Project Finance 2021

Last Updated November 04, 2021

New Zealand

Law and Practice

Authors



Russell McVeagh has one of New Zealand's leading project finance teams. The broader banking and finance team has five partners, two special counsel and 18 other qualified lawyers across offices in Auckland and Wellington. The firm's project finance specialists act for major financial institutions, corporate sponsors and other participants in the infrastructure and project finance sector. They have advised on the financing of New Zealand's largest infrastructure projects and transactions, including energy, road, housing, schools, prisons and telecommunications infrastructure (including acting for the financiers on the three largest public-private partnerships currently under construction). The project finance lawyers work closely with the firm's wider infrastructure team, which combines infrastructure specialists from across the firm. Members of the team have worked extensively on projects in offshore markets and have experience across a range of industries and transaction structures.

The sponsors for project finance transactions in New Zealand are typically either private equity investors, large institutional investors or, in some cases, government agencies.

The lenders for project finance in New Zealand are typically commercial banks (both New Zealand banks and offshore banks), large institutional investors and, in some cases, government agencies.

Public-private partnership (PPP) transactions have been used for roads, prisons and schools in New Zealand. New Zealand adopted the PPP model fairly late. The model used in New Zealand is closely based on models used in similar jurisdictions such as Australia and the United Kingdom, so the framework is familiar to international financiers.

During the 2010s, the model was used for eight large public infrastructure projects comprising two roads of national significance (the Transmission Gully and Puhoi to Warkworth motorways), three prisons and three schools bundles. Three PPP projects remain under construction. The most recent PPP to reach financial close was the Waikeria prison project in 2018.

New Zealand's current government has a policy of not procuring new social infrastructure such as hospitals, schools or prisons through PPPs but the PPP model remains available for other new infrastructure such as transport and urban infrastructure.

The PPP programme is administered by the Infrastructure Commission (Te Waihanga), which published a report on New Zealand's PPP model in January 2021, concluding that the model should continue to be considered as a procurement option for major infrastructure projects.

There is no specific legislation governing the operation of PPPs in New Zealand. The Infrastructure Commission publishes guidance on the PPP model for public sector entities, and also publishes a model form project agreement and schedules. PPPs are also subject to government sector procurement rules.

Project finance transactions in New Zealand are typically structured in a similar way to project finance transactions in similar jurisdictions such as Australia and the United Kingdom. New Zealand has a common law system and many participants in the market have experience in offshore markets. The main issues that need to be considered are therefore broadly the same as the main issues that financiers need to consider for project finance transactions in other markets.

For projects that involve new construction, the main issues relate to the certainty of achieving a completed project that is able to generate sufficient revenues to service its debt. Lenders typically expect a fixed-price turnkey contract and a security package that is appropriate for the builder involved and the nature of the project (including, as appropriate, the availability of liquidated damages for delay, parent guarantees and performance bonds). Lenders expect extensive due diligence and appoint a technical adviser to monitor and certify matters in relation to the project; they also require direct agreements with counterparties and a package of undertakings and defaults in the finance documents that are appropriate having regard to a project's gearing. In some cases, sponsors might also provide additional credit support, although this has not been a feature of PPPs.

For operational projects, the main focus is on the operation and maintenance servicing arrangements and the key revenue contracts. Lenders expect direct agreements with key counterparties and appropriate credit support for the nature of the project (which may include guarantees or performance bonds) and a package of undertakings and defaults in the finance documents that are designed to protect the lenders' interests during the operations phase.

Projects are typically funded through a mix of debt finance and equity. The initial debt financing typically has a tenor that gives the sponsors a window after anticipated completion to achieve a successful operating project before the first refinancing. The project vehicle is a body corporate, which is either a limited partnership established under the Limited Partnerships Act 2008 or a company established under the Companies Act 1993.

The most active sectors in the coming year are likely to be renewable energy, transport and urban infrastructure.

Until recently, New Zealand has not needed to focus as much as other countries on replacing fossil fuels with renewable energy because New Zealand's electricity generation already includes a large proportion of renewable hydro generation. However, a step change is required to implement policies designed to achieve net zero and electrify transport networks. A focus on new wind, solar, hydrogen and other renewable projects is expected in the coming year.

In 2021, the government appointed a working group to develop a business case for introducing light rail in New Zealand's largest city, Auckland. If the project goes ahead, light rail is likely to be the largest transport project in New Zealand.

The government is also focused on improving infrastructure to unlock growth in housing and urban development. The first projects under the new Infrastructure Funding and Financing Act 2020 are currently being prepared and are expected to come to market in the coming year.

In project financing, the security package typically involves:

  • security over all assets of project obligors (including the project documents, project accounts and any rights in land); and
  • in some cases, security from sponsors over their equity interests in the project obligors (however, commonly there is a two-tier structure for the project obligors, with the borrower and its holding entity being obligors, in which case security from the sponsors is not needed because the holding entity grants all asset security, including over its equity interests in the borrower).

