Essar Steel Ltd v The Argo Fund Ltd

This is an appeal by Essar Steel Ltd (“Essar”) against a decision of Mr Justice Aikens on 12^th April 2005 concerning the meaning and effect of a provision in an unsecured syndicated loan agreement (the “Agreement”) made on 7^th March 1997 between Essar as borrower and a syndicate of nine banks and financial institutions (the “Syndicate”), restricting the Syndicate members’ entitlement to transfer their rights and obligations under the Agreement to entities that are “a bank or other financial institution”. The case concerns the purported transfer by some of the Syndicate members to the Respondent, The Argo Fund Limited (“Argo”), in 2002 and 2003 in the “secondary debt market” of part of the over-all loan drawn down by Essar.

The Agreement is the standard 1997 Loan Market Association (“LMA”) form, which, at the material time, contained no further definition or elaboration of the term “bank or other financial institution”. In November 2001 the LMA revised the definition by adding to it “trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets”. It did so in order to remove grounds for dispute, illustrated by this appeal, as to the range of entities that could qualify as a “financial institution” within this provision. However, there are apparently many syndicated loan agreements, in addition to this one, in the 1997 LMA un-amended form that are or may be the occasion of similar dispute as to the range of institutions to which syndicate members may transfer debts in the secondary debt market.

The agreed expert evidence before the Judge indicated that restrictions on transferability in such agreements were not uncommon in 1997 when this Agreement was made and that there were a number of reasons why potential parties to such agreements might wish some such restriction. These included the preservation of a continuing relationship between borrower and lenders and between the lenders themselves; minimisation of costs of administration of the loan and to retain replacement lenders who would be likely to observe the law and regulatory guidelines. The question for the Court is whether and to what extent the restriction in this case, in its unadorned 1997 form, was intended by Essar and the Syndicate members to serve such or other purposes and, more particularly, whether it served to exclude Argo from claiming repayment as a transferee under the Agreement.

Essar, which was incorporated in 1976 in the State of Gujurat, is part of one of the largest corporate groups in India. It is a publicly listed company engaged in the manufacture of various semi-processed iron and steel products, which, at the material time, had assets of US$810m. and an annual turnover of about $550m.

Argo is an investment company incorporated in 2000 in the Cayman Islands, which, as part of a small group of companies, holds and manages funds and the investments purchased with them. At all material times, it had a portfolio of debt, including bonds, loans, letters of credit and promissory notes, mainly purchased in the secondary debt market from other institutions. Argo described itself as a “Global Emerging Markets Debt Hedge Fund”, and had as its investment aim the securing of higher returns for investors at the more risky end of the market, though it had sometimes acted as an original lender.

Following Essar’s draw-down of the entirety of the loan provided under the Agreement, Argo acquired from members of the Syndicate a substantial part of the debt, of which it now seeks repayment from Essar. The main issue before the Court is whether Argo is an “other institution” within the transfer restriction in the Agreement, so as to entitle it, as a transferee, to claim repayment against Essar. It is common ground that it is not a “bank” for the purpose.

I take the facts from the helpful summaries of them by the Judge, in paragraphs 1 to 13 of his judgment, and the skeleton argument of Mr Laurence Rabinowitz QC on behalf of Essar.

In 1996, Essar, in need of funds, sought and obtained approval from the Reserve Bank of India to enter into the Agreement, which was for an unsecured loan of US40m, to be drawn down within 45 days of the date of making of the Agreement and to be repayable within two years. It entered into the Agreement on 7^th March 1997 and, on 22^nd of that month, drew down the whole facility in a single advance, the loan thus becoming repayable on 22^nd March 1999.

By 1999, Essar had fallen into substantial financial difficulty as a result of a dramatic collapse in the price of steel. Its unsecured liabilities in India and elsewhere were about US$800m, and it could not repay the loan on the due date. It therefore entered into protracted negotiations with the Syndicate and other creditors with a view to restructuring its debt.

By March 2003 Essar had agreed a comprehensive debt restructuring programme with a majority of its secured creditors. At about the same time it also made proposals to its unsecured creditors, including the Syndicate, to make an immediate cash repayment of 25 cents in the dollar or a “bullet” repayment in March 2018 with interest at a rate of 0.25% per annum, paid half-yearly.

However, in November 2002, Argo had begun to buy in the secondary debt market, purportedly pursuant to provisions of the Agreement permitting transfer, tranches of Essar’s debt at a substantial discount to its nominal value. In April 2003, following the announcement of Essar’s proposal to its unsecured creditors, Argo offered to acquire from the Syndicate all Essar’s outstanding debt under the Agreement at a price equal to 25.5% of its nominal value, that is, some 0.5% more than the first of the alternative proposals made by Essar to its unsecured creditors generally.

A number of members of the Syndicate accepted Argo’s offer and, by June 2003, it claimed to have purchased Essar’s debt under the Agreement to a nominal value of US$29.5 million, but for a price equal to 25.5% of that sum.

