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Part D The Bank as Service Provider, 21 Syndicated Loans

From: The Law and Practice of International Banking (2nd Edition)

Charles Proctor

Content type:
Book content
Product:
Financial Law [FBL]
Published in print:
01 March 2015
ISBN:
9780199685585

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Subject(s):
Syndicated loans — Regulation of banks

(p. 417) 21  Syndicated Loans

Introduction

21.01  The previous chapter dealt with loan facilities made available by a single lender.1 Many transactions may, however, be of such a size that, in the interests of prudence, a single bank would not wish to make available on its own.2 In such cases the bank may have to syndicate the loan by inviting a number of institutions to participate in the transaction as well.3

21.02  For the most part, this will not really affect the terms of the facility agreement so far as the borrower is concerned. Subject to the comments made later in this chapter, the terms governing the utilization of the loan, the package of undertakings, and the events (p. 418) of default will remain essentially the same, even though a number of banks may be involved. The various standard provisions discussed in the last chapter will therefore apply equally in the context of a syndicated transaction. This is, of course, only logical. As explained in that chapter, the purpose of these provisions is to ensure that the borrower and the credit risk remain the same—so far as practicable—throughout the life of the facility. Concerns of this kind remain the same even though the facility has been syndicated.

21.03  Nevertheless, the presence of a number of lenders does serve considerably to complicate— and, hence, to lengthen—the documentation. In some respects, this follows from the fact that a number of institutions acquire rights and assume obligations to the borrower under the terms of a single document. For the most part, however, the additional provisions to be found in a syndicated loan agreement are designed to govern the relationship between the banks themselves, and to deal with consequential administrative matters.4

21.04  An additional layer of legal complexity is also introduced by the role of the various parties.5 Whilst most banks will participate in the facility as lenders, one bank will have organized the facility in its capacity as arranger by inviting the participation of other institutions as lenders. Another bank (or possibly the same one) will assume the role of agent and will be responsible for the administration of the facility after the documentation has been signed. These additional relationships and functions clearly have legal consequences for the various parties involved.

21.05  With these considerations in mind, the present chapter is arranged as follows:

  1. (a)  the role and liability of the arranger will be considered;

  2. (b)  the role of the agent will be considered;

  3. (c)  the legal nature of the relationships between the individual banks and the borrower will be discussed;6

  4. (d)  the relationships between the banks themselves will be discussed; and

  5. (e)  the particular structure adopted for any security arrangements will be described.

The Arranger

Duration and Nature of the Role

21.06  The commencement and duration of the arranger’s role7 are, of course, closely linked to the functions which it is required to undertake (see below). However, as the title implies, the essential task of the arranger is to bring matters to a position where a number of institutions have given a formal commitment to participate in the facility, that is to say, they have executed a formal loan agreement which legally obliges them to provide the facility, subject to the terms and conditions set out in that document. The arranger’s role may thus be said (p. 419) to commence once it receives a mandate from the borrower, authorizing it to act as arranger and to take the various steps which are necessary to that end.8

21.07  The arranger’s functions may be said to come to an end when the agreement is executed by all parties, in that it will have completed the task for which it was mandated. However, it may remain subject to potential liabilities arising out of that role. As a result, it will be a party to the facility agreement so that it may seek to take advantage of the various exculpatory clauses included for its benefit.9 It will also be noted that the contractual obligations of the arranger are derived from the terms of the mandate and are thus owed exclusively to the borrower.10 Whilst the arranger will be a party to the facility agreement for the reasons already noted, the standard LMA document imposes no obligations on it in favour of either the borrower or the other lenders—the signing of the agreement effectively brings their role to an end.

Functions of the Arranger

21.08  As noted above, the essential role of the arranger is to invite other institutions to participate in the proposed facility.

21.09  This may involve a variety of functions. The process will usually start with the negotiation of a set of outline terms which the arranger believes will be acceptable to the market and will thus attract a level of commitments from participants.11

21.10  The borrower and the arranger will then produce an information memorandum or similar package, which will be distributed to potential lenders and assist them in determining whether or not they wish to participate in the facility and (if so) what level of financial commitment they are prepared to provide. The information memorandum will thus contain details of the borrower, its business and financial position, the amount of the proposed loan, the detailed financial terms, and the purpose for which it is to be provided. The information memorandum will frequently go further than this, providing an analysis of any particular risks and any steps which have been taken in an effort to mitigate them.

Liability of the Arranger

21.11  As has been shown, the arranger in some respects acts as a ‘salesman’ for the facility, seeking loan participations from other institutions in the market. To what extent may the arranger incur liability if it transpires that the information memorandum was incomplete or misleading, or if it has fallen short of accepted market standards12 in the preparation of that (p. 420) document? Apart from the preparation of the information memorandum and any associated materials, are there any other circumstances under which the arranger may incur liability to the syndicate? Of course, questions of this kind will only become ‘live’ if it becomes apparent that the borrower itself will be unable to repay the facility.13 But, should the worst happen, will the arranger be liable to meet losses suffered by facility participants who relied on the information memorandum in making a commitment to the loan?

21.12  Before considering the possible heads of liability, it is perhaps appropriate to deal with one threshold matter. Whether one speaks in terms of an action in contract or in tort, it will be necessary for the participant to show that he relied on the misleading information in making his decision to join the loan. In other words, there must be a sufficient nexus between the alleged breach and the loss. This will, of course, be a matter of evidence but in practice this will be a significant obstacle to any claim against the arranger, however the claim may be pleaded. The recipient of the information memorandum will itself be a sophisticated financial institution, with the resources and market knowledge to make its own assessment of the borrower and the underlying transaction. In any event, and regardless of the underlying factual matrix, it will be unattractive for the applicant bank to start proceedings on the footing that it did not make its own independent analysis of the deal. It will thus in practice be difficult for it to plead unequivocal reliance on the memorandum as the reason for its commitment to the deal.

21.13  Leaving aside this practical caveat, it has been suggested14 that there are three possible bases of arranger liability under these circumstances, namely, (i) misrepresentation, (ii) negligence, and (iii) breach of fiduciary duty. The following observations may be made in this regard:

  1. (a)  Misrepresentation. As noted above, the information memorandum is circulated by the arranger on behalf of the borrower. Consequently, the arranger will not normally be liable for misrepresentations contained in the information memorandum, since an agent is not responsible for statements made by his principal, or made by the agent on behalf of the principal and within the scope of his authority. To the extent to which the arranger may itself be said to have made any misrepresentation as principal, it must be remembered that the statement induces the lender to enter into a contract with the borrower, and not with the arranger itself.15 Under these circumstances, it seems that the arranger would only be liable for misrepresentation if (i) to the knowledge of the arranger, the relevant statement was made fraudulently or (ii) the relevant statement creates a collateral contract between the lender and the arranger.16 Fraud is unlikely to (p. 421) be an issue in this type of case, since individuals within an institution are unlikely to go so far in order to sell down a facility, and the mere act of circulating an information memorandum should not suffice to create a collateral contract between the arranger and the recipient. The Court of Appeal has decided that the distribution of the memorandum does not imply a warranty or representation on the part of the arranger to the effect that it had no knowledge of any facts which would or might render parts of the information contained in it untrue.17 As between sophisticated market counterparties, it is the invariable practice to include in the information memorandum a disclaimer of any warranties or similar assurances and this is a perfectly valid provision as between such parties.18 Thus, in a very complex case involving a highly structured facility for Enron Corporation, a syndicate member again failed to recover its losses from the arranger of the facility, in part on the basis that the information memorandum incorporated the standard disclaimers.19 Liability under this heading is therefore unlikely to arise in practice.20 However, in the rare cases in which the disclaimer clause can be disregarded—perhaps because the arranger has been guilty of dishonesty21 and/or was aware that the relevant information was untrue—it may be pertinent to note that the measure of damages for the syndicate member would be the loss suffered as a result of entering into the relevant agreement. In other words, the lender could recover all of its losses from the deal.22 This may be contrasted with the measure of damages in negligence (see para (b) below);

  2. (b)  Negligence. The question of liability in negligence can only arise if the arranger owes a duty of care to recipients of the information memorandum who choose to take a participation in the facility. For that purpose, there must be some assumption of responsibility by the arranger in the knowledge that the recipient will rely on the information provided to it in making its credit decision.23 There are two reasons why such liability will not generally arise in this type of case. First of all, the recipient bank will be a financial institution capable of making its own analysis of the borrower and its status. Secondly, the information memorandum will specifically disclaim any liability on the (p. 422) part of the arranger and, in the context of arrangements between financial institutions, such disclaimers would appear to be valid.24 In IFE Fund SA v Goldman Sachs International,25 the Court of Appeal held that such a disclaimer made it clear that the arranger did not assume a liability or duty of care in favour of the recipient, and that the court should not strain to identify a duty of care in a transaction between sophisticated parties where the documentation specifically sought to exclude such a relationship. Once again, therefore, it seems that the arranger should not normally be liable to loan participants under this heading. In the unlikely event that a claim in negligence could be established, the recoverable damages would represent the loss flowing from the inaccuracy of the relevant information (ie and not necessarily the entire loss suffered by the syndicate participant).26

  3. (c)  Breach of fiduciary duty. In circulating an information memorandum, the arranger is effectively trying to induce other participants in the market to subscribe for a share of the proposed facility. Especially bearing in mind that the arranger is—to the knowledge of the recipient—mandated by the prospective borrower, there should be no scope for implying a fiduciary duty or similar obligation of good faith owed by the arranger to the prospective participant.27 It is true that, in some cases, courts have expressed the view that a fiduciary relationship may exist between the arranger and the syndicate member28 but, as others have pointed out,29 the court seems to have applied general principles of law without examining in depth the nature of the particular market.30 Once again, it is therefore submitted that the court should not find or imply any fiduciary duty owed by the arranger to the recipient of the memorandum.31

21.14  In the ordinary course, therefore, the arranger should not incur any liability to a loan participant merely because the information memorandum contains information which is later found to be untrue and on which the recipient places reliance.32 As noted earlier, the arranger will usually be a party to the syndicated facility agreement and this will include a number of exculpatory provisions with respect both to the information memorandum and (p. 423) any other material generated in connection with the facility.33 Since the arranger’s role will have been completed as at the time of signature of the loan agreement, it is by no means clear that it provides any consideration for the benefit of these protective clauses.34 However, the point will not normally be of great practical importance because the information memorandum will itself have contained similar provisions, which will have been known to the participants when they decided to commit to the transaction.