There are two principal regimes governing security over property in New Zealand: one relates to land, and the other to personal property. The Land Transfer Act 2017 (LTA) and the Property Law Act 2007 (PLA) govern the creation and enforceability of security over land and interests in land. The Personal Property Securities Act 1999 (PPSA) governs the creation, enforceability and priority of security interests in personal property (subject to certain exceptions contained in the PPSA and certain provisions of the PLA that apply to personal property).

In New Zealand, certain categories of documents must be in writing. For example, under the PLA, guarantees and contracts for the sale or other disposition of land must be in writing in order to be legally enforceable.

Land

Security over land may take the form of an unregistered charge contained in a general security deed, but where the borrower owns material interests in land it is typical to take a registered mortgage. Pursuant to the LTA, instruments registered on real property titles take effect according to the date and time of registration. Generally, registered mortgages have priority over subsequently registered mortgages and unregistered mortgages. Hence, failure to register may lead to loss of priority. Mortgages are registered at Land Information New Zealand through an online e-dealing system, and the registration process is handled by the solicitors acting on the transaction.

Security over land that is not subject to the LTA (for example, certain Māori land or land that was overlooked when the prior deeds system was replaced by the LTA regime) is generally taken by way of a charge, assignment by way of security, or equitable mortgage.

Personal Property

A security interest in personal property subject to the PPSA is enforceable against a third party in respect of particular collateral only if the collateral is in the possession of the secured party or the debtor has signed or assented to a security agreement that contains:

  • an adequate description of the collateral by item or kind that enables the collateral to be identified;
  • a statement that a security interest is taken in all of the debtor's present and after-acquired property; or
  • a statement that a security interest is taken in all of the debtor's present and after-acquired property except for specified items or kinds of personal property.

A security interest in personal property that is subject to the PPSA is perfected when the security interest has attached and either a financing statement has been registered on the Personal Property Securities Register (PPSR) or the secured party has possession of the collateral (except where possession is a result of seizure or repossession). The PPSR is a publicly available online register that shows all security interests registered against an entity's personal property that is subject to the PPSA.

Under the PPSA, a security interest "attaches" to collateral when:

  • value is given by the secured party; and
  • the debtor has rights in the collateral; and
  • the security agreement is enforceable against third parties, except for the purpose of enforcing rights between the parties to the security agreement.

The most common method of perfecting a security interest is the registration of a financing statement on the PPSR, which is a quick, cheap and straightforward process. Where the relevant property includes a serial-numbered good (a motor vehicle or an aircraft), it is necessary to include the serial number and various other details of the relevant property in the financing statement.

Although a security interest over all different categories of personal property can (and typically will) be perfected by the registration of a financing statement on the PPSR, it is sometimes also desirable to take additional steps in relation to certain categories of personal property to ensure that the required priority is obtained and protected. For example, under the PPSA, a previously first ranking security interest over investment securities, negotiable instruments or chattel paper can lose priority over those assets to a subsequent purchaser (which includes the grantee of a security interest) if that purchaser obtains (among other things) possession of the relevant property.

To protect against that risk, it is common for lenders to take possession of those types of assets to ensure that no other person can do so. For example, in the case of an investment security, this might involve the lender taking possession of the share certificate (if one exists) and/or having the lender's security interest noted on the share register. There are also certain types of collateral (such as inventory and accounts receivable) that are subject to special priority rules. Accordingly, it is important to establish what key assets the obligor owns so that all necessary steps can be taken to protect the lender's position.

In addition to (or, in some cases, instead of) registration on the PPSR, a number of other registration regimes may also be applicable, depending on the asset concerned (for example, ships, fishing quota, insurances and radio frequencies).

As a general matter of New Zealand law, it is possible to take security over all the assets of a borrower. This all-asset security is typically documented in a New Zealand law general security deed.

The only applicable costs (in addition to costs incurred in connection with preparing the security documents) are registration costs, which are generally nominal in the scheme of a transaction. For example, the cost for registering a financing statement in respect of personal property under the PPSA is currently NZD16.10 and the cost of registering a mortgage over land under the electronic "Landonline" system is currently NZD80.

In New Zealand, it is customary to grant security over all personal property and all other property under a general security deed. It is not necessary to identify each item of collateral individually in the security document. If security is not taken over all of the obligor's property, the relevant security agreement must contain an adequate description of the collateral by item or kind that enables the collateral to be identified.

In some cases, it is necessary to identify collateral individually for the purposes of specific security or registration. In particular:

  • if the lender seeks a registered mortgage over land (rather than an unregistered charge under a general security deed), a mortgage needs to be registered on the specific land title;
  • if the grantor owns serial-numbered goods (motor vehicles and aircraft), certain details of the serial-numbered goods need to be registered on the PPSR; and
  • where personal property is registered on a specific register other than the PPSR (for example, a ship registered on the register of ships), specific registration for the particular collateral may be required.

There are no general restrictions on the grant of security or guarantees in New Zealand law, but there may be relevant contractual restrictions in other security agreements or contracts to which the grantor is party.

