Loan Facilities Flashcards
What is the Difference between a Term and Revolving Facility?
- Term Facility: A lump sum is withdrawn all at once.
- Revolving Facility: A finite sum may be withdrawn at any time up to a point, after which, the balance must be paid down to permit further withdrawls.
P. 110.
Naturally, drawdown and repayment in revolving facilities is also subject to conditions. Also, a single loan agreement may encompass multiple different facilities, e.g. Term / Revolving / Letter of Credit / Bank Guarantee
What is the Difference between a Committed Facility and Uncommitted Facility?
- Committed Facility: The Lender must advance funds once certain conditions are met.
- Uncommitted Facility: The Lender may, at its discretion, advance funds once certain conditions are met.
P. 110.
What is a Term Sheet?
A first draft that outlines the transaction’s essential elements and summarises non-essential elements.
P.112.
Are Term Sheets Binding unto themselves?
Usually not. They are:
- Insufficiently certain;
- Drafted without the intention to be legally-bound,° and are
- Heavily disclaimed.°°
P. 112.
° Bear Stearns v Forum Global [2007] EWHC 1576, at [164].
°° Proforce Recruit v The Rugby Group [2006] EWCA 69.
Absent express disclaimer, the Court will also look to whether sufficient consensus and certainty exists regarding essential elements. Although, lawyers’ involvement gives rise to the presumption that bindingness corresponds with final signatures.° In any case, certain subsidiary obligations within a Term Sheet may be found to be binding independent of the rest of the agreement.°°
°Whitehead Mann [2006] EWCA Civ 1303 | °°Charles Shaker [2012] 2 All ER (Comm) 1010.
Regarding the Contract itself, how are Loan Agreements generally Structured? (IPO-HET-TB)
- Interpretative Provisions, outlining definitions and the like.
- Purposive Provisions, outlining rights, obligations, and who bears what in which capacities.
- Operative Provisions, outlining the contract’s governing mechanics and procedures (e.g. drawdown).
- Hedging Provisions, outlining the measures in place to protect the Lender’s interests (e.g. R&Ws, Covenants, etc.).
- Enforcement Provisions, outlining EODs and the Lender’s powers should one arise.
- Third-Party Provisions, outlining the need for or nature of third-party involvement (e.g. Guarantees, Insurance, etc.)
- Transfer Provisions, outlining the parties’ ability to transfer rights and obligations.
- Boilerplate Provisions, outlining typical legalities (e.g. waivers, jurisdiction, etc.).
Why might a Lender strictly draft the Purpose Clause?
To enable itself to argue that it is the beneficiary of a resulting (Quistclose) trust over the funds.
P. 118 | Barclays Bank [1970] AC 567, Twinsectra [2002] UKHL 12, and Cooper [2008] 2 All ER (Comm) 964.
Particularity alone is insufficient; either the contract itself or the surrounding circumstances must evidence an intention to create a trust, or at the very least, to disallow the Borrower from freely using the funds.
P. 119 | Gabriel [2013] EWCA Civ 1513.
What is a Quistclose Trust?
A trust that arises when:
1. The Lender advances funds to the Borrower exclusively for a stated and clear purpose, and
2. The Borrower, knowing this, disburses it pursuant to another end.
Alternatively, the Parties could explicity agree that the funds will be held on trust until they are appropriately disbursed.
P. 937-939; Quistclose Investments v Rolls Razor [1970] AC 567; Twinsectra v Yardley [2002] UKHL 12.
This trust structure has been applied to other types of transaction where payment is made for some specific purpose. See P. 939.
What is the Commercial Utility of a Quistclose Trust?
It removes the funds from the Borrower’s estate and gives the Lender a traceable proprietary interest therein.
Lecture Notes.
From Where do Lenders typically Source the Funding for their Loans?
The Interbank Market, namely because it allows Lenders to source funding in large sums over long tenors and in various major denominations.
P. 120.
In effect, the Lender borrowers from the Interbank Market in the short-term to finance its longer-term loan to the Borrower, and uses the proceeds therefrom to repay its debts as they fall due. However, because tenors in the Market are typically much shorter than the loan’s, the Lender’s debt will have to be successively rolled-over during the contract’s lifespan. Likewise, the contract will contemplate and account for the possibility of a market disruption, although concerns of reputation and confidentiality may stay reliance thereon.
