The Loan Markets Association ("LMA") has amended its suite of syndicated facility agreements to address concerns raised in a recent decision by a Hong Kong Court of First Instance in Charmway Hong Kong Investment Ltd v. Fortunesea (Cayman) Ltd1 ("Charmway") that an individual lender does not have the right to take independent enforcement action. The Asia Pacific Loan Markets Association ("APLMA") has advised that it will be mirroring these changes in its syndicated facility agreements.
Syndicated lending transactions in the Asian markets are usually documented under the APLMA standard form facility agreements or APLMA-compliant facility agreements and, to a lesser extent, the LMA standard form facility agreements.
Clause 2.2 (Finance Parties' rights and obligations) of each of the LMA/APLMA standard form facility agreements states that unless otherwise provided in a finance document, amounts owed under the finance documents are owed to each lender separately and hence each lender may separately enforce its debt. Relying on this, the market assumption has been that unless the lender contractually binds itself to not do so (for instance, by entering into an inter-creditor agreement which imposes certain restrictions on individual enforcement action), each lender has an independent right to recover debts owed to it by the borrower.
Hong Kong court decision
In the Charmway case, on the question of whether an individual lender was entitled to take independent enforcement action, the Hong Kong court held that:
- the facility agreement (which appears to have been based on the LMA form, though not in its entirety) created a consolidated loan advanced by the lenders and, therefore, did not create a debt to an individual lender;
- consequently, upon the occurrence of an event of default, no lender had a right to claim payment of its proportionate share of the defaulted loan; and
- for the above reasons and because an agent is required to act on the instructions of the majority lenders upon the occurrence of an event of default, a lender cannot take independent enforcement action.
The decision in Charmway does not take into account certain fundamental concepts underpinning syndicated facilities, how syndicated facilities operate in practice and the interplay between the various clauses of a syndicated facility agreement. It appears from the decision that an expert on syndicated facilities was not consulted by the court. It would have been useful to have done so given that this is a specialist area with well-developed market norms. Apart from limiting a minority lender's right to recover any debt which is owed to it, such a decision (were it followed more broadly, which, with respect, we do not believe it will be) could have the following implications on lending transactions:
- A lender would not be able to use the threat of legal proceedings as leverage in its negotiations with other lenders and the borrower during a workout unless it holds a sufficient percentage of the loan to ensure that a majority cannot be constituted without it.
- If the loan is considered to be a consolidated loan, given the need for strict mutuality between debits and credits under English insolvency set- off rules, a lender's right of set-off may be affected adversely.
- A further unforeseen consequence could be that borrowers seek to assert that lenders have joint liability (notwithstanding clause 2.2(a) of the APLMA standard form facility agreement) to advance the loan and should a lender fail to advance its share of the loan, the other lenders will need to make good on the deficit. Taken to its logical conclusion, this would adversely impact the regulatory capital position of lenders.
The decision is also a reminder of the importance of boilerplate provisions and the need to carefully consider the implications of removing such provisions. It appears that the standard and helpful provision which sets out the exceptions to the pro-rata sharing rule among finance parties may not have been included in the facility agreement (although this is mere speculation, based on the fact that the judge did not refer to this provision in the decision). If this provision had been included or relied on, it would have given the claimant finance party the ability to retain amounts recovered by it if the other finance parties had elected not to join the claimant and participate in those recovery proceedings. This, in turn, would have made it more difficult for the judge to take the view that clause 2.2 operates only with respect to mandatory prepayments or in the context of the borrower's right to prepay the loans or cancel the commitments of a single lender.
The Hong Kong decision is not binding on English courts and, at best, has limited persuasive value. With due respect to Justice Harris, we do not believe that an English court would adopt his reasoning or reach the same conclusion if a similar case were to come before an English court. Nevertheless, the LMA has made some useful amendments to clause 2.2 of its standard form facility agreements to address concerns arising from the decision, particularly in the Asian markets (given that this is a Hong Kong decision).2