Loan Transfers Flashcards

Question

In the Equitable Assignment of Future Property, what Characteristics must the transaction possess?

Answer 1

The relevant asset must: * Be **clearly identifiable**; * Form **part of the Assignment**; * Have its **beneficial ownership transferred immediately and without condition** upon coming into existence. ## Footnote P. 713;*Tailby v The Official Receiver* (1888) 13 App Cas 523, at [543]; *Holroyd v Marshall* (1862) 10 HLC 191.

Answer 2

**No**. Assignment **cannot bind onto a property** and the rights therein, whether existing or future, **if it is untransferable** through Assignment. ## Footnote McKnight -- *Contractual Restrictions on a Creditor’s Right to Alienate Debts* [8]-[9].

Answer 3

**Yes**, considering it is a right the Assignor held, and could exercise, against the Borrower. ## Footnote *Technotrade v Larkstore* [2006] EWCA Civ 1079, at [56]. This does not extent to wholly personal rights, though, which includes indemnities, capital adequacy levies, and the like.

Answer 4

**Yes**, since it **possesses the legal title** for the chose in action. ## Footnote Lecture Notes.

Answer 5

**No**, but it can: * **Petition the Assignor**; * **Name the Assignor as Co-Defendant** with the Borrower if it does not comply; or * **Obtain an irrevocable Power of Attorney**, held on trust, at Assignment.° ## Footnote ° §4(1)(b) -- Power of Attorney Act 1971. Having the Power held on trust allows it to survive the Assignor's insolvency. Gaining the power to sue does not necessarily entail notifying the Borrower, assuming the Assignment is in writing and properly executed, whereas exercising that power does. See *Public Trustee v Gray* [1919] 2 Ch 104.

Answer 6

**Yes**, but only if the rights accrued **prior to Assignment** and **after notice thereof had been given**. This applies to both LA and EA.° ## Footnote P. 730; *Roxburghe v Cox* (1881) 17 ChD 520, at [526]. ° *Lawrence v Hayes* [1927] 2 KB 111, at [120-121].

Answer 7

* The **netting** of a **pre-existing**, **separate**, and **unconnected** claim; * **Owed** by the **Transferor** to the **Borrower**; * **Against** the **Borrower's current debt** to the **Transferee**. ## Footnote P. 731; *Christie v Taunton* [1893] 2 CH 175. If a Transferee, in its own name, sues the Borrower, the legal right of set-off automatically applies to any counter-claims the Borrower may have.

Answer 8

The **netting of a cross-claim so closely connected** with the Transferee's claim against the Borrower that it would be **manifestly unjust to enforce without accounting for this claim**. ## Footnote Lecture Notes.

Answer 9

Assuming the Borrower had set-off rights against the Transferee: * If the second transaction used **Unnotified EA**°, the **Borrower's rights will not be exercisable** against the ST; but, * If the second transaction used **LA**°° or **Notified EA**,°°° the **Borrower's rights will be exercisable** against the ST. ## Footnote P. 732. ° *Banco Central v Lingoss* [1980] 2 Lloyd's Rep 266. °° *Read v Brown* (1888) 22 QBD 128, at [132]. °°° *William Brandt's Sons v Dunlop Rubber* [1905] AC 454, followed in *Three Rivers v Bank of England* [1996] QB 292.

Answer 10

* Where two interests are **equal in nature**, **timing determines priority**;° however * The **second may displace** the first **if**, **when** it was **created**: 1. Its **Holder** had **no notice** of the **first**; and 2. The **Borrower had notice of the second before the first**.°° | This is known as the Rule in *Dearle v Hall*. ## Footnote P. 734; ° *Pfeiffer v Arbuthnot Factors* [1988] 1 WLR 150, at [161-163]; *Compaq Computer v Abercorn Group* [1991] BCC 484 at [497-502] °°*Dearle v Hall* (1828) 3 Russ 1.

Answer 11

It **applies** to both **LA**° and **EA**;°° and **may disapply if** the **earlier interest's Holder recieves payment without notice** of the later interest.°°° ## Footnote ° *Pfeiffer v Arbuthnot Factors* [1988] 1 WLR 150. °° *Marchant v Morton Down* [1901] 2 KB 829. °°° *Dearle v Hall* (1828) 3 Russ 1.

Answer 12

* **Actual Notice:** **Has knowledge** of the matter. * **Constructive Notice:** **Would have had knowledge** of the matter had it **conducted reasonable enquiries**. ## Footnote P. 736; §199(1)(ii)(a) -- Law of Property Act 1925; *Lloyd v Banks* (1868) LR 3 Ch App 488.

