1
Q
What is a Loan Transfer?
A
The transference of one Lender’s rights and obligations regarding a Loan to another.
Henceforth, these will be known as the Transferor and Transferee.
2
Q
Why would a Lender transfer its Rights and Obligations under a Loan?
A
- To decrease exposure the Borrower’s insolvency risk.
- To manage portfolio risk, i.e. decrease and increase exposure to segments of the market accordingly.
- To realize immediate revenue, i.e. increase liquidity.
- To optimize the balance sheet vis-à-vis capital adequacy requirements, so as to make as many Loans as possible.
- To provide security for borrowing of its own.
Textbook – P. 693-694.
As unlikely as this is, if a loan becomes illegal to maintain, a Lender may have no choice but to transfer it to a legally-viable party.
3
Q
If a Lender is troubled by a Borrower’s insolvency risk post-execution, how does a Loan Transfer resolve the problem?
A
It allows it the Lender to either:
- Get out while it is ahead of the Borrower’s insolvency; or
- Cut its losses, the size of which will correlate with the anticipated loss on recovery, and expend its energy more productively elsewhere.
The ability to transfer insolvency risk as described enables Lenders to make Borrowers riskier loans, knowing they have viable, albethey unideal, options.
4
Q
How can the Revenue recieved pursuant to a Loan Transfer be used productively by a Lender?
A
The Lender may use it to either:
- Issue a new loan, one which could prove more profitable than the last, especially if it has not advanced funding;
- Repay a proximate liability;
- Bolster quarterly or annual performance.
Transferring an undrawn loan to issue a new one is especially opportune because very little has been lost, meaning that the relative margin for gain is much larger.
5
Q
Why would a Lender want to purchase another Lender’s Rights and Obligations under a Loan?
A
- To gain exposure to a particular sector(s) or Borrower(s), and thereby build one’s expertise and network.
- Assuming a low credit risk, to gain exposure to a reliable yield.
- To realize a profit.
- To acquire the right to set-off against the Borrower.
Regarding the third point, a profit could be realized on the purchase of distressed debt, e.g. buying a Loan at 20p p/£ and recovering 30p p/£. A purchaser could also capitalize on arbitrage, e.g. buying a Loan for X and selling it for Y where Y > X.
Textbook –
6
Q
Why would a Borrower wish to Limit the Transferability of a Loan?
A
- Minimize the risk of Lender-side nonperformance.
- Preserve its set-off rights against the Transferor with respect to present and future claims,* both during solvency and insolvency.**
- Preserve its working relationship with the Transferor, who may be more amenable to waivers or aid during hardships, and whose ‘skin in the game’ keeps it invested.
- Avoid the risk of overlooking notice of Assignment and/or accidentally paying the Transferor and liable therefore.***
- Avoid the added complexity of going through the Transferor to deal with the Transferee, e.g. to claim a refund.****
- Avoid legally and commercially associating with certain parties, e.g. competitors or Vultures, especially unkowingly.
Textbook – P. 722-723; *Business Computes v Anglo-African Leasing [1977] 1 WLR 578; **IA 1986 – §323 and Rules 2.85/4.90; ***LPA 1925 – §136 and William Brandt’s Sons v Dunlop Rubber [1905] AC 454; ****Pan Ocean Shipping v Creditcorp [1994] 1 WLR 161.
The second point is made worse if the Borrower has no pre-existing equities or set-off rights against the Transferee, as, depending on the means of Transfer, it may have no way or desire to create new ones. The third point is a defect of all Transfers, as even Equitable Assignment or Sub-participation may place undue influence on the Transferor to behave adversely to the Borrower’s interests. The sixth point is most relevant to undrawn term loans or revolving loans.
7
Q
What are the Four Means of Loan Transfer?
A
- Novation.
- Assignment.
- Transfer by Way of Trust.
- Sub-Participation.
8
Q
Does Novation present Conflict of Laws issues?
A
No. Novation is characterized as a contractual matter, and will therefore be governed with reference to the contractually-specified jurisdiction(s).
Textbook – P. 696-697.
The relevant governing laws will be ascertained through either Rome I or the Contracts (Applicable Law) Act 1990.
9
Q
Does Assignment present Conflict of Laws issues?
A
Moderatly. While Assignment is governed with reference to the contractually-specified jurisdiction(s),* issues may arise regarding non-contractual means of Assignment, e.g. Trusts.
Textbook – P. 698-707; *Rome I – Art. 14.
10
Q
How is Assignment Characterized?
A
As a contractual voluntary assignment of debt, namely because its terms and effects are of such a nature.
Raiffeisen Zentralbank Österreich v Five Star General Trading [2001] EWCA Civ 68 at [26-43].
It is for this reason that Assignment falls within the remit of Art. 14.
11
Q
What are the Non-Contractual Means of Voluntarily Assigning a Debt?
A
- Unnotified Equitable Assignment; and
- Declaration of Trust.
Textbook – P. 703.
12
Q
Why do the Non-Contractual Means of Voluntarily Assigning a Debt escape Article 14?
A
They do not directly affect the Borrower’s contractual obligations or its relationship with the Transferor; it is only the latter’s benefit therein which is affected.
Giuiliano-Lagarde Report; Raiffeisen Zentralbank Österreich v Five Star General Trading [2001] EWCA Civ 68.
13
Q
What is the Lex Situs?
A
The lex situs is the Borrower’s residence, which is hopefully specified in the contract. If not, it may hinge on where it has assets or has submitted to jurisdiction.
Société Eram v Hong Kong and Shanghai Banking [2003] UKHL 30 at [73].
14
Q
Assuming a Non-Contractual Assignment, how would a Conflict of Laws be resolved?
A
Lex situs will be used to determine both jurisdiction*, which will be used to construe the agreement, and payment priority.**
Textbook – P. 705; *Re United Railways [1960] Ch 52 at [84-88]; **Raiffeisen Zentralbank v Five Star [2001] EWCA Civ 68 at [36-37].
15
Q
In light of the Banker’s Duty of Confidentiality to its Borrowers, what must it refrain from doing during a Loan Transfer?
A
It ought not make disclosures concerning its customers, without their consent, to the prospective Transferee.
Tournier v National Provincial and Union Bank of England [1924] 1 KB 461.
If such disclosures are necessary for the transaction to proceed, then it will likely fall through unless the bank can procure its customer’s consent. Naturally, this duty does not extend to non-banks.
