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The Law of International Finance, 2nd. Ed. > Loan Transfers > Flashcards

Loan Transfers Flashcards

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1
Q

What is a Loan Transfer?

A

A transference of one Lender’s rights and obligations under a Loan to another.

Henceforth, these parties will be known as the Transferor and Transferee, respectively.

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2
Q

What is the Commercial Impact of Transferability on Lending?

A
  • By enhancing liquidity and risk management, it increases the quantity, quality, and variety of debt Lenders can issue; and
  • By increasing competition in capital markets, it decreases the cost of borrowing.
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3
Q

For a Lender, what is the Commercial Purpose of a Loan Transfer?

A
  • Increase liquidity.
  • Manage protfolio risk.
  • Collateralize borrowing.
  • Acquire set-off rights against the Borrower.
  • Capitalize on arbitrage by acquiring distressed debt.
  • Gain exposure to a strategic sector or Borrower.
  • Minimize exposure to the Borrower’s credit risk.
  • Minimize capital carrying costs (CCCs) or otherwise comply with capital adequacy requirements (CARs).

P. 693-695.

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4
Q

In a Syndicated Facility, how is the Borrower’s Consent to Transfer established a priori?

A

Under LMA Documentation, i.e. Cl. 24.1, the Borrower’s entry into the contract signifies a standing offer that any party can accept by following the procedure in Cl. 24.6.

Naturally, this is subject to the restrictions in Cl. 24.

Lecture Notes; Carlill v Carbolic Smoke Ball [1892] EWCA Civ 1 applied in The Argo Fund v Essar Steel [2005] EWHC 600 (Comm).

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5
Q

When administering a Transfer, would the Agent Bank be an agent of either the Transferor or the Transferee?

A

No. It would be an agent of the Syndicate alone.

Lecture Notes; Habibsons Bank v Standard Chartered [2010] EWCA Civ 1335.

Therefore, if either the Transferor or Transferee are Syndicate members, it will owe duties to them.

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6
Q

What are the Four Methods of Transfer (MOTs)?

A
  • Novation.
  • Assignment.
  • Sub-Participation.
  • Transfer by Way of Trust.
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7
Q

What is Novation?

A

An arrangement wherein:
* The Transferor and Borrower discharge their contractual rights and obligations toward one another; and
* Transfer them to the Transferee under a new contract between it and the Borrower.

P. 715.

Novation will extinguish the Transferor’s security and guarantees, Unless held on trust, because they attach to the Borrower’s now-terminated obligations.

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8
Q

Does Novation require Consideration?

A

Yes, namely from the Transferee to the Transferor, since a new contract is being formed.

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9
Q

What are the Advantages of Disadvantages of Novation as a Method of Transfer?

A

Advantages:
* Transfers obligations in addition to rights, and therefore, achieves a clean break.
* Avoids stamp duty.

Disadvantages:
* Completely severs the Transferor-Borrower relationship because of the clean break.

Lecture Notes.

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10
Q

What is Variation?

A

A modification of the contract’s terms.

Lecture Notes; Scarf v Jardine (1882) 7 App Cas 345 at [351]-[352].

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11
Q

How is Variation distinct from Novation?

A

With reference to the parties’ intentions, namely whether they intend amend the old contract or to terminate and substitute it.

Lecture Notes; Morris v Baron [1918] AC 1, at [19].

Adding a new party to the contract does not necessarily constitute Novation.

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12
Q

What are the Advantages and Disadvantages of Variation relative to Novation?

A

Advantages:
* Securities and guarantees do not terminate; and
* No new taxes are imposed as no new loan contract has been formed.

Disadvantages:
* It cannot transfer outstanding obligations.

Lecture Notes.

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13
Q

What is Assignment?

A

The transfer of rights or interests in a chose in action from the Transferor to the Transferee.

In Assignment, the Transferor and Transferee are termed the Assignor and Assignee, respectively.