Shortly afterwards, on 26^th June 2003, Argo claimed in the Commercial Court, purportedly as transferee under the Agreement, repayment in full of the tranches of debt it had purchased. Argo issued its claim in London relying on a term in the Agreement providing for non-exclusive jurisdiction of the English courts.

In August 2003, Argo issued an application in the Commercial Court for summary judgment, pursuant to CPR Part 24.

Shortly afterwards, in September 2003, Essar instituted proceedings against the Syndicate, but not Argo, in Singapore claiming among other things a declaration that the transfers to Argo were void and of no effect because Argo was not a “bank or other financial institution” as required by the Agreement, and therefore not a permitted transferee of the Syndicate’s rights and obligations under it. The Syndicate, in its defence to those proceedings, relied upon the instruments of transfer, asserting their validity.

Essar, in reliance upon the same contention as that in its proceedings against the Syndicate in Singapore, also applied to the Commercial Court to set aside service of or to stay Argo’s claim.

Before continuing with the story, I should set out the relevant provisions of the Agreement.

Clause 27 of the Agreement provided for two modes by which Syndicate members could pass their rights under the Agreement to another, one by way of assignment on notice to Essar, the other by way of transfer, which also operated to transfer obligations as well as rights, amounting to a novation. As to assignment, the Agreement imposed no restriction save as to documentation and notice to Essar, clause 33.1 expressly providing that, where the context permitted, “any ‘Bank’” should be construed so as to include “without limitation … Transferees and assigns in accordance with their respective interests”. As to transfer, the context did not permit such limitless construction, since clause 1, the interpretation clause, defined a “Transferee” as:

“a bank or other financial institution to which [a Syndicate member] seeks to transfer all or part of such [member’s] rights and obligations hereunder in accordance with the provisions of this Agreement.” [my emphasis]

Clause 27 provided, so far as material:

“27.1

This Agreement shall be binding upon, and inure to the benefit of each party hereto and their respective successors, Transferees and assignees. … Any Bank may, subject to the execution and completion of such documents as the [Syndicate members’] Agent may specify and with notice to the Borrower, assign all or any of its rights and benefits hereunder or, subject to the payment to the Agent of a transfer fee of $250, transfer in accordance with Clause 27.2 all or any of its rights, benefits and obligations hereunder.

27.2

If any Bank wishes to transfer all or any of its rights, benefits and/or obligations hereunder, then such transfer may be effected by the delivery to the Agent of a duly completed and duly executed Transfer Certificate in which event …:

(i)

to the extent that in such Transfer Certificate the Bank party thereto seeks to transfer its rights and obligations hereunder, the Borrower and such Bank shall be released from further obligations towards one another hereunder and their respective rights against one another shall be cancelled (such rights and obligations being referred to in this Clause 27.2 as ‘discharged rights and obligations’);

(ii)

the Borrower and the Transferee party thereto shall assume obligations towards one another and/or acquire rights against one another which differ from the discharged rights and obligations only insofar as the Borrower and the Transferee have assumed and/or acquired the same in place of the Borrower and such Bank; and

(iii)

… the Transferee and the other Banks shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had the Transferee been an original party hereto as a Bank with the rights and/or obligations acquired or assumed by it as a result of such transfer”

On 26^th January 2004 David Steel J heard Argo’s application for summary judgment and Essar’s application to set aside service or to stay the proceedings. As is plain from Essar’s contentions, both applications turned primarily upon the answer to the question whether Argo was a “bank or other financial institution” within the meaning of that term in the definition of “Transferee” in clause 1 when read with clause 27.1 and 2 of the Agreement.

David Steel J, after hearing argument on both sides and in a fully reasoned judgment, dismissed Argo’s application for summary judgment. In doing so, he expressed preference for Essar’s contentions that: 1) the transfer provision in the Agreement operated as a limitation on the class of person to whom transfer could be made; 2) it should be narrowly construed so as to apply only to “banks and other institutions akin to banks, a substantial proportion of whose business involved the making of loans”; and 3) “[Essar had] very much the better of the argument that Argo was not a qualifying transferee”.

David Steel J, however, dismissed Essar’s applications to set aside service or stay Argo’s claim in the Commercial Court.

On 14^th February 2005, the matter came to trial before Mr Justice Aikens. In a reserved judgment on 12^th April 2005, he found, contrary to the inclination of David Steel J, in favour of Argo, holding that: 1) the transfer provision in the Agreement operated to impose some restriction on the class of potential transferees that it permitted; 2) an “other institution” for the purpose of that provision was one that shared at least some of the characteristics of a bank; 3) Argo had sufficient of those characteristics and so qualified as a transferee, and 4) Argo failed in an alternative claim that the transfer, if ineffective as such, operated as an assignment.

