guide to acquiring distressed debt

8/12/2019 Guide to Acquiring Distressed Debt

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Acquiring Distressed DebtA guide to European regimes


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Acquiring Distressed Debt

A guide to European regimes

April 2013


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1

Introduction

A key challenge facing the banking sector in recent years has been the need to deal

with troubled loans on balance sheets. One of the solutions available to optimise

returns is to transfer loans to purchasers, either individually or on a portfolio

basis. Loan sales of this nature give a bank a relatively quick and easy method of

converting its distressed loan book into cash, whilst giving potential purchasers

the ability to acquire loans to build their own strategic portfolio, or on a loan toown basis with a view to ultimately acquiring the underlying business or asset.

The Loan Market Association has published a users guide which includes a

suggested procedure for debt transfer, and a set of precedents for suggested use

in debt transfer transactions. However, as the LMA guide points out, users need

to pay heed to local law considerations before entering into debt trades.

In this guide we provide an overview of the relevant local law considerations in

14 key European jurisdictions, prepared by specialist nance lawyers from our

network who have extensive experience of advising clients on debt transfers.

At the end of this note, we set out a brief overview of the suggested LMA

procedure for debt transfers.


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General observations on cross-border transactionsAs with any nance transaction, it is critical that local law advice is takenat the earliest opportunity as the laws governing loan assignments andparticipations differ from country to country. This inevitably increasesthe complexity of loan acquisitions where the borrower has groupcompanies and/or assets in multiple jurisdictions. However, set out beloware some observations which may assist a potential loan acquirer in suchcircumstances:

It is increasingly common for LMA style, English law governed,

documentation to be used for higher value, cross border lending. Thissimplies the process for taking assignments or participations of loans.Care should still be taken when reviewing such documentaiton howeverbecause, for example, the borrowers may have negotiated changes fromstandard LMA wording on a case-by-case basis or in the case of securityover assets outside the UK, it may be necessary to re-take or re-registersecurity, irrespective of wording contained in the facility agreementwhich apparently circumvents this need.

In most jurisdictions, rights against a borrower can be assigned, butlender obligations cannot; the effect of this is that, other than in the

case of matured loans, in order to transfer outstanding obligations,a new agreement (ie a novation) will need to be agreed under whichthe borrower agrees to release the original lender from its existingobligations and replace those with obligations from the new lender. Theproblem is that in many jurisdictions, a novation requires new guaranteesand security to be taken, with attendant cost and delay. It may, however,be possible to mitigate this problem if the original lender assigns its rightsunder the loan agreement, and the new lender assumes the outstandingobligations of the original lender. This may still require the consent of theborrower, but may remove the need to re-take guarantees or security.Legal advice should be taken in any particular case.

Note and Disclaimer

This note does not consider regulatory issues that may arise on a transfer of debt (eg in

relation to transfers of consumer loans) or set off issues (which can be complex, particularly

where a borrower becomes subject to a formal insolvency procedure). If you require guidance

on either of these issues, please contact any of the lawyers whose contact details are

included in this guide.

Published [ ] 2013. The information contained in this document is intended as a guideand whilst the information is believed to be correct, it is not a substitute for legal advice.

Eversheds LLP can take no responsibility for action taken based on the information

contained in this guide.


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Contents

England and Wales 4

Republic of Ireland 8

Czech Republic 12

France 16

Germany 20

Hungary 24

Lithuania 28

Poland 30

Romania 34

Spain 36

Switzerland 40

Slovak Republic 44

Sweden 48

The Netherlands 52

Loan Market Association (LMA) 56

3


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England and Wales

There are a variety of methods open to lenders and counterparties which are

available to transfer credit risk between parties for example, credit default swaps

and credit insurance. However, they are beyond the scope of the note below which

considers only assignments, novations and participations of loans.

Note that under the English legal system it is possible to separate legal title, and

equitable (or commercial) title. This concept does not exist in certain other

jurisdictions, and users of this guide should therefore note that this will give rise

to different legal considerations and transaction structures in those jurisdictions.

Main methods for effecting a loan transfer

Assignment

An assignment will effect a transfer of the loan to the buyer.

English law distinguishes between legal and equitable titles to property including

loans. It is therefore possible to effect a transfer of the legal and equitable

title together, or only the equitable title in the loan. If legal and equitable title

is transferred, this means that the buyer will become the lender of record. If

equitable title only is transferred, the original lender will remain lender of record,

but will hold the benet of the loan on trust for the buyer.

The main procedural difference between a legal and equitable assignment is that

in order to a effect a legal assignment, notice of the assignment must be given to

the borrower.

Note that under English law, liabilities of the lender to the borrower eg to full a

drawdown request cannot be transferred to a third party by assignment; if the

parties wish to achieve this, they will need to enter into a novation.

Novation

Under a novation arrangement, the borrower, lender and the third party agree

to terminate the existing lending arrangements and replace them with new

arrangements on the same terms, but substituting the new lender for the original

lender. This will require the agreement of the existing borrower.

Note that under current LMA style syndicated loan documentation, the facility

documentation contains a pre-agreed mechanism to effect novations.


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Participation

Rather than effecting a transfer or novation of rights and obligations, aparticipation (also called a sub-participation) is a contract between the lender

and the participant under which the lender sub-contracts part or all of its risk

to the participant. For payment of a fee, the lender will agree to pay to the

participant sums equal to sums received from the borrower by way of payment

of liabilities under the loan agreement, and the participant will reimburse the

lender where the borrower fails to meet those liabilities.

Participation agreements can be used to achieve a similar commercial outcome

to a transfer or novation, and may be advantageous where a transfer is barred

under the original loan agreement, or where the lender wishes to keep matters

condential from the borrower.

From the participants perspective, the primary disadvantage in entering into a

participation arrangement rather than an assignment is that the participant is

exposed to the credit risk not only of the borrower defaulting on the loan, but

also the credit risk of the lender.

Participation agreements are either funded, where the participant agrees to

reimburse the lender for sums for which it is liable to the borrower eg under

future drawdown requests; or unfunded, where the participant is obliged to

fund the lender only where the borrower has failed to make a payment due to

the lender.

Contractual Limitations

A loan can only be assigned provided that the loan agreement does not contain

a bar or restriction on assignments. The following contractual restrictions and

issues are encountered:

Absolute bar on assignment this is uncommon, but would prevent a lenderfrom assigning its rights to a buyer. It is possible (but, again, uncommon)

that a loan agreement could contain a restriction preventing a lender

entering into a participation agreement.

Restriction on identity of transferee it is common for a loan agreement

to provide that assignments can only be made to a specied category

of permitted assignees eg a bank or other nancial institution. Such a

restriction would have the effect of preventing an assignment to persons

falling outside the denition of permitted assignees.

5

ENGLANDANDWALE

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Consent not to be unreasonably withheld a loan agreement may provide

that a loan can be assigned to a third party only with the consent of theborrower, such consent not to be unreasonably withheld. If this is the case,

and the loan agreement does not contain further provisions clarifying the

basis on which consent can or cannot be withheld, this may give rise to some

uncertainty as to whether any proposed assignment is permitted. Other duties

commonly found in loan agreements are a duty to inform and consult with

the borrower; these provisions, broadly speaking, oblige a lender to give

disclosure of any proposed assignment in advance, but fall short of the need

for consent.

