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.
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  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  3 All ER 733.
19 Raiffeisen Zentralbank Osstereich AG v Royal Bank of Scotland plc  Bus LR D65;  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  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  AC 254 and Royscot Trust Ltd v Rogerson  2 QB 297.
23 Hedley Byrne & Co Ltd v Heller & Partners Ltd  AC 465 (HL); Caparo Industries plc v Dickman  2 AC 605.
24 Hedley Byrne, n 23 above.
25  2 Lloyds Rep 449;  EWCA (Civ) 811 (CA). This aspect of the Goldman Sachs decision was followed in Brown v Innovator One plc  All ER (D) 273 (May);  EWHC 1321 (Comm).
26 See South Australia Asset Management Corp v York Montague Ltd  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  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’  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  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  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  1 Lloyds Rep 487. On this case, see Sequeira, ‘Syndicated Loans—Let the Arranger Beware!’  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  All ER (D) 54 (Feb);  EWHC 136 (Comm). The case is considered further at para 21.39 below.
54 On this point, see Henderson v Merrett Syndicates  3 All ER 506 (HL).
55  All ER (D) 295 (Oct);  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  2 KB 759; Armitage v Nurse  Ch 241 (CA).
63 See Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, at p 912; Rainy Sky SA v Kookmin Bank  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  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  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  2 BCLC 54. By way of contrast, the court in Marex Financial Ltd v Fluxo-Cane Overseas Ltd [ All ER (D) 295 (Oct);  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  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  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  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’  JIBLR 179.
103 Goodfellow v Nelson Line (Liverpool) Ltd  Ch 324.
104 Re New York Taxi Cab Co  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  EWHC 2703 (Ch).
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  All ER (D) 54 (Feb);  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.
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.
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).
134 Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544), art 51.
137 Compare the remarks in Blair, Walker, and Purves, para 17.18.
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  EWHC 144 (Ch); Financial Services Authority v Fradley  2 BCLC 616; EWCA Civ 1183 (CA); Financial Services Authority v Asset L I Inc  2 BCLC 480;  EWHC 178 (Ch); Russell-Cooke Trust Co v Elliott  All ER (D) 197 (Jul);  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  EWCA Civ 53 (CA).
151  All ER (D) 67 (May);  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  All ER (D) 197 (Jul);  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  1 All ER (Comm) 661;  EWHC 3025 (Comm).
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.