Loan Facilities Flashcards
1
Q
What is the Difference between a Term and Revolving Facility?
A
- Term Facility: A lump sum is withdrawn all at once.
- Revolving Facility: A finite sum may be withdrawn at any time up to a point, after which, the balance must be paid down to permit further withdrawls.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
2
Q
What is the Difference between a Committed Facility and Uncommitted Facility?
A
- 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.
3
Q
What is a Term Sheet?
A
A first draft that outlines the transaction’s essential elements and summarises non-essential elements.
P.112.
4
Q
Are Term Sheets Binding unto themselves?
A
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.
5
Q
Regarding the Contract itself, how are Loan Agreements generally Structured? (IPO-HET-TB)
A
- 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.).
6
Q
Why might a Lender strictly draft the Purpose Clause?
A
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.
7
Q
What is a Quistclose Trust?
A
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.
8
Q
What is the Commercial Utility of a Quistclose Trust?
A
It removes the funds from the Borrower’s estate and gives the Lender a traceable proprietary interest therein.
Lecture Notes.
9
Q
From Where do Lenders typically Source the Funding for their Loans?
A
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.
10
Q
Can Retail Deposits be used to Source Funding for Loans?
A
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.
11
Q
What is the Availability Period?
A
The period of time during which the Facility can be drawn-down, subject to the fulfillment of all necessary prerequisites.
P. 125.
12
Q
What Provisions govern the Borrower’s ability to Draw Down the Loan?
A
The Conditions Precedent, with additional reference to the Events of Default.
P. 126.
13
Q
What are the Borrower’s Rights if the Lender wrongfully refuses to lend?
A
- 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.
14
Q
If the Borrower treats the Lender’s wrongful refusal to lend as a Repudiatory Breach, legally, what transpires?
A
- 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].
15
Q
What is the Remediale Objective of Damages?
A
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.
16
Q
As a Head of Liability, what are the Elements of Damages?
A
- 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.
17
Q
What are Conditions Precedent (CPs)?
A
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.
18
Q
To what Standard must Conditions Precedent be Fulfilled?
A
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.
19
Q
What do Conditions Precedents typically require of the Borrower?
A
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.
20
Q
How are Conditions Subsequent distinct from Conditions Precedent?
A
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.
21
Q
Is the Determination of whether a Condition Precedent has been fulfilled a Binary Choice?
A
No.
P. 136.
Novus Aviation [2016] EWHC 1575.
22
Q
Is the Obligation to Repay Absolute?
A
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.
23
Q
Is the Borrower’s Equity of Redemption inalienable?
A
Yes.
Noakes [1902] AC 24.
24
Q
If the Lender agrees to receive compensation, in some form, correspondant to the Borrower’s profit, how will its Creditor Priority be affected?
A
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.
25
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.°°
## Footnote
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.
26
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**.
## Footnote
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.
27
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**.°°°°
## Footnote
P. 159.
°*National Westminster Bank* [1975] QB 654.
°°*Barclays Bank* [1980] QB 677.
°°°*Lloyds Bank* [2000] QB 110.
°°°°*Lipkin Gorman* [1991] 2 AC 548.
28
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.
## Footnote
P. 160.
29
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**.
## Footnote
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.
30
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**.
## Footnote
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."
31
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**.
## Footnote
*Edgington v Fitzmaurice* (1885) 29 Ch D 459.
32
What is a Warranty?
A **promise** with **similar effect to a representation**, **but** one that is **actually a contractual term**.
## Footnote
*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]
33
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**.
## Footnote
*Idemitsu v Sumitomo* [2016] EWHC 1909.
34
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.
## Footnote
*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.
35
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**.
## Footnote
P. 169.
36
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**.
## Footnote
*Idemitsu v Sumitomo* [2016] EWHC 1909.
37
What are the Remedies for a Breach of Warranty or Representation?
* Breach of Warranty:°
* **Damages**.
