The Law of Finance

Second Edition
By

Alastair Hudson LL.B, LL.M, Ph.D (Lond), FRSA, FHEA

Professor of Equity and Finance Law, University of Southampton
Barrister, Lincolns Inn
National Teaching Fellow

SWEET & MAXWELL

 First Edition 2009
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© 2013 Alastair Hudson
Preface
Creating the law of finance
The aim of this book is to create a comprehensive account of the law of finance
which marries an analysis of the principles of the substantive law of England and
Wales with the principles of financial regulation in the UK (further to the
Financial Services and Markets Act 2000 and EU law). This book provides a
comprehensive analysis of the law of finance which can be taught and understood
as a discrete legal field, as opposed simply to presenting a description of
documentation practices or an economist's account of regulatory principles. The
book is divided in half between the "General Principles" of the law of finance and
the "Specific Financial Techniques" which apply those general principles to
particular kinds of market activity. The effect is a combined analysis of
fundamental legal concepts, financial regulation and financial market practice.
Since the first edition of this book was published there has been a stream of
revelations about the practices of financial institutions, ranging from criminal
activity (such as money laundering, sanctions-busting, and the fraudulent fixing
of market rates) through to rank incompetence (such as misreporting millions of
transactions to the regulatory authorities and mis-selling financial products to
ordinary customers).
The reputation of the banking community could not possibly be lower among
their customer bases nor among policymakers than it is now. And yet the
responses to the financial crisis of 2007-09 and to the more recent revelations of
malpractice have generally been mild. Nevertheless, the UK regulatory structure
has been superficially reorganised with talk of a change in attitude, a large swathe
of litigation against banks for fraud, negligence and breach of fiduciary duties in
various contexts is underway, and financial markets have tried to get themselves
back to the position they were in before the crisis began. The European Union has
seen both a permanent crisis in the eurozone and the beginnings of a change in its
regulatory culture for finance, which will come to affect the UK ever more in
time. Consequently, the development of a distinct law of finance, which was the
focus of the first edition of this book, has come on apace in the last four years and
will clearly continue to do so. The United Kingdom needs a coherent law of
finance which combines both substantive law and financial regulation so as to
protect its people and its businesses from the worst excesses of the finance
industry, as has become evident over the last two or three years even to those who
would not previously have believed it. There is much in the old case law which is
instructive for our modem law; and much that needs to be done to embed a
jurisprudence into the constantly changing detail of fmancial regulation.
v
 CHAPTER33

SYNDICATED LENDING

Core principles B. Events of default

1. Introduction 33-01 relating to the giving
The Structure of
of information 33-28
2.
Syndicated Lending
c. General events of
default 33-31
Transactions 33-05 D. Contractual
A. The possible
mechanics specific
structures for a
to syndicated
syndicated loan 33-05
lending
B. Case study: the
syndicated loan
arrangements 33-37
agreement in BNP 5. The Operation of
Paribas v Yukos Oil 33-16 Syndicated Loans, Loan
Participations and Loan
3. The Process of Arranging
Syndicated Loans 33-22
Transfers 33-40
A. The purpose of this
A. The role of the lead
bank in promoting
section 33-40
B. A comparison with
the transaction 33-22
The role of the lead
bond transactions 33-41
B.
bank as "agenf' in
c. Loan participations 33-42
D. Loan transfers 33-43
relation to the E. Case study: Argo
syndicate 33-23 Fund Limited v
C. The lead bank's Essar Steel Limited
potential liability for and the secondary
negligent
market 33-46
misstatement 33-25 F. Cases Studies: The
D. The borrower's right liabilities of the
to borrow and the syndicate agent in
lenders' obligation complex syndication
to lend 33-26 structures 33-47
4. Syndicated Loan
Covenants 33-27
A. The principal
discussion of loan
covenants in the
previous chapter 33-27