16
Q
What is the Risk of Re-Characterization?
A
The risk that a Transfer will be recast as a different transaction, thus changing the parties’ entitlements.
Textbook – P. 739.
For example, an outright sale may be recast as the creation of a security interest.
17
Q
On what Grounds may the Characterization of a Transaction be challenged?
A
There are two Grounds, namely that the transaction is either:
- A sham;* or
- Has the legal effect of an alternative transaction.**
Textbook – P. 740-741; *Orion Finance v Crown Financial Management [1996] BCC 621; **North Central Wagon Finance v Brailsford [1962] 1 WLR 1288.
Allegaitons of a transaction amounting to a sham are quite rare, considering the gravity of the allegation. The ‘alternative transaction’ that will most often be juxtaposed is the creation of a security interest in support of financing.
18
Q
Regarding the question of Recharacterization, what are the Essential Differences between a Sale and a Secured Loan?
A
- A Sale does not entitle the Seller to an Equity of Redemption, unlike a Secured Loan.
- A Sale does not compel the Purchaser to account to the Vendor for any profits made on the resale of the subject matter, unlike a Secured Loan (by way of mortgage).
- A Sale does not entitle the Purchaser to recover from the Vendor any losses made on the resale of the subject matter, unlike a Secured Loan (by way of mortgage)
Lectures Notes; Re George Inglefield [1933] Ch 1.
19
Q
What is the Equity of Redemption?
A
The right to regain unencumbered title in an asset once the relevant secured obligation has been discharged.
Re George Inglefield [1933] 1 Ch 1, at [28];
If a transaction is by way of outright sale, no Equity of Redemption should obtain. Hence, if there is such a right, the transaction’s character may be challenged. Likewise, if the commercial purpose or economic effect of a transaction predominantly resembles an Equity of Redemption, it may provide further backing for a re-characterization, but such considerations are subordinate to parties’ intentions.*
*Brumark [2001] UKPC 28, Smith v Bridgent CBC [2001] UKHL 58, and National Westminster Bank v Spectrum Plus [2005] UKHL 41.
20
Q
To what extent may the Characterization of an Assignment, or indeed any other form of Transfer, be challenged as a Security Interest in support of Finance?
A
Limitedly. While evidencing an Equity of Redemption or analyzing the transaction’s commercial and economic nature can work, the Courts are generally reluctant to re-characterize a Loan Transfer.*
Textbook – P. 741-; *Re George Inglefield [1933] 1 Ch 1 at [28], Lloyds & Scottish Finance v Cyril Lord Carpet Sales [1992] BCL 609, and Welsh Development Agency v Export Finance [1992] BCLC 148.
21
Q
Why have the Courts historically been reluctant to re-characterize a Loan Transfer as anything but?
A
- Freedom of contract and giving effect to parties’ intentions.*
- Finance alone is immaterial; how it was provided and on what terms is what is relevant.**
- Proprietary interest in the way of quasi-security does not automatically recharacterize a Transfer.***
- Recourse against the Transferor in case of the Borrower’s default does not automatically recharacterize a Transfer.****
- Practically straying from a transaction’s strict requirements does not imperil its nature as a sale.*****
Textbook – P. 743-744; *Welsh Development Agency v Export Finance [1992] BCLC 148; **/**** Re George Inglefield [1933] 1 Ch 1 at [27]; ***McEntire v Crossley Bros [1895] AC 457; *****
Regarding the fifth, this is especially true considering that debt purchase transactions often use similar terms and concepts to debt finance transactions.* A right to repurchase a debt from the Transferee does not equate to an Equity of Redemption.**
*Old Discount v Cohen [1938] 3 All ER 281; **Manchester v North Central Wagon (1888) 13 App Cas 544;
22
Q
What are the Two Fundamental Principles of Assignment?
A
- The Borrower’s interest ought not be harmed but for an Assignment; and
- The Transferee ought not inheret a wider set of rights against the Borrower than had the Transferor.
Textbook – P. 710; Dawson v Great Northern & City Railway Co. [1905] 1 KB 260.
23
Q
Using Assignment, can the Transferor Transfer Unexercised Acrrued Rights?
A
Yes. Assuming a full Assignment, the Assignee should be able to exercise all those rights the Assignor held against the Borrower. This does not extend to wholly personal rights, however.
Technotrade v Larkstore [2006] EWCA Civ 1079;
Personal rights include indemnities, capital adequacy levies, and the like.
24
Q
What are the Two Forms of Assignment?
A
- Absolute Assignment (AA).
- Equitable Assignment (EA).
Textbook – P. 709-714; (Absolute) Law of Property Act 1925 – §136.
25
Does Assignment Insulate the Transferee against the Transferor's Insolvency Risk?
**Yes**,\* but under EA:
* **Notice must be give to the Borrower** for this to stand, in order for it to obtain a good discharge; and
* There remains the risk that the **Transferor may collect and disipate the funds in an untraceable fashion**.
\**Gorringe v Irwell India Rubber* (1887) 34 Ch D 128
Assigned book debts must be registered lest they be rendered as void against a trustee in bankruptcy.\* If an Assignment is by of security, rather than by way of sale, then it must be registered (very rare).\*\*
\*IA 1986 -- §344; \*\*CA 2006 -- §859A.
26
What is Absolute Assignment?
The **assignment** of the **legal rights to a debt**, **the legal and other remedies thereto**, and the **ability to discharge** it.
## Footnote
Law of Property Act 1925 -- §136.
27
What are the Elements of Absolute Assignment?
The Assignment must be:
* **In writing and signed** by the Transferor;
* **Accompanied by notice to the Borrower**;
* **Absolute**, i.e. not subject to conditions;
* **Of the entire debt**, **which** **must exist at the material time**.
Law of Property Act 1925 -- §136.
There are no rules on how an Assignment must be written or notice thereof given.
*Re Westerton, Public Trustee v Gray* [1919] 2 Ch 104.
28
What is the Legal Effect of Absolute Assignment?
The **Transferee** becomes the **legal owner** of the debt and **may exercise the rights associated** therewith. The **Transferor keeps its obligations** to the Borrower.
## Footnote
Lecture Notes.
29
What are the Risks of poorly drafting a Notice of Assignment for a Borrower?
