Banking and Finance Law - Essay Example

A) The Bank’s Liability The English law distinguished an arranger from a lead bank in syndicated loans transactions. The role of the arranger and the lead bank are separate and distinct although at some points their roles are overlapping. In Sumitomo Bank ltd. V Banque Bruxelles Lambert SA (1997)1, an arranger was defined as an entity, which is engaged by the borrower to put together a financing package for the former. On the other hand, the lead bank is appointed by the banks to coordinate the loan facility, which may be extended to the borrower. Therefore, in an equation of sorts, we will find the arranger and the lead bank on opposite sides. In the case at bar, the role of Bank A is an arranger as it is representing the borrower and not the participating banks therefore, its obligations centred upon the borrower. Generally, the functions of the arranger starts upon its acceptance of the offer to arrange from the borrow and shall subsist until the time that the facility shall have been executed or in case of syndicated loan, its duties and obligations shall be deemed fulfilled at syndication when the participant banks are brought into direct contractual relations with the borrower2. a. Preparation of the Information Memorandum Part of the duties of the arranger is to assist the borrower in drafting the Information Memorandum (IM), which will be circulated to prospective lenders/investors or in the case of syndication, to participating banks. Note that the IM is an instrument, which will be relied upon by the participating bank in assessing the nature of the investment and risk involved thereon. By this token, English law so for measures that will ensure that the participating bank will not be mislead by unfounded claims set in the IM. The obligations of the arranger towards the participating banks in the case of syndication arise particularly during the negotiation stage and before the signing of the instruments of documents ratifying the facility. Breach of obligation to disclose the full state of the borrower or the misrepresentation of facts in the IM whether it is fraudulent or negligent in nature would give rise to both statutory breach and violation of established case laws. Fraudulent misrepresentation is the act of giving information knowing fully that it is not true. Fraud can also be deemed present where the arranger recklessly gives information without ascertaining its veracity and rending the facts disclosed as misleading. The key in this situation is that there is deceit in the act of the arranger as opposed to an innocent misrepresentation where the arranger believed in good faith in the truthfulness of the data disclosed. Statutory breach hinges on the provisions of Section 2(1) of the Misrepresentation Act 1967 which reads: “Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof has suffered loss, then, if the person making the misrepresentation would be liable to damages…” There is no need to establish a duty of care is owed by the arranger to the participants as such is an inherent factor in the transaction. In Hedley Byrne & Co Ltd v Heller & Partners Ltd3, the House of Lords held that the law would imply a duty of care upon one party making statements or giving information or advice to another where there was a special relationship between the parties. However, a defence of good faith and the fact that the arranger truly believed that the facts stated in the IM are true is available to the arranger in cases of misrepresentation. In English common law, the obligation of the arranger to the participant banks is also recognized and that liability also arises in cases of misrepresentation. In the case of Caparo Industries Plc v Dickman (1990)4, the Court established three criteria in assessing liability for negligent misrepresentation is outlined. According to the case, (a) foreseeability of damage (b) proximity of relationship and (c) reasonableness of imposing a duty should be taken into considerations in determining whether or not negligent misrepresentation is present. b. Conflict of Interest Bank A have been the principal bank of B for many years and it could be assumed that transaction between the two entities may still be subsisting. Part of the obligation of Bank A to the participants of the syndication is the disclosure of existing conflict of interest. Note that Section 2 (2) of the Unfair Contract Terms Act 1977 provides that in case of doubts, the terms and conditions of the contract shall be construed strictly against the arranger and that “satisfaction of the requirements of reasonableness” should be observed. (B) How the Bank may Protect Itself With reference to our scenario, a common practice for companies to protect itself is to include exclusion clauses and disclaimers into the information memorandum. However, such disclaimers should be in consonance with the reasonable circumstances provided for under the Unfair Contract Terms Act (UCTA) 1977. Before, the test of reasonableness is satisfied by the fact that parties entering into contract are of equal bargaining powers5. This test of reasonableness proved to be insufficient where the parties entering into contract are sufficiently different in nature6. In the case of banks where the companies involved are performing a more of less the same function, such difference in the bargaining powers is not so significant this factors which can be construed to support reasonableness may be the anchored on the ability to take professional and legal advice7 as well as the use of standard clauses commonly used in syndication. The only way to limit exposures of the arrangers and bank agents is to remove the duty of care or fiduciary obligation, which will serve as the platform of reliance of the participating banks. Note that in English laws on recovery of damages from breach of contract so provide that the degree of reliance made by the participant on the information provided by the agent determines the liability of the agent. In our case, the fact that B have been a long time client of Bank A would make it extremely difficult for Bank A to deny knowledge of the true financial status and circumstances of B. In the same manner, reliance on the information given by Bank A regarding a long-term client would be “prema facie” evidence of the true status of B. In other words, a long-term relationship could be construed as to ensure intimate knowledge of the business of the client. Although a defence of good faith on the part of Bank A will still be available, such may prove to be a difficult position as common law provides for ‘proximity of relationship” as one of the test for liability8. In a related case of Nat West Australia Bank Ltd v Tricontinental Corp Ltd9, the Supreme Court of Victoria held that the arranger is liable for negligence for failing to disclose vital information regarding conflict of interest. According to the Court, the relationship between the arranger and the participant would give rise to an obligation to disclose information, which are subject to specific inquiries. As a measure to avoid such liabilities and possible lawsuits demanding for damages, the arranger should disclose information, which may be a subject of conflicting interest and not rely on provisions of exclusions, which may not hold in the event of lawsuits based on breaches of duties and obligations. Bibliography Statutes Unfair Contract Terms Act 1977 Misrepresentation Act 1967 Cases Royscot Trust ltd. V Rogerson and Another (1991) 3 W.L.R. 57 Nat West Australia Bank Ltd v Tricontinental Corp LTD (1993) ATPR (Digest) 46-109, pp 53, 501-53, 504 Caparo Industries plc v Dickman [1990] 1 All ER 568 Henderson v Merrett Syndicates [1994] 3 WLR 761 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 Royal Bank Trust Co (Trinidad) Ld v Pampellonne [1987] 1 Lloyd’s Rep 218 PC Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyds Rep. 487 (QBD (Comm)) St. Alban’s City and District Council v International Computers ltd. (1996). The Times, August 13. Journal Articles Bhattacharyya (1995), “The duties and liabilities of lead managers in syndicated loans”, BJIBFL 172 Davies & Halliday (1997), “Risks and responsibilities of the agent bank and the arranging bank in syndicated credit facilities”, JIBL 182 Whitehead (1999), “The jumbo has landed”, European Counsel 25 Sequira S, (1997), “Syndicated Loans- Let the Arranger Beware!” BJIBFL 12(3) Books Cranston R (2002), “Principles of Banking Law”, Oxford University Press; Oxford Read More