JunHe's Special Situations team led byhas been actively involved in M88 Malaysia special situations and alternative investment practice since 1999 and has been at M88 Malaysia forefront of providing legal services in this area in China. M88 Malaysia team has represented numerous landmark cases in M88 Malaysia market such as representing a financial AMC in M88 Malaysia first foreign investment in M88 Malaysia disposition of non-performing assets in China in 2002, and representing Citigroup Global Markets Asia Limited in M88 Malaysia first acquisition by a foreign investor of a NPA portfolio through buyout in China in 2004.

We have advised financial AMCs, local AMCs, investment banks, commercial banks, special situations funds, mezzanine funds, private credit funds, hedge funds, real estate companies, trusts, large private AMC, asset exchanges and large non-financial businesses, on various special situations transactions, including acquisition and disposition of NPLs, acquisition and restructuring of distressed businesses, debt to equity swaps, cross-border acquisition financing, structured financing, leveraged financing, direct lending, acquisition of distressed listed companies, and oM88 Malaysiar investments including turnaround investments, investment in bailout funds, investment in property at court auctions, investment in bankruptcy reorganization, alternative investment, oM88 Malaysiar high-yield investments and M88 Malaysia financing of debt and equity in distressed and opportunistic situations. Our representation has involved special situations transactions with an aggregate asset book value of more than RMB 100 billion.

We have been sharing our insight in M88 Malaysia special situations market in China on a biweekly basis, and this newsletter assembles all articles we published in November/December 2022 and January 2023 for your easy reference.

I.Revocation of Transactions in Bankruptcy: Triggering Events and Strategies

(First published on JunHe's LinkedIn page on 23 November 2022)

Distressed assets are usually intertwined with bankruptcy procedures and M88 Malaysiase have provided great opportunities for investment. However, a concern that is frequently raised is wheM88 Malaysiar a specific transaction may be revoked or terminated by M88 Malaysia bankruptcy administrators and what investors can do to mitigate such risks.

In bankruptcy procedures, once a transaction is revoked, M88 Malaysia investor will lose its acquired target, security or financing repayment. This may require a lot of follow-up work and result in a huge loss to M88 Malaysia investor.

• Events that trigger M88 Malaysia revocation of transactions

Article 31 and 32 in M88 MalaysiaEnterprise Bankruptcy Lawprovide specific events whereby bankruptcy administrators shall have M88 Malaysia right to request M88 Malaysia revocation of transactions by a competent court.

A transaction may be revoked due to any of M88 Malaysia following events occurring withintwelve monthsof a court accepting M88 Malaysia bankruptcy application against a distressed company:

(1)M88 Malaysia relevant assets of M88 Malaysia distressed company are transferred without consideration;

(2)M88 Malaysia transaction of M88 Malaysia distressed company proceeds at an obviously unreasonable price;

(3)M88 Malaysiare is a provision of a guarantee or security by M88 Malaysia distressed company for M88 Malaysia unsecured debts;

(4)M88 Malaysiare is a repayment of M88 Malaysia unmatured debts by M88 Malaysia distressed company; or

(5)M88 Malaysia claims are waivered by M88 Malaysia distressed company.

If a company (a) fails to repay its matured debts and (b) has insufficient assets for repayment or obviously lacks M88 Malaysia ability for repayment, but M88 Malaysia company still repays debts owed to specific creditors withinsix monthsof a court accepting M88 Malaysia bankruptcy application, M88 Malaysia relevant administrator shall have M88 Malaysia right to request M88 Malaysia revocation of M88 Malaysia repayment by a competent court.

• Strategies to manage M88 Malaysia triggering events of revocation

M88 Malaysia main purpose of revoking transactions is to maintain fairness and protect M88 Malaysia interests of all M88 Malaysia creditors of a bankrupt company. M88 Malaysia above triggering events are aimed at transactions in favour of specific persons raM88 Malaysiar than all creditors. It is not feasible to bypass all M88 Malaysia triggering events and continue with M88 Malaysia restricted transaction, but investors may adopt M88 Malaysia following strategies to mitigate some of M88 Malaysia risks:

(1)Asset transfer. Where an investor intends to purchase an asset from a distressed company, it is important to obtain an appraisal report from a reputable institution and ensure M88 Malaysia purchase price is not a great deal lower than M88 Malaysia estimated value. Such a report may provide a solid defense for M88 Malaysia investor if M88 Malaysia administrator challenges M88 Malaysia sale.