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14
Q

What are the Two Fundamental Principles of Assignment?

A
  • The Borrower’s interests ought not be harmed but for an Assignment; and
  • The Transferee ought not inheret a wider set of rights against the Borrower than the Transferor had.

P. 710; Dawson v Great Northern & City Railway Co. [1905] 1 KB 260.

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15
Q

What are the Two Types of Assignment?

A
  • Equitable Assignment.
  • Legal (Statutory) Assignment.

P. 709-714.

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16
Q

What is Legal Assigment (LA)?

A

The assignment of the:
* Legal rights in a chose in action;
* Legal and other remedies thereto; and
* Ability to discharge it.

§136 – Law of Property Act 1925.

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17
Q

What is Equitable Assignment (EA)?

A

The assignment of the beneficial interest in a chose in action.

Typically, EAs are LAs that fail to meet one or more of §136’s requisites.

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18
Q

What are the Elements of Legal Assignment?

A

The Assignment must be:
* In writing and signed by the Assignor;
* Accompanied by notice to the Borrower;
* Absolute, i.e. not subject to conditions;
* Of the entire debt, which must exist at the material time.

§136 – Law of Property Act 1925.

There are no rules on how an Assignment must be written or notice thereof given.

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19
Q

What is the Legal Effect of a Legal Assignment?

A
  • The Assignee becomes the legal owner of the chose in action; and
  • May exercise any rights associated therewith; while
  • The Assignor keeps its obligations to the Borrower.

Lecture Notes.

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20
Q

What is the Legal Effect of Equitable Assignment?

A

The Assignee becomes the beneficiary of a trust, wherein the Assignor, as trustee, holds the rights in the assigned debt in its favor.

Lecture Notes.

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21
Q

How does Equitable Assignment differ from Legal Assignment?

A

It need not:
* Notify the Borrower.
* Pertain to the whole of the debt.
* Pertain to existing rights, i.e. may pertain to future rights.
* Be in writing, unless a subsisting equitable interest is being assigned.°

Tailby v The Official Receiver (1888) 13 App Cas 523 with the exception of LPA 1925 – §53(1)(c).
° §53(1)(c) – Law of Property Act 1925.

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22
Q

How does Equitable Assignment Correspond with Legal Assignment?

A

It must:
* Include a clear intention to assign the rights.°
* Be supported by consideration (unless future rights are being assigned).°°

° Milroy v Lord (1862) 4 De GF & J 264, at [12].
°° Price v Easton (1833) 4 B & Ad 433.

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23
Q

What is the significance of Notice to the Borrower for Assignment?

A

It may protect the Assignee against the Assignor’s credit risk, since it is required to:
* Allow the Borrower to obtain a good discharge from paying the Assignee, and thereby cut out the middle-man; and
* Guard against the risk of the Assignor disipating funds untraceably.

Gorringe v Irwell India Rubber (1887) 34 Ch D 128

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24
Q

What is the Risk of poorly drafting a Notice of Assignment to the Borrower?

A

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 [1940] 3 All ER 592.
°° WF Harrison v Burke [1956] 2 All ER 169; Van Lynn v Pelias [1969] 1 QB 607.

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25
Q

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

A

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.

P. 713;Tailby v The Official Receiver (1888) 13 App Cas 523, at [543]; Holroyd v Marshall (1862) 10 HLC 191.

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26
Q

Will an Equitable Assignment of a Future Chose in Action that later turns out to restrict Assignment be valid?

A

No. Assignment cannot bind onto a property and the rights therein, whether existing or future, if it is untransferable through Assignment.

McKnight – Contractual Restrictions on a Creditor’s Right to Alienate Debts [8]-[9].

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27
Q

Can an Assignee exercise an accrued but unused right?

A

Yes, considering it is a right the Assignor held, and could exercise, against the Borrower.

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.

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28
Q

Can a Legal Assignee Claim against the Borrower in its own name?

