Permitted assignees and early termination payments (Grant and others as Joint Administrators of Olympia Securities Commercial Plc (in administration)) v WDW 3 Investments Ltd and another [2017] EWHC 2807 (Ch))

Permitted assignees and early termination payments (Grant and others as Joint Administrators of Olympia Securities Commercial Plc (in administration)) v WDW 3 Investments Ltd and another [2017] EWHC 2807 (Ch))

The case of Grant and others as Joint Administrators of Olympia Securities Commercial Plc (in administration)) v WDW 3 Investments Ltd and another [2017] EWHC 2807 (Ch) considers the possibility that a purported assignee of a loan and associated swap and security interests could not rely upon the assignment or the security because of certain alleged defects in the way in which the documents were drafted and the timing of notices given under those documents.

Why is the case of interest?

The case will be of interest to anyone advising on or documenting the assignment of loan agreements and associated hedging documents; or considering the extent to which security, relating to the liabilities created under the same, can be relied upon by any assignee.

What were the facts?

The case concerned the fallout from the collapse of Allied Irish Bank Corporation Limited. After its collapse, Allied Irish, renamed Irish Bank Resolution Corporation Limited (IBRC) sold most of its loan portfolio.

IBRC had made a facility of £50m available to Olympia Securities Commercial Plc (OSC) pursuant to a facility agreement (the facility agreement). The loan and associated hedging arrangements (the swaps) together with a debenture (the debenture) securing the liabilities arising under the loan and swaps was sold by IBRC to LSREF III Wight Limited (LSREF) an investor vehicle.

Later LSREF appointed WDW 3 Investments Ltd (WDW) as its nominee to take title to the loan, the swap and the benefit of the debenture.

Pursuant to the portfolio sale agreement concluded between IBRC and LSREF the following further agreements were entered into:

  • all IBRC's rights under the facility agreement with OSC were assigned to WDW as LSREF’s nominee
  • by a security assignment deed (SAD), the debenture was assigned by IBRC to WDW who declared that it held the debenture on trust for itself and for IBRC
  • LSREF agreed with IBRC that all or any rights or liabilities arising in respect of the swaps would accrue to or be borne by LSREF notwithstanding that IBRC remained the counterparty under the swaps

OSC defaulted and went into administration.

The ultimate shareholders of OSC, Azarim (Gibraltar) Limited (Azarim), disputed the entitlement of WDW to just over £6m held by the administrators of OSC which WDW argued related to early termination payments (ETP) due to them under the swaps.

The administrators (who took a neutral position as the substantive argument was between WDW and Azarim) applied to the court for directions on how they should distribute the money they held.

Issues before the court

There were three basic issues before the court:

  • whether the assignment of the facility agreement from IBRC to WDW was valid, which turned on whether as a matter of construction WDW was a ‘financial institution’ for the purposes of the facility agreement
  • whether in the circumstances that occurred IBRC was a person entitled to terminate the swaps and demand payment by OSC of the ETP of £6m
  • whether, on the assumption that the ETP became payable by OSC, the sum payable was secured by the debenture

Was WDW a financial institution?

The provision in the facility agreement relating to assignments was relatively standard form as follows:

‘23.2 The Lender may (and the Borrower shall assist as required and irrevocably appoints the Lender to execute any requisite document on its behalf) at any time transfer, assign or novate all or any part of the Lender’s rights, benefits or obligations under this agreement to any one or more banks or other financial institutions...’

Azarim argued that WDW was a shell asset holding vehicle not engaged in any lending activity at the time of the assignment and so was not a ‘financial institution’. Accordingly, it followed the assignment to WDW of IBRC’s interest in the loan was not valid as WDW was not a permitted assignee. If that argument was right WDW had no right to claim the funds held by the administrators.

Some readers will remember we have been here before in Argo Fund Limited v Essar Steel Limited[2006] 1CLC 546 where the Court of Appeal considered an almost identical argument. In Argo the Court of Appeal held that the test was straightforward and was simply whether the proposed assignee was;

‘…a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation and whose business concerns commercial finance’

Whether the business of the proposed assignee included the lending of money was not decisive of the issue in Argo and so could not be determinative under clause 23.2 of the facility agreement. The court decided that the fact WDW was a nominee company holding assets for others also did not exclude it from being a financial institution. The judge thought by using the phrase ‘whose business concerns commercial finance’ the Court of Appeal was intentionally casting the net very wide.

The court went further than the Court of Appeal in Argo on this point by including, for example, commercial trust corporations, primary and secondary lenders and those who act as agents, trustees or fiduciaries either for buyers or borrowers on one side of a transaction or for the providers of services on the other. It would also include those who provide managerial services on behalf of the providers or users of financial products and services. In short the construction of a clause such as the one above will be very result in an extremely wide set of permitted assignees. Indeed one could argue the class of permitted assignees would include anyone willing to take a transfer of a loan and so become engaged in some aspect of commercial finance.

Finally, on this issue the judge held that the fact WDW was not trading at the time of the assignment and had just £1 capital was irrelevant in assessing whether it was a permitted assignee within the meaning of clause 23.2 of the facility agreement.

Could IBRC terminate the swaps?

IBRC had been placed into special liquidation in February 2013. Under the ISDA Agreement regulating the swaps between IBRC and OSC, IBRC had consequently suffered a ‘bankruptcy’ event of default before OSC’s default and that event was continuing because IBRC was still in special liquidation. OSC had been entitled to terminate the swaps relying on this IBRC default but it had chosen not to do so.

