1. Loan Transfers
Methods - novation, equitable and statutory assignment, funded and risk sub-participation,
proceeds assignment and declaration of trust. Not all of these methods imply transfer of
the rights and obligations arising under the loan contract.
Reasons for transfer for the original lender:
1. To spread the risk involved in the loan
2. To release funds committed to the loan for further lending
3. To eliminate the risk of increased costs of the loan (e.g., if the borrower’s
creditworthiness declined)
4. To generate income, i.e. a fee, or by retaining part of the interest payment due under
the loan, while at the same time passing the risk to the new bank
5. To reduce exposure to a particular geographical area or industry or borrower
6. To comply with the requirements of the regulator, e.g., in connection with the fact
that amount of loan assets of a bank has exceeded its capital
Generally:
7. To provide access to this lending market to smaller banksthat couldn’t participate in
the original loan
Novation
Novation doesn’t transfer rights and obligations, but is a cancellation of the old contract
and its substitution by a new contract - the rights and obligations of the borrower, all of the
lenders and other parties in relation to the old lender are discharged and replaced by the
same rights and obligations in respect of the new lender.
Advantage: 1. enables the transfer of obligations which cannot be transferred by
assignment (obligation to lend) - Tolhurst v Associated Portland Cement Manufacturers
(1900) Ltd.; 2. it’s a clean break on a facility which is not fully drawn; 3. No stamp duty is
payable (as compared to statutory assignment);
Disadvantage: requires the consent of all the parties to the original and the new contracts
(Aktion Maritime Corp of Liberia v S. Kasmas& Brothers (The Aktion)). Solutions: 1. LMA
loan contract obtains advance consent from all parties (provided that provisions on
procedures and restrictions are observed).Carlill v Carbolic Smoke Ball Co - an offer can be
made to the whole world and acceptedby the conduct of the offeree without notice of
acceptance to the offeror. In a loan agreement, the offer by all parties to an existing lender
and a prospective new lender to cancel the old contract is accepted by the lender’s
following the procedure in the contract.No changes in terms are allowed, which typically
needs the consent of the majority lenders and the borrower. 2. A form of novation -
Substitution Certificate: the borrower signs the certificates evidencing his debt in
convenient denominations at the inception of the loan, including the borrower's consent to
subsequent novation.
Novation vs variation: Substitution of one lender for another may merely be a
variation.Distinction between variation and novation rests on the intention of the parties.
Novation means complete extinction of the first and formal contract, and not merely the
desire of an alterationof the existing contract(Morris v Baron & Co.).
Novation of a secured loan: termination of the original contract automatically
extinguishes the security. If a new security is obtained, there will be a loss of ranking over
other security interests created in respect of the same assets, since ranking is determined
by the date of creation. Also, in case of insolvency liquidators may challenge the security
within acertain periodupon its creation. Solutions:

2. 1. Use assignment to transfer the lender’s rights to which the security attaches, and
novation to transfer its obligations;
2. More common - in the original loan contract the borrower grants security in favour of a
security trusteefor the benefit of the current lenders, so the security is not affected by the
change of lenders (British Energy Power & Trading Ltd v Credit Suisse).This approach can
also be used for guarantees (Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong)
Limited). Security also attaches to a collateral obligation under which the borrower is
obliged to pay the security trustee the same sums as are owed to the lenders – in case of
breach by the borrower, the security trustee can enforce the security.
Assignment
Assignment cannot be used to transfer obligations (Tolhurst v Associated Portland Cement
Manufacturers (1900) Ltd). Advantages over novation: 1. Guarantee or security under the
loan does not terminate; 2. No need for consideration (Re Westerton, Public TrusteevGray);
3. Subject matter of the assignment doesn’t constitute insolvent assignor’s estate (Gorringe
v Irwell India Rubber &GuttaPercha Works). 4. Consent of the parties is not required (Olsson
v Dyson), but the loan contract may stipulate for this. 5. Doesn’t require notice to the
debtor.
Under English law assignment of future property (which doesn’t exist or hasn’t been vested
on the lender) is possible, provided there is consideration, intention to transfer proprietary
interest and the assets are sufficiently identified.
If an unassignable debt is assigned, under English law there is no assignment of the debt
but there is a contract between purported assignor and assignee.