Restriction on disclosure of condential information a third party is onlylikely to be willing to purchase a loan if the lender is permitted, in advance

of an assignment, to disclose certain condential information relating to

the borrower eg reports or nancial information received under the

loan agreement. Generally under English law a lender will owe a duty of

condentiality to the borrower; therefore a loan agreement needs to

contain an exception to this duty of condentiality to permit a lender

to disclose relevant information to proposed assignees.

Guarantees and Security

Any guarantees, or security (ie mortgages or debentures), can be assigned to the

buyer of the underlying loan, but will only continue to secure the underlying loan

to the extent that it was contemplated under the original guarantee and security

documentation that the rights created would extend to assignees. A buyer should

therefore check that express provisions are contained in the guarantee or security

documentation in this regard (for example, a provision which provides that the

beneciary of the security is the original lender or its permitted assignees).

Where a novation occurs, it is likely that the buyer will need to take new guarantees

or security to the extent required. Note however that where security is held by

a trustee, there will be no need for new security to be taken, provided that the

security documents are for the benet of lenders and their transferees. Note also

that under LMA style syndicated loan documentation, guarantees automatically

extend to loan transferees where there is a transfer by way of novation.

Under a participation agreement, the benet of guarantees and security will not

transfer to the participant (as there is no transfer of the loan itself). However, the

participation agreement can include provisions obliging the lender to enforce any

guarantees and security so as to maximise recoveries made from the borrower,and therefore maximise the value of the participation agreement for the benet

of the participant.


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ENGLANDANDWALE

S

Tax

The transfer of a loan will potentially give rise to a prot or loss for the transferor

for the purposes of UK tax. Broadly speaking, such prot or loss will be

ascertained in accordance with transferors accounting treatment and taxed

or relieved as income (rather than capital). We would not generally expect UK

stamp taxes to be payable in relation to a loan transfer.

Registrations

As there is no publically maintained register for corporate loans in the UK,

a transfer of a loan will not require any registration.

Security held over a companys property (ie mortgages or charges) is registerable

at Companies House in the UK. However, where there is an assignment of

security, that does not trigger a requirement for any new registration. Care needs

to be taken, however, to ensure that any arrangements reached between a lender

and a transferee to which the borrower is party do not in substance amountto a novation of the loan, which might give rise to a requirement to re-register

security rights.

Country contacts:

7

Paul de la Pea+44 20 7919 0706

[email protected]

Nick Swiss+44 20 7919 [email protected]


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Republic of Ireland

Introduction

Irelands recent economic difculties have resulted in a large increase in loan

transfer activity. Much of this activity has involved Irelands National Asset

Management Agency (NAMA). In addition, Irelands IMF/EU programme requires

signicant deleveraging to be achieved by its pillar banks and other incumbent

(and some exiting) nancial institutions have also been engaged in selling parts

of their loan books. Such activity has been particularly prevalent in the context of

distressed real estate loans where purchasers have acquired loans on an individualor a portfolio basis and sometimes at a signicant discount to the loan

amounts outstanding.

The level of warranty protection given in the context of such sales is generally

limited and the onus is usually on a prospective purchaser of the debt in question

to satisfy itself that the loan and security package is transferable and will work in

the manner it requires after its acquisition. It may be that the loan documentation

is amended following the transfer if the borrower is willing to do so. This will all

form part of the prospective purchasers due diligence process.

Ireland is a common law jurisdiction and the broad legal concepts applicable

to the transfer of Irish law loans will be familiar to prospective purchasers who

have knowledge of analogous concepts in England and Wales and other

similar jurisdictions.

Main Methods for Effecting a Loan Transfer

The main methods for effecting a loan transfer in Ireland are broadly the same

as in England and Wales, ie pursuant to an assignment (whether legal or

equitable), a declaration of trust of the transferors rights, a novation or bya contractual sub-participation or risk participation.


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The same type of issues arise in Ireland as in England and Wales in the context of

contractual restrictions on loan transfers and condentiality issues.

The recent judgement in Patrick McKillen v Maybourne Finance and NAMA is a

reminder of the need to analyse contractual provisions in detail prior to effecting

any transfer. Although this was an English Court of Appeal decision it involved

the interpretation of Irish law loan agreements. Provisions in the documentation

required the lender to consult with the borrower prior to the transfer of the

loans in question and these were subject to dispute. The judgement conrmed

that NAMA had been free to transfer its loans in this particular case withoutrestriction.


In Ireland similar considerations arise in the context of the transferability of

guarantees and security documents as those in England and Wales. Since any

existing guarantees and security will expire upon a novation, a transferee will

require new guarantees and security for its own benet. The new security

agreements will be required to be registered and could lose priority or result in

difculties in the context of Irish insolvency legislation relating to preferences,hardening periods and the like.

Tax

The taxation regime in Ireland can be advantageous for entities acquiring

distressed loans. Depending on the circumstances of each particular case, loan

portfolios can be acquired in an efcient manner by using structures which avail

of Irelands favourable corporate tax and capital gains tax regimes, including the

use of Irish special purpose vehicles or Irish qualifying investor funds.

Irish stamp duty can apply if the loan documentation is executed in Ireland,

relates to Irish debt or relates to matters or things done or to be done in Ireland.

A charge to stamp duty can generally be avoided by effecting any loan transfer

by way of a novation and not an assignment. Where a loan cannot be novated,

there is an exemption for transfers of loan capital which may apply subject to

satisfying certain conditions. The transfer of debt securities issued by an Irish

securitisation vehicle are specically exempt from Irish stamp duty.

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ELAND


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Other taxation issues which should be considered include the treatment of interest

payable on the loan subsequent to any transfer. In particular, care should betaken to ensure that interest is paid and is receivable in the most efcient manner

even if interest rate gross-up provisions are contained in the underlying loan

documentation. Also, corporation tax and capital acquisitions tax need to be

considered as part of any arrangement which will involve a waiver or write-down

of the debt.

Registrations

Similar registration issues as those in England and Wales arise in the context of

an Irish debt/security transfer and the position needs to be analysed on eachoccasion.

Note that security lings may be required depending on the nature of the assets

which are subject to the security. So, for example, the particulars of security over

registered land which is transferred can be registered at the Land Registry.


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IR

ELAND

Country contacts:

Steve Rodgers+353 1 [email protected]

Darragh Blake+353 1 [email protected]

11


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Czech Republic


Assignment

Under Czech law, receivables, including the right to repayment of a loan can be

unilaterally assigned by the creditor.

An assignment will become effective between the parties to it upon execution.

Vis--vis the borrower the assignment will be effective upon delivery of a notice

of the assignment to it.The lenders obligations (eg the commitment to permit further drawdown) cannot

be unilaterally transferred without the consent of the borrower. In practice, such

consent is often given in advance in the original loan agreement.

Novation

Under a novation arrangement, the borrower, the original lender and the third

party agree to replace the existing lender with a new lender while the other

conditions of the loan agreement remain unchanged.

The loan documentation may contain a pre-agreed mechanism to effect novations.

