Syndicated lending
Order Description
Apollo Bank (“Apollo”) is a bank based in England. It has suggested to one of its customers, Prospect Limited (“Prospect”) that Prospect should obtain new finance from a syndicated loan, the proceeds of which would be used to repay Apollos’s existing lending to Prospect, which is currently in default. Prospect has no other facilities. Apollo proposes to act as the arranger and agent of the syndicated loan, which is to be governed by English law.
As its legal adviser, advise Apollo on its potential liabilities in acting as an arranger and an agent (note that the duties and potential liabilities of an arranger and an agent are different and you need to analyse both of them).
Attached is the basic material for general understanding what syndicated loan is.
When citing please follow the OSCOLA rules attached.
SYNDICATED LENDING
Aims:
– Describe typical ways of structuring a syndicated loan.
– Understand the role of the key entities in the syndicated transaction.
– Analyse each of the four potential bases of liability of an arranger.
– Discuss the rationale for the arranger liability arising in the Tricontinentalcase and for no arranger liability arising in the IFE Fund case.
– Describe areas of risk to the agent and ways to protect against them.
– Explain the arguments for and against the contention that the agent in a loan syndicate has a fiduciary role.
– Explain the purpose and legal effect of the pro rata sharing clause.
Readings:
– Alastair Hudson: The Law of Finance, Sweet & Maxwell, second edition (2013), Chapter 33
– Denis Petkovic: Arranger Liability in the Euro Markets, Banking Law Journal
– Andrew McKnight: The Law of International Finance, Oxford University Press (2008), pages 473-483
– Charles Qu: The Fiduciary Role of the Manager and the Agent in a Loan Syndicate, Bond Law Review, Volume 12, Issue 1
– IFE Fund SA v Goldman Sachs International (2007) EWCA Civ 811
– Natwest Australia Bank v Tricontinental Corporation Ltd (1993) A.C.D. Rep. 45

I. Key entities and syndication process
Syndicated lending is a form of lending undertaken by several banks when a single borrower wants to borrow more money by way of a loan than any single bank is prepared to lend on its own.
The entities involved in a syndicated transaction will typically include the following:
– The borrower
– The arranger (or the lead manager), which is the financial institution that is commissioned by the borrower to arrange or put the transaction together, which will include finding the syndicate and taking the transaction through to the stage where the facility documentation is signed or, in a “selling down” exercise, the later date when the syndicate is brought into the contractual arrangements.
– The agent bank (also called the facility agent), which is the coordinator of the facility once it has been formalised by the signing of the documentation. Its role begins upon execution of the facility agreements and will continue, unless it is replaced by another agent, until the conclusion of the transaction. Its role is crucial to the management and effective coordination of the arrangements between the banks and as between them and the borrower. The facility agent may be assisted in a complicated facility by other entities which perform specific roles. If security is to be taken, then there might be a separate security agent, failing which, the facility agent will also hold the security, usually as trustee on behalf of the banks.
– The syndicate of banks will provide the lending to the borrower, with each of them having a specified commitment to provide a set proportion of the overall facility amount.
In commercial terms the process of a syndicated loan is likely to commence with a request from the borrower to a bank with which it has a relationship for a loan or facility of a given size and for a given purpose, e.g. working capital or project or take-over finance. The bank approached may then agree to assume the role of lead bank which means that it is prepared to try to put together a syndicate of lenders to fund the loan. This lead bank would necessarily demonstrate its faith in the borrower by being prepared to advance funds itself. The lead bank has the difficult task of assessing the terms for the proposed facility, maturity and price. If the loan is priced too generously to the lenders, the borrower will think poorly of the lead bank and this may damage their relationship for the future; if, however, it is priced too aggressively, it may be that a syndicate cannot be formed. The lead bank at this stage will make it clear that it is seeking to form a syndicate on a ‘best efforts’ basis only, i.e. that it faces no liability if the process stalls.
In order to inform the prospective members of the syndicate, the lead bank will prepare an information document on the borrower, usually known as the information memorandum. This will contain details of the borrower’s financial status and the nature of its business as well as details of the proposed loan itself. Banks are asked to express an ‘in principle’ interest in joining the syndicate and if sufficient are forthcoming, the lead bank will draft the documentation for the proposed loan.
Negotiations will take place over the form of the clauses between the lead bank and the borrower and when this process is complete, the documentation will be shown to the syndicate for their comments. There will typically be a limited opportunity to negotiate further changes to the documentation in the light of these comments before the agreement is signed by all parties, usually at a signing ceremony of some style.
II. The role of the arranger
The role of the arranger is three-fold:
(1) The arranger agrees to assist the borrower in compiling the information that will be required to enable the banks to assess the proposed transaction and decide if they wish to take part in it. Most of the information will have to be provided by the borrower and the arranger’s task will be to advise the borrower on what has to be provided and in assembling the information in a readable and acceptable form of presentation.
(2) The arranger agrees to use its reasonable or best endeavours to approach the banks that it believes would be interested in the transaction and to obtain their agreement in principle to participate in the syndicate. This will depend, to a large extent, on the attractiveness of the proposal that is put to them, not just in the profitability of the proposed transaction, but also in terms of the risk that they will undertake as it is disclosed in the information memorandum and any other information that is sent to the banks.
(3) Finally, the arranger will prepare the facility documentation, having appointed lawyers to assist it in the task. The documentation will reflect the outline represented by the term sheet. The procedure that is usually followed is that the lawyers appointed by the arranger will prepare a draft of the documentation for review by the arranger, following which it will be sent to the borrower and reviewed by the borrower and its lawyers, and then discussed between the arranger, the borrower and their respective lawyers. Once they have agreed the form of the documentation, the arranger will send copies to the banks for their review. The arranger will receive any comments that the banks may wish to make, discuss them with the borrower and perhaps, after further negotiations, the documentation will be settled in an agreed final form for signature by the parties.
III. Potential liability of the arranger
Liability for the arranger under English law can generally arise in four ways: (1) the tort of negligence, (2) the Misrepresentation Act 1967, (3) the tort of deceit and (4) a claim for breach of fiduciary duty.
Read D. Petkovic’s article for a description of each of these potential liabilities. Further, read the IFE Fund SA v Goldman Sachs International (2007) and its analysis in both Petkovic’s article and A. Hudson’s book. Finally, read Natwest Australia Bank v Tricontinental Corporation Ltd.
As you will see, in IFE Fund SA v Goldman Sachs International, Goldman Sachs (as arranger) provided to IFE (as a potential investor in debt facilities) an information memorandum (IM), which was inaccurate and IFE brought a claim against Goldman Sachs on the basis of a misrepresentation that, among other things, it was not aware of facts which might render the IM incorrect. The Court at first instance and on appeal held that no duty of care arose.
At first instance, Toulson J, after noting that the IM was only issued to those who were “financially sophisticated entities operating in a specialist market”, held that: “Goldman Sachs was not acting as an adviser to IFE or purporting to carry out any professional service for IFE, as the terms of the IM made plain. It was acting for the sponsors and not on behalf of the recipients of the IM. In general, a party involved in negotiations towards a commercial venture owes no positive duty of disclosure towards another prospective party. A duty of disclosure may be undertaken, but no such duty was undertaken in this case either expressly or impliedly. The expression ‘assumption of responsibility’ has onoccasions been used in cases where it would be more accurate to speak of the court imposing a responsibility, but I can see no ground on which it would be fair to impose on Goldman Sachs the duty of care contended for by IFE.”