[993]
 INTRODUCTION
CORE PRINCIPLES
The principles relating to syndicated loans build on the principles relating to
ordinary lending which were considered in the previous chapter. The reader is
therefore referred to the previous chapter before reading this one.
Syndicated lending is a form of lending undertaken by groups of banks when a
single borrower wants to borrow more money by way of a loan than any single
bank is prepared to lend on its own. Syndicated lending is used typically where
amounts equivalent to hundreds of millions of US dollars are sought by a
corporate borrower. For the syndicate banks, this mechanism has the advantage
of spreading the risk associated with such a large loan between them, but
nevertheless allows each to participate in the profits that will be earned from
receiving interest from the borrower. The borrower in this sort of transaction is
usually a corporate borrower. The lenders are organised into a "syndicate" which
provides the loan moneys. The loan moneys are typically provided by a series of
separate loans from each individual lender directly to the borrower but subject to
the same contractual terms agreed on behalf of all members of the syndicate;
sometimes these syndicated loans will be contracted for collectively. Different
banks may provide different amounts of the loan. The interest paid on the loan is
therefore divided up between the lenders in proportion to the amount of money
which each has lent.
There will be a lead bank or banks who will be responsible for the structure of
the issue {referred to as the "arranger") and who may well assume greater
liabilities than the other members of the syndicate once the transaction is put in
place (either as an agent for the operation of the transaction on behalf of the
other lending banks; or, if some security structure is provided, as a trustee). The
other banks therefore act simply as lenders responsible for smaller parts of the
total loan amount.
Importantly, many. of the covenants which arise in syndicated loans are the
same as those in ordinary loans: those covenants were considered in the previous
chapter. Examples of these covenants include: core events of default, negative
pledge clauses, pari passu clauses, covenants to provide information, financial
covenants, and so forth. Some of these covenants require some amendment to
cope with the number of lenders involved in syndicated loan business. There are
other covenants, however, which apply only to syndicated loans, such as:
syndicated agent clauses, "syndicate democracy" provisions; set~off, and so forth.
Most of these provisions relate to the allocation of rights and responsibilities
between the various lenders, and the role of a fiduciary (the "syndicate agent") to
ensure the proper flow of moneys and performance of obligations between the
members of the syndicate.
1. INTRODUCTION
B-01 Syndicated loans are best thought of as being ordinary loans with additional
features which are provided typically to large companies in relation to very large
amounts of money. Consequently, syndicated loans are predicated on all of the
techniques and legal principles considered in the previous chapter. Th~ reader
(994]
SYNDICATED LENDING
should refer to that chapter before reading this one to understand the background
inter alia to common loan covenants and the termination of loan agreements. The
difference presented by syndicated loans is primarily based on the amount of
money at issue and the size of the companies involved in the transactions. For
example, the key cases discussed in detail in this chapter have involved one of the
world's largest oil companies and one of the world's largest steel producers. I As a
consequence of the loan being so very large, it is common for individual banks to
balk at the prospect of assuming so large a risk. Loans of this sort usually range in
size from hundreds of millions of US dollars (or their equivalent in other
currencies) to billions of dollars. Clearly, a loan of this size would constitute an
enormous risk for any individual bank when dealing with a single borrower
because that bank would be assuming all of the risk that the borrower would
default on its repayments, with the result that the bank would have loaned out a
ruinously large amount of money to a bad credit risk. Therefore, in relation to
such large loans a group of banks (in the form of a "syndicate") will club together
so that each individual member of that syndicate will lend a part of the total loan
amount separately. The term "syndicate" is not a specifically legal expressi_on. It
merely expresses the presence of a number of banks acting in concert as lenders.
The company is therefore able to borrow the amount of money which it requires
and the banks are able to acquire both an asset in the form of a loan to that
company and a loan of a reasonable size. As is discussed below, a "lead bank"
will organise the syndicate of banks which will provide the entire loan amount to
the borrower by marketing the transaction to them on the borrower's behalf and a
"syndicate agent" will ensure the proper conduct of the loan agreement. The
typical documentation architecture for a syndicated Joan and the possible
permutations for providing a syndicated loan are considered below.
Much of the focus. of finance lawyers in practice is on the large corporate 33-02
transactions because that is the apex of financial market practice for the large,
multinational law firms. The larger the transaction in monetary terms, the larger
the amount of legal expertise that will be poured over it. This does not necessarily
mean that a larger transaction is necessarily any more complex than an ordinary
loan, simply that when more money is at stake it is natural for more care to be
taken in analysing the detail of the transaction and in anticipating potential future
problems. The syndicated loan market is no different. It should be accepted,
however, that the presence of a number of banks acting as lender instead of a
single bank acting as lender will in itself add a layer of complexity to the loan
agreement.
Let us think briefly about the commercial position of the banks in these 33-03
transactions. Each lending bank is effectively taking a speculative risk on the
corporate borrower. While the lenders do not ordinarily acquire any shares in the
borrower nor any other rights against the borrower, subject to what is said below
about taking security, they therefore are taking a calculated risk on the ability of
the borrower both to meet the enormous interest payments which are required
during the life of the loan and to repay the loan capital at the end of the loan term.
1
BNP Paribas v Yukos Oil [2005] EWHC 1321 (Ch.) and Ar.go Fund v Essar Steel [2005] EWHC
(Comm) respectively.
(995]
 THE STRUCTURE OF SYNDICATED LENDING TRANSACTIONS
Therefore, the lenders are taking a speculative risk on the borrower's business
strategy, market positioning and so forth over the life of the loan. The purpose for
which the money is required and the business plan which underpins the request
for fmancing are therefore very significant indeed. Whereas it is common for the
large banks who make these sorts of loans to seek to develop exclusive and close
relationships with large companies, when a loan of this size is sought then those
banks will prefer to loosen the leash on which they would ordinarily prefer to
keep their relationship with their clients so as to enable the loan to be put in place.
Of course, ifthe lead bank in any context was so jealous of its relationship with a
company, then it might prefer to advise that company to borrow money by way of
a bond issue instead of taking out a syndicated loan so that the group of people
who will have privileged access to the company's strategic planning processes is
limited. Bonds are considered in Chapter 34.
3-04 This chapter considers the manner in which syndicated loans may be structured
and the principal legal issues which arise in relation to their documentation. A
syndicated loan is in essence an ordinary term loan entered into for a fixed period
of time, as discussed in Chapter 32, but with a number of lenders instead of there
being just one lender. As with an ordinary term loan, a term loan will come to an
end either when the expiry period ("the term") is reached or when an event of
default specified in the contract occurs~ On the happening of an event of default,
the borrower's obligation to repay the loan is accelerated so that repayment must
be made immediately and any rights to enforce security will crystallise.
Therefore, many of the issues relating to syndicated loans are the same as for
ordinary loans. So, in many places in this chapter there will be a cross-reference
back to the discussion of a particular concept which was discussed in the previous
chapter so as to avoid unnecessary repetition. The specific issues which arise only
in relation to syndicated loans stem primarily from the fact that there are more
lenders involved in a syndicated loan than in an ordinary loan and also relate to
the lender's likely preference for more security to cater for the fact that a
syndicated loan involves such a· large sum of money.
The market association for syndicated lending is the Loan Market Associa-
tion. 2 This association publishes a variety of documentation relating to syndicated
lending, with a view to promoting the "liquidity, efficiency and transparency" of
those markets.
2. THE STRUCTURE OF SYNDICATED LENDING TRANSACTIONS
A. The possible structures for a syndicated loan
Thinking about syndicated lending in the round
3-05 A syndicated loan could conceivably be structured in any one of a series of ways.
This section considers the various, basic approaches. In setting up the law of
finance it is important to consider not just "the one way" in which a market tends
to structure a particular transaction but rather to consider first all of the possible
2
http:llwww.lma.eu.com/default.aspx
[996]
SYNDICATED LENDING
legal techniques which could be used to structure a syndicated loan. There is a
tendency (as was discussed in Chapter 31) for participants in financial markets to
ado~t a herd mentality and c~nsequently to behave in the same way in relation to
particular types of transaction. Consequently, it becomes easy to .think of
agreements like syndicated loans as being exactly the same, when in truth each
has features which are unique to its own particular context. So, in this discussion
we shall consider how a syndicated loan could be structured, as well as
considering the ways in which they typically are structured. One of the key
potential differences between structures revolves around whether the lenders act
as one unit or whether they act as people with different rights and liabilities
separate from one another. The texts on international fmance law have tended to
argue that a syndicated loan must correspond to one particular structure or
another. The assumption is that there is only one way of structuring syndicated
lending or of structuring a bond issue (as considered in the next chapter). This is
simply not true, as.the cases considered at the very end of this chapter illustrate.
Syndicated loan transactions are over-the-counter arrangements and therefore the
parties are free to design them as they see fit. Consequently, while there are
common features to such lending arrangements and while the Loan Market
Association publications will generally. be influential, it is simply not the case
that all syndicated loans are identical nor that they fit a single template.
Therefore, it is important to think matters through from first principles.
Typical events of default in relation to syndicated lending
Before turning to the structure of syndicated loan agreements, it is worth 33-06
reminding ourselves of a few of the basic principles governing a loan agreement:
namely, the events of default which will cause the agreement to be terminated.
The ordinary range of events of default contained in syndicated loan contracts is
considered below. The principal events of default relate to the inaccuracy of any
representation as to the quality or condition of the borrower at the outset of the
transaction, any material adverse change in the condition of the borrower during
the transaction, any failure of any guarantor or other credit support provider
during the life of the transaction, any default in any other borrowing or other
financial transaction, and any event signalling the upcoming insolvency of the
borrower or its general inability to meet its obligations as they become due.
Structure 1: several lending liabilities with identically drafted
documentary events of default
The first means of structuring a syndicated loan would be for the various lenders 33-07
to remain distinct and to have separate rights and obligations from one another.
They would therefore have "several" (or, "distinct") contractual rights. This is the
most common structure in the marketplace. Effectively, there are therefore a
number of distinct lenders making separate loans to the borrower, but on
contractual terms negotiated for them by a lead bank. Thus, the lead bank would
organise a syndicate on the basis that a number of different loans are made to the
borrower which in the aggregate supply the borrower with all of the money that it
[997]
 THE STRUCTURE OF SYNDICATED. LENDING TRANSACTIONS
needs. So, for example, if Metal Basher Plc wished to borrow £80 million to
expand its production capacity in its factories in the Midlands, and if Profit Bank
was unwilling to accept the entire risk. of Metal Basher repaying all of its
obligations, then Profit Bank migl;it agree to provide £10 million by way of one
loan itself and then agree to act as lead bank in sourcing seven further loans of
£10 million each from seven other banks. Suppose that £10 million was then to
be lent by Mammoth Bank to Metal Basher Plc as one of the syndicate of eight
banks. Metal Basher Plc would have eight separate contractual arrangements with
each of the eight banks whereby each would provide £10 million with the result
that Metal Basher Plc would have borrowed a fotal of £80 million.
33-08 The question would then be ·as to the rights and obligations of the parties. On
these facts Metal Basher Plc would owe obligations to pay identical amounts of
interest to each of the lenders (because here each lender has made a loan of the
same size) on the same payment dates during the life of the loan, and identical
3 to the lending banks as opposed to being paid to Profit Bank as agent and then
obligations to make repayment of the capital at the end of the loan term. The
eight lenders would have entered into the same form of contract with the same
wording. There is a complication as to Profit Bank's role. Profit Bank would have
contracted with Metal Basher both as ·a lender and also as the arranger of the
transaction, thus attracting a fee for arranging the deal either directly from Metal
Basher and/or from other lending banks. Profit Bank would probably have two
separate capacities: first as the arranger of the syndicated loan and latterly as the
agent of the syndicate of banks. The contracts which each lender would have
signed would have been negotiated by Profit Bank as arranger of the transaction.
Policing the payment of interest, observance of the covenants in the loan, and the
maintenance of any security for the loan, would be performed by Profit Bank as
the agent for the syndicate of eight banks. Profit Bank would occupy a fiduciary
role in relation to the syndicate when acting as their agent: consequently, Profit
Bank would not be permitted to allow any conflict between its own interests as a
member of the syndicate and its fiduciary role as agent for the syndicate, it would
not be permitted to earn any unauthorised profit from its fiduciary office, and so
forth.
33-09 In the event, however, if the eight lending banks were making entirely separate
loans then their rights and any action taken against Metal Basher would be
separate rights and actions. On this model, Profit Bank would owe its fiduciary
obligations to each lender separately and therefore Profit Bank would have nine
different capacities: one as a lender, and eight different sets of obligations owed
to eight different lenders. However, for the syndicate to be acting as a syndicate,
then the parties' common understanding might be that all eight lenders may
indeed be owed separate repayment obligations by Metal Basher Plc but
nevertheless that they would have some form of contractual arr¥lgement between
themselves whereby Profit Bank in its capacity as agent would be acting for all of
them collectively. The issue in this context would be if one lending bank (such as
Mammoth Bank) sought to advantage itself over the other banks, for example, by
3 If the facts had been different, and loans of different sizes had been made, then the
amounts of interest lind capital payable would have been in proportion to the size of the loan that each
lender had made to Metal BaSher Plc.
[998]
SYNDICATED LENDING
seeking to enforce its security ahead of agreement by the syndicate as to how
recovery of the parties' security should proceed.
T~e manner which an ~gr~ement between the lenders might work is
considered next, but one pomt ts worthy of consideration now. If the ·banks'
events of default in their separate loan contracts were drafted identically but
nevertheless placed in different loan agreements, then there would be nothing to
prevent Mammoth Bank from enforcing its several rights against Metal Basher
Plc without :e~uiring permissi?n from anyone else because its contractual rights
would be dtstmct from the nghts of everyone else in the syndicate. Only a
?ontractual agreement that no single lender would be permitted to act
mdependently of the other lending banks in the syndicate could prevent
Mammoth Bank from acting in that way. Any such agreement would have to
co~stitute a contract between the lending banks in the syndicate even if payments
of mterest or repayments of capital were in fact paid directly by Metal Basher Plc
distributed by Profit Bank between the lenders. Therefore, control of how the
lending banks will activate their rights will need to be governed either by means
of a contract entered into between all of the members of the banking syndicate
·specifying in what circumstances any member of the syndicate will exercise its
~ghts; or will need to be governed by each lending bank agreeing to exercise its
nghts only through Profit Bank as syndicate agent on behalf of each bank with
each syndicate bank agreeing to the same power for Profit Bank and Profit'Bank
agreeing with each bank how those powers would be exercised (considered next)·
or will simply need to be left ungoverned so that Mammoth Bank can ac~
unilaterally in whatever way it pleases.
Structure 2: joint lending with joint events of default
The syndicated loan could be organised so that the lenders have separate rights 33-10
but so that they agree to act as a genuine syndicate in the sense that they are
prey~ted from activating their rights without the agreement of a specified
maJonty of the members of the syndicate to take any particular course of action.
In this scenario a contract between the lenders would identify how votes are to be
organised and what majority is required for the activation of any right such as the
identificati_on of an e~ent of default. In many syndicated loan arrangements, the
lenders will lend different amounts and so will have contributed different
proportions of the total loan amount required by the borrower. As such, each
lender would have a voting power in proportion to the size of its participation in
the syndicated loan amount. '
In an alternative scenario, the relationship between the lending banks could be 33-11
organised as a partnership such that the banks owed fiduciary duties to one
another a.s described by !he partnership contract between them. A partnership in
the English law sense 1s an undertaking in common with a view to profit.
Suppose the parties to the syndicated loan agreement are organised on the same
commercial terms as in the hypothetical example in the previous section. The
lenders' rights to seek recovery from Metal Basher would be exercisable only
collectively by means of the partnership agreement. As a matter of practicality
[999]
 THE STRUCTURE OF SYNDICATED LENDING TRANSACTIONS
this could be most conveniently exercised through the offices of the syndicate
agent, Profit Banlc, so as to prevent the lending banks from exercising their rights
in different ways at different times. Profit Bank would therefore be acting as
agent, and therefore as a fiduciary, for the banks in the syndicate. Any attempt by
an individual lender, such as Mammoth Bank, to act unilaterally would be a
breach of the partnership contract between the lenders, and so that unilateral act
would be terminable, or else any profits earned through breach of the contract
would be held on constructive trust for the other partners.4 In such a collaborative
structure, the parties would take a share .in the interest payments made by the
borrower in proportion to the size of their loan.
33-12 It is suggested that, whereas any individual commentator may describe the
syndicate in a syndicated loan as being comprised of lenders making distinct
loans or as having some interdependent rights, the proper analysis of the
transaction in either event is a matter for the interpretation of any given
transaction on its own terms. As emerges from the case studies at the end of this
chapter, there is no single form of syndicated ban agreement in the world. For
example, the existence of a partnership may be inferred from the circumstances,
just as purely several liability may also be interpreted from the circumstances, or
else either case may be specified explicitly in the documentation thus making
such inference unnecessary. In any case, it is suggested, there will be a "mirror
principle" in operation whereby the. rights of any one lender mirrors the rights of
all other lenders in their capacity as a lender. 5 This position will be secured by a
form of pari passu provision whereby no single member of syndicate nor any
other lender outside the syndicate would be entitled to have rights which granted
it an advantage over other lenders.
The usual syndicated loan structure
33-13 Ordinarily lending banks will not want to be in partnership with one another
because they will not want to owe one another the fiduciary obligations which
come with a partnership; they will not want to share the "profits" of a business
undertaking in the sense that is meant by partnership law; and they will not want
to bear any potential obligation under partnership law to indemnify one another's
losses in relation to the transaction. Therefore, even though the lenders' agent will
collect the borrower's payments of interest before transmitting them on to ·the
lenders, the agreement between the lenders will usually make it plain that they are
not intending to be partners: to ensure that a partnership is not inferred from the
circumstances, the lenders must make it plain that they are not sharing profits nor
sharing losses, but rather are entitled only to a cash amount from the borrower
(paid through the lead bank acting as syndication agent) as specified in the loan
contract. It would be more likely that a partnership would be formed intentionally
if for some reason the lending banks had little confidence in one another and so
wanted the reassurance of having the fiduciary obligations of partners imposed on
all of the members of the syndicate to provide a remedy in the event of any profit
4 On which, see para.5-05.
5 8
That is, the rights and obligations of the lead bank will be different whenever it functions as agent
or arranger from the situation in which it operates purely as a lender (that is "qua lender").
[1000]