P. 124.
Can Retail Deposits be used to Source Funding for Loans?
Yes, but they are ill-suited for large-sum cross-border deals because they are mainly denominated in local currency and are callable without notice.
P. 120.
What is the Availability Period?
The period of time during which the Facility can be drawn-down, subject to the fulfillment of all necessary prerequisites.
P. 125.
What Provisions govern the Borrower’s ability to Draw Down the Loan?
The Conditions Precedent, with additional reference to the Events of Default.
P. 126.
What are the Borrower’s Rights if the Lender wrongfully refuses to lend?
- Damages; however,
- If damages prove inadequate, then specific performance may be awarded.
P. 127.
Concord Trust v Law Debenture [2005] UKHL 27.
A common reason for damages’ inadequacy is the inability to find alternative funding.
If the Borrower treats the Lender’s wrongful refusal to lend as a Repudiatory Breach, legally, what transpires?
- It is entitled to damages.
- Secondary obligations, e.g. choice of law, will survive termination.°
- Accrued obligations, e.g. repayment of sums already advanced, will survive termination.°°
° Moschi v Lep Air [1973] AC 331, at [350].
°° Bank of Boston v European Grain [1989] AC 1056, at [1098]-[1099].
Which obligations are secondary will be a matter of construction.° Barring any contractual clauses to the contrary, the Borrower should also have an equitable right of set-off.
° Duffen v Frabo [2000] 1 Lloyd’s Rep 180, at [194].
What is the Remediale Objective of Damages?
To return the Borrower to the position it would have enjoyed had there been no breach.
Victoria Laundry v Newman Industries [1949] 2 KB 528.
As a Head of Liability, what are the Elements of Damages?
- Causality: The Borrower’s loss must have been caused by the Lender’s breach.
- Remoteness: The loss suffered must not have been too remote from the Lender’s breach, i.e. it naturally arose from the breach, was reasonably foreseeable, and had been assumed responsibility for,° by the Lender.
- Loss Mitigation: The Borrower took measures to mitigate its losses as much as reasonably possible.°°
P. 130-134.
°Hadley v Baxendale [1854] 9 Exch 341.
°°The Achilleas [2009] 1 AC 61.
What are Conditions Precedent (CPs)?
Either:
- The prerequisites necessary to create a legally-binding agreement, i.e. Initial CPs; or
- The prerequisites necessary to allow drawdown of the facility, i.e. Further CPs.
P. 134.
Often, it is stated that they must be satisfied, “in form and substance,” to the Lender, a clearly subjective standard; as such, the Lender need only act honestly, rather than reasonably, and avoid, “arbitrariness, capriciousness, perversity, and irrationality.”° For instance, the Lender cannot obstruct the fulfillment of a CP.° This makes CPs a type of Hedging Provision in that they enhance the Lender’s ability to protect its interests.
°Docker [1969] 1 WLR 1060 | Paragon Finance [2001] EWCA Civ 1466 | Deutsche Bank [2013] EWHC 482.
°°Blake & Co. [1969] 1 WLR 1412 | Thompson [1988] Ch 241.
To what Standard must Conditions Precedent be Fulfilled?
In form and substance satisfactory to the Lender, a clearly subjective standard; as such, the Lender need only act honestly, rather than reasonably, and avoid, “arbitrariness, capriciousness, perversity, and irrationality.”
P. 134.
Docker [1969] 1 WLR 1060 | Paragon Finance [2001] EWCA Civ 1466 | Deutsche Bank [2013] EWHC 482.
Hence, the Lender cannot obstruct the Borrower’s attempts to fulfill a CP,° but in reality, because of the standard’s comfortable breadth, it should not feel the need to. Indeed, the Lender could draft a clause that prevents the implication of any term, barring the above one, that impinges upon its discretion.°°
°Blake & Co. [1969] 1 WLR 1412 | Thompson [1988] Ch 241.
°° Micklefield [1990] 1 WLR 1002 | BNP Paribas [2005] EWHC 1321.
What do Conditions Precedents typically require of the Borrower?
Documentary evidence demonstrating that proper procedure has been observed on its end, e.g. copies of Board resolutions or certificates from regulatory bodies.
P. 134.
How are Conditions Subsequent distinct from Conditions Precedent?