Participation

Similar to UK Law, under Czech law it is possible to conclude a sub-participation

contract between the lender and the participant or another synthetic transfer

of the risks and benets from the loan agreement.


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The following contractual restrictions and issues are commonly encountered:

Restriction on identity of transferee it is common for loan agreements


of permitted assignees eg a bank or other nancial institution. Such a


falling outside the denition of permitted assignees. However, such

restriction is usually limited to situations where the borrower is not in

default. In a default situation, the restriction is relatively uncommon.

Restriction on disclosure of condential information the assignmentcould be effectively restricted by contractual restriction on disclosure of

condential information. Therefore it is important to pay attention to the

condentiality clause in the loan agreement so that it allows the disclosure

of information to a third party. Such disclosure may be conditional upon

conclusion of an NDA.

In addition lenders owe a general duty of condentiality to their customers.

The Czech National Bank has addressed this issue stating that if the borrower

fails to comply with its obligations under the loan documentation and the lender

decides to sell the receivable to any third party, it will be allowed to disclose tosuch third party information about the loan notwithstanding the banks duty of

condentiality to its customers.


Most security instruments (eg mortgages, movable pledges, share charges)

automatically transfer to the buyer together with the assigned loan. However,

there is a risk that they will only continue to secure the underlying loan to the

extent that was contemplated under the original security documentation. It is

therefore advisable that a buyer checks the original security documentation for

any restriction and seeks conrmation from the borrower that it consents to the

assignment of the underlying loan and the extension of the security obligations

to the buyer. This may be difcult to procure where the loan is distressed/non-

performing and the borrower is reluctant to cooperate.

Where a novation occurs, depending on the form of the agreement and wording

of the security documentation, the buyer may need to take new guarantees or

security to the extent required.

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C

ZECHREPUBLIC


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transfer to the participant (as there is no transfer of the loan itself). However, theparticipation agreement can include provisions obliging the lender to enforce any

guarantees and security so as to maximise recoveries made from the borrower,

and therefore maximise the value of the participation agreement for the benet

of the participant.

Registration and stamp duties

The transfer of a loan is not generally expected to give rise to stamp duties.

However, the records of security registered in various registries would need to be

updated, often incurring separate fees (notarial, court or administrative fees).

The following types of security are subject to registration requests:

Mortgages over real property

Pledges of the participation interest in s.r.o. type companies

Pledges over dematerialised shares in a.s. type companies (ie if the shares

are book-entered)

Floating pledges in respect of the assets which remain at the disposition of

the pledgor (egg aircraft, cars, machinery, rolling stocks, etc)

Selected IP rights (trademarks, patents and industrial designs).


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C

ZECHREPUBLIC

15

Country contacts:

Libor Vacek+42 02 51 00 91 [email protected]

Petr Neumann+42 02 51 00 91 11

[email protected]


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France

Introduction

Only duly licensed or passported credit institutions are authorised to conduct

banking activities in France on a regular basis. This includes any form of credit

operations, as well as the purchase and sale of non-matured debts and/or

receivables. There is therefore a risk that a purchaser which acquires receivables,

and is not licensed or passported, might be in breach of these regulations if

its business following the sale constitutes banking activities. There are some

exemptions to that prohibition, in particular in the context of intragroup1

oroff-shore transactions. Also note that an unauthorised person could under certain

conditions enter into a participation arrangement with an existing lender.


Civil law assignment

This is the standard method of assignment of receivables under French law.

The sale is valid between the seller and the purchaser but requires, as a condition

to enforceability as against the assigned debtor and third parties, that theassignment be notied (signi) to the assigned debtor by a court bailiff (or

alternatively that the assigned debtor accept the assignment in a deed executed

before a French public notary)2.

There are no restrictions on the type of receivables that can be assigned under a

civil law assignment.

In the context of loan transfers, it is generally the case that this option is only

available where the loan is fully drawn down and the original lender has no

outstanding obligations to the borrower.

Assignment by way of subrogation

The French law concept of Subrogation is a legal mechanism whereby a third

party (subrog) that pays a debtors existing creditor (subrogeant) is substituted

in place of that existing creditor in respect of its rights as against that debtor. The

existing creditors rights are transferred to the new creditor together with any

ancillary rights attached thereto, up to the amount paid to the existing creditor.

Subrogation can occur without the agreement or consent of the debtor.


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FRANCE

Subrogation occurs at the time of the payment and only occurs if it is expressly

agreed to apply by the subrog and the subrogeant. It further requires a formalreceipt called quittance subrogative to be remitted by the original creditor to the

subrogated creditor.

As with civil law assignment, there are no restrictions in respect of the type of

receivables that can be assigned by way of subrogation. However, as the original

creditors rights against the assigned debtor are transferred to the subrogated

creditor only up to the amount paid by the latter, this may cause difculties

where the debt is purchased at a discount.

Subrogation is often used in the context of real estate renancing, as all existingsecurity interests (eg mortgages (hypothques conventionnelles) or lenders liens

(privilges de prteur de deniers)) will be maintained and transferred with their

existing rank being preserved in favour of the new lender, without the need to

take and register (and can therefore incur the costs of) new security interests on

the renanced assets.

(Note that French subrogation is different in its application and scope to English

law subrogation.)

DelegationOccasionally, lenders in the French market will transfer their loans by means of a

combination of a receivable assignment (cession de crances) and a dlgation

which novates the original lenders obligations under the loan agreement, as

obligations of the lender to the borrower eg to full a drawdown request cannot

be transferred to a third party by way of assignment. For dlgation to occur, the

agreement of the borrower will be required.

Participation

Rather than effecting a transfer of its rights and obligations, a lender canparticipate (or sub-participate) part or all of its risk to a participant.

Participations are generally used where, for example, the borrowers consent to

the transfer of the loan cannot be obtained, or where syndication by way of a

direct transfer will be affected by banking monopoly (ie where the participant is

not duly licensed or passported to conduct banking activities in France), or due

to withholding tax considerations.

Please refer to the description contained in the Participation section of the guide

for England and Wales.

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Limitations

The contractual restrictions described in the Contractual Limitations section of this

guide for England and Wales are also commonly found in French law documents

with one important exception. The French Commercial Code provides that any

clause of an agreement prohibiting the assignment to any third party of the

receivables arising from such agreement is null and void if such agreement is

entered into between commercial parties3.


Assuming that the assignment is performed under one of the methods referred to

above, all related security and ancillary rights will be automatically and without

formality (de plein droit) transferred to the purchaser.

French law4provides however that in case of novation, the guarantees and security

granted to the original lender will not benet any of its transferees or assignees,

unless expressly provided for in the original security documentation.




guarantees and security so as to maximise recoveries made from the borrower, and

therefore maximise the value of the participation agreement for the benet of

the participant.

Tax


for the purposes of French tax. Broadly speaking, such prot or loss will be

ascertained in accordance with transferors accounting treatment and taxed

or relieved as income (rather than capital).In the event the conditions resulting from the procedure prescribed under article

1690 of the French Civil Code (described above) are not met at the time the loan is

transferred, the borrower could run the risk of being regarded as the beneciary of

a waiver of nancial claim which would be liable to corporate income tax.