SYNDICATED LENDING
being earned from a conflict of interest or other breach of duty. There are also
circumstances in which the syndicate will be comprised of lenders with different
types of rights and where some lenders have rights which are subordinate to other
members ~fthe syndicate (for example where ~e borrower goes into insolvency
the subordm1:1.te .l!lembers can only recover therr losses once the senior members
have recovered,. their losses from the borrower). 6 In such circumstances the
lenders will .not be partners and will not have the same rights agains~ the
borrower, the syndicate agent and against one another.
One lender may be liable to another lender in syndicate if that first lender 33-14
knowingly interfered with the other's right, for example, to have the proceeds of
the sale of mortgaged land applied to repay the loan. 7 Therefore, unless the
contract explicitly excludes such liability, the members of the syndicate may owe
duties between themselves not to interfere with one another's separate contractual
rights. Similarly, they may vary the terms of their agreement provided either that
all of the contracting parties agrees to the change or that the contract expressly
permits such a variation. 8 Consequently, it is only possible to speak in the abstract
about the nature of the rights of participants in a syndicated loan arrangement
precisely because those rights and obligations are specifically the creatures of the
contracts which created them from case to case.
Taking security in joint and in several lending
The structure of the transaction and the extent to which the lenders acquire 33-15
security for their loan will depend upon the terms of the loan. The pari passu
"mirror principle" requires that no single lender acquires an advantage over the
other lenders. Therefore, no security could be taken by any single lender in
advance of any other lender. Where the borrower is a member of a group of
companies, then there is a question as to which entity will be the borrower under
the transaction. Each company within a group of companies is treated by
company law as being a separate legal person and therefore a loan obligation will
only be enforceable against the company which is a party to the loan. 9 Therefore,
within groups of companies it is important to identify the company or companies
which either hold the group's most valuable assets or which conduct the group's
principal trade: these are the companies which have the most valuable assets and
therefore it is these companies which should either be the contracting entities or
the entities which are extending any guarantee or other credit support as part of
the transaction. Security in lending transactions may be any of the security
mechanisms discussed in Chapter 22; taking security in loan contracts was
considered in detail in the previous chapter. The fact that a loan is ordinarily
concerned with the payment of money (payments of interest and repayments of
capital) means that a guarantee is often sought from companies other than the
borrower for the lending in common with the other events of default considered
below.
6
British Energy Power v Credit Suisse [2008] EWCA Civ 53, [2008] 1 Lloyd's Rep. 413.
7
Swiss Bank Corp v Lloyds Bank Ltd [1979] 2 All E.R. 853.
Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703.
9
Salomon v A Salomon & Co Ltd [1897] A.C. 22; Adams v Cape Industries Pie [1990] Ch. 433.
[1001]
 THE STRUCTURE OF SYNDICATED LENDING TRANSACTIONS
B. Case study: the syndicated loan agreement in BNP Paribas v
Yukos Oil
This section considers the transaction in the case of BNP Paribas v Yukos Oil as
33-16
an example of how a syndicated loan may be structure~. It wa:s ~ case in which
Evans-Lombe J. ultimately made an order for summary ~udgment m favour of.the
lending banks. The key provisions of this contract will emerge at approp:iate
stages of the discussion to follow. The contract (the "loan .agreement") pro~1~ed
that if any event of default was breached, then the entire ~ount r~mammg
outstanding under the loan agreement would become rep.ayable i~ediate~y: an
"acceleration of obligations" clause, as it is known in the Jargon cons1dered_ m th7
previous chapter. The Yukos Oil Company ("Yukos") is an enormous Russian 011
company. Yukos had borrowed about US $470 million from a s:yndic~te ~fb~.
rn· October 2003 the Russian government commenced an mvestigation mto
Russian oil companies and into the immensely wealthy "oligarchs" who o~ed
and managed them. The position of these oligarchs became somewhat ?recanous
under the Putin regime after they had originally been ~llow~d to acquire contr~l
of the enormous Russian oil companies by the Yeltsm regime as part of their
assistance for the then Russian government. As a result of that investigation, the
chief executive of Yukos, Mr Khodorkovsky, was imprisoned ostensibly in
relation to tax violations, Yukos was subject to a tax bill for US $3 billion, and the
assets ofYukos were frozen by the Russian government. The syndicate of banks
sought to accelerate Yukos 's obligations under the loan on the basis of clause 19.4
of the loan agreement on the grounds that there was some material fallacy in a
representation made to the syndicate as to the financial .prospects for Yuko~, and
under cl.19.27 on the basis that there had been a matenal adverse change m the
fortunes of Yukos due to the freezing of its assets and the imposition of a very
large tax ,bill on it. It was held that there had self-~vide~tly 11 been a materi~l
adverse change once the Russian government had 1mpn~oned the .company .s
chief executive. The context of government interference with the busmess of 011
companies by freezing their assets and 'the imprisonment of ex~cutives on ~e
basis of alleged tax irregularities had caused enormous concern m the financial
press, and so clearly constituted a material adverse change. Further to the
decision of the House of Lords in Concord Trust v Law Debenture Trust
Corporation Plc 12 , Evans-Lombe J. would not imply a term into the contract to
the effect that lenders would not make an invalid demand under a loan contract,
nor would his lordship otherwise imply terms to restrict the lenders' rights to
identify an event of default under the agreement. 13
The loan agreement contained a large number of typical provisions for syndicated
33-17
lending agreements. Clause 15 of the agreement provide~ for a number of
representations which were made at the outset of the transaction by the borrower
10 [2005] EWHC 1321 (Ch.}.
11His lordship gave the order for summary judgment extempore at the end of the subm1ss1ons to him
and as is made clear at the outset of his lordship's judgment, only give his written reasons at a later
dat; because of the urgency of the original application before him.
12 [2005] 1 W.L.R. 1591.
13 [2005] EWHC 1321, [23].
[1002]
SYNDICATED LENDING
to the effect that: no member of the Yukos group was subject to any proceedings
which would lead to their insolvency; no litigation or similar action was then in
process which would have a "material adverse effect" on Yukos; and there had
10 been "no change in the business condition (financial or otherwise) prospects or
operations" of Y1*os since the financial statements which the lenders had
required from Yukos had been prepared. Clause 19 contained the events of default
which would terminate the loan agreement, which included provision that it
would be an event of default if, in the opinion of the lenders, there was a
"material adverse effect" on "the business, condition or production or export
capacity" ofYukos. There would also be events of default ifYukos failed to pay
any sum when it fell due; if Yukos or any of its affiliates failed to comply with
any obligation specified in the agreements; if any statement in a financial
document transpired to be incorrect in a material respect; if Yukos or any member
of its group of companies admitted its inability to make any payment when due; if
any form of insolvency proceeding was threatened against Yukos or any member
of its group of companies; if there was any breach of the pari passu provision; or
if "any event or circumstance occurred which in the reasonable opinion of [an
identified person] had or might reasonably be expected to have a Material
Adverse Effect".
Importantly, then, the syndicate and its agent had the power to identify when a 33-18
material adverse change had occurred in relation to Yukos's business: the parties
were not prepared to wait for an official downgrading of Yukos 's credit worth or
anything of that sort. There is therefore a large amount of "art" in identifying
when such an event of default has occurred, even in relation to a US $470 million
loan, and not simply "science" in the exact calculation of when such an event has
occurred. This may seem surprising given the amount of money at stake.
Nevertheless, it is a feature of even the most sophisticated financial agreements
that there is often a large amount of flexibility and uncertainty in play, even if
commercial lawyers always like to talk about their desire for certainty. So, in this
litigation it is clear that there was a dispute between the parties as to whether or
not an event of default had arisen at all. However, for the lenders to be able to
move quickly so as to realise their security and so forth, there is no time to wait
for "science" to catch up with the reality as bankers can "artfully" understand it.
Formal calculation of Yukos 's credit worth would have required waiting for
official financial information so that analysts at the independent ratings agencies
could calculate the necessary figures and publish an official view. When the chief
executive of the borrower has been imprisoned and the company subjected to a
tax bill which is many times larger than the loan, then common sense dictates that
the borrower will probably be unable to meet its loan obligations in full in the
future.
The classification of the syndicate agent :S- obligations remains a matter
for analysis on a case-by-case basis
. . .
In spite of the foregoing discussion of a usual syndicated lending arrangement, 33-19
recent decided cases have illustrated the variety which is present in practice. It
remains important for finance lawyers to analyse transactions from first
[1003]
 THE STRUCTURE OF SYNDICATED LENDING TRANSACTIONS
principles on each occasion even if there is an assumption that transactions of that
sort correspond generally to a specific pattern. The cas.e law demo~trates that a
proper legal analysis of any transaction or marke~ ':111 proceed m. accordance
·with law and not with market legend. For example, 1t is commonly said that there
is a clear distinction between the agency obligations of a syndicated lending
agent and the trust obligations of a bond trustee (cons.idered in the next chapter).
In the first place it must be acknowledged that simply ~ecause the market
preference is for a syndicate agent to be merely an agent actmg on b~half of the
syndicate, there may nevertheless be situations in which the co~s will fmd that
the syndicate agent was in law acting as a trustee of moneys m favour of the
members of the syndicate as beneficiaries. As is clear from Uzinterimpex JSC v
Standard Bank Plc 14 the "agent" may be held to have been holding property on
trust for the members of the syndicate and to have been acting as a trustee. Here,
the bank participated in the tortious conversion of consignments of cotton in
concert with the borrower. It was held that the syndicate agent should be treated
as trustee of the sale proceeds received for the conversion of the cotton. 15 The
court rejected the argument that the syndicate .agent w~s acting. in law on~y as an
agent. Toulson J. considered that the transaction required the mterpretatlon that
the syndicate agent was in fact holding the money in thi~ b~nk account on trust to
be distributed in accordance with the terms of the syndication agreement.
33-20 While a syndicate agent may therefore be found to be acting as a trustee in ~ome
circumstances there are also circumstances in which the syndicate agent will be
able to limit i;s fiduciary and other obligations to the members of the syndicate.
So in JFE Fund SA v Goldman Sachs International 16 the syndicate agent had
ex~licitly asserted in writing in a Syndicate Information Memoran~~ that it ~as
not providing a warranty for the accuracy of any of the f~anc1al mformat10.n
which it had passed on to the syndicate in its role as syndicate agent. In this
sense, the syndicate agent had acted solely as "arranger" i~ putting the transa~tion
together and as "syndicate agent" .only once th~ transaction had b~en finalised.
The purpose of the disclaimers in a document titled Impo~~ ~once, howe~er,
were effectively intended to reduce the agent's respons1b1htles from bemg
responsible for the bona fides of the transaction to ~eing merely a go-be1':een
who brought the various parties together. This analysis of. the role of a syndi~te
agent strips the role of much of its fiduciary content and mstead puts the .parties
(lenders and borrower) in a position where they must loo~ after thei_r own
positions instead of relying on the offices of the agent to organise everything for
them. The "agent" in this context was merely a kind of matchmake~. It wa~ held
that the syndicate agent was not liable for damages at.co~on·law m relat1?n .to
losses caused by inaccuracies in the information which it had passed. o~ m its
limited syndicate agent role. This is, in effect, a victory for the pnnc1ple of
exclusion of liability by way of contract for specific parts of a transaction. It was
held that "a party involved in negotiations towards a commercial venture owes no
positive duty of disclosure towards another prospective party". 17 Thus, even
14
[2008] Bus. L.R. 1762.
15
[2008] Bus. L.R. 1762, at [42].
1° [2006] EWHC 2887.
7
1 [2006] EWHC 2887, at [64).
[1004]
SYNDICATED LENDING
though the syndicate agent would ultimately be acting as a form of agent (and
thus as a fiduciary) for the syndicate, it bore no positive duties of due diligence
before the creation of the transaction: its fiduciary obligations were thus limited.
There was held to be nothing unfair in these contract terms because, following
Photo Production Ltd v Securicor Transport Ltd, 18 the parties were "not of
unequal bargaining power".
Therefore we can see that the presence of agency obligations does not mean that 33-21
the syndicate agent will necessarily be liable for all loss suffered by the lenders or
borrower. Similarly, that there were people involved in a transaction acting as
syndicate agents, that does not mean that the syndicate agent will be liable to
third parties who suffer loss from a larger transaction to which the syndicate
agent's duties do not extend. This point was upheld in JP Morgan Chase Bank v
Springwell Navigation Corp 19 where the presence of a "syndicate team" within
the defendant investment bank, which was subject to some fiduciary duties when
aCting as syndicate agents, did not mean that every aspect of the bank's dealings
with its customers were subject to fiduciary principles. Therefore, disputes
between the parties fell to be decided only in accordance with contract law.
3. THE PROCESS OF ARRANGING SYNDICATED LOANS
A. The role of the lead bank in promoting the transaction
This section considers the mechanics of putting a syndicated loan agreement 33-22
together. The transaction is commenced by the borrower seeking funding and by
a bank which acts as "lead bank" in organising the terms of the transaction in
negotiation with the borrower and in organising the syndicate of banks which will
participate in the syndicate. The lead bank performs two different roles: the first
as "arranger" of the transaction and the second as "agent" for the syndicate. It
would be possible for the roles of arranger and agent to be performed by different
people, but they are both more usually performed by the lead bank. The arranger
acts as an equivalent to a "promoter" in share issues by seeking out participants
for the syndicated loan. Having negotiated the borrower's requirements and the
expected rate of interest and key covenants with the borrower, then the lead bank
will market the proposed transaction to prospective members of the lending
syndicate, usually by means of a document known as a "term sheet" or an "offer
document". This document engages the lenders' interest and allows the lead bank
to negotiate the precise terms of the transaction with the borrower, as to financial
issues such as the rate of interest, and as to commercial issues relating to the
covenants required in the agreement by the lenders and as to any security
required for the transaction. There will therefore be a contractual nexus between
the lead bank and the borrower, and a separate contractual nexus between the lead
bank and the banks comprising the lending syndicate. Whether the lead bank
should be considered to be an agent in either capacity is considered in the next
section.
18 (1980] A.C. 827, 843, per Lord Wilberforce.
19 [2008] EWHC 1186.
[1005]
 THE PROCESS OF ARRANGING SYNDICATED LOANS
B. The role of the lead bank as "agent" in relation to the syndicate
33-23 The lead bank may be deemed to be acting in a fiduciary capacity as agent of the
borrower when seeking to attract lenders to the syndicate, in that the lead bank is
seeking to attract loan finance for the borrower at the borrower's direction in
accordance with the contract between the borrower and the lead bank. This
suggests that the lead bank is acting as agent, particularly given that the lead
bank's role is to seek the best available deal for the borrower when acting
consequently in the borrower's affairs. 20 Alternatively, the lead bank may be
deemed to be the agent of the lending banks when· negotiating the terms of the
loan agreement on their behalf because the lead bank is acting on their behalf in
securing both the existence and the precise terms of that transaction. 21 It has been
held that the lead bank will occupy a fiduciary role in relation to the information
document which it circulates to potential lenders in advance of an agreement
being formed and when it negotiates the lenders' participation in the syndicated
loan. 22 The lead bank will, however, prefer not be a fiduciary in general terms in
this context. Consequently, the lead bank will typically only agree to act on the
basis that it is not a fiduciary but rather. that it is acting instead as an ordinary
provider of financial services, albeit as an intermediary, on the basis of the
ordinary law of contract. As was considered in detail in Chapter 29, a bank will
rarely be considered to be a fiduciary unless there is something particular about
the context of a transaction which suggested something to the contrary. On the
basis that the lead bank will not be a fiduciary, it would be potentially liable in
tort for any negligent misstatement made either to the lenders as to the condition
of the borrower or made to the borrower (as considered in the next section); the
lead bank may potentially be liable in tort for any fraudulent misrepresentation;
or the lead bank may potentially be liable in contract for any misrepresentation or
any other breach of contract: the general law relating to these heads of liability
were considered in Chapters 20, 24 and 25.
33-24 The lead bank will ordinarily act as the agent of the lenders in collecting all
payments of interest from the borrower. The lead bank will then pass on the
payments to the lenders. It is suggested that on receipt of those payments that the
"agent", as a fiduciary, will hold those payments on trust for the other banks in
the syndicate until such time as those amounts are paid on properly to the banks
making up the syndicate. The precise duties and powers of the agent will depend
upon the structure of the agreement. So, in British Energy Power v Credit
Suisse 23 there was a dispute as to whether the syndicate agent was able to act only
as an agent of the members of the syndicate or whether it could act as a principal
when dealing directly with the borrower and the rights of the various lenders. It
was held that the agent may act "as a principal" in enforcing obligations under the
agreement against the parties to it where the syndicate lending agreement bore
that interpretation.
20
'white v Jones [1995) 2 A.C. 207 at 271.
21 Natwest Australia Bank v Tricontinental Corporation Ltd [1993) A.C.L. Rep 45; discussed in
O'Donovan, Lender Liability, 370.
22 UBAF Ltd v European American Banking Corp [1984) Q.B. 713.
23
[2008] EWCA Civ 53; [2008] 1 Lloyd's Rep. 413.
[1006]
SYNDICATED LENDING
C. The lead bank's potential liability for negligent misstatement
The lead bank plays a significant role in marketing a syndicated loan to the 33-25
lenders. The lenders effectively take a speculative position in "investing" in the
borrower by· le:Q.ding it money because they are taking a risk that the borrower
will not. repay its loan. A loan contract does not fall within the securities
regulatory requirements considered in Part X of this book because loans do not
fall within the definition of "securities" in that context. Therefore, while there are
similarities between a bond issue and a syndicated loan, as considered below, it is
only bonds which are securities and which must comply with securities regulation
in many circumstances. Because syndicated loans do not fall under securities
regulation, the liability of the lead bank for marketing the syndicated loan
therefore arises under the general law. So in Natwest Australia Bank v
Tricontinental Corporation LtcP4 the lead bank failed to make disclosure of all
material facts to the lenders when marketing the syndicated loan transaction to
them. The borrower told the lead bank that its contingent liabilities were
"normal" when in fact it faced contingent liabilities of US$46 million. Some
officers of the lead bank were aware of the true position. The borrower defaulted
on its repayment obligations and the lenders sought to recover their loss in
damages in negligence from the lead bank. It was held that the lead bank had
assumed responsibility to pass on all relevant information to the other lenders and
therefore that the lead bank owed a duty of care to the lenders which it had
breached.
D. The borrower's right to borrow and the lenders' obligation to
lend
Once a loan contract has been created (subject to the conditions precedent 33-26
considered in the next section) then the lenders may face an obligation to lend
money to the borrower in performance of its contractual obligations. It is usual in
relation to a syndicated loan for the contract to provide that each lender makes the
amount specified in the loan contract available to the borrower on the basis that
the borrower is required to give five business days' notice to each lender that it
wishes to draw down that money and furthermore that it makes plain whether it is
drawing down the full amount or only a part of the total amount agreed with the
lender. Consequently, there is a possibility that the lender may agree to lend
money but at a later date refuse to advance that money to the borrower.
Ordinarily, a borrower is not entitled to specific performance of the obligation to
make the loan, 25 in part because damages would be a suitable remedy. 26 The
borrower will not suffer a loss if it can obtain replacement funding elsewhere at
the same rate of interest. If the borrower could only obtain funding at a lower rate
of funding (presumably if the difference in rate was caused by the lender's refusal
to lend, and not simply due to different lending policies at other banks), then that
would constitute a loss which would be compensable by common law damages.
24 [1993] A.C.L. Rep. 45.
25 South African Territories v Wallington [1898) A.C. 309.
26
See para.19-88.
[1007]
 SYNDICATED LOAN COVENANTS SYNDICATED LENDING