21.15  Yet not every case will be ‘ordinary course’. Litigation in this type of area is highly fact-sensitive, and there may be instances where the arranger will be held responsible for information provided to the syndicate in the pre-contractual period. An example is offered by the decision in Sumitomo Bank, Ltd v Banque Bruxelles Lambert SA,35 where a group of banks were invited to participate in a property facility. Since the loan to value ratio exceeded that which banks would normally accept, the excess amount was to be covered by a mortgage indemnity guarantee policy. The arranger indicated to the participants that it would be responsible for organizing the policy but, when a claim ultimately fell to be made, the insurer denied liability on the basis that the required full disclosure had not been made at the outset. The arranger was held to be liable for the syndicate’s losses, on the basis that (i) it had assured the participants that the policy would be put in place, (ii) this necessarily implied that the arranger would take steps to ensure the validity of the policy, (iii) in practical terms, the arranger was the only party who could ensure that full disclosure was made, and (iv) it realized that the syndicate would be relying on it to ensure that the policy was put in place. This situation can readily be distinguished from the ‘ordinary course’ situations discussed above, on the following bases:

  1. (a)  the information provided by the arranger related to steps which it was itself to take in ensuring that the facility was correctly secured, and these assurances were not related to or dependent upon information provided by the borrower;

  2. (b)  it was reasonable for the participants to rely on the expectation that the arranger would act competently in putting the policy arrangements in place; and

  3. (c)  in the circumstances, the standard contractual protections did not apply to cover pre-contractual negligence.

Regulatory Aspects

21.16  It is finally appropriate to consider whether there are any broader, regulatory issues that may apply to the role of the arranger? In particular, as noted above, the arranger will be responsible for the circulation of an information memorandum that solicits contributions to the proposed syndicated facility.

21.17  The principal restriction against the circulation of materials promoting investment activity is to be found in section 21 of the FSMA. That provision is known as the ‘financial (p. 424) promotion restriction’ and states that ‘A person…must not, in the course of business, communicate an invitation or an inducement to engage in investment activity’. A couple of general points may be made about this provision:

  1. (a)  first of all, ‘engaging in investment activity’ includes entering into an agreement to acquire a specified type of investment;36 and

  2. (b)  secondly, the financial promotion restriction does not apply if the document is issued or approved by a PRA/FCA authorized person.37

21.18  At this point, it might be thought that the present discussion should be of theoretical interest only, since almost any institution appointed to float a syndicated loan into the market would itself be a significant institutional participant and would therefore hold a range of permissions from the PRA/FCA. However, if the information memorandum does qualify as a ‘financial promotion’ for these purposes, then the document is subject to various content requirements and must be subject to internal approval processes.38 Under the circumstances and given the nature of the recipients, this level of formality may best be avoided, if possible.

21.19  There are, however, two bases on which the financial promotion restriction would not apply to a document seeking participations in a syndicated loan facility, as follows:

  1. (a)  first of all, as noted above, the financial promotion restriction only applies to a document relating to an investment. The list of relevant investments for this purpose includes39 (i) deposits,40 (ii) debentures, bonds and other instruments ‘creating or acknowledging any present or future indebtedness’,41 (iii) rights under an agreement for qualifying credit,42 and (iv) rights under a relevant credit agreement.43 None of these debt items are apt to embrace a participation in a syndicated loan agreement. The consequence is that such a participation is not an ‘investment’ for present purposes and, hence, the financial promotion restriction does not apply to an information memorandum of this type; and

  2. (b)  even if the analysis in (a) above were found to be incorrect, the information memorandum would be exempt from the financial promotion restriction on the basis that it would only be circulated to recipients who are PRA-authorized persons or whose business generally involves the lending of money.44

(p. 425) The Agent

Duration and Nature of the Role

21.20  It has been noted above that the arranger’s role comes to an end when the facility agreement has been signed. In contrast, the role of the agent is to administer the agreed facility. Consequently, its role is derived from the facility agreement itself, and thus only comes into formal effect once that agreement has been executed by the parties.

21.21  The role of the agent thus runs in parallel with the loan agreement itself. It will continue to be obliged to perform those functions until the loan has been repaid in full.45

21.22  Since the role of the agent is derived from the facility agreement, it follows that it owes obligations of a contractual nature both to the borrower and to the banks themselves.46

Functions of the Agent

21.23  The core function of the agent is to act as a ‘conduit’ between the borrower and the banks, both for payments and for the provision of information.47 This is partly a matter of administrative convenience, but it also helps to ensure that the banks have an equality of information on developments affecting the facility or the financial position of the borrower. Moving to a greater level of detail:

  1. (a)  the agent receives funding requests from the borrower and, if the conditions of the agreement have been met, will request the necessary funds from each of the banks;48

  2. (b)  the lenders will remit those funds to an account of the agent on the drawdown date, and the agent will in turn transfer those monies to the account nominated by the borrower;49

  3. (c)  when the borrower makes a repayment, it is required to do so through an account of the agent. It is then the responsibility of the agent to distribute that sum proportionately among all of the participating banks;50

  4. (p. 426) (d)  the agent receives financial and other materials from the borrower, and is required to distribute them to the individual syndicate members;

  5. (e)  generally, the agent is required to exercise—or refrain from exercising—its other functions on the instructions of a majority of the lenders.51 The agent will even be entitled to amend the terms of the loan and security documentation on the basis of a majority vote, although certain items (eg the interest rate, the repayment date and other core commercial terms) will be ‘entrenched’, and unanimous lender consent will be required in relation to those provisions.52 The ‘entrenched provisions’ will include matters that are fundamental to the initial credit decision to participate in the transaction. Thus, for example, unanimous approval will be required for changes to the repayment schedule, the rate of interest and other amounts payable under the agreement, the release of any security and similar matters. It may be open to question whether the list of ‘entrenched provisions’ is quite as wide as it should be. For example, loan agreements will contain ‘waterfall’ provisions that deal with the priority of application of payments received from the borrower. In one case, clauses dealing with ‘the order of priority or subordination’ under an intercreditor agreement was stated to be entrenched. However, the court held that the waterfall provisions that dealt with the application of payments did not cover the waterfall clause, with the result that such a provision could be altered by the majority lenders acting alone.53

21.24  It will therefore be apparent that the respective roles and functions of the arranger and the agent are quite different. The arranger’s task is to sell the loan asset; the agent’s task is to administer that asset on behalf of the lenders. To carry the distinction further, the arranger’s functions are pre-contractual, whilst the agency role only comes into being after the contract has been signed. The two functions are thus also distinct in terms of time. It is thus unsurprising that the circumstances under which an agent may incur liability to the syndicate members differs significantly from those discussed earlier in relation to the arranger.

Liability of the Agent—Gross Negligence and Wilful Misconduct

21.25  As noted above, the agent will owe duties of a contractual nature both to the borrower and to the lenders. Those contractual obligations will involve the due performance of the functions assigned to it under the terms of the loan agreement itself. In general terms, the existence of contractual obligations does not necessarily exclude the existence of a concurrent liability in tort.54 In the specific context of the agency role for a syndicated loan, however, it appears that the court will be reluctant to impose a duty of care in tort. This follows from the recent decision Torre Asset Funding Ltd v Royal Bank of Scotland plc.55 In that case, the court refused to extend the responsibility of the facility agent beyond its express contractual obligations. In particular, it accepted that the provision excluding the existence of a fiduciary (p. 427) relationship was valid and effective. Although an event of default existed,56 the court would not imply a duty on the part of the agent to inform other lenders to that effect.

21.26  In practice, the terms of the facility agreement will limit the liability of the agent (both in contract and in tort) to cases in which any losses incurred by the lenders have been directly caused by the agent’s ‘…gross negligence or wilful misconduct…’.57 Provisions of this kind have become ‘market standard’, and there is no reason to doubt the essential validity of this particular exclusion clause.58 By the same token, since the facility agent is acting at the request and on behalf of the lenders, the documentation will entitle it to an indemnity against any losses which it may suffer, again provided that these losses do not flow from the agent’s own gross negligence or wilful misconduct.59 It follows that, both in terms of exculpation and its right to indemnity, the meaning of the expressions ‘gross negligence’ and ‘wilful misconduct’ will be critical and those terms therefore merit a brief review.60 It should be said at the outset that much of the English case law about to be noted arises from exemption clauses designed for the protection of trustees. However, it would seem appropriate to apply similar reasoning to the position of an agent under a syndicated loan agreement.

21.27  The expression ‘gross negligence’ has been described cleverly—but not especially helpfully— as the same thing as ordinary negligence but ‘…with a vituperative epithet…’,61 and it has been doubted whether there is any material difference between ‘negligence’ and ‘gross negligence’.62 Yet the House of Lords has said that the meaning of a contract must be ascertained objectively, by determining ‘…the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract…’.63 Applying that test, it is surely inappropriate simply to disregard the word ‘gross’; it is plain that, by using it, the parties intended to refer to something more than ordinary negligence. It may be that the difference between ‘negligence’ and ‘gross negligence’ will often be difficult to discern in practical situations, but that does not absolve the court from its obligation to give effect to the terminology which the parties have chosen to use. The law is, in any event, accustomed to fine distinctions and questions of degree.