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FRANCE

1. Article L.511-7-3 of the French Monetary and Financial Code authorises acompany to carry out credit facility arrangements (oprations de trsorerie)

with companies which, directly or indirectly, have capital links with it that

confer on one of the linked companies an effective control over the others.

2. Article 1690 of the French Civil Code.

3. Article L.442-6 II of the French Commercial Code.

4. Article 1278 of the French Civil Code.

19

Country contacts:

Sophie Perus+33 15 573 [email protected]


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Germany


Assignment

An assignment will effect a transfer of the loan to the buyer. Upon transfer, the

buyer assumes the lenders obligations under the loan agreement in relation to

both the original lender and the borrower.

Where consumer loans are concerned, notice of assignment to the borrower is

mandatory, in other cases such notice is recommended, because otherwise theborrower could make payment to the original lender with debt releasing effect.

If an assignment takes place without giving notice of such assignment to the

borrower, even though the buyer becomes the new holder of the loan and the

security rights, the borrower can continue to make payments to the original

lender with debt releasing effect. In these circumstances, it is therefore advisable

for the buyer to agree specic terms with the original lender to administer rights

and obligations under the loan agreement vis--vis the borrower, and to collect

payments on behalf of the buyer.

Novation

A novation as described in the UK section is possible, but unusual in Germany.

As it creates a new loan agreement, guarantees and securities would need to be

created afresh, which would require the involvement of the borrower.

Participation/Sales Contract

The original lender and the buyer can agree a sales contract of the loan.

Under German law, such sales contract has no direct effect on the ownershipof the purchased asset, ie the loan and its security rights and the original lender

continues to hold the loan and security rights as against the borrower in its own

name. The original lender and the buyer will need to agree specic terms on the

administration of the rights and obligations under the loan for and on behalf of the

buyer vis--vis the borrower in the sales contract or a supplemental agreement.

Such arrangements are similar to a UK style participation, and also expose the

buyer to the credit risk of the original lender.


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G

ERMANY


A loan can only be assigned (with or without notice) if the loan agreement

does not contain a bar or restriction on assignment. Contractual restrictions of

an assignment as described in the England and Wales section of this guide are

possible, but uncommon, in Germany.

Contractual restrictions contained in a loan agreement do not affect the ability

of a lender to enter into a sales contract as described above.

Restriction on disclosure of confidential information

and banking secrecyA buyer will normally not be willing to acquire rights under a loan without

having reviewed the relevant documents, in particular the loan agreement itself.

Broadly speaking, the original lender is restricted on disclosure of condential

information by the banks duty to condentiality.

In practice the loan agreements therefore often contain provisions permitting

the original lender, in advance of an assignment or transfer, to disclose certain

relevant information relating to the borrower for renancing purposes.


German law distinguishes between accessory securities (in particular mortgages

(Hypothek), pledges and guarantees) and non-accessory securities (in particular

land charges (Grundschuld), security assignments, security transfer and

reservation of title).

Upon assignment of a loan, the accessory securities granted for the loan will

generally be transferred automatically by operation of law and will continue to

secure the underlying loan to the extent that it was stipulated under the originalsecured obligation, ie the security documentation. Non-accessory securities do

not automatically transfer to the buyer. In order to transfer those securities, an

additional assignment is required.

Charges over real estate, such as mortgages (Hypothek) or land charges

(Grundschuld), have to be registered in the land register. The transfer of such

charge needs to be registered as well. For such purpose, notary and land register

fees need to be incurred. Particular rules apply to the transfer of certicated

land charges.

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Upon assignment without notice, the original lender will exercise the rights of

accessory securities on behalf of the buyer, but can exercise the rights ofnon-accessory securities in its own name.

As regards Sales Contracts as described above, the original lender remains holder

of the security rights on a trust basis for the buyer. Under the sales contract or

a supplemental agreement the original lender and the buyer need to agree on

administration and enforcement of the security rights as against the borrower.

In order to reduce its credit risk vis--vis the original lender under an assignment

without notice as well as under a sales contract, the buyer is entitled to register its

land charges in the renancing register (Renanzierungsregister), which will grant

a right of separation (Aussonderungsrecht) for the buyer in case of insolvency

proceedings against the original lender.

Tax

Broadly speaking, the purchase and assignment of a loan itself will not give rise

to tax charges, even if the loan is secured by mortgage.

The effect on the corporate tax position of the buyer varies depending on the

particular transfer method.

Registrations

As there is no publically maintained register for loans in Germany, a loan transfer

does not require any registration.


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G

ERMANY

23

Country contact:

Thomas Ziegler, LL.M.+49 89 545 65 [email protected]


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Hungary

In Hungary, there is no entity similar to the Loan Market Association and

accordingly there is no standard procedure for secondary debt-trading as in

England and Wales.


Assignment

Assignment is a very common method of selling and acquiring distressed debt

in Hungary. An assignment will effect a transfer of the loan to the buyer and thebuyer will become the lender of record. There are no formalities prescribed by law

and notice to the borrower is not required for effecting the assignment. Notice

of the assignment to the borrower is however necessary for realizing the debt, as

until notied of the assignment, the borrower may discharge the debt by making

payments to the original lender.

According to the Civil Code (Section 328), if the borrower is notied of the

assignment by the assignor, the debtor may only make payments directly to the

new assignee after notication; in the case of notication by the assignee, the

debtor is entitled to demand certication of the assignment. If the debtor makespayments to the assignee without seeing such due certication, he does so at his

own risk.

The borrower is entitled to enforce objections and offset counterclaims arising

vis--vis the assignee on legal grounds already existing at the time when the

borrower is notied of the assignment.

The original lender shall, as a surety, be liable for the borrowers services to

the new lender, up to the value of the consideration received in return for

assignment, unless:

the original lender has assigned the claim to the new lender expressly as an

indenite claim

the original lender has otherwise excluded his liability.


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In Hungarian law, there are so-called ancillary securities which transfer

automatically to the buyer upon transfer of the underlying loan. Ancillary

securities include, for example, xed pledges, oating pledges, mortgages and

security deposits. There are also types of securities that are non-ancillary and

thereby do not transfer automatically with the transfer of the underlying loan,

these types of securities must be transferred separately or granted to buyer by

the borrower. Non-ancillary securities include for example: independent pledge

(when a pledge is created over an asset independent of any claims), option rights

that serve security purposes and assignment of rights and claims with the purpose

of providing collateral security.

The benet of a guarantee will only transfer to the transferee if the original

guarantee contains provisions that the rights extend to assignees.

Suretyship and liens securing a loan cease to exist upon the assumption of debt

in the absence of statements of approval from the guarantor and the obligor

of the lien.

Tax

Similar tax considerations apply under Hungarian law as those detailed in the

England and Wales section of this guide.

Registrations

As there is no publically maintained register for corporate loans in Hungary,

a transfer of a loan will not require any registration.

If the loan is subject to registered security, the transferees interest should be

registered in the relevant register. Mortgages over real estate are to be registered

with the Land Registry. All non-possessory security rights in movables other thansecurity interest created over special types of movable assets, eg vehicles, ships,

aircraft, intellectual property, business quota must be registered in the Register

of Pledges run by the Chamber of Notaries. Security interests created over the

abovementioned special type of movable assets are to be registered in the

relevant registries.