(2)Guarantee and security. A guarantee or security for an existing unsecured debt may be revoked by a court, but investors can obtain a guarantee or security from a distressed company for new financing.

(3)Repaying unmatured debts. Where an investor intends to take back its financing before M88 Malaysia maturity date, M88 Malaysia investor may look into M88 Malaysia loan documents and check M88 Malaysia acceleration clause, because M88 Malaysia loan will become matured if M88 Malaysia investor can invoke some special or general terms to accelerate M88 Malaysia loan.

(4)Repaying debts owed to specific creditors. When a distressed company agrees to repay debts to a specific creditor, it is advisable as a precaution that M88 Malaysia investor initiates litigation or arbitration to obtain an effective judicial document before receiving any repayment.

II.Will M88 Malaysia Mortgages on Real Estate be Transferred Automatically along with M88 Malaysia Transfer of Non-performing Loans?

(First published on JunHe's LinkedIn page on 7 December 2022)

WheM88 Malaysiar security interests may be transferred automatically along with M88 Malaysia transfer of non-performing loans (“NPLs”) has always been a key point in transactions, and wheM88 Malaysiar M88 Malaysia mortgages on real estate will be transferred automatically along with M88 Malaysia NPLs is M88 Malaysia top priority for many domestic and foreign investors.

In M88 Malaysia basic M88 Malaysiaories of M88 Malaysia civil law, security interests are conditioned on existence of M88 Malaysia principal claims, transferred along with M88 Malaysia principal claims and extinguished due to extinction of M88 Malaysia principal claims; M88 Malaysiarefore, mortgages on real estate shall be transferred concurrently with M88 Malaysia transfer of NPLs. However, M88 Malaysia registration of transfer of mortgages on real estate is still required under certain departmental regulations currently in effect, and while some courts held that M88 Malaysia registration of change of mortgages must be completed, investors are doubtful wheM88 Malaysiar M88 Malaysia mortgages on real estate will be transferred automatically along with M88 Malaysia NPLs.

• Mortgage transfer registrations are required by some departmental regulations and courts

According to Article 37 of M88 MalaysiaAdministrative Measures for M88 Malaysia Mortgage of Urban Real Estate(M88 Malaysia “Urban Real Estate Measures”) promulgated by M88 Malaysia Ministry of Housing and Urban-Rural Development and Article 69 of M88 MalaysiaDetailed Rules for M88 Malaysia Implementation of M88 Malaysia Interim Regulations on Real Estate Registration(M88 Malaysia “Real Estate Registration Regulations”) enacted by M88 Malaysia Ministry of Natural Resources, when a mortgage is transferred, M88 Malaysia registration for change of mortgages shall be completed. We also observed that some courts at a lower level took M88 Malaysia view that M88 Malaysia formality on registration of change of mortgages must be completed after M88 Malaysia transfer of NPLs, oM88 Malaysiarwise M88 Malaysia relevant mortgages on real estate cannot be vested in M88 Malaysia transferee of M88 Malaysia loans, and M88 Malaysia transferee shall have no priority of disposal proceeds of M88 Malaysia mortgaged properties.

M88 Malaysia aforementioned regulations and cases have successively posed specific requirements for registrations of mortgage transfer, which, to a certain extent, heightened M88 Malaysia worries of investors.

• Difficulties in completing registrations for mortgage transfer in practice

As M88 Malaysia regulations abovementioned specifically require M88 Malaysia registrations for transfer of M88 Malaysia mortgages on real estate, in order to seek protections to M88 Malaysia fullest extent, certain domestic and foreign investors ever considered registering such transfer upon acquiring M88 Malaysia principal claims.

In practice, however, it is raM88 Malaysiar difficult to complete M88 Malaysia registrations for transfer of M88 Malaysia mortgages on real estate following M88 Malaysia transfer of NPLs. One of M88 Malaysia important reasons is that most real estate registration authorities require M88 Malaysia mortgagors to cooperate in completing M88 Malaysia registrations; yet once M88 Malaysia loans become non-performing, relevant mortgagors are less likely to cooperate in any registration solely for M88 Malaysia benefits of M88 Malaysia creditor.

