While a trustee and liquidator have certain powers to set aside transactions for preference and undervalued transactions, as well as those that defraud creditors, only a liquidator has the power to prohibit dependent contracts in general. Therefore, a trustee`s failure to work under a sub-participation agreement would constitute an offence without such a circumstance and would constitute a claim for compensation from the sub-participant. However, the possibility of making such a claim would be subject to the moratorium that would result from the appointment of the director. Although there is no automatic right of the sub-participant, in the event of insolvency of certain market players, it is common for an “increase clause” to be included in the sub-participation agreement that gives the participant the right to (i) the perception of a sub-participant to a lender in a record position (if it is granted direct rights and obligations to the borrower), or (ii) the transfer of the loan to a third party (with the intention of the operator of a new interest with such a third party). A participant may argue that partial participation gives rise to confidence in the proceeds of the underlying loan in favour of the sub-participant. Such characterization is difficult to support, however, as the under-participation agreement often explicitly states that nothing in the agreement represents the funder as an “agent, trustee or agent” for the participant. While this argument may be useful in the context of non-payment distributions, such an interpretation does not readily lend itself to the general nature of the partial ownership structure, i.e. a loan granted by the sub-participant to the transferor. In summary, when a lender suffers a deterioration in credit quality, particularly if this may lead the recipient to initiate formal insolvency proceedings, a sub-participant should take into account the recklessness of the lessor`s performance risk and the risk of becoming an unsecured creditor in the event of the lender`s insolvency, by requesting an immediate increase in any partial participations. If such an increase is not possible or is not requested, a sub-participant should also consider requesting the transfer of the lender to a data station to a third party agency in order to negotiate and obtain a new partial interest in that third party. (iii) Approval – Some credit contracts require the borrower`s agreement before a loan can be transferred and there is no consent. This memorandum provides an overview of the practical problems faced by a partial participant in a credit market association (“LMA”) with a partial English-language participation agreement when the lender`s creditworthiness deteriorates. Although the bank was successful, the litigation resulted in a delay in execution, which could have been avoided if, as usual, the partial participation had been confidential between the lead bank and the participant.
Given the nature of the form of the LMA`s partial participation agreement – the underlying loan is the property of the donor – there is a potential risk that the transaction will be wrapped up if the transfer or increase took place on the eve of bankruptcy. However, an increase during a moratorium (the period following the appointment of a director is effectively a freeze on creditors acting against the debtor) would in practice require the cooperation of the administrator and is therefore unlikely to be cancelled at a later date (although the actions of a director could still be challenged by creditors or a liquidator at the request of the court).