In the recent Hong Kong Court of First Instance case Charmway Hong Kong Investment v Fortunesea (Cayman) Ltd & Ors  HKCU 171, the court considered whether an individual lender has the right under a syndicated credit agreement to take action directly against members of the obligor group (including petitioning for winding-up) independently of the other lenders. The case and the market response is of interest to majority and minority creditors in syndicated structures in understanding the extent of their basic rights to pursue the debt owed by the obligors.
Facts - Dispute between lenders over enforcement strategy
The facts of the case are typical of a scenario that arises in the course of restructuring negotiations.
The credit agreement in Charmway was a term loan facility of US$612 million, with a syndicate of lenders, made available to a group of companies which operated in the development and construction sector in China. When the borrower defaulted under the credit agreement, the then majority lenders (representing two thirds of the then outstanding commitments) commenced enforcement action against the group’s assets (which involved appointing a receiver) on behalf of the syndicate as a whole, in accordance with the terms of the prevailing finance documents.
The facts are not particularly clear, but it appears that shortly thereafter there was a flurry of secondary trades in the debt under the credit agreement, which ,resulted in a change to the composition of the majority lender group. That new majority lender group then purported to give an instruction to the facility agent to terminate the enforcement proceedings. It is this change of approach that drew the attention of a group of minority lenders, who sought the continuation of enforcement of their rights under the finance documents individually by bringing separate proceedings to wind up certain group companies.
Issue: Can a lender act unilaterally in a syndicated structure?
The issue before the court was whether any single lender was entitled to seek to enforce repayment of its proportionate share of the syndicated loan and/or to seek a winding up of any of the obligor companies independently of any concerted action by the lenders as a syndicate.
The credit agreement in this case was based on the Loan Market Association's (LMA) form of recommended facility documentation. The relevant clauses were clause 2.2(b) and (c) (finance parties’ rights and obligations) of the LMA multicurrency term and revolving facilities agreement), which provided that:
- The rights of a finance party under the finance documents are separate and independent rights
- A Finance Party may, except as otherwise stated in the finance documents, separately enforce those rights, and
- A debt arising under the finance documents to a finance party is a separate and independent debt.
These provisions together we shall call the 'Separate and Independent Rights Provisions'.
It has long been considered that lenders under a syndicated credit facility retain a right to seek to recover their portion of a loan directly following a payment default, typically by seeking the winding up of Obligors based on these provisions. However, the court found that a syndicated credit facility based on LMA standard terms creates an aggregate loan, rather than individual loans due to the lenders. As a result, in the absence of an express provision giving individual lenders a right to take independent enforcement proceedings it was for the majority lenders, acting in good faith, to decide what enforcement proceedings to take. In practice this meant in this case is that the lenders would be required to proceed through the collective action mechanism of instruction by the lenders (whether majority or all lender) to the administrative (facility) agent.
Sharing of unilateral recoveries
There is clearly a balance to be sought to ensure orderly restructuring discussions, but the decision and rationale are at odds with the jurisprudence around these provisions. Crucially, the judge in the Charmway case did not consider the drafting and the purpose of the 'Sharing' provision (of the LMA multicurrency term and revolving facilities agreement found at clause 34, 'Sharing Among the Finance Parties'), whose purpose is to force the sharing of individual receipts by one bank but not the others, such as receipts by set-off, proceeds of litigation, individual guarantees or direct payment by the borrower.
The practical effect of the sharing clause can be to discourage unilateral action by one creditor because the prosecuting creditor will have to bear litigation costs and only have to share litigation proceeds, unless these are exempted, which they often are. The sharing provision can therefore assist in binding creditors together or acting as a further indirect and informal protection (beyond any formal moratorium or standstill) for the borrower against multiple enforcements during the course of restructuring discussions.
The position adopted by the judge in Charmway can also be contrasted with creditor’s rights in respect of private placements, where there are usually multiple lenders in a facility but no facility agent, so the borrower and investors have a direct relationship, or bond indentures, which, depending on vintage, may preserve (on a payment default) the rights of individual investors to take action immediately and absolutely, often even without any failure by the bond trustee.
LMA update reinforces separate and independent rights
Thankfully, the LMA has issued guidance and concluded that, if such authority were brought before an English court, such court would be unlikely to follow the Hong Kong judgment’s approach and reasoning; in accordance with established loan market practice and understanding, the LMA documentation should operate to give an individual lender an independent debt claim in respect of outstanding loans. Further, the LMA has developed some clarificatory drafting to the separate and independent rights provisions (as of 5 November 2015) to further underscore the individual nature of a lender’s right to payment of all amounts due.
Where does this leave minority dissenting creditors?
The position then is largely unchanged under the LMA documentation; however, it is worth noting:
- Intercreditor: The LMA update is helpful clarification that the separate and independent rights provisions are still available, as a practical matter, to minority creditors in syndicated structures particularly for strategic purposes. However, it is still important to examine the entirety of the terms of the finance documentation, particularly the intercreditor, which may impose further restrictions or contractual provisions (and setting aside particularly any economic or reputational impacts or considerations) − which may dissuade minorities from taking unilateral action by minority creditors.
- Standstills: The material relevance of the separate and independent rights provisions is usually where there is a payment default and, (in the absence of a formal moratorium) often, in order to support the directors of the borrower and/or strengthen the underlying position during restructuring discussions. Any payment defaults will be waived or suspended for a period utilizing the required majorities set out in the amendments and waivers provisions of the LMA multicurrency term and revolving facilities agreement, so an opportunity to use the separate and independent rights provisions never arises.
- Cram-down/in mechanisms: In the overall scheme of macrorestructuring trends (eg given the continuing march of 'cram-in' mechanisms such as schemes of arrangement under section 895 of the Companies Act 2006) restructurings and rescues can proceed at a steady pace while holdout positions without objective substance (eg, as to value) become increasingly difficult to sustain.