Important principle of assignment: the borrower cannot be made worse off by the
assignment (Dawson v Great Northern & City Railway Co.). Market disruption clause
(lender can charge cost of funds exceeding the one as per the loan agreement) and
increased costs clause (lender can charge for a reduction in the rate of return as a result of
change in law). If the withholding tax grossing-up clause or other increased costs clause
entitle the assignee to demand more funds from the debtor than the original lender, the
assignee is unable to claim the additional sum. The assignee assumes only the rights
against the debtor that the assignor had, so if the debtor had a counterclaim against the
assignor, it will also have it against the assignee.
An assignment is not invalid even if the necessity for litigation to recover it is contemplated
(Lordsvale Finance v Bank of Zambia;Camdex International v Bank of Zambia).
Applicable law - The governing law of the loan contract is used to determine whether the
loan is assignable. The law governing the contract of assignment deals with matters such as
whether the requirements of the assignment have been met, what is the effect of the
assignment and what rights the assignee acquires against the debtor.It is suggested that
priority between different assignments is determined under the governing law of the
original debt.
Equitable assignment (EA)
No prescribed form (TailbyvThe Official Receiver), need not be in writing, unless it’s EA of a
subsisting equitable interest (if assignee assigns its right) (Law of Property Act 1925,
s.53(1)(c)). There should be some act of the assignor to assign and acceptance by assignee.
There must be a clear intention to assign, the subject matter and the assignee must be
identifiable at the time of the assignment. EA can cover part of the debt (In re Steel Wing
Corpn Ltd [1921]).
Reasons for use of equitable assignment - Lender may wish: 1. For the borrower not to
know about the assignment; 2.Not to transfer the whole loan; 3. Not to pay a high stamp

3. duty which is mandatory if the assignment is executed in the UK. However, unstamped
document which requires stamping cannot be used in evidence in a court. The following
options are used: 1. The parties execute the documentin a jurisdiction which does not have
its own stamp duty, and bring it to England when it is necessary to sue on it (and pay the
stamp duty only then); 2. Not pay the duty and face the penalty if it is necessary to sue on
the document. 3. Not have a written document of transfer, thus, legitimately not pay any
duty. The buyer will need written evidence – seller sends written offer to the buyer to sell
the loan, stating that it can be accepted by mere payment – the buyer pays. Parties should
avoid a written document of transfer.Onsale of loan using assignment is to be in writing.
Problems with EA:
Claims: to make an action against the borrower, assignee should join the assignor, and if it
objects, name the assignor as co-defendant with the borrower. Solution: irrevocable PoA
granted by the assignor to the assignee at the time of EA.
Lack of notification (also refers to statutory assignment before the time of the notice
to the borrower): 1. borrower will continue to obtain a good discharge by paying the
original lender(OL)– risk of losing funds in case of OL’s insolvency/dishonesty; although
such funds are held by the OL on trust (International Factors Ltd v Rodriguez), they could
be dissipated before the assignee is paid; 2. borrower may be able to set-off debts due from
the assignor against claims under the loan contract – risk in case of the assignor’s
insolvency (also see “Notice-related issues” below).
Statutory assignment (SA)
SA creates direct relationship between the borrower and the assignee (s. 136(1) of the Law
of Property Act 1925)–borrower pays to the assignee; assignee may sue in its own name.
The assignee obtains all the rights against the borrower.
SA must be: 1. In writing; 2.Of the whole debt only; 3.Notice to the borrower – is to be given
prior to making an action on the assignment.
If the assignment does not comply with these requirements, it may still take effect as EA.
There are no mandatory requirements onhow the SA should be written, but presumably it
should be similar to the contents of EA, as specified above. The inaccuracy of the
information on the notice to the borrower on the SA may render it ineffective (W.F.
Harrison & Co Ltd v Burke), the notice should enable identification of the debt and of the
person to whom payment should be made.
Notice-related issues
1. The rule in Dearle v Hall: priority between competing assignees is determined by the
order in which they give notice to the debtor (i.e., the debtor will pay to the one of the
competing assignees who is the first to give the notice to the debtor).
2. The assignee takes subject to equities existing at the time of notice to the borrower - defects in
the title of the assignor or debt which accrues due before notice, or debt which arises out of the
same contract or is closely connected to it, may be set off against the assignee (Business
Computers LtdvAnglo-African Leasing Ltd).So, after the notice is given, no new equities or
counterclaims may be established. Therefore an assignee mayrequire representations from the
lender that no set-off exists.The assignee’s recourse is to the assignor for any shortfall in its
claim against the borrower on the assigned debt arising from the set-off.