Of significance in this case was an express disclaimer. Goldman Sachs had stated in the IM that it had not “independently verified” the information in the IM and hence made “no representation” as to the accuracy or completeness of the IM. The Court of Appeal put particular emphasis on this disclaimer, Waller LJ describing any attempt to establish a duty of care in light of it as “hopeless”.
One area of real potential risk for arrangers lies in the arranger’s responses to requests for information by potential syndicate members, which is sent between the date when the information memorandum (which benefits from the disclaimer language) was sent and the date when the syndicate members sign the loan agreement. Namely, such responses are given rather informally and often do not benefit from the disclaimer language. The issue was explored in Natwest Australia Bank v Tricontinental Corporation Ltd., in which the Supreme Court of Victoria, Australia held that Tricontinental as lead manager was liable for loss suffered by Natwest, a member of the syndicate, in reliance upon information given by Tricontinental in connection with the information memorandum distributed to syndicate members.
The facts of the case:
In October 1988 Tricontinental was given a mandate by a Pro-Image (a video and television production company) to put together a syndicate of banks to provide a syndicated loan of AUS $50,000,000 to Pro-Image. The syndicated loan was to be secured by a first ranking debenture over the assets of Pro-Image, inter-group guarantees and a first registered mortgage over two properties. The purpose of the loan was to consolidate part of the company’s borrowings subsequent to the restructuring of the Pro-Image-Quatro group of companies. Pro-Image was one of several subsidiaries of Quatro.
Following the award of the mandate, Tricontinental contacted several banks, one of which was Natwest and provided Natwest with an information memorandum relating to the proposed facility that had been compiled by Tricontinental.
The information memorandum included a disclaimer notice with the following wording:
“The information herein has been obtained from the borrower and other sources considered reliable. No representation or warranty expressed or implied is made with respect to this information.”
The information memorandum also included information about contingent liabilities but did not mention two guarantees provided by Pro-Image to Disctronics another subsidiary of Quatro. These guarantees amounted to approximately AUS $45,000,000 and Tricontinental benefitted from one of them through loans it had made to Quatro.
Before signing the syndicated loan agreement, an employee of Natwest had several telephone conversations with an employee of Tricontinental regarding the financial status of Pro-Image (see page 9). Natwest particularly enquired as to the existence of any contingent liabilities not mentioned in the information memorandum and Tricontinental answered that, according to the information from Pro-Image, there were only nominal contingent liabilities. Tricontinental, however, knew about the two guarantees provided by Pro-Image to Disctronics and Tricontinental’s lawyer obtained information about these guarantees prior to signing but that information was not revealed to Natwest (see page 19).
Natwest also tried to obtain the latest audited accounts and when they could not be produced before signing Natwest sought an assurance from the auditors of Pro-Image that the financial information set out in the information memorandum corresponded with the information in the audited accounts that would be published after signing in November 1988.
Although such an assurance was not provided, Natwest decided to participate in the syndicate and signed the loan documentation on 11 November, 1988. The loan agreement included the following exculpatory clause (see page 15):
“Each of the Lenders severally represents and warrants to the Syndicate Manager that it has made its own independent investigation and assessment of the financial conditions and affairs of the Borrower in connection with its participation in the Facility and has not relied on any representation or information provided to it by the Syndicate Manager to induce it to enter into the Syndicated Facility Agreement. Each Lender warrants and undertakes to the Syndicate Manager that it shall continue to make its own independent appraisal of the creditworthiness of the Borrower while the Facility continues or the commitment is in force.”
In May 1989 Pro-Image experienced financial problems and a meeting was held between the syndicate and other interested parties. During this meeting Natwest became aware of the two guarantees to Disctronics. Because of the uncertainty as to priority of the different creditors with regard to the security that had been created in respect of the syndicated loan, a default of the syndicated facility was not called and the credit line to Pro-Image was allowed to continue. Pro-Image was shortly thereafter released from the two guarantees it had provided to support Disctronics. The release did not however alter the financial position of Pro-Image.
In December 1990, Pro-Image defaulted under the syndicated loan agreement and Tricontinental as agent bank terminated the loan facility and demanded repayment of all moneys owed.
Pro-Image did not repay the loan and Natwest sued Tricontinental and the solicitor acting for Tricontinental for damages amounting to AUS $11,500,000 which was the amount of its participation in the syndicated facility.
(i) Natwest’s submissions:
Natwest’s claim for damages was based on the following submissions:
1. Tricontinental’s representations in relation to the financial statements and its failure to disclose the guarantees constituted conduct in trade or commerce that was misleading or deceptive or was likely to mislead or deceive contrary to the provisions of s52 of the Trade practices Act 1974 and s11 of the Fair Trading Act 1985.
2. Breach of its common law duty because Tricontinental owed to Natwest a duty to (a) use all reasonable care to ensure that information as to the affairs of Pro-Image conveyed by it to Natwest was accurate; (b) give to Natwest all information which was known to it and was relevant to a decision by Natwest whether or not to participate in the syndicated transaction proposed by Tricontinental or, alternatively, (c) use all reasonable care to ensure that it gave to Natwest all information as to the affairs of Pro-Image which was known to it and which was relevant to a decision by Natwest whether or not to participate in the syndicated transaction proposed by it.
3. Breach of fiduciary duty to disclose all facts as to the affairs of Pro-Image known to Tricontinental and relevant to a decision by Natwest, whether or not to participate in the syndicate transaction proposed by it, or likely to be regarded by a banker as unfavourable factors in making a decision whether or not to participate in the syndicate transaction proposed by Tricontinental.
4. Breach of obligations under the terms of the loan agreement as Tricontinental had failed to inform Natwest of the facts provided by the answers to the requisitions made to Pro-Image’s solicitors regarding contingent liabilities and by allowing Pro-Image to draw on the syndicated facility without informing Natwest of the answers.
McDonald J, ruled on submissions 1 and 2 but not 3 and 4. Submission 1 is irrelevant for purposes of this course, as it relates to an Australian Act that has no relevance in England.
(ii) McDonald J’s decision regarding submission 2:
McDonald outlined his decision by dealing with four questions:
1. Did Tricontinental owe a duty of care to Natwest and, if so, what was the nature of such duty?
2. Had Tricontinental breached that duty of care?
3. Had the breach of duty caused the loss and damage suffered by Natwest?
4. Was there any contributory negligence on the part of Natwest which should result in a lowering of the size of the damages payable to Natwest?
1. A duty of care: (see page 42).
McDonald J. established that Natwest’s claim was a claim for damages for pure economic loss. He then stated that when the claim for damages was for pure economic loss, a duty of care could only be established if there existed, in the relationship between Tricontinental and Natwest, the necessary elements of proximity with respect to economic loss of the kind sustained by Natwest as to cause Tricontinental to owe Natwest a duty to inform it of the existence of the two guarantees known to it.
In order to determine whether the necessary elements of proximity in the relationship between Tricontinental and Natwest were present, McDonald J. examined the circumstances of the case. Having done this he stated that the following facts were of relevance to the question of proximity:
(a) Tricontinental had invited Natwest to become a member of the syndicate and Tricontinental was paid several fees for being the lead manager and agent bank;
(b) at all times the relevant officers of Tricontinental had knowledge of the two guarantees;
(c) the existence of the guarantees was a material and important fact for Natwest when considering whether or not to participate in the syndicate which ought to have been evident to a prudent banker in the position of Tricontinental; and
(d) Natwest would not have participated in the syndicate had it known about the guarantees.
