Syndicated Lending Flashcards
(140 cards)
1
Q
What is a Syndicate?
A
Gathered by an Arranger and headed by an Agent, a Syndicate is a group of Lenders that collectively lend to a Borrower.
Textbook, P. 452.
2
Q
What is Z’s Definition of a Syndicated Loan?
A
“A number of bilateral loans advanced on identical terms which are bound together by an embedded intercreditor agreement.”
Textbook, P. 454.
Z grounds his conception in the fact that Syndicates operate on an agreed-upon set of terms, namely those governing coordinated action, voting, creditor ranking, and securitiy ranking (amonst others), and how each of these terms emphasize, “the collective nature of a syndicated transaction.” This, however, can be juxtaposed with Lenders’ separate liability and separate rights against the Borrower.
3
Q
What is the Purpose of Syndicated Lending?
A
To enable the making of larger loans than would otherwise be possible.
Textbook, P. 451.
4
Q
What Difficulties does Syndication allow Individual Lenders to Overcome?
A
- Over-exposure to a single Borrower.
- Risk assessment and appetite.
- Capital adequacy considerations.
- Insufficient funding.
Textbook, P. 451.
5
Q
Why is Syndicated Lending more efficient than the Making of Several Bilateral Loans?
A
It obviates, “a great deal of unnecessary duplication associated with separate bilateral lending by each bank,” as well as simplifies the set of terms the Borrower must observe.
Textbook, P. 452.
6
Q
What is the Role of the Arranger (Lead Manager)?
A
To put together the transaction, i.e. to find willing Lenders and progress the facility to the contractual stage.
Textbook, P. 453.
7
Q
What are the Steps involved in Arranging a Syndicated Loan?
A
- Information Memorandum: Create a ‘prospectus’ on the Borrower, including financial and business details.
- Guage Interest: Seek out interested Lenders and ask for an ‘In Principle’ commitment.
- Drafting and Negotiation: Draft the contract, negotiate terms with the Borrower, bring it before the Syndicate for comments, and repeat until all parties are satisfied.
- Execution: Have all the parties sign the contract.
8
Q
What is the Information Memorandum (IM)?
A
Comprising a summary of what the Arranger regards as relevant, it is, “the basis upon which potential Lenders start their credit process,”
Textbook, P. 471.
9
Q
Is it Reasonable for a Lender to assume that an IM contains all relevant information pertaining to a Borrower or Facility?
A
No.
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland Plc. [2010] EWHC 1392 (Comm) at [92]-[93].
An IM should not be taken to contain, “everything that anyone might think relevant.”
10
Q
Is an Arranger Liable to the Borrower if it fails to gather a Syndicate?
A
Not necessarily. The Arranger’s performance obligation and liability thereof will depend upon whether it has promised reasonable/ best efforts or to underwrite.
11
Q
What is the Role of the Agent Bank?
A
To coordinate the facility, “once it has been formalized by the signing of documentation,” i.e. post-execution. Typically, it may also act as Security Agent/Trustee.
Textbook, P. 453.
This comes with the added benefits of maintaining a high status in the Syndicate and a strong relationship with the Borrower.
Lecture Notes.
12
Q
May there be Multiple Arrangers and Agent Banks?
A
Yes. Indeed, this is almost necessary for very large syndicated loans.
13
Q
Can a Member of a Syndicate transfer its Lending Obligations to another Bank?
A
Yes, either to another Member or to an outsider.
It is also possible for a bank to assume responsibility for the entire loan and sell off parts of it through secondary syndication.
14
Q
What if a Security Agent is based in a Jurisdiction which does not recognize Trusts?
A
A parallel debt clause may be used in lieu, wherein the Borrower acknowledges, “a separate and additional debt owed by it to the Security Agent.”
Textbook, P. 453.
This separate debt would exist in parallel to the debt owed under the facility, and would, “equal… the amount owed by the Borrower to the Lenders at any time during,” the facility. Awarding this security in favor of the Security Agent, as opposed to the Syndicate, allows for loan transfers without the need to release and re-establish security. This arrangement, however, exposes the Syndicate further to credit risk.
15
Q
Given the Separate Nature of Lenders’ Rights against the Borrower, can any One of them Unilaterally Accelerate its Loan?
A
No. Such a decision will, “usually require a decision… by the requisite majority of Lenders.”
Textbook, P. 455.
16
Q
How are Payments made to the Lenders in a Syndicate?
A
The Borrower will pay the Agent, who will, “distribute [the payment] on a pro rata basis amongst the Lenders.”
Textbook, P. 455. LMA Standard Form, Cl. 28.
This arrangement will be reflected in the facility’s payment clauses.
17
Q
What is a Sharing Clause?
A
One which requires a Lender who has recieved superfluous funds to return the surplus to the Agent so that it may amend the error.
Textbook, P. 455.
This provision applies exclusively to payments due under the facility, including set-off rights and enforcement of security, but not litigation or arbitration recoveries if the Syndicate declined the recipient Lender’s invitation to join proceedings earlier.
Azevedo v Importacao [2013] EWHC Civ 364, [2015] QB 1.
18
Q
What is the Commercial Purpose of a Sharing Clause?
A
To maintain pari passu treatment between creditors as it pertains to the distribution of payments.
Textbook, P. 455.
19
Q
Failing a Super-Majority, how may a Majority of Lenders force through an Amendment?
A
Using a Scheme of Arrangement, wherein a Lender(s) which owns ≥75% of the debt can make an amendment that binds all creditors, subject to court approval.
Companies Act 2006 – Part 26.
This mechanism can be used by non-English Borrowers provided that English law governs the facility.*
*Re Rodenstock [2011] EWHC 1104 (ch).
20
Q
What is a Yank-the-Bank (YTB) Clause?
A
One which entitles the Borrower to replace a Lender that blocks a waiver or amendement that requires unanimous approval and would otherwise pass.
Textbook, P. 458.
21
Q
What is a Snooze-You-Lose (SYL) Clause?
A
One which nullifies a Lender’s vote if it is not submitted before a specific date and time.
Textbook, P. 458.
22
Q
Can the Borrower, its Group, or Lenders connected to either be Barred from Voting, and if so, Why?
A
Yes, so as to better safeguard the Syndicate’s interest.
23
Q
Is it Mala Fide if a Lender votes in accordance with the Instructions of a Third Party?
A
No, but only if the Lender’s vote is in furtherance of a contractual obligation to the Third Party.
Textbook, P. 458; Carey Group Plc v AIB Group (UK) Plc [2011] EWHC567(Ch).
24
Q
On Voting, are Lenders Liable for the Accuracy of the Information or Explanations they exchange with one another?
A
Yes, but only insofar as a reasonable duty of care thereto obtains.
Textbook, P. 458; Torre Asset Funding Ltd v Royal Bank of Scotland Plc [2013] EWHC 2670 (Ch).
25
If a Loan Agreement comprises Multiple Facilities, what is the Benefit of Segregating Voting Rights along the lines of Facilities?
