Loan Transfers Flashcards
What is a Loan Transfer?
The transference of one Lender’s rights and obligations regarding a Loan to another.
Henceforth, these will be known as the Transferor and Transferee.
Why would a Lender transfer its Rights and Obligations under a Loan?
- To decrease exposure the Borrower’s insolvency risk.
- To manage portfolio risk, i.e. decrease and increase exposure to segments of the market accordingly.
- To realize immediate revenue, i.e. increase liquidity.
- To optimize the balance sheet vis-à-vis capital adequacy requirements, so as to make as many Loans as possible.
- To provide security for borrowing of its own.
Textbook – P. 693-694.
As unlikely as this is, if a loan becomes illegal to maintain, a Lender may have no choice but to transfer it to a legally-viable party.
If a Lender is troubled by a Borrower’s insolvency risk post-execution, how does a Loan Transfer resolve the problem?
It allows it the Lender to either:
- Get out while it is ahead of the Borrower’s insolvency; or
- Cut its losses, the size of which will correlate with the anticipated loss on recovery, and expend its energy more productively elsewhere.
The ability to transfer insolvency risk as described enables Lenders to make Borrowers riskier loans, knowing they have viable, albethey unideal, options.
How can the Revenue recieved pursuant to a Loan Transfer be used productively by a Lender?
The Lender may use it to either:
- Issue a new loan, one which could prove more profitable than the last, especially if it has not advanced funding;
- Repay a proximate liability;
- Bolster quarterly or annual performance.
Transferring an undrawn loan to issue a new one is especially opportune because very little has been lost, meaning that the relative margin for gain is much larger.
Why would a Lender want to purchase another Lender’s Rights and Obligations under a Loan?
- To gain exposure to a particular sector(s) or Borrower(s), and thereby build one’s expertise and network.
- Assuming a low credit risk, to gain exposure to a reliable yield.
- To realize a profit.
- To acquire the right to set-off against the Borrower.
Regarding the third point, a profit could be realized on the purchase of distressed debt, e.g. buying a Loan at 20p p/£ and recovering 30p p/£. A purchaser could also capitalize on arbitrage, e.g. buying a Loan for X and selling it for Y where Y > X.
Textbook –
Why would a Borrower wish to Limit the Transferability of a Loan?
- Minimize the risk of Lender-side nonperformance.
- Preserve its set-off rights against the Transferor with respect to present and future claims,* both during solvency and insolvency.**
- Preserve its working relationship with the Transferor, who may be more amenable to waivers or aid during hardships, and whose ‘skin in the game’ keeps it invested.
- Avoid the risk of overlooking notice of Assignment and/or accidentally paying the Transferor and liable therefore.***
- Avoid the added complexity of going through the Transferor to deal with the Transferee, e.g. to claim a refund.****
- Avoid legally and commercially associating with certain parties, e.g. competitors or Vultures, especially unkowingly.
Textbook – P. 722-723; *Business Computes v Anglo-African Leasing [1977] 1 WLR 578; **IA 1986 – §323 and Rules 2.85/4.90; ***LPA 1925 – §136 and William Brandt’s Sons v Dunlop Rubber [1905] AC 454; ****Pan Ocean Shipping v Creditcorp [1994] 1 WLR 161.
The second point is made worse if the Borrower has no pre-existing equities or set-off rights against the Transferee, as, depending on the means of Transfer, it may have no way or desire to create new ones. The third point is a defect of all Transfers, as even Equitable Assignment or Sub-participation may place undue influence on the Transferor to behave adversely to the Borrower’s interests. The sixth point is most relevant to undrawn term loans or revolving loans.
What are the Four Means of Loan Transfer?
- Novation.
- Assignment.
- Transfer by Way of Trust.
- Sub-Participation.
Does Novation present Conflict of Laws issues?
No. Novation is characterized as a contractual matter, and will therefore be governed with reference to the contractually-specified jurisdiction(s).
Textbook – P. 696-697.
The relevant governing laws will be ascertained through either Rome I or the Contracts (Applicable Law) Act 1990.
Does Assignment present Conflict of Laws issues?
Moderatly. While Assignment is governed with reference to the contractually-specified jurisdiction(s),* issues may arise regarding non-contractual means of Assignment, e.g. Trusts.
Textbook – P. 698-707; *Rome I – Art. 14.
How is Assignment Characterized?
As a contractual voluntary assignment of debt, namely because its terms and effects are of such a nature.
Raiffeisen Zentralbank Österreich v Five Star General Trading [2001] EWCA Civ 68 at [26-43].
It is for this reason that Assignment falls within the remit of Art. 14.