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H

UNGARY

5. The draft version of the new Civil Code (which is expected to be adopted by

Parliament shortly) contain provisions on novation, which if enacted, will require

a trilateral agreement between the original lender, the borrower and the new

lender and serve as a method for transferring whole contractual positions instead

of just certain rights and obligations.

27

Country contact:

Agnes Szent-Ivany+361 394 [email protected]


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Lithuania

Generally, the priorities outlined in the section for England and Wales applies

except as described below.


Assignment

Under Lithuanian law, a lender may without the consent of the borrower, assign to

a third party all or part of a loan. The assignment of the loan may not render the

borrowers obligations more onerous.The assignment of the loan should be made in the same form as the principal loan

agreement (eg in written form, approved by notary, etc.).

The loan may be enforced against third parties and the borrower from the

moment when the borrower is notied.

Novation

Under a novation arrangement, the new lender replaces the original lender and

the borrower is released from its obligations to the original lender.


If the loan agreement includes a bar on assignment, an assignment would

only be possible with the borrowers consent. If there is no bar or restriction on

assignment, an assignment is permitted without the borrowers consent,

provided that the borrower is not placed in a less favorable position as a result.


As a general rule, upon the assignment of the loan, the loan is transferred tothe buyer with the privileges established for the security of fulllment of the

obligation and other accessory rights. Some specic rules (eg obligation to

notify the borrower, etc.) may be applied in case of different forms of

guarantees and securities.

Where a novation occurs, it is likely that the buyer will need to take new

guarantees or security to the extent required.


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LITHUANIA

Registrations

As there is no publically maintained register for corporate loans in the Republic

of Lithuania, a transfer of a loan will not require any registration.

Security held over a companys property (ie real estate mortgages, other

property pledges (with exceptions), etc.) as well as amendments/assignment of

the security is registerable at Mortgages Register of the Republic of Lithuania.

29

Country contacts:

Rimtis Puisys+370 5 239 [email protected]

Milda Auktakalnyte.

+370 5 239 [email protected]


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Poland


Assignment

Under Polish law, a lender may transfer its receivable to another entity without

the borrowers consent, unless (i) a specic provision of law, or (ii) a provision of

the contract giving rise to the receivable which is to be assigned. The buyer will

acquire all rights related to the transferred receivable (please also see section 5.4

(Guarantees and Security) below).

The borrower has to be notied of the assignment in order to perfect the transfer.

Until the borrower is notied of the transfer, any payment by the borrower to the

old lender will be an effective discharge.

Novation

In Poland, novation is a transaction between the original borrower and lender

which extinguish the borrowers liability, and is not used for the purpose of

transferring receivables.

While it is possible under Polish law for contracting parties to agree to transfertheir rights and obligations to a third party, in practice the use of such agreements

is rare for distressed debts.

Participation/Securitization Funds

Securitisation Funds are special purpose vehicles set up under recent Polish

legislation. Whilst, under Polish law, lenders cannot generally enter into

participation agreements, they can enter into such agreements with Securitisation

Funds. Such agreements are similar to those described in the UK section.

Note that under Polish Bankruptcy Law, receivables of the bankrupt, which are

the subject of a sub-participation agreement, are exempted from the bankruptcy

estate. The sub-participant, being a party to the sub-participation agreement,

steps in the rights of the bankrupt with respect to the receivables. The trustee

or the receiver of the bankruptcy estate is therefore obliged to transfer to the

Securitisation Fund all proceeds from the securitized receivables.

Note that Securitisation Funds enjoy other benets in relation to loan purchases,

in particular in relation to the tax treatment of the transferred loans, and that a

lender otherwise subject to condentiality restrictions will be exempted from themwhen entering into a transfer or sub-participation agreement with a Securitisation

Fund, if revealing the condential information is necessary in order to conclude

the assignment.


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POLAND


The same type of issues arise in Poland as in England and Wales in the context of

contractual restrictions on loan transfers and condentiality issues:

Absolute bar on assignment this is relatively uncommon, but would

prevent a lender from assigning its rights to a buyer.

Restriction on identity of transferee it is common for a loan agreement


of permitted assignees eg a bank or other nancial institution. Such arestriction would have the effect of preventing an assignment to persons

falling outside the denition of permitted assignees.

Consent not to be unreasonably withheld a loan agreement may provide

that a loan can be assigned to a third party only with the consent of the

borrower, such consent not to be unreasonably withheld. If this is the case,

and the loan agreement does not contain further provisions clarifying the

basis on which consent can or cannot be withheld, this may give rise to

some uncertainty as to whether any proposed assignment is permitted.

Other duties commonly found in loan agreements are a duty to informand consult with the borrower; these provisions, broadly speaking, oblige

a lender to give disclosure of any proposed assignment in advance, but fall

short of the need for consent.

Restriction on disclosure of condential information a third party is only

likely to be willing to purchase a loan if the lender is permitted, in advance

of an assignment, to disclose certain condential information relating to

the borrower eg reports or nancial information received under the loan

agreement. Under Polish law, a lender owes a duty of condentiality to a

borrower. Therefore either a loan agreement needs to contain an exceptionto this duty of condentiality to permit a lender to disclose relevant

information to proposed assignees, or the lender must seek express consent

from the borrower.

However, where loans are transferred to, or are the subject of

sub-participation agreements with, Securitisation Funds, the duty

of condentiality is automatically disapplied.

31


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A mortgage over real property may only be transferred under Polish law together

with the receivable which it secures. The receivable is effectively transferred

upon the entry of the buyer of the receivable as the mortgagee in the Land and

Mortgage Register. In other words, the assignee effectively acquires the receivable

secured with the mortgage after it is registered. Registration could take as long

as 6 months to be completed. In the interim period, transfer agreements often

provide for the transfer of any proceeds from the receivables to the buyer, as the

transferor remains the lender in respect of the receivable until the buyer is entered

in the Land and Mortgage Register as the mortgagee.

If the mortgage secures several receivables, should only one of the receivables be

transferred, the mortgage will x on a proportionate amount of the receivable.

Other security under Polish law takes the form of pledges registered and civil

(unregistered). These are commonly taken over non-real estate assets. Whilst

(unlike with mortgages) the transfer of a receivable takes effect upon the execution

of the transfer agreement, the transfer of a registered pledge is only effective as of

the date of entry of the new pledgee in the pledge register. With civil pledges,

the pledge is transferred as at the date of transfer of the receivable.

Tax

There is some doubt in Poland as to the question of whether the assignment of

receivables should be treated as a provision of services which would be subject

to VAT in Poland. Recent decisions of the ECJ and Polish Supreme Court suggest

that an assignment of receivables for a value lower than the nominal value of the

transferred loan should not be subject to VAT, but the practice of the Polish Tax

Authorities and Regional Administrative Courts is less clear. Assuming however

that the recent ECJ and Polish Supreme Court decisions are followed by the

Administrative Courts in Poland, whilst no Polish VAT will be payable, a civil

transaction tax of 1% of the market value of the receivables would be payable

on any transfer.