As to the first of those four issues, Aikens J held, contrary to Argo’s then case, that the transfer provision in the Agreement operated as some restriction as to the persons to whom the Syndicate could transfer their rights and obligations and that, therefore, unless Argo was a “bank or other financial institution”, it could not claim repayment from Essar as a transferee of the debt under the Agreement. Argo no longer contends that the Agreement does not impose some restriction on the class of potential transferees, but takes issue as to the meaning of an “other institution” for the purpose. However, the Judge’s reasoning on the point informed his approach to the remaining three issues. He drew primarily on the language of the Agreement itself, including the distinction drawn in clause 27 of the Agreement between, on the one hand, an assignment of rights that could be effected without Essar’s consent and with no restriction as to the type of assignee, and on the other hand, the transfer of rights and obligations which, although also not requiring consent, was limited in terms as to the type of transferee. He found support for his conclusion in the commercial sense of the restriction on transfer, observing:

“28.

… it makes commercial sense to restrict the class of potential transferees in some way. … if … there was no restriction, then a transfer could be made to any institution, however unsuitable it might be. The transferee undertakes obligations as well as obtaining rights. The right to transfer can be exercised at any time. This could mean that one of the original Syndicate members could transfer its rights and obligations to another institution before a drawdown by the Borrower. But the Borrower would wish to ensure that the transferee institution would be able to provide its tranche of the funds required at drawdown. Therefore the Borrower would wish to ensure that any transferee was the type of institution that could produce the necessary funds. Such an entity would naturally fall within the phrase ‘a bank or other financial institution’.

29

I also note that the two experts instructed by the parties on the secondary market in debt agreed that restrictions on the ability to transfer syndicated loan agreement were not uncommon in 1997. They agreed that the reasons why a borrower might wish to restrict transferability were to safeguard the relationship between the borrower and the lenders, the possibility of increased costs and concerns to ensure that lenders would abide by legal and regulatory provisions.”

From that base, to which I shall return later in this judgment, the Judge went on, as I have said, to hold in favour of Argo that it was an “other financial institution” within the meaning of the Agreement so as to qualify it as a transferee under clause 27 to claim repayment from Essar of the loans transferred to it. The Judge expressed the view that, if he had not so held, he would have found against Argo on its alternative claim that the instruments of transfer would have effect as or give rise to assignments of the debts.

There are three issues before the Court as to the construction and effect of the Agreement, the first two, raised by Essar in its appeal and the third, raised by Argo in its Respondent’s Notice if Essar succeeds in its case that Argo is not a transferee and so not entitled, as such, to claim repayment:

the meaning of “a bank or other financial institution”

Mr Laurence Rabinowitz QC, on behalf of Essar, maintained that the Judge, having correctly concluded that the Agreement, in keeping with commercial sense, imposed some restriction as to permissible transferees, wrongly failed to give effect or proper weight to that conclusion when considering what the Agreement meant in its use of the term “bank or other financial institution”. At the heart of Mr Rabinowitz’s submission was his contention that that expression, read in its commercial context, limited transferees to those who were “bank-like” lenders active in the primary debt market, whose characteristics would thus be indicative of substance and integrity. It could not, he submitted, include institutions other than banks whose only or main involvement in debt was in trading it, that is in the secondary debt market.

On this issue, the Judge began by considering the commercial context in which the Agreement was made in 1997. On the agreed expert evidence before him, it was one in which trading by banks, their subsidiaries or affiliates in loans in the secondary debt market, for the purpose of managing a portfolio of debt or for other reasons, was at that time common. Non-banking institutions also participated in such secondary trading in debt at that time, but less commonly. Against that background, the Judge held that the parties to this 1997 Agreement must have intended that the class of potential transferees should be wider than that of bodies fitting the definition of a “bank”.

As to how much wider, the Judge nevertheless took as his starting point the extent to which, if at all, the institution in question “shared” characteristics with a bank – a form of ejusdem generis approach. Thus, in paragraphs 36 and 37 of his judgment, he reasoned:

“36.

It is clear that the parties intended that the class of potential transferees should be wider than bodies that fit the definition of ‘banks’. In my view, ‘banks’ and ‘other financial institutions’ were intended by the parties to denote two different types of entity; otherwise the expression ‘banks or other financial institutions’ would be a tautology. …

37.

It ispossible to argue that ‘other financial institutions’ must share many common characteristics with banks or only a few characteristics with banks. Is there any indication in the Agreement that points to an intention of the parties that the key common characteristic is that of providing finance in the primary lending market and being regulated and accountable? In my view, there is not and … [counsel for Essar] could not point to anything specifically in support of his preferred construction.”

In those passages, the Judge appears to have taken what he described as a possible premise or necessary starting point for his analysis, namelythat, although an “other financial institution” meant something “different” from a “bank”, it nevertheless had to have some of its characteristics. He did not seemingly consider that an “other financial institution” without any characteristics peculiar to a bank could have been intended by the parties. Thus, as his ensuing analysis in his judgment makes clear, his starting point was that one of the bank-like characteristics an “other financial institution” should have for the purpose was that of a lender of money. The question for him on Essar’s case was whether it had also to be an original lender, that is in the primary lending market as distinct from becoming one by, say, transfer or assignment.

