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Rosali Pretorius, a partner at Dentons, advises that loan agreements were not intended to fall within the definition of ‘specified investments’ in the Financial Services and Markets Act 2000 (FSMA 2000) (Regulated Activities) Order 2001 (RAO), and doubts that Fons HF (in liquidation) will be the last word on the subject.
A letter to the Treasury from the City of London Law Society (CLLS) asks for clarification on the meaning of a loan agreement, and whether it falls within the meaning of debenture, following a recent Court of Appeal case which has caused uncertainty in the law and is causing confusion in the loan market. The CLLS is seeking clarification that HM Treasury is not treating loan agreements as debentures, and that these activities are not intended to be regulated activities.
The Court of Appeal in Fons HF (in liquidation) v Corporal Limited and Pillar Securitisation S.a.r.l. and another  EWCA Civ 304,  All ER (D) 215 (Mar) held that the loan agreements were debentures because they ‘created or acknowledged debt’ and even went as far as to state that a loan agreement which is undrawn at the time it is signed can create or acknowledge debt. Prior to this decision it had been generally acknowledged by practitioners and academics that a loan agreement did not create or acknowledge a debt. It had been thought that a loan agreement sets up the contractual mechanics for the debt to arise, but until the loan has been drawn down in accordance with those mechanics there is no debt in existence. However, according to Gloster LJ, this approach is ‘unnecessarily technical’ and the debt ‘clearly arises on execution of the loan instrument itself, albeit that such obligation may be contingent on drawdown actually taking place’.
I do not agree with the judgment. I don’t think a debt necessarily arises on the execution of a loan agreement, for the reasons described above. You mention that loan agreements could be caught under RAO, art 77 as a result of the decision. I would agree that if loan agreements are debentures, they could be caught under the RAO. But it is important to remember
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