The traditional view of a syndicated loan has always been that an individual lender can take action to recover its share of the loan when due unless it is expressly prohibited from doing so. Unfortunately, a Hong Kong court in Charmway Hong Kong Investment Ltd & ors v Fortunesea (Cayman) Ltd & ors [2015] HKCFI 1308, 28 July 2015 recently reached the opposite view. While the decision is probably wrong, standard wording in syndicated loan agreements is likely to change to remove any doubt.
The traditional view of a syndicated loan
The essence of a syndicated loan is that a group of lenders agree to make a loan to one or more borrowers on common terms. In some respects, a syndicated loan is effectively a collection of bilateral loans grouped together for administrative convenience. In particular, it is fundamental to a syndicated loan that a lender is only responsible for its own obligations. If a lender fails to perform, the other lenders are not responsible. In other words, the obligations of the lenders to the borrower(s) are several. Consistent with this, the traditional view has always been that the obligations of the borrower(s) to the lenders are also several. As a result, the debts owed by the borrower(s) to the lenders are individual and separately enforceable (meaning, for example, that a lender can sue in its own name to recover its share of a loan that is due but unpaid).
The "Finance Parties' rights and obligations" clause
In syndicated loan agreements based on Loan Market Association (LMA) and Asia Pacific Loan Market Association (APLMA) terms, this traditional view of a syndicated loan is reflected in the "Finance Parties' rights and obligations" clause. This clause expressly states that each finance party's obligations are several, and that its rights and any debt owed to it are separate and independent. It goes on to state that each finance party may separately enforce its rights.
The Charmway decision
In Charmway, a Hong Kong court faced the question of whether an individual lender could take action to recover its share of overdue loans under a syndicated loan agreement that appears to have been based on LMA or APLMA terms. Surprisingly, the court held that an individual lender could not do so. The decision largely rests on the absence of any provisions in the loan agreement specifically stating or acknowledging that each lender's share in a loan is a separately enforceable debt owed to that lender.
The court referred to a number of provisions that it said were inconsistent with each lender being owed a separate debt and having the right to enforce it. In relation to provisions that might point to the opposite conclusion, the court said that, taken individually and together, they did not overcome the absence of specific provisions.
Referring to the "Finance Parties' rights and obligations" clause, the court said that it does not "say when, if at all, a debt to an individual lender arises". The fact that it "suggests that such a debt may arise does not mean that it does". As a result, in the absence of some other provision saying that a lender's participation in a loan creates a debt owing to that lender, the court found that the clause simply did not apply.
In relation to enforcement, the court said that there were no provisions giving an individual lender the right to take independent enforcement action. Rather, taken as a whole, the relevant provisions in the loan agreement "envisage collective action" only. It was for the majority lenders "to decide what enforcement proceedings to take".
In its concluding remarks, the court commented that the absence of specific provisions dealing with an individual lender's rights might be explained by the use of the LMA loan agreement "which does not address adequately the individual rights of lenders to recover in the event of default".
Comment: The Charmway decision appears to reflect a major misunderstanding of the nature of a syndicated loan. The leading English texts all support the traditional view that a lender's obligations and rights in connection with a syndicated loan are several and that it can separately enforce its rights. There are some U.S. cases supporting the Charmway decision, but those cases have been widely criticised and, as was pointed out in Charmway, were based on different contractual terms. In particular, the loan agreements in those cases did not include anything similar to a "Finance Parties' rights and obligations" clause. By contrast, one U.S. decision supporting the traditional view involved a loan agreement that included such a clause.
It is true that syndicated loan agreements generally do not include provisions specifically stating or acknowledging that each lender's share in a loan is a separately enforceable debt owed to that lender. However, it is also true that they generally do not include provisions specifically stating that each loan is, to quote the court in Charmway, a "unitary" or "aggregated" debt owed to the lenders jointly and that an individual lender has no right to enforce its share of the debt when due.
In the absence of specific provisions, a syndicated loan agreement has to be considered in the round to determine the intention of the parties. The question is what a reasonable person having all the background knowledge available to the parties would understand the loan agreement to mean.
The right to repayment is a lender's most fundamental right in relation to a loan. If it is correct that a lender has no right to take action to recover its share of a syndicated loan when due (ie after acceleration or final maturity), it is entirely in the hands of the majority lenders as to whether that lender is repaid if a borrower defaults. Indeed, a blocking minority could stop any lender being repaid by refusing to sanction enforcement action. That means a lender could potentially find itself unpaid and remediless for an indefinite period without any specific provision to that effect. This makes little commercial sense (especially considering that a lender has no control over who is in a syndicate and therefore no control over who might form a majority or blocking minority).
With that commercial context in mind, it would appear that the court in Charmway started from the wrong basic premise. Consistent with the traditional view, the starting point for any analysis of a syndicated loan agreement should be to say that each lender's share in a loan is a separately enforceable debt owed to that lender, unless there is a specific provision to the contrary. None of the provisions identified in Charmway as being inconsistent with each lender being owed a separately enforceable debt specifically and unambiguously addresses the point. Set against those provisions are others that either implicitly support the traditional view or, at the very least, are inconsistent with the Charmway analysis.
While the Charmway decision is probably wrong and an English court could be expected to reach a different conclusion, it cannot be ignored. In the absence of provisions specifically stating that each lender's share in a loan is a separately enforceable debt owed to that lender, there is room for argument. As a result, the drafting of "Finance Parties' rights and obligations" clauses is likely to change to remove any doubt. Both the LMA and the APLMA are considering changes to their loan agreements.
