Mechanisms Used in Common Law - Coursework Example

Mechanisms Used In Common Law and Civil Law in Transfer of Syndicated Debt Introduction The civility of human existence is guided by the laws and regulations put in place by the legislature. Civil law has been in existence in most societies since medieval ages. Civil law refers to laws that are passed by a legislative assembly such as a parliament which can be referred to for any case and no precedents for a similar case can be used as binding guides. It is the oldest legal system that is still surviving and is practiced in parts of Africa and Asia, also Latin America and continental Europe while common law is a legal system in which the law is dynamic and continuously evolves depending on with a higher court being given weight where a lower court cannot overrule a higher courts’ ruling and interpretation. It is also subject to being added upon by legislation from a law making legislature such as parliament. Here previous rulings give guidance on current cases and are referred to. It originated in England and is still used commonly there and in former Great Britain colonies such as Australia, New Zealand Canada and in most countries of the commonwealth. Debt syndication is a situation where many lenders come together to offer credit to an individual entity, a conglomerate, or a government to spread out the debt risk among the participating lenders (called the syndicate) and share in the profits of the debt proportionately under a single syndicated loan agreement. This paper gives an analytical introspection into common and civil law in reference to transfer of syndicated debt. Loan amounts involved in syndicated debts are normally much larger than normal debts, and a default could have serious ramifications on a single lender, hence the need to spread the risk among many lenders. There is a lead borrower known as the ‘agent’ that does most of the administrative work concerning the loan or contributes proportionally larger debts.1 A syndicated loan can be provided as a term loan provision where a specified amount of loan is provided over an agreed time period of time called the ‘term. In addition, the borrower is usually allowed, under the given circumstances, a brief time after the loan availability to withdraw money up to the maximum limit and then repays in installments (amortization) or once at the expiry of the term (bullet payment). The syndicated loan may also be provided as a revolving loan facility where the borrower draws portions of the loan amount for a given period, for instance, within three to six months after which the repayment is due and can draw from the loan facility to repay the outstanding loan. This is a concept which is referred to as rollover loan. A syndicated loan can also be in the form of a general loan where new borrowers can come into the agreement under specific circumstances and may also combine rollover loans and multiple term loans. This is a concept which is legally defined within the law.2 The borrower usually starts by approaching the lead borrower (agent) who advises the said borrower and contacts other lenders. The agent is the contact person with the borrower and represents the views of the syndicate. The agent also monitors how the borrower meets terms and conditions of the loan agreement. In addition, the agent keeps all records, collects all payments and interest from the borrower, and then pays both members of the syndicate at a fee. After a loan is approved with the requisite legal requirements satisfied, the borrower can then access the loan under the agreed terms. In this case, the borrower may wish to transfer the loan to a third party for a variety of reasons listed in the following part of the discussion. Acquire Capital The borrower may sell its interest in the syndicated loan if it is a long term loan facility to get capital or benefit from new better loan facilities. Reduce or Avoid Loss The borrower may experience difficulties and decide to sell its loan commitment to distressed debt specialists Capital Regulatory Requirements Certain regulatory requirements need the lending bank to retain a portion of what it lends as a cover for its existing loan requirements Risk Management A borrower can sell its commitment in a syndicated loan to change yield dynamics and thereby diversify its risk portfolio The transfer of commitment is enforced through the transferrable loan certificate or transfer loan instruments The selling off of its syndicated loan commitment must conform to the forms of transfers as expressed in the agreement for the syndicated loan.2 Under common law, a borrower can transfer the aforementioned commitment in a loan through the mechanisms of novation, legal assignments, equitable assignment, risk participation and funded participation. Novation is where a lender transfers all the debt commitment rights and obligations as outlined in the loan agreement, the selling borrowers obligations, and rights come to an end and the incoming borrower takes over the legal commitment; the selling borrowers’ obligations are substituted by the new borrowers’ legal commitments and obligations to the syndicated loan with identical obligations. Basically it is an old debt being exchanged for a new debt. Novation originated in Roman law and has been adopted ib both civil law and common law practices.3 Transfer is possible based on meeting conditions set out in the loan agreement and the borrower has to be a party to the process of novation. Most syndicated loan agreements have a transfer certificate which provided all parties agree to the transfer of the syndicated loan, is accepted to be used as the transfer certificate under civil law. In common law, rulings tend to go with the civil law where the terms in the loan agreement and transfer certificate on the premises of novation govern transfer as provided for by the ‘Chitty on contracts’ that governs all contracts of a commercial nature . In the case between Habibsons Bank Ltd vs. Standard Chartered Bank (Hong Kong) Ltd,4 in which the Standard Chartered bank entered into an agreement with Habibsons bank to purchase a portion of the loan given to the borrower. However, the borrower went under and the business was put under whence Standard Chartered bank deducted a fraction of the amounts due from the borrower who could not meet her obligations from the portion purchased by Habibsons bank. Consequently, the latter went to court for the deductions to stop since the borrower had not consented but the judge declined to grant Habibsons bank their wish since the original agreement did not require consent from the borrower. This is different from an Australian case which involved Goddridge vs. Macquaire Bank Ltd.5 In this case, the Australian federal Court ruled that an exercise of the right to sale a syndicate obligation by Macquaire Bank Ltd were contrary to the original loan agreement as it failed to give adequate notice contrary to the (NSW) Conveyance act of administration1919 section 170 that made all actions of Macquaire bank void. This difference is due to jurisdiction.4 However, under civil law, the