dollars, or as a registered branch of a foreign company with the same amount available to finance its operations.

Thirdly, the Company cannot begin operating until it obtains a license to offer the Platform from the CMA by submitting a series of documents best summarized as a detailed business plan, risk management procedures and background checks for its directors and auditors among other documents. As outlined in the Decision no. 3, the Company must submit

(i)    administrative documents proving successful registration at the commercial registry and that the minimum capital or required funds are available in a bank in Lebanon, as well as a list of the Company’s authorized signatories and directors,
(ii)    internal regulations concerning the job description of employees, any user manual(s) or code(s) of conduct, and the procedures in place to protect investors from fraud, prevent money laundering, subscribe to shares, protect personal information and professional secrecy, accept electronic signatures, and
(iii)    technical precautions taken to make the platform effective and safe such as antispam, antivirus, firewalls, log in access restrictions, authentication procedures, etc…

Once the CMA is satisfied that the Company has fulfilled all the conditions above, it issues a license to operate the Platform that must be used within 6 months of issuance or it becomes void.

In operating the Company, the Company is required to have an electronic platform to connect the companies seeking investment with potential investors and an interest bearing escrow account at a bank operating in Lebanon for each crowdfunding transaction with release to either the company seeking investors upon reaching the stated funding goal or to the investor, with interest, if funding goals are not reached within 180 days.

Finally, the Company should cooperate with the CMA by facilitating CMA supervision, sending periodic reports and annual financial reports to the CMA and clarifying that the CMA takes no responsibility related to the information on the Platform. Specifically the Company cannot give advice to any investor or company nor display anything other than shares on the Platform, restricting the Platform to only the equity based model of crowdfunding.

Capital Increases through Crowdfunding

In order for any company to request funds through a Platform operating out of Lebanon, the Company must receive the former’s commercial registry certificate, statues, financial reports, a feasibility study and a list of all directors, general manager and shareholders signed by the Chairman. This means that only already existing entities can raise funds by offering shares on the Platform.

Each attempt to raise funds must be at least 30,000,000 Lebanese Pounds, roughly equivalent to $20,000, and each investor’s direct and indirect investment must be between 750,000 LBP and 15,000,000 LBP, roughly equivalent to $500 and $10,000.

Furthermore the Company should ensure that the company requesting funds submits a term sheet to the investor consisting of: Capital of Company to be crowdfunded, Conditions for investment, summary on risks that the Investors might encounter, relation with Organization and CMA and that the company executes a contract detailing subscription conditions with the investor governed by the Lebanese Commercial Law.

Crowdfunding presents a unique model to test out ideas and venture before expending the capital to put them into the market, while allowing more individuals to invest. As crowdfunding continues to grow as an alternative finance method, we can expect regulations to increase with it.

Project Finance: there’s no such thing as indisputable principles…

  1. Project finance principles

The equity investment is ‘first in, last out’—that is, in principle any losses that the project suffers are borne first by the investors, and lenders begin to suffer only if the equity investment is lost“, Edward Farquharson, How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets, p. 53.

Thus the investors’ risk is the same whether the equity is invested early or late., E. R. Yescombe, Principles of Project Finance, p. 294.

 An experienced project finance practitioner will probably recognize the above statements as basic and indisputable principles of a project financed transaction.

Indeed, it is (or it used to be) generally and consistently accepted among project finance practitioners and studiers that the first loss, in a project financed transaction, is always incurred by the sponsors of the project, for the maximum amount of the equity they undertake to bring to the project, and that the lenders’ losses will only commence to the extent the equity brought by the sponsors is lost. The sponsors’ liability is accordingly limited only in the sense that their contribution to the project is expressly provided for and limited to a maximum amount of equity. Sponsors and lenders are not therefore partners; the sponsors’ risk is always, in relative terms, higher than that of the lenders that fund the project, primarily because the sponsors’ return on the project is also greater than the banks’ return. This is in line with one of the most elementary market rules: the greater the risk, the greater the reward and vice versa.

This is true irrespectively of whether the investors’ contribution is made up front, pro rata/pari passu or back ended because this only concerns the timing of the contribution, not the corresponding amount: it relates to the when, not to the how much.