21.28  Happily, more recent case law acknowledges this position. A US court has specifically confirmed that ‘negligence’ and ‘gross negligence’ involve different degrees of culpability—a point which, apart from the English case law, would be linguistically obvious. In the case concerned,64 an agent’s bank failure to consult counsel on the need to register a security (p. 428) interest was careless but, under the particular circumstances,65 did not amount to ‘gross negligence’. The English courts have picked up this baton, again holding that gross negligence ‘exceeds’ negligence, and involves either conduct undertaken in the knowledge of the likely risks, or serious disregard of (or indifference to) an obvious risk.66 Indeed, in Camerata Property Inc v Crédit Suisse Securities (Europe) Ltd,67 the court noted that the expression ‘gross negligence’ has never been accepted by the English courts as a concept separate from ordinary, civil negligence, but went on to observe:68 ‘The relevant question is not whether generally gross negligence is a familiar concept in English civil law, but the meaning of the expression in these paragraphs of these terms and conditions. I cannot accept that the parties intended to connote mere negligence.’ The court then held that an investment adviser had not been guilty of ‘gross negligence’ in failing to advise a client of developing counterparty risk in relation to Lehman Brothers. The US cases have generally assumed that the contractual exclusions of liability as between sophisticated parties are valid and effective. This was probably a reasonable assumption but the point was subsequently confirmed in express terms in another case arising out of the collapse of Enron Corporation. In Unicredito Italiana SpA v J P Morgan,69 both defendants—JP Morgan and Citibank—had detailed knowledge of so-called ‘prepays’ and off-balance sheet transactions undertaken by Enron as a result of their close business relationship. However, these transactions were not disclosed to other lenders in syndicated deals administered by those institutions as agent. The participant bank sought to recover its losses on the basis of fraud and misrepresentation, but the court dismissed these claims because, in line with the standard terms of the facility agreement, there was no duty of disclosure in the first instance. A claim based on an agent’s implied fiduciary duty/duty of good faith was dismissed on the same basis.

21.29  On the other hand, ‘wilful misconduct’ connotes a deliberate (rather than merely careless) step, taken in the knowledge that the step is wrongful.70 The use of the word ‘wilful’ includes the notion that the step is known to be wrongful at the time it is taken, rather than with the benefit of hindsight.71

21.30  In terms of an absolute position, it is therefore possible for the agent to exclude liability for all forms of negligence or misconduct, other than fraud itself—a point determined by the Court of Appeal in Armitage v Nurse.72 As a result, it is technically possible for a facility agent or trustee contractually to exclude liability for its own gross negligence.73 (p. 429) However, the syndicated loan market has determined that a higher standard of conduct is required and that the facility agent should be accountable for it. The market and contractual compromise is that the agent will be liable for losses suffered by the lenders as a result of the agent’s fraud, wilful misconduct or gross negligence.74 It may be added in passing that a trustee exemption clause has been found not to be subject to the Unfair Contract Terms Act 1977, on the basis that the exemption was created by a unilateral trust deed, rather than by contract.75 That decision is probably inapplicable in the present context because the exclusion clause will be contained in a facility agreement. However, as between contracting counterparties in the loan market, it must in any event be very unlikely that a challenge to the exclusion clauses based on the 1977 Act would succeed.

Other Sources of Liability and Protections

21.31  Leaving aside the specific provisions dealing with gross negligence and wilful misconduct, it is appropriate to highlight a few miscellaneous points relating to the liability and protection of the agent:

  1. (a)  an agent who takes action on the instructions of the majority lenders76 will generally be protected from any liability for any loss suffered by a lending bank as a consequence of that action.77 This will remain the case even though the bank concerned may have voted against that action because—obviously—the agent has to be able to obtain binding instructions from some quarter, and the majority lenders are the obvious source;78

  2. (b)  an agent is generally obliged to avoid placing itself in a position in which its own interests conflict with those of its principal.79 In order to counteract any suggestion that the agent is prohibited from other dealings with the borrower or has to account for any resultant profit, the LMA document—recognizing market realities—specifically states that the agent may conduct other business with the borrower.80

  3. (c)  it has been suggested that an agent bank which takes security for its own separate facility—thus diluting the assets available to the unsecured syndicate—is liable to the syndicate members for resultant losses because the taking of such security constitutes a breach of the agent’s fiduciary duty.81 Now, it may be that the use of the language of ‘agency’ tends to confuse matters but, in any event, agency relationships are not homogeneous; the precise nature and extent of the respective rights and obligations (p. 430) of the parties depend both on the terms of the contract itself and the practices of the market concerned. In essence, the agent is appointed solely to perform the tasks imposed upon it by the facility agreement itself. It is suggested that the court should take great care in imposing wider duties of good faith falling outside the scope of the agreement—especially in a case of this kind where it is invariably accepted that the agent may have other business relationships with the borrower;82

  4. (d)  a similar, excessively broad brush approach taints the decision of the US court in Chemical Bank v Security Pacific National Bank,83 where the court simply held that acceptance of an appointment as agent necessarily involved an assumption of fiduciary duties to the principal. This may well be so, although it places terminology ahead of substance and fails to recognize that different markets will have different expectations. The court held that an agent bank which mistakenly failed to register a security interest thereby incurred liability to the syndicate for breach of its fiduciary duty, on the basis that it had acted negligently and in breach of its contract. It is submitted that this confuses a number of different heads of liability which might have benefited from individual treatment. Nevertheless, the point did not ultimately matter because the court found that the agent, whilst in breach of some duty, had not been guilty of ‘gross negligence’ and was thus protected by the provisions which have been discussed above;84

  5. (e)  another US decision holds (rightly, it is submitted) that the existence or absence of a fiduciary relationship is to be determined by reference to the terms of the contract, and that no such relationship should be inferred in a commercial transaction between parties of similar bargaining power and experience where no such relationship is expressly created;85

  6. (f)  in summary, it is submitted that the extent of the agent’s liability should be determined by reference to its functions and any relevant protections under the facility agreement itself. It is not generally appropriate for the court to look for broader fiduciary duties in cases of this kind.

Relationship between Individual Banks and the Borrower

21.32  As in the case of a single bank loan, the essence of the relationship between a syndicate bank and the company remains that of lender and borrower. How does the grouping (p. 431) of the banks as a syndicate affect this relationship? The key points of difference are as follows:

  1. (a)  Crucially, each bank is only liable for the advance of funds to the borrower up to its own agreed participation limit.86 A bank is not responsible for the failure of another institution to perform its obligations.87 Although the situation rarely arises in practice, it should be appreciated that the borrower is taking a performance risk on a group of banks.88 The point could be important where the loan is to be used to fund an acquisition, for failure by a single, relatively minor participant could leave the borrower unable to complete the commercial transaction, even though all of the other lenders have complied with their funding obligations.

  2. (b)  Each bank is able independently89 to take steps to enforce payment of the monies which have already fallen due to it. This point will usually be made apparent by the terms of the facility agreement itself, which will specifically state that the rights of the lenders are several and, hence, an individual lender can take proceedings against the borrower in respect of sums due to it without being required to join in the facility agent or the other lenders for this purpose.90 Yet some care is still required. In an unusual case, the New York Court of Appeals has recently held that the delegation of enforcement rights to the agent, coupled with the absence of a clause allowing individual lenders to take separate action for overdue amounts, must lead to the conclusion that the lenders contemplated ‘collective action’ by way of enforcement and that individual proceedings were thus inadmissible.91 Even if it is somewhat unpopular from the debtor’s perspective, the correct view appears to be that—in the absence of a specific prohibition—syndicate members can sue for the monies due to them even if the other lenders decline to take proceedings under the same circumstances.92

  3. (c)  The formulation in paragraph (b) above does, however, beg a significant question, namely, to what extent are the amounts owing in respect of the facility actually due for payment? In this context, it should be appreciated that an individual bank cannot (p. 432) cancel or accelerate the facility. That right will usually be exercisable only by the agent on the instructions of a majority group of lenders.93 The majority may, equally, direct the agent to refrain from exercising any discretion which may be vested in it with respect to the acceleration of the loan.94

  4. (d)  It should be appreciated that the enforcement rights listed in (b) above are limited in certain practical terms. For example, whilst an individual bank may take legal proceedings with a view to seeking payment and could serve a statutory demand with a view to the presentation of a winding-up petition,95 it cannot enforce any security over the borrower’s assets.96 That security is held by the agent as trustee, and the individual syndicate banks only have a beneficial interest in the security arrangements. Enforcement proceedings must therefore be initiated in the name of the agent, and the agent will normally only take that step if the majority lenders so determine.97 In other words, the individual syndicate member can enforce those rights which are referable to its status as an unpaid (and unsecured) creditor, but it cannot directly enforce any rights associated with the security package.

Relationship between the Individual Banks

Introduction

21.33  As noted above, a syndicated facility is in many ways merely a convenient means of documenting a series of bilateral loans, all of which are made available for the same purpose. But, in practice, it is impossible to avoid the reality that the banks have all been invited to participate in what is effectively a single facility. The present section accordingly examines the consequences of that state of affairs for the contractual relationship among the lenders themselves.

Several Obligations

21.34  As noted earlier, an individual syndicate bank is not liable for the performance of the obligations of any other syndicate bank. In other words, the obligations of the lenders are several, rather than joint. In this sense, the legal relationship between the lending banks is of a relatively limited nature.98

(p. 433) Consents, Instructions, and Waivers; Majority Rule

21.35  There are, however, certain cases in which the action of some lenders may affect the interests of others. For example, and as already noted above, the majority lenders may decide to give a waiver or consent under the terms of the facility agreement.99 They may also elect to accelerate the facility following the occurrence of a default and determine whether (and if so, when) any security is to be enforced. Under the terms of the agreement, any such action will be binding on other lenders notwithstanding that they voted against it.100 Under a bilateral facility, the lending bank would have a veto on such matters; in a syndicated loan, it merely has a vote on them.