However, it has been held that in "exceptional circumstances" the borrower may by the securities .regulations set out in P~ X of ti:is book but rather by a looser
be entitled to specific performance of the loan agreement. 27 It is suggested that form of regulat10n, then the lenders will require the provision of detailed
exceptional circumstances may arise if, after completion of the loan contract, information directly.
market conditions deteriorated so markedly that the borrower could not acquire
funding from any other bank due .to a loss of market liquidity as in the global Financial covenants
banking crisis of 2008, then that may constitute exceptional circumstances in
which the bank should be required to perform its contractual obligations to lend The context of financial covenants was considered in detail in the previous
at the contractually specified .rate. The distinction here would be that the
33-29
chapter. 30
borrower could not acquire .a replacement transaction and therefore that specific
performance of the loan contract would be the only appropriate remedy. 28 Conditions precedent and representations

4. SYNDICATED LOAN COVENANTS As was discussed in Chapter 19, it is common in financial contracts for the 33-30
borrower to make a number of representations as to its financial condition its
A. The principal discussion of loan covenants in the previous capacity to act, and so forth. 31 The intention is that these representations
· chapter constitute conditions precedent to the lenders' obligations to lend a fixed amount
of money or to make a loan facility available to the borrower. That they are
33-27 Loan covenants were discussed in detail in the previous chapter. 29 The discussion "co?ditions precedent" means that the lender bears no obligation to make money
in this chapter therefore is only intended to highlight any additional features available to the borrower unless those conditions are first satisfied. Furthermore,
which arise in relation to syndicated loans, and to consider terms which are if those representations transpire to have become false in any way or turn out to
specific to syndicated loans. The reader is therefore referred to the previous have been false at the time that they were made, then an event of default is
chapter in relation to loan covenants and to Chapter 19 for general principles of committed.
contract law as to the operation of contracts, before considering this section.
C. General events of default
B. Events of default relating to the givb1g of information
These events of default and any law relating specifically to them were considered 33-31
Covenants to provide information to the lenders in general terms in the preceding chapter. The reader is thus referred to that
discussion. 32 This discussion highlights the context of these provisions in relation
33-28 to syndicated loans specifically.
The loan contract ordinarily provides that the borrower is required to supply the
syndicate with specified types of information about its condition, performance
and prospects during the life of the loan. Most significantly the borrower will be Acceleration of obligations
required to provide financial information as to its profit and loss forecasts,
balance sheet, and cash flow to the lenders on a half-yearly or even quarterly As with any loan, in the event that a loan covenant is breached, then the borrower 33-32
basis. The lenders may also require information as to any significant event which is required to repay the loan immediately. In that sense, the loan is
occurs in relation to that borrower's fmancial condition between the presentatiE "accelerated".33
of financial information and the creation of the syndicated loan contract.
relation to entities which have their securities posted on a regulated market or n Cross default
the Official List, then there will be a large amount of information publi ly
available and the issuer of those securities will bear continuing obligations to A default under another transaction would constitute a default under the loan 33-33
make the markets aware of any significant change in their financial condition (as agreement. 34 A cross default provision would encompass a breach of any other
considered in Part X of this book): therefore, the lenders will have a large amount loan contract, bond issue or other financial transaction of a minimum size. For
of information available to them through those mechanisms. However, if the example, if an acceleration provision had been triggered under another loan, then
borrower has no such securities in issue (which is rare given the size of these the first loan contract would also have its acceleration provision triggered.
loans and thus. the nature of the companies involved) or if they are not governed 30
See para.32-21 et seq.
31
See para.19-28 et seq.
27
Loan Investment Corp ofAustralasia v Bonner [1970] N.Z.L.R. 100. 32
See para.32-17.
28
See para.19-88 et seq. 33 See para.32-33.
29
See para.32-17 et seq. 34
See para.19-49.