Answer 13

An enquiry that would be done as **a matter of prudence** by others in the **protection of their interests**. ## Footnote Lecture Notes; *Bailey v Barnes* [1894] 1 Ch 25, at [35].

Answer 14

* **When value is given for interest**, i.e. at the time of creation;° or * When a **Holder's Agent comes into actual or constructive knowledge** while acting in the same transaction.°° ## Footnote ° *Mutual Life Assurance Society v Langley* (1886) 32 ChD 460; \ °° §199(1)(ii)(a) -- Law of Property Act 1925

Answer 15

Advantages: * **Avoids stamp duty**. * **Permits debt partitioning**. * **Permits** the transfer of **rights in future property**. * **Avoids notifying the Borrower**, thereby preserving the Assignor's relationship therewith. Disadvantages: * Affords the Assignee **weaker rights**. * **Will notify** the Borrower if **enforcement is pursued**. * Are more easily undermined by **priority disputes** and **defects in title**.° ## Footnote ° For the former point, see the rule in *Dearle v Hall* (1828) 3 Russ 1.

Answer 16

* It **cannot transfer obligations**,° but this is only problematic if obligations are outstanding. * It is **likely restricted by contract** to some extent. * **Losses** the Assignor **would not have suffered** **cannot be claimed** by the Assignee.°° ## Footnote P. 720-722. ° *Technotrade v Larkstore* [2006] EWCA Civ 1079. °° *Dawson v Great Northern* [1905] 1 KB 260.

Answer 17

A synthetic novation, wherein the Transferor and Transferee use a separate contract to replicate a transfer of rights and obligations. ## Footnote In Sub-Participation, the Transferor and Transferee are termed the Grantor and Grantee, respectively.

Answer 18

**Funded Participation** (FP): * The Grantor agrees to regularly pay the Grantee sums equivalent to its proceeds under the facility in exchange for a lump sum. **Risk Participation** (RP): * The Grantee indemnifies the Grantor against the Borrower's obligations to it for a fee, including any payments received from the Borrower's insolvency. ## Footnote P. 718. It is important to note that rights other than payment may be 'transferred' in an FP, such as the right to vote, redeem security, or act on a breach.

Answer 19

It **requires notification for perfection**, whereas England does not. ## Footnote Lecture Notes. Henceforth, only English SP shall be discussed.

Answer 20

To **economically simulate a transfer of rights and obligations** in a way that: * **Circumvents orthodox transfer restrictions**; * **Satisfies capital adequacy requirements**; and * **Maintains contractual privity** between the Grantor and Borrower. ## Footnote Lecture Notes; G. Penn, *Promoting Liquidity in the Secondary Market: Is Sub-Participation still Fit for Purpose?*.

Answer 21

The Grantor: * **Recoups its outstanding debt**, or at least a portion thereof, while also **executing a significant risk transfer**; and The Grantee: * Undertakes the **risk and reward** regarding the **Borrower's future performance**. ## Footnote P. 718. A significant risk transfer is important for decreasing CARs.

Answer 22

The Grantor: * **Executes a significant risk transfer**; and The Grantee: * Undertakes the **all the risk** and **some of the reward** regarding **Borrower's future performance**, the discrepancy between which is accounted for with a premium. ## Footnote P. 718. Given its unsecured status, the Grantee should draft the agreement so that its obligation ceases upon the Grantor’s insolvency.

Answer 23

**FP**, since the Grantor **receives money up-front**, whereas with **RP**, the Grantee's credit risk remains relevant. ## Footnote Lecture Notes.

Answer 24

**Not ideal**, considering the **Borrower's default** may prompt the Syndicate to **roll over** its debt in lieu of a fresh loan, **therefore returning the Borrower's credit risk to the Grantor's balance sheet**. ## Footnote Lecture Notes. This may result in the Grantee being entitled to full repayment, although this can be pre-emptively neutralized through good drafting.

Answer 25

**When the Borrower pays the Grantor**. In this respect, namely payment, FP **functions as a mirror** of the underlying loan agreement. ## Footnote Lecture Notes. In effect, it is a derivative agreement, and therein, the Grantee's entitlement to payment should be made contingent upon the Borrower's performance, as otherwise, the Grantor may find itself obligated to continue paying the Grantee even if the Borrower becomes insolvent. See *Adolfo Altman v Banking Group* [2002] EWHC 2488.

