A recent Hong Kong case ruled that minority lenders are not entitled to take independent enforcement action (including winding-up proceedings) under APLMA or LMA standard loan documents.

In the case of Charmway Hong Kong Investment Ltd & Ors v Fortunesea (Cayman) Ltd & Ors [2015] HKCU 1717, the Hong Kong Court of First Instances had to determine what enforcement rights for repayment were available to the individual Lenders under the Finance Documents (which were based on LMA Multicurrency Term and Revolving Facilities Agreement).

The developer, known in China as Rightway Real Estate (formerly Dalian Rightway Real Estate), has been in payment default on the already restructured facility since June 2011 and as of 15 October 2013, the total indebtedness under the facility was US$ 612 Million.

The facility was arranged by Goldman in 2007, which subscribed to a large portion and syndicated the rest largely to funds and investment bank special-situation desks.

Frustrated by a series of defaults before and after an early 2011 restructuring deal, a groups of creditors including Goldman-controlled entities started enforcement action in late 2012. This included appointing PwC as receiver and launching a series of judicial battles that wound through BVI, Cayman Islands, Hong Kong and Dalian court houses.

At the time, the enforcement group controlled more than two-thirds of the loan required under the Finance Documents to instruct the Security Agent.

However, by mid-2013, most of the debt was bought up by nine SPVs controlled by Chinese parties Goldman alleged were linked to Rightway founder Fu Yanbin. Fu was an ally of former Chinese leader Bo Xilai.

After buying up more than two-thirds of the debt, the new majority group in June 2013 instructed DB Trustees, the loan agent, to halt enforcement actions, including to remove receiver PwC, which had been in the process of trying to gain control over the operation companies in China.

While arguing that the new majority group’s instructions should be disregarded because it was allegedly acting in bad faith, the Goldman group launched winding-up proceedings in the BVI and Cayman Islands, seeking the court appointment of a liquidator over the offshore shareholding vehicles to take up the fight if PwC were removed.

The facility was governed by Hong Kong laws and the dispute therefore turned on whether the Minority Lenders had rights to take enforcement proceedings independently under the Finance Documents.

The court commented that the difficulty was that neither the Facility Agreement nor the Intercreditor Agreement dealt directly with the right of an individual Lender to obtain repayment of its portion of the syndicated loan in the Event of Default.

The court interpreted a number of provisions in the Finance Documents, in particular, clause 2.2 of the standard LMA loan documents (which is the same as the APLMA loan documents), upon which the claim of the Minority Lenders was based. In this clause, it was stated that:

• “the rights of a Finance Party under the Finance Documents are separate and independent rights”;
• “a Finance Party may, except as otherwise stated in the Finance documents, separately enforce those rights”; and
• “a debt arising under the Finance Documents to a Finance Party is a separate and independent debt”.

The Minority Lenders argued that these provisions gave individual Lender the right to enforce its debt independently.

However, the court ruled otherwise. The court concluded that the Facility Agreement created an aggregated loan rather than aliquot shares and that, this being so, in the absence of an express provision giving individual Lenders a right to take independent enforcement proceedings it was for the Majority Lenders, acting in good faith, to decide what enforcement proceedings to take. The court held that:

• The various provisions in clause 2.2 did not say when, if at all, a debt to an individual Lender would arise. In particular, clause 2.2 did not create, assuming Rightway did not pay in accordance with the Finance Documents, a debt owed to each Lender.
• Under the Event of Default clause, it was the Majority Lenders who were given the power to call for immediate repayment of the loan by instructing the Administrative Agent to make an immediate demand. It followed that no individual Lender could do this.

The facts of this case were unusual in that following a payment default, the Majority Lenders originally instructed the agent to make demand for early repayment of all amounts advanced but following the subsequent change of lenders, this instruction was revoked. The judgment did not address either:

• whether the Majority Lenders had the right to withdraw the demand made for repayment of the entire loan once made; or
• whether the Minority Lenders had the right to take independent enforcement action to recover amounts due and payable, either following the demand made by the agent on Majority Lender instruction before the instruction was revoked, or for the original unpaid amount following the initial payment default (the latter would not have relied upon the agent accelerating demand for the whole loan).

The APLMA and LMA facility agreements do not expressly provide for a withdrawal of instructions by the Majority, and arguably, once demand had been made for repayment of all advances, then by virtue of the provisions referred to above relating to the Finance Parties’ rights and obligations, each Lender could separately enforce their share of the debt (albeit recoveries would be required to be accounted for under the sharing provisions). The judge’s comments that “..the Facility Agreement created an aggregated loan rather than aliquot shares and that, this being so, in the absence of an express provision giving individual Lenders a right to take independent enforcement proceedings it is for the Majority Lenders, acting in good faith, to decide what enforcement proceedings to take,” do not seem consistent with these provisions and we may therefore see parties seeking to make the rights of Minority Lenders clearer in drafting these provisions.

Norton Rose Fulbright is experienced in the syndicated loan market. For more information, please contact Peter Haslam (Peter.Haslam@nortonrosefulbright.com) or Davide Barzilai (Davide.Barzilai@nortonrosefulbright.com) who would be happy to help.