Syndicated loan agreements—do lenders have the right to enforce independently following an event of default?

What should lenders and their advisors take from the recent decision of the Hong Kong Court of First Instance in Charmway Hong Kong Investment v Fortunesea?

Original news

Charmway Hong Kong Investment v Fortunesea (Cayman) Ltd & Ors [2015] HKCU 1717

In this recent case, the Hong Kong Court of First Instance considered whether an individual lender has the right under a syndicated loan agreement to take action directly against members of the obligor group (including petitioning for winding-up) independently of the other lenders. The loan agreement in this case was based on the Loan Market Association’s (LMA) form of recommended facility documentation and the points of construction in the loan agreement which were considered in this case may be of interest to users of the LMA documentation. Equivalent provisions in the LMA Multicurrency Term and Revolving Facilities Agreement are indicated below where relevant.

What were the facts of the case

This case concerned a defaulting borrower’s relationship with its lending syndicate and the rights and remedies of the individual syndicate members.

The loan in question was a term loan facility in excess of $600m, with a syndicate of 16 lenders, made available to a group of companies which carried on construction and development in China. When the borrower defaulted under the loan agreement, the then majority lenders (representing 66 ⅔ 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 finance documents. Numerous secondary trades subsequently resulted in a change to the composition of the majority lender group, which then gave an instruction to terminate these proceedings.

This change in approach was disputed by a group of minority lenders who sought to enforce their rights under the finance documents individually by bringing separate proceedings to wind up certain group companies. This course of action was opposed by the majority lender group. 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.

What did the court decide?

As the facility documentation did not directly address the question at issue, the court reviewed the various clauses which were relevant to determine the intention of the parties when entering into the documentation.

The minority lenders relied heavily on wording (also included at cl 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.'

Their argument was that these paragraphs clearly entitled a lender to sue for a debt owed to it independently of the other lenders. Hon Harris J agreed in principle but considered that they did not in fact say when, if at all, a debt to an individual lender arises under such syndicated finance documents and when these rights can therefore be exercised.

Hon Harris J considered that, where a borrower is obligated to repay a participation to a single lender, that lender could have a right to the repayment of this debt which it might pursue independently of the syndicate in the event of non-payment. This right would arise in, for example, the mandatory prepayment provisions on illegality and change of control and where a borrower delivers a notice to voluntarily prepay a single lender but fails to honour it (as in cls 8.1 (Illegality), 8.2 (Change of control) and 8.6 (Right of replacement or repayment and cancellation in relation to a single Lender) of the LMA Multicurrency Term and Revolving Facilities Agreement respectively).

However, the judge contrasted this with a situation where the borrower is in default and the enforcement of the whole outstanding debt is at issue, on the grounds that:

  • the facility agreement (in a provision equivalent to cl 2.1 (The Facilities) of the LMA Multicurrency Term and Revolving Facilities Agreement) obliged the lenders to make available to the borrower ‘a term loan facility in aggregate amount equal to the Total Commitments’ (which meant ‘the aggregate of the Commitments of all the Lenders’), thus creating a single aggregate loan from all the lenders together, rather than what he termed ‘separate and aliquot’ loans from each lender to the borrower—this meant that the debt was a debt owed to the syndicate as a whole and not to each lender in the amount of their respective participations
  • the rights to recover and distribute payments under the loan agreement and to take acceleration action under the acceleration clause (under provisions equivalent to cls 29 (Payment mechanics) and 23.13 (Acceleration) of the LMA Multicurrency Term and Revolving Facilities Agreement) had clearly been handed over by the agreement of the syndicate to the administrative agent in this case (acting on the instructions of the majority lenders)—the judge concluded that if the agent has this right, it follows that no individual lender can take acceleration or enforcement action upon a default in the absence of an express provision allowing this, and
  • in the international syndicated loan market (and citing US legal authorities), ‘it is understood, at least by informed participants in the market, that syndicated loans may only be enforceable in accordance with the wishes of a majority or super-majority of lenders unless it is specifically agreed’—it was therefore unlikely that the parties’ intention was to deviate from this established practice in the absence of specific language addressing this

The Court of First Instance found in favour of the majority lenders and dismissed the petitions of the minority lenders to enforce against and wind up the obligors without the backing of the majority lenders, ruling that under this facility documentation, enforcement action had to be collective.

What are the key points for lenders and their advisers?

As this was a decision of the Hong Kong Court of First Instance, it would not bind a court in England and Wales, but may be taken into account by such a court in interpreting documentation with similar provisions.

For market participants, it serves as a clarification of single lenders’ rights under loan documentation based on the LMA recommended forms of syndicated loan agreement, as well as a reminder of the limitations on the powers of minority lenders under such documentation (and the importance of building a blocking stake if they are to exercise any influence), particularly in a restructuring situation. Practitioners advising a minority lender in such a situation should review the documentation carefully to determine whether and when an individual debt due to a lender might arise. If, at the outset, it is commercially agreed between the parties for any particular reason that syndicate members should have the right to take unilateral action without a determination of the majority lenders, this right should be expressly provided for in the loan agreement.

The position of individual lenders to take unilateral action in relation to syndicated loans can be contrasted with some other financing structures, for example private placements in the US and Europe. In these transactions there are usually multiple lenders in a facility but no facility agent, so the borrower and investors have a direct relationship. This enables individual investors to take direct action against the borrower upon a payment default, independently of the other lenders. In the LMA’s new Pan-European Private Placement template documentation, parties have the option to permit acceleration to be undertaken by a single lender or noteholder on an individual basis (as opposed to by a determination of the majority lenders or noteholders), so that this lender or noteholder can cancel its commitment or declare any loan or notes held by it to be immediately due and repayable (cl 22.13 (Acceleration) of the LMA’s Term Facility Agreement for use in Pan-European European Private Placements).

Kate Edwards, solicitor in the Lexis®PSL Banking & Finance Team.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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