Lenders satisfy themselves by searching security registers in respect of material assets. As noted above, security interests in personal property to which the PPSA applies may be perfected by registering a financing statement on the online PPSR. Lenders search the PPSR to check for any existing security interests in collateral that might have priority over the security interests to be granted in favour of the lenders. If the grantor's assets include real property, the lenders may also conduct title searches to check whether there are any mortgages or other encumbrances or interests registered against the land. Depending on the assets involved, other register searches might also be relevant.

Searches provide significant comfort but they are not definitive. For example, searches will not identify interests in personal property that are not subject to the PPSA (such as some liens) or interests that are perfected by possession rather than registration (although possession by a third party should be evident in due diligence).

Lenders also typically receive representations from grantors as to the absence of other liens that are not permitted under the finance documents and as to the effectiveness and priority of the lenders' security interests in the collateral.

Personal Property

A security interest in personal property may be released by agreement between the secured party and the borrower, which typically takes the form of a release deed. A security agreement may allow for the automatic release of a security interest in certain circumstances. For instance, a general security deed is likely to allow certain disposals of secured property in the ordinary course of business. Upon the occurrence of such a disposal, the security interest will be released. The purpose of permitting these types of disposals is to enable the borrower to continue to engage in its business (by allowing it to sell inventory to generate revenue, for example).

Once the secured property has been released, the financing statement registered on the PPSR will need to be discharged.

Discharge of Mortgage

A mortgage over land under the LTA may be wholly or partially discharged by a mortgage discharge instrument that is registered under the LTA.

A lender can generally enforce its security or guarantee freely after default by the obligor, subject to:

  • compliance with the terms of the security agreement or guarantee;
  • in respect of personal property, compliance with the notice requirements and other duties under the PPSA and the PLA;
  • in respect of mortgages over land, compliance with the notice and procedural requirements of the PLA; and
  • all insolvency, moratorium, reorganisation or similar laws affecting creditors' rights generally (including voluntary administration and statutory management).

Personal Property

Part 9 of the PPSA provides statutory remedies available to a secured party when a debtor is in default or the collateral is "at risk". Part 9 does not apply to a receiver within the meaning of section 2(1) of the Receiverships Act 1993 (with enforcement by a receiver being governed by that Act).

Section 108 of the PPSA allows a first ranking secured party to collect accounts receivable and other financial assets held as security and to apply the proceeds to the obligation secured if the debtor is in default. Section 109 of the PPSA allows a secured party (whether or not such secured party's security interest is first ranking) to take possession of and sell collateral when the debtor is in default under the security agreement or where the collateral is at risk.

Notice is required to be given to the debtor and other secured parties at least ten working days prior to any proposed sale, unless an exception applies (for example, if the collateral is perishable). Where the security interest is a "mortgage over goods" as defined by the PLA, a matching period of ten working days before the goods can be sold applies, and a prescribed form of notice must be given. The parties to a security agreement may contract out of the requirement to notify the debtor under the PPSA but may not contract out of the notice requirements under the PLA.

As noted above, the secured party does not need to have first ranking priority over other secured parties when selling collateral, but must use the proceeds of any enforcement to pay out those prior ranking secured parties first.

In exercising a power of sale, the secured party is obliged to obtain the best price reasonably obtainable and must provide a statement of account within 15 working days to the debtor and other secured parties. A secured party must also exercise its rights in good faith and in accordance with reasonable standards of commercial practice.

Additional obligations apply where personal property has become an accession to, or has been mixed with, other property given the interests of third parties that may be involved.

Prior to a secured party selling collateral, the debtor (or another secured party given notice) may redeem the collateral by fulfilling the obligations secured by the collateral and paying the reasonable expenses incurred by the secured party in enforcing the security agreement. It is not possible to contract out of this ability to redeem.

Prior to the sale of collateral, the debtor mayreinstate the security agreement by paying any sums in arrears, remedying any other defaults and paying the reasonable expenses incurred by the secured party in enforcing the security agreement. This cannot be done more than twice a year.

Land

A mortgage over land may not be enforced by reason of a default unless a notice in the form prescribed in the PLA has been served on the mortgagor (whether by the mortgagee or the receiver) and the default has not been remedied upon the expiry of the remedial period specified in the notice. The minimum remedial period is usually 20 working days.

Enforcement powers for which such conditions must be satisfied include:

  • the mortgagee entering into possession of the mortgaged land;
  • a receiver managing mortgaged land or demanding and recovering income from the mortgaged land;
  • the mortgagee or receiver selling the mortgaged land; and
  • amounts secured by the mortgage being payable under an acceleration clause.

A mortgagee who exercises a power of sale owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time of sale.

Assuming the relevant document is otherwise legal and enforceable, a choice of foreign law to govern a commercial contract is a valid choice of law under the laws of New Zealand, and would be given effect by the New Zealand courts if that choice is made in good faith and is legal, and if there is no reason for avoiding the choice on grounds of public policy. Even if a New Zealand court determined that a dispute should be heard in New Zealand, the court would be required to decide the dispute according to the law of the contract. However, if the dispute is heard in New Zealand, a remedy will not be granted under the law of the contract if no comparable remedy is available under New Zealand law.