Sub-participation (SP)
The lender (the grantor, seller or lead bank) enters into a back-to-back agreement with
another party (the grantee, buyer, sub-participant or participant) whereby that other party
assumes all or part of the risk involved in the loan contract. SP gives the sub-participant no

4. rights under that contract: the sub-participant only acquires rights against the lender, not
against the borrower (Lloyds TSB Bank plc v Clarke and Chase Manhattan Bank Luxembourg
SA). Sub-participant may itself grant a sub-participation (Socimer International Bank Ltd v
Standard Bank London Ltd (No 2)), assign or novate its rights under SP (BanqueFinanciere
de la Cite SA v Westgate Insurance Co.).
SP allows trading in debt which has transfer restrictions (Lloyds TSB Bank plc v Clarke and
Chase Manhattan Bank Luxembourg SA) or if the borrower objects to the transfer (Royal
Bank of Scotland plc v Highland Financial Partners LP), since it does not require the
borrower’s consent. SP, unlike an assignment, permits the economic effect of an obligation
to be transferred; allows to avoid tax liability arising in assignment or novation (due to the
transferee becoming the lender of record); avoids problems with security and guarantees
supporting the loan and with hardening periods in insolvency law; allows to remove the
loan for the lender’s capital adequacy requirements; payments from sub-participant
arenotnormally caught by the sharing clause in the loan contract.
Funded SP - debtor-creditor relationship between the lender and the sub-participant: sub-
participant pays the lender a sum equivalent to the loan, if the borrower defaults, the
lender retains the equivalent amount from the funds received from the sub-participant.
The lender pays to the sub-participant out of its own funds a sum equivalent to the
payments of interest and capital received from the borrower (Lloyds TSB Bank plc v Clarke),
but only if the borrower makes a payment (Adolfo Altman v Australia and New Zealand
Banking Group Ltd).
Sub-participant cannot use the clauses of the loan agreement in connection with increased
cost of funds (MAC, market disruption clauses). The lender is not acting as an agent of the
sub-participant in the loan contract.Funded SP removes the loan from the calculation
oflender’s capital adequacy ratio (although it remains on the lender’s balance sheet).
Risk SP–payment by the participantis contingent on the borrower’s default; the participant
is paid: a fee irrespective of such default, and the equivalent of any payments received from
the borrower after default. It is advisable that participant’s obligations terminate upon the
lender’s insolvency, since payments from the participant and borrower fall into general
assets for unsecured creditors.
Risk SP is less effective for removing the loan for regulatory purposes, because the sub-
participant may fail to pay on the borrower’s default. In case of borrower’s default the
participant, by virtue of having indemnified the lender, can make the same claims against
the borrower as would have been available to the lender(Orakpo v Manson Investments
Ltd).
Problems with SP generally: 1. participant cannot bring an action against the borrower –
depends on the lender managing and enforcing the loan. Solutions: 1). SP agreement may
state that the lender will not transfer/grant security over the right of action under the loan
(lender may object to such solution); 2). Require the lender to give a PoA for the
participant to enforce the loan in its own name – but such PoA will not be irrevocable, and
the lender may refuse (since the participant could thus be put directly in contact with the
borrower).
2. lender may be demotivated to protect rights under the loan contract if it isn’t interested
in it – e.g., the lender may fail to monitor the borrower’s compliance with the covenants.
Protections for the participant - Promise of the lender to: 1. notprejudice the rights of the
participant; 2. notify the participant of notices from other parties to the loan or any event
of default; 3. administer the loan with the same care as transactionson its own account (not
very clear and is usually limited by exclusions);4. Consult with or defer to the participant
before amending the loan contract (Al-Bank Al Saudi Al-Alami Ltd v Arbuthnot Latham Bank
Ltd) – problematic if the lender has granted several sub-participations (may create

5. difficulties with other participants)/ retained interest in the loan. To solve the problem
with other participants, the SP agreement can include a clause similar to the one dealing
with syndicate management in loan contracts;5. The SP agreement may state that upon a
certain event the lender will procure that the participant is elevated to the lender, or rights
and obligations under the loan shall be transferred to a third party, which will be obliged to
conclude the SP agreement with the same participant. Such clauses are difficult to draft, the
lender may be reluctant to include them. If elevation was shortly after insolvency, it can be
unwound by the liquidator (Insolvency Act 1986, s.239).
Problems with funded SP: 1. Participant in a funded participation runs a double credit
risk (Lloyds TSB Bank plc v Clarke and Chase Manhattan Bank Luxembourg SA; Altman v
Australia and New Zealand Banking Group Ltd; Socimer International Bank Ltd v Standard
Bank London Ltd (No 2)): 1). Borrower’s insolvency means no payments to the participant.