OSC had defaulted under the facility agreement in June 2014. The failure to repay sums under the facility agreement was a default under the ISDA Agreement by OSC. IBRC had chosen to terminate the Swap based upon this default by OSC.

Azarim argued that under clause 6(a) of the ISDA IBRC was not entitled to serve a termination notice because from the time of its special liquidation IBRC was not a ‘Non-defaulting Party’. IBRC was a ‘Defaulting Party’ for the purposes of that provision and such a party could not terminate the Swap.

Clause 6(a) is in the following terms:

6. Early Termination

(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the ‘Defaulting Party’) has occurred and is then continuing, the other party (the ‘Non-defaulting Party’) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions….’

The judge analysed the position as follows relying upon the principles set out in the earlier case of Lomas v JFB Firth Rixson Inc[2013] 1 BCLC 27:

  • OSC could have served a termination notice under clause 6(a) when IBRC went into special liquidation but it chose not to do so
  • the Swap contract continued after IBRC’s special liquidation because OSC did not serve a termination notice
  • under clause 2(a)(iii) of the ISDA OSC’s payment obligations under the swaps was suspended from the time of IBRC’s special liquidation and that suspension continued while the bankruptcy event in respect of IBRC continued
  • the suspension of OSC’s payment obligations to IBRC under the swaps did not affect OSC’s payment obligations under the facility agreement in respect of the loan
  • when OSC failed to repay the loan an event of default occurred under the Schedule to the ISDA entitling IBRC to serve a termination notice under clause 6(a) of the ISDA

One consequence of OSC not serving its own termination notice in relation to IBRC’s liquidation (ED1) was that it could subsequently commit an event of default (ED2). In such an event the “Defaulting Party” in relation to ED1 is fully entitled to serve an early termination notice under clause 6(a) in respect of ED2 as long as the non-defaulting party in respect of ED1 has not itself served a clause 6(a) notice in relation to ED1.

Consequently, IBRC could properly serve a termination notice in respect of the swaps based upon OSC’s payment default under the facility agreement.

Was the ETP a secured liability under the debenture?

In many ways this was the trickiest issue that the court had to determine. The answer to this question depended upon the effect of the assignments made by the parties and WDW’s status as a nominee for various parties. Analysing this issue required a detailed consideration of the definitions used in the relevant suite of agreements.

The security created by the debenture was for the benefit of IBRC acting ‘…on its own behalf and on behalf of the hedging counterparty (if the hedging counterparty is the lender or its affiliate’. Hedging counterparty was defined as meaning ‘the party to the Hedging Arrangement other than the Borrower’ and ‘Hedging Arrangement’ is defined as meaning ‘…any…interest rate swap…and includes all related documentation…’.

The debenture secured ‘the liabilities’ which were defined as:

‘ all monies, obligations and liabilities which shall from time to time…be due, owing or incurred from each Obligor to the Lender and/or to the Hedging Counterparty under the Finance Documents whether actually or contingently’

As explained earlier under the SAD, the debenture was assigned by IBRC to WDW who declared that it held it on trust for itself and for IBRC.

However, at some time after the SAD IBRC assigned its right to the ETP to a third party MHB-Bank AG (MHB). In August 2016 the fact that WDW still held the debenture for itself and IBRC (not MHB) was noticed and a deed was entered into under which WDW declared that it now held the debenture as nominee for itself and MHB.

Azarim argued that the sequence of events was such that:

  • at the time IBRC demanded the ETP under the swaps it was no longer ‘the Lender’ as defined in the facility agreement and the debenture
  • WDW was ‘the lender’ under the facility agreement as a result of the assignment to it by IBRC of all its rights under the facility agreement
  • IBRC was not an ‘affiliate’ of WDW and so could not be a ‘hedge counterparty’ as defined in the facility agreement
  • the ETP being due to someone not a hedge counterparty as defined in the facility agreement no longer fell within the scope of the ‘liabilities’ as defined in the debenture and it followed it was not a liability secured by the debenture

WDW put its case more simply:

  • Re Lehman Brothers International (Europe) (In Administration)[2012] EWHC 2997 (Ch) was authority for the view that the debenture conferred on WDW a specifically enforceable right to have OSC’s property appropriated to the payment of the ETP even though WDW had no right itself to receive the ETP
  • the construction Azarim sought to place upon ‘hedge counterparty’ was unduly narrow and made no commercial sense in a transaction where it was always envisaged other parties who were not Affiliates of a Lender could become a party to the swaps

The judge accepted both of WDW’s arguments. WDW was entitled to insist that assets subject to the debenture were appropriated towards payment of the ETP even though it was due to MHB not WDW.


It is helpful to lenders to have another decision which gives an extremely wide construction of ‘financial institution’ in a permitted assignee provision in a loan agreement. The judge in this case went further than the Court of Appeal in Argo so much so that it is difficult to conceive of a special purpose vehicle that would not fit within the meaning of ‘financial institution’ simply as a result of taking an assignment of a commercial loan.

If borrowers want to exercise effective control of the identity of their lenders they should insist on a so called ‘white list’ of pre-approved assignees.

Security creates a specifically enforceable right to insist the assets subject to a charge are appropriated towards the relevant liability whether the holder of the security can insist on payment of it or not. The case is a useful reminder of the operation of a basic principle of English security law and one that is often overlooked.

Finally, the case serves as a warning to those drafting interlocking agreements that they must ensure the definitions they use are appropriate and work for the whole transaction not just the individual components of it. This is no easy task in some document heavy transactions.

Case details

Court: High Court, Chancery Division, Insolvency and Company List

Judge: HH Judge Pelling QC

Date of judgment: 23 November 2017

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