Answer 26

**Its own funds**, and **not receivables from the Borrower**, as its interest therein is neither held on trust for nor assigned to the Grantee. ## Footnote Lecture Notes.

Answer 27

* **If** the contract is **silent on enforcement**, then **yes**, because the **Grantee** will be considered to have **acquired an equitable interest in the underlying loan**; however * In practice, the contract will usually specify that **all rights in the facility vest solely in the Grantor**, meaning the **Grantee** would have **no standing**. ## Footnote *Socimer v Standard Bank (No 2)* [2006] EWHC 718, at [63]; *Banque Financiere v Westgate Insurance* [1990] 1 QB 665, at [782].

Answer 28

* **Voting** rights. * **Information** rights. * **Enforcement** rights. ## Footnote Lecture Notes. While these rights' inclusion is not necessarily stanard-issue, it is likewise not uncommon.

Answer 29

It will be **liability to pay damages for breach of contract**, and **any unapproved changes may be non-binding** on their contract. ## Footnote Lecture Notes. For instance, if the Grantor, without approval, agrees to decrease the interest rate payable on the underlying facility, the contract will nevertheless continue to mimic the original rate. However, if an unapproved changes renders impossible the operation of the contract, liability for immediate repayment of outstanding obligations and damages for additional losses, e.g. future interest, may await.

Answer 30

* It **legally cedes decision-making** in the underlying facility; which * Has the **commercial effect** of giving the Grantee **indirect contractual privity**; thus * **Potentially harming** the **Grantor-Borrower relationship**. ## Footnote Lecture Notes.

Answer 31

**It hollows its relationship with the Grantor**, and worse yet, probably **without knowing** it even happened. ## Footnote Lecture Notes.

Answer 32

For the **Grantor** (in an **RP**): * The exposure to the **Borrower's and Grantee's credit risk**, against which it has an unsecured claim. For the **Grantee** (in an **FP**): * The exposure to the **Borrower's credit risk**, against which it has **no claim**, and **Grantor's credit risk**, against which it has an u**nsecured claim**. ## Footnote Lecture Notes;*Lloyds TSB Bank v Clarke* [2002] UKPC 27

Answer 33

**No**,° because the Grantor's payments from the Borrower are the **measure**, **not the source**, of the Grantee's payments. ## Footnote Lecture Notes; *Lloyds TSB Bank v Clarke* [2002] UKPC 27; *Adolfo Altman v Banking Group* [2002] EWHC 2488.

Answer 34

* **Elevation**. * Bankruptcy-Remote **SPV**. * **Grant of security** over the underlying facility. * **Credit support**, on entry or on trigger events. * Use of a **New-York Style** Funded Participation. * **Declaration of trust** over the underlying facility. ## Footnote Lecture Notes.

Answer 35

A clause that **entitles the Grantee** in and FP **to become a Lender in the underlying facility**, as defined therein, upon request. ## Footnote Lecture Notes. This is usually envisioned as being achieved through Novation or Legal Assignment.

Answer 36

* The **Grantor's interest** will be **transferred to an unrestricted party**, who will itself **become a Lender**; after which * The **Grantee** will **enter into a new FP agreement therewith**; thus * Allowing it **maintain its economic interest** and **evade the Grantor's credit risk**. ## Footnote Lecture Notes.

Answer 37

**It terminates**, after which either: * A **direct legal interest** in underlying facility is created; or * A **new FP agreement is entered into** with whomever the interest was transfered to. ## Footnote Lecture Notes.

Answer 38

An Elevation Clause: * **Implies** the Grantor is **financially unreliable**. * **May cause reputational and relational difficulties**, either with the Borrower or the Syndicate. * May **adversely affect** its, or the Syndicate's, **decision-making capabilities**, particularly if the Grantee has a **blocking majority**. * **Defeats the transaction's purpose** by **giving the Grantee actual rights** in the underlying facility and **commercial influence** over the Borrower. ## Footnote Lecture Notes.

Answer 39

An Elevation Clause: * **Dilutes** the substantiveness of its **relationship with the Grantor**. * **Gives a stranger legal rights** and **commercial influence** over it; who * May use its privity to **accrue greater ownership**; and * Make decisions **adverse** to its **commercial interests**. ## Footnote Lecture Notes.

