Bilateral Loans Agreement - Essay Example

Bilateral Loans Agreement I. Introduction Bilateral loans are direct transactions between bank and client. As a direct transaction, it requires that the parties enter into a contract. In the execution of the contract, the bank can already protect itself by inserting contractual provisions, which will ensure that the interest of the bank is protected. The first line of defence of the bank in the event of a default is the terms and conditions embodied in the contract of loan. The binding effects of the provisions of the contract would give the bank the power to enforce its terms upon the client. In the event of a default, a contractual relationship between parties would give rise to two types of remedies may be availed of by the bank to protect its interest namely, judicial and extra-judicial. It should be noted that in loans transactions, the terms and conditions must be put in writing for it to be enforceable, including the duration of the, the securities required and the amount of interest which should be imposed on top to the principal amount of the loan. The fact that the contract is unvaried at the time it is entered into by the parties, it shall remain unvaried until otherwise amended by the parties1. II. Extra-judicial Remedies through the Provisions of the Contract The loan contract may include provisions for securities such as mortgage and negative pledges. These two types of securities differ in the sense that mortgage requires that a title to specific properties of the client be given as collateral of the loan while negative securities require no bodily pledging of properties but rather a prohibition on the part of the client not to use any property thereon as securities for other obligations. In other words, it is “a promise between the borrower and the lender that the borrower will not encumber its property, including present and future property, to secure the loan of another creditor which would give the subsequent creditor priority”.2 There are many forms of restrictions available against the properties of the clients but these should be used with caution so as not to restrict the business transactions of the client. In drafting restriction clauses, due care should be taken not to confer blanket restrictions which will have an effect of freezing the total assets of the client. For instance, a blanket restrict on the manufacturing company may have the effect of prohibiting the client for selling its assets. As the manufactured goods are part of the assets of the client, a blank restriction would in effect prohibit the client from selling its manufactured goods, which is unconscionable and may not pass scrutiny under the Unfair Contract Terms Act (UCTA) 1977. Furthermore, where the client belongs to a conglomerate of a group, the contract must also be couched in terms that includes all other members of the group based on the maxim that what is not included is deemed excluded. Acceleration clauses are also valid measures to protect the interest of the bank. According to the case of law Debenture Trust Corporation PLC v Electrim Finance BV (2005)3 acceleration clauses are valid in cases of default provided that it is executed with the sanction of the Board of Directors. Interest due to the date of default may also be collected provided that it does not constitute as a penalty4. As ruled in the case of Lordsvale Finance Plc v Bank of Zambia (1996)5, designating default interest provisions to protect the creditor, should be confined to those cases where the increased rate purported to operate retrospectively. Set-off provisions in the contract which allows the bank to deduct the amount due on the loan against the deposit of the client is also applicable provided that an express authority made in writing have been granted by the client to the bank6. The right to set-off is effective against liquidators in cases on insolvency provided that such right did not “go beyond what was permitted by the Bankruptcy Act 1914 Section 31.”7 A measure which may also be injected into the contract is the considerations for a “material adverse change” (MAC) and the “material adverse effect” (MAE) clauses which generally becoming acceptable under English law8. The drafting of this clause would depend on the intent of the parties. A MAC clause is based on the premise that an evident has occurred which will likely to have significant negative changes in the financial or commercial situation including the assets and goodwill of the client. Often, the drafting of a MAC clause “acts as the precursor of an actual event of default”9 allowing the banks to negotiate for new terms and conditions. On the other hand, a MAE clause is the translation of the negative event into negative impact of the assets and finances of the client. In other words, a MAE clause would take effect in the occurrence of “any event that is materials and unforeseeable”10 which has direct effect on the financial situation or reputation of the client. III. Judicial Remedies Aside form extra judicial and contractual remedies, the bank can also rely on judicial remedies, which may arise in the event of breach of contract and for damages arising for tortuous acts of the client. First, where the client breached the contract of loan as in the case of negative pledges where the client sells the property subject thereof, the legal remedy of injunction may be called up. By its nature, an injunction is a court order, which is used to stop the act being committed, based on the ground of impending damages or a purported wrong done on the part of the complainant. It comes in two types, the preliminary injunction, which prevents or stops the act and the mandatory injunction, which requires the undoing of the act, which has already been performed. To illustrate, where a preliminary injunction would stop the sale, mandatory injunction would generally seek to rescind the sale and restore the property to its original state before the purported breach occurred. The bank may also seek damages for breach of contract in the event that there is a showing of bad faith on the part of the client and that due to such bad faith resulting damages occur. As early as the case of Hadley v Baxendale (1854)11the rule have been set and is presently subsisting that damages can only be sought where the it is the natural consequence of the contract and it is within the intent of the parties and not just a remote12 supposition thereof. References Laws and Articles 1. Bankruptcy Act 1914 Section 31 2. Hurlock, "New Approaches to Economic Development: The World Bank, the EBRD and the Negative Pledge Clause" (1994) Harvard International Law Journal 345. 3. Julien F. (2004) Material Adverse Change and Syndicated Bank Financing Part 1. JIBLR 20004, 19(5) 172-176 4. McKnight A. (2002) Restrictions on Dealings with Assets in Financing Documents; Their Role, meaning and Effect. JIBL 2002, (17(7), 193-204 5. Unfair Contract Terms Act 1977 Cases 1. BNP Paribas SA v Yukos Oil Co (2005) EWHC 1321 (CH) 2. Cryne v Backlays Bank (1987) BCLC 548 3. Debenture Trust Corporation PLC v Electrim Finance BV (2005) EWHC 1999(CH); 2005 WL 2229626 4. Hadley v Baxendale (1854) 9 Ex 341 5. Hedley Byrne V. Heller (1964) AC 465; (1963) 2 All ER 575 6. Hongkong and Shanghai Banking Corp. v Kloeckner (1990) 2 Q.B. 514 7. Lordsvale Finance Plc v Bank of Zambia (1996) QB 752, [1996] 3 All ER 156 8. Re Charge Card Services ltd. (1987) Ch. 150 9. The Angelic Star (1987) (CA(Civ Div) Court of Appeals; (1988) 1 Lloyd’s Rep. 122 Read More