In paragraphs 38 and 42 of his judgment, the Judge held that for an entity to be an “other financial institution” it had to have at least the following characteristics of a bank:

The last of those characteristics, if read on its own, could embrace all sorts of financial concerns without regard to any characteristics of banks or their probity or substance (cf. the Federal Court of Australia’s approach to the term “financial corporation” in the context of federal trade practices legislation, in Re Ku-Ring-Gai Co-operative Building Society (1978) 22 ALR 621, per Bowen CJ at 624 and Deane J at 642). However, it is plain from the Judge’s general comment in paragraph 39 that he did not intend it to be a free-standing statement of the restriction:

“Provided the ‘other financial institutions’ have these characteristics, which they would share with the banks, that is, in my view, sufficient to bring them within the definition. The original parties … were well aware that debt could be traded; indeed that must be the underlying rationale for permitting a transfer of rights and obligations. The parties knew of the existence of a secondary debt market in which entities specialised in the purchase of distressed debt. The parties must have contemplated that if a potential transferee was an ‘other financial institution’ that had the characteristics I have identified, then it could legitimately take a transfer, even though it did not engage substantially in the business of providing finance in the primary lending market.”

As I have said, on the Judge’s approach, critical among those characteristics was the first and the fourth, namely that the institution should not only be a lender of money but one with an ability to advance the agreed loan during the drawdown period, as ‘quasi-primary lenders’.

Mr Rabinowitz developed his submission that the Judge wrongly failed to confine the restriction to institutions “akin to banks”, in the sense of their being engaged primarily in original lending, by four main arguments.

First, he maintained that the Judge, by his analysis, defined the meaning of an “other financial institution” in the Agreement too broadly in that it would enable almost every commercial financial entity satisfying those basic criteria, to qualify as a transferee, even though not subject to any public or other regulatory restriction and however otherwise unsuitable. He maintained that the Judge, in adopting such a broad definition, gave little or no effect to his initial conclusion that the parties must have intended some meaningful restriction on the class of potential transferees (as distinct from assignees) for good commercial reasons. On the Judge’s approach, he complained, any entity participating in 1997 in the secondary debt market that wished and was able to acquire such debts would qualify.

Secondly, Mr Rabinowitz criticised as circular the Judge’s reasoning that a transferee of debts could satisfy the first of his criteria - being a lender of money – on the basis that every transfer would make a transferee contractually a “lender” for the purpose. On that approach, he said, the key criterion for qualifying as a transferee would be met by becoming one, whereas he submitted that trading in debt is not the same as lending money.

Thirdly, Mr Rabinowitz submitted, as the Judge had acknowledged when concluding that the Agreement imposed some restriction as to the class of transferees, that an underlying commercial purpose of such restriction was to ensure that only suitable institutions that could be expected to perform their obligations would become parties to the Agreement. Only lenders of money in the primary lending market, argued Mr Rabinowitz, could give that degree of reassurance, not entities whose only or primary business activity was in the trading of debt. It is also important, he maintained, that a transferee should be an entity able and likely to maintain continuing good relationships between the borrower and itself and the remaining Syndicate lenders, and also between all the lenders. A lending entity with which other Syndicate lenders could expect good continuing relationships was, he suggested, more likely to act in the interest of the lenders as a whole than to pursue its own particular interests whatever the circumstances. A further point was the likely concern by parties to such an agreement to avoid transfers to “small participants” whose involvement might lead to an increase in the costs of administration of the loan. Such considerations, it will be remembered, also weighed with the Judge when concluding in paragraph 29 of his judgment (see paragraph 24 above) that the Agreement should be construed so as to impose some restriction on the class of transferees.

Fourthly, Mr Rabinowitz referred to a number of provisions in the Agreement outside clause 27 which, he suggested, pointed to an expectation or an intention of the parties that an “other financial institution” would not just be an entity sharing certain characteristics of a bank, but also would be of a kind akin to a bank. These included references in various provisions to the word “bank” without the qualifying addition “or other financial institution” and to matters germane to banking activity, such as “a lending office” (clause 3), rates of interest calculable by reference to LIBOR (clauses 7 and 12), (Footnote: ¹) “bank-like” obligations on the lenders as to calculation of payments (clause 20), provisions as to calculation of tax (clause 21), additional costs by lenders in complying with central bank or other regulatory bodies’ requirements (clause 22) and redistribution among lenders of repayments (clause 24).

For those reasons, Mr Rabinowitz submitted that the Judge has fixed on too broad a definition of permissible transferees of the rights and obligations of the Syndicate under the Agreement, with the result that he wrongly bound himself on the facts to conclude that Argo was an “other financial institution”.

Mr Mark Howard QC, on behalf of Argo, acknowledged that the Agreement, in its definition of a transferee as “a bank or other financial institution”, imports some restriction as to the class of entities that may be transferees. However, he supported the Judge’s analysis of the nature and extent of the restriction, making two main submissions.