* **Repudiation**.
* Breach of Representation:°°
* **Damages**.
* **Rescission**.
## Footnote
° *Sycamore v Breslin* [2012] EWHC 343.
°° §2(1) & §2(2) --Misrepresentation Act 1967.
38
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**.
## Footnote
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.
39
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.
40
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.
41
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**.
## Footnote
*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.
42
Do R&Ws which, at the time of execution, are false, but later become true, constitute a Breach?
**Yes**. All representations **must necessarily be true at execution**, and may need to remain so thereafter if the contract stipulates **repetition**.
43
Regarding R&Ws, what Points of Negotiation would the Borrower particularly concern itself with?
The extent to which:
* It is **beholden to the companies in its Group** or the number of such companies that are caught by the R&Ws;
* The **form and substance of the legal opinions** are left to the Lender's discretion, seeking to **pre-agree as much as possible**;
* **Commercial or factual statements are unqualified** and thus left to the Lender's discretion, seeking to **introduce a well-defined test of materiality**.
## Footnote
P. 172.
44
What is the Commercial Purpose of the Covenants & Undertakings (C&W) Clause?
* To **exercise control** over what the **Borrower can and cannot do**, thereby gaining some assurance that its **legal and financial health** won't detriorate.
* To **provide** the Lender with **information about the Borrower**, which **facilitates monitoring** and **decreases information asymmetry**.
* To **provide** the Lender with a **reliable way to refuse to lend or to renegotiate terms**.
## Footnote
P. 173.
Regarding the third point, this is made true by the frequency with which C&Ws are breached.
45
Regarding C&Ws, What Influences the Level of Strictness a Lender would Accept or be Comfortable With?
* The **Borrower's profile**.
* The **Lender's relationship** with the Borrower.
* The **transaction's type** and **risk profile**.
* The degree of **competition between Lenders**.
## Footnote
P. 174.
46
To the Borrower, What Risks comes with Overly Strict C&Us?
* Decreased **commercial freedom**.
* Increased probability of **triggering an EOD**.
## Footnote
For a Borrower, triggering an EOD would be harmful because it could either result in it being refused the loan or having to accept more onerous terms during a renegotiation.
47
To the Lender, What Risk comes with Overly Strict C&Ws?
Being labelled a **Shadow Director**.
## Footnote
P. 174.
48
What is a Shadow Director?
"A person in accordance with whose directions or **instructions** the directors of the company are **accustomed to act**."
## Footnote
§251(1) -- Companies Act 2006 **|** *Secretary of State v Deverell* [2001] Ch. 340, at [354].
49
How does a Lender become a Shadow Director?
* By **actively** and **effectually** **influencing** the Borrower's **managerial** or **governance** affairs on an **objective** basis.
## Footnote
*HM Revenue v Holland* [2010] UKSC 51.
50
What did *Deverell* Establish regarding How a Lender becomes a Shadow Director?
* The concept **should not be applied narrowly**, but normally;
* The Lender's involvement **need not have been secret**;
* The Borrower **need not have been wholly subservient** to the Lender;°
* The Lender **need not have expected** that their **instructions would be followed**.
## Footnote
See also *Mckillen v Misland Investments* [2012] EWHC 521.
51
What is the Consequence of Being Labelled a Shadow Director?
One **assumse the fiduciary duties and liabilities of an ordinary director**,° most notably **safeguarding creditors' interests** in case of insolvency.
## Footnote
°*Vivendi SA v Richards* [2013] EWHC 3006 (Ch).
Not only does this mean the Lender would have to observe the interests of third-party creditors, but it may also face personal liability for misstepping. Likewise, it may have to comply with the special procedures for corporate transactions with directors or related parties under §187 / §223 CA 2006.
If the Borrower is in financial difficulty, this opens the door to managerial disqualification proceedings under §6 of the Company Directors Disqualificiation Act 1986 or fraudulent and wrongful trading proceedings under §213-§214 of the Insolvency Act 1986.
