Lloyd's Maritime and Commercial Law Quarterly
Security, security trusts and the amendment of syndicated credit agreements: lessons from Australia
Richard Hooley *
In Public Trustee of Queensland v Fortress Credit Corp (Aus) II Pty Ltd, the High Court of Australia recently held that the designation of a guarantee of an unsecured facility agreement as a “Transaction Document”, for the purposes of a separate facility agreement that was secured by a charge, brought the guarantor’s liability within the ambit of that charge and constituted neither a variation in the terms of the charge nor the creation of a new charge requiring registration. The decision offers comfort to English finance lawyers seeking to rely on a designation provision in a syndicated credit agreement in order to extend the protection of the security held under an existing security trust to new lenders brought into the syndicate to advance additional funds to the borrower. This article questions the utility of that approach and considers whether an unintended consequence of it might be to destroy the very security trust from which the new lenders seek to benefit.
Introduction
This article seeks to examine the effect on security and security trusts when a syndicated credit agreement is amended to bring in new lenders who will increase the level of funding available to the borrower. Two established methods for introducing new lenders into a syndicated credit agreement are for an original lender either to assign or to novate its interest in the facility to a new lender. An essential difference between these two mechanisms is that with an assignment the original lender (assignor) transfers its rights under the credit agreement to the new lender (assignee) but still remains liable to perform its obligations under the credit agreement, whereas a novation allows the original lender to transfer both its rights and obligations to the new lender. Particular care must be taken with a novation, since it extinguishes the borrower’s payment obligation to the original lender and thereby threatens any security which the original lender has taken. The most common way to deal with this problem is for the security to be held by a security trustee in favour of any buyer of the loan.1
* Professor of Law, King’s College London; Consultant, Allen & Overy LLP. I would like to thank Graham Smith and Richard Bethell-Jones of Allen & Overy LLP for their helpful comments on an earlier draft of this article. All errors and omissions remain mine, and nothing in this article should be regarded as necessarily representing the views of Graham Smith, Richard Bethell-Jones or Allen & Overy LLP.
1. See, eg, British Energy Power & Energy Trading Ltd v Credit Suisse [2008] EWCA Civ 53; [2008] 1 Lloyd’s Rep 413.
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