**Avoiding inter-creditor conflicts of interest.**
## Footnote
Textbook, P. 459; *Redwood Master Fund LTd. v TD Bank Europe Ltd.* [2002] EWHC 2703.
26
From whence does Voting Power arise in a Syndicated Loan?
The **inter-creditor agreement**, which **must stipulate** the **purpose**, **scope**, **rules**, and **thresholds** involved in voting.
## Footnote
Textbook, P. 459; *Hay v Swedish & Norwegian Ry Co.* (1889) TLR 460.
27
Generally speaking, are the Majority empowered to outright bind the Minority?
**Yes**, and **can do so in their own interets** if that the vote is not tainted.
## Footnote
Textbook, P. 459; *British America Nickel Corp Ltd. v MJ O'Brien Ltd.* [1927] AC 369.
28
Can a Lender enjoy a Special Advantage in a Vote?
**Yes**, but it is **only effective if disclosed**.
## Footnote
Textbook, P. 459; *British America Nickel Corp Ltd. v MJ O'Brien Ltd.* [1927] AC 369; *North-West Transportation Co. v Beaty* (1887) 12 App Cas 589.
29
Can an Inducement that is Openly and Equally Promised amount to Bribery or Oppression?
**Yes**, but **only** if the **effect** of the vote passing would **directly harm the minority**.
## Footnote
Textbook, P. 460; *Azevedo v Importacao* [2013] EWHC Civ 364, [2015] QB 1.
30
Can the Court intervene on Grounds of Unfairness or Opression more broadly?
**Yes**, but **only if** such action was both **deliberate** and **manifestly *mala fide***, which sets a very high standard of proof.
## Footnote
Textbook, P. 460; *Redwood Master Fund Ltd. v TD Bank Europe Ltd.* [2002] EWHC 2703.
Under *Redwood*, so long as the Majority is pursuing its own commercial interests, regardless of how discriminatory the side-effects, the court is unlikely to interefere. Coercion and intimidation, particularly when they are the sole or dominant function of an action, are however a textbook example of when it will grâce à *mala fide*.\*
*Assenagon Asset Management v Irish Bank Resolution Corp.* [2012] EWHC 2090, [2013] 1 All ER 495.
31
Is a Syndicate a Partnership for Legal Purposes?
**No**. Lenders **severally** **bear** their own **profits**, **losses**, and **liabilities**, and **can transfer their rights and obligations** to other entities, all of which contravene the law and spirit of partnership.
## Footnote
Textbook, P. 461-464; Partnership Act 1980.
This would be a further undesirable arrangement because it would undermine the capital adequacy advantages of syndicated lending by leading regulators to, "each lender to have a commitment equal to the size of the entire loan," and assess their balance sheets accordingly.
Lecture Notes.
32
Is each Lender in a Syndicate entitled to Accelerate the Loan under the appropriate circumstances?
**No**. **Cl. 23.13** specifies that the **Majority Lenders'** **assent** is required to accelerate.
## Footnote
Lecture Notes.
'Majority Lenders' is defined as those, "whose Commitments aggregate more than 66⅔ per cent of the Total Commitments," or it Total Commitments equate to zero, "aggregated more than 66⅔ per cent of the Total Commitments immediately prior to the reduction)."
LMA Standard Form, Section 1.
33
Is a Syndicate a Collective Investment Scheme?
**No**, as it is **exempt**.
## Footnote
See: Financial Services and Markets Act (Collective Investment Schemes) Order 2001 -- Para. 6 & 9.
34
What is the Mandate given by the Borrower to the Arranger?
An **agreement** to, "**assemble** and bring the **transaction to fruition**."
## Footnote
Textbook, P. 469.
Described in the mandate, or the term sheet accompanying it, will be the proposed transaction and its principal terms and tthe arranger's fees (amongst other things). Here, the Arranger will undertake to reasonably endeavor the transaction, thus creating a performance obligation, but the inclusion of either a MAC or Market Flex clause may allow it withdraw or amend the terms, respectively.
35
What is a Market Flex clause?
One which allows the **Arranger** to **amend the terms** of the agreement in the event of **adverse economic changes** which affect, "the financial markets and the **availability of finance** for the transaction."
## Footnote
Textbook, P. 470.
36
What is the Commercial Purpose of a Market Flex clause?
To enable the Arranger to, **if necessary**, "**sweeten the [deal]**, so as to make [it] more attractive to [Lenders]."
## Footnote
Textbook, P. 470.
Sweeting the deal usually entails making the financial terms more profitable for Lenders, but could extend to the inclusion of guarantees or security.
37
Are Market Flex clauses discretionary?
**Yes**. **Subject to drafting**, the Arranger has a, "**considerable** amount of discretion," as to **when it activates** and **to what extent** the deal needs to be sweetened.
## Footnote
Textbook, P. 470.
38
When do Market Flex clauses expire?
Once the parties have **executed the transaction**.
## Footnote
Textbook, P. 470.
39
How may the Borrower best protect itself against an Overzealous Exercise of the Market Flex clause?
By specifically defining the cirumstances wherein it can arise, as well as restricting the extent to which terms can be amended.
## Footnote
Textbook, P. 470-471.
Other means, e.g. mandatory consultation prior to amendment or termination where the Borrowe is dissatisfied with the deal, may prove ineffective if the Borrower cannot afford to walk away.
40
What are the Arranger's Legal Exposures?
A Claim by either the Borrower or Syndicate in:
* Breach of Contract.
* The Tort of Negligence.
* The Tort of Deciet.
* Fraudulent Misrepresentation.
* Negligent or Innocent Misrepresentation.
* Negligent Misstatement.
* Breach of Fiduciary Duty.
Textbook, S. 9.4.
41
Why would a Borrower Claim against the Arranger?
It may be **unhappy** with, "the **performance** of the tasks undertaken," particularly if a **syndicate fails to materialize**.
## Footnote
Textbook, P. 473.
So long as the mandate or term sheet were well-draft and the Arranger acted, "competently and exercised reasonable care and skill," the any such claims will likely fail.
42
Why would a Syndicate Claim against the Arranger?
The **end transaction** may unfold to be **riskier than bargained for**, especially in a way that leaves the Syndicate believing it was **ill-advised**.
## Footnote
Textbook, P. 473.
A Syndicate is the greatest threat to the Arranger because it is the most well-funded party in the transaction. Furthermore, it is an especially threatening force if the Borrower would otherwise provide poor recourse because it would become insolvent. Any claim would likely arise in tort, due to the lack of a contractual relationship pre-execution.
43
What is the Commercial Purpose of Claiming in the Tort of Negligence?
To, "**recover for pure economic loss**."
## Footnote
Textbook, P. 475; *Hedley Byrne & Co. Ltd. v Heller & Partners Ltd.* [1964] AC 465.
44
What are the Elements of the Tort of Negligence?
* **Existence** of a Duty of Care;
* **Scope** of the Duty of Care;
* **Breach** of the Duty of Care;
* **Reliance** upon the Duty of Care;
* **Causation** of Loss arising from the Breach;
* **Foreseeability** of Loss arising from the Breach.