The latter concern is particularly problematic as it may invalidate the Lender's license under FSMA 2000 or CCA 2006.
52
Broadly Speaking, What are the Types of C&Us?
* **Financial** Covenants.
* **Information** Covenants.
* **Maintenance of Business** Covenants.
## Footnote
P. 176.
53
How is Compliance with Covenants Assured by the Lender?
It has the Borrower's Directors sign **compliance certificates** stating as much.
## Footnote
This may either be done regularly, i.e. under a Maintenance Regime, or on the occurance of specific events, i.e. under an Incurrence Regime. Maintenance debt is the norm, with Incurrence debt typically reserved for liquid and disparately-owned high-yield facilities.
54
What is an Information Covenant?
A **contractual obligation** on the Borrower to **provide information** to the Lender as specified.
## Footnote
P. 176.
55
What is the Commercial Purpose of an Information Covenant?
To **decrease the information asymmetry** between the Lender and Borrower, thereby **improving the Lender's monitoring and decision-making**.
56
What do Information Covenants Typically Pertain to?
Such things as:
* Financial and Accounting Statements.
* Regulatory compliance.
* Corporate governance.
* Monitoring.
* *Ad hoc*.
## Footnote
Regarding Regulatory Compliance, the Lender will ask the Borrower to prove its compliance and require the Borrower to present any information it needs to comply with its own obligations, e.g. capital adequacy.
Regarding Corporate Governance, think planned market announcements or disclosures to shareholders.
57
What is a Financial Covenant?
A covenant which seeks to, "**monitor**, **regulate**, and **preserve** the financial and **economic position** of the borrower," and/or its Group.
## Footnote
P. 177.
58
What is the Commercial Purpose of Financial Covenants?
Its **main purpose** is to **regulate the Borrower's financial condition**, and ensure that it is either **maintained** or **improved**.
Consequently, it further allows the Lender to:
* **Exit the loan** or **force a restructuring**.
* **Discipline** the Borrower's management **without** having to assert **further control**.
## Footnote
Regarding the Exit point, this may be undermined if the Borrower has a contractual Right to Cure, i.e. a right to remedy a breach within a given period of time before the Lender's remedial rights activate.
These must be drafted clearly and carefully, so as to avoid unintended consequences or invalidation by the court.°
°*Strategic Value v Ideal Standard* [2011] EWHC 171 (Ch).
59
All things being equal, Why do Lenders favor Strong Financial Covenants?
* They provide **greater assurance** that the Borrower will **repay its debt**.
* They **alert** the Lender to **more minute changes to the Borrower's condition**.
60
What are the Practical Weaknesses of Financial Covenants?
* They are **backwards-looking**, and therefore **slow** to reveal noncompliance.
* **Accounting practices may vary** or obscure reality.
* They are **drafted on the assumption of a going concern**.
## Footnote
That they are backwards-looking is their biggest weakness. It is usually several months before Compliance Certificates are renewed, and during that time, a breach may occur or the makings of a breach may accumulate.
Even if the Borrower is bound to notify in such cases, it will not report to the Lender unless it: (a) is honest; and (b) actually recognizes the existence of a problem it cannot fix before the next compliance check.
61
Provide examples of metrics a Financial Covenant may use:
* Leverage.
* Net Worth, i.e. Net Assets - Net Liabilities.
* Cash Flow.
* Net Asset Value (NAV).
* Working Capital (WC).
* Capital Expenditure (CapEx).
* Security.
* Leverage : NAV.
* Total Consolidated Borrowings : Net Worth.
* Current Assets : Current Liabilities.
* Interest : Earnings.
* Interest : Profits before Interest and Tax (PBIT).
62
What is a Fall-Away Financial Covenant?
A covenant that **ceases to apply** if the Borrower meets a **specific objective**.
## Footnote
This usually relates to its leverage, aggregate indebtedness, credit rating, and the like.