[1008] [1009]
 SYNDICATED LOAN COVENANTS
Material adverse change
33-34 A material adverse change involves any deterioration in the financial condition or
·position of the borrower. An example of a material adverse change clause was
given in relation to BNP Paribas v Yukos Oil3 5 where the loan agreement
provided that there would be an event of defaul~ ~f there w~ "8?Y event or
circumstance occurred which (in the reasonable opmion of [an identified person]
had or might reasonably be expected to have a Material Adverse Effect". The
identification of a "material adverse change" requires an exercise of an art of
identifying a change in the condition of the borrower and also an identification
that that change was sufficiently "material". So, that a company faces a US $3
billion tax bill and has its CEO imprisoned will constitute a material adverse
change. 36 However, where there are no financial statements available for a new
start-up company, then it will be impossible to identify whether or not ther~ ~as
been a material adverse change because it could not be known what the position
37
was before so as to identify whether or not it had changed materially. A fall of
20 per cent in the net assets of the company has been held to be a material
adverse change. 38
Restructuring
33-35 The decision to make a loan and the covenants and security required as part of the
transaction are based on the condition of the borrower at that time. If the
borrower alters its capital structure, however, then the basis on which the loan
was originally made is altered. Similarly, if the borrower is either taken over by
another company, or takes over another company, or merges with anot~er
company, then the resultant entity will be different from the borrower to which
the money was lent: therefore, the acceleration provision will be triggered if the
credit worth of the resultant entity is materially weaker than that of the original
borrower.
Negative pledge and pari passu clauses
39
33-36 Negative pledge and pari passu clauses were considered in Chapter 19.
D. Contractual mechanics specific to syndicated lending (
arrangements .
The role of the syndicate agent
33-37 The lead bank, when acting as agent for the syndicate, will be a fiduciary but the
extent of its obligations can nevertheless be limited by the terms of its agency.
35 [2005] EWHC 1321 (Ch.).
36 BNP Paribas v Yukos Oil (2005] EWHC 1321 (Ch.).
37 Re TR Technology Investment Trust Plc (1988) 4 B.C.C. 244.
38 Levison v Farin [1978] 2 All E.R. 1149.
39 See para.19-57 et seq.
[1010]
SYNDICATED LENDING
Consequently, the terms of the agency agreement will limit the lead bank's
obligations in practice. The agent will be the agent of the lenders and not of the
borrower. The loan contract will provide that when the borrower pays the interest
payments to the agent on behalf of the syndicate then that satisfies the borrower's
obligations to make that payment. The lenders are required to proceed against the
agent. It is suggested that the lenders should specify in the terms of the agent's
agency that it acts as trustee of the entire payment received from the borrower for
the lenders as beneficiaries, in the proportions to which those lenders are entitled
under the loan contract. While the lead bank will receive a fee for acting as agent,
it will not wish to assume the sort of manage:i;nent obligations which are imposed
on trustees in bond transactions (considered in the next chapter): that is, the agent
will accept no obligations for the management of the borrower's payment
obligations, to commence litigation against the borrower to enforce the obligation
to make payment, and so forth. Similarly, the lenders will ordinarily choose to
structure their contract so that they are not bound to form a consensus with the
other lending banks when deciding how to proceed in relation to their individual
rights under the loan agreement.
However, there are transactions in which the lead bank will owe fiduciary duties 33-38
to lenders precisely because those transactions are based on the common
understanding that the lead bank will undertake duties negotiating with the
borrower in the event of some default under the transaction. This possibility
emerges from the discussion of Argo Fund Limited v Essar Steel Limited.40 set out
below. For example, Tennekoon presents a broader commercial management role
for the agent and was more accepting of the possibility that lead banks will be
fiduciaries 41 than are other commentators such as Wood who see the lead bank as
never occupying a fiduciary role. 42 However, as Lord Browne-Wilkinson put it in
White v Jones 43 one becomes a fiduciary whenever one involves oneself in the
affairs of another. 44 This definition is very broad but it does capture the essence
of an agency relationship as imposing fiduciary duties: one owes fiduciary duties
in any context in which one is acting on behalf of another in that other's affairs in
a context in which that other is reposing trust and confidence in you to act
selflessly in their interests, such as the context in which a lead bank is negotiating
a loan agreement on behalf of a syndicate and in which it is collecting interest
payments on behalf of that syndicate from the borrower. In some of the decided
cases considered at the end of this chapter, the syndicate agent has been found to
be a fiduciary.
Syndicate democracy
As was highlighted above in relation to some syndicated loan agreements, the 33-39
lenders' several rights will be tempered by a contractual provision between the
lenders that they will only exercise their contractual rights (for example to
40
[2005] EWHC 600 (Comm).
41 Tennekoon, The Law and Regulation ofInternational Finance (Butterworths, 1991 ), p.58.
42 e.g. Wood, Law and Practice of International Finance (London: Sweet & Maxwell, 2008), p.96.
43 [1995] 2 A.C. 207 at 271.
44
See paras 5-04 and 5-05.
[1011]
 THE OPERATION OF SYNDICATED LOANS, LOAN PARTICIPATIONS AND LOAN TRANSFERS SYNDICATED LENDING