Textbook, P. 475.
45
In Determining whether a Duty of Care is present, what is the Court attempting to do?
"To discover what could **reasonably be inferred from the defendant's conduct** against the background of all the circumstances of the case," both as a **matter of fact** and of **fairness** and **public policy**.
## Footnote
Textbook, P. 476; *HM Commissioners of Customs and Excise v Barclays Bank Plc.* [2006] UKHL 28.
46
As laid out in *Barclays Bank*, what are the Three Tests for determining the Existence of a Duty of Care?
* The Assumption of Responsibility Test.
* The Threefold Test.
* The Incremental Test.
*HM Commissioners of Customs and Excise v Barclays Bank Plc.* [2006] UKHL 28.
47
What is the Assumption of Responsibility Test?
A test of, "whether the defendant **voluntarily assumed responsibility** for what he **said** and **did** vis-à-vis the claimant, or is to be **treated by the law** as having done so."
## Footnote
Textbook, P. 477; *HM Commissioners of Customs and Excise v Barclays Bank Plc.* [2006] UKHL 28.
This test was championed in the cases of *Spring v Guardian Assurance Plc., Henderson v Merrett Syndicates Ltd., and White v Jones*. Lord Geoff based it off of Lord Devlin's speech in *Hedley Byrne*.
48
What constitutes Voluntary Assumption of Responsibility?
"A **conscious**, **considered**, **or deliberate decision** on the part of the defendant."
## Footnote
Textbook, P. 477 paraprhasing *HM Commissioners of Customs and Excise v Barclays Bank Plc.* [2006] UKHL 28 at [72].
49
For our Purposes, when does an Assumption of Responsibilty denote the Existence of a Duty of Care?
When the relationship it denotes **possesses the equivalent characteristics of a contract**, absent consideration, but this **should not be taken too literally**.\*
## Footnote
Textbook, P. 477; E.g: *Calvert v William Hill Credit Ltd.* [2008] EWHC 454.
The Court in *Barclays Bank* stated that such was the position in *Hedley Byrne, White v Jones,* and *Henderson v Merret Syndicates Ltd.*. Interestingly, according to [184]-[194] of the lattermost case, the same paradigm could be upheld in cases where a tortuous claim is brought in lieu of one in contract.
\*See: *Smith v Eric S Bush*; *White v Jones*; and *Phelps v Hillingdon London Borough Council*.
50
On what Basis is the Assumption of Responsibility Test to be Applied?
On an **objective basis**.
## Footnote
Textbook, P. 477; HM Commissioners of Customs and Excise v Barclays Bank Plc. [2006] UKHL 28 at [5].
51
What is the Threefold Test?
A test of:
* "Whether the **loss** of the Claimant it was a **reasonably foreseeable consequence** of what the Defendant did or failed to do;
* Whether the **relationship** between the Defendant and the Claimant was one of **sufficient proximity**; and
* Whether in all circumstances, it [is] **fair**, **just**, **and reasonable to** **impose a duty of care** on the Defendant towards the Claimant."
Textbook, P. 478; Outined in *Caparo Industries Plc. v Dickman* [1990] 2 AC 605 at [617]-[618]; Approved in *HM Commissioners of Customs and Excise v Barclays Bank Plc.* [2006] UKHL 28 at [4].
52
What constitutes Sufficient Proximity?
"A **measure of control over**, and **responsibility for**, the **situation** giving rise to the loss."
## Footnote
Textbook, P. 479; *Sutradhar v Natural Environment Research Council* [2006] UKHL 33 at [38].
In the same case, at [32], Lord Hoffman stated that the Three Fold Test is to be the standard framework for examining whether there exists a duty of care bewteen two parties.
53
When is it Unnecessary to demonstrate the 'Fair, Just, and Reasonable' criterion?
When it can **shown** that there has been a **voluntary assumption of responsibility** by the **Defendant**.
## Footnote
Textbook, P. 479; *Henderson v Merret Syndicates Ltd.* [1995] 2 AC 145 [180]-[181]; Echoed in *Williams v Natural Life Health Foods Ltd.* and *HM Commissioners of Customs and Excise v Barclays Bank Plc.* [2006] UKHL 28.
54
What is the Incremental Test?
An **adjunctive** test which states **new legal categories of negligence** should be **developed**, "**incrementally** and **by analogy** with established categories."
## Footnote
Textbook, P. 480; *Sutherland Shire Council v Heyman* [1985] 157 CLR 424 at [481]; Approved in *Caparo Industries Plc. v Dickman* [1990] 2 AC 605 at [618].
55
Will an Arranger owe a Duty of Care to either Borrower or the Syndicate if it acts through an Agent?
**Yes**, and in addition, the **Agent** will likewise **bear personal liability** if it can **shown**, **objectively**, that it **assumed responsibility** towards a Claimant who **reasonably relied** on this assumption.
## Footnote
Textbook, P. 480; *Williams v Natural Life Health Foods Ltd.* [1998] 1 WLR 830 at [835]-[836].
56
How can the Scope of an Arranger's Duty of Care be constructed?
Either **narrowly**, wherein **reasonable care** need **only** be exercised in **specific tasks**, or **widely**, wherein it need be exercised, "to ensure that the **transaction was suitable** for [the Lenders]... [or that they] were **correctly appraised**," and the transaction **well-investigated**.
## Footnote
Textbook, P. 481-482; (**Wide**) *Aneco Reinsurance Underwriting Ltd. v Johnson and Higgins Ltd.* [2001] UKHL 51; (**Narrow**) *Torre Asset Funding v RBS* [2013] EWHC 2670 (Ch).
The consequence of a narrow construction is that it increases the likelihood of the Arranger escaping liability for negligence, or at the very least, paying a lower sum in damages.
57
How will the Scope of a Duty of Care be Demarcated?
By observing the **nature** of the **responsibility** and resultant **duty of care assumed** by the Defendant.
## Footnote
Textbook, P. 482; *Aneco Reinsurance Underwriting Ltd. v Johnson and Higgins Ltd.* [2001] UKHL 51; *Torre Asset Funding v RBS* [2013] EWHC 2670 (Ch).
58
What constitutes Reasonableness?
That which may be **expected** from, "the **ordinary skilled person** exercising and professing to have [a] special skill."
## Footnote
Textbook, P. 483; *Bolam v Friern Hospital Management Committee* [1957] 1 WLR 582; Echoed in *Bartlett v Barclays Bank Trust Co. Ltd.* [1980] Ch 515 at [534].
Ordinariness is merely a reference to, "consistency with the reasonable average."
*Eckersley v Binnie* [1988] 18 Con LR 1.
59
Does Acting in Accordance with Common Practice always constitute Reasonable Care and Skill?
**No**, not if the practice is, "**inherently negligent**," or a **foreseeable risk** could have been **avoided** through **alternative action**.
