9.3 Exit of Debt Investors 327erally, usual constraints can be based on contracts, provisions of the law of prop-
erty, insolvency law, and provisions of company law.
The parties may agree on payments to asset investors. The firm’s contracts with
other investors can nevertheless contain covenants that prohibit unusual transac-
tions or require the lenders’ prior consent (section 4.3 and Volume II).
The law of property (Sachenrecht) acts as a constraint, because the firm cannot
validly return assets to an asset investor where a third party has a right that pre-
vails over the asset investor’s rights. For example, provisions of the law of prop-
erty can influence the characterisation of the transaction under which the firm may
use the asset; depending on the governing law, a financial leasing transaction
might be characterised as a hire-purchase agreement (section 3.3.3), and a sale and
lease-back transaction might be characterised as an assignment by way of security
rather than a “true sale” (section 3.3.4).
The characterisation of the transaction will be very important in the insolvency
of the asset investor or the firm. Insolvency laws are typically mandatory.
Provisions of company law can act as a constraint as in any transaction. For ex-
ample, members of the board owe a duty of care and fiduciary duties to the com-
pany, and payments to shareholders are constrained by restrictions on the making
of distributions to shareholders and the principle of equivalent treatment. If the
owner of the asset is a shareholder, excessive or unnecessary payments may
amount to a breach of such rules.
9.3 Exit of Debt Investors
The exit of debt investors has already been discussed in the context of the per-
formance of monetary obligations (Volume II), the transfer of claims (Volume II)
and the risks inherent in debt funding (section 4.2).
Exit. A debt investor can release capital in two main ways. First, the debtor can
fulfil its payment obligations or the investor may ask the debtor to fulfil them
through acceleration or otherwise. The main traditional ways to discharge a mone-
tary obligation are through payment, set-off, and netting. Second, the debt investor
can transfer its claims.
Mitigation of risk. As debts are repayable, there are three particular basic ways
to mitigate the risk inherent in the exit of a debt investor. First, the firm should en-
sure that it has enough managerial discretion (section 4.2) under the loan facility,
and the firm should also ensure that the necessary repayment of debts will not be
constrained by the firm’s contractual obligations to other providers of funding
(covenants). Second, the firm can mitigate risk by using the equity technique (sec-
tion 6.3). Third, the firm can also restrict the right of the lender to transfer its
claims (section 4.2 and Volume II). Restrictions on the transferability of claims
can be necessary because of the signalling effects of the transfer of claims.