Note that Polish law provides for advantageous tax treatment of sale of receivables

to Securitisation Funds.


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POLAND

Registrations

As there is no publically maintained register for corporate loans in Poland,

a transfer of a loan does not require any registration.

If the loan is secured with a mortgage the buyer must be registered as the new

mortgagee in the Land and Mortgage Register. Registration in the Pledge Register

is required in order to transfer registered pledges securing the loans.

33

Country contacts:

Dr Krzysztof Haladyj+48 22 5050 731

[email protected]


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Romania


Assignment

Romanian law does not distinguish between legal and equitable title, butdistinguishes between assignment of contract and assignment of receivables.

Assignment of receivables

Unlike the assignment of contract, the assignment of receivables transfers only

the rights and not the obligations under a contract. This is the preferred transfermethod for fully-drawn loans. An assignment of receivables does not require theconsent of the borrower, but should be notied to it to be enforceable.

Both in the case of an assignment of contract and of an assignment of receivables,any guarantees and security interests will be transferred with the same ranking byvirtue of law to the assignee.

Assignment of contract

The rights and obligations of the lender can be transferred by agreement betweenthe lender and the buyer. The entire contract can be transferred by agreement

between the assignee and the assignor, with the assignee taking the place ofthe assignor.

The assignment of contract is possible only with the borrowers consent. Theborrower may consent in advance (eg in the original loan agreement), but inthis case the assignment needs to be formally notied to the borrower in orderto be effective.

Novation


to terminate the existing lending arrangements and replace them with newarrangements on the same terms, but substituting the new lender for theoriginal lender.

Security interests and guarantees will not be transferred to the new lender unlessexpressly agreed by all parties (and where security or guarantees come from thirdparties, the consent of such parties is needed). However, if all parties agree, theranking of the existing security subsists.

Participation

Participation is not proscribed under Romanian law, but can be structuredcontractually along similar lines to those set out in the guide for England

and Wales.


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R

OMANIA

Limitations

Commercial lending can only be made by regulated entities. As such, theobligations of the lender under a loan which has not been fully drawn can betransferred only to another regulated entity.

Other contractual or legal limitations may apply (such as restriction on disclosureof condential information, data protection issues etc.). Such issues would needto be dealt with on a case by case basis, but note that under Romanian law aclause seeking to prevent assignment of receivables is void.

Tax

The transfer of a loan will may give rise to prot tax and VAT issues, in particularwhere the face value is different from the transfer value. As these issues dependon a number of factors (such as nationality and business object of the parties,type and purpose of transfer etc.), tax advice should be sought on a case bycase basis.

Registrations

Assignments of receivables need to be registered with the Romanian ElectronicArchive for Secured Transactions in order to be opposable to third parties.

Where security is transferred as result of the transfer of the loan, it is advisablethat the change of the creditor be registered with the same register wheresecurity had been registered (eg Romanian Electronic Archive for SecuredTransactions, The Cadastre and Real Estate Ofce Registry etc). This may entailadditional formalities and potentially the need for notarized documents with

associated costs.

35

Country contacts:

Cristian Lina+40 21 31 12 56 [email protected]


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Spain


Assignment

Under Spanish law, the sale and transfer of loans and credits is generally governed

by articles 1526 to 1536 of the Spanish Civil Code. The general rule is that the loan

can be transferred by an assignment which may be executed by means of a public

deed of assignment granted before a Spanish Notary.

Unlike in other jurisdictions (eg England & Wales), Spanish law does notdistinguish between legal and equitable titles. The transfer of a loan will

accordingly generally imply the transfer of the full ownership of the loan.

As a general rule, a loan may be freely transferred without the need to obtain

the consent of the borrower unless the loan documentation provides otherwise.

However, special care needs to be taken in relation to a loan which has not

been fully drawn down. If the whole loan is to be assigned (which includes the

obligation of the lender to make further payments of available funds to the debtor

under the loan) then the consent of the borrower will be required. Such consent

should not be necessary, on the other hand, if the assignment relates to only thatpart of the loan which has been fully drawn down by the borrower.

As a general rule, it is not necessary to provide notice of the assignment to the

borrower for it to be deemed valid and effective. However, a borrower who pays

the original lender before having been notied about the transfer would be

released from its obligations in relation to the payment of such amount. Once the

borrower is notied, the transfer will be fully effective and payment made to the

original lender will not release the borrower vis--vis the new lender. Note that the

documentation may establish an obligation to notify the borrower.

Participation

Rather than effecting a true sale, a sub-participation arrangement is a contract

between the lender and the participant under which the lender sub-contracts part

or all of its risk to the participant. Note that the ancillary rights and securities are

not assigned to the participant.

The participation agreement creates only a personal obligation between the lender

and the participant and the participant is not entitled to execute direct rights

against the borrower.


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SPAIN

37

Although it is unusual to absolutely prohibit the assignment of a loan agreement,

participation agreements can be used to achieve a similar commercial outcometo an assignment where a transfer is barred under the original loan agreement

or where the lender wishes to keep the arrangement condential from

the borrower.

From the participants perspective, the primary disadvantage in entering into a

participation arrangement rather than an assignment is that the participant is

exposed to the credit risk not only of the borrower defaulting on the loan, but

also the credit risk of the lender.

Contractual LimitationsA loan can only be assigned provided that the loan agreement does not contain a

bar or restriction on assignment. The following contractual restrictions and issues

are commonly encountered:

Absolute bar on assignment this is relatively uncommon, but would

prevent a lender from assigning its rights to a buyer.


to provide that assignments can only be made to a specied category of

permitted assignees (eg to a bank or other nancial institution).

Restrictions on the minimum amount to be transferred or on particular dates

it is fairly common that syndicated loans establish certain conditions for

the transfer of a debt such as the minimum amount to be transferred or that

the transfer can only occur on particular dates (eg at the end of an interest

period so that break cost are eliminated or minimised).


Article 1528 of the Spanish Civil Code provides that the sale or transfer of a

credit facility involves all ancillary rights, such as those relating to deposits,

mortgages, pledges or security interests. The general rule, therefore, is that the

transfer of a loan would necessarily entail the assignment of any related security

which has been granted to strengthen the contractual position of the lender.

In addition, it is necessary to analyse the form of the execution of the security.

Article 1280 of the Spanish Civil Code also sets out that acts and contracts upon

which in rem rights are created, transferred, modied or extinguished must be

formalised in a public document (1280.1) and that the assignment of actions

or rights which have been formalised in a public document must also in turn beformalised in a public document. Article 1878 of the Spanish Civil Code states

that the mortgage credit facility may be transferred or assigned to a third party

in whole or in part in accordance with the formalities stipulated by law.


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Therefore, the assignment of a loan guaranteed by a mortgage or pledge (an in

rem right) and previously formalised in a further public document would alsohave to be formalised in a public document. Special care also needs to be taken to

complete the transfer of certain securities. In particular, a transfer of mortgages,

chattel mortgages and special pledges needs to be recorded in public registries

and a transfer of a pledge over shares or of a pledge over receivables may require

notice to be given to the corresponding borrowers.




guarantees and security so as to maximise recoveries made from the borrower and,therefore, maximise the value of the participation agreement for the benet of

the participant.