First, he supported the Judge’s inclusion, in his list of shared characteristics with a bank for this purpose, an ability to lend money of the order provided for in the Agreement because, as he conceived it, of a need to secure, as far as possible, that a transferee before draw-down could honour the loan. Beyond that, Mr Howard maintained, there was little, if anything, in the Judge’s reasoning from the language of the Agreement or in the agreed expert evidence on which the Judge had relied, to narrow the meaning of the term “other financial institution” to a lender active in the primary debt market, as contended for by Mr Rabinowitz.

In particular, Mr Howard submitted that the agreed expert evidence as to the small extent to which in 1997 non-bank entities traded in debts was of no help to Essar, since it showed that there was a well-known market for trading in debt when Essar and the Syndicate made the Agreement and that it was a market in which bank and non-bank investors participated. As to why individual borrowers at that time might have looked for a restriction on transfer, it was enough to note that Essar had not sought to rely on any implication of term by custom or usage in support of the restriction that it claimed.

Secondly, Mr Howard pointed out what is plain from the Agreement. Although it imposes a restriction on transferability, it imposes no restriction at all as to assignability. The Syndicate members, if they had chosen to do so, could have assigned their rights to anyone on due notice to Essar, including that of entitlement to repayment of the loans already drawn down. That alternative option, he submitted, undermined Mr Rabinowitz’s attribution, as a matter of general construction of the Agreement, of concern to the parties at the time of making it as to the “suitability” of those who might become transferees under it. Put alongside the clear contemplation of the Agreement that Syndicate members might trade the debt in the secondary debt market, he submitted it could not sensibly be construed to exclude institutions whose sole or primary activity was in that market from becoming transferees, yet to enable them to take over the debt as assignees without such or any restriction.

In my judgment, the Judge correctly concluded that the term “other financial institution” in the expression “bank or other financial institution” need not be a bank or even akin to a bank. Clearly, the disjunctive form of the contractual expression, “bank or other financial institution”, allowed for a financial institution that was not a bank, certainly not in the narrow conventional sense of lending money and/or accepting deposits for investment. However, given the use of that expression in a loan agreement allowing the transfer of the rights and obligations of the contract loan to a financial institution other than a bank, the assignment of its rights to anyone, and the known existence of a secondary market in such loans, I can see no basis for the Judge’s starting point that one of the characteristics of such an institution was that it had to be a lender, whether in the primary market or otherwise. It is equally beside the point whether a potential transferee is technically a lender as an established trader in loans in the secondary market or, indeed that it would become a lender, if not otherwise qualifying as such, on becoming a transferee under the Agreement.

It follows, in my view, that it is equally immaterial in the commercial context of the Agreement whether a transferee is good for the loan monies under it, if, at the time of transfer, the borrower had not drawn them down – the fourth characteristic that the Judge held an “other financial institution” should share with a bank. It would be nonsensical if the meaning of a transferee under this Agreement were to turn on whether, at the time of transfer, the loan had been drawn down. The commercial reality of the Agreement, with its short draw-down period of 45 days and in its provisions as to transfer and to assignment, was that in the majority of cases it was catering for the trading of debts, often distressed debts, in the secondary debt market, that is, after draw-down. In that commercial context there can be no justification for insinuating into the term an “other financial institution”, an ability to honour the original loan in the short draw-down period commonly a feature of such syndicated loans. As an exercise of construction, it would, as Mr Howard observed in argument, amount to the tail wagging dog.

Equally, it is difficult to see the commercial reality of the arguments advanced by Mr Rabinowitz (and at least in part acknowledged by the Judge in concluding that clause 27.2 imposed some restriction on transfer) in the greater reassurance for all parties in the restriction for which he contended for example, in the approach to and administration of the recovery of the loan. Those who buy debt, distressed or otherwise, are, by the very nature of the transaction and commitments undertaken, likely to have a shared interest with fellow lenders in the orderly payment of interest and or of any staged repayments of capital for which such an agreement or subsequent arrangement might provide and with which the borrower is complying. But where, as in this and many such cases, the borrower is in serious long-term default and its debt has been traded at a significant discount, the commercial reality is that each lender, whether original or transferee (or assignee) will have its own commercial interest in securing speedy or an otherwise effective means of recovery by whatever legal means are open to it. The trading in distressed debt and recovery of their outlay by those who have contractually secured their right to sell it, and by those who buy it, is necessarily a harsh commercial environment. It is not one in which parties to syndicated loan agreements providing contingently for the trading of debts the subject of them could ordinarily confidently expect or provide at the time of contract for enduring and harmonious relationships.

Behind all those considerations is Mr Howard’s second main submission on this issue, namely that clause 27.1 of the Agreement, in its provision for the trading of the loans made under it, allowed members of the Syndicate, as lenders, though not Essar, as the borrower, to assign rights under the Agreement. That provision entitled the Syndicate members to assign to anybody the right to recover, in accordance with the Agreement’s terms, monies advanced to Essar. It is true that, after assignment and before draw-down, Essar would have retained its rights to call for the loan monies against the Syndicate. It is also true that, after assignment and after draw-down, both Essar and the original Syndicate members would have been subject to certain residual obligations under the Agreement, for example, obligations of Essar to indemnify Syndicate members (clauses 18 and 22) and continuing obligations of Syndicate members in respect of costs of redistribution between them of loan repayments (clause 24), costs of administration (clause 25) and agency fees (clause 26). Even allowing for those residual obligations, there would have been little point in either Essar or the Syndicate members intending or seeking to protect themselves against transfer by one or more of them to a financial institution that was not an established lender of proven worth or one that might not behave “suitably” in the administration and/or recovery of any loan monies transferred. Such protection, if it existed, could simply be set at nought by the Syndicate members selling their share of the debt resorting to assignment.