An exclusive submission to the Australian courts in a commercial contract will be considered valid by New Zealand courts, provided that the submission is not null and void under Australian law. The exclusive submission will entitle a party to a stay of proceedings unless the court is satisfied that:

  • giving effect to it would lead to a manifest injustice or would be manifestly contrary to New Zealand public policy;
  • the relevant Australian courts have decided not to determine the case; or
  • for exceptional reasons beyond the control of the parties, the submission to jurisdiction cannot reasonably be performed.

An effective exclusive submission to foreign jurisdiction (other than Australian courts) will be considered valid by the New Zealand courts, and will entitle a party to a stay of proceedings except where a party can show strong reasons why proceedings should be brought in New Zealand.

A non-exclusive submission to jurisdiction in a commercial contract is considered valid by the New Zealand courts. The submission to jurisdiction will be a factor in favour of a party seeking to obtain a stay of any proceeding in New Zealand. However, it will not be conclusive if there are other factors that suggest it is more appropriate for the dispute to be heard in New Zealand.

Australia

A final and conclusive judgment given or registered by an Australian court will be enforceable in the same manner as a judgment obtained in the High Court of New Zealand, provided that it is considered a "registrable Australian judgment" under the Trans-Tasman Proceedings Act 2010 (TTPA). Subject to the specific requirements of the TTPA, registration may be set aside under the TTPA in certain instances, including where:

  • enforcement would be contrary to public policy in New Zealand; or
  • the subject matter of the judgment relates to immovable property, or movable property in an in rem proceeding, which is not situated in Australia at the time of the proceedings.

Reciprocal Enforcement of Judgments Act 1934 (REJ Act)

A final and conclusive judgment for a sum of money that is obtained in the superior courts of a jurisdiction to which the REJ Act applies will be enforceable in the same manner as a judgment obtained in the High Court of New Zealand, provided that:

  • it is and remains registered in the High Court of New Zealand pursuant to, and in accordance with, the REJ Act; and
  • it is not in respect of taxes, fines or penalties.

Subject to the specific requirements of the REJ Act, a judgment is registrable unless it has been wholly satisfied or it could not be enforced in the country giving the judgment. Registration may be set aside under the REJ Act in certain instances, including where:

  • the court giving the judgment had no jurisdiction;
  • the judgment was obtained by fraud;
  • enforcement would be contrary to public policy in New Zealand; or
  • if, prior to the date of the judgment, the matter in dispute had been the subject of a final and conclusive judgment by another court having jurisdiction in the matter.

Other Judgments

At common law, New Zealand courts will recognise a judgment obtained in a court other than those in Australia or those to which the REJ Act applies in proceedings if New Zealand law recognises the jurisdiction of the courts of the relevant jurisdictions over the defendant. A submission to jurisdiction contemplated by the relevant document(s) is sufficient for this purpose. Such a judgment may form the basis for proceedings in New Zealand courts, provided that such judgment:

  • is final and conclusive;
  • was not obtained by fraud or in a manner contrary to the principles of natural justice; and
  • is not contrary to New Zealand public policy.

A foreign in personam judgment will only be enforceable at common law if it is:

  • for payment of a debt or a definite sum of money;
  • not in respect of taxes, fines or penalties; and
  • not wholly satisfied.

As an alternative to common law enforcement, a judgment for a sum of money given by a court in "Her Majesty's Dominions" that is not registrable under the REJ Act may be able to be enforced under the Senior Courts Act 2016 (SCA), subject to such terms and conditions (if any) as the court thinks fit, if:

  • a memorial of the judgment complying with the SCA is filed in the High Court of New Zealand as a record of the judgment;
  • application is made by the party in whose favour judgment was given for service against the party against whom judgment was given to show cause why execution should not be issued upon such judgment; and
  • the party served does not appear or does not show sufficient cause why execution should not be issued.

Arbitral Awards

New Zealand is a contracting state under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention).

Under the Arbitration Act 1996, an arbitral award (irrespective of the country in which it is made) must be recognised as binding and, upon application in writing to the court, must be enforced by entry as a judgment in terms of the award, subject to certain procedural requirements. The party relying on the award or applying for its enforcement must supply the duly authenticated original award (or a duly certified copy), the original arbitration agreement (or a certified copy) and translations into English if the award or arbitration agreement are not made in English.

Recognition and enforcement of an arbitral award may be refused at the request of the party against whom it is invoked only if that party furnishes proof of one of the grounds specified in the Arbitration Act. These grounds replicate the grounds set out in Article V of the New York Convention and apply equally to domestic and foreign arbitral awards.

There are no other matters that might affect a foreign lender's ability to enforce its rights under a loan or security agreement.

There are no general restrictions on foreign lenders granting loans. However, depending on the level and nature of a foreign lender's activity in New Zealand, it may be required to comply with certain registration requirements under New Zealand law.

Reserve Bank of New Zealand Act 1989 (RBNZ Act)

The RBNZ Act does not directly prevent any person from carrying on the business of lending but it restricts the carrying on of activities in New Zealand using a name or title that includes certain words. In particular, no person may carry on any activity directly or indirectly in New Zealand (whether through an agent or otherwise) using a name or title that includes a restricted word.

