Argo Fund Ltd v Essar Steel Ltd
| Jurisdiction | England & Wales |
| Judge | Auld,Rix,Hallett LJ |
| Judgment Date | 15 March 2006 |
| Court | Court of Appeal (Civil Division) |
| Date | 15 March 2006 |
Court of Appeal (Civil Division).
Auld, Rix and Hallett LJ.
Laurence Rabinowitz QC and David Wolfson (instructed by Cripps Harries Hall) for the appellant.
Mark Howard QC and Jonathan Nash (instructed by Eversheds) for the respondent.
The following cases were referred to in the judgment of Auld LJ:
Ku-Ring-Gai Co-operative Building Society, ReUNK(1978) 22 ALR 621.
Van Lynn Developments v Pelias Construction CoELR[1969] 1 QB 607.
Banking Syndicated loan Transfer Assignment Secondary debt market Loan agreement permitted assignment or transfer to bank or other financial institution Fund which dealt in distressed debt acquired debt by transfer in secondary market and sought repayment from borrower Fund was other financial institution Transferee did not have to have characteristics of bank or original lender Ineffective transfer would not operate as assignment.
This was an appeal by Essar Steel Ltd (Essar), an Indian steel maker, against a decision of Aikens J [2005] 2 CLC 209 concerning the meaning and effect of a provision in an unsecured syndicated loan agreement, made between Essar as borrower and a syndicate of banks, restricting the syndicate members entitlement to transfer their rights and obligations under the agreement to an entity which was a bank or other financial institution.
Following Essar's draw-down of the loan provided under the agreement some syndicate members had purportedly transferred part of the debt to the respondent, Argo, in the secondary debt market. Argo was an investment company incorporated in the Cayman Islands, which, as part of a small group of companies, held and managed funds and the investments purchased with them. At all material times, it had a portfolio of debt, including bonds, loans, letters of credit and promissory notes, mainly purchased in the secondary debt market from other institutions. Argo described itself as a Global Emerging Markets Debt Hedge Fund, and had as its investment aim the securing of higher returns for investors at the more risky end of the market, though it had sometimes acted as an original lender.
The loan agreement was on a standard 1997 Loan Market Association (LMA) form, which, at the material time, contained no further definition or elaboration of the term bank or other financial institution. Clause 27 of the agreement provided for two modes by which syndicate members could pass their rights under the agreement to another: one by way of assignment on notice to Essar, the other by way of transfer, which also operated to transfer obligations as well as rights, amounting to a novation.
The judge held that the transfer provision in the agreement operated to impose some restriction on the class of potential transferees permitted; an other institution for the purpose of that provision was one that shared at least some of the characteristics of a bank; Argo had sufficient of those characteristics and so qualified as a transferee; Argo failed in an alternative claim that the transfer, if ineffective as such, operated as an assignment.
Held, dismissing the appeal:
1. The judge correctly concluded that the term other financial institution in the expression bank or other financial institution need not be a bank or even akin to a bank. However, given that the loan agreement allowed the transfer of the rights and obligations of the contract loan to a financial institution other than a bank, the assignment of its rights to anyone, and the known existence of a secondary market in such loans, there was no basis for the judge's starting point that one of the characteristics of such an institution was that it had to be a lender, whether in the primary market or otherwise. It was equally immaterial in the commercial context of the agreement whether a transferee was good for the loan moneys under it, if, at the time of transfer, the borrower had not drawn them down. Contrary to the reasoning of the judge, it was not a necessary characteristic of a transferee that its business should include bank-like activities, such as the lending of money, whether on the primary or secondary debt market or otherwise, or indeed that it should exhibit any particular standard of suitability or probity as a financial institution. A financial institution was merely an entity having a legally recognised form or being, which carried on its business in accordance with the laws of its place of creation and whose business concerned commercial finance.
2. Argo was a financial institution and thus entitled as a transferee to claim repayment from Essar.
3. If Argo had not been a financial institution, the purported transfers could not operate as assignments. Clause 27 provided two quite distinct modes by which syndicate members could transfer their debts, by assignment or by transfer or novation. Those modes must have been intended to be alternative and mutually exclusive.