Given the history of this matter, it is a curiosity that the members of the Syndicate concerned and Argo seemingly did not turn their minds at an earlier stage than they have to the assignment route to recovery. If they had done, it would not have been open to Essar to take any point as to Argo’s qualification to become an assignee and hence its entitlement to recovery of the loan monies concerned.

I should add, for the sake of completeness, that I have considered with care Mr Rabinowitz’s recourse to a number of provisions in the Agreement to support his narrow construction of “transfer” within the ambit of clause 27.2. Without going into unnecessary detail, my view is that none of them considered individually or together, supports his contention that a transferee for the purpose of clause 27 must be an institution that lends money in the primary lending market. Such references were in the main clearly short-hand references to the original lenders under the Agreement or, in the event of transfer or assignment under clause 27 and as appropriate, a transferee or assignee, as inclusively defined in clause 33.1, the latter in its context, “without limitation” - that is, anyone at all.

For the reasons I have given, I would go further and hold - contrary to the reasoning of the Judge on this issue - that it is not a necessary characteristic of a transferee that its business should include bank-like activities, such as the lending of money, whether on the primary or secondary debt market or otherwise, or indeed that it should exhibit any particular standard of suitability or probity as a financial institution. All or most of Mr Rabinowitz’s submissions in this respect turned on the use of the word “bank” and reference to what was expected of it in different contexts after draw-down. However, those few residual obligations of lenders after draw-down are, in my view, insufficient to colour or restrict the range of entities to which debt may be passed in the secondary debt market. In such circumstances – for which the secondary debt market mostly provides - the borrower has had the benefit of the money. It is its substance and integrity in meeting its repayment obligations, not those of the original or transferee lender’s ability to continue to hold the debt that will, in most cases, be the matter for concern.

As to “suitability” of a transferee, given the spare terms of the Agreement’s definition of “Transferee”, its separate provision for unrestricted assignment and its commercial context, the notion of a transferee having to be a sound and respectable lender, whether in the primary of secondary market, was, in my view, clearly outside what the parties could reasonably have intended or expected of the Agreement. If the parties had intended it to provide protection to that effect, they could and would have done so in clear terms. For example, they could have stipulated that it should be a body subject to a particular regulatory regime or regimes, or, as Hallett LJ mooted in the course of submissions, have expressed the restriction as “a bank or other similar financial institution”.

I, therefore, end up with a broader interpretation than did the Judge of the term “other financial institution” in the expression, “a bank or other financial institution”, in the Agreement. In my view, the Judge, in identifying the nature of the restriction imposed by the Agreement on the meaning of a transferee for the purpose of considering whether a putative transferee was entitled to claim repayment of debts of Essar passed to it, adopted too restrictive a meaning. He should have held that it was satisfied by proof that the putative transferee met the broad fifth criterion he identified in paragraph 38 of his judgement, namely having “a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation and whose business concerns commercial finance”, and whether or not its business included the lending of money on the primary or secondary lending market.

The commercial reality of a dispute such as this is that a lender under a syndicated loan agreement, whether original or by way of transfer or assignment, may and should be entitled to recover from the borrower monies lent when they become due and that the borrower, whether distressed or otherwise, has and need have little interest as to the commercial or financial status of the body to which the role of lender has passed. Here, Essar is a long-standing defaulter in making repayment of a substantial loan provided for by an agreement which, by its very nature, provided for the eventuality of it being traded at a discount as a distressed debt in the secondary debt market. There is no basis, whether in law as a matter of construction of the Agreement, still less of justice, for permitting it to avoid honouring its debt through the device of mounting an attack, well-founded or not, on the financial or commercial character or status of its lender.

whether Argo is an “other financial institution”

The Judge was satisfied, on clearly adequate evidence, that Argo was not a “bank” or otherwise principally engaged as a provider of finance in the primary lending market; and Argo does not challenge that finding. However he found that it was an “other financial institution”, within the meaning he had given to that term under issue 1, for the purpose of the transfer provisions of clause 27.2, a meaning, which, as I have said, was in my view too narrow. He said, at paragraph 48 of his judgment:

“I have concluded that Argo is and was, at the time the transfers were made, an ‘other financial institution’ within the meaning of the phrase that I have held the parties intended to give to it. Thus:

(i)

Argo is a lender of money. It lends money principally by buying debt on the secondary debt market, but in stepping into the shoes of the primary lenders it always thereby becomes a lender itself. At the same time, Argo does (and did, albeit as a minor part of its business in 2002/3), engage in some primary lending.