Tax


for the purposes of Spanish tax. Broadly speaking, such prot or loss will be

ascertained in accordance with transferors accounting treatment and taxed or

relieved as income (rather than capital).

If the purchaser is a tax resident of a European Union State, interest payments will

be exempt from taxation in Spain. If the purchaser is a tax resident of a foreign

State not being member of the European Union, interest payments will be subject

to taxation at a xed tax rate (currently 21%) other than where a Double Taxation

Treaty applies by establishing a lower tax rate.

We would not generally expect Spanish stamp duty or VAT taxes to be payable in

relation to a loan transfer unless the transfer implies the transfer of a loan secured

with a guarantee that may be registered (such as a mortgage security) in which

case the tax rate is generally 1% of the total amount secured.

Registrations

As there is no publically maintained register for corporate loans in Spain, a

transfer of a loan will not require any registration. However, special care needs

to be taken when the loan is secured by a registered security (ie mortgage or

chattel mortgage). It is advisable for any buyer, where there is an assignment of a

registered security, to register its acquisition by following any statutory formalities

whenever the original loan or its security is registered.


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SPAIN

39

Country contacts:

Juan e Daz+34 91 42 94 33 3

[email protected]

Javier Ibez+34 91 42 94 33 3

[email protected]


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Switzerland


Assignment

Claims including those deriving from loans and their related security may be

assigned in writing under Swiss law, unless the assignment is prohibited by law,

by the nature of the debt or by a contract between the borrower and the

original lender.

Swiss law does not distinguish between legal and equitable titles to property.The assignment of debts does not require the borrowers consent unless the

underlying contract provides otherwise. However, unless and until the borrower

is notied of the assignment, the borrower may validly discharge its duties by

payment to the original lender rather than the buyer.

On the other hand, the accession of a third party to the debt relationship in lieu of

and with the release of the previous borrower, is effected by means of a contract

between the third party and the lender.

Novation


to terminate the existing lending arrangements and replace them with new

arrangements on the same terms (or possibly with amendments), but substituting

the new lender for the original lender. This will require the agreement of the

existing borrower. Effects of such a novation on related security constituted are to

be assessed on a case by case basis.

Participation

In accordance with the principle of contractual freedom under Swiss law, parties

may enter into a participation or sub-participation as described in the England

and Wales section of this guide. A choice of law clause in favour of English law

will further be upheld by Swiss courts.


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SWITZERLAND

41


Under Swiss law, the same contractual restrictions and issues are commonly

encountered as outlined under the England and Wales section of this guide:

Restriction on disclosure of condential information - a third party is only

likely to be willing to purchase a loan if the lender is permitted in advance

of an assignment to disclose certain condential information relating to the

borrower or guarantor, eg reports or nancial information received under

the loan agreement. The Swiss Data Protection Act of 19 June 1992 needs to

be complied with. Each person who processes data is subject to a general

duty of diligence. Further, the disclosure of data abroad is subject to specicrequirements. If the data controller is a bank, banking condentiality rules

set out in particular at article 47 of the Swiss Banking Act of 8 November

1934 specically apply. In principle, client data that is not fully anonymised

cannot be disclosed to any third party, unless the client has waived its

banking condentiality. The provisions of a loan agreement need to contain

an express waiver to permit a lender to disclose relevant information to

proposed assignees.


Pledges and sureties (cautionnements) are automatically transferred to the

assignee in case of assignment of the secured debts. By contrast, the security

created by way of assignment in favour of the secured creditor (mortgage

certicates cdules hypothcaires and securities such as assigned insurance

policies) do not automatically pass on to the assignee in case of the assignment

of the secured claims and necessitate an express assignment. Further, the

assignee needs to take the effective control of the original insurance policies

and mortgage certicates. Personal guarantees are usually not transferred to

the assignee. In any event, there are some important differences betweendifferent types of guarantees and the parties should pay attention to the wording

they use (in particular as English translations may be uctuating in this respect).

Where a novation or sub-participation occurs, the legal situation is similar as

that outlined in the England and Wales section of this guide.


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Tax

We would not generally expect Swiss stamp taxes to be payable in relation to a

loan transfer and related security. Other tax issues (in particular withholding tax)

are to be examined on a case by case basis.

Registrations

There is no publically maintained register for corporate loans in Switzerland,

therefore the loan transfer will not require any registration.

Switzerland does not hold a registry for movable security, except for aircrafts and

boats. Mortgages and mortgage certicates are registered with the competentland registry.


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SWITZERLAND

43

Country contacts:

Fabien Aepli+41 22 818 45 00

[email protected]


46/62

Slovak Republic


Assignment

Under Slovak law receivables, including the right to repayment of a loan, can be

unilaterally assigned by the lender.

An assignment will become effective between the parties to it upon execution

of the agreement. Vis--vis the borrower the assignment will be effective upon

delivery of the notice of the assignment.The lenders obligations (eg the commitment to provide further drawdown)

cannot be unilaterally transferred without the consent of the borrower. In practice,

such consent is often given in advance in the original loan agreement.

Novation

Under a novation arrangement, the borrower, the original lender and the new

lender agree to replace the existing lender with a new lender while the other

conditions of the loan agreement remain unchanged. This requires the agreement

of the existing borrower.

The loan documentation may contain a pre-agreed mechanism to effect novations.

Participation

Under Slovak law, it is possible to conclude a sub-participation contract

between the lender and the participant or another synthetic transfer of the risks

and benets from the loan agreement along similar lines to those set out in the

England and Wales section of this guide.


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SLOVAKREPUBLIC

45


The following contractual restrictions and issues are encountered:

Absolute bar on assignment this is uncommon, but would prevent an

existing lender from assigning its rights to a new lender.


to provide that assignments can only be made to a specied category of

permitted assignees, eg a bank or other nancial institution. Such a


falling outside the denition of permitted assignees. However, such

restriction is usually limited to situations where the borrower is not indefault. In a default situation the restriction is relatively uncommon.

Condentiality issues - the assignment may include a contractual restriction

on the disclosure of condential information. Such disclosure may be

conditional upon conclusion of an NDA with the interested bidder. Even

if the contract does not contain an express restriction, banks are generally

unable to disclose the details of loans to third parties without the explicit

consent of the borrower. However, banks are allowed to transfer receivables

to a third party without the borrowers consent if the borrower is, following

delivery of a written demand from the bank, in default of payment of theloan for more than 90 days.


Most of the security instruments (eg mortgages, movable pledges, share

charges), automatically transfer together with the assigned loan. Subsequently

there is an obligation for the old lender to provide notice of the transfer of the

loan to the borrower. However, there is a risk that security instruments will only

continue to secure the underlying loan to the extent that it was contemplated

under the original security documentation. It is therefore advisable that thebuyer checks the original security documentation for any restriction and

seek conrmation from the relevant security provider that it consents to the

assignment of the underlying loan and the extension of the security obligations

owed to the buyer. This may be difcult to procure where the loan is distressed/

non-performing and the borrower is reluctant to cooperate.

Where a novation occurs, there is the risk (depending on the form of the

novation agreement and wording of the security documentation) that the buyer

will need to take new guarantees or security to the extent required.