In fact, nowadays, lenders tend not to object to the equity being injected pro rata/pari passu or even at the end of the construction period or even later, and grant, in the latter case, an additional credit facility that replaces equity in the meantime, conditional upon the equity injection being the subject of a firm, legally binding commitment by the investors, i. e., duly secured, notably by providing bank guarantees or letters of credit. Postponement of the sponsors’ contributions does not impact on the allocation of the risk inherent in the project as the sponsors “credit exposure to the project is essentially the same as it would have been had it made its equity contribution to the project company in the usual way” (upfront), (John Dewar, International Project Finance, p. 311).

  1. Not quite indisputable

A recent dispute made however clear that there’s no such thing as undisputable principles.

The facts:

  • In 2008, a Portuguese company (a special purpose entity created for the effect, below “the Company”) and the Portuguese State entered into a concession agreement for the conception, construction, financing, operation and maintenance, with toll, of a motorway in Portugal.
  • In the context of the concession agreement, the Company, its shareholders (“the Sponsors”) and a syndicate of banks (“the Lenders”) entered into several agreements, including Facility Agreements – whereby the Lenders granted long term facilities and equity bridge facilities – and an equity subscription agreement according to which the Sponsors undertook to make additional capital contributions to a certain maximum amount.
  • The actual payment of the Sponsors’ additional capital contributions was partially deferred to the end of the construction period, but on first demand bank guarantees were provided as security for these contributions.
  • Since the long-term facilities were insufficient to satisfy all the funding needs of the project up to the end of the construction, postponement of the aforementioned Sponsors’ contributions implied additional short-term credit facilities, which would make it possible to overcome the aforementioned gap.
  • The construction works were suspended by a preliminary injunction requested by a company claiming damages arising from the construction.
  • Because the construction works were on hold and the Company could not assure that the completion date would occur on the estimated date or what impact the suspension would have on the feasibility of the Concession, the drawdowns under the Facility Agreements were suspended.
  • The equity bridge facilities were not used in full.
  • The Sponsors voluntarily made additional capital contributions but in an amount substantially lower than the maximum amount foreseen in the equity subscription agreement.
  • In 2012, on the date foreseen in the equity subscription agreement, the lenders and the Company requested the payment by the Sponsors of the remaining amount of the additional capital contributions up to the full amount foreseen in the referred agreement, failing which the Lenders would enforce the bank guarantees.
  • The Sponsors refused to pay the outstanding full amount, alleging that the amount of the additional capital contributions was unquestionably linked to the sums withdrawn under the equity bridge facilities.
  • The Lenders therefore enforced the bank guarantees.
  • The Sponsors however filled two separate injunctions against the Company and the banks which provided for the on first demand bank guarantees – but not against the Lenders who had to, by their own initiative, intervene in the proceedings as a third party – to prevent the enforcement of the bank guarantees, alleging that their obligation to make additional capital contributions was limited by the amounts withdrawn under the equity bridge facilities.
  • One of the injunctions was granted, with the court actually analysing and interpreting the relevant clauses of the equity subscription agreement, despite the fact that it was deciding on the enforcement of on first demand bank guarantees. The other injunction was rejected and two of the Sponsors’ bank guarantees were indeed enforced and paid.
  • The Sponsors then commenced arbitral proceedings against the Lenders and the Company asking the arbitral tribunal to declare that the Sponsors had fulfilled their obligations under the equity subscription agreement and that no amount was due under the referred agreement and to declare that the Lenders and the Company, by requesting the payment of the full outstanding amount of additional capital contributions and enforcing the bank guarantees, had breached the equity subscription agreement. The Lenders on the other hand asked the arbitral tribunal to condemn the Sponsors to pay the total amount of additional capital contributions plus interests.

In summary, the Sponsors’ thesis was based on three main arguments:

  • That it resulted from the agreements and the Base Case (financial model) that the funding of the project would always have to respect a debt/equity ratio of 85/15 and a proportional and pari passu payment of funds, in the sense that the Sponsors could never be required to fund more than 15% of the total funds, even in the event of collapse of the project;
  • That the terms of the equity subscription agreement restricted the required amount of additional capital contributions to the sum outstanding under the equity bridge facilities; and, finally,
  • That the agreements contained no clause providing for mandatory prepayment or acceleration of the obligation to make additional capital contributions.

