In a welcome announcement for participants and advisers in the UK loan market, the UK financial regulator the Financial Conduct Authority (FCA) recently confirmed that the Court of Appeal decision in Fons Hf v Pillar Securitisation Sarl ([2014] EWCA CIV 304 (March 20 2014)) has not altered its interpretation or application of the regulatory perimeter prescribed by Financial Services and Markets Act 2000.

Before this clarification, the Fons ruling raised legal uncertainties as to whether loan agreements are "specified investments" under Article 77 of the Financial Services and Markets Act (Regulated Activities) Order 2001, and therefore whether certain participants in the loan market carrying out activities which hitherto have not been regulated must be FCA authorised in order to conduct their business.


Fons concerned the interpretation of a security agreement and the ambit of the assets secured under that agreement. The regulatory framework was not raised or considered.

In June 2006 Fons Hf, through a wholly owned entity, purchased shares in Corporal Ltd. In 2007 and 2008 two shareholder loans were advanced to Corporal. Subsequently, Fons granted share security in favour of Kaupthing Bank Luxembourg over its shares in Corporal.

Kaupthing subsequently transferred the benefit of the security to a third party, Pillar. When Fons and Kaupthing both went into liquidation, it became evident that Fons's right to be repaid under the shareholder loan agreement was worth more than the shares Fons held in Corporal.

Pillar argued that Fons's rights in the shareholder loan agreements were secured under the terms of the share charge.

The relevant charging clause was fairly market standard and provided that:

"the Chargor, as continuing security for the payment, discharge and performance of the Secured obligations, charges and agrees to charge in favour of the lender:

3.1.1 by way of first legal mortgage, the Shares;

3.1.2 by way of first equitable mortgage, the Distribution Rights from time to time accruing to or under Shares; and

3.1.3 to the extent not validly or effectively charged by way of mortgage pursuant to clauses 3.1.1 or 3.1.2 by way of first fixed charge, the Secured Property and all the Chargor's interest in the Secured Property."

'Shares' were defined as:

"all Shares (if any) specified in schedule 1 (Shares) and also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the Chargor in Corporal from time to time or any in which it has an interest".

The key question before the courts was what was meant by the term 'debenture'. Pillar contended that the rights of Fons under the shareholder loan agreements were charged as debentures on the basis that a debenture is an instrument which creates or evidences indebtedness – and that was exactly what the loan agreements did. While the first-instance judge did concede the possibility that a debenture "might, in the appropriate context, be construed as extending to a simple loan agreement", in the context of the clause itself he held that a reasonably objective observer would not understand the parties to have intended the reference to either "other securities" or "debentures" as extending to documents such as the shareholder loan agreements or any unsecured liabilities arising therefrom.

The Court of Appeal unanimously overturned the first-instance decision. It was accepted that the term 'debenture' has a number of meanings, depending on the context, but that in the context of the relevant clause, it was intended that the charge was to cover a much wider range of assets than investments and stocks and shares in their conventional sense, and the reference to the phrase "or other securities" should not be read as limited to some form of security in the sense of a charge over property. Further, while it is possible for specific words to have a number of meanings, the clause as a whole was not ambiguous so as to allow the court to construe the words other than to give the word 'debenture' its ordinary meaning of an acknowledgement of debt in a written document.

Before Fons, the accepted market view was that loan agreements are not instruments creating and acknowledging indebtedness because such an instrument is simply the contractual framework under which loans can be drawn down in the future. However, the court specifically considered this, with Lord Justice Gloster stating that the notion that a loan agreement cannot constitute an instrument that creates and acknowledges indebtedness because there is no existing indebtedness is both "wrong and unnecessarily technical. The obligation to repay clearly arises on execution of the loan agreement itself, albeit that such obligation may be contingent on drawdown actually taking place".


Regulatory consequences
The import of the finding that a loan agreement is a debenture arises by virtue of Article 77 of the Financial Services and Markets Act (Regulated Activities) Order, which states that for the purposes of the Financial Services and Markets Act (and subject to various exclusion), "specified investments" include "any… instrument creating or acknowledging indebtedness".

Under the act, persons engaging in certain activities in relation to specified investments – including those entering into agreements, arranging or advising in relation to them – are required, subject to various exemptions, to be duly authorised in accordance with the Financial Services and Markets Act framework. There are a number of penalties for breach, but of particular note is that an unauthorised person commits a criminal offence and agreements entered into in the course of carrying out an unauthorised regulatory activity are unenforceable against that other person.

For the most part, this was not necessarily an issue for some participants in the loan market. The Financial Services and Markets Act contains some exceptions which are pertinent to the loan market, and invariably most UK-based banks are already authorised, at least in relation to dealings in the primary market. However, given the growth of alternative credit providers and the fact that corporate borrowers might also potentially be caught, as counterparties to a specified investment, as well as the position of intermediaries arranging or advising on loans and concerns about whether trading debt in the secondary market would also need to be regulated, Fons raised a number of major regulatory and market concerns.

In a June 4 2014 letter the Loan Market Association requested not only a clarificatory statement from Her Majesty's Treasury on its policy intentions, but legislative clarification in due course. In the FCA's July 17 2014 letter of response, while stopping short of confirming that the legislation would be clarified, the FCA confirmed that it did "not consider that the judgment of the Court of Appeal in [Fons] has altered our interpretation or applications of regulatory perimeters prescribed by [the Financial Services and Markets Act]".

The FCA:

"understand[s] that the interpretation of Article 77 of Regulated Activities Order and the regulated activities relating to instruments covered by that specified influence investment category case were not considered relevant to the issues considered in the case by the Court... We have considered the judgment, and in our judgment the case does not impact the regulatory perimeter."

Impact on drafting of share charge
The unintended consequences of the Fons decision from a regulatory and market standpoint have understandably occupied the minds of most practitioners and market participants, but one further factor should not be overlooked: the definition of 'shares' considered in the relevant share charge is not uncommon in English law-governed share charges. Where borrowers and issuers are required to grant security over their shareholdings, they and their legal counsel must be careful to ensure that the ambit of the charge does not unwittingly cover other unintended assets. In light of the decision in Fons, if it is appropriate to extend the definition of 'shares' beyond shares or other specific securities, it would be prudent to expressly exclude loan agreements and any rights under those loan agreements.

For further information on this topic please contact Emma Menzies or Gary Bellingham at Greenberg Traurig Maher LLP by telephone (+44 203 349 8700), fax (+44 207 900 3632) or email ( or The Greenberg Traurig Maher LLP website can be accessed at