What are the Non-Contractual Means of Voluntarily Assigning a Debt?
- Unnotified Equitable Assignment; and
- Declaration of Trust.
Textbook – P. 703.
Why do the Non-Contractual Means of Voluntarily Assigning a Debt escape Article 14?
They do not directly affect the Borrower’s contractual obligations or its relationship with the Transferor; it is only the latter’s benefit therein which is affected.
Giuiliano-Lagarde Report; Raiffeisen Zentralbank Österreich v Five Star General Trading [2001] EWCA Civ 68.
What is the Lex Situs?
The lex situs is the Borrower’s residence, which is hopefully specified in the contract. If not, it may hinge on where it has assets or has submitted to jurisdiction.
Société Eram v Hong Kong and Shanghai Banking [2003] UKHL 30 at [73].
Assuming a Non-Contractual Assignment, how would a Conflict of Laws be resolved?
Lex situs will be used to determine both jurisdiction*, which will be used to construe the agreement, and payment priority.**
Textbook – P. 705; *Re United Railways [1960] Ch 52 at [84-88]; **Raiffeisen Zentralbank v Five Star [2001] EWCA Civ 68 at [36-37].
In light of the Banker’s Duty of Confidentiality to its Borrowers, what must it refrain from doing during a Loan Transfer?
It ought not make disclosures concerning its customers, without their consent, to the prospective Transferee.
Tournier v National Provincial and Union Bank of England [1924] 1 KB 461.
If such disclosures are necessary for the transaction to proceed, then it will likely fall through unless the bank can procure its customer’s consent. Naturally, this duty does not extend to non-banks.
What is the Risk of Re-Characterization?
The risk that a Transfer will be recast as a different transaction, thus changing the parties’ entitlements.
Textbook – P. 739.
For example, an outright sale may be recast as the creation of a security interest.
On what Grounds may the Characterization of a Transaction be challenged?
There are two Grounds, namely that the transaction is either:
- A sham;* or
- Has the legal effect of an alternative transaction.**
Textbook – P. 740-741; *Orion Finance v Crown Financial Management [1996] BCC 621; **North Central Wagon Finance v Brailsford [1962] 1 WLR 1288.
Allegaitons of a transaction amounting to a sham are quite rare, considering the gravity of the allegation. The ‘alternative transaction’ that will most often be juxtaposed is the creation of a security interest in support of financing.
Regarding the question of Recharacterization, what are the Essential Differences between a Sale and a Secured Loan?
- A Sale does not entitle the Seller to an Equity of Redemption, unlike a Secured Loan.
- A Sale does not compel the Purchaser to account to the Vendor for any profits made on the resale of the subject matter, unlike a Secured Loan (by way of mortgage).
- A Sale does not entitle the Purchaser to recover from the Vendor any losses made on the resale of the subject matter, unlike a Secured Loan (by way of mortgage)
Lectures Notes; Re George Inglefield [1933] Ch 1.
What is the Equity of Redemption?
The right to regain unencumbered title in an asset once the relevant secured obligation has been discharged.
Re George Inglefield [1933] 1 Ch 1, at [28];
If a transaction is by way of outright sale, no Equity of Redemption should obtain. Hence, if there is such a right, the transaction’s character may be challenged. Likewise, if the commercial purpose or economic effect of a transaction predominantly resembles an Equity of Redemption, it may provide further backing for a re-characterization, but such considerations are subordinate to parties’ intentions.*
*Brumark [2001] UKPC 28, Smith v Bridgent CBC [2001] UKHL 58, and National Westminster Bank v Spectrum Plus [2005] UKHL 41.
To what extent may the Characterization of an Assignment, or indeed any other form of Transfer, be challenged as a Security Interest in support of Finance?
Limitedly. While evidencing an Equity of Redemption or analyzing the transaction’s commercial and economic nature can work, the Courts are generally reluctant to re-characterize a Loan Transfer.*
Textbook – P. 741-; *Re George Inglefield [1933] 1 Ch 1 at [28], Lloyds & Scottish Finance v Cyril Lord Carpet Sales [1992] BCL 609, and Welsh Development Agency v Export Finance [1992] BCLC 148.
Why have the Courts historically been reluctant to re-characterize a Loan Transfer as anything but?
