This case is an unusual example of an LMA “standard” debt trade leading to litigation in the UK Supreme Court and demonstrates that standardised terms are by no means immune to dispute, despite their frequent use. It is also an interesting example of the judiciary taking into account the practical implications in the specific commercial context of the debt trading market, in addition to a legal consideration of the LMA standard wording, when reaching its decision.
The Supreme Court has held that the Loan Market Association standard terms and conditions for par trade transactions (the “LMA Terms”) do not allow a transferor to recover from the transferee part of a “Payment Premium” pertaining to the period prior to the date of transfer.
The Court will not readily infer continuing rights and obligations in the context of the LMA loan market, where standardised documentation has been designed to facilitate the trading of debt, often many times over.
The case highlights the importance of ensuring any payments to which a transferor might be entitled are incorporated into the purchase price or otherwise expressly provided for in the assignment documentation when trading debt on the LMA Terms.
Background & Facts
Tael One Partners Limited (“Tael”) participated in a USD100m syndicated facility to borrower Finspace S.A. On 14 January 2010 (the “Settlement Date”) Tael transferred USD11m of its USD32m participation to Morgan Stanley, which in turn transferred the USD11m participation to Spinnaker Global Strategic Fund Limited.
In addition to interest at 11.5% per annum, the terms of the Finspace facility provided for a “Payment Premium” – a lump sum to be paid upon prepayment or repayment of the principal – effectively increasing the lenders’ rate of return to 17% or 20%, depending upon the circumstances of repayment.
Tael and Morgan Stanley executed a purchase price letter, providing for consideration of USD11m plus accrued interest to 14 January 2010, but silent with respect to the Payment Premium. When the facility was repaid, including the Payment Premium, Tael argued that it should be entitled to recover from Morgan Stanley part of the Payment Premium attributable to the USD11m during the period prior to the Settlement Date.
In the absence of any express reference to the Payment Premium in the purchase price letter, the question arose as to whether Tael could assert its entitlement to a portion of the Payment Premium on the basis of the LMA Terms.
The question largely turned on the interpretation of condition 11 of the LMA Terms, and in particular whether the Payment Premium fell within the scope of 11.9(a) as “fees… which are expressed to accrue by reference to the lapse of time”, which, in accordance with that provision, “shall, to the extent they accrue in respect of the period before (and not including) the Settlement Date, be for the account of the Seller”. Put another way, did the right to the Payment Premium arise over the life of the loan or only upon the repayment date?
The High Court initially ruled in favour of Tael, finding that the Payment Premium was similar to interest and performed an analogous function. As such, a part of it could be said to have “accrued” prior to the Settlement Date. However, the Court of Appeal disagreed, ruling Tael was not entitled to payment. Tael appealed the decision to the Supreme Court.
The Supreme Court Decision
The Supreme Court upheld the Court of Appeal’s decision on the basis that, on a proper construction of the LMA Terms, payment had not “accrued” in respect of the Payment Premium. It also considered the commercial context of the secondary debt market in reaching its decision.
The Court considered that “accrue” was generally used to describe the coming into being of a right or an obligation. The entitlement may not be payable until a future date, but an entitlement may nevertheless have accrued. However, the Payment Premium under the facility agreement accrued on a defined event (i.e. pre/repayment). The fact that the Payment Premium was calculated in part by reference to interest on the facility did not mean that part of the Payment Premium should be deemed to have accrued at the same time as pre-Settlement Date interest – the method of calculation should not be confused with the accrual of a right.
The Commercial Context
The Court’s conclusions on the interpretation of the conditions were reinforced by the commercial context of the transaction.
The debt was traded in the secondary loan market using LMA standard documentation that had been designed to facilitate the trading of debt many times (as had happened in this instance). In this context, the Court held it would not readily infer that the parties had intended to create such ongoing rights and obligations between the parties. The Court found further support for this conclusion by virtue of the fact that there is no mechanism in the LMA Terms for a transferor to know when it had become entitled to such a payment and how much it was owed, to enable it to enforce its rights. In this instance, Tael only knew the Payment Premium was paid because it had retained part of its original USD32m participation. Furthermore, without a process enabling an initial transferee to recover the Payment Premium from subsequent transferees, such as Spinnaker, intermediate holders such Morgan Stanley could be liable to turnover funds they have never received.
Consequently, the Court determined one would expect any right to a Payment Premium to be reflected in the consideration price for the transfer. Tael was not entitled to any more than that stated in the purchase price letter.
Conclusion and Comment
The case is interesting from a practical as well as a legal perspective, addressing the issues with attempting to create or infer ongoing obligations in a market where interests are traded frequently. The Court declined to impose such obligations; to hold otherwise would have risked imposing financial obligations on traders to turn over funds they never received. This decision avoided imposing an additional administrative burden on debt traders to monitor historic trades (to ensure they know when rights and obligations to payment arise which were uncertain at the outset of the loan).
Following this judgment, the LMA Secondary Documentation Committee is considering revising the LMA Terms to include provisions for “premium”. Until then, the key lesson for debt traders is to be absolutely explicit: make sure all payments, including any premium, are expressly incorporated into the terms of the trade.