provisions are the same. A syndicated loan commitment can also be transferred to another party by Legal Assignment where only the rights are transferred but not the obligations. Under civil law, the Law of Properties Act of 1925 section 136 requires that the assignment must be absolute, signed and put in writing by the current lender and the borrower is notified in writing otherwise the transfer can be equitable. The borrower’s rights such as the right to sue as stipulated in the loan agreement hold. However, the lenders obligation to provide the borrower with money is not transferrable through legal assignment2 .legal assignments are also applicable under common law, an example involved the Argo Fund Ltd vs. Essar Steel Ltd,6 where interpretation whether Argo Fund was another financial institution and therefore entitled to its claim where a syndicated loan agreement restricted the transfer of rights and obligations to entities that were a ‘financial institution’ which did not have to be a bank or any other financial institution. The basic requirement was that the entity was a legal business and was in commercial finance business and it did not matter whether it was a lender to either a primary or secondary market. The judge’s ruling was that Argos was entitled to its claim7. A syndicated debt can also be transferred by Equitable Assignment when the terms of the Law of Property of 1925 section 136 are not fulfilled. In this case, a new lender who becomes an equitable assignee is obliged to enjoin the current lender (the assignor) in the syndicated debt. Its main difference with legal assignment is that the borrower is not notified in equitable assignment. An example of common law was the case of Burridge vs. MPH Soccer management Ltd,8 which involved a claim for payment by Mr. and Mrs. Burridge from a Mr. Harrison. Mr. Harrison acted as West Ham FC’s agent in the transfer of Lucas Neil to West ham from Blackburn Rovers. In the agreement between them, Mr. Harrison was to be paid GBP 900 000 and subject to the Football association regulations that only allow individuals to be agents though they may conduct their business through companies. Through the payment declaration, Harrisons Company MPH was inserted. As a consequence, Mr. and Mrs. Burridge got a third party order for a debt against MPH. In a court of appeal case where it was to make a decision whether payment from West ham FC was to be made to MPH or Mr. Harrison, the ruling was that it was to be paid to Mr. Harrison had Mr. Harrison assigned the payment to MPH. The appeals court ruled that Harrison had assigned the payment to MPH without going against the FA rules and so an equitable assignment took place.6 Funded participation is also a way to transfer commitment in a syndicated loan. Under civil law, the current lender and a participant sign an agreement where the participant lender accepts to pay the current lender what the current lender had disbursed to the borrower; the participant is entitled to a share interest and principal paid by the borrower so far from the current lender.2 A security trust is another way that syndicated loans can be transferred or loans recovered. It refers to a trust deed or a bond or any other instrument such as a mortgage that parties to a commercial contract enter into where a security is pledged, conveyed or transferred to secure or acquire an obligation such as debt repayment. It is applicable in both civil law and common law jurisdictions but exercised differently; in common law jurisdictions security trust can be enforced to recover money or a debt obligation under the Uniform Commercial Code (UCC) where upon defaulting on an obligation, a secured lender can dispose the security and use the realized proceeds to settle the debt or hold on to the security provided the borrower doesn’t object while in civil law jurisdictions such as Germany a receiver appointed by a constitutional court is required to dispose the security which is not in possession of the secured lender. The receiver answers to the court so the secured lender has little or no control in execution of the collateral and may receive its interest in lieu of a defaulted loan late as delays are common.9 Security interest In civil law, loans can be assured by providing security in personam where a third party entrusts a loan security to the security trustee in a loan syndicate who are the beneficiary should a default or inability to pay agreed premiums as agreed in the loan agreement; or in rem where the principal borrower entrusts collateral to offset the loan should the borrower fail to pay.10 Security interest refers to interest in a property crafted by an agreement or law enforcement over chattels to guarantee a loan performance obligation to a creditor who holds certain special rights in the offsetting of security entrusted by the borrower or a guarantor.11This form of entrusting a security is commonly used in syndicated loan agreements in common law jurisdictions to protect the creditors interests under syndicated and other loan agreements. The security trustee holds a security interest on the provided collateral on behalf of members of the syndicate and has the right to obtain in part or in whole the collateral to recover loans disbursed in the event of a default by the borrower. Conclusion Security interests are guided by the trust law in common law jurisdictions with the English trust law being the guide and reference point for all trust laws worldwide. In civil law jurisdictions, trusts are not recognized so parallel debts are used instead since in such jurisdictions such as Dutch and Russian civil law, the security trustee cannot execute a collateral to recover loans owed to a syndicate as the security trustee may not be a creditor itself while the law requires that the holder of security be itself a creditor. A parallel debt becomes handy as the borrower signs a covenant separately to pay the security trustee the sums owed in her own right (the trustee) and not as an agent for the syndicate so that the trustee is recognized in law as the owner of the security and the secured debt through the borrowers’ covenant which a court can use to secure payment.12 Bibliography Banking and financial Institutions group newsletter (McGuire Woods vol 3 2002). [2010] FCA 67 - 12 Feb 2010 - Federal Court of Australia - Rares J http://www.lawyersweekly.com.au/blogs/top_cases/archive/2010/02/16/goodridge-v-macquarie-bank-ltd.aspx accessed 23 January 2012 Legal Dictionary, Duhamie.org http://www.duhaime.org/LegalDictionary/N/Novation.aspx accessed 24 January 2012. Loan Market Association Guide to Syndicated Loans (2012) http://www.lma.eu.com/uploads/files/Introductory_Guides/Guide_to_Par_Syndicated_Loans.pdf accessed 24 January 2012. Muelhbarcher W and Varga D, Providing Security Austrian legal Aspects (2002/2003) < http://www.dbj.at/sites/default/files/publ138.pdf> accessed 23 January 2012. R P Wood International Loans, Bonds, Guarantees and Legal Opinions (2nd edn, Sweet & Maxwell 2007) 1-003. T Syrbe, V Bortkevicha, A Anichkin and M Bartholomy, Real estate in Russia- A legal Guide (Clifford Chance 2010) Read More