- Freedom of contract and giving effect to parties’ intentions.*
- Finance alone is immaterial; how it was provided and on what terms is what is relevant.**
- Proprietary interest in the way of quasi-security does not automatically recharacterize a Transfer.***
- Recourse against the Transferor in case of the Borrower’s default does not automatically recharacterize a Transfer.****
- Practically straying from a transaction’s strict requirements does not imperil its nature as a sale.*****
Textbook – P. 743-744; *Welsh Development Agency v Export Finance [1992] BCLC 148; **/**** Re George Inglefield [1933] 1 Ch 1 at [27]; ***McEntire v Crossley Bros [1895] AC 457; *****
Regarding the fifth, this is especially true considering that debt purchase transactions often use similar terms and concepts to debt finance transactions.* A right to repurchase a debt from the Transferee does not equate to an Equity of Redemption.**
*Old Discount v Cohen [1938] 3 All ER 281; **Manchester v North Central Wagon (1888) 13 App Cas 544;
What are the Two Fundamental Principles of Assignment?
- The Borrower’s interest ought not be harmed but for an Assignment; and
- The Transferee ought not inheret a wider set of rights against the Borrower than had the Transferor.
Textbook – P. 710; Dawson v Great Northern & City Railway Co. [1905] 1 KB 260.
Using Assignment, can the Transferor Transfer Unexercised Acrrued Rights?
Yes. Assuming a full Assignment, the Assignee should be able to exercise all those rights the Assignor held against the Borrower. This does not extend to wholly personal rights, however.
Technotrade v Larkstore [2006] EWCA Civ 1079;
Personal rights include indemnities, capital adequacy levies, and the like.
What are the Two Forms of Assignment?
- Absolute Assignment (AA).
- Equitable Assignment (EA).
Textbook – P. 709-714; (Absolute) Law of Property Act 1925 – §136.
Does Assignment Insulate the Transferee against the Transferor’s Insolvency Risk?
Yes,* but under EA:
- Notice must be give to the Borrower for this to stand, in order for it to obtain a good discharge; and
- There remains the risk that the Transferor may collect and disipate the funds in an untraceable fashion.
*Gorringe v Irwell India Rubber (1887) 34 Ch D 128
Assigned book debts must be registered lest they be rendered as void against a trustee in bankruptcy.* If an Assignment is by of security, rather than by way of sale, then it must be registered (very rare).**
*IA 1986 – §344; **CA 2006 – §859A.
What is Absolute Assignment?
The assignment of the legal rights to a debt, the legal and other remedies thereto, and the ability to discharge it.
Law of Property Act 1925 – §136.
What are the Elements of Absolute Assignment?
The Assignment must be:
- In writing and signed by the Transferor;
- Accompanied by notice to the Borrower;
- Absolute, i.e. not subject to conditions;
- Of the entire debt, which must exist at the material time.
Law of Property Act 1925 – §136.
There are no rules on how an Assignment must be written or notice thereof given.
Re Westerton, Public Trustee v Gray [1919] 2 Ch 104.
What is the Legal Effect of Absolute Assignment?
The Transferee becomes the legal owner of the debt and may exercise the rights associated therewith. The Transferor keeps its obligations to the Borrower.
Lecture Notes.
What are the Risks of poorly drafting a Notice of Assignment for a Borrower?
It may be ill-construed as a revocable authority to pay a third party,* or invalid if so inaccurate that it disables the Borrower from paying the correct party and receiving a good discharge.**
*James Talcott v John Lewis & North American Dress [1940] 3 All ER 592; **WF Harrison & Co v Burke [1956] 2 All ER 169 and Van Lynn Developments v Pelias Construction [1969] 1 QB 607.
What is Equitable Assignment?
The assignment of the beneficial interest in a debt.
Textbook – P. 711-712.
Procedurally, how does Equitable Assignment differ from Absolute Assignment?
Equitable Assignment need not:
- Be in writing, unless a subsisting equitable interest is being assigned.*
- Pertain to the whole of the debt.
- Notify the Borrower.
- Be supported by consideration.**
Tailby v The Official Receiver (1888) 13 App Cas 523 with the exception of LPA 1925 – §53(1)(c); **/ ***
An intention to assign must nevertheless be clear.***
What is the Legal Effect of Equitable Assignment?
The Transferee becomes the beneficiary of a trust, where the Transferor, as trustee, holds the rights in the assigned debt in favor of the Transferee.
Lecture Notes.
Can the Transferee Claim in its own name against the Borrower?
Not under EA. It must either:
- Petition the Transferor;
- Name the Transferor as a co-defendant with the Borrower if it does not comply; or
- Obtain an irrevocable Power of Attorney, held on trust, at Assignment.
Having the Power held on trust allows it to survive the Transferor’s insolvency. Notice is necessary for suit,* but not for creation, thus it may be witheld judiciously.
Power of Attorney Act 1971 – §4(1)(b); *Public Trustee v Gray [1919] 2 Ch 104.