## Footnote
Textbook, P. 483; *Edward Wong Finance Co. Ltd. v Johnson Stokes & Master* [1984] AC 296.
60
What Constitutes Reasonable Reliance?
**Demonstrable reliance** on the Defendant's exercise of reasonable care **where it would have been reasonable** for the Claimant to do so.
## Footnote
Textbook, P. 483; *Williams v Natural Life Health Foods Ltd.* [1998] 1 WLR 830.
Curiously, where the Defendant owes a duty of care, but which the Claimant was unaware, any breach thereof may be inactionable due to lack of reasonable reliance. I say 'may' because such reliance may be implied by the Court, although this is highly unlikely for Lenders.
E.g: *White v Jones* [1995] 2 AC 207.
61
What constitutes Causation?
**Direct effecting** of the loss suffered in reference to the **scope** of the Defendant's **duty of care**.
## Footnote
Textbook, P. 484-485; *SAAMCO v York Montague Ltd.* [1997] AC 191; Torre Asset Funding v RBS [2013] EWHC 2670 (Ch) at [238].
62
What constitutes Foreseeable Loss?
One which is **reasonbly foreseeable** and which **arises from breach of duty**.
## Footnote
Textbook, P. 484-485; *Wagon Mound (No. 1)* [1961] AC 388.
63
In determining the Nature and Scope of an Arranger's duty of care, if any, what Distinction does Z make regarding the Arranger's task?
He divides the endeavor into two stages, namely:
* **Stage 1:** Pre-Negotiation.
* **Stage 2:** Negotiation and Drafting.
Textbook, P. 487.
64
At the Pre-Negotiation Stage, how will the Arranger typically be viewed with respect to Duties of Care?
As an **agent** acting on behalf of the **Borrower**, its **principal**, **shielding** it from **personal liability** towards the Lenders unless otherwise can be judged objectively.
## Footnote
Textbook, P. 487; *Williams v Natural Life Health Foods Ltd. [1998] 1 WLR 830*.
"The market practice is that Lenders have no claim against Arrangers since each Lender is treated as carrying out its own research and making its own credit decision, a position which is confirmed by the inclusion of disclaimers to that effect which are themselves market standard."
Textbook, P. 487-488.
65
At the Negotiation and Drafting Stage, how will the Arranger typically be viewed with respect to Duties of Care?
As **acting independently**, thus **potentially**, but **improbably**, owing a **narrow** duty of care to the Syndicate.
## Footnote
Textbook, P. 488-489.
Independent action may be evinced by reference to the Borrower's and Arranger's use of lawyers to further their respective interests in their negotiations as to the form and content of the facility. Improbability is evincible from the Syndicate's engagement with the drafting process, as well as the wealth of information it is provided with, the lawyers used to navigate it, and the accompanying disclaimers.
66
Practically, when will the Arranger be taken to owe a Duty of Care to either the Lender or the Syndicate?
When it **assumes responsibility for the performance of a particular task or policy**.
## Footnote
Textbook, P. 489-491; *NatWest Australia Bank Ltd. v Tricontinental Corp. Ltd.* (26/7/1993); *Sumitomo Bank Ltd. v Banque Bruxelles Lambert SA* [1997] 1 Lloyd's Rep 487.
In *NatWest*, the duty of care arose with respect to the provision accurate information in response to a specific query by a Lender. *NatWest*, however, is extraordinary because the Arranger possessed information that contradicted its response to the Lender, made it appear as if the response was its own, and made no effort to limit the role it undertook beyond the IM.
67
What are the Elements of the Tort of Deceit?
The making of a **dishonestly untruthful statement** to **induce** the recipient, who **relies** upon it, to contract.
## Footnote
Textbook, P. 491; *Derry v Peek* [1889] 14 App Cas 337.
68
How can the Tort of Deceit be Established?
On the grounds that the Defendant:
* **Deliberatly** made a false statement;
* Had **no belief in its truth**; and
* Was **reckless** as to its **truth** or **falsity**.
Textbook, P. 491; *Derry v Peek* [1889] 14 App Cas 337.
Recklessness, in this context, denotes an, "indifference to the truth, the moral obliquity which consists in a willful disregard of the importance of the truth."
*Angus v Clifford* [1891] 2 Ch 449.
69
In the Tort of Deciet, is the Presence of a Commercial Justiciation for the False Statement relevant?
**No**.
## Footnote
Textbook, P. 492; *Standard Chartered Bank v Pakistan National Shipping Corp.* [2000] 1 Lloyd's Rep 218.
70
In the Tort of Deceit, do Mere Carelessness or Honest Belief result in liability?
**No**.
## Footnote
Textbook, P. 492; (Mere Carelessness) *Derry v Peek* [1889] 14 App Cas 337 at [369] and [373]; *Akerhielm v De Mare* [1959] AC 789.
71
On what basis is Dishonesty judged?
On a **subjective** basis.
## Footnote
Textbook, P. 492; *Society of Lloyd's v Jaffray* [2002] EWCA Civ 1101 at [66].
It is unnecessary to prove an intention to cheat or injure.
*Foster v Charles* (1830) 7 Bing 105.
72
In the Tort of Deceit, is an Agent shielded from Liability in a manner equivalent to the Tort of Negligence?
**No**.
## Footnote
Textbook, P. 492; *Standard Chartered Bank v Pakistan National Shipping Corp. (No. 2)* [2002] UKHL 43.
73
What are the Remedies for the Tort of Deceit?
**Contractual Rescission** and **Tortious Damages**.
## Footnote
Textbook, P. 493; *Newbiggin v Adam* (1886) 34 ChD 582.
Rescission can be disallowed if the Claimant delays too long, if it is impossible to restore the parties to their pre-contractual positions, or if it would adversely and disproportionately affect third parties in a unfair manner. Foreseeability is not a limiter on damages recoverable.\*
*Thomas Witter Ltd. v TBP Industries Ltd.* [1996] 2 All ER 573 at [588]; \**Smith New Court Securities Ltd. v Scrimgeour Vickers Ltd.* [1997] AC 254.
74
What are the Elements of Fraudulent Misrepresentation, i.e. §2(1) Misrepresentation?
The Claimant contracts in **reliance** upon a **misrepresentation** made to him by the Defendant, who **neither had reasonable grounds to believe nor believed in its truth**, leading the Claimant to **suffer loss**.
## Footnote
Textbook, P. 493; Misrepresentation Act 1967 -- §2(1).
75
Are Disclaimers sufficient to Preempt a Claim of Misrepresentation?
**Yes**.
## Footnote
Textbook, P. 494-495; *IFE Fund SA v Goldman Sachs International* [2007] EWCA Civ 811; *Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland Plc.* [2010] EWHC 1392 (Comm).
The disclaimer would have to state that the Arranger, "made no representations concerning the truth or accuracy of the information contained in the IM and disclaimed any responsibility to check such information or to correct it." A disclaimer will fail, however, if a representation is adopted by the Arranger or unfairly communicated.