Based on these facts, McDonald J. stated that:
(a) Natwest’s enquiry to Tricontinental regarding contingent liabilities proved that Natwest relied on Tricontinental to provide Natwest with the information sought and that Tricontinental accepted the responsibility to provide an answer to the enquiry;
(b) the disclaimer clause in the information memorandum did not affect the question as to whether a sufficient relationship of proximity existed to give rise to the duty of care contended by Natwest. The information memorandum related specifically to information provided and did not seek to effect, release or discharge Tricontinental from any duty or obligation to provide information which it may have been under a duty to provide;
(c) the exculpatory clause in the syndicated loan agreement did not, in the circumstances of the case, negate the element of reliance on Tricontinental by Natwest arising from the specific question about any contingent liabilities;
(d) a prudent banker in the position of Tricontinental and with its knowledge of Pro-Image ought to have known that if the guarantees were disclosed to Natwest it would not, in all probability have entered into the syndicated loan agreement; and
(e) it ought to have been reasonably foreseen by Tricontinental that if Natwest entered into the loan agreement and advanced the moneys it would be exposed to a risk which was not far-fetched or fanciful.
Conclusion:
In the specific circumstances of the case and in particular due to the enquiry made by Natwest to Tricontinental regarding contingent liabilities, there existed a duty to disclose to Natwest the existence of the guarantees which was a material fact to the consideration by Natwest as to whether it would join the syndicate and was further a fact known to officers of Tricontinental.

2. Breach of duty of care:
McDonald J. stated that according to the circumstances relied on when discussing whether a duty of care existed, the answer given to Natwest by Tricontinental which failed to disclose the existence of the guarantees and the failure of Tricontinental to disclose such guarantees which were known to it and which were ascertainable by its officers from its files, constituted a breach of the duty owed by Tricontinental to Natwest to disclose the existence of the guarantees.
3. Causation:
McDonald J. held that because it was “proved” by Natwest that it would not have entered the loan agreement had it been aware of the guarantees, the non-disclosure by Tricontinental was the cause of Natwest entering into the loan agreement.
Further, as it was clear that Natwest, by entering into the syndicated loan agreement, was “financially” worse off than it would have been had it not entered the loan agreement. McDonald J. held that the non-disclosure and the subsequent entering into the loan agreement had in fact caused the loss and damage suffered by Natwest.
Finally, the judge held that there was no act or omission on the part of Natwest between the time of advancing the money and demanding its repayment which broke the chain of causation.
4. Contributory negligence:
Tricontinental had argued that the damages suffered by Natwest were contributed to by its own negligence or lack of care.
McDonald J. held that having been satisfied that there was negligence on the part of Tricontinental, which was a cause of Natwest suffering the loss and damage suffered by it in consequence of its failure to recover from Pro-Image the moneys lent to it, the issue to be decided was whether there was fault on the part of Natwest which was in part a cause of the damage suffered by it. Such fault, if any, was not limited to any act or omission which may have related directly to Natwest entering into the agreement and allowing draw-down.
The standard of care against which the conduct of Natwest was to be measured was that of a reasonably prudent-banker engaged in the subject transaction.
Having assessed the steps taken by Natwest during the period before entering into the loan agreement and the default of Pro-Image , McDonald J. held that:
(a) Natwest had not failed to take adequate steps as a banker to assess the credit risk under the proposal and as put forward by Tricontinental;
(b) the enquiry made by Natwest to Tricontinental regarding contingent liabilities was adequate with regard to how far such enquiries should be taken;
(c) there was no fault on Natwest for not enquiring as to what was meant by “nominal” contingent liabilities because the evidence showed that both Tricontinental and Natwest regarded nominal as meaning a figure much smaller than the actual guarantees; and
(d) there was no fault on Natwest in not obtaining the audited accounts of Pro-Image as soon as they were available or in entering into the syndicated loan agreement without the assurance from Pro-Image’s auditors with regard to the correspondence between the financial information in the information memorandum and the actual financial status of Pro-Image.
Conclusion as to contributory negligence:
McDonald J. held that there was no negligence on the part of Natwest which entitled Tricontinental to have reduced the damages which Natwest was entitled to recover against it for the loss suffered in consequence of Tricontinental’s breach of common law duty.

McDonald J’s final conclusion:
Having concluded that Tricontinental owed a duty to Natwest, that Tricontinental had breached that duty and that there was no contributory negligence on the part of Natwest, McDonald J. held that Natwest was entitled to damages as claimed i.e. AUS $11,500,000.

IV. The agent bank
An agent bank is appointed to administer the syndicated loan once it has become a legal commitment. The lead bank often becomes the agent bank and it earns a modest fee for so acting. This bank is happy to act in the role of agent because this allows it to maintain its senior status and its relationship with the borrower. The agent bank, just as when it acted as lead bank, will be anxious not to expose itself to liability to members of the syndicate if problems should develop with the borrower’s ability to repay. However, under English law, an agent owes considerable duties to his principal and this presents difficulties to an agent bank. The way of avoiding liability broadly consists of expressing the contractual duties of the agent bank with utmost precision so that there is little scope for additional implied duties to exist.
Read Andrew McKnight’s chapter on the agent to understand the duties and possible liabilities of the agent in a loan syndicate. Further, read Charles Qu’s article on the fiduciary role of the agent. As you will read, it has been argued by some commentators that the agent bank in a loan syndicate usually has only a very limited mechanical discretion and the agent therefore should not be held as owing fiduciary obligations to the participants. Further, it has been argued that the fact that the lenders in a syndicated loan are all sophisticated financial institutions speaks against the existence of fiduciary relationship between the agent and participants. What do you think? In order to effectively analyse this issue, it is necessary to look at the clauses of the LMA facility agreement:
On the one hand, clause 26.4 of the loan agreement states plainly: “Nothing in this agreement constitutes the Agent as a fiduciary of any other person.” However, whether or not someone is a fiduciary is a question of law, which is determined by looking at the agent’s duties.
In that context, provisions of the loan agreement seem to give the agent bank the capability to unilaterally exercise its power or discretion. For example:
– The agent has discretionary power to bind lenders by, for instance, calling an event of default and accelerating payment under the loan (see clause 23.13) or by agreeing to changes in the facility following a disruption event (see clause 29.10).
– The agent bank “is not obliged” to check the accuracy of a document, which implies that it has a discretion (see clause 26.2(c)).
– The documents and evidence provided by the borrower in fulfilment of the conditions precedent must be “in form and substance satisfactory to the Agent” (see clause 4.1), which again suggests that the agent has wide discretion in determining whether or not conditions precedent to disbursement have been met.
– Clause 26.7(a) states that the majority lenders can instruct the agent bank on the exercise of discretion “vested in it”, which seems a plain admission that the agent has such powers, while by clause 26.7(c), “[i]n the absence of instructions from the Majority of Lenders, the Agent may act (or refrain from taking action) as it considers to be in the best interest of the Lenders”
Yet another example of the agent’s power would be the case of the negative pledge. If the borrower is about to breach it and grant a security to a third party, the consequences may be disastrous for the lenders. Under such circumstances, the syndicate should apply for an injunction to restrain the breach. However, the syndicate would not be able to do this without necessary information. Given that the borrower is often the agent bank’s customer in other capacities, the agent bank may well be the only party to have access to, or possess the information. If that is the case, then prompt action on the part of the agent bank would safeguard the interests of the syndicate. On the other hand, belated action or failure to act may result in a failure for the syndicate to obtain any repayment from the borrower. Thus, the manner in which the agent bank exercises its discretion can fundamentally affect the participants’ legal and practical interests.