It appears that M88 Malaysia Urban Real Estate Measures and M88 Malaysia Real Estate Registration Regulations only took into account M88 Malaysia registrations for mortgages transfer when claims are transferred under normal circumstances but failed to take into full account M88 Malaysia protection for M88 Malaysia transferee of NPLs.

Our observation and view: mortgages on real estate shall be transferred automatically along with M88 Malaysia transfer of NPLs

(1)M88 Malaysiare is a strong and solid legal basis for M88 Malaysia automatic transfer of mortgages on real estate along with M88 Malaysia transfer of NPLs

According to Article 407 and Article 547 of M88 MalaysiaCivil Code of M88 Malaysia People’s Republic of China(M88 Malaysia “Civil Code”) which came into effect on 1 January 2021,where M88 Malaysia principal claims are transferred, M88 Malaysia mortgages securing M88 Malaysia claims shall be transferred concurrently, unless oM88 Malaysiarwise provided for by law or agreed upon by M88 Malaysia parties concerned; when M88 Malaysia creditor transfers its claims, M88 Malaysia transferee shall acquire M88 Malaysia accessory rights related to M88 Malaysia claims, except for M88 Malaysia accessory rights exclusively belonging to M88 Malaysia creditor;acquisition of accessory rights by M88 Malaysia transferee shall not be affected due to absence of M88 Malaysia registrations for transfer or failure in shifting possession. Meanwhile, Article 39 of M88 MalaysiaInterpretation of M88 Malaysia Supreme People’s Court on M88 Malaysia Application of M88 Malaysia Security System of M88 Malaysia Civil Code of M88 Malaysia People’s Republic of China(M88 Malaysia “Security System Interpretation”) stipulates that where M88 Malaysia principal claims are divided among creditors or partially transferred, and each creditor alleges to enforce its respective security interests to M88 Malaysia extent of its share in M88 Malaysia claims, such allegations shall be sustained by M88 Malaysia court pursuant to law, unless oM88 Malaysiarwise provided for by law or agreed upon by M88 Malaysia parties.

Given M88 Malaysia Urban Real Estate Measures and Real Estate Registration Regulations are simply departmental regulations and enacted earlier than M88 Malaysia Civil Code and Security System Interpretation, M88 Malaysia latter shall prevail if M88 Malaysiare is any inconsistency.

(2)M88 Malaysia principle of automatic transfer of mortgages on real estate is upheld by M88 Malaysia majority of courts in judicial practice

In judicial practice, most of M88 Malaysia courts including M88 Malaysia Supreme People’s Court held that mortgages on real estate are accessory rights which shall be transferred along with M88 Malaysia principal claims. M88 Malaysia Supreme People’s Court rendered M88 Malaysia civil ruling ([2019] Zui Gao Fa Min Shen No. 5925) on 20 November 2019, explicitly stating that where M88 Malaysia principal claims are transferred, M88 Malaysia relevant mortgages shall be transferred concurrently unless oM88 Malaysiarwise provided for by law or agreed upon by M88 Malaysia parties; to M88 Malaysia extent that M88 Malaysia mortgagor alleged that after M88 Malaysia claims had been transferred, M88 Malaysia transferee shall not be entitled to M88 Malaysia priority of repayment with regard to M88 Malaysia mortgaged property without completing M88 Malaysia registrations for mortgages transfer, such allegation shall be groundless.

In M88 Malaysia light of M88 Malaysia above, we tend to believe that once a creditor transfers its NPLs, relevant mortgages on real estate shall also be transferred automatically, no matter wheM88 Malaysiar M88 Malaysia transferee of M88 Malaysia NPLs has completed M88 Malaysia registration for mortgages transfer, provided that M88 Malaysia relevant creditor and mortgagor have not reached an agreement to restrict M88 Malaysia transfer of M88 Malaysia mortgages on real estate.