A

Yes, since it possesses the legal title for the chose in action.

Lecture Notes.

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29
Q

Can an Equitable Assignee Claim against the Borrower in its own name?

A

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.°

° §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.

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30
Q

Can a Borrower exercise Set-Off Rights it possessed vis-à-vis the Assignor against the Assignee?

A

Yes, but only if the rights accrued prior to Assignment and after notice thereof had been given. This applies to both LA and EA.°

P. 730; Roxburghe v Cox (1881) 17 ChD 520, at [526].

° Lawrence v Hayes [1927] 2 KB 111, at [120-121].

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31
Q

What is the Legal Right of Set-Off?

A
  • 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.

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.

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32
Q

What is the Equitable Right of Set-Off?

A

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.

Lecture Notes.

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33
Q

Can a Borrower assert its Right to Set-Off against a Successive Transferee (ST)?

A Successive Transferee is the Transferee of a Transferee.

A

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.

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.

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34
Q

In an Assignment, how are Priority Disputes resolved?

A
  • 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.

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.

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35
Q

What is the scope of application of the Rule in Dearle v Hall?

A

It applies to both LA° and EA;°° and may disapply if the earlier interest’s Holder recieves payment without notice of the later interest.°°°

° Pfeiffer v Arbuthnot Factors [1988] 1 WLR 150.
°° Marchant v Morton Down [1901] 2 KB 829.
°°° Dearle v Hall (1828) 3 Russ 1.

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36
Q

What constitutes Notice under the Rule in Dearle v Hall ?

A
  • Actual Notice: Has knowledge of the matter.
  • Constructive Notice: Would have had knowledge of the matter had it conducted reasonable enquiries.

P. 736; §199(1)(ii)(a) – Law of Property Act 1925; Lloyd v Banks (1868) LR 3 Ch App 488.

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37
Q

What constitutes a Reasonable Enquiry for the purposes of Constructive Notice?

A

An enquiry that would be done as a matter of prudence by others in the protection of their interests.

Lecture Notes; Bailey v Barnes [1894] 1 Ch 25, at [35].

38
Q

What is the Material Time for giving Notice under the Rule in Dearle v Hall?

A
  • 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.°°

° Mutual Life Assurance Society v Langley (1886) 32 ChD 460; \
°° §199(1)(ii)(a) – Law of Property Act 1925

39
Q

What are the Advantages and Disadvantages of Equitable Assignment relative to Legal Assignment?

A

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.°

° For the former point, see the rule in Dearle v Hall (1828) 3 Russ 1.

40
Q

What are the Limitations of Assignment as a Method of Transfer?

A
  • 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.°°

P. 720-722.
° Technotrade v Larkstore [2006] EWCA Civ 1079.
°° Dawson v Great Northern [1905] 1 KB 260.

41
Q

What is Sub-Participation (SP)?

A

A synthetic novation, wherein the Transferor and Transferee use a separate contract to replicate a transfer of rights and obligations.

In Sub-Participation, the Transferor and Transferee are termed the Grantor and Grantee, respectively.

42
Q

What are the Two Types of Sub-Participation:

A

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.

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.

43
Q

How does Sub-Participation differ in New York relative to England?

A

It requires notification for perfection, whereas England does not.

Lecture Notes.

Henceforth, only English SP shall be discussed.

44
Q

What is the Commercial Purpose of Sub-Participation?

A

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.

Lecture Notes; G. Penn, Promoting Liquidity in the Secondary Market: Is Sub-Participation still Fit for Purpose?.

45
Q

How does a Funded Participation economically simulate a transfer of rights and obligations?

A

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.

P. 718.

A significant risk transfer is important for decreasing CARs.

46
Q

How does a Risk Participation economically simulate a transfer of rights and obligations?

A

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.

P. 718.

Given its unsecured status, the Grantee should draft the agreement so that its obligation ceases upon the Grantor’s insolvency.

