The Charmway case raises the significance of clear language in syndicated loan agreements relating to individual rights of the loan providers.
Specific loan providers under a syndicated facility contract might not have an independent right to recuperate their respective portion of a center following default, according to the Hong Kong choice in Charmway Hong Kong Investment Ltd v Fortunesea (Cayman) Ltd  HKEC 1496. In Charmway, the Court interpreted the loan agreement as developing a loan in aggregate, rather than different and aliquot loans from each loan provider.
While lots of analysts see this decision as incorrect, the Loan Market Association (LMA) has recently published optional wording for syndicated loan agreements which tries to deal with the concern.
Existing APLMA files
Many lenders see a syndicated loan arrangement as producing a different and independent debt responsibility in between the customer and each lender, which a loan provider can enforce on its own if the financial obligation is not paid when due. Stipulation 2.2 of the basic form loan contract released by both the Asia Pacific Loan Markets Association (APLMA) and the LMA looked for to codify this position by stating in the Financing Parties rights and commitments provision that:
The rights of each Finance Celebration under or in connection with the Financing Files are separate and independent rights and any debt developing under the Finance Files to a Financing Party from an Obligor shall be a different and independent debt.
A Finance Party may, except as otherwise mentioned in the Finance Documents, independently implement its rights under the Financing Files.
Numerous believed that stipulation 2.2 of the APLMA basic syndicated loan contracts supplied enough express defense of individual loan providers rights. Unfortunately, the court in the Charmwaycase disagreed.
The Charmway Courts view of clause 2.2 of the APLMA standard syndicated loan arrangements
Charmway involved loaning under a secured syndicated loan arrangement, which was supplied mostly on the typical APLMA published terms. In this case, the Bulk Lenders  have actually started enforcement versus the borrower, but consequently issued directions to end the enforcement procedures regardless of the concerns of the minority lenders. Following the bulk decision, the minority loan providers began specific ending up proceedings to recover their part of the debt from the customer.
The Hong Kong Court thought about, amongto name a few things, whether a declaration can be made that, on the real and appropriate building of the facility arrangement, no specific lender is entitled to separately enforce payment of their proportionate share of the syndicated term loan center made offered to the debtor.
A crucial argument put forward by the minority loan providers was that the center agreement entitled a loan provider to suedemand any debt owed to it separately of the other loan providers. The lenders sought to rely on provision 2.2 of the center arrangement (Financing Parties rights and obligations) to support this argument.
The Court specified that, the rights and commitments of the parties under the facility contract need to be figured out reading the document as a whole. While it agreed in principle that there are clauses in the facility arrangement that are constantfollow a loan provider having a number of and independent rights, it was held that the relevant transaction documents did not, as a whole, create an independent right to require payment of the debt owing to a lender, or to take independent enforcement action. The Court instead discovered that the center arrangement created an aggregate loan, rather than separate and aliquot loans to each individual loan provider which the rights regulating recuperation and distribution of payments in respect of such debt had actually been moved to the management agent, who acts on the direction of the Majority Lenders.
Even more, the Court was not prepared making an assumption that a bank lending cash, whether as part of a syndicated loan or otherwise, should be required to assume that it can sue to get its money back. In the Courts view, if this was a clear objective of the celebrations, they might have made it clear in the documents, however they did refrain from doing so. As such, other than in the condition of illegality, modification of control or other express rights of an individual loan provider to recover under the Charmway center arrangement, the lenders only had option to their financial obligation through the cumulative enforcement mechanism.
Secret takeaways for loan providers
TheCharmway case, while not a direct authority in Australia, raises the value of clear language in syndicated loan arrangements concerning specific rights of the loan providers.
While the loan providers often presume that their right to have the financial obligation repaid once due is sacrosanct, there are many stipulations in syndicated loan arrangements where the loan providers providequit essential decisions (including whether or not to speed up the debt before its maturity or to impose any security held by the distribute) to the bulk lenders. On one interpretation, the Charmway case took the next logical step by ruling that the individual loan providers in a syndicated loan have no independent rights to recover their debt at all and have positioned their capability to be paid back completely in the hands of the bulk loan providers.
It is hard to think of any loan provider intentionally accepting a risk that its right to be repaid remains in the hands of the bulk loan providers, when they have no control over who may form a bulk or a blocking minority under a loan agreement.
As an outcome, the LMA has just recently proposed changes to the preparing of Financing Celebrations rights and responsibilities clauses in an effort to remove any doubt, and such modification was supported by the APLMA. Lenders and their counsel must thoroughly think about the proposed wording and whether it (or any alternative language) should be included in their syndicated loan agreements.