Newsletter
RESTRICTIONS ON TRANSFER OF LOANS TO AMCS
In a past interpretation dated 2 May 2001, the Ministry of Finance clearly defined the scope of non-performing loans (NPLs) that a financial institution may sell to an asset management company (AMC) as "all overdue loans and other credit extension that are required to be reported to the competent authority, including the re-scheduling loans which are qualified to exempt from such reporting obligations." But it re-mained unclear whether, in addition to purchas-ing NPLs, an AMC whose articles of incorpora-tion include the wording "may conduct other business not prohibited or restricted by law", may also purchase the performing loans from a financial institution's.
To address this issue, on 9 December 2004 Lee and Li requested a legal interpretation from the Financial Supervisory Commission (FSC). The FSC responded with an interpretation dated 31 December 2004, in which it stated that a finan-cial institution cannot transfer its performing loans to an AMC.
The reasons were as follows: even if the lending agreements between a financial institution and its clients contain no explicit provisions prohibiting the transfer of the loans thereunder, considering the confidentiality obligations of the financial institutions under Paragraph 2, Article 48 of the ROC Banking Act, an implicit agreement pro-hibiting the transfer of performing loans should be deemed to have been entered into by the par-ties as stipulated in Item 2, Paragraph 1, Article 294 the Civil Code. Therefore, unless (i) the express consent of the debtor is obtained, or (ii) the loans are transferred to another financial in-stitution pursuant to the Act Governing Merger of Financial Institutions or the Financial Asset Securitization Act, or (iii) the transfer are made under other special circumstances such as refi-nancing, a financial institution may not transfer performing loans at will without violating the principle of good faith.
In view of the above, in future financial institu-tions may not transfer performing loans to AMCs at will. Otherwise, not only may such transfers be held to be void on the grounds of contravening Item 2, Paragraph 1, Article 294 of the Civil Code, but the financial institution may also face penalties for breaching its duty of confidentiality under Paragraph 2, Article 48 of the ROC Banking Act.