Borrower’s balance with the participant cannot be set-off against the borrower’s debt; 2).
Participant doesn’t benefit from security/guarantee under the loan contract. 3). As per the
SP agreement, if the loan is rescheduled, the SP interest is subject to the new terms.
2.Upon payment from the borrower, lender may be restricted from paying the participant,
or participant may be restricted from receiving it, or lender goes into insolvency before
payment. In case of insolvency the participant will be an unsecured creditor; also, SP
agreement can be set aside on the grounds of undervalue or preference in insolvency
proceedings.
Solutions: 1. Lender declares a trust over the loan and the proceeds – better to document
it as proceeds assignment to avoid the lender being characterized as an agent. 2. Lender
grants security to the participant over the lender’s rights, payments and security under the
loan – lender may be reluctant to do this, and such security may be unenforceable in case of
insolvency1.
3.If the underlying loan is refinanced and the funds come from new lenders, the OL shall
pass them to the participant and the SP terminates. If funds come from OL – not clear if the
participant should pay its share.
Problem with risk SP: if the loanis syndicated, with a sharing clause obliging lenders to
share payments received from any source, payments from the participant are shared with
the other lenders – this means shortfall of the lender triggering further payment from the
participant, which will also be shared, etc.
Proceeds assignment (PA), AKA proceeds trust
PA doesn’t involve any assignment, but involves a declaration of trust - beneficiary obtains
a proprietary interest in a contingent right to payments by the borrower as soon as they
are made to the lender. Plus - such funds are not available to the lender’s general creditors,
the participant receives the funds paid by the borrower. No notice to the borrower is
required. No requirements to the form, but there must be intention to hold funds on trust
for the benefit of the transferee as soon as they reach the lender (e.g., if as per the
agreement such money is held on a special account).
Problem: lender’s insolvency before the borrower pays – transferee cannot sue the
borrower (lender’s right to sue is not assigned), liquidator is not interested in enforcing the
debt.Solution: lender retains a small part of the loan, or to agree that the lender acts as a
collection agent for a fee. This will motivate the liquidator to enforce the debt.
Transfer by way of trust, AKA benefits trust
1Another option - transfer the lender’s interest in the loan to a third party, this party grants
SP – is not a viable one.

6. Effect similar to novation or assignment – declaration of trust over the benefit of the
contract (Milroy v Lord (1862) 4 De G.F. & J. 264; Re Turcan; Linden Gardens Trust
LtdvLenesta Sludge Disposals Ltd).Lender has legal interest, but holds beneficial interest for
the transferee. In proceeds trust (see above), the subject is the payment received from the
borrower, while in a benefits trust (BT) the subject is the rights the lender has against the
borrower. Unlike assignment, in BT the borrower continues to pay to the lender (while in a
notified assignment the borrower pays the assignee), and the beneficiary cannot bring
action against the borrower (while an assignee can).
To confirm there is a trust, there must be intention to create it, clear subject matter and
beneficiary (Milroy v Lord; Re Turcan; Linden Gardens Trust LtdvLenesta Sludge Disposals
Ltd).
Don King Productions Inc v Warren: the contracts could not be assigned, so it was held the
intention of the parties must have been to declare a trust over the benefits of it (although
this position was later criticized). Also held that non-assignment clause in the management
contracts did not apply to a declaration of trust. However, the contractor under the
relevant contract may be reluctant to be in a direct relationship with the beneficiary (i.e.,
beneficiary may be allowed to enforce the obligation directly, wind up the trust and require
the trustee to transfer the trust property). The court may modify the effect of trust law for
commercial reasons –in this case judges suggested the court would be hesitant to permit a
beneficiary to sue directly by joining the trustee.
General issues relating to transfer
Non-transfer clauses
A clause may be included into the loan contract restricting transfers or requiring the
borrower’s consent for a transfer. English courts broadly rejected the idea that restrictions
on transfers are contrary to public policy.
Reasons:
1. Borrower will not be able to set up new equities and set-offs against a transferee
2. Despite the notice of assignment, there is a risk that the borrower’s finance office
might pay the wrong person (especially if parts of the loan are assigned to different
persons – this risk can be diminished if the loan contract prohibits transfers below a
certain amount)
3. Sovereign states or central banks may wish to restrict the categories of entities that
can acquire their debts (Barbados Trust Co Ltd v Bank of Zambia)
4. The borrower may want to avoid becoming bound to a transferee dealing in
distressed loans
Consent to transfer
Non-transfer clauses can be absolute (less common) or qualifiedprohibition on transfer.