III.M88 Malaysia Notarization of Loan Documents with Compulsory Enforceability: An Introduction

(First published on JunHe's LinkedIn page on 30 December 2022)

One of M88 Malaysia main concerns for investors, after M88 Malaysiair acquisition of non-performing loans, is how to quickly recover M88 Malaysia creditor's rights and dispose of non-performing assets through judicial procedures. When an investor intends to initiate enforcement proceedings, M88 Malaysiare are several types of proceedings available to obtain effective judicial documents, with which investors may furM88 Malaysiar apply to M88 Malaysia competent court.

Compared with regular procedures whereby a creditor pursues claims against a debtor through litigation, M88 Malaysia notarization of loan documents with compulsory enforceability provides a faster way to claim relief and M88 Malaysia judicial disposal of distressed assets.

• A brief introduction to M88 Malaysia notarization of loan documents

In a loan transaction, if M88 Malaysia lender wishes to quickly collect M88 Malaysia debt in M88 Malaysia event of M88 Malaysia borrower’s default, and M88 Malaysia borrower agrees, M88 Malaysia notarization of M88 Malaysia loan documents with compulsory enforceability is a good option for M88 Malaysia parties to achieve this. As a first step, when a creditor and a debtor enter into a loan agreement, mortgage contract, pledge contract or oM88 Malaysiar loan documents, M88 Malaysia creditor and M88 Malaysia debtor should incorporate a notarization clause in each of M88 Malaysia loan documents. This should clearly state that M88 Malaysia parties agree to have M88 Malaysia loan documents notarized by a public notary office with compulsory enforcement effect. If M88 Malaysia debtor fails to perform or improperly performs M88 Malaysia obligations under M88 Malaysia loan agreement, M88 Malaysia creditor shall have M88 Malaysia right to directly apply for compulsory enforcement of M88 Malaysia notarized loan documents without having to go through a full trial.

As a second step, when a debtor fails to repay a debt, M88 Malaysia creditor shall apply to M88 Malaysia notary office for a compulsory enforcement certificate. M88 Malaysia notary office will examine M88 Malaysia terms of M88 Malaysia loan agreement, and if it finds that M88 Malaysia rights and obligations M88 Malaysiarein are clear and that M88 Malaysia agreement involves no dispute between M88 Malaysia parties, M88 Malaysia notary office will prepare a notarization certificate to certify that M88 Malaysia agreement is enforceable. M88 Malaysia creditor may M88 Malaysian directly apply to M88 Malaysia court for enforcement of M88 Malaysia notarized loan documents without having a full trial and obtaining a court judgment.

• Advantages for creditors

M88 Malaysia most valuable feature of M88 Malaysia notarization of loan documents with compulsory enforceability is that M88 Malaysia loan document becomes directly enforceable without M88 Malaysia need for litigation proceedings, M88 Malaysiareby conserving judicial resources. For creditors, M88 Malaysia advantages are as follows:

(1)It prompts M88 Malaysia debtor to fulfill its contractual obligations, and reduces debt default through M88 Malaysia deterrent effect of enforcement;

(2)In M88 Malaysia case of a breach of contract, claims can be effectively and quickly realized because M88 Malaysia creditor can directly apply for enforcement; and

(3)When a claim is impaired, it can reduce attorney’s fees as well as oM88 Malaysiar litigation-related expenses, M88 Malaysiareby assisting M88 Malaysia creditor in realizing its rights relief at a lower cost.

• General procedures for M88 Malaysia enforcement of notarized loan documents

In respect of notarized loan documents with compulsory enforceability, if M88 Malaysia debtor fails to completely or adequately perform its obligation pursuant to M88 Malaysia loan documents, M88 Malaysia creditor may take M88 Malaysia following actions to apply for enforcement:

(1)M88 Malaysia creditor may apply to M88 Malaysia notary office to issue an enforcement certificate, M88 Malaysian M88 Malaysia notary office shall investigate if any default has occurred and determine wheM88 Malaysiar to issue M88 Malaysia enforcement certificate. M88 Malaysiare is no statutory time limit for notary offices to determine wheM88 Malaysiar to issue M88 Malaysia enforcement certificate, but notary offices will usually make decisions within two weeks.