In view of the above, it seems clear that the agent bank is a fiduciary: it has the power to alter the legal position of the lenders and, therefore, they place trust and confidence in it in respect of those actions.
But, what about the argument that the lenders in a syndicated loan are all sophisticated financial institutions, which speaks against the existence of fiduciary relationship between the agent and participants?
As articulated by C. Qu, first, not all lenders are sophisticated big banks. Usually, the agent banks are the largest and most sophisticated international banks. The participants, however, could include new, smaller and obviously less sophisticated banks. Secondly, even sophisticated participants can be in a vulnerable position when the agent bank exercises its discretion. As we saw, there are occasions in which the agent bank is able to exercise discretion unilaterally so as to determine the legal interests of the participants.
Because of the close relationship between the agent bank and the borrower, the agent has easier access to the borrower’s information. The informational advantage the agent possesses is susceptible to abuse. This was well illustrated in the New Zealand High Court case, NZI Securities Ltd. v Unity Group. In this case, the agent bank took security from the borrower to secure an independent loan, which had been previously unsecured, when it learned that the borrower was in financial difficulties. This move diluted the potential collateral available to other syndicate banks, whose loans were unsecured. As evident from this case, the sophistication and financial strength of the participants does not make them less vulnerable to the agent bank’s exercise of its discretion in an unconscionable manner.

Relationship between the members of the syndicate
Although a syndicated loan in commercial terms is seen as one large loan made by a group of lenders to the borrower, in legal terms it is not structured in this way. The main reason for this is that if the loan is a joint one, the lenders might in law be seen to be in partnership and the obligations of the lenders would then take the form of joint liability. This would mean that any single lender could be held liable for the commitment of the partnership as a whole. Apart from the obvious drawbacks in private law terms, this would be undesirable because bank regulators would deem each lender to have a commitment equal to the size of the entire loan and balance sheets would be assessed for capital adequacy purposes accordingly. Lenders clearly prefer to minimise the impact of their commitments in order to give themselves the freedom to enter into other lending obligations without having unnecessarily reached the maximum available under the regulations. A clause in the agreement will typically make it clear that the rights and obligations of the banks in the syndicate are independent of each other (usually expressed as “several” rights and obligations) and that legally the “syndicated loan” consists of separate loans made by each bank to the borrower (see clause 2.2(a) of the LMA facility loan agreement).
As each bank is making its own contract with the borrower in respect of its loan, it would follow that each bank can make its own decisions on matters such as whether to accelerate following an event of default or to forgive it and, if acceleration does take place, whether to go to court to seek recovery. Of course, each of the many loan contracts in a syndicated loan will have identical terms as the clauses are negotiated on behalf of the syndicate by the agent bank. The benefits of wrapping all the loans into one transaction are reaped whilst the legal risks associated with a true partnership are avoided. There are two areas, however, where lenders would normally prefer to limit the consequences of complete independence.
Calling an event of default and other major decisions
The first is on the issue of when an event of default can be called or other major decisions regarding the financing (such as a decision to amend or waive a lender’s right to refuse funds) be reached. The agreement will have its events of default listed within it and each lender thus has the benefit of that clause. It is not seen as desirable for lenders to make different decisions on this matter. Therefore, a clause is included which typically declares that when an event of default takes place, all the lenders decide by a majority vote (commonly 66% based on exposure, irrespective of funds actually lent; see “Majority Lenders” definition in the LMA facility agreement) on whether to accelerate the facility or to waive the event of default. If the majority does vote in favour of an acceleration, the agent will be authorised to notify the borrower accordingly and the loan will be brought to an end. Each lender is then free to make its own decision on whether to take the borrower to court. Any lender which wants to take the borrower to court over a loan in default is not able to do so, however, unless the majority has voted in favour of an acceleration.
Further, there are certain decisions that are so crucial that they require unanimous lender consent. These are enumerated in clause 35.2 of the LMA facility agreement and include such matters as extension of the term of the loan, reduction of the margin, increase of any commitment, change of the borrower or the guarantor, change of the “Majority Lenders” definition, etc.
Pro rata sharing
The other area where lenders prefer to limit the consequences of the logic of making independent loans concerns the possibility that the borrower may prefer some lenders over others. Lenders are driven by the fear of a borrower in default leaving them unpaid whilst other lenders to the same borrower get their funds back. Lenders accept that some loans will go bad and can accept this when it happens but they do not accept that such a borrower might successfully prefer other creditors. A so-called sharing clause deals with the situation where a particular bank receives or recovers payment directly when the other banks have not been paid or, alternatively, where it receives or recovers more than its fair share with respect to a payment that is due by the borrower (see clause 28 of the LMA facility agreement).
This clause stipulates that all payments by the borrower will be paid to the agent bank, whose task it is to distribute the payments pro rata amongst the lenders. Assuming the agent abides by this term, the lenders will be treated equally but the borrower may voluntarily pay one lender directly or a lender may be able to set-off a deposit it holds in the borrower’s account. A typical sharing clause will oblige any lender who receives a payment by whatever means from the borrower (including setting-off a deposit) to share it out pro rata with the other lenders.
However, if the sharing clause simply provided for the receiving bank to pay over the excess amount to the agent, then that bank might be at a disadvantage, as the borrower could claim that it had paid, or should be treated as having paid, the full amount (including the excess) to that bank, so that the state of the account as between them had been reduced by the full amount, rather than by the lesser amount that the bank has been able to retain in consequence of the operation of the sharing clause. To overcome such an argument, the clause will provide for one or more mechanisms that are intended to restore to the bank the right to claim from the borrower an amount equivalent to the excess that it has paid over to the agent. One such mechanism is to provide that the receiving bank is to be treated as if it had never received the amount of the excess, so that the outstanding account as between it and the borrower will only be reduced by the amount the bank has been able to retain (see clause 28.3 of the LMA facility agreement).

Primary Sources
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Give the party names, followed by the neutral citation, followed by the Law Reports citation (eg AC, Ch, QB). If there is no neutral citation, give the Law Reports citation followed by the court in brackets. If the case is not reported in the Law Reports, cite the All ER or the WLR, or failing that a specialist report.
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Council Regulation (EC) 139/2004 on the control of concentrations between undertakings (EC Merger Regulation) [2004] OJ L24/1, art 5
Case C–176/03 Commission v Council [2005] ECR I–7879, paras 47–48
Case C–556/07 Commission v France [2009] OJ C102/8
European Court of Human Rights
Omojudi v UK (2010) 51 EHRR 10
Osman v UK ECHR 1998–VIII 3124
Balogh v Hungary App no 47940/99 (ECHR, 20 July 2004)
Simpson v UK (1989) 64 DR 188
Secondary Sources
Books
Give the author’s name in the same form as in the publication, except in bibliographies, where you should give only the surname followed by the initial(s). Give relevant information about editions, translators and so forth before the publisher, and give page numbers at the end of the citation, after the brackets.