Answer 40

Advantages: * **Avoids stamp duty** and other potential tax liabilities. * **Economically simulates a transfer of obligations**. * **Creates arbitrage opportunities** regarding payable interest. * **Mitigates** the Grantor's **exposure** to the Borrower's **credit risk**. * **Circumvents Restriction Clauses**, at least those that do not target it specifically. * **Does not require the Borrower's knowledge or consent**, allowing the Transferor to maintain an exclusive relationship. Disadvantages: * **Double Credit Risk**. * **May harm Grantor-Borrower relations**, depending on the provisions included. * **May leave the Grantee with no power**, depending on the provisions included. * **Imperfectly transfers** the **Borrower's credit risk**. * **Imperfectly transfers assets** for capital adequacy purposes. ## Footnote Lecture Notes.

Answer 41

A clause either **excluding** or **limiting** a **Lender's ability** to **transfer its rights and obligations** in a loan. ## Footnote Lecture Notes.

Answer 42

* **Absolute**, i.e. 'will not'. * **Qualified**, i.e. 'will not without/unless/etc...' ## Footnote Lecture Notes.

Answer 43

* **Avoid** the **added complexity** of transference. * **Minimize exposure** to the **Transferee's credit risk**. * **Preserve** its **set-off rights** against the **Transferor**.° * **Preserve** its **commercial relationship** with the **Transferor**.°° * **Avoid legal** or **commercial association** with certain types of parties, like Vulture Funds.°°° ## Footnote ° This is particularly important if the Borrower has no pre-existing equities or set-off rights against the Transferee, as, depending on the Method of Transfer, it may have no way or desire to create new ones. °° This is because the Transferor is likely, but not always, the Borrower's Relationship Lender, who by nature is more amenable than usual to give waivers or leeway during economic hardship because it wants to keep the Borrower as a client long-term. °°° This is pertinent considering the silent nature of certain Methods of Transfer.

Answer 44

The standard of **reasonableness**. ## Footnote Lecture Notes. Usually, the clause will stipulate that consent will not be unreasonably withheld.

Answer 45

For the **Lender**: * **Consent** must **always be requested**; and * A **court declaration of unreasonableness** should sought **before executing** a denied transfer. For the **Borrower**: * It must have a **commercially justifible reason for withholding consent**, one that a reasonable Borrower in a similar situation would raise. ## Footnote Lecture Notes.

Answer 46

Based **firstly** on what it is **expressly referenced**,° and **secondly**, **what the context indicates** the parties intended to restrict.°° ## Footnote P. 725. ° *Floods of Queensferry* [1998] 1 WLR 1496. °° *Don King Productions v Warren* [2000] Ch 291. For instance, in *Don King*, because of the facts, the court may take a restriction on Assignment to contain an implicit intention to restrict the transfer of any interest in the loan whatsoever, thereby extending to, for instance, a transfer by way of trust.

Answer 47

The transaction is invalidated thereby **denying the Transferee any rights** against the Borrower or in the debt. ## Footnote Lecture Notes; *Linden Gardens v Lenesta* [1994] 1 AC 85, at [108]. Naturally, the Transferor may be held liable for damages. See *Helstan Securities v Hertfordshire CC* [1978] 3 All ER 262.

Answer 48

* **White List:** An extensive list of potential Transferees. Any outsiders require Borrower consent, but them being outsiders is not a reasonable excuse for refusal. * **Black List:** An extensive list of prohibited Transferees. Descriptions ought be extremely thorough and specific, but broad as well. * **Competitors:** A ban on transferring to competitors, however so defined. * **Minimum Hold Obligations:** An agreement between the Lender(s) and Borrower that the former promises to maintain an agreed percentage of the total commitment, therefore only prohibiting Novation. May fall away after the Availability Period or full drawdown. * **Sub-Participation Regulations:** Full details of any proposed Sub-Participations prior to entry and/or prohibition on Elevation and Voting provisions. ## Footnote Lecture Notes.

Answer 49

An entity that either solely **focuses on acquiring distressed assets in pursuit of a loan-to-own strategy** or principally or predominantly employs this strategy, amongst others. ## Footnote Lecture Notes.

Answer 50

**As widely as possible**, preferrably denoting **any entity whose primary business resembles the Borrower's or its Group**, thereby capturing as large a demographic as possible. ## Footnote Lecture Notes. 'Resemblence' may be elaborated upon to denote commercial activities, markets, products, geography, demographics, etc.

Answer 51

* **Assignment** of rights under the contract or the fruits thereof; * **Declaration of Trust**, or holding thereon, of the benefit of those rights or the fruits thereof; or * **Creation of a security interest** against those rights or the fruits thereof. ## Footnote Lecture Notes.