On the other hand the Lenders argued that:

  • The Sponsors had undertaken to make additional capital contributions in the maximum amount foreseen in the equity subscription agreement irrespectively of the amount of debt service owed by the Company at any time or of the amounts disbursed under the equity bridge facilities;
  • The Sponsors’ risk is the same whether the equity is invested up front, pro rata or back ended (as in case) and irrespectively of the amount disbursed by the Lenders under the equity bridge facilities, because the debt/equity ratio only stands in normal conditions but does not necessarily stand when the project collapses, or of the amount disbursed under the equity bridge facilities (when they exist, as in case);
  • The Base Case (financial model) cannot be used as an element of interpretation of the agreements – namely to limit the Sponsors’ risk, by limiting the amount of the additional capital contributions to the amount disbursed under the equity bridge facilities – because it isn’t made with that concern or purpose. The Base Case is nothing but a reference scenario which cannot be used in case of disruption of the construction works, suspension of the financing and collapse of the concession. The Base Case is not prepared to be applied or solve abnormal situations and can only be changed for the purposes of restoring the financial balance of the Concession. It is then irrelevant if there is in the financial model an operational connection between the reimbursement of the equity bridge facilities and the payment of the additional capital contributions.
  • Once the Base Case of a project finance transaction and the debt/equity ratio are agreed, the Sponsors undertake, from inception, to inject in the project company the equity foreseen in the Base Case, i.e. equity equal to the difference between what would be, in the light of the aforementioned model, the amount of the total funding needs of the project and the amount of loans agreed to meet these needs (whether they should do so upfront, pari passu or at the end is a different issue).
  • If a project needs to secure funding to meet costs possibly exceeding those contemplated in the Base Case, this is normally provided as contingency funding/ standby equity.
  • The additional capital contributions at stake corresponded to the equity required according to the Base Case: they are, accordingly, base equity (equity that must always be injected) and not standby equity (equity that must be injected only if certain circumstances occur).
  • A back-ended project finance transaction includes an equity bridge component — a facility whose purpose is to bridge the gap created by the postponement of payment of equity until the date the equity is injected by the sponsors. It is because the sponsors undertake from the outset to make their contributions at a certain date in the future that the project company agrees a bridge loan for the intervening period; and not the reverse, i.e. the sponsors undertake to make their contributions at a certain date in the future because this is the date of repayment of the bridge loan.

Both the Sponsors and the Lenders filled several legal opinions in support of their thesis.

In 2014, the arbitral tribunal issued its award which was entirely favourable to the Banks: the arbitral tribunal endorsed the Lenders’ interpretation of the Equity Subscription Agreement and sentenced the Sponsors to pay the full amount of additional contributions foreseen in the equity subscription agreement and confirmed that the enforcement of the bank guarantees by the Lenders was entirely licit and compliant with the equity subscription agreement.

The Sponsors then filed a request to set aside the arbitral proceedings – still pending – mainly sustaining violation of public policy’s principles, the main argument being that the arbitral tribunal, by arguing that the obligation of payment of additional capital contributions also had a function of guarantee of the Lenders’ credits over the Company violated the Portuguese rule according to which surety must be expressly declared because such rule applies to all personal guarantees.

The Lenders argued in response that (i) the referred obligations are not and were not considered by the court as personal guarantees; (ii) in any case, such obligations were expressly declared; (iii) in any case, the Portuguese rule regarding surety does not apply to other personal guarantees; (iv) in any case, such rule could not be considered as an international public order principle not only because the Portuguese rule has no specific correspondence to other countries rules regarding surety but also because in other countries’ courts and authors also defend that such surety’s rules do not apply to personal guarantees.

Despite all Sponsors’ creative attempts not to comply with their obligations, postponing the payment of the full amount of the additional capital contributions, at the end the abovementioned principles were reinforced as basic principles of project finance transactions.

Doing Business in New Zealand: Compliance and Regulation


New Zealand is predominately a dual island state located in the South Pacific. During the 1980s, New Zealand underwent changes within its economic market structure. The result is a deregulated and decentralised economy engaging in international partnerships and most favoured nation agreements. Diminished import controls and subsidies establish New Zealand as a competitive international trading partner.