63
What is a Maintenance of Business Covenant?
A covenant preventing the Borrower from **varying the nature of its business** within specified parameters.
## Footnote
P. 181.
64
What is the Commercial Purpose of Maintenance of Business Covenants?
To ensure the **Borrower continues doing** whatever made the **Lender believe it could repay the loan**.
## Footnote
In other words, to limit its exposure to the Borrower's credit, operational, and market risk.
Likewise, a bank's ability to lend to a certain sector may be limited, and would thus wish to constrain a Borrower's ability to enter into such sectors.
65
Which General Covenant pertains to Creditor Ranking?
The ***Pari Passu*** Clause. It states that **all creditors' unsecured claims will rank equally** to one another **upon insolvency**.°
## Footnote
P. 182.
*Pari passu* is the default position under English law (§107 / §328(3) IA 1986 and Rule 4.181 IR 1986), but not necessarily internationally, especially when dealing with sovereign debt.
° Except for those claims mandatorily perferred by law (§175 IA 1986).
66
What is the Negative Pledge?
A covenant **prohibiting the Borrower** from granting security or otherwise **subordinating the Lender's priority** to a third party.
## Footnote
P. 183.
67
What is an Anti-Asset Disposal (AAD) Clause?
A covenant prohibiting the Borrower from disposing of an asset(s) either absolutely or without the Lender's consent.
## Footnote
P. 183.
68
How is Security defined?
A **proprietary right in an asset** exercisable by the Lender against the Borrower pursuant to the discharging of his debt.°
## Footnote
° *Bristol Airport v Powdrill* [1990] Ch 744 at 760.
69
When is Security Created?
When a Creditor obtains **exercisable rights** against a **property** the Debtor has an interest in for the purpose of **discharging the Debtor's obligation**.°
## Footnote
° *Bristol Airport v Powdrill* [1990] Ch 744 at 760.
70
What are the Commercial Purposes of Negative Pledges and AADs?
* **Increase** the Lender's chance of **repayment**;
* **Limit** the Borrower's ability to **deflate** creditors' asset cushion;
* **Prevent** the **Subordination** of unsecured debt;
* **Safeguard Proprietary Interests** in securities;
* **Indirectly Warn** against the Borrower's potential **financial** **difficulties**.
* **Preempt** Third-Party **obstructions** to loan **restructurings**.
* **Avoid** the **transaction costs** of ranking **overlapping** **proprietary** **rights**.
71
What are the Commercial Purposes of the Negative Pledge?
Maintain *Pari Passu* treatment:
* **Limit the number of secured Creditors**, since more Creditors lessens the payout per Creditor.
* **Monopolize enforcement of the security**, and thereby, other Creditors' ability to enforce a security or obstruct a restructuring.
* **Warn** against the **Borrower's financial difficulties**.
* **Prevent** the **subordination** of **unsecured Creditors**.
## Footnote
There is a high degree of overlap between the Commercial Purposes of Negative Pledges and AADs, although AADs focus more on limiting the Borrower's ability to deflate Creditors' asset cushion or fiddle with business-critical assets.
72
When drating a Negative Pledge, what Commercial Considerations must the Lender pay mind to?
**Balancing self-protection** with allowing the Borrower to **operate efficiently**.
73
What sorts of Provision might the Lender use to preserve the Balance between Protection and Flexibility?
* **Carve-Outs**, allowing the Borrower to create new security interests in its ordinary course of business or where it does not adversely impact the Lender's position.
* **Consent Clauses**, allowing the Lender to deny new security interests or to accept and alter terms accordingly, e.g. by increasing the margin.
## Footnote
Carve-Outs may be caveated with hard caps, e.g. only X number of transactions worth no more than $Y each are allowed per quarter, and a requirement on the Borrower to create equivalent security interests as a matter of course.
74
What are the Two Types of Negative Pledges?
* **Contractual Negative Pledge** (CNP).