It may be **ill-construed as a revocable authority to pay a third party**,\* or **invalid if so inaccurate that it disables the Borrower from** paying the correct party and **receiving a good discharge**.\*\*
## Footnote
\**James Talcott v John Lewis & North American Dress* [1940] 3 All ER 592; \*\**WF Harrison & Co v Burke* [1956] 2 All ER 169 and *Van Lynn Developments v Pelias Construction* [1969] 1 QB 607.
30
What is Equitable Assignment?
The **assignment** of the **beneficial interest in a debt.**
## Footnote
Textbook -- P. 711-712.
31
Procedurally, how does Equitable Assignment differ from Absolute Assignment?
Equitable Assignment need not:
* **Be in writing**, unless a subsisting equitable interest is being assigned.\*
* **Pertain to the whole of the debt**.
* **Notify the Borrower**.
* **Be supported by consideration**.\*\*
*Tailby v The Official Receiver* (1888) 13 App Cas 523 with the exception of LPA 1925 -- §53(1)(c); \*\*/ \*\*\*
An intention to assign must nevertheless be clear.\*\*\*
32
What is the Legal Effect of Equitable Assignment?
The **Transferee** becomes the **beneficiary of a trust**, where the **Transferor**, **as trustee**, holds the **rights in the assigned debt** in favor of the Transferee.
## Footnote
Lecture Notes.
33
Can the Transferee Claim in its own name against the Borrower?
**Not under EA**. It must either:
* **Petition the Transferor**;
* **Name the Transferor as a co-defendant** with the Borrower **if it does not comply**; or
* **Obtain an irrevocable Power of Attorney**, held on trust, at Assignment.
Having the Power held on trust allows it to survive the Transferor's insolvency. Notice is necessary for suit,\* but not for creation, thus it may be witheld judiciously.
Power of Attorney Act 1971 -- §4(1)(b); \*Public Trustee v Gray [1919] 2 Ch 104.
34
Can Obligations be Transferred using Assignment?
**No**.
## Footnote
*Tolhurst v Associated Portland Cement Manufacturers* [1902] 2 KB 660.
35
What are the Advantages of Equitable Assignment?
* **Permits debt partitioning**, which allows the Lender to obtain a **better end-price** because of each tranche's lower risk.
* **Permits the assignment of future property**.
* **Avoids notifying the Borrower**, allowing the Transferor to **maintain its exclusive relationship** it.
* **Avoids stamp duty**, which would be **1% *ad valorem*** of any **written** Assignment over £30,000.
Lecture Notes.
36
When will Valuable Consideration be necessary to support and Equitable Assignment?
When the Assignment concerns either:
* A **future property**, which must be:\*
* Clearly identifiable;
* Form a part of the Assignemnt; and
* Transfer beneficial ownership immediately and without condition.\*\*
* An **equitable charge**.\*\*\*
Textbook -- P. 713; \**Tailby v The Official Receiver* (1888) 13 App Cas 523 at [543] and *Holroyd v Marshall* (1862) 10 HLC 191; \*\**Re Lind* [1915] 2 Ch 345 at [359]-[360].; \*\*\**Re Earl of Lucan, Hardinge v Cobden* (1890) 45 ChD 470.
37
What is the Danger of leaving an Assignment Unstamped?
An unstamped document **cannot be used as evidence in court**. As such, Lenders will refrain from stamping an Assignment until if ever it is necessary.
Lecture Notes.
Under §15 of the Stamp Act 1891, this strategy may incur additional costs in the form of unpaid interest and unpaid amounts on the duty.
38
How do Lenders go about Mitigating Stamp Duties?
* **Execute the document outside the UK and in a jurisdiction which does not have a stamp duty**, e.g. Jersey.
* If needed for court, bring it into the UK and have it stamped within 30 days.
* **Do not pay the duty** and face the penalty if it is needed for court.
* **Do not use a written document at all**.
Lecture Notes.
39
Whether Absolute or Equitable, what are the Limitations of Assignment?
* **Cannot transfer obligations**.\*
* **May be contracutally restricted**.
* **Losses** that the Transferor **would not have otherwise suffered cannot be claimed** by the Transferee.\*\*
* Absent clear drafting, **rights personal to the Transferor** **cannot be transferred**.
Textbook -- P. 720-722; \**Technotrade v Larkstore* [2006] EWCA Civ 1079; \*\**Dawson v Great Northern* [1905] 1 KB 260.
The first is only an issue if there remain oustanding obligations. Regarding the fourth, the Transferee's entitlement to payment will mirror what the Transferor would have otherwise received.
40
What is Novation?
An agreement where the **Lender and Borrower discharge their current contractual rights and obligations towards each other**, **and identically transfer them to a new Lender** under a new contract.
## Footnote
Textbook -- P. 715.
In other words, the Transferor and Borrower terminate their contract and substitute it with a new one between the Transferee and the Borrower. Therefore, consideration is necessary.
41
What happens to the Securities or Guarantees under Novation?
**They are extinguished**, as any securities and guarantees would have attached to the obligations that were terminated in a novation. However, **if originally held on trust**, **they survive novation**.
## Footnote
Lecture Notes.
42
In a Syndicated Facility, how is the Borrower's Consent to Transfer ascertained?
Under LMA Documentation, i.e. **Cl. 24.1**, the Borrower’s **entry into the contract signifies a standing offer to the whole world** that any party can accept by following the procedure in **Cl. 24.6**.
## Footnote
Lecture Notes; *Carlill v Carbolic Smoke Ball* [1892] EWCA Civ 1 applied in *The Argo Fund v Essar Steel* [2005] EWHC 600 (Comm) and *Habibsons Bank v Standard Chartered Bank (Hong Kong)* [2010] EWCA Civ 1335.
This is an offer to enter into a Loan Transfer, specifically by way of Novation or Assignment.
43
Is Consideration necessary for the Novation or Assignment of a Syndicated Loan under LMA Documentation?
**No**.
## Footnote
Lectures Notes; *Tweddle v Atkinson* (1861) 1 B&S 393 at [399], followed by *Re Wyvern Developments* [1974] 1 WLR 1097 at [1103].
*"No action can be maintained upon a promise, unless the consideration moves from the party to whom it is made."*
44
Is the Agent Bank, in executing a Transfer Certificate, an Agent of either the Transferor the Transferee?
