The English High Court has sent a clear message about the importance of precision when drafting contractual limitations of what an agent can and cannot do.
In Torre Asset Funding v RBS, the Court examined the duties of a facility agent appointed by a bank syndicate on London Loan Market Association (LMA) ‘market standard’ terms.
The Court adopted a strict interpretation to determine that a bank will only be held to its duties as a facility agent where those duties are expressly defined in the contract.
We expect Australian courts to follow the English lead and be reluctant to imply duties beyond what is contractually agreed. What does this mean for banks that are prepared to act as facility agents?
Torre Asset Funding Limited participated at the Junior Mezzanine (B1) level within a complex, six-tiered lending structure to a property company, Dunedin Property Industrial Fund. Royal Bank of Scotland assumed various roles in the lending structure including as a lender, security trustee and facility agent at the junior mezzanine level.
Dunedin was unable to meet its interest payment obligations and, consequently, devised a restructuring proposal with RBS. A revised business plan and quarterly cash flow statements were also prepared by Dunedin in the context of these discussions but were not circulated to Torre or the other B1 junior lenders.
RBS, in its capacity as a lender, then sought consent from the B1 junior lenders to execute Dunedin’s restructuring proposal. RBS informed Torre that the change was necessary for Dunedin’s capital expenditure needs without indicating that Dunedin was at risk of not being able to fully service the lending. This proposal did not ultimately go ahead despite Torre providing its consent.
In September 2008, in the grip of the GFC, Dunedin’s financial position deteriorated and it went into receivership. The security was realised at a level well below the amount of debt outstanding and a number of the lenders did not recover their loans. Torre then issued proceedings for damages against RBS.
Torre brought proceedings against RBS, alleging:
- RBS was in breach of its duty as agent by failing to pass on the business plan and cash flow statement to the claimants;
- RBS had knowledge that there was an event of default arising from Dunedin’s inability to pay its interest obligations and RBS breached its duty as agent by failing to report the event to the claimants; and
- RBS made negligent misrepresentations to the claimants as to why it was seeking consent to the restructuring proposal.
All three claims failed, because:
- despite being obliged to supply Annual Budget documents, RBS was not contractually obliged to supply the claimants with documents in the nature of the business plan or the cash flow statement;
- neither RBS nor Dunedin believed an event of default occurred at the time of default, meaning the contractual duty requiring RBS to inform the claimants was not triggered; and
- when providing the claimants with an explanation as to why their consent was sought, RBS only owed a duty to take reasonable care to ensure that the explanation was accurate. RBS did not owe a duty to ensure that the explanation was accurate for the wider purpose of the claimants reviewing their continued involvement in the transaction as a whole.
APPLICATION OF TORRE ASSET V RBS IN AUSTRALIA
It’s not certain that Torre Asset Funding v RBS will apply in Australia as the issues are yet to be considered by a State or Commonwealth court.
However, given similarities between the LMA standard facilities agreement, and its Asia Pacific Loan Market Association (APLMA) equivalent, it is likely that an Australian court would reach a similar conclusion.
While both the LMA and APLMA facilities agreements state that “the Agent's duties under the Finance Documents are solely mechanical and administrative in nature," the APLMA version goes even further by stating expressly that “the Agent has no other duties except as expressly provided in the Finance Documents”.
By being even stricter than the LMA limitations, the APLMA drafting increases the likelihood of the English court’s interpretation of an agent’s duties being applied in Australia.
It’s likely Australian courts will be reluctant to imply duties beyond what has been negotiated and contractually agreed by independently-advised, sophisticated parties acting at arms’ length.
Commercially, it means that banks prepared to act as facility agents will not need to increase their agency fees to reflect a radically increased risk of being exposed to liability from disgruntled lenders within a bank syndicate. The role of a facility agent is confirmed as one that is primarily passive in nature, with a minimal degree of positive obligation and even less ability to exercise discretion.
However, this does not mean that agents can always take a back seat. Where a positive obligation specifically arises or is triggered, the agent will be required to take action to fulfil that obligation.
While lenders should not expect a facility agent to go so far as policing a borrower’s compliance with the terms of any finance document, the APLMA terms (like their LMA cousins) do require an agent to pass on certain information it receives to other parties, such as sending notices describing a default to lenders.
In the (unusual) situation of an Australian facility agent exercising a discretion independently of instructions from the lenders, such exercise will be bound by concepts of honesty, good faith, and genuineness and the need to avoid arbitrariness, capriciousness and irrationality.
In complex leveraged or structured finance transactions, where there are multiple tranches of debt and lead banks take on various roles and capacities, it is in the lead banks’ interests to ensure that the agent’s obligations are clearly and unambiguously defined in the facilities agreement. This reduces potential avenues of attack if the borrower group becomes insolvent and third party lenders face write-offs of their exposures. This will also achieve clarity from a contractual perspective of those issues that fall squarely within the agent’s ostensible authority.