Thomas Hobbes, Leviathan (first published 1651, Penguin 1985) 268
Gareth Jones, Goff and Jones: The Law of Restitution (1st supp, 7th edn, Sweet & Maxwell 2009)
K Zweigert and H Kötz, An Introduction to Comparative Law (Tony Weir tr, 3rd edn, OUP 1998)
Contributions to edited books
Francis Rose, ‘The Evolution of the Species’ in Andrew Burrows and Alan Rodger (eds), Mapping the Law: Essays in Memory of Peter Birks (OUP 2006)
Encyclopedias
Halsbury’s Laws (5th edn, 2010) vol 57, para 53
Journal articles
Paul Craig, ‘Theory, “Pure Theory” and Values in Public Law’ [2005] PL 440
When pinpointing, put a comma between the first page of the article and the page pinpoint.
JAG Griffith, ‘The Common Law and the Political Constitution’ (2001) 117 LQR 42, 64
Online journals
Graham Greenleaf, ‘The Global Development of Free Access to Legal Information’ (2010) 1(1) EJLT <http://ejlt.org//article/view/17> accessed 27 July 2010
Command papers and Law Commission reports
Department for International Development, Eliminating World Poverty: Building our Common Future (White Paper, Cm 7656, 2009) ch 5
Law Commission, Reforming Bribery (Law Com No 313, 2008) paras 3.12–3.17
Websites and blogs
Sarah Cole, ‘Virtual Friend Fires Employee’ (Naked Law, 1 May 2009) <http://www.nakedlaw.com/2009/05/index.html> accessed 19 November 2009
Newspaper articles
Jane Croft, ‘Supreme Court Warns on Quality’ Financial Times (London, 1 July 2010) 3
OSCOLA Quick Reference Guide

Syndicated lending
Order Description
Apollo Bank (“Apollo”) is a bank based in England. It has suggested to one of its customers, Prospect Limited (“Prospect”) that Prospect should obtain new finance from a syndicated loan, the proceeds of which would be used to repay Apollos’s existing lending to Prospect, which is currently in default. Prospect has no other facilities. Apollo proposes to act as the arranger and agent of the syndicated loan, which is to be governed by English law.
As its legal adviser, advise Apollo on its potential liabilities in acting as an arranger and an agent (note that the duties and potential liabilities of an arranger and an agent are different and you need to analyse both of them).
Attached is the basic material for general understanding what syndicated loan is.
When citing please follow the OSCOLA rules attached.
SYNDICATED LENDING
Aims:
– Describe typical ways of structuring a syndicated loan.
– Understand the role of the key entities in the syndicated transaction.
– Analyse each of the four potential bases of liability of an arranger.
– Discuss the rationale for the arranger liability arising in the Tricontinentalcase and for no arranger liability arising in the IFE Fund case.
– Describe areas of risk to the agent and ways to protect against them.
– Explain the arguments for and against the contention that the agent in a loan syndicate has a fiduciary role.
– Explain the purpose and legal effect of the pro rata sharing clause.
Readings:
– Alastair Hudson: The Law of Finance, Sweet & Maxwell, second edition (2013), Chapter 33
– Denis Petkovic: Arranger Liability in the Euro Markets, Banking Law Journal
– Andrew McKnight: The Law of International Finance, Oxford University Press (2008), pages 473-483
– Charles Qu: The Fiduciary Role of the Manager and the Agent in a Loan Syndicate, Bond Law Review, Volume 12, Issue 1
– IFE Fund SA v Goldman Sachs International (2007) EWCA Civ 811
– Natwest Australia Bank v Tricontinental Corporation Ltd (1993) A.C.D. Rep. 45

I. Key entities and syndication process
Syndicated lending is a form of lending undertaken by several banks when a single borrower wants to borrow more money by way of a loan than any single bank is prepared to lend on its own.
The entities involved in a syndicated transaction will typically include the following:
– The borrower
– The arranger (or the lead manager), which is the financial institution that is commissioned by the borrower to arrange or put the transaction together, which will include finding the syndicate and taking the transaction through to the stage where the facility documentation is signed or, in a “selling down” exercise, the later date when the syndicate is brought into the contractual arrangements.
– The agent bank (also called the facility agent), which is the coordinator of the facility once it has been formalised by the signing of the documentation. Its role begins upon execution of the facility agreements and will continue, unless it is replaced by another agent, until the conclusion of the transaction. Its role is crucial to the management and effective coordination of the arrangements between the banks and as between them and the borrower. The facility agent may be assisted in a complicated facility by other entities which perform specific roles. If security is to be taken, then there might be a separate security agent, failing which, the facility agent will also hold the security, usually as trustee on behalf of the banks.
– The syndicate of banks will provide the lending to the borrower, with each of them having a specified commitment to provide a set proportion of the overall facility amount.
In commercial terms the process of a syndicated loan is likely to commence with a request from the borrower to a bank with which it has a relationship for a loan or facility of a given size and for a given purpose, e.g. working capital or project or take-over finance. The bank approached may then agree to assume the role of lead bank which means that it is prepared to try to put together a syndicate of lenders to fund the loan. This lead bank would necessarily demonstrate its faith in the borrower by being prepared to advance funds itself. The lead bank has the difficult task of assessing the terms for the proposed facility, maturity and price. If the loan is priced too generously to the lenders, the borrower will think poorly of the lead bank and this may damage their relationship for the future; if, however, it is priced too aggressively, it may be that a syndicate cannot be formed. The lead bank at this stage will make it clear that it is seeking to form a syndicate on a ‘best efforts’ basis only, i.e. that it faces no liability if the process stalls.
In order to inform the prospective members of the syndicate, the lead bank will prepare an information document on the borrower, usually known as the information memorandum. This will contain details of the borrower’s financial status and the nature of its business as well as details of the proposed loan itself. Banks are asked to express an ‘in principle’ interest in joining the syndicate and if sufficient are forthcoming, the lead bank will draft the documentation for the proposed loan.
Negotiations will take place over the form of the clauses between the lead bank and the borrower and when this process is complete, the documentation will be shown to the syndicate for their comments. There will typically be a limited opportunity to negotiate further changes to the documentation in the light of these comments before the agreement is signed by all parties, usually at a signing ceremony of some style.
II. The role of the arranger
The role of the arranger is three-fold:
(1) The arranger agrees to assist the borrower in compiling the information that will be required to enable the banks to assess the proposed transaction and decide if they wish to take part in it. Most of the information will have to be provided by the borrower and the arranger’s task will be to advise the borrower on what has to be provided and in assembling the information in a readable and acceptable form of presentation.
(2) The arranger agrees to use its reasonable or best endeavours to approach the banks that it believes would be interested in the transaction and to obtain their agreement in principle to participate in the syndicate. This will depend, to a large extent, on the attractiveness of the proposal that is put to them, not just in the profitability of the proposed transaction, but also in terms of the risk that they will undertake as it is disclosed in the information memorandum and any other information that is sent to the banks.
(3) Finally, the arranger will prepare the facility documentation, having appointed lawyers to assist it in the task. The documentation will reflect the outline represented by the term sheet. The procedure that is usually followed is that the lawyers appointed by the arranger will prepare a draft of the documentation for review by the arranger, following which it will be sent to the borrower and reviewed by the borrower and its lawyers, and then discussed between the arranger, the borrower and their respective lawyers. Once they have agreed the form of the documentation, the arranger will send copies to the banks for their review. The arranger will receive any comments that the banks may wish to make, discuss them with the borrower and perhaps, after further negotiations, the documentation will be settled in an agreed final form for signature by the parties.
III. Potential liability of the arranger
Liability for the arranger under English law can generally arise in four ways: (1) the tort of negligence, (2) the Misrepresentation Act 1967, (3) the tort of deceit and (4) a claim for breach of fiduciary duty.