Textbook, P. 494; *FoodCo UK LLP v Henry Boot Developments Ltd.* [2010] EWHC 358 (Ch).
76
If the Arranger does himself join the Synidcate, or otherwise become party to the Contract, can a Claim in Fraudulent Misrepresentation be brough against him?
**No**. Somehow, the Arranger **must be party to the same contract** as the Claimant, **unless** the existence of a **collateral contract** can be established.
## Footnote
Textbook, P. 495; *Taberna Europe v Selskabet (In Bankruptcy)* [2015] EWHC 871 (Comm); *Shanklin Pier Ltd. v Detel Prodcuts Ltd.* [1951] 2 KB 854.
If, due to lack of standing, a Claimant cannot resort to Fraudulent Misrepresentation, he may find recouse in Negligent Misstatement. Although, if the Arranger was acting as an Agent within the scope of its authority, liability will attach to the Principal.
*Gosling v Anderson* [1972] 223 EG 1743; *The Skopas* [1983] 1 WLR 857.
77
What constitutes Inducement?
The playing of a, "**real and substantial**," part of the Claimant's **decision** to contract. Such a role a **need not be sole or decisive**, **only** **material**.
## Footnote
Textbook, P. 495-496; *Edgington v Fitzmaurice* (1885) 29 Ch D 459; *Avon Insurance Plc. v Swire Fraser Ltd.* [2000] 1 All ER at [14]-[18].
78
What constitutes a Correct Statement?
One which is **substantially**, **even if not entirely**, **true**.
## Footnote
Textbook, P. 496; *With v O'Flanagan* [1936] Ch 575.
79
Can a Correction of Rectification of a Misrepresentation made Preempt a Claim in Fraudulent Misrepresentation?
Only if the **Claimant** is shown to have **discovered the truth**, "either in consequence of the correction actually made," or as a result of its own investigations **before exectuion**. **Constructive notice will not suffice**.
## Footnote
Textbook, P. 496; *Redgrave v Hurd* [1881] 20 ChD 1.
80
In Fraudulent Misrepresentation and the Tort of Deceit, must the Representation have been made In Writing?
**Yes**, **but only insofar** as it relates to the, "character, conduct, credibility, ability, trade, or dealings," of another.
## Footnote
Textbook, P. 496; Statute of Frauds Amendment Act 1828 -- §6.
Additionally, the representation must have been, "signed by the party to be charged therewith."
Statute of Frauds Amendment Act 1828 -- §6.
81
What are the Remedies for the Tort of Fraudulent Misrepresentation?
**Contractual Rescission** and **Tortious Damages**.
## Footnote
Textbook, P. 497.
82
What are the Elements of Negligent Misstatement?
The Defendant **negligently** makes a **false or misleading** statement to the Claimant, to which he owes a **duty of care**, who subsequently **relies** upon it **to his detriment**.
## Footnote
*Hedley Byrne & Co. Ltd. v Heller & Partners Ltd.* [1964] AC 465.
This Tort has a great deal of overlap with the Tort of Negligence, in that they share many of the same elements.
83
What are the Remedies for the Tort of Negligent Misstatement?
**Tortious Damages**.
## Footnote
*Hedley Byrne & Co. Ltd. v Heller & Partners Ltd.* [1964] AC 465.
84
What is the Defence of Contributory Negligence?
One which leverages the **Claimant's own responsibility** for the loss that arose to **reduce the damages payable** by the Defendant. The **degree of reduction** is left to the **Court's discretion**.
## Footnote
Textbook, P. 500; Law Reform (Contributory Negligence) Act 1945 -- §1(1).
This defence does not apply to claims of fraud or deceit. Furthermore, the size of the reduction should accord with what is just and equitable.\*
*Standard Chartered Bank v Pakistan National Shipping Corp. [2000] 1 Lloyd's Rep 218*; \**Platform Home Loans Ltd. v Oyston Shipways Ltd.* [2000] 2 AC 190.
85
What is a Fiduciary?
"Someone who has **undertaken to act for**, or **on behalf of**, **another** in a particular matter and circumstances which gives rise to a **relationship of trust and confidence**... [whose] **distinguishing obligation** is... [that **of**] **loyalty**."
## Footnote
Textbook, P. 498; *Bristol & West Building Society v Mothew* [1998] Ch 1 at [18].
Millet LJ later said: "Confidence is the very essence of the relationship. Unless a relationship is one of trust and confidence, it is not fiduciary," and explained that merely undertaking to act for another's benefit does not give rise to a fiduciary obligation.
*R v Chester* [1998] 1 WLR 1496 at [1500].
86
Can the Arranger be construed as the Fiduciary of the Borrower?
**Unlikely**. Due to the **missing elements of trust and confidence**, the relationship may much more aptly be classified as Agent-Principal.
## Footnote
Textbook, P. 498-499.
87
What are the Arranger's Means for Self-Protection?
**Extra-Contractual Disclaimer** and **Contracual Exemption**.
## Footnote
Textbook, P. 501-520.
88
What is an Extra-Contractual Disclaimer?
A **notice**\* given to the Lenders that the Arranger:
* Is acting as an Agent for the Borrower, its Principal;
* Is a conduit through which information is passed on, as opposed to a Representor;
* Has not undertaken to verify any information, nor will it;
* Does not represent the Lenders' interest nor will it; and
* Is not liable to the Lenders.
According to the Statute, a notice is, "an announcement, whether or not in writing, and any other communication or pretended communication."
89
What is a Contractual Exemption?
A term which **excludes or limits the liability of the Arranger**, namely by stating that:
* No fidcuiary obligations are owed;
* No duties of care are owed; and
* A Non-Reliance clause.
Textbook, P. 502.
90
What is a Non-Reliance Clause?
One which states that a **Lender**, by accepting to contract, **made its own investigations** as to the agreement's factual and substantive matters, and that it **neither recieved any representations from nor relied upon the Arranger** in reaching its decision.
## Footnote
Textbook, P. 503-504.
91
How will an Exemption Clause be Construced?
**Strictly**. The **Arranger bears the burden of proving** that whatever transpired falls within its **scope**.
## Footnote
Textbook, P. 503; *Ailsa Craig Fishing Co. Ltd. v Malvern Fishing Co. Ltd.* [1983] 1 WLR 964.
If the clause is verily clear and unambiguous, it will be read as it is written, i.e. to give effect to the parties' intentions. Where there is ambiguity, however, the clause will be read against the reliant party.\*
*Photo Production Ltd. v Securicor Transport Ltd.* [1980] AC 827 AT [850]-[851]; \**Pera Shipping Corp v Petroship SA* [1984] 2 Lloyd's Rep 363 at [366.]
92
Will an Exception to the Exemption clause Obtain?
**Yes**, but the **reliant party bears the burden of proving** that whatever transpired falls within its **scope**.
## Footnote
Textbook, P. 504; *Kenyon Son & Craven Ltd. v Baxter Hoare Ltd.* [1971] 1 WLR 232.
93
Can an Exemption Clause exclude liability for Negligence?