47
Q

Which between the Two Types of Sub-Participation is more effective from a Capital Adequacy standpoint?

A

FP, since the Grantor receives money up-front, whereas with RP, the Grantee’s credit risk remains relevant.

Lecture Notes.

48
Q

To what extent is Sub-Participation an effective Method of Transfer for minimizing Capital Adequacy Requirements?

A

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.

Lecture Notes.

This may result in the Grantee being entitled to full repayment, although this can be pre-emptively neutralized through good drafting.

49
Q

In a Funded Participation, when does the Grantor’s obligation to pay the Grantee trigger?

A

When the Borrower pays the Grantor. In this respect, namely payment, FP functions as a mirror of the underlying loan agreement.

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.

50
Q

In a Funded Participation, from which source of funds does the Grantor pay the Grantee?

A

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

Lecture Notes.

51
Q

Can a Grantee file a suit against the Borrower in its own name?

A
  • 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.

Socimer v Standard Bank (No 2) [2006] EWHC 718, at [63]; Banque Financiere v Westgate Insurance [1990] 1 QB 665, at [782].

52
Q

In a Funded Participation, aside from Payment, what other Rights may be simulated?

A
  • Voting rights.
  • Information rights.
  • Enforcement rights.

Lecture Notes.

While these rights’ inclusion is not necessarily stanard-issue, it is likewise not uncommon.

53
Q

In a Funded Participation, what happens if the Grantor refuses to comply with the Grantee’s voting instructions?

A

It will be liability to pay damages for breach of contract, and any unapproved changes may be non-binding on their contract.

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.

54
Q

How may the Grantee’s possession of Voting Rights be problematic for the Grantor?

A
  • 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.

Lecture Notes.

55
Q

How may the Grantee’s possession of Voting Rights be problematic for the Borrower?

A

It hollows its relationship with the Grantor, and worse yet, probably without knowing it even happened.

Lecture Notes.

56
Q

What is Double Credit Risk (DCR)?

A

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 unsecured claim.

Lecture Notes;Lloyds TSB Bank v Clarke [2002] UKPC 27

57
Q

Can the Grantee claim Trusteeship or Unconscionability if the Granteor becomes Insolvent?

A

No,° because the Grantor’s payments from the Borrower are the measure, not the source, of the Grantee’s payments.

Lecture Notes; Lloyds TSB Bank v Clarke [2002] UKPC 27; Adolfo Altman v Banking Group [2002] EWHC 2488.

58
Q

In a Funded Participation, How may the Grantee seek to mitigate its Double Credit Risk?

A
  • 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.

Lecture Notes.

59
Q

What is an Elevation Clause?

A

A clause that entitles the Grantee in and FP to become a Lender in the underlying facility, as defined therein, upon request.

Lecture Notes.

This is usually envisioned as being achieved through Novation or Legal Assignment.

60
Q

What happens if an Elevation Clause activates but a Transfer Restriction in the Underlying Facility prohibits the Grantee from becoming a Lender?

A
  • 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.

Lecture Notes.

61
Q

In a Funded Participation, what happens to the Agreement after Elevation?

A

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.

Lecture Notes.

62
Q

In a Funded Participation, from the Grantor’s perspective, why is Elevation problematic?

A

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.

Lecture Notes.

63
Q

In a Funded Participation, from the Borrower’s perspective, why is Elevation problematic?

A

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.

Lecture Notes.

64
Q

What are the Advantages and Disadvantages of Sub-Participation as a Method of Transfer?

A

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.

Lecture Notes.

65
Q

What is a Transfer Restriction?

A

A clause either excluding or limiting a Lender’s ability to transfer its rights and obligations in a loan.

Lecture Notes.

66
Q

What are the two Types of Transfer Restriction?

A
  • Absolute, i.e. ‘will not’.
  • Qualified, i.e. ‘will not without/unless/etc…’

Lecture Notes.

67
Q

Why would a Borrower wish to Limit the Transferability of its Debt?