21.36  Yet it is necessary to go further than this. To what extent does a lender have to take into account the interests of other syndicate members in deciding how to vote on a particular matter? It seems plain that the lender owes no fiduciary duty to the borrower in exercising its powers, since their interests will often be diametrically opposed.101 But do the banks owe any duties as between themselves? The relationship among the banks is that of co-lenders and, once again, there is no basis for implying any form of fiduciary duty in this context. As a starting point, therefore, a lender is entitled to look solely to its own interests in deciding how to vote on any particular matter. Yet, as in almost any context, the court will be astute to prevent the misuse of powers or obvious cases of bad faith.102 Thus, in earlier cases dealing with the voting powers of bondholders, the court observed that those powers may be exercised in the interests of the bondholder himself, even though he may have particular interests which differ from those of the other bondholders; the court would only intervene to prevent ‘unfairness or oppression’.103 Clearly, a vote to prioritize or divert payments to the majority bondholders will be oppressive, because it is designed to advantage the majority at the expense of the minority.104

21.37  In more recent years, the type of dispute which formerly arose under debenture stock trust deeds has crossed over into the syndicated loan market. There have been instances which have illustrated the conflict between the ‘majority rule’ and the ‘entrenched rights’, to which reference has already been made. For example, a US case illustrates the point that the individual, entrenched right of each lender to veto an extension of the maturity date of the loan may be of limited value if the majority lenders retain the right to direct (or prevent) the enforcement of the security or collateral package by the agent or security trustee.105

21.38  The English courts have been confronted with a similar problem in recent times. In Redwood Master Fund v TD Bank Europe Ltd,106 a syndicated facility had been made available to a borrower in three separate tranches (labelled facility A, B, and C). Facility A was a revolving credit facility which had not been drawn at the relevant time. Apart from relatively (p. 434) minor amounts, facilities B and C were fully drawn. The borrower ran into difficulties and applied for waivers of breaches of financial undertakings.107 The majority voting procedures allowed lenders holding 66.66 per cent of the overall facilities to grant waivers of this kind.108 The necessary majority voted for a waiver of the default on the basis of the borrower’s undertaking to pay down a part of facility B by drawing the necessary funds on facility A. Perhaps unsurprisingly, the facility B lenders voted in favour of this arrangement; the necessary majority was easily obtained because facility B was by far the largest segment of the overall facilities. Equally unsurprisingly, however, the facility A lenders viewed this prospect with rather less enthusiasm. Their currently undrawn position would be utilized solely for the purpose of paying lenders in another part of the syndicate. The A lenders thus brought proceedings for a declaration that they were not bound by the terms of the waiver letter on the basis that the majority were required to use their powers for the benefit of the syndicate group as a whole or, at least, could not use them to the specific disadvantage of a distinct lender group. The court rejected this line of argument, holding that it was impossible to imply terms of this kind into a lengthy facility agreement which had been professionally prepared and negotiated. More generally, the court held that it should only interfere with decisions taken under ‘majority rule’ provisions of this kind if the relevant action was manifestly discriminatory or oppressive towards the minority lenders. The evidence would have to show that the majority had been acting in bad faith and seeking to use their powers for an improper purpose. In the light of these tests, minority lenders who seek to challenge majority decisions will thus have something of a hill to climb. In particular, it seems that the fact that one group of lenders is disadvantaged will not be a sufficient ground of challenge if the overall proposal is clearly for the benefit of the lending group as a whole.

21.39  In addition, and as applies to any other contractual provision, difficulties of interpretation may arise in particular circumstances. It has been noted earlier that the LMA standard form documents allow for most consents, waivers and amendments to be approved via a majority vote of the syndicate members. However, certain fundamental provisions are ‘entrenched’ and can only be revised with the unanimous approval of all of the lenders.109 The difference is, of course, significant; if a right or provision is entrenched, then the holder of a tiny portion of the overall loan can block an amendment to the facility that has been agreed between the borrower and the vast majority of lenders.110 The interpretation of the ‘entrenched rights’ clause fell for consideration in The Bank of New York Mellon v Truvo NV.111 In essence, the ‘entrenched rights’ clause required unanimous approval for any amendment that had ‘the effect of changing or which relates to…the order of priority or subordination under this Agreement’. The borrower was in imminent danger of breaching the financial covenants in the agreement. It accordingly sought amendments to the documentation to limit the rights of the lenders to accelerate the loan on the basis of such a breach. The request—later (p. 435) approved by the majority lenders—included a provision for mandatory prepayments out of asset disposal proceeds and excess cashflow to be applied in a revised order as between the various lending groups. The court held that references to priority or subordination in the entrenched rights clause were intended to address issues that might arise on the insolvency of the borrower. As a result, amendments dealing with the order of application of proceeds whilst the borrower remained solvent were not matters of priority or subordination. It followed that the amendments fell outside the scope of the entrenched rights clause and was thus validly approved by the majority lenders only.

Pro Rata Sharing

21.40  The pro rata sharing clause112 supports the central principle that the syndicate lenders should share equally the risks and rewards of the facility—occasionally referred to as the ‘equal misery’ principle. In essence, the clause provides that, in the event that a bank receives a payment from the borrower which is in excess of its pro rata share of that payment, then it must account to the agent for that sum so that it can be paid proportionately to all syndicate members. The clause is intended to reinforce the application of the equal risk/equal reward principle to which reference has already been made.113 It is necessary to ask why a pro rata sharing clause should be required at all. The borrower’s obligation is to make all payments to the agent, which is in turn responsible for ensuring that those sums are distributed proportionately among the syndicate banks.114 Why, then, are further provisions necessary in order to reinforce the equality principle?

21.41  The answer lies in various episodes which have affected the syndicated loan markets over the years. For example, during the Iran hostage crisis in 1979,115 the Government of Iran ignored its obligation to direct repayments through the agent. Instead, they made payments direct to all of their European bank lenders, but they withheld payment from US-based lenders. This action was, of course, politically motivated but it resulted in a violation of the equal risk/equal reward principle. A similar situation arose in 1982, when Argentina invaded the Falkland Islands, a British Dependent Territory. Once again, the Argentine Government made payments direct to US and continental lenders, but by-passed the process for payment via the agent and withheld payment from UK banks. The pro rata sharing clause was thus developed and refined in response to these crises, in an effort to ensure that banks bore the risks proportionately, regardless of the country in which they happened to be based.116

21.42  It will thus be apparent that the pro rata sharing clause owes its origins and subsequent development to crises of a political nature involving sovereign borrowers. Nevertheless, the issue may arise in the context of ordinary corporate loans. Suppose, for example, that a corporate borrower goes into insolvent liquidation. It has an outstanding syndicated loan (p. 436) with a group of five banks. However, one of those banks holds substantial deposits from the borrower. Accordingly, that bank exercises a right of set-off against those deposits to repay its portion of the syndicated facility. It seems clear that the proceeds of the set-off would have to be shared with the other syndicate members under the terms of the pro rata sharing clause, because the relevant bank has received an amount in excess of its proportionate share of that payment.117 There may also be cases in which one bank is able to recover on its security, whilst another is not. Cases of this kind will be rare, given that the security is generally created in favour of the agent118 for the benefit of all lenders. Nevertheless, this did occur in one case,119 and it is possible to conceive of its application in others.120

21.43  Whilst these principles appear to be clear, their application in a particular case may not be quite so straightforward. In particular, the clause only comes into operation if an individual syndicate member receives a direct payment in respect of monies owing to it under the relevant facility agreement. But some lenders121 may have amounts owing to them under separate, bilateral facilities or even under separate, syndicated facilities. If such a lender receives a payment direct from the borrower, it will have to redistribute those monies for the benefit of the other syndicate lenders if it has received those monies in respect of the particular syndicated facility concerned. But money is a fungible commodity, so how will this be proved? If a payment of an amount equal to a principal and interest instalment is received by that lender on the due date under the syndicated agreement, then that will obviously be very strong evidence that the payment relates to that agreement and the pro rata sharing clause would have to be applied accordingly.

21.44  If, however, the receipt cannot be allocated in this way—for example, because the payment is received as a result of the lender’s unilateral decision to exercise a right of set-off—then can the lender appropriate the receipt to its own, bilateral facilities and thus retain the full benefit of it for its own account? Or is it under an obligation to prefer the syndicated deal, and thus bring those funds into account under the pro rata sharing clause? In the absence of an express provision dealing with this matter,122 then the lender could only be obliged to give priority to the syndicated transaction if it were possible to imply into the agreement a clause to that effect. However, it is submitted that there is no consideration of ‘business efficacy’ which is necessary to create such an implication. If anything, the LMA document implies to the contrary,123 and it is thus necessary to conclude that the lender is free to prioritize its own bilateral facilities in applying the proceeds of any set-off.

(p. 437) 21.45  As a final point, it has already been noted124 that individual banks may take proceedings to enforce their own debt claims as against the borrower. Since that exercise involves both risk and expense for the bank concerned, it would be unreasonable to expect that bank to share the fruits of that litigation with other lenders who chose not to participate in the proceedings. The syndicated facility agreement should accordingly exclude the obligation to share receipts in this type of situation.125

Liability and Regulatory Aspects

21.46  It remains to consider two issues relating to risk and regulatory liability which may arise in the context of participation in a syndicated loan, namely, (i) the risk that a lending bank may be responsible for the obligations of another lender which fails or refuses to advance funds under the agreement and (ii) the possibility that the structure might constitute a ‘collective investment scheme’ for the purposes of the Financial Services and Markets Act 2000 (FSMA) and, hence, would become subject to a variety of regulatory requirements.

21.47  As to the first, liability point:

  1. (a)  It has already been noted that a syndicated loan agreement will provide that the obligations of the lenders are several and not joint, and that syndicate members should not have any liability for a failure or non-compliance by another syndicate member. Is there any basis on which the effect of such a contractual provision could be disregarded?

  2. (b)  It is fundamental to the lenders in a syndicated loan facility that they are responsible only for the provision of funds up to their pre-agreed commitment. They will, after all, have obtained the necessary internal credit approval on that basis. But courts in the United States have stressed the collective or ‘joint venture’ nature of syndicated loans.126 It is thus necessary to consider whether a disaffected borrower could sue other syndicate banks on the basis that they are responsible for the failure of one of their number to provide its share of the facility.

  3. (c)  So far as English law is concerned, the only basis of such possible liability appears to be the Partnership Act 1890, on the footing that the syndicated loan agreement constitutes a partnership among the lenders. Section 1 of the 1890 Act provides that partnership ‘…is the relation which subsists between persons carrying on business in common with a view of profit…’. Where such a relationship exists, then each member of the partnership ‘…is jointly liable with the other partners…for all debts and obligations of the firm incurred while he is a partner…’.127

  4. (d)  It might conceivably be argued that the syndicate members are carrying on business in common and with a view to profit, on the basis that they share both the risks and rewards of the arrangements on a proportionate basis.