As a result, international trade rules, overseas investment rules, and domestic governance over commercial activities have changed.

New Zealand’s International Links

New Zealand is a member of the British Commonwealth system as well as an independent sovereign state. New Zealand’s governmental and economic policies are influenced by both its location within the South Pacific as well as its Commonwealth counterparts. Operating under a triennially, democratically elected, Westminster model political system strengthens its relationships through trade, security, and investment. New Zealand has the following international agreements in force:[1]

  • New Zealand-Australia Closer Economic Relations;
  • Australia-New Zealand Closer Economic Relationship;
  • ASEAN-Australia-New Zealand Free Trade Agreement;
  • New Zealand-Hong Kong, China Closer Economic Partnership;
  • New Zealand-China Free Trade Agreement;
  • New Zealand-Malaysia Free Trade Agreement;
  • Trans-Pacific Strategic Economic Partnership (P4);
  • New Zealand-Thailand Closer Economic Partnership; and
  • New Zealand-Singapore Closer Economic Partnership

New Zealand has also concluded the following agreements which are yet to be enforced:[2]

  • Trans-Pacific Partnership;
  • New Zealand-Korea Free Trade Agreement;
  • Anti-Counterfeiting Trade Agreement (concluded and signed, but not yet ratified);
  • New Zealand-Gulf Cooperation Council Free Trade Agreement (concluded but not yet signed);
  • New Zealand-Russia-Belarus-Kazakhstan Free Trade Agreement (under negotiation);
  • New Zealand-India Free Trade Agreement (under negotiation); and
  • Regional Comprehensive Economic Partnership (RCEP) (under negotiation)

Agreements on Economic cooperation are also in place with Taiwan, Penghu, Kinmen, and Matsu.[3]

Overseas Investments

Investments within New Zealand typically adopt either a local subsidiary model or a registry branch, and are dependent upon foreign business requirements. Other options include purchasing local businesses or the establishment of a sole trade business, or engaging within joint ventures, partnerships, or franchises.

There are no restrictions on transfer of capital, dividends, profits, royalties, or interest into or out of New Zealand. Fair competition and strict legal guidelines establish transparent frameworks in order to attain consistency and confidence-building when undertaking business in New Zealand. Operating a business in New Zealand as an overseas investor is predominately regulated by the Overseas Investment Act 2005, as well as the Overseas Investment Regulation Amendment Act 2005.

Other domestic legislation which further controls corporate activity in New Zealand includes:

  • Companies Act 1993;
  • Partnership Act 1998;
  • Limited Partnerships Act 2008;
  • Commerce Act 1986; and
  • Reserve Bank of New Zealand 1989

The Overseas Investment Office (OIO) is responsible for approving applications for overseas persons who wish to invest in New Zealand. An overseas person is defined by the Overseas Investment Act as, ‘a person who is not a citizen or ordinarily resident in New Zealand.’ This definition includes a Company that may be incorporated outside of New Zealand, or a partnership or other corporate body which is 25% (or possibly more) controlled by an overseas person or persons. The assessment is based on a number of factors, including the amount of the investment, the type of investment, and the proposed sector in which the investment is to be made.

Fair Competition

Business acquisition falls under the regulatory framework of the Commerce Act 1986. This Act aims to promote competition which establishes a long term benefit for New Zealand in a fair and equitable way. New Zealand sees more and more extraterritorial ventures, and as a result, the Commerce Act extends to business activities conducted outside of New Zealand by New Zealand Corporates. The Commerce Act is strict in its prohibition of business acquisitions which substantially lessen competition in the market, create safe harbours, and promote restrictive trade practices. It covers cartel behaviours, collective boycotts, and price fixing.

New Zealand also has a very well established consumer protection legal framework, which includes:

  • Fair Trading Act 1986;
  • Consumer Guarantee Act 1993; and
  • Sale of Goods and Services Act 1908

The above legislation oversees trade between businesses and to general consumers through regulation of business activities. If business activities are deemed to be unfair, then subject to the situation, one of the above legislative measures comes into force. Unfair business practice extends to conduct which is deemed to be misleading or deceptive, or that causes consumers or other businesses to form a mistaken belief or impression as to the product or service on offer.