**No**. The Agent Bank is **agent to the Syndicate alone**.
## Footnote
Lecture Notes; *Habibsons Bank v Standard Chartered Bank (Hong Kong)* [2010] EWCA Civ 1335.
Therefore, if either the Transferor or the Transferee are Syndicate members, it will owe agent duties to them.
45
What are the Advantages and Disadvantages of Novation as a method of Loan Transfer?
* **A:** **Can transfer obligations** and therefore **achieve a clean break**.
* **A: Avoids stamp duty.**
* **D:** **Most damaging** method of transfer for the **Transferor-Borrower relationship**.
Lecture Notes.
46
What is Variation?
**A modification of the terms of a contract**.
## Footnote
Lecture Notes; *Scarf v Jardine* (1882) 7 App Cas 345 at [351]-[352].
47
How is Variation distinguished from Novation?
**With reference to the parties' intentions**, as may be gathered from the surrounding circumstances and the desired outcome.
## Footnote
Lecture Notes; *Morris v Baron* [1918] AC 1.
The question is whether the parties intend to terminate the old contract and substitute it with completely new self-sustained agreement, or whether they just intend to it.\* Adding a new party to an agreement does not necessarily constitue a novation.\*\*
\*\**Morris v Baron* [1918] AC 1 at [19] and *British and Benningtons v North Western Cachar Tea* [1923] AC 48 at [62]; \*\**Trustees of Saunders v Ralph* [1993] 2 EGLR 1 at [3]-[4].
48
What are the Advantages of Variation as opposed to Novation?
**Securities and guarantees do not terminate** upon Variation, as they do in Novation, and **no new taxes are imposed** as no new loan contract has been formed.
## Footnote
Lecture Notes.
Making out the securities and the Guarantor's Promise to a Trustee fully resolves this problem.
E.g: *British Energy Power & Trading v Credit Suisse* [2008] EWCA Civ 53.
49
Why might a Lender find Novation to be a more favorable means of Transfer than Variation?
**It permits the transfer of outstanding obligations**.
## Footnote
Lecture Notes.
Novation, relative to Variation, also does not come with any additional procedural costs, as the Borrower must still be informed and consenting.
50
What are the Two Forms of Sub-Participation?
* **Funded Participation** (FP), wherein the Grantor agrees to transfer to the Grantee its proceeds under the facaility in exchange for a sum and on the condition that the Borrower's default will not entitle the Grantee to accelerate its debt.
* **Risk Participation** (RP), wherein the Grantee agrees to give the Grantor an indemnity or guarantee of the Borrower's obligations to it for a fee, usually a premium and the equivalent of any payments received from the Borrower's insolvency.
Textbook -- P. 718.
51
Originally, what was the Purpose of English-Style Sub-Participation?
To **economically simulate a transfer of rights and obligations** in a way which:
* **Circumvents orthodox transfer restrictions**;
* **Satisfies capital adequacy requirements**; and
* **Maintains contractual privity** between the Grantor and Borrower.
Lecture Notes, G. Penn, *Promoting Liquidity in the Secondary Market: Is Sub-Participation still Fit for Purpose?*.
52
Where does a Funded Participation leave the Grantor and Grantee?
The Grantee **undertakes the risk and reward of the Borrower's future performance**, and the Grantor **recoups its outstanding debt** whilst also **executing** **a**'**significant risk transfer**'.
## Footnote
Textbook -- P. 718.
53
Why is a 'Significant Risk Transfer' valuable in and of itself?
Pursuant to capital adequacy requirements, **it creates more room** on the Grantor's balance sheet **to originate new loans**.
## Footnote
Lecture Notes.
The term derives from the EU Capital Requirements Regulation.
54
Where does a Risk Participation leave the Grantor and Grantee?
The Grantee undertakes the **all the risk** and **some of the reward** of the **Borrower's future performance**, and the Grantor **executes a**'**significant risk transfer**'.
## Footnote
Textbook -- P. 718.
Given its unsecured status, the Grantee should draft the agreement so that its obligation ceases upon the Grantor’s insolvency.
55
From a Capital Adequacy Standpoint, which between Funded and Risk Participation is more effective, and why?
**FP**, since the Grantor **receives money up-front**; under **RP**, it runs the **risk of the Grantee not paying**.
## Footnote
Lecture Notes.
56
Can a Debt be Partitioned using Sub-Participation?
**Yes**.
## Footnote
Lecture Notes.
57
When does the Grantor's obligation to pay the Grantee activate?
**When the Borrower pays the Grantor**. With respect to payment, Sub-Participation **functions as a mirror** of the underlying loan agreement.
## Footnote
Lecture Notes; *Adolfo Altman v Australia and New Zealand Banking Group* [2002] EWHC 2488.
Payment therefore derives from the Grantor's own funds, and not receivables from the Borrower whose interest therein is either held on trust or assigned for the Grantee. Precisely what entitles the Grantee to payment should be painstakingly outlined and qualified in the contract.
58
Can a Grantee itself Transfer its interest in a Sub-Participation agreement?
**Yes**. It can do so either by way of **Sub-Participation**\* or by way of **Novation or Assignmen**t.\*\*
## Footnote
\**Socimer International Bank v Standard Bank London (No 2)* [2006] EWHC 718 at [63]; \*\**Banque Financiere v Westgate Insurance* [1990] 1 QB 665 at [782].
59
Under Sub-Participation, whom do the Rights against the Borrower vest in?
**The Grantor**. Principally, Sub-Participation is a contractual arrangement between it and the Grantee that does not impact the legal or commercial relationship bewteen it and the Borrower.
## Footnote
Textook -- P. 718-719.
The emergence of Elevation and Voting provisions has therefore radically changed the nature of Sub-Participation.
60
Why may the Granting of Voting Rights in a Sub-Participation prove Problematic for the Grantor?
It **legally cedes control of decision-making** in the underlying facility to the Grantee, which has the **commercial effect** of giving the Grantee **indirect contractual privity** therein, thus **potentially harming the Grantor-Borrower relationship**.
## Footnote
Lecture Notes; LMA Master Funded Participation Agreement -- Cl. 6.2(b).
Contemplation of multiple Grantees and voting rights is likewise given in Cl. 6.2(b).
61
Why may the Granting of Voting Rights in a Sub-Participation prove Problematic for the Borrower?