**Yes**, but **only if** the **wording** used to do so is **sufficiently clear**.
## Footnote
Textbook, P. 504; Photo Production Ltd. v Securicor Transport Ltd. [1980] AC 827 AT [846].
Such a clause will be construed with abnormal strictness.
*Ailsa Craig Fishing Co. Ltd. v Malvern Fishing Co. Ltd.* [1983] 1 WLR 964 at [970].
94
How is an Exemption Clause extending to Negligence to be Constructed?
* **Express Reference** to Negligence**: *De facto.***
* Non-Express Reference: According to the **ordinary meaning of the words** and whether they can **clearly** be said to cover **negligence specifically**, as opposed to than some other head.
Textbook, P. 504-505; *Canada Steamship Lines v The King* [1952] AC 19.
Exemption clauses do not apply to fraud.
*HIH Casualty and General Insurance Ltd.* *v Chase Manhattan Bank* [2003] UKHL 6 at [15]-[16].
95
Can the protection of an Exemption Clause be extended to a Third Party?
**Yes**, but **only under certain circumstances**, e.g. where the Agent contracts for the benefit of a Third Party.
## Footnote
Textbook, P. 505; *New Zealand Shipping v AM Satterthwaite* [1975] AC 154. See also the Contracts (Rights of Third Parties) Act 1999.
A term may also be included which binds the X from suing the servants or agents of Y.
*Snelling v John G Snelling Ltd.* [1973] QB 87.
96
What are the Exceptions to Part I of the Unfair Contract Terms Act 1977?
Aside from the areas of law in Schedule 1, it disapplies to:
* International supply contracts (§26); and
* Contracts that could have otherwise been goverened by foreign laws (§27).
Textbook, P. 508; UCTA 1977 -- §26-27.
§27 disapplies if the intent of choosing governance by a foreign jurisdiction is to avoid the application of UCTA 1977.
97
Under UCTA 1977, how will the Validity of an Exemption Clause be examined?
With reference to both its **form** and **substance**.
## Footnote
Textbook, P. 508; UCTA 1977 -- §13(1).
§13 further functions to prevent: "(a) making the liability or its enforcement subject to restrictive or onerous conditions; (b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy; (c) excluding or restricting rules of evidence or procedure; and (to that extent) §2, §6, and §7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty."
98
How is Negligence defined under UCTA 1977?
An **express** or **implied term**, or **common law duty**, to **take or exercise reasonable care and skill** in furtherance of a contract or duty.
## Footnote
UCTA 1977 -- §1(1).
This definition of negligence does not apply to the duty of care and skill imposed on fiduciaries, which is an equitable obligation.
99
Does Awareness of an Exemption Clause constitute a Voluntary Assumption of Risk?
**Not in and of itself.**
## Footnote
UCTA 1977 -- §2(3).
§2(1) further clarifies that liability in negligence arising from death and personal injury cannot be escaped.
100
Does §3 of UCTA 1977 apply in the Context of Syndicated Lending?
Given that loan contracts are **customized** to the particular transaction, it is **very unlikely** that §3 **applies**.
## Footnote
Textbook, P. 511; *Falmar Interocean Ltd. v Denamc Ltd.* [1990] 1 Lloyd's Rep 434 at [438].
"In circumstances where commercial parties, represented by solicitors, have utilized a "neutral" industry model form as the basis for a complex and detailed financial contract, executed after the usual process of negotiation, including revising a traveling draft, it will require cogent evidence to raise even an arguable case that the resulting contract is made on the written standard terms of one of those parties."
Phillips J in *African Export-Import Bank v Shebah Exploration* [2016] EWHC 311 at [27].
101
When will an Exemption Clause be deemed Invalid for Unfairness?
When it fails the **Reasonableness Test**, of which the **burden of proving** the contrary falls upon the **reliant party**.
## Footnote
UCTA 1977 -- §2(2). The Reasonableness Test and its burden of proof is outlined in §11.
102
According to §11 UCTA 1977, what constitutes a Reasonable Term?
One which has, "**regard to the circumstances** which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made."
## Footnote
UCTA 1977 -- §11(1).
In other words, this is an examination of how the term, as a whole, was incorporated into the contract, with the material time naturally being pre-execution.
Textbook, P. 513; Stewart Gill Ltd v Horatio Myer & Co Ltd. [1992] QB 600 at [607]-[609].
103
What ought the Court take into account when Assessing Reasonableness?
Those matters outlined in **Schedule 2 of UCTA 1977**.
## Footnote
UCTA 1977 -- §11(2).
The most notable are: relative bargaining power (Sch. 2(a)); and knowledge or constructive knowledge of the relevant term (Sch. 2(c)).
Textbook, P. 513.
104
Is the Test of Reasonableness Equivalent for a Notice as it is for a Term?
**No**. The **relevant test** is whether it would be, "**fair and reasonable** to **allow reliance** on it, having regard to **all the circumstances** obtaining when the **liability arose** or (but for the notice) **would have arisen**."
## Footnote
UCTA 1977 -- §11(3).
The material time and substance of this test are therefore different to that of a contract term.
105
Can the Arranger limit the Sum for which it can be Sued?
**Yes**, insofar as the sum is **reasonable** given the Arranger's **resources** and the degree to which it could have **insured** itself.
## Footnote
UCTA 1977 -- §11(4).
106
Generally speaking, how do the Courts regard Protective Provisions between Commercial Parties?
As an **agreed allocation of risk**, especially where the parties are of **equivalent bargaining power and resources**, and are thus **inherently reluctant to interfere** with them.
## Footnote
Textbook, P. 514; *Watford Electronics Ltd. v Sanderson CFL Ltd.* [2001] EWCA Civ 317.
On this ground, and from the following case, Z finds it unlikely, "that a court would hold to be unreasonable protective provisions aimed at protecting the Arranger from liability for negligence arising from a wide duty of care," whether in the form of notice or contractual term.
Textbook, P. 514-516; *Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland Plc.* [2010] EWHC 1392 (Comm).
107
Can an Exemption Clause exclude liability for Misrepresentation?
**Yes**, **but only** insofar as it satisfies the **Reasonableness Test**, of which the **burden of proving** the contrary falls upon the **reliant party**.
## Footnote
Misrepresentation Act 1967 -- §3.
The Reasonableness Test is that which is outlined in §11(1) UCTA 1977, and as with general unfairness, it is the whole term that must satisfy the requisite of reasonableness.
Textbook, P. 518.
108
Can Contractual Estoppel Obtain with respect to Misrepresentation if an Exemption (Non-Reliance) Clause is used?
**Yes**. Further, in invoking estoppel, the Arranger **need not show detrimental reliance** or **unconscionability**.
## Footnote
Textbook, P. 519; *Springwell Navigation Corp. v JP Morgan Chase Bank* [2010] EWCA Civ 1221 at [177].
Consequently, Non-Reliance Clauses neutralize the threat of common-law misrepresentation.
Textbook, P. 519; *Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland Plc.* [2010] EWHC 1392 (Comm).