The Reserve Bank of New Zealand Act 1999 empowers the Reserve Bank of New Zealand to regulate monetary policy in order to promote stability in pricing, as well as overseeing the maintenance of the financial system. It also supervises banks operating within New Zealand, including those which may be owned by overseas entities.

Most financial services are regulated within New Zealand. For example, insurance providers (domestic or overseas providers) are governed by the principles of the Insurance (Prudential Supervision) Act 2010. Domestic and overseas financial service providers fall under the ambit of the Financial Services Providers (Registration and Dispute Resolution) Act 2008. Regulatory frameworks and compliance will generally depend upon the type of investment venture.

Capital Markets

New Zealand operates three securities markets:

  • New Zealand stock market (NZSX);
  • New Zealand alternative market (NZAX); and
  • New Zealand Data Market (NZDX).

NZSX is the principal market for equity securities for larger Corporations; the NZAX offers securities for small or medium-sized businesses. Fixed income businesses are generally listed on the NZDX. Any offer of securities to the New Zealand public must comply with the New Zealand Securities Act 1978 and the Securities Regulations 2009. This includes primary, dual, or overseas listings.


The Income Tax Act 2007 governs income and overseas tax for individual and corporate tax payers. Taxes are normally levied on annual gross income from all sources less annual total deductions, as well as any losses carried forward. Gross income is defined as income which includes all gains on financial instruments, and short-term or planned profits on land or shared transactions.

Deductions might be defined as expenses incurred in gaining income or in carrying out business for the purpose of gaining income. Tax is payable in New Zealand if a person is a resident in New Zealand, or if the person is non-resident but derives an income from a source within New Zealand. Worldwide income will be dependent on in which country and how that income is derived.

New Zealand resident companies are taxable on their worldwide income at a rate of 28%, unless that company has made an election with the IRD to be a look-through company (‘LTC’). This means that the shareholders themselves are liable for income tax on the LTC’s profits, rather than the company itself. They can offset the LTC’s losses against their own personal income in New Zealand. Non-resident shareholders of an LTC are not liable to pay income tax in New Zealand on any overseas sourced income, only on income sourced in New Zealand. An overseas company is taxable at the same rate if its income has a New Zealand source.

The New Zealand dividend imputation system under which tax is paid by New Zealand resident companies allocates an imputation credit to dividends paid to shareholders. New Zealand resident shareholders may offset this imputation credit against tax liabilities in respect of other dividends; however, this will be dependent upon a range of factors, i.e. the rate of non-resident withholding tax, or if a New Zealand resident company receives dividends from a foreign tax company.

In order to ensure overseas owned companies pay the appropriate level of tax on their New Zealand sourced profits, a transfer pricing regime exists. Maintenance of the appropriate pricing records and compliance with other New Zealand regulatory regimes such as PAYE, Goods and Services Tax, and Kiwi Saver (Superannuation Schemes) also apply.


The above is an overview of useful information for overseas investment within New Zealand, but does not constitute legal advice. Specific legal requirements and compliance must be assessed on a case-by-case basis, and are dependent upon business needs or plans. Doing business in New Zealand needs careful guidance through the legislative frameworks and processes in order to ensure proper compliance. Before taking steps to invest in New Zealand, we strongly suggest that you consult with legal experts.

[1] Information supplied by the Ministry of Foreign Affairs and Trade of New Zealand.

[2] Information supplied by the Ministry of Foreign Affairs and Trade of New Zealand.

[3] Information supplied by the Ministry of Foreign Affairs and Trade of New Zealand.

Determinants of Intra-regional Trade Flows: A case of Uganda’s Bilateral Trade with her East African Community State Partners


Regional trade is important in stimulating economies of regional block countries through free trade agreements.[1] The history of cooperation in East Africa can be traced to 1917 when the British colonies of Kenya and Uganda were first joined into a Customs Union (CU) and later the defunct East African Community (EAC) in 1967 which collapsed in 1997[2] and re-established in 1999.[3]

Theoretical Background

The theory of comparative advantage attributed to David Ricardo can explain determinants of bilateral trade flows. It is the ability of a party to produce a good at a lower marginal and opportunity cost over another.[4] The theory has, however, been criticized for restraining competition with non-regional trading bloc firms and increasing welfare among state parties implementing such strategic trade policies.[5] Nonetheless, it still remains invaluable.