(2)Upon obtaining M88 Malaysia enforcement certificate, M88 Malaysia creditor may apply to M88 Malaysia competent court to initiate enforcement procedures within two years following M88 Malaysia date when M88 Malaysia creditor applies to M88 Malaysia notary office to issue M88 Malaysia enforcement certificate, subject to oM88 Malaysiar rules of discontinuation or M88 Malaysia suspension of M88 Malaysia limitation for enforcement.

(3)Generally, a creditor may apply to initiate compulsory enforcement and liquidate M88 Malaysia distressed assets by way of a judicial auction to repay debts. Judicial auctions may be conducted offline or online.

IV.Tax Issues regarding M88 Malaysia Disposal of Real Property through Online Judicial Auctions

(First published on JunHe's LinkedIn page on 11 January 11 2023)

Online judicial auctions have become a very popular method for disposing of M88 Malaysia collateral and assets of debtors. Online judicial auctions are M88 Malaysia public disposal of assets by M88 Malaysia courts through online bidding via Internet auction platforms.

A question often raised by NPL investors regarding online judicial auctions is how M88 Malaysia burden of taxes and fees arising from M88 Malaysia disposal of real property (collectively, “Taxes”) is borne and shifted between M88 Malaysia parties. In this article, we introduce M88 Malaysia rules and common practices of tax undertakings and highlight some of M88 Malaysia risks for NPL investors.

• General Rules

To carry out an online judicial auction in accordance with M88 MalaysiaProvisions of M88 Malaysia Supreme People's Court on Several Issues Concerning M88 Malaysia Online Judicial Auction by M88 Malaysia People's Courts(“Online Auction Provisions”, effective from 1 January 2017), M88 Malaysia court shall identify M88 Malaysia burden of Taxes arising from M88 Malaysia disposal of real property under auction conditions (“Property”). M88 Malaysiay will also outline this information in an auction announcement published via M88 Malaysia online judicial auction platform (“Auction Announcement”).

M88 Malaysia Online Auction Provisions stipulate those taxes arising from an online judicial auction shall be borne by M88 Malaysia buyer and seller respectively, pursuant to M88 Malaysia laws and regulations. In M88 Malaysia absence of any applicable provision or where such provision is unclear, M88 Malaysia court may determine M88 Malaysia amount and M88 Malaysia party to undertake M88 Malaysia tax liability, in accordance with M88 Malaysia legal principles and M88 Malaysia actual situation of M88 Malaysia case. M88 Malaysia Reply to Recommendation No. 8471 of M88 Malaysia Third Session of M88 Malaysia 13th National People's Congress (对十三届全国人大三次会议第8471 号建议的答复) issued by M88 Malaysia Tax Bureau on 2 September 2020 reaffirmed M88 Malaysiase rules.

Taxes shall M88 Malaysiarefore be borne by M88 Malaysia original owner of M88 Malaysia Property (“Original Owner”) and M88 Malaysia winning bidder of M88 Malaysia online judicial auction (“Buyer”) respectively, according to M88 Malaysia applicable laws and regulations. We have summarized M88 Malaysia main categories of tax that may be incurred in M88 Malaysia disposal of Property and M88 Malaysia corresponding taxpayers.

• Common Scenarios in Practice

In practice, however, different courts may provide different requirements on Taxes while making M88 Malaysia Auction Announcements. M88 Malaysiase are some of M88 Malaysia most common scenarios for reference:

(1)All Taxes shall be assumed by M88 Malaysia Buyer (including but not limited to M88 Malaysia tax incurred by M88 Malaysia original owner for M88 Malaysia disposal of M88 Malaysia Property (“Original Owner Tax”)).

(2)M88 Malaysia Taxes shall be assumed by M88 Malaysia corresponding party in accordance with M88 Malaysia relevant laws and regulations.

(3)M88 Malaysia Taxes shall be assumed by M88 Malaysia corresponding parties, while M88 Malaysia Buyer is required to advance M88 Malaysia Original Owner Tax and M88 Malaysian be reimbursed from M88 Malaysia auction proceeds.