  5. (e)  Nevertheless, whilst the banks will be sharing the gross margins and fees on a proportionate basis, they will not be sharing profits on the same basis, since the actual profit (p. 438) on the transaction of each individual institution will vary according to its particular circumstances.128 As a result, an ordinary syndicated loan should not result in the creation of a partnership since ‘…the sharing of gross returns does not of itself create a partnership…’.129

  6. (f)  Matters may become a little more involved where—as is commonly the case—the interest margin varies according to the profitability of the borrower’s business.130 The linking of the interest return to the underlying profits certainly creates at least an impression that the banks are acting in partnership with the borrower itself. But this will not be treated as a partnership at law because (i) the lenders are not carrying on a business in common with the borrower and (ii) it is specifically provided that ‘…receipt of a payment contingent on or varying with the profits of a business…’ does not of itself render a person a partner in that particular business.131

  7. (g)  In any event, there is nothing in the 1890 Act which prohibits a specific agreement to the effect that individual partners are only to be liable among themselves to a particular extent or manner. Accordingly, the borrower’s usual acknowledgement that the obligations of the lenders are several and that they will not be responsible for the default of the other lenders132 should, in principle, be legally valid and effective.

  8. (h)  It follows that, in ordinary circumstances, a syndicate lender is not responsible for the performance of the obligations of any other lender.

21.48  As to the second, regulatory issue:

  1. (a)  Part XVIII (sections 235–283) of the FSMA regulates ‘collective investment schemes’ in a variety of ways. In particular, it restricts the circulation of promotional material, even by persons who hold authorization from the FSMA.133 Furthermore, a person who establishes or operates a collective investment scheme must hold authorization from the Financial Services Authority for that purpose.134 These rules would have obvious consequences, in that the arrangers need to circulate an information memorandum in order to identify participants for the facility, and the facility agent plainly acts as administrator of the arrangements. It is therefore necessary to determine whether a syndicated loan transaction does indeed amount to a ‘collective investment scheme’ for these purposes.

  2. (b)  It is accordingly necessary to ask (i) what is a collective investment scheme and (ii) does a syndicated loan agreement have the characteristics of such a scheme?

  3. (c)  By virtue of section 235(1) of the FSMA, a collective investment scheme is constituted by

    …any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it, or otherwise) to participate in or (p. 439) receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income…

    On the face of it, this definition is wide enough to embrace a syndicated loan.

    1. (d)  However, an arrangement only amounts to a collective investment scheme if ‘…the persons who are to participate do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions…’.135 In the writer’s view, this condition is not met because—apart from administrative duties—the facility agent will in practice have very limited discretion as to the management of the loan or any decisions to be taken in connection with it. It will have to consult all of the lenders and will have to act in accordance with their directions.136 It is true that, in some cases, the agent will be required to act on the instructions of the majority lenders, but this would not appear to detract from the fact that the lenders have effective day-to-day control over their own individual participations in the loan.137

    2. (e)  Quite apart from this, the arrangements will only constitute a collective investment scheme if either (i) the contributions of the participants and the profits or income out of which they are to be paid are pooled or (ii) the property is managed as a whole by or on behalf of the operator of the scheme.138 It is doubtful whether either of these tests is met. The facility agreement will make it clear that the amounts owing to the individual investors are separate and independent debts, and this should negate any inference of ‘pooling’.139 As to the second element, the requirement that the property should be ‘managed’ by the operator of the scheme connotes a degree of discretion in its management. The essentially administrative duties of the facility agent would not appear to cross this threshold test.140

    3. (f)  As a result, a syndicated loan does not amount to a collective investment scheme and is thus not subject to the corresponding regulatory provisions of the FSMA.141

(p. 440) Security Arrangements

The Security Trust Structure

21.49  When a bank makes a facility available to a borrower, it will often take a guarantee from other group companies, and may also take security over the assets of the obligor group. This poses no difficulty where the guarantee and security arrangements are of an essentially bilateral nature.142 Two issues do, however, arise where the transaction is to be made available by a syndicate of lenders:

  1. (a)  it is cumbersome and inconvenient for a group of lenders to take security over the same assets. The concept of security created in favour of a number of entities does not sit well with English law; and

  2. (b)  the secondary loan market has been very active in recent years, and it is important to banks and other financial institutions that they should be able to trade their loan participations.143 Whilst it is possible to assign the benefit of a fully drawn loan and the associated security, this is an untidy process in the context of a syndicated transaction. Furthermore, if the credit is of a revolving nature,144 an assignment is not possible insofar as the lender remains obliged to make future advances. In such a case, a novation would be required; in substance, this amounts to a new facility and accordingly it would be necessary for the borrower to execute fresh security in favour of the incoming lender. The cost and inconvenience of this exercise would be significant, especially if a particular facility is heavily traded.

21.50  These difficulties have been circumvented by the use of a security trust structure. Any security associated with the facility is executed in favour of the agent as trustee145 for the banks which are members of the syndicate from time to time.

21.51  An institution which wishes to sell its participation in the loan may execute a form of transfer certificate.146 The effect of this arrangement is to transfer to the new lender (i) the outgoing lender’s title to the loan, (ii) the outgoing lender’s obligation to make further advances, and (iii) the outgoing lender’s interest in the security trust.147 Since the new (p. 441) lender acquires an interest in the security which is already established under a fully constituted trust, there is no need for the borrower to execute new security documents.

21.52  The agent bank will hold the security on trust for the lending group. It will usually be required to enforce the security if the set majority of the syndicate banks require it to do so.148 Individual banks cannot enforce their share of the security since, as noted earlier, the individual banks are not the owners of it; their interest is held in their capacity as beneficiaries under a trust.149

21.53  In the normal course, and for the reasons given above, the facility agent will usually enter into any security documents under the label ‘security trustee’. But some care is required in distinguishing between these two roles because, where the agent is acting as a trustee, the banks will be beneficiaries under the trust but will not have any positive obligations to the borrower in that particular capacity. On the other hand, where the facility agent is genuinely acting as agent for the banks, then any obligation contained in the relevant documents will be binding on the banks as principals. The capacity in which the agent acts for particular purposes will depend upon an analysis of the individual clauses of the agreement concerned. It has, for example, been held that the security assets and their proceeds may be held as a trustee, whilst contractual restrictions on assignment may be entered into as agent for—and, hence, will be binding on, the individual syndicate members.150 The need to distinguish between the various roles in which a particular party acts and the rights and obligations conferred upon it in that capacity assumed a particular importance in Landesbank Hessen-Thuringen Girozentrale v Bayerische Landesbank.151 In that case, Bayerische Landesbank through different branches acted as the facility agent for the syndicate lenders in the usual way. It also provided a hedging arrangement to limit the borrower’s exposure to exchange rate movements. In these capacities, it was respectively defined as the ‘Facility Agent’ and as the ‘Hedging Lender’. The distinction between these two roles became important because of a ‘waterfall’ clause which provided for the priority of application of payments. The first priority payment on the list consisted of the fees and expenses of the Facility Agent. Although there were certain curiosities in the language of the waterfall clause, it was held that the facility agent’s priority of payment extended only to costs and expenses incurred by it in its capacity as facility agent. It could not claim the same level of priority for amounts owing to it in its capacity as a hedging lender.152

(p. 442) Parallel Debt Clauses

21.54  The difficulty with the security trust structure lies in the fact that the trust device is not recognized in a number of civil law jurisdictions,153 and this may pose difficulty where any of the charged assets are situate in such a jurisdiction.154

21.55  The practical consequences of this state of affairs are highly significant; a charge created in favour of the security trustee could not secure a debt owing to other syndicate members, who would be treated as third parties for these purposes. This difficulty is frequently addressed by so-called ‘parallel debt’ provisions, which state that the amount outstanding under the facility agreement will be deemed to be owing to the security trustee, but that debt will be reduced by an amount equal to the payments actually received by the syndicate members under the facility agreement. The clause is designed to ensure that the security trustee can enforce the foreign security for the full amount owing to the syndicate, even though they are not parties to the relevant security document. A specimen of such a clause might read as follows:

  1. (a)  The borrower and each of the lenders agree that the security trustee shall be the joint creditor (together with the relevant lender) of each and every obligation of the borrower towards each of the lenders under the facility agreement, and that accordingly the security trustee will have its own independent right to demand performance by the borrower of those obligations (the ‘Parallel Debt’). However, a discharge of any such obligation to one of the security trustee or the lender shall, to the same extent, discharge the corresponding obligation owing to the other.

  2. (b)  Without limiting the security trustee’s rights under (a) above, the security trustee agrees that it will not exercise any rights as joint creditor in respect of the Parallel Debt unless it has consulted with the relevant lender as to the action which it proposes to take.

  3. (c)  In relation to the Parallel Debt, the security trustee acts in its own name and not as trustee, and none of its claims in respect of the Parallel Debt shall be held on trust for any other party. The security granted to the security trustee under the [foreign security documents] to secure the Parallel Debt is granted to the security trustee in its own capacity as creditor of the Parallel Debt.

21.56  It hardly needs to be stated that the ‘deeming’ provisions contained in the parallel debt clause are highly artificial. They seek to create a series of debt relationships which, otherwise, would not exist and which bear limited similarity to the realities of the underlying factual situation. If the borrower becomes insolvent, then the extent to which the parallel debt clause suffices to cover all of the debt owing to the entire syndicate would arise. The point would almost certainly fall to be determined by reference to the law of the country in which the charged assets are situate.155 However, where the transaction is unsecured, the validity of the clause should be governed by the law applicable to the facility agreement, subject to any public policy issues in the forum and the system of law that applies to the borrower’s (p. 443) insolvency procedure. In a major step, the French Supreme Court recognized the validity of parallel debt clauses in 2011.156 The company challenged the parallel debt clause on the basis that this could lead to a ‘double payment’ to the agent and the syndicate members. However, the Supreme Court rejected this argument on the basis that the contract specifically provided that payments made to the agent would reduce the obligation of the borrower to the syndicate lenders pro tanto.157

Intercreditor Issues

21.57  Reference has already been made above to the difficulties that may flow from waterfall clauses dealing with the priority of application of payments among parties to a syndicated loan agreement. Those problems may be compounded in the case of larger transactions, where different ‘layers’ of debt are used. For example, a large part of the debt may be provided by a group of senior lenders, who will have the benefit of a first charge over the package of security assets. A second group of lenders (referred to as ‘mezzanine’ or ‘junior’ lenders) will provide a second slice of debt. They will rank after the senior lenders in terms of priority over the security package and will receive enhanced fees or interest to reflect their increased risk of loss.

