98 4 Debt
proceedings, both procedural and substantive, on the persons and legal relations
concerned (see also Volume II).
In the Schefenacker case, the restructuring of what was basically a German firm was moved
to England. The necessary steps were as follows:^51 (1) Schefenacker AG changed its legal
form, becoming a German limited partnership, Schefenacker GmbH & Co. KG (Sche-
fenacker KG), with Schefenacker plc as a general partner. (2) The other general partner and
the limited partner either withdrew from the partnership or transferred their interests in the
partnership to Schenefacker plc. (3) According to German law, this resulted in (i) Schene-
facker KG ceasing to exist and (ii) the assets and liabilities of Schefenacker KG being ac-
quired by operation of law by Schefenacker plc as the remaining general partner. (4) The
new English holding company for the Schefenacker group could proceed to implement a
company voluntary arrangement under English law and take advantage of the flexible in-
solvency laws there.
Such formal restructuring proceedings would nevertheless be expensive. The par-
ties would not have full discretion to decide on the restructuring because, depend-
ing on the governing law, core decisions in formal restructuring decisions tend to
require either a court order or approval by a majority of creditors or each class of
creditors. Some creditors might therefore be able to block the restructuring and
cause further costs.^52
Thin capitalisation, lack of managerial freedom, risk of recharacterisation.
Depending on the law governing the company and the law governing insolvency
proceedings, a loan might in rare cases be recharacterised as a functional equiva-
lent to shareholders’ capital. This risk is characteristic of mezzanine financing.
4.3 Particular Clauses in Loan Facility Agreements....................................
Broadly speaking, a loan agreement follows the same pattern as most commercial
agreements. Some clauses are nevertheless characteristic of loan agreements.^53
There is plenty of variation in the details. Different loan agreements contain dif-
ferent terms, because the terms of the loan must be tailored to suit the borrower,
lenders, market practice and the prevailing economic circumstances.
(^51) Proposal for a Company Voluntary Arrangement for Schefenacker plc (9 March 2007),
section 2.6.
(^52) The walking dead, The Economist, December 2007.
(^53) For the legal aspects of loan agreements, see, for example, Adams D, Corporate Fi-
nance: Banking and Capital Markets, LPC 2003/04. Jordans, Bristol (2004); Diem A,
Akquisitionsfinanzierungen. C.H. Beck, München (2005); Fuller G, Corporate Borrow-
ing. Third Edition. Jordans, Bristol (2006). For a summary of loan covenants and the
terns of loan agreements, see Tirole J, The Theory of Corporate Finance. Princeton U P,
Princeton and Oxford (2006) pp 103–106 containing a text from Zimmermann C, An
approach to writing loan agreement covenants, J Comm Bank Lending (1975) pp 213–
228.