A "restricted word" is defined as "bank", "banker", "banking" or any of those words as part of another word or as a translation of those words into another language. If a foreign lender wants to carry on an activity in New Zealand using a name that contains a restricted word and it does not fall within certain exceptions, it must be registered as a bank by the Reserve Bank of New Zealand (RBNZ) or otherwise be authorised to use that name by the RBNZ. In a guidance note, the RBNZ states that it will not take a formulaic approach in determining what constitutes "carrying on any activity directly or indirectly in New Zealand", but will rather consider the individual circumstances of each situation.

In some cases, an overseas bank may carry on activities in New Zealand where the use of a restricted word (or words) in its name or title would be unlikely to mislead the public and could even have a net positive impact on the New Zealand financial system (through increased competition or choice). To accommodate for such cases, the Reserve Bank released a class authorisation notice (Authorisation Notice) that permits unregistered overseas banks to carry out certain activities (including wholesale lending activities) with wholesale customers in New Zealand using a restricted word. The Authorisation Notice is currently temporary and is due to expire on 22 September 2024. To rely on the Authorisation Notice, an eligible overseas bank must:

  • notify the RBNZ, before relying on the Authorisation Notice, that it intends to carry on activities using a name or title that includes a restricted word on the basis of the Authorisation Notice;
  • maintain an authorised agent in New Zealand for the purpose of accepting service of documents;
  • submit to the RBNZ any information requested under the RBNZ Act regarding its authorised activities; and
  • carry on in New Zealand only those activities that are specified in the Authorisation Notice.

Companies Act 1993

An overseas company that commences "carrying on business" in New Zealand must apply for registration under Part 18 of the Companies Act within ten working days of commencing business. An overseas company registered under Part 18 of the Companies Act is not subject to most of the general provisions of the Companies Act, but is subject to some special notification and financial reporting requirements.

The Companies Act does not set out a definitive test as to precisely what constitutes carrying on business for the purposes of the Companies Act. Rather, it provides non-exhaustive examples of activities that do – and do not on their own – amount to carrying on business in New Zealand. Whether a company is carrying on business for the purposes of the Companies Act is a question of fact that must be decided by having regard to all the circumstances in each case. It is a different test to the "carry on any activity" provision of the RBNZ Act. Accordingly, it does not necessarily follow that an entity that is carrying on any activity in New Zealand for the purposes of the RBNZ Act will be carrying on business in New Zealand for the purposes of the Companies Act (although registration as a registered bank under the RBNZ Act is likely to be an indicator that the relevant bank is carrying on business in New Zealand).

Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act)

The FSP Act requires providers of financial services (including granting loans) to register as a financial service provider in relation to the financial services they provide.

The territorial scope of the FSP Act applies to a person (A) who is in the business of providing a financial service if:

  • A's financial services are provided to persons in New Zealand by or on behalf of A;
  • A is, or is required to be, a licensed provider under a licensing enactment;
  • A is required to be registered under the FSP Act by or under any other enactment (including under a licence condition);
  • A provides the service in prescribed circumstances; or
  • A is a reporting entity to which the AML/CFT Act applies.

There are certain exceptions to the application of the FSP Act that can often be relevant for overseas lenders, including for lenders who do not have a place of business in New Zealand and who also do not provide services to retail clients.

Overseas Investment Act 2005 (OIA)

The granting of a loan by a foreign lender is not subject to the restrictions that may apply to the acquisition of property by foreign persons or corporations under the OIA, provided that the loan is not convertible into certain control or ownership rights or interests set out in the OIA. The restrictions that may apply to loans that are so convertible are discussed in greater detail below in 4.3 Foreign Investment Regime.

Other than those contractual restrictions on granting security described in 4.1 Restrictions on Foreign Lenders Granting Loans, there are no particular restrictions on the granting of security or guarantees to foreign lenders.

Investments by overseas persons are regulated by the OIA, which is enforced by the Overseas Investment Office (OIO).

Consent will be required from the OIO where an "Overseas Person" (ie, a non-resident or overseas company) acquires "Significant Business Assets" and/or "Sensitive Land". The purchase of the relevant assets or land is conditional on OIO consent being received. "Significant Business Assets" include the purchase of assets or 25% or more of a business or the set-up of a New Zealand business, at a cost greater than NZD100 million. "Sensitive Land" includes non-urban land and other land that is given particular significance in New Zealand (such as conservation land).

Prospective purchasers under the OIA must satisfy a test that shows they meet certain character requirements (business experience, financial commitment to the investment, good character, etc). If the investment is in "Sensitive Land", a second test must be satisfied that proves their investment will likely result in benefit to New Zealand. This benefit test is a counterfactual assessment against the consequences of the investment not going ahead.

The OIO will then review the application and decide whether it consents to the proposed transaction. The outcome of this process is then released publicly on the OIO website.

There are no general restrictions on making payments out of New Zealand, nor on the repatriation of capital by foreign investors.

There are no restrictions under New Zealand law that would prevent a project company maintaining an offshore currency account.