Review of literature

Bilateral trade flows are common dependent variables used in trade flow gravity models.[6] Factors indicating demand and supply and those representing impediments imposed to trade flows have been used as explanatory variables.[7] The common proxies for demand and supply factors are measurements of countries’ economic and market sizes (population, GDP and GDP per capita).[8] Impedance factors include transportation costs proxied by great circle distance between a pair of countries economic centers.[9] Others are common language, boarder adjacency, land-lockedness of a country and regional integration agreements. [10]


This study adopted longitudinal research design.[11] It included state parties; Burundi, Kenya, Rwanda, Tanzania and Uganda. Macro-economic panel time-series (monthly) data from 1980 to 2013 were generated from IMF Financial Statistics databases (Bilateral trade ($), GDP, GDP per capita, population) and circle distances between state capitals. Dummy variables in the model represented membership to trade agreements, adjacency and land lockedness of a country.

Data analysis

A log-linearized augmented Gravity Model was used to analyze data. The model was estimated on the basis of single country variables. This specification distinguishes structural factors in the exporting country to those in the importing country. This made it possible to test and compare the relative importance of the study variables in the countries of origin and destination countries.


Regression results show according to a priori expectations that the following variables were positively related to Uganda’s bilateral trade flows and were statistically significant (p < 0.05): Uganda’s GDP (β =1.42), Uganda’s GDP per capita (β = 0.45), Uganda’s population (β = 3.80), absolute difference between Uganda’s GDP per capita and partners (β = 0.23) and circle distance (β = – 0.13). Partner’s population, GDP per capita and Uganda’s GDP were not found to be statistically significant while Uganda’s GDP was negative and so was GDP per capita of partners.


Gross domestic product (GDP) indicates economic size. The bigger the GDP the higher the aggregate demand potential.[12] The findings, however, contrasts with findings that GDPs of trading bilateral partners were statistically insignificant.[13] GDP per capita indicates purchasing power of the people in a country. This study found that Uganda’s GDP per capita was positive and significant which contradicts other studies.[14] This study however found a negative relationship between Uganda’s partners GDP per capita with Uganda’s bilateral trade flows. Population size is associated with production capacity and market consumption potential. Uganda’s population was found to positively relate to bilateral trade flows consistent with Lwin.[15]

Absolute differences in per capita GDP of Uganda and partners was found to positively relate to bilateral trade flows which contradicts other studies.[16] Economic integration showed positive and significant relationship with bilateral trade flows. Membership to the regional trade agreement introduced widening of the common market reducing cost of trade by abolishing tariffs among partners consistent with other studies in Malawi, Fiji and Namibia.[17] This study however contradicts findings that failed to account for possible influence of regional integration agreement on Fiji.[18] Land lockedness status of a state, regional integration (EAC) and distance were statistically significant consistent with studies in Fiji.[19] In examining the factors influencing trade between Fiji and her Asian partners, results suggested that Fiji’s exports are significantly influenced by Fiji’s trade infrastructure.[20]Such resistance is posed by factors like land lockedness, adjacency and language and various other obstacles to trade with trading partners.[21] In analysis of trade creation and trade diversion effects of Southern Asian Association for Regional Cooperation a study found that trade was positively determined by regional cooperation agreements.[22]

Distance between trading partners proxied by transportation costs is as expected, negatively related to trade flows and significant in this study consistent with other study findings.[23] Contrary to the above findings it was found that transport cost reductions do not have a significant effect on exports from African countries[24] and did not play an important role in determining Ethiopian volume of exports.[25]


Economies of EAC countries are expected to grow (GDP and GDP per capita) increasing Uganda’s bilateral trade flows with EAC partners. Regional integration has promoted Uganda’s bilateral trade. Integration efforts have boosted bilateral trade while longer destination markets impedes trade due to increased transportation costs.


Policies that support economic growth, deepen regional integration efforts, improves communication infrastructure (roads, rail and air transport) and focus on efficient production and scale economies should be pursued to promote Uganda’s bilateral trade.