Whereas the latter concerns ex ante events that are necessary to demand performance, the former concerns ex post events which, if befell, would discharge the obligation to perform.
P. 134.
CPs do not impinge upon the Lender’s ability to demand that the Borrower perform its secondary obligations, e.g. pay certain fees. In practice, CSs may also be construed as obligations the Borrower must perform at a later date to avoid triggering an EOD.
Is the Determination of whether a Condition Precedent has been fulfilled a Binary Choice?
No.
P. 136.
Novus Aviation [2016] EWHC 1575.
Is the Obligation to Repay Absolute?
Not necessarily, for it may be:
- Conditional, e.g. subject to a cashflow requirement; or
- Qualified, e.g. Limited or Non-Recourse provisions.
Usually though, it is absolute.
P. 139.
The latter entails the Lender’s recourse being either partially or totally limited to the fruits of an asset(s), whether that be through realizing it through sale or through passive income.
Is the Borrower’s Equity of Redemption inalienable?
Yes.
Noakes [1902] AC 24.
If the Lender agrees to receive compensation, in some form, correspondant to the Borrower’s profit, how will its Creditor Priority be affected?
Unless its claim is secured,° it will be subordinated to those of the Borrower’s unsecured creditors.**
P. 145.
°Re Lonergan [1877] 4 ChD | Badeley [1888] 38 ChD 238.
°° §3 – Partnership Act 1980 | Rule 12.3(2A) (c) – Insolvency Rules 1986 | Re Theo Garvin [1969] 1 Ch 624.
Regarding a Defaulted Debt, can Interest be awarded over the period of time between the Default and the Date of the Judgment?
Yes, although not necessarily.° If not awarded as interest directly, it could also be awarded as a form of damages under Hadley if the criteria therein are met.°°
P. 145.
°Cook v Fowler [1874] LR 7 HL 27 – cf – London Chatham [1893] AC 429.
°°Sempra Metals [2007] UKHL 34.
Likewise, under §35A of the Supreme Court Act 1981, the High Court has the discretion to, “award simple interest on an upaid debt provided that the debt remained unpaid,” when formal recovery commenced. The rate is usually correspondant to commercial practice, and may be compounded accoridngly. Interest may also be awarded in equity, although this is rare.
Tate & Lyle [1982] 1 WLR 149.
Will Clauses stipulating additional Interest Payable following a Breach constitute a Penalty?
Generally, no. Such clauses are seen as compensatory as opposed to punative, and thus, not penalites. However, depending on their harshness, this may not stand.
P. 148.
Cavendish [2015] UKSC 67 | Murray [2005] EWCA Civ 963 | Lordsvale [1996] QB 752.
Clauses that impose a detriment that is, “out of all proportion to any legitimate interest of the innocent party,” constitute a penalty, a naturally fact-dependent determination.° Prepayment or early termination fees, and other such clauses, do not constitute penalites,°° but one which demands the defaulted Borrower pay the Lender all the interest it would have accrued well may.°°°
°Cavendish.
°°Bridge [1962] AC 600.
°°°The Angelic Star [1988] 1 Lloyd’s Rep 122.
What happens if a Payment is made by Mistake?
Prima facie, the Payer will have a right of redemption,° unless:
- It was mutually intended or contractually stated that the Payee should receive the monies in all events;°°
- The Payment was made for good consideration, i.e. to close a deal;°°° or
- The Third-Party used the monies to change its position in good faith.°°°°
P. 159.
°National Westminster Bank [1975] QB 654.
°°Barclays Bank [1980] QB 677.
°°°Lloyds Bank [2000] QB 110.
°°°°Lipkin Gorman [1991] 2 AC 548.
Why are Bigger Banks more attractive Lenders for Borrowers?
Because they are themselves able to borrower for cheaper on the Interbank Market, and thus, can offer more attractive rates to Borrowers.
P. 160.
How do Lenders protect themselves against unavoidable increases in the cost of lending to a Borrower?
They contract on the basis that the Borrower will compensate them for decreases in ROR due to, for instance, adverse legal or regulatory changes or try to incorporate costs into the margin.