It is not generally necessary to register or file financing or project agreements, except for the registration of security interests (see 2.1 Assets Available as Collateral to Lenders) and the registration of the constitutional documents for the project entities at the Companies Office. Other disclosure rules may apply depending on the nature of the project entity and its counterparties (for example, details may need to be disclosed under the applicable listing rules if an entity is listed).

Various licences may be required for the ownership or use of land and natural resources. For example, permits are required for the exploration and extraction of petroleum and mineral resources under the Crown Minerals Act 1991, and resource consents are required for the development of land under the Resource Management Act 1991. Comprehensive due diligence on the applicable regulatory regimes is typically carried out at the beginning of a project.

As a general matter, licences may be held by a foreign entity but foreign investment is subject to the OIA (see 4.3 Foreign Investment Regime).

The concepts of both agency and trust are recognised in New Zealand. While both constructs can be found in the common law, the law concerning trusts in New Zealand has recently been updated under the Trusts Act 2019, which modernises and streamlines the law of trusts. There are no alternative structures that are commonly used.

Personal Property

The following applies in relation to the priority between secured creditors in personal property where the PPSA applies:

  • perfected security interests have priority over unperfected security interests;
  • perfected security interests have priority over other perfected security interests in the same personal property perfected later in time (subject to the below);
  • certain perfected security interests have super priority – in particular, sellers of goods that take security for the purchase price, financiers of specific goods and lessors and bailors may have a perfected purchase money security interest that may have priority over a lender with a perfected security interest under a general security deed (even if perfected later in time); and
  • certain unregistered interests such as liens may have priority over registered security interests.

Land

Generally, the mortgage with greater priority is that which is registered first in time. The priority of a mortgage over property, in relation to any subsequent mortgage over the property, does not necessarily extend to advances made under the prior mortgage after the subsequent mortgage comes into operation. However, if a mortgage secures further advances by way of financial accommodation up to a stated priority limit, the priority of the mortgage, in relation to any subsequent mortgage over the property, extends to every such further advance, up to the stated priority limit. There are certain other secured interests, such as statutory charges, that make take priority over registered mortgages.

Subordination

It is possible to vary the statutory priorities by agreement among the secured creditors. Subordination is typically effected under a subordination deed or a priority deed. Under the PPSA, an agreement to subordinate one security interest to another in the same property is effective according to its terms. Similarly, the priority of mortgages over land may be regulated by a priority deed. It is also possible (but not essential) to register a financing change statement on the PPSR to disclose the subordination or to register a priority instrument in relation to mortgages.

It is not essential for a project company to be organised under the laws of New Zealand but they almost always are. Project entities in New Zealand are generally set up as special purpose vehicles. The typical legal form is either a company or a limited partnership.

The main insolvency procedures in New Zealand are voluntary administration, liquidation and receivership. New Zealand law also provides for creditors' compromises and schemes of arrangement as available reorganisation procedures. The commentary in this section and the following sections on insolvency focuses on companies, but similar regimes exist for limited partnerships (companies and limited partnerships are the usual structures for borrowing entities in project finance).

Voluntary administration is provided for in Part 15A of the Companies Act. Voluntary administration begins when an administrator is appointed, which may be done by the company, a liquidator, the court or a substantial secured creditor. While the company is in administration, the administrator has control of the company's business, property and affairs.

The object of the voluntary administration regime is to provide for the business, property and affairs of an insolvent company (or a company that may become insolvent) to be administered in a way that:

  • maximises the chances of the company continuing in existence, or as much as possible of its business; or
  • results in a better return for the company's creditors and shareholders than would result from immediate liquidation, if it is not possible for the company or its business to continue in existence.

Voluntary administration imposes a moratorium on most proceedings by or against the company in administration. There are three possible outcomes from a voluntary administration, which are determined by the company's creditors:

  • the company executes a deed of company arrangement (which is an agreement between the company and its creditors approved at a creditor's meeting under which the parties agree to give decision-making power to a deed administrator to compromise their debt, usually resulting in distributions to creditors);
  • a liquidator is appointed; or
  • the administration ends and control of the company is handed back to its directors.

Liquidation is provided for in Part 16 of the Companies Act and is the final stage of a company's existence as a legal entity. Liquidation involves the appointment of a liquidator to realise and distribute a company's assets. Liquidation commences upon the appointment of a liquidator, which may be by a special resolution of shareholders, the board of a company, the court or (during an administration) a resolution of creditors. In most cases, a liquidator is appointed by the company's shareholders or by the court on the application of a creditor. When the court appoints a liquidator, it must be satisfied that one of the statutory grounds is met. The usual ground upon application by a creditor is that the company is unable to pay its debts.

Upon the appointment of a liquidator, the liquidator has custody and control of the company's assets and, whilst the directors remain in office, they largely cease to have any powers. The principal duty of a liquidator is to, in a reasonable and efficient manner:

  • take possession of, protect, realise and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with the Companies Act; and
  • if there are surplus assets remaining, to distribute them in accordance the order of priority set out in the Companies Act.