* **Automatic Security Negative Pledge** (ASNP).
75
How are CNPs typically Drafted?
"The Borrower will not create or permit to subsist any security over any of its assets."°
## Footnote
°LMA, Cl. 22.3(a).
There are variants of this drafting. Consider the following:
*The Double Negative Pledge:* The Borrower may not create new security interest without giving equal and ratable security over that asset, or an asset of equivalent value, to the Lender.
*The Affirmative Negative Pledge:* The Borrower will give equal and ratable security interest over that asset, or an asset of equivalent value, to the Lender when creating new security interest.
*The Negative(+) Pledge:* The Borrower will not create new security interest, but if it does, it may escape liability by giving equal and ratable security over that asset, or an asset of equivalent value, to the Lender.
76
What are the limitations of CNPs?
* **Timing Determines Priority**:° The Lender's **commensurate security will rank below the other Creditor's**, rendering Springing Security clauses or Specific Performance practically useless.
* **Enforcement:** CNPs **only afford** the Lender **rights against the Borrower**, not the other Creditor, and do not restore *pari passu* treatment.
* **Poor Causes of Action:** The Torts of Inducing a Breach of Contract and Interfering with Contractual Relations **only award damages**, rather than nullify the other Creditor's security or grant the Lender an equivalent interest.°°
* **Perfection:** If the Lender's commensurate security is **not perfected within 21 days**, it will be **voided**, presenting the **issues of monitoring and notification**.°°°
## Footnote
° §870 CA 2006.
°° *Mainstream Properties v Young* [2007] UKHL 21.
°°° §859 CA 2006.
77
How is the Tort of Inducing a Breach of Contract established?
1. Evince a **breach of contract** between the Lender and Borrower.
2. Evince that the Third-Party **knowingly** induced this Breach.°
3. Evince that the Third-Party **foremost intended to procure** this Breach.
## Footnote
*OBG v Allan* [2007] UKHL 21.
°° Knowledge is judged subjectively. Morever, while actual knowledge is the gold standard, reckless indifference and gross negligence may suffice. Respectively, see (*Merkur Island v Laughton* [1983] 2 AC 570 at 591) and (*Swiss Bank v Lloyds Bank* [1979] Ch 548).
78
How do ASNPs differ from CNPs?
They **automate security creation**, namely by binding the creation of the Lender's commensurate security to a sufficiently clear trigger that transpires before the breach.
79
What is typically made the Trigger in an ASNP?
**Board resolution**. The Borrower's AOAs are amended so that only its Board can grant security, and the creation of the Lender's commensurate security is tied thereto.
## Footnote
This way, the Lender's commensurate security comes into existence either immediately before or in concurrence with the other Creditor's security, resolving the Priority issue.
80
What Limitations do ASNPs share with CNPs?
**Enforcement**, **Poor Causes of Action**, and **Perfection**.
## Footnote
Perfection is the most pressing, since automating creation is meaningless if the resultant security is not promptly registered. Accordingly, the Lender could obligate the Borrower to share the minutes of all Board meetings using an Information Covenant.
81
For CNPs and ASNPS, is Fresh Consideration Necessary to Create a Commensurate Security Interest?
**No**.°
## Footnote
° *Asiatic Enterprises v United Overseas Bank* [2000] 1 SLR 300.
82
What is a Quasi-Security?
Any instrument which **mimics the economic effect of a true security** by altering the Creditor heirarchy.
## Footnote
Well-made NPs include them in their drafting, and as a term, they should be clearly defined to facilitate enforcement.
83
Is the Commensurate Security created by the Negative Pledge a Fixed or Floating Charge?
**A Fixed Charge**, and specifically, "a charge expressed to come into existence on a specified future event and then to attach to assets then owned by the company."°
## Footnote
*Smith v Bridgend County Borough Council* [2002] 1 A.C. 336 at 357.
The specificity of the trigger event and relevant assets are what make this a fixed charge.
