How borrowers can protect themselves
The concerns of many developers whose loans were sold by Irish banks to foreign funds are quickly becoming reality. Banks such as Ulster Bank, IBRC and Nama are nearing completion of their loan book disposal. Numerous dismayed borrowers have learnt that in many instances the loan purchasers have no intention of establishing relationships or working with borrowers. They simply aggressively pursue enforcement.
Galway-based developer Gerry Maguire recently faced enforcement action from Goldman Sachs in respect of loans acquired from IBRC. It appointed Tom Kavanagh of Deloitte as receiver to Maguire’s main company Parolen and four related companies.
Earlier in the year another fund vehicle sought summary judgment against five borrowers. The fund said that there was no defence and so tried to use the fast track summary proceedings procedure. The defendants successfully challenged the application and convinced the High Court that they had a genuine defence to the claim.
The borrowers successfully raised three potential defences:
1. Fiduciary Duty: the bank had a fiduciary duty to the borrowers because a portion of the money loaned was used to buy one of the bank’s own products. The bank was therefore in breach of its own guidelines for lending.
2. Condition Precedent:the loan agreement contained a condition precedent in relation to a valuation of lands and the bank failed to adhere to its obligations under it. The Court noted that where a condition precedent was for the benefit of two parties, it could not be waived unilaterally by the bank.
3. Admissibility of Documents: the plaintiff failed to establish that NALM had acquired the assets, held and assigned the assets and notified the client of the assignment.
As this was a motion for summary judgment, the Judge had to consider whether or not it was “very clear” that the defendants had no case. The Judge concluded that the summary procedure was not suitable for this case and remitted the matter for plenary hearing which is a slower and more expensive process. The case confirmed that which ought to be well known now that establishing a bona fide defence to a claim can often be achieved.
Once your loans are sold taking steps to protect yourself becomes more difficult. Of course some borrowers are still in the slightly better position where their loans have not been assigned. The obvious concerns are clear but there may be some less obvious ones that borrowers need to familiarise themselves with. For example loans are usually purchased with the benefit of all the security available to the original lending bank. This will include any cross company or personal guarantees as well as debentures or charges over shareholdings in associated companies. If the loan relates to a company which is part of a wider group of companies, enforcement action or insolvency proceedings taken against one company by a new lender may have serious knock on implications for other companies in the group. This is due to common provisions which allow other lenders to the group to treat any such enforcement action as an event of default, thus triggering rights to call in their own loans and/or apply increased rates of interest/fees.
There are a number of steps that borrowers can take to protect their position in circumstances where they are notified (or suspect) that their bank is intending to sell their loan to a third party. These include:
1. Knowledge – can the bank sell your loans?
Usual contractual terms in loan agreements allow the bank to transfer without any restriction or requirement to notify the borrower in advance. However, sometimes the bank is required to notify the borrower of its intention to transfer the loan; or is required to consult the borrower in advance of any transfer; or can only transfer to certain types of purchaser e.g. only to another financial institution providing loan facilities as part of its business; or seek the borrower’s consent. The terms may or may not say that such consent cannot be unreasonably withheld.
2. Security – is consent required to transfer from borrower or guarantor?
Borrowers should check the terms of all security documents and associated contracts, for example, guarantees and interest rate hedging products, to see whether these can be sold on with the loan without the borrower’s consent or if there are any other restrictions regarding transfer.
3. Confirmed Agreements
Make sure that any ongoing disputes or agreements reached with the bank about amendments to terms on your facility, or waivers of the bank’s rights are recorded in writing.
Remind the bank of all the points you would like a potential loan purchaser to be made aware of. This makes it less likely that any disputes will arise later between you and the new lender because the bank will have to consider carefully now what representations it makes and how to answer the potential purchaser’s queries during the sale process to avoid allegations that the bank has misled the purchaser if a dispute arises later.
4. Confidential Information
What damaging confidential information about your business has the bank disclosed to potential purchasers with the sale memorandum or in the data room? Does the loan agreement allow the bank to disclose that information? The bank can not disclose confidential information it holds about your business and/or personal financial circumstances unless the loan agreement provides for this or you have subsequently agreed to it.
5. Be Alert
A bank planning a loan sale in the short to medium term may check in advance for terms which restrict its ability to do so. They may then try to achieve, in the course of other discussions/restructuring amendments to your facility, terms to remove any restrictions or other clauses which might present obstacles to selling the loan. Take legal advice on any proposed changes to facility terms, even if they appear straightforward or if you think you know what they are intending to do. There may be implications or consequences, not apparent to non-lawyers, which could be important in the context of your rights in the event the bank decides to sell your loan.
A positive story for developers is that of Padraic Rhatigan. His groups’ loans with Ulster Bank relating to the Radisson Blu hotel in Dublin were sold to Goldman Sachs. On Christmas Eve last year it notified Rhatigan that the full debt was due. On New Year’s Eve it appointed receivers. Rhatigan successfully injuncted Goldman Sachs from appointing a receiver and in May the High Court ruled in Rhatigan’s favour potentially allowing him to buy his loans back from the investment bank. However, that judgment has now been appealed and so we will watch with interest how it unfolds when it is back before the Court for Directions next week.
Contact Ronan McGoldrick for further information.
This publication is for guidance purposes only. It does not constitute legal or professional advice. No liability is accepted by Leman Solicitors for any action taken or not taken in reliance on the information set out in this publication. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. Any and all information is subject to change.