LMA, clause 24.1 – assignment or transfer is subject to the borrower’s consent.
Example of qualified restrictions – in Essar Steel Ltd v The Argo Fund Ltd, transfers were
permitted to “a bank or other financial institution”, and the court held that the transferee
did no have to resemble a bank; the Court of Appeal held that the transferee could be a
legally recognized form of being doing business concerning commercial finance.
Under the LMA, where the transfer requires the borrower’s consent, it must not be
“unreasonably withheld or delayed” (as per LMA, the borrower is deemed to have
consented 5 business days after the request),the request for the consent must be given as
per the contract.Under the LMA, therequest for consent must go through the agent, so the
deeming period (5 days) begins when the agent delivers the request.

7. Where there is a transfer to an existing lender or its affiliate, consent is not required. The
borrower can refuse when the transferee falls within the list of entities to which a transfer
can be made (the fact that it is included in this list does not constitute the borrower’s
consent).
“Unreasonable refusal of consent”: 1. Narrow view: borrower can reasonably refuse
when the assignment would cause increased liabilities under a tax gross-up clause or an
increased cost clause. When applying this view one should consider the circumstances of
the particular credit. Little authority to support this view.
2. Broad view (J. Oldnall and M. Clark, “The Age of Consent”): refusal at the borrower’s
discretion. Authority: 1). The right of a lessor to refuse consent to the assignment of
tenant’s rights; 2). Discretion conferred by contracts.
The approach states that a reasonable refusal is determined in each case by reference to
the borrower's position and the specific situation.
Whether the borrower can refuse on the grounds beyond the subject matter of the loan
contract (e.g., the type of the lender) – if the contract requires consent of the borrower, this
can mean that issues beyond the subject matter can be taken into account. In the landlord-
and-tenant cases, the courts have supported the idea that the landlord’s interest in the
identity of the tenant is a significant consideration. So, the broad view also supports that
the borrower could reasonably refuse consent to a transfer to, e.g., a vulture fund.
Criticisms of the broad view: reasonable refusal must relate to the contract and not
extrinsic issues (British Gas Trading Ltd v Eastern Electricity).Besides, if the borrower
refuses the transfer because of the new lender’s identity, it is generally difficult to persuade
the courts that the identity of commercial parties is of relevance.
The borrower’s wrongful refusal from the contract has no effect, however, the borrower is
not in breach of the contract for this. Where the lender does not seek consent because it
argues that the borrower could not reasonably have refused, the Court of Appeal seems to
uphold that the assignment would not be effective.
Breadth of the prohibition – what types of transfers are restricted? Depends on the
wording, but if properly worded can apply to all types. Non-assignment clause doesn’t
prohibit a declaration of trust (Don King Productions Inc v Warren). The judge admitted
that it is possible to have a clause prohibiting declaration of trust, but restrictions in the
contract cannot be extended to other types of transfer (Barbados Trust Co Ltd v Bank of
Zambia). If the lender breaches a non-transfer clause, the relevant transfer will be
ineffective (Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd).If the transfer is
ineffective, the transferee should still be able to bring an action against the transferor on
the transfer agreement (although there is a decision to the contrary - Helstan Securities Ltd
v Hertfordshire County Council). In Linden Gardens Trust Ltd v Lenesta Sludge Disposals
Ltdit was said that the assignment contract would not be affected by the breach of the no-
assignment clause, so that the assignee could bring an action for a breach of the contract.
Liability of the transferor – if the borrower defaults after a transfer, can the transferee
seek to recover its loss from the transferor?
The transferor is unlikely to have fiduciary duties with respect to the transferor (New York
courts have rejected the existence of a fiduciary duty in loan transfers in the absence of
such clear intention). Usually the transfer agreement states that the transferee has done
the due diligence and thus exclude the transferor’s fiduciary duties, and may exclude action
for misrepresentation or negligence. E.g., in National Westminster Bank plc v Utrecht-
America Finance Co.the court upheld that a transfer clause can exclude all potential liability
of the seller to the purchaser.

8. Confidentiality – the lender must obtain consent of the borrower to disclosure of
information to the transferee, which is implied when the borrower consents to a transfer
(but better to include the borrower’s confidentiality waiver for transfer purposes into the
loan contract). The transferee is not bound to keep confidential the borrower’s
information disclosed before the transfer. Partial solutions: 1) To argue that such
disclosure to the transferee still creates confidentiality obligations; 2). To include into the
transfer agreement the transferee’s confidentiality obligations.