109
Who is the Agent Bank appointed by?
The **Syndicate**, as their **Agent**, **intermediary**, and **representative of their interests**.
## Footnote
Textbook, P. 520-522; LMA Standard Form, Cl. 26.1.
110
What are the Duties of the Agent Bank under the LMA Standard Form?
To act as a **payment** and **information conduit** **between** the **Syndicate** and the **Borrower**.
## Footnote
LMA Standard Form, Cl. 26, 28, 29.
111
What is an Ostrich Clause?
One which permits the Agent Bank **not to pass on information** unless it has received **written notice of its veracity** from an **external source**, after which it will be bound to perform its information duty.
## Footnote
Lecture Notes.
Such a clause further provides a partial solution to the potential conflict that arises from the Agent Bank's duty of confidentiality to the Borrower.\* Admittedly, this could also be remedied by stipulating the Agent Bank will not pass on information which could leave it civilly or criminally liable. Ultimately, it is all the more reason for the Agent Bank to establish Chinese Walls between its potentially legally hazardous departments.
Lecture Notes, \**Tournier v National Provincial and Union Bank of England* [1924] 1 KB 461.
112
What is the Purpose of the *Pro Rata* Sharing clause?
To **maintain parity of treatment** between Lenders with respect to **repayment** of interest and principal.
## Footnote
Lecture Notes; See: Cl. 28.
This does not necessarily entail direct payment. For instance, set-off against a liability owed to the Agent Bank by a Lender can constitute repayment. To reduce the allure of litigation, such a clause may also, "oblige a Lender who has taken the Borrower to court to recover his loan to share out the proceeds."
Lecture Notes.
113
Is the Agent Bank in breach of its Fiduciary Duty to avoid Conflicts of Interests if, for instance, it is a Lender to the Borrower in its own right or as a part of another Syndicate?
**Potentially**. However, **carve-out clauses** may permit the Agent Bank to take on such roles without offending its duties.
## Footnote
Lecture Notes.
114
What is the Rule against the Making of Secret Profits?
A **prohibition** on the use of the Agent Bank's **capacity** to make **unauthorized profits**, to which it will be **accountable to the Syndicate** for any such profits.
## Footnote
Lecture Notes, *Boardman v Phipps* [1967] 2 A.C 46.
This practically entails disclosure obligations relating to any fees which the Agent Bank earns in its capacity as the Syndicate's Agent, e.g. management fees.
Lecture Notes.
115
How is the Notion of Apparent Authority relevant to the Construction of the Agent Bank's Duties?
**Conduct** by the Syndicate **which** **may reasonably lead** the Borrower to believe that the Agent Bank **possesses broader powers** than those bestowed upon it by contract, and to **rely** upon this apparently greater remit, may **render the Syndicate liable for the Agent's actions**.
116
If the Agent Bank fails to pass on funds to the Borrower, who is Liable?
**The Syndicate**.
## Footnote
Lecture Notes.
117
Can the Agent Bank recover funds paid to a Lender in advance of receiving them from the Borrower if they fail to materialize?
**Yes**, either through a **claw-back clause** or, should one not exist, the doctrine of **mistake of fact**.\*
## Footnote
Lecture Notes; \**Barclays Bank Ltd. v W.J. Simms Son & Cooke (Southern) Ltd.* [1980] QB 677.
Real difficulties arise, however, if funds are paid over to a Borrower who becomes insolvent. In such cases, unless it can be establish that it held the funds under an express or resulting trust or that the funds were otherwise traceable in equity, the latter of which necessitates the pre-existence of some fiduciary duty, the Agent Bank and Syndicate will be out of luck.
Lecture Notes.
118
What are the Agent Bank's Legal Exposures?
A Claim by either the Borrower or Syndicate in:
* Breach of **Fiduciary Duty**;
* Breach of **Contract**;
* Breach of **Tort**.
Textbook, S. 9.6.2.
119
Can the Agent Bank be a Fiduciary of the Syndicate?
**Yes**. Unlike the Arranger, the elements of **trust** and **confidence** obtain, and the **obligation of loyalty is clear**.
## Footnote
Textbook, P. 522; *Bristol & West Building Society v Mothew* [1998] Ch 1 at [18].
In cases previous, Agent Banks have been found to owe fiduciary duties to their Syndicates. This is a major exposure that the Agent Bank will try to avoid.
*UBAF Ltd. v European American Banking Corporation* [1984] QB 713.
120
Will the Agent Bank be taken as a Fiduciary of the Syndicate?
**Not necessarily**. The matter is **ultimately fact-dependent**. For instance, an **express term to the contrary** means it will not.\*
## Footnote
Textbook, P. 524-525; *Boardman v Phipps* [1967] 2 A.C 46; \**Torre Asset Funding v RBS* [2013] EWHC 2670 (Ch).
In *Boardman*, at [127], the following was stated: "The facts and circumstances must be carefully examined to see whether, in fact, a purported agent and even a confidential agent is in a fiduciary relationship to his principal. It does not necessarily follow that he is in such a position."
121
What are the Agent Bank's Fiduciary Duties?
It is under a duty to:
* Act in good faith;
* Act with care and skill;
* Avoid making unauthorized profits;
* Avoid conflicts of interests;
* Avoid benefiting itself or a third party.
Textbook, P. 523 (authorities cited therein).
122
What is the Remedy for Breach of Fiduciary Duties?
**Equitable Compensation**, to which similar common law rules of **remoteness** and **causation** may apply.
## Footnote
Textbook, P. 523; *Henderson v Merret Syndicates Ltd.* [1995] 2 AC 145 [205]-[206]
123
How is the Nature and Scope of a Fiduciary Duty demarcated?
With reference to the **context** in which the Fiduciary is acting, most notably the **contractual background**. Barring loyalty and good faith, there is **no legally-defined set of obligations**.\*
## Footnote
Textbook, P. 523; *New Zealand Netherlands Society v Kuys* [1973] 1 WLR 1126 at [1129]-[1130]; \**Torre Asset Funding v RBS* [2013] EWHC 2670 (Ch) at [147].
For reference, those fiduciary duties owed by an express trustee are incomparably extensive to those owed by an Agent Bank.
Textbook, P. 523; *Henderson v Merret Syndicates Ltd.* [1995] 2 AC 145 [206].
124
Is the Agent Bank under a duty to Exercise Reasonable Care and Skill?
**Yes**, both in **Contract** and in **Tort**:
* **Contract:** **§13** of the Supply of Goods and Services Act (SGASA) 1982.\*
* **Tort:** **Duty of care** (should one arise).\*\*
Textbook, P. 525-528; \**Weld-Blundell v Stephens* [1920] AC 956; \*\**Henderson v Merret Syndicates Ltd.* [1995] 2 AC 145 [184]-[194].
125
What are the Agent Bank's Means for Self-Protection?
**Agency Clauses**, which effectively nullify many of its exposures.
## Footnote
Textbook, P. 529.