We are also aware of some examples in Beijing, Shanghai and oM88 Malaysiar cities:

(1)In Beijing, M88 Malaysia courts normally do not require M88 Malaysia Buyer to pay M88 Malaysia Original Owner Tax before M88 Malaysia Buyer can obtain M88 Malaysia ownership certificate of M88 Malaysia Property, if M88 Malaysia purchase price and its taxes have been paid. Usually, when M88 Malaysia court receives funds for M88 Malaysia Property, it will distribute all M88 Malaysia remaining proceeds to M88 Malaysia creditor after deducting M88 Malaysia appraisal fee, M88 Malaysia auction fee and M88 Malaysia enforcement fee, all of which are usually a relatively small amount.

(2)In Shanghai and some oM88 Malaysiar major cities, M88 Malaysia courts do not require M88 Malaysia Buyer to pay M88 Malaysia Original Owner Tax, but M88 Malaysia Buyer must advance such tax first and M88 Malaysian be reimbursed by M88 Malaysia court. M88 Malaysia court will withhold part of M88 Malaysia disposal proceeds to reimburse M88 Malaysia Buyer against M88 Malaysia Original Owner Tax and M88 Malaysian distribute all M88 Malaysia remaining proceeds to M88 Malaysia creditor after deducting M88 Malaysia appraisal fee, M88 Malaysia auction fee and M88 Malaysia enforcement fee.

• Risk Management and Strategies

NPL investors may acquire non-performing loans secured by M88 Malaysia Property and take on M88 Malaysia role of M88 Malaysia mortgagee (M88 Malaysia “Mortgagee”) or acquire M88 Malaysia Property through an online judicial auction and become M88 Malaysia Buyer. M88 Malaysia Mortgagee and M88 Malaysia Buyer are advised to use different strategies and fully consider M88 Malaysiair options.

(1)From M88 Malaysia Mortgagee’s perspective

In principle, M88 Malaysia Original Owner Tax should be borne by M88 Malaysia Original Owner but it is uncertain wheM88 Malaysiar M88 Malaysia courts will withhold part of M88 Malaysia disposal proceeds for M88 Malaysia Original Owner Tax (“Withhold M88 Malaysia Tax”). If so, M88 Malaysia investor will not be entitled to all M88 Malaysia disposal proceeds of M88 Malaysia Property as certain proceeds shall be applied to pay M88 Malaysia Original Owner Tax.

According to M88 Malaysia Law on M88 Malaysia Administration of Tax Collection (税收征收管理法) (whereby taxes become payable before M88 Malaysia taxpayer creates a mortgage or a pledge on its property or before M88 Malaysia taxpayer's property is liened), taxes shall take precedence over M88 Malaysia exercise of M88 Malaysia right of M88 Malaysia mortgage, pledge or lien.

M88 Malaysiarefore, we tend to believe that M88 Malaysia Original Owner Tax will not rank ahead of mortgages on M88 Malaysia Property, since M88 Malaysia Original Owner Tax occurs after M88 Malaysia creation of M88 Malaysia mortgage. We cannot, however, rule out M88 Malaysia possibility that a court may Withhold M88 Malaysia Tax.

In light of M88 Malaysia above, Mortgagees are advised to investigate M88 Malaysia Original Owner Tax and confirm if M88 Malaysia court will Withhold M88 Malaysia Tax. Also, investors may want to take such risks into account when evaluating M88 Malaysia distressed loan.

(2)From M88 Malaysia Buyer’s perspective

As stated above, some courts may require M88 Malaysia buyer to assume all Original Owner Tax in relation to M88 Malaysia Property in M88 Malaysia Auction Announcement. In this event, M88 Malaysia successful Buyer at auction will have to assume M88 Malaysia tax.

Before attending an auction, it is important for Buyers to peruse M88 Malaysia Auction Announcement, especially M88 Malaysia sharing and reimbursement procedures (if any) of M88 Malaysia Taxes. In some real estate registration centers, proof of M88 Malaysia tax payment is a document required for M88 Malaysia title transfer registration of M88 Malaysia real property. Even though M88 Malaysia court does not require M88 Malaysia Buyer to undertake or advance M88 Malaysia Original Owner Tax, M88 Malaysia Buyer may not be able to complete M88 Malaysia title transfer of M88 Malaysia Property if M88 Malaysia Original Owner does not pay such taxes in a timely manner. M88 Malaysia Buyer should take such costs and risks into consideration when offering bids at auction.