(ii)

[Counsel for Essar] did not suggest, nor could he, that Argo would be unable to identify a “Lending Office” or produce accounts as evidence of money lent to the Borrower and so forth.

(iii)

Argo is and was, financially, technically and legally capable of lending money on the scale required to be a participant in this syndicated loan.

(iv)

Argo is an entity that is properly constituted in accordance with the laws of the Cayman Islands and it carries on its business there under the Cayman Islands Monetary Authority. Its manager and investment adviser are both properly constituted and carry on business in accordance with the regulatory authorities in, respectively, Cyprus and the UK.”

Mr Rabinowitz accepted that if the Judge was correct in his interpretation of the term “a bank or other financial institution” under the first issue on the appeal, he could not challenge his finding on this second issue. However, he submitted that, if the Judge was wrong on the first issue in failing to include primary lending as a necessary characteristic to satisfy the definition, there was no legal basis for this finding. He addressed the Court on what he suggested were Argo’s insecure, indeed suspect, corporate structure and base, its lack of any significant involvement in primary lending and its concentration on trading in “distressed debt” such as that of Essar.

Mr Howard, in response, was content to support the Judge’s reasoning based on his, the Judge’s, construction of the term an “other financial institution”. Mr Howard submitted that, on the Judge’s findings of fact in paragraph 48 of his judgment, Argo’s secondary lending activities fell within it. With an eye also on the Judge’s inclusion of capacity to lend sums of this order in the secondary debt market in his list of characteristics of such an institution eligible to become a transferee, Mr Howard sought vigorously to rebut Mr Rabinowitz’s suggestions that Argo was suspect in that or any other respect.

In my view, the Judge’s conclusion, on the evidence before him and for the reasons he gave, that Argo was an “other financial institution”, and thus entitled as a transferee to claim repayment was consistent with his construction of that term in the Agreement. It is also and with a greater margin consistent with the broader construction that I would adopt, which, as I have said, does not depend upon Argo’s principal business being that of a lender, whether in the primary or secondary debt market.

I would, therefore, dismiss Essar’s appeal, with the result, if I am right, that Argo does not need to rely on its alternative case, now repeated in its Respondent’s Notice, that the instruments upon which it relied as transfers were effective as assignments under clause 27.1 or as notices of assignment effected by the Syndicate’s pleaded reliance upon them as transfers in Essar’s proceedings against them in Singapore. However, like the Judge, and in deference to the arguments put to the Court on this alternative issue, I shall express my view shortly on it.

whether, if Argo is not an “other financial institution”, the purported transfers could operate as assignments

As a matter of entitlement under the Agreement, this is an academic issue quite apart the fact – if am right as to transfer – that it is an alternative basis for Argo’s claim on which it does not need to rely. If Argo wished, or wishes to rely on assignment, it could have done so at any time, and could do so now, by procuring from the original Syndicate members a clear act of assignment followed by a fresh action based upon it. Argo’s failure to take that course, certainly as the present proceedings have matured, may have more to do with the costs of these proceedings than anything else.

Mr Howard submitted that the Syndicate’s defence in the Singapore proceedings relying upon the purported transfers, if ineffective as such, took effect as assignments of which the notices of transfer and/or that defence served as notice, or that the defence itself operated as an assignment. In so submitting, Mr Howard referred to what he described as the general principle of law that contractual rights are freely assignable in the absence of a stipulation in the contract to the contrary, and noted again that clause 27.1 expressly provides for unrestricted assignment. He also pointed out that an assignment need not take any particular form; it is enough for a creditor to make clear his intention that the putative assignee should have the benefit of the debt, citing Halsbury’s Laws, 4^th ed, Vol 6, para 30; and Van Lynn Developments v Pelias Consttruction Co [1969] 1 QB 607, CA. It followed, he submitted, that the relevant Syndicate members could have effected an assignment at any time simply by declaring their wish to do so, either when the Syndicate members pleaded their case in the Singapore proceedings or when the original instruments of transfer were entered into.

The Judge rejected a similar argument of Mr Howard. He did so first, by holding that, on Argo’s pleaded claim before him, it could not maintain that the Syndicate members’ defence in Singapore indicated a change of mind as to the nature and effect of the earlier instruments of transfer. Secondly, he held that if the instruments of transfer were ineffective as such, they could not take effect as assignments, because the two concepts, certainly in the context of clause 27 of this Agreement, were two quite different legal constructs; transfer amounting to novation so as completely to replace the relevant Syndicate members by Argo for all purposes of the Agreement and, by its very nature, incompatible with a simultaneous intention or understanding by both parties that one of them should assign some of its existing rights under the Agreement. This is how the Judge put it, at paragraph 65 of his judgment, setting aside for the purpose his concern on the pleading point:

Mr. Howard challenged the Judge’s need for concern as to way in which Argo’s case is pleaded, but sought, if necessary, permission to overcome any deficiency in that respect by amendment. On the point of substance, he adhered to his alternative argument before the Judge that the instruments of transfer themselves were effective as assignments, alternatively that the Syndicate members’ defence in the Singapore proceedings served as such. He added that the Judge had made too much of the legal difference between novation and assignment, and that, since assignment requires no particular form, and that transfer “includes” assignment in the sense that “the greater includes the smaller”, the intention of the parties, rather than the form used should prevail.