84
What is an Event of Default (EOD)?
An event that entitles the Lender to either:
* **Cancel**;
* **Declare immediately due**; or
* **Accelerate** the facility.
## Footnote
P. 188.
Acceleration is when the Lender declares the facility immediately due *and* demands repayment.
EODs that do not constitute breaches of contract are not enforceable by means of a claim for damages or an injunction.
85
What is the Commercial Purpose of Events of Default?
* Enable the Parties to **clarify** the **scope** of **events** that **may offend their agreement**, and the **consequent remedies available**.
* Enable the **Compliant Party** to **exit the transaction before** the **Defaulting Party's risk worsens** or materializes.
## Footnote
Lecture Notes.
86
How are EODs Construed?
**On their own merits**, **read separately** from one another and **given literal effect**.° Accordingly, the parties should pay due attention to the drafting of each one.
## Footnote
P. 195.
°*Law Debenture v Elektrim FInance* [2005] EWHC 1999.
87
If the Qualifier 'Continuing' is used to caveat an EOD, what does this mean?
That **depends** on its **construction**:°
* **Wide (Unilateral):** The EOD is resolved if the Borrower remedies the breach.
* **Narrow (Bilateral):** The EOD is resolved if the Lender waives the breach, typically after the Borrower remedies it.
## Footnote
°*LB Re Financing v Excalibur Funding* [2011] EWHCA 2111 (Ch).
Construction itself depends upon what the parties agree the term entails.
88
Must the Lender act Reasonably in its Discretion to Accelerate?
**No**.° So long as its entitlement has arisen, no considerations of reasonableness apply.°°
## Footnote
° *BNP Paribas v Yukos* [2005] EWHC 1321 (Ch), at [23].
°° *Çukurova Finance v Alfa Telecom* [2013] WKPC 2, at [78].
89
Must a Lender act in Good Faith in its Discretion to Accelerate?
**No**.° The court **will not imply** any such term.
## Footnote
° *Sucden Financial v Fluxo-Cane* [2010] EWHC 2133 (Comm), at [50].
Interestingly, under New York law, there is an obligation of good faith and fair dealing when determing whether acceleration should be exercised. See §1-208 of the New York Uniform Commercial Code.
90
What are the most Common EODs?
* Repudiation.
* Unlawfulness.
* Cross-Default.
* Non-Payment.
* Misrepresentation.
* Breach of Contract.
* Material Adverse Change (MAC).
* Insolvency / Insolvency Proceedings.
91
What is the Consequence of Invalidly Declaring an Event of Default?
* **If grounds exist**, but the Lender **cites the wrong ones**, the **declaration is still valid**;° however,
* **If no valid grounds exist**, **barring a provision** against invalid declaration, **no liability befalls the Lender**.°°
Nonetheless, the Borrower should seek an injunction if it believes an invalid declaration was made.
## Footnote
° *Brampton Manor v McClean* [2006] EWHC 2983 (Ch).
°° *Concord Trust v Law Debenture* [2005] UKHL 27.
No liability is befallen because an invalid declaration would be null, and therefore, unable to give rise to a breach of contract.°°°
°°° *Verizon UK v Swiftnet* [2008] EWHC 551 (Comm).
92
What is a Cross-Default Clause?
An EOD that triggers if the **Borrower defaults** on **certain obligations to another Creditor**, usually relating to non-payment and acceleration.
## Footnote
There is no need for the cross-defaulted obligations to be similar to those included in the Lender's contract.°
°*Abu Dhabi Commercial Bank v Saad Trading* [2010] EWHC 2054.
93
What is the Commercial Purpose of the Cross-Default Clause?
Ensure the **Lender** posseses the **same rights against the Borrower** as does its **other Creditors**.
## Footnote
P. 192.
This is particularly important when the Borrower is in financial difficulty and its Creditors find themselves in a Truxican Standoff.