**It renders commercially hollow its relationship with the Grantor**, a fact which it **may have no knowledge of**, leading it to unkowingly deal with a puppet.
## Footnote
Lecture Notes.
62
What is Double Credit Risk?
* To the **Grantee** in an **FP**, the risk of having **no claim against the Borrower** and an **unsecured claim**\* **against the Grantor**.
* To a **Grantor** in an **RP**, the risk arising from the **Borrower's and Grantee's credit risk**.
Lecture Notes; \**Lloyds TSB Bank v Clarke* [2002] UKPC 27, referred to in *Adolfo Altman v Australia and New Zealand Banking Group* [2002] EWHC 2488.
Because the Borrower's payments to the Grantor are the measure, not the source, of the Grantee's payments, it cannot claim trusteeship or unconscionability if the Grantee collapses.\*
63
Can the Grantee claim Trusteeship or Unconscionability if the Granteor collapses?
**No**,\* because the Grantor's payments from the Borrower are the **measure**,\*\* **not the source**, of the Grantee's payments.
## Footnote
Lecture Notes; \**Lloyds TSB Bank v Clarke* [2002] UKPC 27, referred to in *Adolfo Altman v Australia and New Zealand Banking Group* [2002] EWHC 2488; \*\*LMA Master Funded Participation Agreement -- Cl. 3.
64
How may a Grantee seek to mitigate its Double Credit Risk?
* Declaration of Trust over Loan.
* Grant of Security over Loans and Proceeds.
* Credit support, on entry or on trigger events.
* Bankruptcy-Remote SPV.
* Elevation.
* Participation under New York Law.
65
What is an Elevation Clause?
A provision which **entitles the Grantee to become a Lender in the underlying loan agreement**, as defined therein, on request.
## Footnote
Lecture Notes; LMA Master Funded Participation Agreement -- Cl. 19.1.
66
What happens if an Elevation Clause activates but a Restriction in the Underlying Facility operates to prohibit the Grantee from becoming a Lender?
The **relevant sum** will be **transferred to an unrestricted party**, who will itself **become a Lender**, and with which the **Grantee will enter into a new Sub-Participation agreement**, thus allowing it to **maintain its economic interest** and **evade the Grantor's insolvency risk**.
## Footnote
Lecture Notes, G. Penn, *Promoting Liquidity in the Secondary Market: Is Sub-Participation still Fit for Purpose?*.
Under LMA documentation, this mechanism is available on request and requires both parties to use, "commercialy reasonable efforts," to execute the elevation.\*
LMA Master Funded Participation Agreement -- Cl. 19.
67
What happens to the Sub-Participation Agreement after Elevation?
**It terminates**, and either a direct legal interest in the relevant portion of the underlying loan is created, or a new Sub-Participation is entered into with whomever the relevant sum was transfered to
## Footnote
Lecture Notes.
The relevant transitory documents are the Bilateral/Multilateral Termination and Transfer Agreements, respectively.
68
Why might the Elevation of a Grantee prove Problematic for the Grantor or its Syndicate?
Depending on its agenda, Grantee's **newfound privity could adversely affect** the Grantor's or Syndicate's **ability to make decisions** that advance their interests but not the Grantee's.
## Footnote
Lecture Notes.
Even if the Grantee's interest is but a minority, if it is over 33.3%, it may acquire a negative control, or 'blocking', position that would deadlock all future decision-making. Such an issue, though, can be addressed with a Yank-the-Bank clause.
69
Why might the Elevation of a Grantee prove Problematic for the Borrower?
Depending on its agenda, the Grantee could use its newfound privity to **make decisions which harm its interests**, or **accrue further interest in the facility** until it is in a position to do so.
## Footnote
Lecture Notes.
The threat of further accrual derives from Cl. 24.2(a)(i) and the ability of Lenders under the facility to freely transfer their interests therein to one another.
70
Why are Elevation Clauses problematic?
For Lenders, an Elevation Clause:
* **Defeats the purpose of Sub-Participation** by giving the Grantee legal rights and commercial influence over the Borrower and changing the Lenders of Record.
* **Implies the Lender is financially unreliable**.
* **May cause reputational and relational difficulties**, either with the Borrower or the Syndicate and other Lenders.
* For the Grantee, if **may be unwound by the Grantor's liquidator for transgressing §239 IA 1986**, i.e. preferential treatment of creditors.
For Borrowers, an Elevation Clause:
* **Empowers a third party with commercial and legal rights** over it.
* **Places it in a potentially dangerous position**, based on the third party's **intentions**, e.g. 'loan to own', or **aggressiveness**.
* **Dilutes the significance of its relatinonship with the Grantor**.
71
What are the Advantages and Disadvantages of Sub-Participation?
Advantages:
* **Mitigates** the Grantor's **exposure** to the Borrower's **credit risk**.
* **Allows capitalization on the arbitrage of interest rates payable**.
* **Avoids stamp duty** and other potential tax liabilities.
* **Does not require the Borrower's knowledge or consent**, allowing the Transferor to maintain an exclusive relationship.
* **Circumvents Restriction Clauses**, at least those that do not target it specifically.
* **Economically simulates a transfer of obligations**.
Disadvantages:
* **Double Credit Risk**.
* **May harm Transferor-Borrower relations**, depending on the provisions included.
* **May leave the Transferee with no power**, depending on the provisions included.
* **Imperfectly transfers the Borrower's credit risk**.
* **Imperfectly transfers assets for capital adequacy purposes**.
Lecture Notes; \*The Bank of England's Notices BSD/1/1989/1 and BSD/1992/3.
By way of example for the second advantage: if a Lender recieves a margin of 4% from the Borrower, but only pays out a margin of 3.5% to the Participant, he turns a profit.
72
Why is Sub-Participation imperfect for Capital Adequacy purposes?
A Borrower's default may prompt the Grantor's Syndicate to **roll over** its debt in lieu of a fresh loan, **therefore returning the Borrower's credit risk to the Grantor's balance sheet**.
Lecture Notes.
This may also result in the Grantee being entitled to full repayment, although this can be pre-emptively neutralized through good drafting.
73
What are the two Types of Transfer Restriction?
* **Absolute**, i.e. 'will not'.
* **Qualified**, i.e. 'will not without/unless/etc...'
Lecture Notes.
The qualification is typically that consent not be unreasonably withheld.
74
Generally speaking, what Rights does the Restriction Clause pertain to?