[1] Lwin, N., N (2009). Analysis of international trade of Cambodia, Laos and Myanmar countries. Institute of Development Economics Discussion Paper no. 215, August 2009.
[2] Kenya Economic Update, June (2012).
[3] Protocol establishing the East African Community (1999).
[4] Samuelsson, (1969)
[5] Krugman, Paul R. (1987). “Is Free Trade Passed?”Journal of Economic Perspectives1(2).pp. 131–144.
[6] Simwaka, K. (2006). Dynamics of Malawi’s trade flows: A Gravity Model approach. Munich Personnel re PECArchives, MPRA Paper No. 1122.
[7] Kepatsoglou, K., Karlaftis, M., G. & Tsamboulas, D. (2010). The Gravity Model specification for modeling International Trade Flows and international trade agreements effects: A 10-year review of empirical studies. Open Economics Journal 2010 (3), 1 – 13.
[8] Bergstrand, J. H. (1985). The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence. The Review of Economics and Statistics. No. 67. Pp. 474 -481.
[9] Martinez-Zarizosa, I., & Suarez-Bougueat, C. (2005). Trade costs and trade: Empirical evidence for Latin American Imports from the European Union. Journal of International Trade Economics and Development 2005; 14 (3), 353 – 371.
[10] Kepatsoglou, Karlaftis, & Tsamboulas, (2010).
[11] Amin, M., E. (2005).Social science research: Conception, methodology and analysis. Kampala: Makerere University.
[12] Eita (2008). Eita, J. H. (2008). Determinants of Namibian exports: A Gravity Model Approach, University of Namibia, Namibia.
[13] Gani, A. (2008). Factors influencing trade between Fiji and its Asian partners. Pacific Economic Bulletin. Vol. 23, no. 2. The Australian National University.
[14] Rahman, M. M. (2009). Australia’s Global Trade Potential: Evidence from the Gravity Model Analysis in Oxford. Business and Economics Conference, 24-26 June, 2009, Oxford University, Oxford, UK.
[15] Lwin, N., N (2009). Analysis of international trade of Cambodia, Laos and Myanmar countries. Institute of Development Economics Discussion Paper no. 215, August 2009.
[16] Rahman, M. M. (2009). Australia’s Global Trade Potential: Evidence from the Gravity Model Analysis in Oxford. Business and Economics Conference, 24-26 June, 2009, Oxford University, Oxford, UK.
[17] Simwaka, K. (2006). Dynamics of Malawi’s trade flows: A Gravity Model approach. Munich Personnel re PECArchives, MPRA Paper No. 1122; Roy, M. and Rayhan, I. (2011). Trade Flows of Bangladesh: A Gravity Model Approach, Economics Bulletin, Vol. 31 no.1 pp. 950 -959.
[18] Eita, J. H. (2008). Determinants of Namibian exports: A Gravity Model Approach, University of Namibia, Namibia.
[19]Gani, A. (2008). Factors influencing trade between Fiji and its Asian partners. Pacific Economic Bulletin. Vol. 23, no. 2. The Australian National University.
[20] Gani, A. (2008). Factors influencing trade between Fiji and its Asian partners. Pacific Economic Bulletin. Vol. 23, no. 2. The Australian National University.
[21] Lwin, N., N (2009). Analysis of international trade of Cambodia, Laos and Myanmar countries. Institute of Development Economics Discussion Paper no. 215, August 2009.
[22] Hassan, M. K. (2001). “Is SAARC a viable economic block?” Evidence from Gravity Model, Journal of Asian Economics, Vol. 12, pp. 263 – 290.
[23] Lwin, N., N (2009). Analysis of international trade of Cambodia, Laos and Myanmar countries. Institute of Development Economics Discussion Paper no. 215, August 2009; Hassan, M. K. (2001). “Is SAARC a viable economic block?” Evidence from Gravity Model, Journal of Asian Economics, Vol. 12, pp. 263 – 290; Rahman, M. M. (2009). Australia’s Global Trade Potential: Evidence from the Gravity Model Analysis in Oxford. Business and Economics Conference, 24-26 June, 2009, Oxford University, Oxford, UK.
[24] Márquez-Ramos, L. (2007). Understanding the determinants of international trade in African countries: An Empirical analysis for Ghana and South Africa. Instituto de Economía Internacional, Universitat Jaume I.
[25]Taye (2009)