94
From the Borrower's Perspective, what are the Dangers of a Cross-Default Clause?
* It may trigger a **chain reaction** leading to its **collapse**.
* It allows **all its Creditors** to **take advantage** of the **most onerous terms** in contracts they **may not be privy to**.
## Footnote
Accordingly, the Borrower should seek to limit the Cross-Default clause to instances where a Creditor has validly acquired the right to accelerate **and** used it.
95
What is a Material Adverse Change (MAC) Clause?
## Footnote
Otherwise known as a Material Adverse Effect (MAE) Clause.
A clause allowing the **Lender** to **suspend funding** in case of a **significant unfavorable change** affecting the **Borrower's ability to comply with its obligations**.
## Footnote
P. 193.
It may be drafted as either a Condition Precedent, an Event of Default, or both.
96
What is the Commercial Purpose of the MAC Clause?
**Defend the Lender against uncertainty** by permitting it to either:
* "**Cancel or Accelerate unimpeded**; or...
* "**Force a renegotiation of terms**,"
In case of unforeseen circumstances.°
| In other words, it is a risk reallocation tool.
## Footnote
° Narine Lalafaryan -- *Material Adverse Change Uncertainty: Costing A Fortune, If Not Corporate Lives*, [40].
97
How are MAC Clauses Construed?
**On its own merits**, with reference to:°
1. **Drafting**; and
2. **Context**.
According to the **standard of reasonableness**.
## Footnote
°*Grupo Hotelero v Carey* [2013] EWHC 1039 (Comm), at [344].
An event may be significant in the context of an acquisition facility but less significant in that of a project finance facility. Still, an adverse change [will] be material if it substantially or significantly affect[s] the Borrower's ability to repay the loan.°
98
When Drating a MAC Clause, what are Common Points of Negotiation?
* **Temporality:** Should it be forward-looking, and to what extent?
* **Scope:** Should it only concern itself with the Borrower's financial condition?
* **Probability:** Should it only concern itself with highly probable events, or also with plausible but uncertain ones?
* **Discertion:** Should the Lender's discretion be fettered, and if so, by what?
* **Construction:** Should it be subjectively or objectively construed?
## Footnote
P. 193
99
Regarding the MAC Clause, is it Relevant whether the Borrower is at fault for the Trigger Event?
**No**.°
## Footnote
° *Levison v Farin* [1978] 2 All E.R. 1149.
100
Which Doctrines Qualify the Lender's Discertion to use the MAC Clause?
**Good Faith** and **Reasonableness**.° The Lender, with whom lies the burden of proof, must **honestly** and **rationally** believe an event is materially adverse, even if, **objectively**, it is not.
## Footnote
°*Grupo Hotelero v Carey* [2013] EWHC 1039 (Comm), at [344].
However, this may depend on drafting. An objectively-formulated clause will limit the Lender to what it can prove, but it comes with the advantage of allowing it to rely on information **discovered subsequent** to using the clause, while the alternative **limits** such reliance to information available at the **material time**.°
101
To what extent is the Nebulosity of the MAC Clause Problematic?
During times of **high** **volatility**, it may be used to **abruptly terminate now-unprofitable agreements**, thus **costing** both Borrowers and the economy **severely**.°
## Footnote
° Narine Lalafaryan -- *Material Adverse Change Uncertainty: Costing A Fortune, If Not Corporate Lives*, [41].
That said, the clause's nebulosity is also its greatest strenght. It allows the Lender to capture many eventualities it either did not foresee or could not include at the tme of drafting for practical reasons.
102
What is the Commercial Purpose of Events of Default?
* Enable the Parties to **clarify** the **scope** of **events** that **may offend their agreement**, and the **consequent remedies available**.
* Enable the **Compliant Party** to **exit the transaction before** the **Defaulting Party's risk worsens** or materializes.
103
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.
## Footnote
Lecture Notes.
104
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.
## Footnote
Lecture Notes.