Protection is afforded by emphasizing, with total precision, the administrative and mechanical nature of the Agent Bank's duties, which has the effect of, "minimiz[ing] so far as is possible... the substantive content of the duties on the Agent." Such clauses will inform the case's factual matrix.
*Torre Asset Funding Ltd. v Royal Bank of Scotland Plc.* [2013] EWHC 2670 (Ch) at [196], [34], and [163(i)].
126
How are Agency Clauses Constructed?
**Strictly**, with reference to the **natural meaning of the words used**, and only allowing the **limitation of liability** when done in **clear**, **unequivocal**, and **unambiguous** terms.
## Footnote
Textbook, P. 530; *Armitrage v Nurse* [1998] Ch 241 at [255]-[256] (*contra preferentum* disapplies where diction is as described); *Tai Hing Cotton Mill Ltd. v Liu Chong Hing Bank Ltd.* [1986] AC 80 (*contra preferentum* applies where diction is ambiguous).
In conjunction with Exemption and Non-Reliance Clauses, the Agent Bank can quite appreciably hedge itself against its legal exposures. However, exculpatory clauses cannot protect against fundamental breaches of performance by the Agent Bank.
Textbook, P. 530-534 for a thorough walkthrough.
127
What is Subordination?
The, "process by which an **unsecured creditor** agrees to **subordinate its right to payment** by a debtor, particularly in [case of] insolvency, **behind**," **one or all other** such claims.
## Footnote
Textbook, P. 963-964.
Such creditors are referred to as 'junior creditors', and their debt as 'junior debt'. Those to whom they subordinate are referred to as 'senior creditors', and their debt as 'senior debt'. Subordination can also refer to the determination of how different securities interests rank between secured creditors, but for clarity's sake, such things will be referred to as 'agreements as to priority'.
128
Subordinated debt may be likened to a Quasi-Equity Instrument. To what extent is this untrue?
Subordinated debt:
* Ranks ahead of shareholders' equity.
* Carries a contractual right to interest payments.
* Does not amount to a reduction of capital when repaid.
* Can be issued at a discount.
* Recieves different tax treatment.
* Does not entitle the creditor to the company's residual profits.
Textbook, P. 964.
129
What is a Creditor's Rationale for Subordinating its Debt?
The **increased riskiness** will correspond with **greater yields** in the form of **higher interest rates**.
## Footnote
Textbook, P. 965.
This has the ancilliary effect of facilitating other creditors, "to provide funding that is less risky," but which carriers lower returns. Its other utilies include optimizing capital adequacy requirements, providing funding to other memebers of a corporate group without requiring subscription by the parent, or facilitating a guarantee.
130
Is a Junior Creditor one who has Subordinated all of its Debt?
**Not necessarily**. It is possible to subordinate **only a portion** of one's debt, in which case it is critical to determine exactly which part of the indebtedness has been subordinated.
## Footnote
Textbook, P. 966.
131
What are the Two Types of Subordination?
**Structural** and **Contractual**.
132
What are the Two Types of Contractual Subordination?
* Turnover Subordination by Trust.
* Contingent Debt Subordination.
Textbook, P. 966-967.
133
What is Turnover Subordination?
Subordination wherein the junior creditor **agrees to account** to the senior creditor **the junior debt's benefits** under specified circumstances, e.g. insolvency. This is typically **achieved by means of a trust**.
## Footnote
Textbook, P. 966.
This may be achieved contractually, but such an arrangement would leave the senior creditor vulnerable in insolvency proceedings. As such, subordination by trust is the perferred means of achieving turnover subordination.
134
What is a Subordination Trust?
A trust wherein, "the junior creditor undertakes to hold its **rights** and **any payment** that it receives [**from the junior debt**] on trust for the senior creditor."
## Footnote
Textbook, P. 966; *Re British and Commonwealth Holdings Plc. (No. 3)* [1992] 1 WLR 672.
Z advises that the senior creditor should, "possess authority, preferably in the form of power of attorney, to take action on behalf of the junior creditor with respect to the junior debt, including lodging proofs and pursuing claims."
135
What is Contingent Debt Subordination?
Subordination wherein, in case of insolvency, the junior creditor is contractually bound from recieving payment until the senior creditors have been paid out in full.
## Footnote
Textbook, P. 967; *Re Maxwell Communications Corp Plc. (No. 2)* [1993] 1 WLR 1402.
The relevant clause may also prohibit the junior creditor from claiming against the debtor whilst senior debt remains outstanding. Z further comments that this method is, "not suitable where there are unsecured creditors... who are not senior creditors," because the aim of this provision is to, "swell the pot," for said senior creditors rather than redistribute revenue.
136
Does Subordination pertain exclusively to Insolvency?
**Not necessarily**. While it is the **main focus**, subordiantion **can extend further** to such things as recieving and retaining of **interest payments**.
## Footnote
Textbook, P. 967.
137
How are arrangements which subvert the *Pari Passu* Principle treated in law?
They are **void**.
## Footnote
Insolvency Act 1986 -- §107, §328(3), and Rule 4.181; *British Eagle International Airlines Ltd. v Cie Nationale Air France* [1975] 1 WLR 758.
138
Is Subordination taken to by the law be an arrangement which subverts the *Pari Passu* Principle?
**No**. The princple intends to **prevent the debtor** from creating arrangements which **do not equally benefit all creditors**. Because subordination is an **inter-creditor agreement** in relation to the debtor, it is therefore not subversive.
## Footnote
Textbook, P. 968; (Turnover Subordination by Trust) *Re British and Commonwealth Holding*s Plc. (No. 3) [1992] 1 WLR 672; (Contingent Debt Subordination) *Re Maxwell Communications Corp Plc. (No. 2)* [1993] 1 WLR 1402; (Subordination, more generally) *Re SSSL Realisations (2002) Ltd; Manning v AIG Europe Ltd.* [2004] EWHC 1760, [2005] BCLC 1; *Re Lehman Brothers International (Europe)* [2014] EWHC 704 (Ch).
In *Re SSSL*, it was further held that the potential insolvency of the junior creditor, and the effect that would have on its own creditors, does not subvert the principle.
139
Does Insolvency Set-Off between the Debtor and Junior Creditor obtain?
* Under Subordination by Trust: **No**.
* Under Contingent Debt Subordination: **Yes**, but only if the senior debt is fully repaid.\*
Textbook, P. 969; .
It is good practice in a contingent debt subordination agreement to stipulate that, "the junior creditor should account to the senior creditors for the benefit it receives in any set-off that is applied."
140
Does a Subordination Trust constitute a Security by Way of Charge?
**No**.
## Footnote
Textbook, P. 971; *Re SSSL Realisations (2002) Ltd.* [2004] EWHC 1760 at [49]-[51].
In *SSSL*, the relevant clause pertained to limited sums of the junior debt made due to the senior creditor. More importantly, even if a charge was created, "it would not be registrable if it were a security financial collateral agreement," which a subordination trust could be.\*
Textbook, Part 14.7.6.