A
  • 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.°°°

° 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.

68
Q

For Qualified Transfer Restrictions, what standard is used to qualify consent?

A

The standard of reasonableness.

Lecture Notes.

Usually, the clause will stipulate that consent will not be unreasonably withheld.

69
Q

In Transfer Restrictions, what are the Implications of the Reasonableness Standard?

A

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.

Lecture Notes.

70
Q

How is the Scope of a Restriction Clause determined?

A

Based firstly on what it is expressly referenced,° and secondly, what the context indicates the parties intended to restrict.°°

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.

71
Q

What is the effect of breaching a Transfer Restriction on a Loan Transfer?

A

The transaction is invalidated thereby denying the Transferee any rights against the Borrower or in the debt.

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.

72
Q

How may a Borrower limiting the sort of Entites its Debt may be Transferred to?

A
  • 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.

Lecture Notes.

73
Q

How may a Vulture Fund or Distressed Debt Specialist be described in a Black List?

A

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.

Lecture Notes.

74
Q

How should the term ‘Competitor’ be defined?

A

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.

Lecture Notes.

‘Resemblence’ may be elaborated upon to denote commercial activities, markets, products, geography, demographics, etc.

75
Q

What Elements should a comprehensive Restriction Clause include?

A
  • 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.

Lecture Notes.

76
Q

What is a Transfer by way of Trust?

A

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.

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.

77
Q

How does a Transfer by way of Trust differ from an Equitable Assignment?

A

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.

Lecture Notes.

78
Q

Will a Failed Novation or Assignment result in the creation of a Constructive Trust in favor of the were-to-be Transferee?

A

Very unlikely, unless there is sufficient evidence to demonstrate an intention to have the relevant interests held on trust for the Transferee.

Lecture Notes; Don King v Warren [2000] Ch 291.

79
Q

What is a Proceeds Assignment?

A

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.

Lecture Notes.

80
Q

For Benefits Trusts, if the Trustee becomes insolvent, how does the Beneficiary ensure the Liquidiator enforces the debt and does not dispose of the Trust as Onerous Property?

See §178 – Insovlency Act 1986.

A

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.

Lecture Notes.

This problem arises from the Beneficiary having no right of action against the Borrower to enforce the debt in its own name.

81
Q

For a Proceeds Assignment, are there any Formalities that must be observed?

A

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

Lecture Notes.

82
Q

For a Proceeds Assignment, how may a Clear Intention to hold funds on Trust be drafted or demonstrated?

A

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.

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.

83
Q

Generally, how can the Parties prevent the Liquidator from ever being appointed as a Trustee?

A

By pre-appointing a Trustee in the deed for if the intital Trustee becomes insolvent.

Lecture Notes.

84
Q

What is Re-Characterization Risk (RCR)?

A

The risk that a transfer will be reconstrued as a different transaction, thus changing the parties’ entitlements.

P. 739.

For example, an outright sale may be recast as the creation of a security interest.

85
Q

On what Grounds may a Transaction’s Characterization be challenged?

A

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

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.

86
Q

Regarding Re-Characterization, what are the Essential Differences between a Sale and a Secured Loan?

A
  • 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.

87
Q

Regarding the Sale-Secured Loan distinction, what are the Implications of the Welsh Development decision?

A
  • 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

Welsh Development Agency v Export Finance [1992] BCLC 148.

88
Q

What is the Equity of Redemption?

A

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 Spectrum Plus [2005] UKHL 41.

89
Q

To what extent may a Loan Transfer’s Characterization be challenged as Mere Collateral?

A

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.

P. 741; Re George Inglefield [1933] 1 Ch 1; Welsh Development v Export Finance [1992] BCLC 148.

90
Q

Why are the Courts reluctant to Re-Characterize Loan Transfers?

A
  • 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.°°°°

°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.

The Law of International Finance, 2nd. Ed. (14 decks)

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