terminate the loan contract) if there is a contractually specified majority of
lenders voting in favour of it. However, the lenders ordinarily do have separate
rights to be repaid their loans (because the loan agreements are typically
structured in that way) and therefore they would ordinarily have distinct rights
under the law of contract to proceed against the borrower in the event of a failure
to make payment. The extent of syndicate democracy will depend upon the terms
of the loan contract. 45 An individual lender would be prevented from acting
unilaterally only if the syndicated loan agreement were organised so that the
lenders agreed only to act collectively to enforce repayment of their loans (for
example, by terminating the loan agreement), as was discussed above at
para.32-07.
5. THE OPERATION OF SYNDICATED LOANS, LOAN PARTICIPATIONS AND
LOAN TRANSFERS
A. The purpose of this section
B. A comparison with bond transactions
Syndicated lending is superficially similar to bond issues in that a number of 33-41
investors are found by the arranger to lend money to a borrower in return_ for
periodical payments of interest, and repayment of the loan capital at the e;nd of
the transaction, or on the earlier happening of an event of default. However, the
investors in a bond issue acquire a number of securities equivalent to the size of
their investment and those securities can generally be disposed of easily on the
open market (depending on the nature of the issuer); whereas participations in a
syndicated loan involve a much larger investment by the lending banks and do
not grant the lending banks securities. It is usual for syndicated loans to explain
the extent to which the lending banks may transfer away their rights under the
loan, so that the lenders may sell their participation in the loan transaction to third
parties, albeit they would be required to sell into an illiquid market when
compared to the liquid market for corporate bonds. Bond transactions are
considered in the next chapter. -

