If taking security | Taiwan | Asia Pacific Guide to Lending and Taking Security

1. Are there any classes of unsecured and unsubordinated creditor whose claims against a debtor would rank equally with or above those of the debtor’s secured creditors?

The enforcement fees incurred and paid to the court in accordance with the applicable laws and the following preferential rights to payment provided by law have priority over secured claims as described below:

Land value increment tax, land value tax, house tax and business tax levied on property/goods auctioned by a court or administrative enforcement agency have priority over all other claims and mortgages.
Fines, costs and payments for pollution remediation under the Soil and Groundwater Pollution Remediation Act take priority over all creditor and mortgagee rights.

The following preferential secured claims rank ahead of other secured claims:

When a contract is for work on the construction of a building or other works on land or for vital repairs in relation to that building or those works, an unsecured contractor may demand that the proprietor register a mortgage in favor of the contractor over the building or the land, or the building to be constructed, to secure the remuneration and payments to be made to the contractor. The mortgage would rank above any mortgage registered earlier to the extent of the value of the work.
If an act of a mortgagor is likely to cause a reduction in the value of the mortgaged property, the mortgagee may demand the cessation of the act and take any necessary action to safeguard the mortgaged property. The mortgagor bears the costs incurred for a demand or specified disposition and the claims for those costs have priority over claims secured by any mortgage on the property.
When a lien holder takes possession of or retrieves the relevant property of a chattel secured transaction (such as a chattel mortgage) in accordance with the Chattel Secured Transaction Act, a bona fide lien holder's expenditure for the repair or addition of work to the relevant property of the chattel secured transaction, which increases the value of the chattel, is given priority of satisfaction, to the extent of the increase in value, over any chattel secured rights that were previously established in accordance with the Chattel Secured Transaction Act.

Further, when an employer has suspended or liquidated its business or has been declared bankrupt, the following rights of the employees rank equally and pro rata with those of the holders of any first priority security interests:

Unpaid wages for less than six months.
Pensions that the employer has failed to disburse in accordance with the Labor Standards Act.
Severance pay that the employer has failed to disburse in accordance with the Labor Standards Act or the Labor Pension Act.

2. May security given by a company rank in a specified order so as to secure liabilities owed to different creditors of the company in that order and, if that is not possible, is it viable for parties to enter into a contractual arrangement for the purposes of moderating this order?

Yes, but this is only applicable to a mortgage of real property and chattels (such as machinery, equipment, tools, raw materials, semi-finished products, finished products, vehicles, forestry, fishery, agricultural and livestock products, livestock and vessels), in respect of which registration with the relevant authority or authorities would cause it to:

Become effective in the case of a mortgage of real property.
Be effective against a bona fide third party in the case of a mortgage of chattels.

In these cases, the mortgagor and the mortgagee may determine and designate the priority of multiple mortgages in relation to the same property.

3. Does this jurisdiction recognise the concept of floating security or similar equivalent (i.e., security over a changing pool of assets that the company giving the security is free to buy, sell and generally deal with)?

No. Under the laws of Taiwan, there is no floating charge concept, and a charge over a changing pool of assets is not possible. Each time there is a change of assets in the pool, the changed pool of assets must be repledged or remortgaged and (if required) reregistered.

4. If so, are there any practical reasons why floating security is difficult to take, maintain or enforce?

Not applicable.

5. May security be granted to a trustee to be held on trust for the lenders from time to time, in such a way that a change of lenders does not require new security to be taken?

No, this type of trust regime is not recognized. However, a trust in relation to a mortgage or pledge is permissible for securitization purposes only, in which case the security interest concerned may be held by a trustee, as provided under the Financial Asset Securitization Act.

6. If not, are there any techniques that can be used to achieve substantially the same effect (e.g., parallel debt structures)?

The lenders may appoint an agent that is also a lender and that has joint and several rights with the lenders to act for and on behalf of the lenders to hold the security interest and may be registered as the mortgagee or possess the pledged property and any documents evidencing it.

7. If an agent holds security for the lenders rather than a trustee, is it necessary to take new security on a change of lenders? If no, why not? If yes, are there ways to structure the transaction to avoid such a requirement?

No. When an agent is appointed by the lenders to hold the security on behalf of the lenders, the security agreement (e.g., a mortgage agreement or pledge agreement) is signed by the security provider and by the agent (being the mortgagee or pledgee) only. In the case of a mortgage that must be registered, only the agent is registered as the mortgagee. Therefore, a change to a lender (or lenders) that is not the agent does not require the creation of new security.

The legal relationship between the lender or lenders (that is/are not the agent) and the security provider is via the agent. If any lender (that is not the agent) changes by way of assignment and transfer, the new lender will assume the rights and benefits of the original lender. Therefore, the rights against the obligors remain unchanged and the security documents will not need to be amended.

If, however, there is a change to a lender that is also the agent, the amendment of the security documents or new security will be required.

8. Under the laws of this jurisdiction, is there any class of asset over which it is difficult or impossible to grant effective and perfected security, or in relation to which any security granted will be of limited effect?

It is difficult to grant an effective and perfected security interest over a changing pool of assets, such as inventories to be sold and deposits in a bank account. See the answer to question 3 of this section.

9. Under the laws of this jurisdiction, are there any restrictions on offshore lenders taking security over any class of asset?