21.58  In such cases, the security package will usually be held by the facility agent for the senior lenders as security trustee for both the senior and the junior lenders.158 In such a case, however, the security trustee will hold the package for the benefit of both the senior and the junior lenders. The security trustee itself will usually also be a party to the transaction in its separate capacity as a senior lender and will thus have a significant financial exposure to the overall transaction. The scope for conflicts of interest in the context of the security trustee’s role will therefore be obvious. In addition, given that the senior and junior lenders will be providing funds under separate agreements, issues such as the payments waterfall and decisions about enforcement proceedings are dealt with in a separate agreement—usually referred to as an ‘intercreditor agreement’ —between the different classes of lenders.159 The conflicts and other difficulties that are inherent in such a structure were considered in Saltri III Ltd v MD Mezzanine SA SICAR.160 In that case, the security trustee enforced the security on the instructions of the senior lenders—including itself—and the net result was that no funds were available for distribution to the junior lenders. On the facts, the court held that the security trustee had complied with its obligation to obtain the best reasonably obtainable price.161 In addition, however, the court also held that the security trustee owed no duties of a fiduciary character to the junior lenders. The duties of the security trustee were of a purely contractual nature as set out in the intercreditor agreement itself. The security trustee was thus able to take into account its own interests as senior lender in determining the course of action to be taken.162(p. 444)

Footnotes:

1  As in the last chapter, for convenience of illustration, reference will be made to the provisions of the Multicurrency Term Facility Agreement (the ‘LMA document’) published on the website of the Loan Market Association.

2  Indeed, in some cases, the bank may not be permitted to undertake the entire transaction. See the discussion on large exposures and concentration risk in Chapter 6 above. There may, however, be other considerations which may lead to the syndication of a loan transaction. For example, the borrower may have relationships with a number of other institutions, and may thus wish to ensure that they each have a share of the new business; or it may wish to establish a wider range of banking relationships. Completion of a large, syndicated transaction may also enhance the borrower’s standing in the financial markets generally, thus enhancing its access to those markets on future occasions.

3  In some cases, it may be equally possible for the borrower to raise a series of bilateral facilities, rather than a syndicated loan. However, the syndicated structure may be much more convenient, especially where all of the lenders are to share in a common security package: see the security trust structure discussed at paras 21.49–21.56 below.

4  For example, such as the making and distribution of payments.

5  It must therefore be appreciated that a syndicated loan creates a web of separate contractual relationships among the various parties.

6  For a very useful and detailed work dedicated to this topic, see Mugasha.

7  The duration of the arranger’s role is, perhaps, of relatively limited legal significance. However, the point is made so that the roles of the agent and the arranger can be contrasted in this respect.

8  The arranger will, of course, receive a fee for its efforts. In most cases, the mandate will include a description of the essential terms of the proposed facility and authorize the arranger to syndicate the transaction on a ‘best efforts’ basis. This means that the arranger will take appropriate steps to market transactions to institutions which may have an interest in that type of business, but will not incur any liability to the borrower if it proves impossible to raise the required funds. In some cases, the arranger may also underwrite the facility, in the sense that it undertakes to provide the funding itself if it cannot find participants to the required level. Needless to say, the detailed terms and conditions of such a mandate are considerably more complex and the underwriting arrangements will have a significant cost so far as the borrower is concerned.

9  See paras 22.25–22.30 below.

10  The extent to which the arranger may incur liability in tort to the participants is considered below.

11  It may be that this aspect of the process involves an element of an advisory role. However, since the advice will relate to market conditions and sentiment—all of which may change at short notice—it is perhaps unlikely that the arranger could incur any liability to the borrower in respect of such advice.

12  Any institution acting as an arranger will, of course, seek to ensure the accuracy and completeness of information which it circulates to the market. It needs to preserve its reputation for future transactions, and the dissemination of misleading information may have regulatory consequences: see for example, FSA Handbook, MAR.

13  If the borrower is able to meet its obligations, then the lenders would not generally suffer any loss. In some cases, it might just be arguable that, had the correct information been given, the lenders would only have committed to the transaction at a higher interest margin, and the excess figure would then be recoverable from the arranger. Such a case would, however, be highly fact-sensitive and the case would, in practice, be very difficult to run. It may be added that, whilst the information memorandum is actually prepared and circulated by the arranger, the document remains the responsibility of the borrower—a fact emphasized by the provision found in the facility agreement and allowing for acceleration of the loan if the memorandum is found to have been materially misleading: see para 20.33(g) above.

14  See Mugasha, paras 3.64ff.

15  The arranger will generally be a party to the facility document, but any statement will have been designed to induce the lender to contract with the borrower itself.

16  ie the lender enters into the contract with the borrower in consideration of the information and assurances provided by the arranger. On misrepresentations by third parties, see Chitty, para 6-021.

17  IFE Fund SA v Goldman Sachs International [2006] EWHC (Comm) 2282 (CA). The decision does however suggest that the arranger makes an implied representation of ‘good faith’, in the sense that it is not knowingly in possession of details which show that the information memorandum is inaccurate. The point did not directly arise for decision in that case.

18  National Westminster Bank plc v Utrecht-America Finance Co [2001] 3 All ER 733.

19  Raiffeisen Zentralbank Osstereich AG v Royal Bank of Scotland plc [2010] Bus LR D65; [2010] EWHC 1392 (Comm).

20  In some jurisdictions, statutory rules dealing with improper trade practices may have an impact on the arranger’s liability: see Mugasha, para 3.113, discussing the decision of the Supreme Court of Victoria in Natwest Australia Bank Ltd v Tricontinental Corp Ltd (26 July 1993). The decision in that case may to some extent have been influenced by the fact that the arranger itself was the beneficiary of the guarantees that had not been disclosed in the information memorandum. Importantly, the syndicate lender had also specifically requested information on the borrower’s contingent liabilities, but the relevant information was still not disclosed. The decision is discussed by Mugasha, ‘Loan Syndication in Australia: Natwest v Tricontinental’ (1994) 9 BFLR 135.

21  It may not always be easy to recognize or define dishonesty—in Armitage v Nurse [1997] 2 All ER 705 (CA), it was held on the facts that ‘gross and culpable negligence’ could not be equated with dishonesty.

22  See the Raiffeisen, case, n 19 above, at para 83, discussing the decisions in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 and Royscot Trust Ltd v Rogerson [1991] 2 QB 297.

23  Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL); Caparo Industries plc v Dickman [1990] 2 AC 605.

24  Hedley Byrne, n 23 above.

25  [2007] 2 Lloyds Rep 449; [2007] EWCA (Civ) 811 (CA). This aspect of the Goldman Sachs decision was followed in Brown v Innovator One plc [2012] All ER (D) 273 (May); [2012] EWHC 1321 (Comm).

26  See South Australia Asset Management Corp v York Montague Ltd [1997] AC 191.

27  How can one act on behalf of one party, and yet owe a fiduciary duty to the other? Such a view would expose the arranger to undue conflicts of interest.

28  UBAF Ltd v European American Banking Corp [1984] QB 713 (CA).

29  Mugasha, para 3.124. See also the discussion in Ellinger, Lomnicka, and Hare, pp 764–765; as there pointed out—with a number of authorities—US courts have generally viewed the relationship between the parties as an arm’s-length commercial arrangement, and have thus been reluctant to impose fiduciary duties in that context.

30  The syndicated facility agreement will usually state explicitly that the arranger owes no fiduciary duties: see LMA document, clause 24.6(b).

31  For an article written from an Australian perspective and which broadly shares this view, see Skene, ‘Syndicated Loans: Arranger and Participant Bank Fiduciary Theory’ [2005] JIBLR 269. It may be added that the circulation of the information memorandum is effected on behalf of the borrower. It is thus impossible to infer any form of advisory relationship between the arranger and the recipient. This view seems to be right as a matter of principle but it is reinforced by a recent decision which suggests that advisory obligations will not readily be implied in this type of situation: see JP Morgan Chase v Springwell Navigation Corporation [2008] EWHC (Comm) 1186. The case is considered in more detail in Chapter 25 below.

32  Of course, if the arranger knew that the information was untrue when the memorandum was circulated, then it may be that the arranger has acted fraudulently, and different considerations will then apply—see the discussion in para 21.13(a) above.

33  Clause 26.14 of the LMA document includes confirmation by the lenders that they have made their own assessment of the borrower and of the facility, and of the accuracy and adequacy of the materials contained in the information memorandum.

34  In some respects, the court in Sumitomo Bank, Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyds Rep 487 proceeded on the footing that the contractual protections available to an arranger did not cover conduct prior to the execution of the facility agreement. The decision is considered below.

35  [1997] 1 Lloyds Rep 487. On this case, see Sequeira, ‘Syndicated Loans—Let the Arranger Beware!’ [1997] 3 JIBFL 117.

36  See s 21(8) and (9) of the FSMA.

37  See s 21(2) of the FSMA.

38  For details of these requirements, see PRA Handbook, SYSC 3, SYSC 4, and COBS 4.10.

39  See Pt II of Schedule 1 to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529), referred to as the ‘Financial Promotion Order’.

40  Loans made to a borrower under a syndicated loan agreement will not amount to ‘deposits’ with the borrower entity because they will be made by a PRA-authorized entity or another company whose ordinary business consists of lending money: see the discussion at para 1.14(g) above.

41  A syndicated loan agreement will not fall within any of these categories because no debt instruments will be issued and a loan agreement does not of itself ‘create or acknowledge indebtedness’; it merely creates a right to draw advances under specified conditions.

42  The expression ‘qualifying credit’ refers to the promotion of credit to prospective borrowers and is thus inapplicable to a document which constitutes an invitation to prospective lenders.

43  Again, this category will not apply because ‘relevant credit agreement’ refers only to loans to individuals—see para 26D of Sch 1 to Pt II of the Financial Promotion Order.

44  This is the so-called ‘investment professionals’ exemption in Art 19 of the Financial Promotion Order. The exemption is subject to the conditions set out in Art 19(3) and (4), but these would be met in practice.