Receivership is a process that allows a secured creditor to appoint a receiver to realise assets or manage the business of a company for the secured creditor's benefit. Receiverships are governed by the Receiverships Act 1993. A receiver has the powers and authorities expressly or impliedly conferred by the deed or agreement governing its appointment, or by court order, together with the default powers under the Receiverships Act (subject to the appointing document) such as managing property in a receivership and recovering income of the property in receivership to satisfy creditor debts. The powers given to the receiver in the security agreement usually include the power to sell the company's assets.

Creditors' compromises are governed by Part 14 of the Companies Act. A creditors' compromise is a compromise made between a company and its creditors, in respect of debts owing. The definition of "compromise" is relatively wide and flexible. The Companies Act provides that a compromise includes cancelling all or part of a debt, varying the rights of creditors or terms of a debt, and altering the constitution of a company in a way that will affect the likelihood of the company being able to pay the debt. If a company is or will be unable to pay its debts, a compromise may be proposed by either the company's directors, a receiver or liquidator of the company, or a creditor or shareholder with leave of the court. There is no automatic moratorium on the enforcement of debts once a compromise is proposed. A meeting of creditors is held and the compromise proposal will be approved if a majority in number representing 75% in value of the creditors voting vote in favour. Creditors may be divided into classes for the purposes of voting. Each class votes separately, and all classes must vote in favour of the compromise for it to be approved.

Schemes of arrangement are governed by Part 15 of the Act. The court may order that an arrangement or amalgamation or compromise shall be binding on the company. "Arrangement" includes rearranging the share capital of a company, but also extends to anything that could be the subject of an agreement between a company, its shareholders and its creditors.

The commencement of voluntary administration brings an automatic moratorium for the duration of the administration, which prevents a person from enforcing a charge over the company's property and halts any enforcement process in relation to the company's property. In addition, during an administration, a guarantee or a liability of the company cannot be enforced against a director of the company or their spouse or relative, without the court's permission. The purpose of a moratorium is to give the company space and time during which it may continue to operate while parties assess the situation and form a plan to present to creditors.

An important exception to the moratorium is that a creditor with a security interest over the whole or substantially the whole of the company's property may still enforce its security after administration has commenced, provided it does so within ten working days of receiving notice that the company has gone into administration.

From the commencement of liquidation, the liquidator has custody of the company's assets and, unless the liquidator agrees or the court orders otherwise, a person must not commence or continue legal proceedings against the company or exercise or enforce a right or remedy over or against the property of the company. However, the fact that the liquidator has custody of the company's assets does not affect the rights of a secured creditor in relation to secured assets, which do not form part of the property available to the liquidator to distribute to unsecured creditors. Subject to certain restrictions, where there is a charge over assets, a creditor will be entitled to take possession of, or otherwise deal with, those assets after liquidation has commenced. A receiver may be appointed, may continue to act, and may exercise all its powers in respect of property of a company that has been put into liquidation, unless the court orders otherwise. A liquidator can serve written notice on a secured creditor requiring it to elect its course of action upon the debtor company's liquidation. Where a secured creditor does not make an election within 20 working days, it will be deemed to have surrendered its charge for the benefit of all creditors.

The obligations of a company are subject to various insolvency, moratorium, reorganisation or similar laws affecting creditors' rights. For example:

  • transactions and charges having preferential effect may be set aside;
  • the liquidator may recover any excess benefit provided by a company under a transaction at undervalue;
  • dispositions of property that are made with an intent to prejudice a creditor by way of gift or without receiving reasonably equivalent value in exchange may be set aside by the court;
  • an obligor's obligations may be affected by restrictions on creditors' rights during an administration or statutory management (under the Corporations (Investigation and Management) Act 1989);
  • in a liquidation, preferential claims (as set out in the seventh schedule of the Companies Act) may be paid out of the proceeds of inventory and accounts receivable in priority to the secured claims of a secured creditor (except to the extent that the security interest is perfected and value provided by the secured creditor was applied by the company in acquiring rights in that collateral); and
  • any provision in a document that confers or waives or purports to confer or waive a right of set-off, netting or similar right may be ineffective in a liquidation in certain circumstances.

If the assets of a company are insufficient to meet all liabilities in the liquidation of said company, the liquidator must apply the assets in accordance with the priorities established by the Companies Act. The assets of the company do not include assets subject to a charge, unless the charge is surrendered or redeemed. Therefore, the first creditors paid out in company insolvencies are generally the secured creditors through the enforcement of security (subject to certain preferential claims, as noted in 6.2 Impact of Insolvency Process). A financier for a project will almost always require comprehensive security over the obligors' assets so would expect to recover in preference to the company's general creditors (subject to resolving priorities between competing secured creditors, if any).

A liquidator is required to pay certain expenses, fees and claims out of a company's assets (after secured creditors have realised their security) as preferential claims in the order specified in the seventh schedule to the Companies Act. These preferential claims include costs of the liquidation, certain wages and salaries of the company's employees and certain tax liabilities.

After paying preferential claims, the liquidator must apply the company's assets in satisfaction of all other claims, which rank equally amongst themselves. If there is any surplus left after paying all claims, it is distributed in accordance with the company's constitution (which generally involves a distribution to the shareholders).