Read D. Petkovic’s article for a description of each of these potential liabilities. Further, read the IFE Fund SA v Goldman Sachs International (2007) and its analysis in both Petkovic’s article and A. Hudson’s book. Finally, read Natwest Australia Bank v Tricontinental Corporation Ltd.
As you will see, in IFE Fund SA v Goldman Sachs International, Goldman Sachs (as arranger) provided to IFE (as a potential investor in debt facilities) an information memorandum (IM), which was inaccurate and IFE brought a claim against Goldman Sachs on the basis of a misrepresentation that, among other things, it was not aware of facts which might render the IM incorrect. The Court at first instance and on appeal held that no duty of care arose.
At first instance, Toulson J, after noting that the IM was only issued to those who were “financially sophisticated entities operating in a specialist market”, held that: “Goldman Sachs was not acting as an adviser to IFE or purporting to carry out any professional service for IFE, as the terms of the IM made plain. It was acting for the sponsors and not on behalf of the recipients of the IM. In general, a party involved in negotiations towards a commercial venture owes no positive duty of disclosure towards another prospective party. A duty of disclosure may be undertaken, but no such duty was undertaken in this case either expressly or impliedly. The expression ‘assumption of responsibility’ has onoccasions been used in cases where it would be more accurate to speak of the court imposing a responsibility, but I can see no ground on which it would be fair to impose on Goldman Sachs the duty of care contended for by IFE.”
Of significance in this case was an express disclaimer. Goldman Sachs had stated in the IM that it had not “independently verified” the information in the IM and hence made “no representation” as to the accuracy or completeness of the IM. The Court of Appeal put particular emphasis on this disclaimer, Waller LJ describing any attempt to establish a duty of care in light of it as “hopeless”.
One area of real potential risk for arrangers lies in the arranger’s responses to requests for information by potential syndicate members, which is sent between the date when the information memorandum (which benefits from the disclaimer language) was sent and the date when the syndicate members sign the loan agreement. Namely, such responses are given rather informally and often do not benefit from the disclaimer language. The issue was explored in Natwest Australia Bank v Tricontinental Corporation Ltd., in which the Supreme Court of Victoria, Australia held that Tricontinental as lead manager was liable for loss suffered by Natwest, a member of the syndicate, in reliance upon information given by Tricontinental in connection with the information memorandum distributed to syndicate members.
The facts of the case:
In October 1988 Tricontinental was given a mandate by a Pro-Image (a video and television production company) to put together a syndicate of banks to provide a syndicated loan of AUS $50,000,000 to Pro-Image. The syndicated loan was to be secured by a first ranking debenture over the assets of Pro-Image, inter-group guarantees and a first registered mortgage over two properties. The purpose of the loan was to consolidate part of the company’s borrowings subsequent to the restructuring of the Pro-Image-Quatro group of companies. Pro-Image was one of several subsidiaries of Quatro.
Following the award of the mandate, Tricontinental contacted several banks, one of which was Natwest and provided Natwest with an information memorandum relating to the proposed facility that had been compiled by Tricontinental.
The information memorandum included a disclaimer notice with the following wording:
“The information herein has been obtained from the borrower and other sources considered reliable. No representation or warranty expressed or implied is made with respect to this information.”
The information memorandum also included information about contingent liabilities but did not mention two guarantees provided by Pro-Image to Disctronics another subsidiary of Quatro. These guarantees amounted to approximately AUS $45,000,000 and Tricontinental benefitted from one of them through loans it had made to Quatro.
Before signing the syndicated loan agreement, an employee of Natwest had several telephone conversations with an employee of Tricontinental regarding the financial status of Pro-Image (see page 9). Natwest particularly enquired as to the existence of any contingent liabilities not mentioned in the information memorandum and Tricontinental answered that, according to the information from Pro-Image, there were only nominal contingent liabilities. Tricontinental, however, knew about the two guarantees provided by Pro-Image to Disctronics and Tricontinental’s lawyer obtained information about these guarantees prior to signing but that information was not revealed to Natwest (see page 19).
Natwest also tried to obtain the latest audited accounts and when they could not be produced before signing Natwest sought an assurance from the auditors of Pro-Image that the financial information set out in the information memorandum corresponded with the information in the audited accounts that would be published after signing in November 1988.
Although such an assurance was not provided, Natwest decided to participate in the syndicate and signed the loan documentation on 11 November, 1988. The loan agreement included the following exculpatory clause (see page 15):
“Each of the Lenders severally represents and warrants to the Syndicate Manager that it has made its own independent investigation and assessment of the financial conditions and affairs of the Borrower in connection with its participation in the Facility and has not relied on any representation or information provided to it by the Syndicate Manager to induce it to enter into the Syndicated Facility Agreement. Each Lender warrants and undertakes to the Syndicate Manager that it shall continue to make its own independent appraisal of the creditworthiness of the Borrower while the Facility continues or the commitment is in force.”
In May 1989 Pro-Image experienced financial problems and a meeting was held between the syndicate and other interested parties. During this meeting Natwest became aware of the two guarantees to Disctronics. Because of the uncertainty as to priority of the different creditors with regard to the security that had been created in respect of the syndicated loan, a default of the syndicated facility was not called and the credit line to Pro-Image was allowed to continue. Pro-Image was shortly thereafter released from the two guarantees it had provided to support Disctronics. The release did not however alter the financial position of Pro-Image.
In December 1990, Pro-Image defaulted under the syndicated loan agreement and Tricontinental as agent bank terminated the loan facility and demanded repayment of all moneys owed.
Pro-Image did not repay the loan and Natwest sued Tricontinental and the solicitor acting for Tricontinental for damages amounting to AUS $11,500,000 which was the amount of its participation in the syndicated facility.
(i) Natwest’s submissions:
Natwest’s claim for damages was based on the following submissions:
1. Tricontinental’s representations in relation to the financial statements and its failure to disclose the guarantees constituted conduct in trade or commerce that was misleading or deceptive or was likely to mislead or deceive contrary to the provisions of s52 of the Trade practices Act 1974 and s11 of the Fair Trading Act 1985.
2. Breach of its common law duty because Tricontinental owed to Natwest a duty to (a) use all reasonable care to ensure that information as to the affairs of Pro-Image conveyed by it to Natwest was accurate; (b) give to Natwest all information which was known to it and was relevant to a decision by Natwest whether or not to participate in the syndicated transaction proposed by Tricontinental or, alternatively, (c) use all reasonable care to ensure that it gave to Natwest all information as to the affairs of Pro-Image which was known to it and which was relevant to a decision by Natwest whether or not to participate in the syndicated transaction proposed by it.
3. Breach of fiduciary duty to disclose all facts as to the affairs of Pro-Image known to Tricontinental and relevant to a decision by Natwest, whether or not to participate in the syndicate transaction proposed by it, or likely to be regarded by a banker as unfavourable factors in making a decision whether or not to participate in the syndicate transaction proposed by Tricontinental.
4. Breach of obligations under the terms of the loan agreement as Tricontinental had failed to inform Natwest of the facts provided by the answers to the requisitions made to Pro-Image’s solicitors regarding contingent liabilities and by allowing Pro-Image to draw on the syndicated facility without informing Natwest of the answers.
McDonald J, ruled on submissions 1 and 2 but not 3 and 4. Submission 1 is irrelevant for purposes of this course, as it relates to an Australian Act that has no relevance in England.