The rights to **demand performance** and to **payment**.
## Footnote
Textbook -- P. 724; *Linden Gardens Trust v Lenesta Sludge Disposals* [1994] AC 85.
Ultimately, which rights are pertained to will depend on the clause itself. For instance, a restriction may bar one or the other above, i.e. future performance but not the fruits thereof or vice versa.\*
*Floods of Queensferry* [1998] 1 WLR 1496
75
Generally speaking, what Dealings does the Restriction Clause pertain to?
**Whichever are so specified**, as determined by an **objective reading** of the clause and with respect to the **relevant context**.
## Footnote
Textbook -- P. 725.
An express reference to Assignment will restrict both its legal and equitable forms,\* but if context illuminates that the clause's purpose was to prohibit the transfer or disposal of any interest in the loan whatsoever, then it may be extended to, for example, a declaration of trust.\*\*
*\*Floods of Queensferry* [1998] 1 WLR 1496; \*\**Don King Productions v Warren* [2000] Ch 291.
76
If a Restriction Clause specifies that the Borrower ought not 'Unreasonably Withold Consent', what are the Legal Implications of such phrasing?
**Consent must be requested irrespective**, and if the Lender regards a denial as **unnecessary** or **unreasonable**, it **should apply to court for a declaration** of such **before proceeding** with a transfer despite it the cost of time.
## Footnote
Textbook -- P. 727; *Hendry v Chartsearch* [1998] CLC 1382.
Consent may be deemed to be given if the Borrower fails to respond within a specified period of time,\* i.e. Cl. 24.2(b). This period will begin once the Agent delivers the request according to Cl. 31.3(a).
*Barbados Trust v Bank of Zambia* [2007] EWCA Civ 148.
77
What is the Legal Effect of Assigning a Debt in breach of a Restriction Clause?
A Restriction Clause **invalidates the transfer of a chose in action**,\* thereby **denying the Transferee any rights** against the Borrower or in the debt. It may hold the **Transferor liable for damages**.\*\*
## Footnote
Lecture Notes; \**Linden Gardens Trust v Lenesta Sludge Disposals* [1994] 1 AC 85 at [108]; \*\**Helstan Securities v Hertfordshire CC* [1978] 3 All E.R. 262.
Lord Browne-Wilkinson's reasons: *“If the law were otherwise, it would defeat the legitimate commercial reason for inserting the contractual prohibition, viz, to ensure that the original parties to the contract are not brought into direct contractual relations with third parties.”*
78
May an Assignment constitute a violation of a Negative Pledge or Anti-Asset Disposal Clause?
**Yes**, **unless** the relevant contract permits the **disposal of business assets at a fair market price**.
## Footnote
Textbook -- P. 728-729.
The aggrieved party may also have recourse against the Transferee in the form of an injunction\* or the Tort of Inducing or Procuring a Breach of Contract; both are longshots, though.
*\*Swiss Bank Corpn v Lloyds Bank* [1979] Ch 548.
79
Can a Borrower assert its Right to Set-Off against the Transferee using debts owed to it by the Transferor?
**Yes**,\* but only claims which accrued **prior to Assignment and after notice thereof has been given** can be set-off.\*\*
## Footnote
Textbook -- P. 730; \**Roxburghe v Cox* (1881) 17 ChD 520 at [526]; \*\**Pan Ocean Shipping v Creditcorp* [1994] 1 WLR 161
From *Roxburghe*: *"An Assignee... takes subject to all rights of set-off and other defences which were available against the Assignor."* Therefore, if set-off cannot be asserted against the Transferor, neither can it be asserted against the Transferee. This applies to both AA and EA.\*
\**Lawrence v Hayes* [1927] 2 KB 111 at [120-121].
80
What is the Legal Right of Set-Off?
The **netting** of a **pre-existing**,\* **separate**, **and unconnected claim** **owed by the Transferor to the Borrower against the Borrower's current debt to the Transferee.**
## Footnote
Textbook -- P. 731; \**Christie v Taunton* [1893] 2 CH 175; *Business Computes v Anglo-African Leasing* [1977] 1 WLR 578.
If a Transferee, in its own name, sues the Borrower, the legal right of set-off automatically applies to any counter-claims the Borrower may have.
81
What is the Equitable Right of Set-Off?
The **netting of a cross-claim so closely connected** with the Transferee's claim against the Borrower that it **would be manifestly unjust to enforcement without taking into account the cross-claim**.
## Footnote
*Geldof Metaalconstructice NV v Smion Carves* [2010] EWCA Civ 667, following *The Nanfri* [1978] 2 QB 927.
In other words, what is necessary is a claim, "flowing out of and inseparably connected with the dealings and transactions which also give rise to the subject of the assignment.”
*The Government of Newfoundland v The Newfoundland Railway Co.* (1888) LR 13 App Cas 199 at [213].
82
Can a Borrower assert its Right to Set-Off against a Successive Transferee (ST), i.e. the Transferee of a Transferee?
Assuming the Borrower can claim set-off rights against the Transferee:
* If the ST was transferred to using **EA without notice**, the Borrower **will not be able to claim** set-off against it;\* but
* If the ST was transferred to using **AA**\*\* **or EA with** **notice**\*\*\*, the Borrower **will be able to claim** set-off against it.
Textbook -- P. 732. *\*Banco Central v Lingoss and Falce* [1980] 2 Lloyd's Rep 266; \*\**Read v Brown* (1888) 22 QBD 128 at [132]; \*\*\**William Brandt's Sons v Dunlop Rubber* [1905] AC 454, followed in *Three Rivers District Council v Bank of England* [1996] QB 292.
83
Under Assignment, how is Competition for Priority settled?
Where two interests are **equal in nature**, **timing determines priority**.\* However, a **later interest may displace an earlier** one if, when it was created, its **Holder had no notice of the earlier and the Borrower had notice of the later before it had notice of the earlier**.\*\*
## Footnote
Textbook -- P. 734; \**E Pfeiffer v Arbuthnot Factors* [1988] 1 WLR 150 at [161-163] and *Compaq Computer v Abercorn Group* [1991] BCC 484 at [497-502]; \*\**Dearle v Hall* (1828) 3 Russ 1.