Auld LJ:
1. This is an appeal by Essar Steel Ltd (Essar) against a decision of Aikens J on 12 April 2005 concerning the meaning and effect of a provision in an unsecured syndicated loan agreement (the Agreement) made on 7 March 1997 between Essar as borrower and a syndicate of nine banks and financial institutions (the Syndicate), restricting the Syndicate members entitlement to transfer their rights and obligations under the Agreement to entities that are a bank or other financial institution. The case concerns the purported transfer by some of the Syndicate members to the Respondent, the Argo Fund Ltd (Argo), in 2002 and 2003 in the secondary debt market of part of the over-all loan drawn down by Essar.
2. The Agreement is the standard 1997 Loan Market Association (LMA) form, which, at the material time, contained no further definition or elaboration of the term bank or other financial institution. In November 2001 the LMA revised the definition by adding to it trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets. It did so in order to remove grounds for dispute, illustrated by this appeal, as to the range of entities that could qualify as a financial institution within this provision. However, there are apparently many syndicated loan agreements, in addition to this one, in the 1997 LMA un-amended form that are or may be the occasion of similar dispute as to the range of institutions to which syndicate members may transfer debts in the secondary debt market.
3. The agreed expert evidence before the Judge indicated that restrictions on transferability in such agreements were not uncommon in 1997 when this Agreement was made and that there were a number of reasons why potential parties to such agreements might wish some such restriction. These included the preservation of a continuing relationship between borrower and lenders and between the lenders themselves; minimisation of costs of administration of the loan and to retain replacement lenders who would be likely to observe the law and regulatory guidelines. The question for the Court is whether and to what extent the restriction in this case, in its unadorned 1997 form, was intended by Essar and the Syndicate members to serve such or other purposes and, more particularly, whether it served to exclude Argo from claiming repayment as a transferee under the Agreement.
4. Essar, which was incorporated in 1976 in the State of Gujurat, is part of one of the largest corporate groups in India. It is a publicly listed company engaged in the manufacture of various semi-processed iron and steel products, which, at the material time, had assets of US$810m. and an annual turnover of about $550m.
5. Argo is an investment company incorporated in 2000 in the Cayman Islands, which, as part of a small group of companies, holds and manages funds and the investments purchased with them. At all material times, it had a portfolio of debt, including bonds, loans, letters of credit and promissory notes, mainly purchased in the secondary debt market from other institutions. Argo described itself as a Global Emerging Markets Debt Hedge Fund, and had as its investment aim the securing of higher returns for investors at the more risky end of the market, though it had sometimes acted as an original lender.
6. Following Essar's draw-down of the entirety of the loan provided under the Agreement, Argo acquired from members of the Syndicate a substantial part of the debt, of which it now seeks repayment from Essar. The main issue before the Court is whether Argo is an other institution within the transfer restriction in the Agreement, so as to entitle it, as a transferee, to claim repayment against Essar. It is common ground that it is not a bank for the purpose.
7. I take the facts from the helpful summaries of them by the Judge, in paragraphs 1 to 13 of his judgment, and the skeleton argument of Mr Laurence Rabinowitz QC on behalf of Essar.
8. In 1996, Essar, in need of funds, sought and obtained approval from the Reserve Bank of India to enter into the Agreement, which was for an unsecured loan of US40m, to be drawn down within 45 days of the date of making of the Agreement and to be repayable within two years. It entered into the Agreement on 7th March 1997 and, on 22nd of that month, drew down the whole facility in a single advance, the loan thus becoming repayable on 22nd March 1999.
9. By 1999, Essar had fallen into substantial financial difficulty as a result of a dramatic collapse in the price of steel. Its unsecured liabilities in India and elsewhere were about US$800m, and it could not repay the loan on the due date. It therefore entered into protracted negotiations with the Syndicate and other creditors with a view to restructuring its debt.
10. By March 2003 Essar had agreed a comprehensive debt restructuring programme with a majority of its secured creditors. At about the same time it also...
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