33-40 Law is the perfect social science. As with all social sciences, there are many C. Loan participations
theorists creating complex theoretical models and arguing over the likely
performance of those models if they were implemented in practice. Lawyers A loan participation is different from a syndicated loan. In a loan participation, a 33-42
create models in the form of statutes, in the form of common law principles single lender of a large amount of money will seek to transfer parts of that large
effected through court judgments, and in the form of structures like contracts and loan to other lenders so as to spread the risk of the borrower failing to make
trusts. There are therefore many examples of legal models at work in the world, repayment to those other lenders. This is similar to an insurer agreeing to insure a
and there are many other models available in textbooks, in academic articles and large risk but then seeking to reinsure that same risk with other insurers so as to
in other jurisdictions where things are done differently. What is also perfect about reduce the amount of the risk which it is effectively shouldering on its own.
law as a social science is that when key actors take actions-especially judges,
and to a lesser extent legislators and lawyers-they give detailed reasons for their
D. Loan transfers
actions in the form of written judgments which reflect on factual scenarios which
have arisen in the real world and which reflect the consequences which were
deliberately designed for those real-world scenarios in the form of remedies.
Loans as discussed in Chapter 32 and 33 of this book are not securities: that is, 33-43
those loans cannot be traded on an organised market in the way that shares in
Therefore, to understand how problems come before a court in England and
public companies or bonds can be traded on open markets. (Securities are
Wales and how those problems are resolved there are thousands of case reports
considered in Part X of this book.) Loans are contracts entered into between two
available annually detailing the mechanisms which English law uses to resolve
parties. A loan will be capable of transfer, however, to a third party in the same
disputes. This section considers cases on syndicated lending to illustrate the
way that the benefit of any chose in action can be transferred to a third party. The
context in which issues arose and the way in which they were resolve* the
loan can therefore be transferred in exchange for money. A loan is transferred by
English High Court. What is noticeable is the way in which a syndicated lo was
assigning all or part of the lender's rights to another person. The loan contract
used to provide the borrower with protection against unfortunate econo c and
~vent such a transfer, for example if the borrower wished to control
political circumstances, all of which occurred outside the United Kingdom but
who would be its lender from time-to-time so that it can ensure that its lender is
which were nevertheless resolved by an English court under choice of law and
not a person with an aggressive policy on acceleration of loan obligations, and so
choice of jurisdiction principles in the syndicated loan agreement: Our focus,
forth.
therefore, will be on the cases of Argo Fund v Essar and others below. However,
before we come to those case studies it is important first to explain some A loan can be transferred either by way of a novation or simply by means of a 33-44
activities which are commonly conducted in relation to loans and their similarity transfer. A novation of the agreement would involve replacing the original lender
to bonds. with a new party such that the borrower and other parties could no longer enforce
any rights against that original lender; instead, all of the rights and obligations
45
would pass to the new party. In an ordinary transfer the original party does not
For example, the agreement may permit a majority of lenders to compel the compliance of the
minority against their wishes: Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703.