Mr Rabinowitz supported the Judge’s reasoning in rejecting Mr Howard’s submissions on this issue, maintaining that novation and assignment are mutually exclusive and that there was no evidence to support a suggestion that the Syndicate members in their Singapore pleading intended a change of mind from transfer to assignment.

If it were necessary to do so, I would uphold the Judge’s reasons for rejection of Mr Howard’s submissions in support of Argo’s alternative case under this head. Clause 27 provides two quite distinct modes by which syndicate members could – to use a neutral term for this purpose – pass debts, in the sense of the right to repayment of them, to another. The first, for which clause 27.1 provided, was assignment subject to no restriction as to the class of assignee, and the second, for which clause 27.2 provided was transfer – novation – imposing, albeit, in my view, loosely, a restriction as to who could be a transferee. In entering into the Agreement containing two such separate modes by which the Syndicate members could trade their debt in the secondary debt market, Essar and they must be taken to have intended two alternative and mutually exclusive modes of doing it. Such an intention was consistent with English law, which, by clause 32.1 of the Agreement governed its construction. In English law a distinguishing feature of novation from assignment is that the effect of novation is not to assign or transfer a right or liability, but to extinguish the original contract and replace it by another: see Chitty on Contracts, 29^th ed. Vol 1, paras 19-085 – 19-087.

Accordingly, I would dismiss Essar’s appeal and reject Argo’s arguments set out in its Respondent’s Notice.

I agree, but, in the light of the different opinions expressed below, add a few observations of my own.

It is clear that a transferee must accept the obligations which would fall on it, and these, early in the life of the contract and for a short time only viz before drawdown, might include the obligation of primary lending. It should not be supposed, however, that that possibility can give much guidance to the meaning of “other financial institution”. This is because the lending obligation transferred might be larger or smaller, since the transferring bank can transfer all or any part of its rights. And even banks, let alone other financial institutions, come in all shapes and sizes. However, that does not mean that an “other financial institution” needs to be primarily or even generally engaged in primary lending as distinct from other forms of financial transactions. That would, in my judgment, be unnecessarily restrictive: as Hallett LJ observed in argument, the phrase under consideration is not “bank or other similar institution”.

I therefore agree that the first of the judge’s required characteristics (see para 38 of his judgment), namely that “they must be lenders of money” is not necessary, if by that is meant that an “other financial institution” must be primarily or regularly engaged in lending. Moreover, his explanation that “institutions who buy debt in the secondary market thereby become lenders, by definition” is not, I think, correct. Traders or investors in the secondary market are not lending, for they are lending neither to the selling bank, with whom their relationship is one of buyer and seller, nor to the original borrower, who has already received his loan from the syndicate of banks. What traders and investors in the secondary market are doing is providing capital, and by doing so they are performing the important function of adding to the liquidity of that market; and thereby providing support for the primary market too. But they are not thereby lenders.

In my judgment the essential characteristic of a “financial institution” is that it provides capital to financial markets. It is not, therefore, any kind of business entity, but one that, to adopt the expression later used by the LMA, regularly makes, purchases or invests in loans, securities or other financial assets. As such, such institutions are likely to be professional, more or less regulated, and of a certain size. It seems to me that the word “institution” denotes an entity of a certain substance. As such it is a rather unsatisfactory word to use in a contract: how substantial does a company have to be to be an institution? How long is a piece of string? In the circumstances, I am not surprised that the expression has since 2001 been dropped by the LMA. I would suggest that the only satisfactory way to regard this element is to say that the word is intended to exclude entities which are insubstantial. As stated above, a regular provider of capital to financial markets is unlikely to be insubstantial (although of course it might become financially insecure, which is, however, another matter).

In the present case, however, Argo is a hedge fund, which is a recognised type of financial institution, is quoted on the Irish stock exchange, and invests money for clients who include insurance companies, pension funds, banks, other funds and rich individual investors. As the transactions in this case alone demonstrate, it is certainly not insubstantial.

The question might arise, although it did not in this case, as to what might happen if a syndicate bank sought to transfer its obligations in full before drawdown to a transferee who was not capable, despite being an “other financial institution”, of fulfilling the primary lending obligation devolved on it. In an extreme case, a syndicate bank might, I suppose, try deliberately to shuffle off its lending obligation by such a transfer. It is in theory possible that in such circumstances some term is to be implied to the effect that the transferring syndicate bank warrants that its transferee is capable of performing its drawdown obligation. However, while drawing attention to this issue, I prefer to express no opinion about it.

In sum, I agree that this appeal must be dismissed.

I have had the opportunity of reading the judgment of Auld LJ in draft and for the reasons that he gives, I too agree that this appeal must be dismissed.