Key Points:

The Charmway case raises the importance of clear language in syndicated loan agreements regarding individual rights of the lenders.

Individual lenders under a syndicated facility agreement may not have an independent right to recover their respective portion of a facility following default, according to the Hong Kong decision in Charmway Hong Kong Investment Ltd v Fortunesea (Cayman) Ltd [2015] HKEC 1496. In Charmway, the Court construed the loan agreement as creating a loan in aggregate, rather than "separate and aliquot" loans from each lender.

While many commentators view this decision as wrong, the Loan Market Association (LMA) has recently published optional wording for syndicated loan agreements which attempts to address the issue.

Current APLMA documents

Most lenders view a syndicated loan agreement as creating a separate and independent debt obligation between the borrower and each lender, which a lender can enforce on its own if the debt is not paid when due. Clause 2.2 of the standard form loan agreement published by both the Asia Pacific Loan Markets Association (APLMA) and the LMA sought to codify this position by stating in the "Finance Parties' rights and obligations" clause that:

"The rights of each Finance Party under or in connection with the Finance Documents are separate and independent rights and any debt arising under the Finance Documents to a Finance Party from an Obligor shall be a separate and independent debt.
A Finance Party may, except as otherwise stated in the Finance Documents, separately enforce its rights under the Finance Documents."

Many thought that clause 2.2 of the APLMA standard syndicated loan agreements provided sufficient express protection of individual lenders' rights. Unfortunately, the court in the Charmway case disagreed.

The Charmway Court's view of clause 2.2 of the APLMA standard syndicated loan agreements

Charmway involved lending under a secured syndicated loan agreement, which was provided largely on the usual APLMA published terms. In this case, the Majority Lenders 1 have commenced enforcement against the borrower, but subsequently issued instructions to terminate the enforcement proceedings notwithstanding the concerns of the minority lenders. Following the majority decision, the minority lenders commenced individual winding up proceedings to recover their portion of the debt from the borrower.

The Hong Kong Court considered, among other things, whether a declaration can be made that, on the true and proper construction of the facility agreement, no individual lender is entitled to independently enforce repayment of their proportionate share of the syndicated term loan facility made available to the borrower.

A key argument put forward by the minority lenders was that the facility agreement entitled a lender to sue for any debt owed to it independently of the other lenders. The lenders sought to rely on clause 2.2 of the facility agreement ("Finance Parties' rights and obligations") to support this argument.

The Court stated that, the rights and obligations of the parties under the facility agreement need to be determined reading the document as a whole. While it agreed in principle that there are clauses in the facility agreement that are consistent with a lender having several and independent rights, it was held that the relevant transaction documents did not, as a whole, create an independent right to require repayment of the debt owing to a lender, or to take independent enforcement action. The Court instead found that the facility agreement created an aggregate loan, rather than "separate and aliquot loans" to each individual lender and that the rights governing recovery and distribution of payments in respect of such debt had been transferred to the administrative agent, who acts on the instruction of the Majority Lenders.

Further, the Court was not prepared to make a presumption that a bank lending money, whether as part of a syndicated loan or otherwise, must be taken to assume that it can sue to get its money back. In the Court's view, if this was a clear intention of the parties, they could have made it clear in the documentation, but they did not do so. As such, except in the circumstance of illegality, change of control or other express rights of an individual lender to recover under the Charmway facility agreement, the lenders only had recourse to their debt through the collective enforcement mechanism.

Key takeaways for lenders

The Charmway case, while not a direct authority in Australia, raises the importance of clear language in syndicated loan agreements regarding individual rights of the lenders.

While the lenders often assume that their right to have the debt repaid once due is sacrosanct, there are many clauses in syndicated loan agreements where the lenders give up fundamental decisions (including whether or not to accelerate the debt before its maturity or to enforce any security held by the syndicate) to the majority lenders. On one interpretation, the Charmway case took the next logical step by ruling that the individual lenders in a syndicated loan have no independent rights to recover their debt at all and have placed their ability to be repaid entirely in the hands of the majority lenders.

It is difficult to imagine any lender intentionally accepting a risk that its right to be repaid is in the hands of the majority lenders, when they have no control over who might form a majority or a blocking minority under a loan agreement.

As a result, the LMA has recently proposed amendments to the drafting of "Finance Parties' rights and obligations" clauses in an attempt to remove any doubt, and such amendment was supported by the APLMA. Lenders and their counsel should carefully consider the proposed wording and whether it (or any alternative language) should be included in their syndicated loan agreements.


1Defined under the Facility Agreement as "Lenders whose share in the outstanding Loans aggregates 66 2/3 % or more of the aggregate of all outstanding Loans of all Lenders".

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.