The Rule applies to both AA\* and EA.\*\* The Rule may disapply if the earlier interest's Holder recieves payment and does not have notice of the later interest.\*\*\*
\*/\*\*\**E Pfeiffer* and *Compaq*; *\*\*Marchant v Morton Down* [1901] 2 KB 829.
84
Under the Rule in *Dearle v Hall*, what constitutes Notice?
* **Actual Notice:** **Has knowledge** of the matter.\*
* **Constructive Notice:** **Would have had knowledge** of the matter had it conducted reasonable enquiries.\*\*
Textbook -- P. 736; \*/\*\*LPA 1925 -- §199(1)(ii)(a) and *Lloyd v Banks* (1868) LR 3 Ch App 488.
85
What constitutes a Reasonable Enquiry for the purposes of Constructive Notice?
One which mimics **what would be done as a matter of prudence** by others in the protection of their interests.
## Footnote
Lecture Notes; *Bailey v Barnes* [1894] 1 Ch 25 at [35].
86
For the Rule in *Dearle v Hall*, what is the Material Time for Notice to be given?
**When value is given for interest**, i.e. the time of creation,\* or when a **Holder's Agent comes into actual or constructive knowledge** whilst acting in the same transaction.\*\*
## Footnote
\**Mutual Life Assurance Society v Langley* (1886) 32 ChD 460; \*\*LPA 1925 -- §199(1)(ii)(b).
87
To what extent does Constructive Notice apply to Assignments as Commercial Transactions?
**Fully**.\* This is becauase we have a, "recognized procedure for investigating the Mortgagor's title which the Creditor ignores at his peril."\*\*
## Footnote
Textbook -- P. 737; \**Spencer v Clarke* (1878) LR 9 ChD 137; \*\**Macmillan v Bishopsgate Investment Trust (No. 3)* [1995] 1 WLR 978
Therefore, the objections of unreasonableness and impracticability associated with the orthodox position of disapply constructive notice to commercial transactions do not stand.\*
\**Manchester Trust v Furness* [1895] 2 QB 539;
88
If a Security Interest has been Assigned, how may the making of Further Advances impact its priority?
If the Holder has **actual notice** of a subsequent security interest and **makes further advances**, it **will lose its priority with respect to those advances** unless the new Holder **agrees to maintain ranking** or the **advances were obliged** by the prior Holder's security interest.
## Footnote
Textbook -- P. 738-739; LPA 1925 -- §94.
89
If a Security Interest has been Assigned, how may the making of Further Advances impact its priority?
How may the Holder of an Assigned Security Interest protect said Interest whilst still making Further Advances?
It could **close its relevant account and open a new one** from which further advances and/or repayments can be made.\* The same analysis holds true for purchase interests.\*\*
## Footnote
Lecture Notes; \**Devaynes v Noble* (1816) LF CH 256; \*\**Siebe Gorman v Barclays Bank* [1979] 2 Lloyd's Rep 142.
90
What is a Proceeds Assignment?
A Declaration of **Trust over the proprietary interest in the right to the fruits of the loan**, i.e. its proceeds, and **only this interest**.
## Footnote
Lecture Notes.
The Transferor and Transferee are Trustee and Beneficiary, respectively.
91
In a Proceeds Assignment, if the Trustee goes into Liquidation, under §178 IA 1986, the Liquidator may regard the arrangement as Onerous Property, i.e. an Unprofitable Contract, and therefore not enforce it. How may this be circumvented?
**An irrevocable Power of Attorney**, **held on trust**, could be given to the Beneficiary. Alternatively, the Trustee could:
* **Retain a small part of the loan**; or
* **Commission a small fee for acting as a Collection Agent**;
Thereby give the Liquidator an asset, i.e. a reason, to enforce the debt. Alternatively,
Lecture Notes.
This arises from the Beneficiary having no rights of action against the Borrower to enforce the debt in its own name.
92
Mechanically, with respect to Payment, what is the difference between a Proceeds Assignment and a Funded Sub-Participation that allows the former to grant Insolvency protection against the Transferor?
Under the former, the Transferee **derives payment directly from the Borrower**, whereas under the latter, payment from the Borrower is **used only as a proxy** to measure how much the Grantor owes the Grantee.
## Footnote
Lecture Notes.
93
Are there any Formalities which must be observed with regard to Proceeds Assignment?
**No**, but there **must be a clear intention to hold funds on trust** for Transferee as soon as they reach the Transferor.
## Footnote
Lecture Notes.
94
Regarding Proceeds Assignment, how may a Clear Intention to hold funds on Trust be drafted or demonstrated?
The parties could agree to:
* **Deposit the relevant sums into a dedicated account**, so as to maintain traceability; but if so impossible,
* **Create a trust over a commingled account** into which the relevant sums are deposited, creating a proprietary interest of which the Transferee is beneficiary of all amounts outstanding.
Lecture Notes.
Regarding the second, to satisfy the Certainty of Subject Matter, the documentation should clearly identify all amounts outstanding and the Transferee's entitlement thereto. An irrevocable Power of Attorney may also be contemplated. This structure can also be used in FPs.
95
Generally speaking, how can the Finance Parties prevent a Liquidator from ever becoming a Trustee under any of their arrangements?
**By pre-appointing a Trustee** in the deed for if the intital Trustee becomes insolvent.
## Footnote
Lecture Notes.
96
What is a Transfer by way of Trust?
A **Declaration of Trust over the beneficial interest of a contract**, where the Transferor, as Trustee, remains legal owner and holds said beneficial interest in favor of the Transferee, as Beneficiary.
## Footnote
Lecture Notes; *Milroy v Lord* (1862) 4 De GF & J 264 and *Re Turcan* (1889) 40 ChD 5.
97
How is a Transfer by way of Trust different from a Transfer by way of Equitable Assignment?
Under an Equitable Assignment (assuming notice):
* The Borrower obtains a **good discharge by paying the Transferee**, whereas the **inverse is true** under a Benefits Trust.
* The **Transferee can bring an action against the Borrower**, whereas this is normally untrue under a Benefits Trust.
Lecture Notes.
98
Will a Failed Novation or Assignment result in the creation of a Constructive Trust in favor of the to-be Transferee?
**Very unlikely**. However, if there is **sufficient evidence to demonstrate an intention** between the parties to have the **relevant interests held on trust** for the Transferee, then perhaps.
## Footnote
Lecture Notes; *Don King v Warren* [2000] Ch 291.
99
Do Motivations matter when it comes to Transfers?