45  It should be noted that a particular agent has the right to resign, but there must be an institution which acts as agent throughout the life of the loan: see LMA document, clause 26.11(e).

46  As noted above, the parties to the facility agreement will include the borrower, the lending banks, the arranger, and the agent. However, the agent does not usually assume any material obligations in favour of the arranger (they are not infrequently the same institution in any event).

47  Notwithstanding the ‘conduit’ nature of the role, it should be appreciated that the agent is appointed to act as agent for the lenders—it is not an agent for the borrower. The significance of this point is explained in n 49 below.

48  LMA document, clause 5. On the extent of the obligations of individual banks to contribute to advances, see para 21.32 below.

49  It should be noted that, so far as the borrower is concerned, the process of payment to it is only complete when the funds actually reach the borrower’s nominated account. Consequently, if the agent receives funds from the lenders but fails to pass them on to the borrower (eg because the agent goes into administration on that day) then payment to the borrower has not been made, and it could require the lenders to advance the funds to it again. Payment to the agent does not discharge the lenders’ obligations, because it acts as agent for the lenders (and not for the borrower). As a result, payment to the agent does not equate to payment to the borrower. Of course, if the funds reach the borrower’s bank then the lenders’ obligations are discharged. From that point, the borrower takes the risk that the funds are lost through the failure or default of its own bank.

50  On payment mechanics generally, see LMA document, clause 29. Since the agent has been appointed as agent of the banks to receive this payment, it follows that the borrower’s payment obligation is discharged once the funds reach the agent’s account. Consequently, if the agent fails to account to the lenders, the borrower cannot be made to pay a second time. It should be noted that the obligation of the agent is to distribute funds received pro rata to the participations of the individual banks. This is designed to ensure that the risks and rewards of the facility are shared according to the percentage interests of the banks. This has occasionally been referred to as the ‘equal misery’ provision and it is further reflected in the ‘pro rata sharing clause’, which is considered later in this section in the context of the relationship between the individual lending banks (see paras 21.33–21.45 below).

51  This will frequently be a group of lenders who account for 66.66 per cent of the loan.

52  On these points, see LMA document, clause 35.

53  Bank of New York Mellon (London branch) v Truvo NV [2013] All ER (D) 54 (Feb); [2013] EWHC 136 (Comm). The case is considered further at para 21.39 below.

54  On this point, see Henderson v Merrett Syndicates [1994] 3 All ER 506 (HL).

55  [2010] All ER (D) 295 (Oct); [2013] EWHC 2670 (Ch).

56  On this aspect of the case, see para 20.46(g) above.

57  See LMA document, clause 26.9(a).

58  This impression is reinforced by the Court of Appeal decision in IFE Fund SA v Goldman Sachs International (n 17 above) upholding the validity of similar exculpatory provisions in the information memorandum. It may be added that the fees paid for the performance of the agency function are in practice relatively modest, and this may reinforce the impression that it is not intended to undertake wide-ranging and substantive liability to the syndicate members. However, it is, of course, one thing to say that the clause is valid, but it is quite another to determine its scope, meaning and effect. These issues are considered below.

59  See LMA document, clause 26.10.

60  On the same subject, see Mugasha, paras 9.58–9.61.

61  See Wilson v Brett (1843) 11 M&W 113.

62  Pentecost v London District Auditor [1951] 2 KB 759; Armitage v Nurse [1998] Ch 241 (CA).

63  See Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at p 912; Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 (SC). The proper construction of contract terms is, of course, a very large one. For an authoritative discussion, see Chitty, paras 12-041 et seq.

64  Chemical Bank v Security Pacific National Bank 20 F 3d 375 (9th Cir, 1994).

65  A security interest had already been registered in favour of the agent in a separate facility, and it had not been appreciated that a further registration was required for the subsequent, syndicated transaction.

66  See Red Sea Tankers v Papachristidis [1997] 1 Lloyds Rep 547. For an English case in which the Court of Appeal had to consider the German law concept of gross negligence, see Tradigrain SA v Intertek Testing Services Canada Ltd [2007] All ER (D) 376 (CA). See also Great Scottish & Western Rail Co v British Railways Board (10 February 2000, CA), noted by Mugasha, para 9.59.

67  [2011] 2 BCLC 54. By way of contrast, the court in Marex Financial Ltd v Fluxo-Cane Overseas Ltd [[2010] All ER (D) 295 (Oct); [2010] EWHC 2690 (Comm) seems to have been less enthusiastic to pursue the precise effect of adding ‘gross’ to ‘negligence’.

68  Camerata Property Inc, n 67 above, para 161.

69  288 F Supp 2d 485 (2003, SDNY).

70  Lewis v Great Western Railway Co (1887) 3 QBD 195 (CA).

71  Chemical Bank v Security Pacific National Bank 20 F 3d 375 (9th Cir, 1994).

72  [1998] Ch 241. This principle applies even to a professional trustee who charges for his services.

73  Albeit in the context of specific Guernsey legislation on trusts, the Privy Council reached the same conclusion in Spread Trustee Co Ltd v Hutcheson [2012] 1 All ER 251. The judgments contain wide-ranging discussions of the whole subject.

74  See LMA document, clause 26.10.

75  Baker v J E Clarke & Co [2006] EWCA Civ 464 (CA).

76  As noted earlier, ‘Majority Lenders’ is normally stated to be lenders holding 66.66 per cent of the participations, although this is a matter for agreement.

77  See LMA document, clause 26.7. It is implicit in these provisions that the agent will obtain its mandate from the syndicate by making a full disclosure of the issues at stake and the reasons or need for the proposed action. The agent obviously could not rely on an authority obtained on the back of an incomplete disclosure to its principals.

78  Certain ‘core’ actions affecting the amounts owing under the agreement, the maturity dates, and the interest margin are reserved matters which would require the consent of all of the lenders: see LMA document, clause 35. These provisions are considered in paras 21.36–21.39 below.

79  Although, on the application of general agency principles in this particular context, see para 21.26 above.

80  LMA document, clause 24.

81  NZI Securities Ltd v Unity Group Ltd (High Court of New Zealand, 11 February 1992), discussed by Mugasha, para 3.125.

82  It may well be that the problem which arose in the NZI Securities case (n 81 above) could satisfactorily be viewed from another angle. As has been shown (see para 20.43(b) above), facility agreements will generally include a negative pledge clause which will prohibit the creation of security in favour of third parties. If the agreement in NZI Securities contained no such provision, or the security given to the agent in its separate capacity fell within the allowable exceptions, then it is hard to see why there should be any objection to the arrangement. If, on the other hand, the security offended the negative pledge clause (and the agent would obviously have been aware of that fact), then it could have been made liable in tort for inducing or conspiring with the borrower to breach the terms of the syndicated agreement. It would not have been necessary to have recourse to any supposed fiduciary duty for that purpose.

83  20 F 3d 375 (9th Cir, 1994).

84  See the discussion of the ‘gross negligence’ aspects of this decision at para 21.28 above.

85  See First Citizens’ Federal Savings and Loan Association v Northern Bank and Trust Co 919 F2d 510 (9th Cir, 1990), distinguishing Women’s Federal Savings and Loan Association v Nevada National Bank 811 F 2d 1255 (9th Cir, 1987). The two decisions are considered by Mugasha, para 3.128.

86  This must necessarily be the case, since the lending bank will have obtained credit approval only for its agreed participation limit.

87  In other words, the obligations of the lenders are several, and not joint. This important point is confirmed by LMA document, clause 2.2(a).

88  It should be said, however, that the global financial market crisis which set in during the course of 2008 has sharpened market awareness of this particular consideration.

89  ie without any reference to, or consent of, the agent or the other lenders. This point is confirmed by LMA document, clause 2.2(b).

90  See, for example, LMA document, clause 2.2.

91  Beal Savings Bank v Viola Sommer 8 NY 3d 318 (2007). It is submitted that the dissenting judgment of Smith J is to be preferred, in the sense that it would probably more closely reflect market expectation. At all events, the case highlights the need for careful preparation of the required facility documentation. It may be noted that the Court of Appeals cited with approval the earlier decision in Credit Francais International v Sociedad Financiera de Comercio SA 490 NYS 2d 670 (1985). This decision—based on the notion that the lenders had surrendered their individual rights in return for the benefit of the ‘joint venture’ arrangement created by the syndicated facility agreement—has been roundly and rightly criticized: see, for example, Asiedu-Akrofi, ‘Sustaining Lender Commitment to Sovereign Debtors’ (1992) 30 Col J Transnat’l L 13.

92  See AI Credit Corp v Government of Jamaica 666 F Supp 629 (SDNY, 1987). An alternative approach is to imply into the syndicated loan agreement a term allowing for individual lender enforcement in relation to sums which have fallen due. There must be a strong argument that considerations of business efficacy justify such a term. It is unreasonable to suppose that an institution in the business of providing debt finance would enter into arrangements under which it could only pursue recovery proceedings if the majority lenders agreed with it.

93  On this point, see LMA document, clause 23.13. As previously noted, the requisite majority is usually stated to be 66.66 per cent in loan value of the syndicate members. The principle of majority control runs through many aspects of the facility agreement. For example, amendments to the documentation and approval of consents and waivers usually require majority approval: see LMA document, clause 35.1. Certain key provisions of the facility agreement (such as those dealing with the interest rate, repayment dates, and similar matters) are ‘entrenched’, and can only be amended if every lender so agrees: see LMA document, clause 35.2.

94  See New Bank of New England v Toronto-Dominion Bank 768F Supp 1017 (SDNY, 1991).

95  A creditor to whom at least £750 is owing may present a demand for that sum and, if it remains unpaid after 21 days, it is assumed that the company is insolvent; as a result, the creditor concerned is entitled to seek the compulsory winding up of the company. On this procedure, see Insolvency Act 1986, s 122.

96  Thus, for example, an individual syndicate lender in this position could not appoint an administrator of the borrower, because that right is exercisable only by a creditor who holds a qualifying floating charge. On this procedure, see Insolvency Act 1986, Sch B1 (as amended).