Can Obligations be Transferred using Assignment?
No.
Tolhurst v Associated Portland Cement Manufacturers [1902] 2 KB 660.
What are the Advantages of Equitable Assignment?
- Permits debt partitioning, which allows the Lender to obtain a better end-price because of each tranche’s lower risk.
- Permits the assignment of future property.
- Avoids notifying the Borrower, allowing the Transferor to maintain its exclusive relationship it.
- Avoids stamp duty, which would be 1% ad valorem of any written Assignment over £30,000.
Lecture Notes.
When will Valuable Consideration be necessary to support and Equitable Assignment?
When the Assignment concerns either:
- A future property, which must be:*
- Clearly identifiable;
- Form a part of the Assignemnt; and
- Transfer beneficial ownership immediately and without condition.**
- An equitable charge.***
Textbook – P. 713; *Tailby v The Official Receiver (1888) 13 App Cas 523 at [543] and Holroyd v Marshall (1862) 10 HLC 191; **Re Lind [1915] 2 Ch 345 at [359]-[360].; ***Re Earl of Lucan, Hardinge v Cobden (1890) 45 ChD 470.
What is the Danger of leaving an Assignment Unstamped?
An unstamped document cannot be used as evidence in court. As such, Lenders will refrain from stamping an Assignment until if ever it is necessary.
Lecture Notes.
Under §15 of the Stamp Act 1891, this strategy may incur additional costs in the form of unpaid interest and unpaid amounts on the duty.
How do Lenders go about Mitigating Stamp Duties?
-
Execute the document outside the UK and in a jurisdiction which does not have a stamp duty, e.g. Jersey.
- If needed for court, bring it into the UK and have it stamped within 30 days.
- Do not pay the duty and face the penalty if it is needed for court.
- Do not use a written document at all.
Lecture Notes.
Whether Absolute or Equitable, what are the Limitations of Assignment?
- Cannot transfer obligations.*
- May be contracutally restricted.
- Losses that the Transferor would not have otherwise suffered cannot be claimed by the Transferee.**
- Absent clear drafting, rights personal to the Transferor cannot be transferred.
Textbook – P. 720-722; *Technotrade v Larkstore [2006] EWCA Civ 1079; **Dawson v Great Northern [1905] 1 KB 260.
The first is only an issue if there remain oustanding obligations. Regarding the fourth, the Transferee’s entitlement to payment will mirror what the Transferor would have otherwise received.
What is Novation?
An agreement where the Lender and Borrower discharge their current contractual rights and obligations towards each other, and identically transfer them to a new Lender under a new contract.
Textbook – P. 715.
In other words, the Transferor and Borrower terminate their contract and substitute it with a new one between the Transferee and the Borrower. Therefore, consideration is necessary.
What happens to the Securities or Guarantees under Novation?
They are extinguished, as any securities and guarantees would have attached to the obligations that were terminated in a novation. However, if originally held on trust, they survive novation.
Lecture Notes.
In a Syndicated Facility, how is the Borrower’s Consent to Transfer ascertained?
Under LMA Documentation, i.e. Cl. 24.1, the Borrower’s entry into the contract signifies a standing offer to the whole world that any party can accept by following the procedure in Cl. 24.6.
Lecture Notes; Carlill v Carbolic Smoke Ball [1892] EWCA Civ 1 applied in The Argo Fund v Essar Steel [2005] EWHC 600 (Comm) and Habibsons Bank v Standard Chartered Bank (Hong Kong) [2010] EWCA Civ 1335.
This is an offer to enter into a Loan Transfer, specifically by way of Novation or Assignment.
Is Consideration necessary for the Novation or Assignment of a Syndicated Loan under LMA Documentation?
No.
Lectures Notes; Tweddle v Atkinson (1861) 1 B&S 393 at [399], followed by Re Wyvern Developments [1974] 1 WLR 1097 at [1103].
“No action can be maintained upon a promise, unless the consideration moves from the party to whom it is made.”
Is the Agent Bank, in executing a Transfer Certificate, an Agent of either the Transferor the Transferee?
No. The Agent Bank is agent to the Syndicate alone.
Lecture Notes; Habibsons Bank v Standard Chartered Bank (Hong Kong) [2010] EWCA Civ 1335.
Therefore, if either the Transferor or the Transferee are Syndicate members, it will owe agent duties to them.
What are the Advantages and Disadvantages of Novation as a method of Loan Transfer?
- A: Can transfer obligations and therefore achieve a clean break.
- A: Avoids stamp duty.
- D: Most damaging method of transfer for the Transferor-Borrower relationship.
Lecture Notes.