It is possible for a creditor to agree to subordinate its claim and therefore receive a lower priority than it would otherwise receive under the regime set out in the Companies Act.

Lenders should be aware of the following risks if a borrower, security provider or guarantor becomes insolvent.

  • As described in 6.2 Impact of Insolvency Process, the obligations of an insolvent company are subject to various insolvency, moratorium, reorganisation or similar laws affecting creditors' rights (including clawback regimes upon insolvency and a moratorium during the administration of a company).
  • In a distress scenario, the sale of a company's assets might be insufficient to cover the full amount of the debt owed to the lenders. This is particularly acute where the company's key assets include rights under contracts that might be terminated in an insolvency, therefore removing value.
  • Restructuring processes may be subject to a vote of creditors and may be approved without the lender's approval (although lenders in project finance transactions generally have security and are therefore less exposed to restructuring processes and will typically exercise control through their secured position).

There may be creditors whose claims rank in priority to the lenders. For example, some security interests (such as the interest of a supplier of goods to the company) rank in priority to a security interest granted to lenders under a general security agreement. Some accounts receivable may be subject to set-off or other arrangements that reduce their value to the lenders.

No entities are excluded from bankruptcy proceedings; bodies corporate, other entities and natural persons are generally subject to insolvency or similar rules under applicable legislation.

The details of insurance law are outside the scope of this overview but there are no general legal restrictions, controls, fees or taxes on insurance policies over project assets.

The Reserve Bank of New Zealand is the regulator and supervisor of insurance businesses in New Zealand. Insurance providers who carry on insurance business in New Zealand must be licensed as an insurer in New Zealand.

Generally, the benefit of the security package including insurance policies is held by a New Zealand security trustee rather than by the lenders directly, so any amounts would be paid to the security trustee in the first instance and then distributed to the lenders. However, there are no restrictions on foreign creditors receiving the benefit of payments under the insurance policies.

Broadly speaking, New Zealand has two key types of withholding tax:

  • resident withholding tax (RWT); and
  • non-resident withholding tax (NRWT).

RWT must be withheld on payments of resident passive income (ie, interest and dividends) made by New Zealand tax residents or non-residents carrying on a taxable activity in New Zealand through a fixed establishment in New Zealand. Resident passive income includes payments to non-residents for the purpose of a business they carry on in New Zealand through a fixed establishment, and offshore registered banks operating through a New Zealand branch (that are not associated with the payer).

RWT is required to be withheld at the marginal rate of the payee of the interest (28% for companies), or at a default rate of 45% if information is not provided by the payee regarding the appropriate withholding rates. If the relevant payee of interest holds RWT-exempt status, RWT is not required to be withheld on the interest payment (regardless of whether the lending is provided by a New Zealand or offshore branch).

NRWT must be withheld on payments of non-resident passive income. The rate of NRWT is 15% in respect of interest but this is reduced to 10% in most cases where the payee is resident in a country with which New Zealand has a double-tax agreement (with the exception of Malaysia, Chile, Turkey and Thailand).

Where a payer and payee are not associated, a payer may elect to reduce the rate of NRWT on interest to 0% and instead register for and pay an approved issuer levy (AIL) at a rate of 2%. The AIL regime is not available where interest is derived jointly by a resident and a non-resident or by associated persons (unless the approved issuer is a member of a New Zealand banking group), or in instances of related-party debt.

There are no stamp taxes or other taxes, duties or charges that are relevant for lenders making loans to entities incorporated in New Zealand.

There are no formal rules limiting the amount of interest that can be charged. A court may reopen a credit contract if it considers that the contract is oppressive (in this context, oppressive means harsh, unjustly burdensome or in breach of reasonable standards of commercial practice) but a court is not usually expected to reopen the amount of interest payable under a commercial contract. In addition, a default interest rate that is regarded as a penalty will not be enforceable.

Project agreements are typically governed by New Zealand law.

Financing agreements are typically governed by New Zealand law.

In New Zealand project financings, most matters are typically governed by New Zealand law. Even if some matters are governed by foreign law, the security in relation to New Zealand assets should be governed by New Zealand law.

Russell McVeagh

Level 30, Vero Centre
48 Shortland Street
PO Box 8
Auckland 1140
New Zealand
DX CX10085

+64 9 367 8000

+64 9 367 8163

bevan.peachey@russellmcveagh.com www.russellmcveagh.com
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Law and Practice

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Russell McVeagh has one of New Zealand's leading project finance teams. The broader banking and finance team has five partners, two special counsel and 18 other qualified lawyers across offices in Auckland and Wellington. The firm's project finance specialists act for major financial institutions, corporate sponsors and other participants in the infrastructure and project finance sector. They have advised on the financing of New Zealand's largest infrastructure projects and transactions, including energy, road, housing, schools, prisons and telecommunications infrastructure (including acting for the financiers on the three largest public-private partnerships currently under construction). The project finance lawyers work closely with the firm's wider infrastructure team, which combines infrastructure specialists from across the firm. Members of the team have worked extensively on projects in offshore markets and have experience across a range of industries and transaction structures.

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