Previously, foreign companies had to obtain recognition pursuant to the Company Act of Taiwan to become eligible to take a security interest over assets located in Taiwan. After the abolishment of the concept of recognition of foreign companies under the Company Act, a foreign company without a local presence is still unable to be registered as a secured party for chattel mortgages. For chattel mortgages, registration is not required for a chattel mortgage to be valid but it is necessary for the chattel mortgage to be enforceable against a bona fide third party. Furthermore, foreign entities may only acquire rights over land in Taiwan if their countries of incorporation, pursuant to treaties or their domestic laws, allow Taiwanese nationals and entities to the same rights. Under Taiwanese law, a real estate mortgagee agreement has to be registered to be valid. Hence, to allow a foreign company to take security interest over real estate located in Taiwan, the country of incorporation of such entity must allow Taiwanese entities to enjoy the same right. Furthermore, a foreign company without a local presence is still unable to be registered as a secured party for real mortgages. In addition, if a foreign lender would like to take security over scripless shares, they may encounter difficulties as the scripless shares would have to be deposited into a securities account opened by the foreign lender with a securities firm and some Taiwanese securities firms would refuse to allow foreign lenders to use their securities accounts for such purpose.

10. Must a company receive a corporate benefit in return for giving a guarantee or security? In particular, are there restrictions on the grant of upstream and cross-stream guarantees and security? If yes, briefly what is the effect of these laws?

Neither the Regulations Governing Lending of Funds and Making of Endorsements or Guarantees by Public Companies ("Lending or Guarantees Regulations") nor any other legislation requires a company to receive a corporate benefit in return for giving a guarantee or security. However, directors and managers of a Taiwanese company have a duty to act in good faith for the benefit of the company when considering giving a guarantee or security.

Under the Taiwan Company Act, a Taiwanese company must not act as a guarantor of any type (including giving security to secure a third party's indebtedness) unless otherwise permitted by other laws or by the Articles of Incorporation (AOI) of the company. A responsible person who violates this restriction is personally liable under the guarantee or security and for any damage to the company that results from it.

A Taiwanese public company that is permitted to give guarantees or security to secure a third party's indebtedness under its AOI must also comply with the Lending or Guarantees Regulations and establish internal rules accordingly. The Lending or Guarantees Regulations provide that a Taiwanese public company may provide a guarantee, an endorsement of a payment instrument or security for a third party's indebtedness for the following companies:

A company with which it does business.
A company in which it directly or indirectly holds more than 50% of the voting shares.
A company that directly or indirectly holds more than 50% of the voting shares in the Taiwanese public company.

A Taiwanese public company, and any company in which it holds, directly or indirectly, 90% or more of the voting shares, may provide an endorsement/a guarantee/security for a third party's indebtedness to each other, but the amount of the endorsement/guarantee must not exceed 10% of the net worth of the Taiwanese public company. However, this restriction does not apply to an endorsement/guarantee/security for a third party's indebtedness made between companies in which the public company holds, directly or indirectly, 100% of the voting shares.

11. What type of security interests does your jurisdiction recognise, e.g., pledge, charge, mortgage, hypothecation? In relation to each type of security interest, please state the formalities required to create and perfect that security.

There are four major types of security interest:

A mortgage over real property
A mortgage over chattels
A pledge over personal property
A pledge over rights

The formalities for each type of security interest are set out below.

Mortgage over real property

The mortgagor and the mortgagee enter into a mortgage agreement and file for registration of the mortgage with the land office where the mortgaged real property is located.

Mortgage over chattels

The mortgagor and the mortgagee enter into a mortgage agreement and file it with the competent authority to ensure it will be effective against a third party.

Pledge over personal property

The creation of a pledge becomes effective by the transfer of possession of the pledged personal property from the pledgor to the pledgee. In practice, it is advisable for the pledgor and pledgee to enter into a pledge agreement to record their respective rights and obligations.

Pledge over rights

The pledge is created in writing. If there is any document evidencing the pledged rights, the pledgor must deliver it to the pledgee.

The pledgor and the pledgee must notify the debtor of the pledge.

12. Are there any registration, translation or notarization requirements in relation to security, guarantees, subordination or intercreditor documents?

Yes, registration is necessary for mortgages over real property and chattels. A real estate mortgage agreement has to be registered to be valid. A chattel mortgage agreement has to registered to be enforceable against a bona fide third party. Real estate mortgage agreements and chattel mortgage agreements need to be made in a bilingual version or accompanied by a Chinese translation for registration purposes.

13. Are there any stamp, documentary, registration, notarization or other taxes, duties or fees chargeable in respect of security, guarantees, subordination or intercreditor documents? If yes, what are the amounts and when are they payable?

A registration fee must be paid when applying for a mortgage registration, as set out below.

Registration of a mortgage over real property

A fee equal to one-tenth of 1% (0.1%) of the amount of the secured indebtedness is payable.

Registration for a mortgage over chattels

The fees are as follows:

Registration fee (including certificate fee): TWD 900
Amendment registration fee (including certificate fee): TWD 450
Registration cancellation fee: free of charge

If the amount of the secured claim in relation to a mortgage over chattels is TWD 90,000 or less, the administrative fees set out above are reduced by 50%.

No other fees are payable.

Asia Pacific Guide to Lending and Taking Security