[1012] [1013]
 THE OPERATION OF SYNDICATED LOANS, LOAN PARTICIPATIONS AND LOAN TRANSFERS
necessarily pass away its obligations to third parties (such as the borrower and the
other lenders) when it transfers the benefit of its contractual right to the new
party.
33-45 The benefit derived from a transaction which is expressed as being non-
transferable may be transferred to a third party or settled on trust. 46 The contract
is not transferred, because it is non-transferable, but rather the benefit that is
derived from it has been held to be capable of being treated as an item of property
in itself. 47
E. Case study: Argo Fund Limited v Essar Steel Limited and the
secondary market
33-46 This section considers the transaction in the case of Argo Fund Limited v Essar
Steel Limited48 as an example of how a syndicated loan was structured in
practice, and as an example the rights of those who acquire rights under
syndicated loans by acquiring those rights in the secondary market as opposed to
acting as a lender under the syndicated loan transaction. Essar Steel Limited
("Essar") is a very large Indian steel producer; whereas the Argo Fund Limited
("Argo") was a mutual fund resident in the Cayman Islands. Essar entered into a
two-year syndicated loan for US$40 million over which Bayersiche Landesbank
Girozentrale ("BLG") was the lead bank. The purpose of the loan was to
consolidate Essar's obligations to its bondholders. The loan was taken out shortly
before customs duties and US embargoes were imposed on Indian steel products
which severely affected Essar's business. Consequently, Essar was unable to
make its payments to the lending banks when they became due. Essar began
negotiations with BLG on behalf of the other lenders (demonstrating that BLG
occupied a fiduciary role as lead bank and agent in relation to the other lenders).
Argo had acquired its rights by acquiring a participation in the syndicated loan on
the secondary loan market. That means that Argo had bought its right to become
part of the syndicate from a member of the loan syndicate, even though it had not
been part of the original group of lenders, presumably because it considered loan
repayments from Essar to be a good investment. Argo sought a right to enforce
Essar's failure to pay as an acquirer of rights on the secondary market. Essar
argued that the terms of the loan contract meant that only the original lending
banks were entitled to enforce the events of default under the agreemtnt. Clause
27 of the loan contract permitted transfers of lenders' contract right and there
was no limitation placed on the persons who could become transfer es of those
rights. However, that clause differentiated between a novation and a transfer. By
contrast an assignment of the agreement which passed "all rights and benefits"
under it would not necessarily release the original lender's obligations. It was
held that on the proper construction of these agreements, Argo was a proper
46 Don King v Warren [1998) 2 All E.R. 608.
47 [1998) 2 All E.R. 608.
48 [2005) EWHC 600 (Comm).
[1014]
SYNDICATED LENDING
"bank or financial institution" which was capable of taking a transfer of an
original lender's right and consequently capable of enforcing Essar's obligations
to make payment against it.
F. Cases Studies: The liabilities of the syndicate agent in complex
syndication structures
The syndicate agent may be acting as a trustee
Syndicated financing can be more complex than the sorts of straightforward 33-47
lending by a group of banks that was considered above. For example, a syndicate
may be assembled so as to pay performance guarantees in relation to the delivery
of goods, as in Uzinterimpex JSC v Standard Bank Plc. 49 In that case, the bank
acted as agent for a syndicate of banks providing a guarantee of payment in
advance of delivery of a consignment of cotton. It was alleged that the bank had
connived with the buyer in taking delivery of the cotton without proper
documentation (in breach of contract), such that the buyer had been able to take
the goods and resell them before having paid for them. 50 In this instance the bank
was not proved to have acted dishonestly, but it was found that it had committed
the tort of conversion in assisting the sale of the cotton contrary to the terms of
the contract. In this instance, the bank acted as syndicate agent in such a way that
it received "the entire proceeds for the sale of the cotton" which was paid into a
"transaction account" held specifically for this arrangement by the bank before
transmission of amounts on to the members of the syndicate. It was held that the
bank as syndicate agent acted as trustee of these moneys while they were held in
that account. 51
In relation to the finding of a trust, the argument was raised that the bank was 33-48
acting solely as "agent" and thereby solely in a ministerial capacity52 in holding
those moneys and then transferring them on to the members of the syndicate: as
such, what was being argued was that the bank was not acting as a trustee at all
but rather as a sort of steward passing the money out from the account. As was
made clear in para.29-04 above, the House of Lords in Foley v Hill53 held that a
bank does not usually act as a trustee in relation to the operation of ordinary bank
accounts. However, in this context Steel J. considered that the transaction
required the interpretation that the syndicate agent was in fact holding the money
in this bank account on trust to be distributed in accordance with the terms of the
syndfoation agreement. That must be correct: as was explained in para.21-07 et
seq., an express trust can be inferred from the circumstances without the parties'
needing to use the term "trust". Here it was sufficient to find the existence of a
49
(2008) Bus. L.R. 1762.
so See the discussion of letters of credits at para.30-45 et seq.
51
[2008] Bus. L.R. 1762, [42].
52 A "ministerial" capacity is one in which you are simply passing money on without taking any
rights or obligations yourself: such as a bank paying out an ordinary standing order for one of its
customers.
53 (1848) 2 H.L. Cas. 28, 9 E.R. 1002.
[1015]
 THE OPERATION OF SYNDICATED LOANS, LOAN PARTICIPATIONS AND LoAN TRANSFERS
trust that the bank had legal title in money which it was holding for the benefit of
other people on terms defined in the contract.
33-49 Furthermore, it was not suggested that any liability was transmitted to the
members of the syndicate as principals when their agent, the bank, sought to
recover money from the seller without releasing the appropriate documentation
relating to the cotton to the seller. Therefore, the bank would not appear to bear
the obligations of an ordinary agent when acting on behalf of the syndicate (as
would ordinarily be the case, as discussed in para.18-32 et seq). 54 This question
of limiting the obligations of syndicate agents is considered in the next section.
The syndicate agent may exclude its liability for the accuracy of
information
33-50 A further illustration of the obligations of a syndicate agent was set out in JFE
Fund SA v Goldman Sachs Internationa/55 in which Autodis, a large manufacturer
of car parts, sought to take over Finelist. The syndicated financing in this case
was in the form of 1'syndicated credit facilities" provided in "tiers". This meant
that Autodis was given a right to draw on funds provided by a syndicate of
lenders: akin to a series of overdrafts being provided by different banks. That the
funding was in "tiers" meant that in the event of Autodis failing to make
repayment of these loan facilities then the priority of each lender to have recourse
to Autodis 's assets or to any security put up by Autodis would be controlled by
the terms of the contracts in place between the parties. Goldman Sachs was the
syndicate agent. There was a "mezzanine facility" supplied by the claimant, IFE,
which had priority ranking behind the "senior debt". 56 In this litigation, it
transpired that Finelist's accounts had presented a false picture of its financial
position and so IFE among others suffered loss when the transaction fell through.
IFE sued Goldman Sachs (as the most attractive solvent defendant) for
misrepresentation of Finelist's position.
33-51 On the facts, however, Goldman Sachs had explicitly asserted that it did not
warrant the accuracy of any of the financial information which it had passed on to
the syndicate in its role as syndicate agent. This explicit exclusion of liability was
set out in the form of an "Important Notice" attached to the front of the
"Syndicate Information Memorandum" which was circulated electronically and
latterly in writing to the potential members of the syndicater:bfl re the transaction
was finalised. It made it clear that all of the information ha een acquired from
third parties (the sponsors, Arthur Anderson the accountan s, and so forth). The
Important Notice explained that Goldman Sachs· had not verified any of the
information and that therefore it was making no representation nor warranty as to
the accuracy of that information. Goldman Sachs thus acted as "arranger" in
s4 See e.g. [2008] Bus. L.R. 1762, [10] and [24], per Moore-Bick L.J.
ss [2006] EWHC 2887. This decision was affirmed at [2007] 2 Lloyd's Rep. 449, [2007] EWCA Civ
811.
s6 If it makes it easier to picture, IFE effectively stood in the middle of the queue behind the senior
lenders and in front of the junior lenders. In such transactions, because the junior lenders are only
entitled to recover their security last, they will ordinarily receive a higher rate of interest on their loans
to reflect the higher risk.
[1016]
SYNDICATED LENDING
putting the transaction together and as "syndicate agent" once the transaction had
b~en ~nalis~d: all in receipt of _its usual fees for doing so. The· purpose of the
disclallllers m the Important Notice, however, were effectively intended to reduce
Goldman Sachs's responsibilities from being responsible for the bona fides of the
transaction to being a sort of matchmaker between borrower and lenders. It
transpired that the accounts had been prepared without knowledge of fraudulent
movements of money within Fine list so as to conceal its true financial position.
Toulson J. held that Goldman Sachs had therefore not made any representation as 33-52
to the condition of Finelist and therefore could not be held liable for damages at
common law on that basis. Therefore, a syndicate agent may explicitly exclude its
liability for any of the information which it transmits as syndicate agent, even if it
is also acting (as Goldman Sachs was) as the arranger of the transaction.
Goldman Sachs had put the syndicate together and organised the syndicate's
mezzanine fmancing of this transaction, but it avoided liability. There is therefore
no obligation of due diligence as to the accuracy of all information passed on to
the syndicate members on the part of an arranger nor of a syndicate agent when
putting such a transaction together provided that that financial institution
expressly excludes its liability; it is assumed (but not decided in this case) that a
syndicate agent would not bear an obligation to conduct due diligence as to the
accuracy of all information passed on to the syndicate members even if it had not
excluded its liability. It seems that it was only if Goldman Sachs had "actual
knowledge" that the information which it had transferred was inaccurate that it
would have borne an obligation to bring that matter to the attention of the
members of the syndicate. 57 Otherwise, "a party involved in negotiations towards
a commercial venture owes no positive duty of disclosure towards another
prospective party". 58 Thus, even though Goldman Sachs would ultimately be
acting as a form of agent (and thus as a fiduciary) for the syndicate, it bore no
positive duties of due diligence before the creation of the transaction. As was
discussed in Chapter 5, 59 the obligations of a fiduciary are ordinarily very
demanding but they can be excluded for anything short of dishonesty by express
provision in the document setting out the fiduciary's obligations, as was
effectively illustrated here.
Furthermore, it was held that there was nothing unfair in these contract terms 33-53
because, in reliance on Photo Production Ltd v Securicor Transport Ltd, 60 where
the parties were "not of unequal bargaining power" the intention of Parliament in
relation to the unfair contract terms legislation was to allow them to apportion the
risks between themselves. Here, the members of the syndicate were thus
assuming the risk of the information provided to them being correct because
Goldman Sachs had refused to provide any warranty as to its accuracy.
57
[2006] EWHC 2887, [60].
SS [2006] EWHC 2887, [64].
59
See para.5-37 et seq.
60
[1980] A.C. 827, 843, per Lord Wilberforce.
[1017]
 THE OPERATION OF SYNDICATED LOANS, LOAN PARTICIPATIONS AND LOAN TRANSFERS

The presence of syndicate agency need not impose further private law
liabilities

33-54 In JP Morgan Chase Bank v Springwell Navigation Corp61 there was

CHAPTER 34
involvement by the "syndicate team" at various subsidiaries of JP Morgan Chase
Bank with the investment entities used by a family of wealthy shipping magnates.
BONDS
The private law claims relating to these transactions were considered in Chapter
25, 62 in particular the question as to whether or not the bank owed a duty of care
to clients: on these facts it was held that no such duty was owed even to private
individuals because they had sufficient investment expertise to understand the Core principles 2. The Documentation of Bond
risks for themselves. 63 No particular, actionable fiduciary or other duties attached 1. Introduction 34-01 Issues 34-15
to the bank because of the context of any syndicated investment structures. Thus, A. The scope of this A. The scope of this
even the liabilities of an "agent" in relation to syndicated transactions may be chapter 34-01 discussion 34-15
quite limited; except where a trust or other fiduciary obligation is both B. What is a bond? 34-02 B. The typical
necessitated by the context and not excluded by the syndicated loan C. The management of documentation architecture
bond issues 34-05 for a London eurobond
documentation.
D. Bonds as securities and issue 34-16
the advantages of listing 34-08 C. The use of a trustee or
E. The dematerialisation of a fiscal agent 34-22
bonds 34-09 D. Typical contractual
F. Bonds and syndicated provisions 34-31
lending 34-10 3. Bonds Offered to the Public or
G. The use of a trustee 34-12 Listed 34-41
H. The role of credit rating 4. Covered Bonds 34-43
agencies 34-13

CORE PRINCIPLES

/ obligations between the banks managing the issue; and, significantly, a
61 [2008] EWHC 1186.
62 See para.25-28 et seq.
63 It is difficult to shake the sense that Gloster J. reached this decision in part because the claimants
were so rich that it is thought that they must know the risks, as well as because they were self-assured
and experienced enough not to need the risks explained to them. Nevertheless, they were placing their
investment portfolio in the hands of professionals to invest in complex products. What perhaps sunk
their claim was the fact that the losses were caused by the failure of the Russian banking market (a
straightforward fonn of political risk) and not by the inherent complexity of the products in which
they were investing.
A bond is a security by which investors make capital loans to the issuer of the
bond and in return receive an income stream by way of interest, repayment of the
loan at the end of the bond's life, and transferable securities in the form of bonds
in an amount proportionate to the size of the loan.
A typical eurobond issue in London is documented by means of a "mandate
letter" which sets out the role of lead managers of the issue; a "subscription
agreement" detailing inter alia the banks' obligation to buy up any bonds which are
not subscribed for by investors; a "management agreement" detailing the
prospectus detailing the terms of the bond, the issuer's financial cond_ition and so
forth ~us will be legally required if the bonds are to be offered to the
public). The required contents of a prospectus are considered in Chapter 36.
'----somttransactions usually contain a negative pledge provision (which requires
that none of the issuer's assets are pledged to any other person), and a pari
passu provision (which provides that all investors must be treated equally). Events
of default under a bond agreement typically include failure to make payments of
interest when due, a deterioration in the issuer's credit worth or credit rating, any
event of insolvency relating to the issuer; cross default and cross acceleration in

[1018] [1019]