97  On this point, see para 21.19 above and Re Enron Corp 2005 WL 356985 (SDNY, 15 February 2005).

98  In many ways, this conclusion is appropriate because the banks have entered into the facility in order to make loans to the borrower, and not for the purpose of entering into relationships with other banks.

99  See LMA document, clause 35.1 and para 21.23(e) above. This comment is subject to the ‘entrenched rights’ referred to in that paragraph.

100  On this point, see LMA document, clause 26.7(b).

101  On the relationship between the lenders and the borrower, see para 21.27 above.

102  For a helpful discussion on these issues and some of the cases about to be noted, see Rawlings, ‘The Management of Loan Syndicates and the Rights of Individual Lenders’ [2009] JIBLR 179.

103  Goodfellow v Nelson Line (Liverpool) Ltd [1912] Ch 324.

104  Re New York Taxi Cab Co [1913] 1 Ch 1.

105  See the situation which arose in First National Bank of Louisville v Continental Illinois National Bank and Trust Co of Chicago 933 F 2d 466 (7th Cir, 1991).

106  [2002] EWHC 2703 (Ch).

107  On undertakings of this kind, see paras 20.41–20.42 above.

108  ie facilities A, B, and C in the aggregate. There was no provision for voting by reference to the individual classes of lender.

109  These entrenched provisions have already been noted at para 21.35 above.

110  Some loan agreements may contain a provision allowing for the share of such a dissenting bank to be compulsorily purchased by another lender (the so-called ‘yank the bank’ clause). However, this clause is only effective if a buyer for that portion can be identified.

111  [2013] All ER (D) 54 (Feb); [2013] EWHC 136 (Comm). The case is complex and involved both senior and junior debt, and an intercreditor agreement. The following discussion is therefore a simplified version of a complex case.

112  See the version of the clause set out in clause 28 of the LMA document. For further discussion of the pro rata sharing clause and the principles which underlie it, see Mugasha, paras 5.106–5.115.

113  See n 50 above.

114  See para 21.23 above.

115  The crisis involved the kidnapping of staff at the US Embassy in Tehran.

116  Whilst the ‘equal risk/equal reward’ principle is well-established in the syndicated loan markets, it may well be asked whether it should apply in this type of situation. Individual banks are always exposed to political risks of this kind, and it is by no means clear why they should enjoy any protection from them simply because they participate in syndicated facilities involving lenders from other countries.

117  If the bank concerned also had separate, bilateral facilities outstanding with the same borrower, then it seems clear that it could apply the proceeds of the deposits against those bilateral facilities. There is nothing in the LMA document which obliges a bank to exercise a right of set-off under these circumstances and, if it elects to do so, there is no obligation to apply the proceeds against the syndicated loan in preference to the bilateral facilities.

118  In this capacity, usually referred to as the ‘security trustee’.

119  Chemical Bank v Security Pacific National Bank 20 F 3d 375 (1994). Security Pacific had accepted in that case that it had to share the proceeds of a security interest which it held for itself, even though an intended security interest in favour of the other lenders had not been perfected.

120  For example, see the discussion of ‘parallel debt’ clauses at paras 21.54–21.58 below. If the courts of any foreign jurisdiction found that the security was only valid in relation to monies owing to the agent in its personal capacity, then it would have to share the proceeds with the other lenders, whose security had proved to be void.

121  This applies particularly to the arranger, who will often have the closest relationship with the borrower.

122  The LMA document does not explicitly deal with the subject.

123  Clause 26.5 of the LMA document confirms that the agent and the arranger are free to enter into other business transactions with the borrower. If this is true of the parties which may—arguably—owe fiduciary duties to the lender, then it must equally be true of the general body of the participants, where no such duty can arise.

124  See para 21.2 above.

125  For a provision to this effect, see LMA document, clause 28.5(b).

126  See, for example, Crédit Français International SA v Sociedad Financiera de Comercio 490 NYS 2d 670 (1985).

127  Section 9 of the 1890 Act.

128  For example, some institutions will suffer higher funding costs than others, with the result that their profit on the deal will be lower to that extent.

129  Section 2(2) of the 1890 Act.

130  This type of ‘margin ratchet’ can operate in one of two ways. First of all, the margin could increase if profits increase, as a reward to the banks in supporting the success of the business. Alternatively, the margin could reduce, on the basis that the higher level of profitability reduces the risk to the lenders.

131  Section 2(3) of the 1890 Act.

132  See LMA document, clause 2.2(a).

133  FSMA, s 238.

134  Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544), art 51.

135  FSMA, s 235(2).

136  See para 21.23(e) above.

137  Compare the remarks in Blair, Walker, and Purves, para 17.18.

138  FSMA, s 235(3).

139  Although it must be said that the pro rata sharing provisions and the general notion that risks and rewards are to be shared on a proportionate basis does convey an element of ‘pooling’. In addition, the court will not be bound by individual terms in the facility agreement but will examine the matter on a broader basis: see Blair, Walker, and Purves, para 17.19, citing Enviro Systems Renewable Resources Pty Ltd v ASIC (2001) ASCR 762.

140  It must be added that there have been a number of cases that have considered the expression ‘collective investment scheme’, and that phrase has certainly posed challenges in the field of interpretation. For a selection of the applicable case law, see Financial Conduct Authority v Capital Alternatives Ltd [2014] EWHC 144 (Ch); Financial Services Authority v Fradley [2006] 2 BCLC 616;[2005] EWCA Civ 1183 (CA); Financial Services Authority v Asset L I Inc [2013] 2 BCLC 480; [2013] EWHC 178 (Ch); Russell-Cooke Trust Co v Elliott [2001] All ER (D) 197 (Jul); [2001] All ER (D) 197 (Jul). However, none of the structures under discussion in those cases bears any resemblance to a syndicated loan. Indeed, it is not obvious why the regulator or any other party would challenge a structure which has been used so extensively in the UK financial markets.

141  It should be added that it is a matter of some importance to be able to reach this conclusion on the basis of the main provisions contained within s 235 itself. The overall scheme of the legislation is to create the widest possible definition of ‘collective investment scheme’, and then to cut back the definition by exemption in appropriate cases. But the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2002 (SI 2001/1062, as amended) contains no exemptions which would be directly applicable in this type of case. For example, (i) the exemption in para 5 (Debt issues) of Sch 1 applies only where debentures or similar instruments are issued, and this is not generally the case in the context of a syndicated loan and (ii) although it is possible that para 9 (Schemes entered into for commercial purposes wholly or mainly related to existing business) of Sch 1 may potentially apply to syndicated loans, but it was clearly not designed for that purpose.

142  On guarantee and security arrangements generally, see Part E below.

143  There are various reasons for this development. First of all, banks may wish to free up the capital ascribed to the facility in order that they may pursue other opportunities. Secondly, loans in default can be sold at a discount, thus disposing of problem assets and crystallizing (and perhaps limiting) the relevant loss. On the subject generally, see Chapter 22 below.

144  A revolving credit may be drawn and repaid by the borrower, and the bank may thus remain under an obligation to make further advances until the termination date of the facility.

145  Although the agent bank will act as a trustee in this capacity, in practice some of the more onerous fiduciary duties imposed on a trustee will be excluded by the documentation: see, for example, LMA document, clause 26.4.

146  On this procedure and the form of the certificate, see LMA document, clause 24 and Sch 5. Clause 24 also deals with the terms of the contractual relationship between the incoming and outgoing lenders. In essence, the clause provides that the new lender has been responsible for its own credit assessment, and the outgoing lender gives no warranties as to the quality of the loan asset. The protections given to the selling lender are thus very similar to those afforded to the arranger of a syndicated loan: see para 21.14 above.

147  In other words, the transfer of the benefit of the existing loans and the obligation to make further advances is novated in favour of the incoming lender. It is, perhaps, not strictly accurate to speak of the ‘transfer’ of the outgoing lender’s interest in the security package to the new lender, even though this may be the practical effect. In fact, the outgoing lender simply ceases to be a beneficiary under the trust, because it no longer falls within the defined class of beneficiaries. By the same token, the new lender, having acquired a loan participation, will now fall within the defined class. There is thus no assignment of a beneficial interest; rather, the former interest is extinguished and a new one is created in its place.

148  See, for example, LMA document, clause 26.7.

149  For confirmation of this point, see Re Enron Corp 2005 WL 356985 (SDNY, 15 February 2005), where the attempt by the syndicate participants directly to enforce security failed on the basis that a security agent had been appointed and there was no contractual provision allowing for enforcement by any other party.

150  British Energy Power and Trading Ltd v Crédit Suisse [2008] EWCA Civ 53 (CA).

151  [2014] All ER (D) 67 (May); [2014] EWHC 1404.

152  Waterfall clauses of the type just noted have caused difficulty in other contexts: see, for example, the decision of the Court of Appeal in Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-Rate CLO 2 BV [2014] All ER (D) 197 (Jul); [2014] EWCA Civ 984.

153  On the Hague Convention on the Recognition of Trusts, see Dicey, Morris, and Collins, para 29-014 et seq. The Convention has entered into force in various jurisdictions, particularly in Europe. Nevertheless, the Convention is not of widespread application and, accordingly, a detailed discussion lies beyond the scope of this work.

154  For example, land which is physically located in that country, or shares issued by a company incorporated there. On the whole subject, see the discussion of the respective forms of security in Part E below.

155  It is true that the document creating the parallel debt provision would itself often be governed by English law. However, the validity of a charge over foreign property is governed by the lex situs, and that principle must surely also extend to the amount which can be treated as validly secured against the assets concerned.

156  The decision of the Supreme Court is dated 13 September 2011 and related to the restructuring of the Belvedere Group.

157  See the wording reproduced in paragraph (a) of the specimen clause, above.

158  On the use of security trust structures in the context of syndicated loans, see the discussion at paras 21.49–21.53 above.

159  The Loan Market Association has published a standard form of such a document for use alongside its recommended forms of facility agreement.

160  [2013] 1 All ER (Comm) 661; [2012] EWHC 3025 (Comm).

161  On this general obligation, see the discussion at paras 32.29–32.31 below.

162  This may be compared with the decision in Torre Funding (see the discussion at para 21.25 above) where a similar view was adopted in relation to the obligations of a facility agent.