Essar Steel Ltd v The Argo Fund Ltd

In a syndicated loan agreement permitting transfer to a “bank or other financial institution”, the latter expression is not confined to banks, bank-like bodies or primary lenders. It includes a legally recognised entity which lawfully carries on a business concerning commercial finance. The transferee need not possess any particular degree of probity, regulatory status or capacity to fund the original loan.

The agreement’s commercial setting and its separate provision for unrestricted assignment supported that broad construction. Transfer by novation and assignment were nevertheless distinct and mutually exclusive contractual mechanisms. An ineffective transfer could not retrospectively become an assignment merely because the parties later asserted a contingent intention to that effect.

An unsecured syndicated loan agreement permitted a syndicate member to transfer its rights and obligations to a “bank or other financial institution”. It separately permitted unrestricted assignment of rights. After the borrower defaulted, a Cayman Islands hedge fund acquired substantial portions of the debt from syndicate members in the secondary debt market and sought repayment as transferee.

At trial, Aikens J held that the fund was an “other financial institution”, although he construed that expression as requiring several characteristics shared with banks. He also held that, had the transfers been ineffective, they would not have operated as assignments. The borrower appealed against the finding that the fund was a permitted transferee. By a respondent’s notice, the fund relied alternatively on assignment.

The central issues were the contractual meaning of “other financial institution”, whether the fund satisfied that expression, and whether ineffective transfers could take effect as assignments.

1. The appeal was dismissed unanimously. Auld LJ delivered the leading judgment, with which Hallett LJ agreed. The expression “bank or other financial institution” did impose a restriction on permissible transferees, but it was broader than the construction adopted below.

2. The disjunctive wording did not require an “other financial institution” to be a bank, resemble a bank or engage in lending. The agreement contemplated trading in drawn-down loans on the secondary debt market. Its short drawdown period, together with its separate provision for unrestricted assignment, made a transferee’s ability to fund the original advance immaterial. Nor did the agreement require any particular regulatory status, probity or suitability. Such protections could have been stipulated expressly. The expression was satisfied by a legally recognised entity conducting its business under the law of its place of creation where that business concerned commercial finance: per Auld LJ at [43]–[52].

3. The fund fell within that broad meaning. It was properly constituted and conducted a commercial finance business involving investment in debt. The criticisms of its corporate structure, concentration on distressed debt and limited primary lending did not disqualify it. It was therefore entitled to claim repayment as transferee: per Auld LJ at [53]–[57].

4. Rix LJ agreed that primary or regular lending was unnecessary. In his view, a financial institution essentially provides capital to financial markets, while the word “institution” excludes insubstantial entities. The fund was a recognised hedge fund and plainly substantial. He left open whether a transferring bank might impliedly warrant a transferee’s ability to perform an undischarged lending obligation before drawdown: [66]–[70].

5. The assignment issue was academic, but Auld LJ would have rejected the fund’s alternative case. Clause 27 created separate and mutually exclusive mechanisms: assignment of rights and transfer by novation of rights and obligations. An instrument intended to effect novation could not simultaneously operate as an assignment. Nor could later pleadings produce a retrospective and contingent change of intention. The respondent’s notice was rejected: [58]–[64].

1. Court of Appeal (Civil Division): The borrower’s appeal was dismissed unanimously. The court upheld the conclusion that the respondent was a permitted transferee, although it adopted a broader construction than Aikens J. The respondent’s alternative assignment argument was rejected: [2006] EWCA Civ 241.

2. Commercial Court, Aikens J: The judge held that the transfer provision restricted the class of transferees, that an eligible financial institution required some characteristics shared with banks, and that the respondent possessed sufficient characteristics. He rejected the respondent’s alternative case that ineffective transfers could operate as assignments.

3. Commercial Court, David Steel J: On an earlier interlocutory application, the judge refused summary judgment because the borrower had the better argument that the respondent was not a qualifying transferee. He nevertheless dismissed the borrower’s applications to set aside service or stay the proceedings.