Only insofar as motivations, i.e. intentions, **inform the relevant context do they matter**.\* The court **will not void a Transfer on grounds of motivations alone**.\*\*
## Footnote
Lecture Notes; \**Don King v Warren* [2000] Ch 291; \*\**Fitzroy v Cave* [1905] 2 KB 364.
100
What is the phrase, "bank or financial institution," in Cl. 24.1 of the Multicurrency Term and Revolving Facilities Agreement taken to mean?
Any, "**legally recognised form of being** which carries on its business in accordance with the laws of its place of creation and **whose business concerns commercial finance**."
## Footnote
Lecture Notes; *Argo Fund* v *Essar Steel* [2006] EWCA Civ 241 at [51].
101
When can the Borrower refuse consent to a Transfer?
**When it is reasonable**, i.e. not so baseless that no reasonable Borrower would do the same.
## Footnote
Lecture Notes.
Naturally, if Black and White Lists are included in the contract, they will inform the determination of reasonableness.
102
In a Sub-Participation where Voting Rights are Granted, what happens if the Grantor does not follow the wishes of the Grantee?
Noncompliance may result in **liability to pay damages for breach of contract**, and **any unapproved changes may be non-binding** on the Sub-Participation agreement.
## Footnote
Lecture Notes.
For instance, if the Grantor, without approval, agrees to decrease the interest rate payable on the underlying facility, the Sub-Participation will nevertheless continue to mimic the original rate. However, if an unapproved changes renders impossible the operation of the derivative agreement, liability for immediate repayment of outstanding obligations and damages for additional losses, e.g. future interest, may await.
103
How may the Borrower go about limiting the Risk of Elevation?
It may **prohibit elevation** or **limit which EODs disapply transfer restrictions**.
## Footnote
Lecture Notes.
104
How does Elevation impact the Grantee's Double Credit Risk?
It either **eliminates the Grantee’s exposure** to the Grantor’s credit risk or **substitutes the Grantor with another whose credit risk is lower**.
## Footnote
Lecture Notes.
105
How may the Granting of a Trust over a Sub-Participated sum mitigate the Grantee's Double Credit Risk?
The Grantee may or would be able to:
* **Sue the Borrower**.
* **Unwind the Trust** and have the relevant sum transferred to it.
* **Have the Grantor act as its fiduciary**.
Lecture Notes.
Issues with the Liquidator in case of the Grantor's insolvency have been addressed in Cards 90 and 94. This method is, however, unadvisable. It would change the nature of Sub-Participation and encourage borrowers to extend their transfer restrictions accordingly, thus a key commercial objective of Sub-Participation.
106
How may a Borrower go about Limiting the sort of Entites to which its Debt can be Transferred to?
* **White List:** An extensive list of potential Transferees. Any outsiders require Borrower consent, but them being outsiders is not a reasonable excuse for refusal.
* **Black List:** An extensive list of prohibited Transferees. Descriptions ought be extremely thorough and specific, but broad as well.
* **Competitors:** A ban on transferring to competitors, however so defined.
* **Minimum Hold Obligations:** An agreement between the Lender and Borrower that the former promises to maintain an agreed percentage of the total commitment, therefore only prohibiting Novation. May fall away after the Availability Period or full drawdown.
* **Sub-Participation Regulations:** Full details of any proposed Sub-Participations prior to entry and/or prohibition on Elevation and Voting provisions.
107
How may a Vulture Fund or Distressed Debt Specialist be described in a Black List?
An entity that either solely **focuses on acquiring distressed assets in pursuit of a loan-to-own strategy** or principally or predominantly employs this strategy amongst others.
## Footnote
Lecture Notes, G. Penn, *Promoting Liquidity in the Secondary Market: Is Sub-Participation still Fit for Purpose?*.
108
In Restriction Clauses, how should the term 'Competitor' be defined?
**As widely as possible**, preferrably denoting **any entity whose primary business bears resemblance to the Borrower's or its Group**, thereby capturing as large a demographic as possible.
## Footnote
Lecture Notes.
'Resemblence' may be elaborated upon to denote commercial activities, markets, products, geographies, demographics, etc.
109
What is the true lesson to be learned from *Don King*?
Restriction clauses will be **read objectively and in light of the relevant context**, as informed by the **parties’ intentions**, to demarcate their application.
## Footnote
Lecture Notes.
Therefore, if a Restriction solely mentions Assignemtn, and there is no reason to conclude that it was intended to extend to the fruits or benefits of the loan, it should not catch Transfer by way of Trust.
110
With reference to *Don King* and the Construction of Restriction Clauses, what are the most important considerations with respect to Parties' Intentions?
Whether the Borrower intended to:
* **Perserve its set-off rights** against the Lender;
* **Permit the legal and equitable interests** in its debt to be **transferred**; and
* **Maintain awareness of who it would be dealing** with at all times.
Lecture Notes.
111
According to McKnight, what Elements should a comprehensive Restriction Clause include?
A prohibition on the:
* **Assignment** of rights under the contract or the fruits thereof;
* **Declaration of Trust**, or holding thereon, of the benefit of those rights or the fruits thereof; or
* **Creation of a security interest** against those rights or the fruits thereof.
McKnight -- *Contractual Restrictions on a Creditor’s Right to Alienate Debts* [2].
112
Will a Restriction on Assignment be taken to include both Absolute and Equitable Assignment?
**Yes**.
## Footnote
*Helstan Securities v Hertfordshire CC* [1978] 3 All E.R. 262; *Floods of Queensferry* [1998] 1 WLR 1496.
113
Will an Equitable Assignment in the interest of a Future Chose in Action, which later turns out to restrict Assignment, be valid?
**No**. An Assignment cannot bind onto a property and the rights therein, whether existing or future, if it is untransferable through Assignment.
## Footnote
McKnight -- *Contractual Restrictions on a Creditor’s Right to Alienate Debts* [8]-[9].
Legal Aspects of International Finance
flashcards
Decks in class (10)
# Cards
-
International Debt and Capital Markets28
-
Contract Law for International Finance33
-
Tort Law for International Finance18
-
LIBOR48
-
International Term Loan Agreements185
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Syndicated Lending140
-
Loan Transfers113
-
Securitization108
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Further Reading: The Global Financial Crisis26
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Further Reading: Securitization and the Global Financial Crisis28