P. 161.
ROR stands for Rate of Return. Such provisions are typically found in the contract’s ‘Increased Costs’ clause, and include certain Borrower protections for fairness’ sake, e.g. right of prepayment or Lender’s duty to mitigate increased costs. Other types of costs, e.g. the imposition of withholding or general taxes or currency loss pursuant to enforcement actions, can be dealt with under the contract’s Tax or Indemnities and Guarantees clauses.
What is a Withholding Tax?
A tax paid at the source, rather than the destination. In other words, it is a tax on the bank’s proceeds that originates with the Borrower.
P. 164.
Usually, this is imposed by the jurisdiction within which the Payer is residing or from which the payment is being made. It effectively renders the Payer a, “tax collection agent.”
What is a Representation?
A statement of fact made at or prior to the contract’s formation which intends to induce its recipient to contract.
Edgington v Fitzmaurice (1885) 29 Ch D 459.
What is a Warranty?
A promise with similar effect to a representation, but one that is actually a contractual term.
Idemitsu v Sumitomo [2016] EWHC 1909:
- “When a seller, by the terms of the contract under which he sells, ‘warrants’ something about the subject matter sold, he is making a contractual promise. Nothing less. But also I think (and all things being equal) nothing more.” [14]
What is the core difference between a Warranty and a Representation?
- A warranty is a statement of fact made by the contract; whereas
- A representation is a statement of fact made by a party.
Idemitsu v Sumitomo [2016] EWHC 1909.
On what additional grounds are Warranties and Representations differentiated?
- Time: Warranties, as contractual entities, necessarily come into existence ex post, whereas Representations can only be made ex ante or ex intra.
- Laterality: Warranties are tools used bilaterally to define the agreement’s terms, whereas Representations entail parties unilaterally asserting facts and counterparties relying thereupon.
- Drafting: Warranties and Representations may be intentionally drafted as distinct and used accordingly.
Sycamore v Breslin [2012] EWHC 343 | Idemitsu v Sumitomo [2016] EWHC 1909.
The Time point also explains why a Breach of Warranty cannot give raise to a claim of misrepresentation.
In Practice, is there a Distinction between Representations and Warranties?
Generally, no. Often equivocated, either is taken to mean a statement made by the Borrower that the Lender accepts as true at the contract’s formation and which influences its decision to contract.
P. 169.
Is the Executing of an Agreement a Representation in and of itself?
No, as it is not a statement of fact per se, but rather, “the agreed means by which the parties together choose to define,” their agreement.
Idemitsu v Sumitomo [2016] EWHC 1909.
What are the Remedies for a Breach of Warranty or Representation?
- Breach of Warranty:°
- Damages.
- Repudiation.
- Breach of Representation:°°
- Damages.
- Rescission.
° Sycamore v Breslin [2012] EWHC 343.
°° §2(1) & §2(2) –Misrepresentation Act 1967.
Are the Traditional Remedies for Breach of Warranty or Representation useful to the Lender?
No:
- Rescission and repudiation are practically undesirable if funds have already been advanced.
- Damages are unlikely to make the Lender whole and will not compensate it for otherwise lost interest.
P. 169.
“What the Lender needs, and what a well-drafted agreement should provide, is the right to refuse to make advances to the Borrower if the terms of the clause… have been breached or if such a breach is likely to occur.” This is why the Events of Default clause will encompass such breaches, so as to give the Lender more practical solutions.
What is the Commerical Purpose of Warranties and Representations?
- Assuredness: Give the Lender an initial and continuing sense of assuredness regarding the Borrower’s true credit and legal risk.
- Status Quo: Place onto the Borrower an initial and continuing obligation to perserve the variables upon which the Lender contracted.
- Troubleshoot: Allow both parties to address potential obstacles ahead.
- Truthfulness: Pledges the Borrower to truthfulness, both on R&Ws and other aspects of the contract.
How does the Lender avail itself of R&Ws’ veracity once they’ve been made?
By mandating the Borrower repeatedly authenticate them, e.g. upon submitting a Utilization Request or at the start of every interest rate period.
The word ‘Material’ is often used in R&Ws and elsewhere throughout loan contracts. What does it mean, practically?
Any knowledge which, if known, would affect the Lender’s mind.
Traill v Baring [1864] 4 D.J. & S. 318 | Gordon v Street [1899] 2 Q.B. 641.
The knowledge, or lack thereof, of a counterparty is irrelevant to this calculus.
