96 4 Debt
In the English case of Essar Steel Ltd v The Argo Fund Ltd,^43 expert evidence indicated that
restrictions on transferability in syndicated loan agreements were not uncommon 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 the
borrower and lenders and between the lenders themselves; minimisation of the costs of ad-
ministration; and the need to retain replacement lenders likely to observe the law and regu-
latory guidelines.
In this case, parties to a syndicated loan agreement had used the standard 1997 Loan
Market Association form. Following Essar’s drawdown of the entirety of the loan, Argo, a
hedge fund, acquired from members of the syndicate a substantial part of the debt at a sub-
stantial discount. Argo sought repayment in full of the debt that it had purchased. Now,
Clause 27 of the LMA 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. As for transfer, the interpretation clause defined a “Trans-
feree” as: “a bank or other financial institution to which [a Syndicate member] seeks to
transfer all or part of such [member’s] rights and obligations hereunder in accordance with
the provisions of this Agreement.” The case concerned the meaning and effect of the provi-
sion restricting the syndicate members’ entitlement to transfer their rights and obligations to
entities that are “a bank or other financial institution”. The Court of Appeal held that the
provisions of the 1997 version of the LMA agreement permitted a transfer to a hedge fund.
Restructuring. It can be expensive both for lenders and the borrower (the firm) if
the lenders actually use the remedies available to them upon the occurrence of an
event of default. Both the firm and the lenders may therefore prefer to restructure
the debt when the firm gets into trouble. Restructuring could take the form of
changing the terms of the debt or converting the debt into shares (equity). Restruc-
turing can range from voluntary restructuring based on an agreement between the
parties to involuntary restructuring based on a court order.
The easiest way to restructure the debt is by changing its terms. The borrower
might negotiate to change the repayment date or alternatively it might take out
new borrowing on completely different terms, with the new borrowing being
treated as repaying the old borrowing.
Alternatively, the lenders may agree to convert the debt into shares. The terms
of the conversion will indicate whether there is a release of part of the debt in ex-
change for the issue of shares, and how much of the debt is treated as released. In
the EU, the conversion of debt into shares will be constrained by the legal capital
regime (see below) and require shareholder consent (pre-emptive rights). In addi-
tion, the conversion may be regarded as a form of issuing shares other than for a
cash consideration, in which case particular requirements as to form, expert opin-
ion, valuation, and the minimum value of the consideration would have to be
complied with (see section 5.12). This is important, because the reason why debt
is converted in the first place is that the firm will not be able to repay it in full.
Whereas some Member States would regard the nominal value of the debt as
(^43) Essar Steel Ltd v The Argo Fund Ltd [2006] EWCA Civ 241.