(ii) McDonald J’s decision regarding submission 2:
McDonald outlined his decision by dealing with four questions:
1. Did Tricontinental owe a duty of care to Natwest and, if so, what was the nature of such duty?
2. Had Tricontinental breached that duty of care?
3. Had the breach of duty caused the loss and damage suffered by Natwest?
4. Was there any contributory negligence on the part of Natwest which should result in a lowering of the size of the damages payable to Natwest?
1. A duty of care: (see page 42).
McDonald J. established that Natwest’s claim was a claim for damages for pure economic loss. He then stated that when the claim for damages was for pure economic loss, a duty of care could only be established if there existed, in the relationship between Tricontinental and Natwest, the necessary elements of proximity with respect to economic loss of the kind sustained by Natwest as to cause Tricontinental to owe Natwest a duty to inform it of the existence of the two guarantees known to it.
In order to determine whether the necessary elements of proximity in the relationship between Tricontinental and Natwest were present, McDonald J. examined the circumstances of the case. Having done this he stated that the following facts were of relevance to the question of proximity:
(a) Tricontinental had invited Natwest to become a member of the syndicate and Tricontinental was paid several fees for being the lead manager and agent bank;
(b) at all times the relevant officers of Tricontinental had knowledge of the two guarantees;
(c) the existence of the guarantees was a material and important fact for Natwest when considering whether or not to participate in the syndicate which ought to have been evident to a prudent banker in the position of Tricontinental; and
(d) Natwest would not have participated in the syndicate had it known about the guarantees.
Based on these facts, McDonald J. stated that:
(a) Natwest’s enquiry to Tricontinental regarding contingent liabilities proved that Natwest relied on Tricontinental to provide Natwest with the information sought and that Tricontinental accepted the responsibility to provide an answer to the enquiry;
(b) the disclaimer clause in the information memorandum did not affect the question as to whether a sufficient relationship of proximity existed to give rise to the duty of care contended by Natwest. The information memorandum related specifically to information provided and did not seek to effect, release or discharge Tricontinental from any duty or obligation to provide information which it may have been under a duty to provide;
(c) the exculpatory clause in the syndicated loan agreement did not, in the circumstances of the case, negate the element of reliance on Tricontinental by Natwest arising from the specific question about any contingent liabilities;
(d) a prudent banker in the position of Tricontinental and with its knowledge of Pro-Image ought to have known that if the guarantees were disclosed to Natwest it would not, in all probability have entered into the syndicated loan agreement; and
(e) it ought to have been reasonably foreseen by Tricontinental that if Natwest entered into the loan agreement and advanced the moneys it would be exposed to a risk which was not far-fetched or fanciful.
Conclusion:
In the specific circumstances of the case and in particular due to the enquiry made by Natwest to Tricontinental regarding contingent liabilities, there existed a duty to disclose to Natwest the existence of the guarantees which was a material fact to the consideration by Natwest as to whether it would join the syndicate and was further a fact known to officers of Tricontinental.

2. Breach of duty of care:
McDonald J. stated that according to the circumstances relied on when discussing whether a duty of care existed, the answer given to Natwest by Tricontinental which failed to disclose the existence of the guarantees and the failure of Tricontinental to disclose such guarantees which were known to it and which were ascertainable by its officers from its files, constituted a breach of the duty owed by Tricontinental to Natwest to disclose the existence of the guarantees.
3. Causation:
McDonald J. held that because it was “proved” by Natwest that it would not have entered the loan agreement had it been aware of the guarantees, the non-disclosure by Tricontinental was the cause of Natwest entering into the loan agreement.
Further, as it was clear that Natwest, by entering into the syndicated loan agreement, was “financially” worse off than it would have been had it not entered the loan agreement. McDonald J. held that the non-disclosure and the subsequent entering into the loan agreement had in fact caused the loss and damage suffered by Natwest.
Finally, the judge held that there was no act or omission on the part of Natwest between the time of advancing the money and demanding its repayment which broke the chain of causation.
4. Contributory negligence:
Tricontinental had argued that the damages suffered by Natwest were contributed to by its own negligence or lack of care.
McDonald J. held that having been satisfied that there was negligence on the part of Tricontinental, which was a cause of Natwest suffering the loss and damage suffered by it in consequence of its failure to recover from Pro-Image the moneys lent to it, the issue to be decided was whether there was fault on the part of Natwest which was in part a cause of the damage suffered by it. Such fault, if any, was not limited to any act or omission which may have related directly to Natwest entering into the agreement and allowing draw-down.
The standard of care against which the conduct of Natwest was to be measured was that of a reasonably prudent-banker engaged in the subject transaction.
Having assessed the steps taken by Natwest during the period before entering into the loan agreement and the default of Pro-Image , McDonald J. held that:
(a) Natwest had not failed to take adequate steps as a banker to assess the credit risk under the proposal and as put forward by Tricontinental;
(b) the enquiry made by Natwest to Tricontinental regarding contingent liabilities was adequate with regard to how far such enquiries should be taken;
(c) there was no fault on Natwest for not enquiring as to what was meant by “nominal” contingent liabilities because the evidence showed that both Tricontinental and Natwest regarded nominal as meaning a figure much smaller than the actual guarantees; and
(d) there was no fault on Natwest in not obtaining the audited accounts of Pro-Image as soon as they were available or in entering into the syndicated loan agreement without the assurance from Pro-Image’s auditors with regard to the correspondence between the financial information in the information memorandum and the actual financial status of Pro-Image.
Conclusion as to contributory negligence:
McDonald J. held that there was no negligence on the part of Natwest which entitled Tricontinental to have reduced the damages which Natwest was entitled to recover against it for the loss suffered in consequence of Tricontinental’s breach of common law duty.

McDonald J’s final conclusion:
Having concluded that Tricontinental owed a duty to Natwest, that Tricontinental had breached that duty and that there was no contributory negligence on the part of Natwest, McDonald J. held that Natwest was entitled to damages as claimed i.e. AUS $11,500,000.

IV. The agent bank
An agent bank is appointed to administer the syndicated loan once it has become a legal commitment. The lead bank often becomes the agent bank and it earns a modest fee for so acting. This bank is happy to act in the role of agent because this allows it to maintain its senior status and its relationship with the borrower. The agent bank, just as when it acted as lead bank, will be anxious not to expose itself to liability to members of the syndicate if problems should develop with the borrower’s ability to repay. However, under English law, an agent owes considerable duties to his principal and this presents difficulties to an agent bank. The way of avoiding liability broadly consists of expressing the contractual duties of the agent bank with utmost precision so that there is little scope for additional implied duties to exist.
Read Andrew McKnight’s chapter on the agent to understand the duties and possible liabilities of the agent in a loan syndicate. Further, read Charles Qu’s article on the fiduciary role of the agent. As you will read, it has been argued by some commentators that the agent bank in a loan syndicate usually has only a very limited mechanical discretion and the agent therefore should not be held as owing fiduciary obligations to the participants. Further, it has been argued that the fact that the lenders in a syndicated loan are all sophisticated financial institutions speaks against the existence of fiduciary relationship between the agent and participants. What do you think? In order to effectively analyse this issue, it is necessary to look at the clauses of the LMA facility agreement:
On the one hand, clause 26.4 of the loan agreement states plainly: “Nothing in this agreement constitutes the Agent as a fiduciary of any other person.” However, whether or not someone is a fiduciary is a question of law, which is determined by looking at the agent’s duties.
