The Argo Fund Ltd v Essar Steel Ltd.

A syndicated loan agreement may restrict transfers of both rights and obligations to entities within its contractual definition of a transferee. The phrase “bank or other financial institution” was construed broadly enough to include a fund that bought distressed debt, provided that it was a lender of money, had a lending office, maintained appropriate accounts, could lend when required, and carried on a commercial finance business through a legally recognised form. A transfer under the agreement operated as a novation and did not require the borrower’s participation. An ineffective novation could not simultaneously operate as an assignment where the parties intended only to novate. A term could not be implied for business efficacy where it was unnecessary and inconsistent with the agreement’s express provisions.

The claimant had acquired substantial tranches of a syndicated loan originally made to the defendant. It claimed repayment under the facility agreement as transferee. The defendant argued that the claimant was not a “bank or other financial institution”, that the purported transfers were ineffective, that they did not operate as assignments, and that an implied term required any transferee to be capable of receiving foreign-currency payments under Indian exchange-control law.

The central issues were the construction of the transfer provisions, the legal effect of the transfer certificates, the alternative assignment case, and whether permission should be given to amend the defence to plead the proposed implied term.

1. Construction of the transfer provisions. The agreement distinguished between an unrestricted power to assign rights and a power to transfer rights, benefits and obligations under clause 27.2. The latter was available only through the contractual transfer mechanism and only to a “Transferee”, defined as a bank or other financial institution.
2. Meaning of “other financial institution”. The expression did not require the entity principally to provide finance in the primary lending market. It required an entity to be a lender of money, to have or be able to identify a lending office, to maintain accounts evidencing sums lent and due, to possess the financial, technical and legal capacity to lend when required, and to have a legally recognised form and a business concerning commercial finance. A purchaser of debt in the secondary market could satisfy those requirements. The claimant did so.
3. Effect of a transfer. Clause 27.2 operated by novation. Delivery of a duly completed transfer certificate terminated the old contractual relationship and created corresponding rights and obligations between the borrower and the transferee. The borrower had no role in the mechanics of the transfer and could not refuse it if the transferee fell within the contractual class.
4. Assignment. The parties intended valid novations, not assignments. The legal differences between the two transactions meant that the same acts could not operate as an assignment merely because the intended novation was later held ineffective. The alternative assignment case would therefore have failed.
5. Implied term. Permission to amend was refused because the proposed term had no reasonable prospect of success. The agreement was governed by English law, payments were made through the agent and were not required to originate in India, and the express provisions dealt with necessary consents and transfers. The proposed restriction would contradict and substantially subvert the agreed transfer and assignment mechanisms.
6. Judgment was entered for the claimant for US$29.5 million, with interest to be addressed if necessary.