Answer 52

A **Declaration of Trust over the beneficial interest** in the underlying facility, wherein: * The **Transferor**, as **Trustee**, remains **legal owner**; and * Holds said **beneficial interest** in favor of the **Transferee**, as **Beneficiary**. ## Footnote Lecture Notes. *Milroy v Lord* (1862) 4 De GF & J 264;*Re Turcan* (1889) 40 ChD 5. This is otherwise known as a Benefits Trust.

Answer 53

Under an **EA** (assuming notice): * * **The Borrower** obtains a **good discharge** by **paying the Assignee**, whereas the inverse is true under a Benefits Trust. * **The Assignee can bring an action against the Borrower**, whereas this is **normally untrue** under a Benefits Trust. ## Footnote Lecture Notes.

Answer 54

**Very unlikely**, unless there is **sufficient evidence to demonstrate an intention** to have the **relevant interests held on trust** for the Transferee. ## Footnote Lecture Notes; *Don King v Warren* [2000] Ch 291.

Answer 55

A type of Benefits Trust that presdies **only** over the **proprietary interest in the right to the fruits of the loan**, i.e. its proceeds. ## Footnote Lecture Notes.

Answer 56

**An irrevocable Power of Attorney**, **held on trust**, could be given to the Beneficiary. Alternatively, the Trustee could: * **Retain a small part of the loan**; or * **Commission a small fee for acting as a Collection Agent**; and Thereby give the Liquidator reason to enforce the debt. | This applies to Equitable Assignment as well. ## Footnote Lecture Notes. This problem arises from the Beneficiary having no right of action against the Borrower to enforce the debt in its own name.

Answer 57

**No**, but there **must be a clear intention to hold funds on trust** for the Transferee as soon as they reach the Transferor. ## Footnote Lecture Notes.

Answer 58

The parties may agree to: * **Deposit the relevant sums into a dedicated account**, so as to maintain traceability; but if this is impossible, * **Create a trust over a commingled account** into which the relevant sums are deposited, giving the Transferee a proprietary interest. ## Footnote Lecture Notes. Regarding the second, to satisfy the Certainty of Subject Matter, the documentation should clearly identify all amounts outstanding and the Transferee's entitlement thereto. An irrevocable Power of Attorney may also be contemplated. This structure can also be used in FPs.

Answer 59

**By pre-appointing a Trustee** in the deed for if the intital Trustee becomes insolvent. ## Footnote Lecture Notes.

Answer 60

The risk that a **transfer** will be **reconstrued as a different transaction**, thus **changing the parties' entitlements**. ## Footnote P. 739. For example, an outright sale may be recast as the creation of a security interest.

Answer 61

The transaction is either: * A **sham**;° or * Has the **legal effect of another transaction**.°° ## Footnote 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.

Answer 62

* 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) ## Footnote Lectures Notes; *Re George Inglefield* [1933] Ch 1.

Answer 63

* A Sale Agreement's **character will be determined according to** its **substance**. * There are **no objective criteria** underpinning this determination. * **Proper construction** must be applied with reference to the **whole of the agreement** and the **nature of the legal relationship the parties intended to create**. * Such terms as '**sale**', '**purchase**', and '**price**' must be construed **as they appear and are used**. * The **mere presence of provisions** which are **similar to** those used in **secured financing** is **not determinative of** **character** ## Footnote *Welsh Development Agency v Export Finance* [1992] BCLC 148.

Answer 64

The **right to regain unencumbered title** in an asset **once** the relevant secured **obligation has been discharged**. ## Footnote *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 *Spectrum Plus* [2005] UKHL 41.

Answer 65

**Limitedly**: * While evidencing an **Equity of Redemption** or analyzing the **transaction's commercial and economic nature** is relevant; * The Courts are **reluctant to re-characterize** transfers. ## Footnote P. 741; *Re George Inglefield* [1933] 1 Ch 1; *Welsh Development v Export Finance* [1992] BCLC 148.

Answer 66

* **Freedom of contract** and **giving effect to parties' intentions**. * **Finance alone is immaterial**; **how it was provided and on what terms** are 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**.°°°° ## Footnote ° *Re George Inglefield* [1933] 1 Ch 1 at [27]. °° *McEntire v Crossley Bros* [1895] AC 457 . °°° *Re George Inglefield* [1933] 1 Ch 1 at [27]. °°°° *Old Discount v Cohen* [1938] 3 All ER 281.