In that context, provisions of the loan agreement seem to give the agent bank the capability to unilaterally exercise its power or discretion. For example:
– The agent has discretionary power to bind lenders by, for instance, calling an event of default and accelerating payment under the loan (see clause 23.13) or by agreeing to changes in the facility following a disruption event (see clause 29.10).
– The agent bank “is not obliged” to check the accuracy of a document, which implies that it has a discretion (see clause 26.2(c)).
– The documents and evidence provided by the borrower in fulfilment of the conditions precedent must be “in form and substance satisfactory to the Agent” (see clause 4.1), which again suggests that the agent has wide discretion in determining whether or not conditions precedent to disbursement have been met.
– Clause 26.7(a) states that the majority lenders can instruct the agent bank on the exercise of discretion “vested in it”, which seems a plain admission that the agent has such powers, while by clause 26.7(c), “[i]n the absence of instructions from the Majority of Lenders, the Agent may act (or refrain from taking action) as it considers to be in the best interest of the Lenders”
Yet another example of the agent’s power would be the case of the negative pledge. If the borrower is about to breach it and grant a security to a third party, the consequences may be disastrous for the lenders. Under such circumstances, the syndicate should apply for an injunction to restrain the breach. However, the syndicate would not be able to do this without necessary information. Given that the borrower is often the agent bank’s customer in other capacities, the agent bank may well be the only party to have access to, or possess the information. If that is the case, then prompt action on the part of the agent bank would safeguard the interests of the syndicate. On the other hand, belated action or failure to act may result in a failure for the syndicate to obtain any repayment from the borrower. Thus, the manner in which the agent bank exercises its discretion can fundamentally affect the participants’ legal and practical interests.
In view of the above, it seems clear that the agent bank is a fiduciary: it has the power to alter the legal position of the lenders and, therefore, they place trust and confidence in it in respect of those actions.
But, what about the argument that the lenders in a syndicated loan are all sophisticated financial institutions, which speaks against the existence of fiduciary relationship between the agent and participants?
As articulated by C. Qu, first, not all lenders are sophisticated big banks. Usually, the agent banks are the largest and most sophisticated international banks. The participants, however, could include new, smaller and obviously less sophisticated banks. Secondly, even sophisticated participants can be in a vulnerable position when the agent bank exercises its discretion. As we saw, there are occasions in which the agent bank is able to exercise discretion unilaterally so as to determine the legal interests of the participants.
Because of the close relationship between the agent bank and the borrower, the agent has easier access to the borrower’s information. The informational advantage the agent possesses is susceptible to abuse. This was well illustrated in the New Zealand High Court case, NZI Securities Ltd. v Unity Group. In this case, the agent bank took security from the borrower to secure an independent loan, which had been previously unsecured, when it learned that the borrower was in financial difficulties. This move diluted the potential collateral available to other syndicate banks, whose loans were unsecured. As evident from this case, the sophistication and financial strength of the participants does not make them less vulnerable to the agent bank’s exercise of its discretion in an unconscionable manner.

Relationship between the members of the syndicate
Although a syndicated loan in commercial terms is seen as one large loan made by a group of lenders to the borrower, in legal terms it is not structured in this way. The main reason for this is that if the loan is a joint one, the lenders might in law be seen to be in partnership and the obligations of the lenders would then take the form of joint liability. This would mean that any single lender could be held liable for the commitment of the partnership as a whole. Apart from the obvious drawbacks in private law terms, this would be undesirable because bank regulators would deem each lender to have a commitment equal to the size of the entire loan and balance sheets would be assessed for capital adequacy purposes accordingly. Lenders clearly prefer to minimise the impact of their commitments in order to give themselves the freedom to enter into other lending obligations without having unnecessarily reached the maximum available under the regulations. A clause in the agreement will typically make it clear that the rights and obligations of the banks in the syndicate are independent of each other (usually expressed as “several” rights and obligations) and that legally the “syndicated loan” consists of separate loans made by each bank to the borrower (see clause 2.2(a) of the LMA facility loan agreement).
As each bank is making its own contract with the borrower in respect of its loan, it would follow that each bank can make its own decisions on matters such as whether to accelerate following an event of default or to forgive it and, if acceleration does take place, whether to go to court to seek recovery. Of course, each of the many loan contracts in a syndicated loan will have identical terms as the clauses are negotiated on behalf of the syndicate by the agent bank. The benefits of wrapping all the loans into one transaction are reaped whilst the legal risks associated with a true partnership are avoided. There are two areas, however, where lenders would normally prefer to limit the consequences of complete independence.
Calling an event of default and other major decisions
The first is on the issue of when an event of default can be called or other major decisions regarding the financing (such as a decision to amend or waive a lender’s right to refuse funds) be reached. The agreement will have its events of default listed within it and each lender thus has the benefit of that clause. It is not seen as desirable for lenders to make different decisions on this matter. Therefore, a clause is included which typically declares that when an event of default takes place, all the lenders decide by a majority vote (commonly 66% based on exposure, irrespective of funds actually lent; see “Majority Lenders” definition in the LMA facility agreement) on whether to accelerate the facility or to waive the event of default. If the majority does vote in favour of an acceleration, the agent will be authorised to notify the borrower accordingly and the loan will be brought to an end. Each lender is then free to make its own decision on whether to take the borrower to court. Any lender which wants to take the borrower to court over a loan in default is not able to do so, however, unless the majority has voted in favour of an acceleration.
Further, there are certain decisions that are so crucial that they require unanimous lender consent. These are enumerated in clause 35.2 of the LMA facility agreement and include such matters as extension of the term of the loan, reduction of the margin, increase of any commitment, change of the borrower or the guarantor, change of the “Majority Lenders” definition, etc.
Pro rata sharing
The other area where lenders prefer to limit the consequences of the logic of making independent loans concerns the possibility that the borrower may prefer some lenders over others. Lenders are driven by the fear of a borrower in default leaving them unpaid whilst other lenders to the same borrower get their funds back. Lenders accept that some loans will go bad and can accept this when it happens but they do not accept that such a borrower might successfully prefer other creditors. A so-called sharing clause deals with the situation where a particular bank receives or recovers payment directly when the other banks have not been paid or, alternatively, where it receives or recovers more than its fair share with respect to a payment that is due by the borrower (see clause 28 of the LMA facility agreement).
This clause stipulates that all payments by the borrower will be paid to the agent bank, whose task it is to distribute the payments pro rata amongst the lenders. Assuming the agent abides by this term, the lenders will be treated equally but the borrower may voluntarily pay one lender directly or a lender may be able to set-off a deposit it holds in the borrower’s account. A typical sharing clause will oblige any lender who receives a payment by whatever means from the borrower (including setting-off a deposit) to share it out pro rata with the other lenders.
However, if the sharing clause simply provided for the receiving bank to pay over the excess amount to the agent, then that bank might be at a disadvantage, as the borrower could claim that it had paid, or should be treated as having paid, the full amount (including the excess) to that bank, so that the state of the account as between them had been reduced by the full amount, rather than by the lesser amount that the bank has been able to retain in consequence of the operation of the sharing clause. To overcome such an argument, the clause will provide for one or more mechanisms that are intended to restore to the bank the right to claim from the borrower an amount equivalent to the excess that it has paid over to the agent. One such mechanism is to provide that the receiving bank is to be treated as if it had never received the amount of the excess, so that the outstanding account as between it and the borrower will only be reduced by the amount the bank has been able to retain (see clause 28.3 of the LMA facility agreement).

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