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transfer to the participant (as there is no transfer of the loan itself). However, theparticipation agreement can include provisions obliging the lender to enforce any

guarantees and security so as to maximise recoveries made from the borrower, and

therefore maximise the value of the participation agreement for the benet of

the participant.

Registration and stamp duties

The transfer of a loan is not generally expected to give rise to stamp duties.

However, the records of security registered in various registries would need to

be updated. Such update is often subject to separate fees (notarial, court oradministrative fees).

The following types of security are subject to registration requests:

Mortgages over real property

Pledges of the participation interest in s.r.o. type companies

Pledge over dematerialised shares in a.s. type companies (ie if the shares

are book-entered)

Movable pledges in respect of the assets which will remain at the dispositionof the pledgor (eg aircraft, cars, machinery, rolling stocks, etc)

Pledges over receivables, security papers, enterprise or part thereof

Selected IP rights (trademarks, patents and industrial designs), etc.


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SLOVAKREPUBLIC

47

Country contacts:

Marek Bomba+42 02 51 00 91 [email protected]


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Sweden


In Sweden a loan by a bank or a credit institution is legally categorized as

a promissory note (Sw. skuldebrev) and governed by the provisions in the

Promissory Notes Act (Sw. Lag (1936:81) om skuldebrev). A promissory note is

dened as a unilateral written commitment to pay a monetary amount which has

been intentionally prepared to serve as evidence. Promissory notes are divided into

two main categories, non-negotiable promissory notes (Sw. enkla skuldebrev) and

negotiable promissory notes (Sw. lpande skuldebrev). The negotiable promissorynote is intended to easily be transferred between creditors. Banks and credit

institutions routinely use so called order promissory notes (Sw. orderskuldebrev),

ie a kind of negotiable promissory note, in their lending operations.

The transfer of a loan is based on an agreement between the lender and the buyer.

Assignment

Assignment of non-negotiable promissory notes

Non-negotiable promissory notes are payable to a specic person. Non-negotiable

promissory notes thus identify a particular person, natural or legal, as payee. An

assignment of a non-negotiable promissory note will, in general, be effectively

upheld by creditors of the lender if the relevant borrower has been duly notied

(Sw. denuntierad) of the assignment.

Assignment of negotiable promissory notes

Negotiable promissory notes are payable to the bearer (bearer promissory note)

or to a specic person or order (order promissory note).

The bearer promissory note is valid in the bearers hand. An assignment of a bearerpromissory note will, in general, be effectively upheld by creditors of the lender,

if the transferee has it in his or her possession.

A lender who assigns an order promissory note shall endorse it to the buyer. This

may be done on the note or in a separate document. An assignment of an order

promissory note will, in general, be effectively upheld, if the transferee has it in his

or her possession duly endorsed to him or her.


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SWEDEN

49

Substitution of Creditors

Under a substitution arrangement the borrower, the lender and a third partymay agree to terminate the existing lending arrangements and replace them

with new arrangements, substituting the original lender with a new lender.

This requires consent from the borrower. Within the Swedish legal system such

substitution has been used quite sparingly as a method for transferring loans.

Participation

A participation is a contract between the lender and a participant under which

the lender sub-contracts part or all of its risk to the participant. For payment

of a fee the lender would agree to pay to the participant sums equal to sumsreceived from the borrower under the loan agreement, and the participant

would reimburse the lender where the borrower fails to meet those liabilities.

Participation agreements are rarely seen in Sweden.


There are certain limitations on the right to assign loans under Swedish law:

Bar on assignment if the loan agreement includes a bar on assignment,

it would only be permitted if the parties later agree to vary the terms ofthe loan agreement. If there is no bar or restriction on assignment, an

assignment would be allowed without the borrowers consent as long as

the borrower does not end up in a less favorable position because of

the assignment.


Under Swedish law guarantees and securities would generally continue to

secure the underlying loan at a transfer. There may however be limitations to

this included in the original guarantee or security documentation. In general itwould be possible to agree that a security or guarantee may be assigned to the

buyer of an underlying loan. A buyer should conrm that express provisions of

assignment are contained in the guarantee or security documentation.

Where a substitution of lenders occurs, a new loan arrangement is agreed and it

is very likely that the new lender will need to take new guarantees or security.

Under a participation agreement the benet of guarantees and security will not

transfer to the participant.


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Tax

The transfer of a loan will potentially give rise to a prot or a loss for the transferor

for the purposes of Swedish tax. No stamp duty is payable in relation to a loan

transfer in Sweden.

Registrations

As there is no publically maintained register for corporate loans in Sweden, a

transfer of a loan will not require any registration. Security held over a companys

property is registered at the Swedish Companies Registration Ofce

(Sw. Bolagsverket) and the National Land Survey (Sw. Lantmteriet), and apurchaser of a loan secured by a registered charge will need to register its interest.


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SWEDEN

51

Country contacts:

Tord Svensson+46 07 09 79 87 [email protected]


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The Netherlands

Introduction

There are several options described in the Dutch Civil Code (Burgerlijk Wetboek,

DCC) to effect a transfer of loan, the most common of which are assignment

(cessie) and contract takeover (contractsovername). Transfer by novation is

also possible.


Assignment

An assignment will effect a transfer of claims arising under a loan to the buyer.

The requirements and characteristics for such assignment are as follows:

(i) a deed of assignment must be drafted in order to effect a transfer of legal

title. Such a deed may be drafted by the lender and buyer (a so called private

instrument (onderhandse akte)), or by a civil law notary (an authentic deed

(authentieke akte))

(ii) Dutch law distinguishes between a disclosed assignment (openbare cessie)

and undisclosed assignment (stille cessie). In case of a disclosed assignmenta notice of the assignment must be given to the borrower to effect a legal

transfer. In case of an undisclosed assignment, the deed of assignment must

be either executed by civil law notary (notaris) or registered with the Dutch

Tax Authorities (Belastingdienst). Furthermore, under the latter the borrower is

only obliged to pay to the buyer after notice of the assignment is given to him.

The lender and buyer should note that, according to Dutch law, a borrower who

has paid the original lender after the assignment may rely on the payment as a

discharge against the new lender, provided the borrower had reasonable grounds

to believe that the recipient of the payment was entitled to the such payment. This

might be the case if notice of an assignment has not been given to the borrower.

This is known as payment in discharge of an obligation (bevrijdende betaling).

After a notice is given to the borrower, such a discharge is no longer possible

for the borrower to rely upon in case of payment to another party than the

new lender.

Note that in each case, a borrower may not be put in a worse position than his

position to the original lender was as a result of the assignment.


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Novation

Under a novation arrangement, the borrower, lender and the third party agree toterminate the existing loan agreement and replace it with a new agreement on

the same terms, between the new lender and the borrower.

Contract takeover

A party to an agreement may transfer its contractual legal relationship with

the counterparty to a third party by a deed, if the counterparty gives its

prior consent.

Contractual limitationsThe following contractual limitations are commonly encountered:

Absolute bar on assignment - it is possible that the loan agreement may

include a clause stipulating that the rights and obligations cannot be

assigned. The loan documentation often stipulates that the borrower may

not assign to a third party without written consent of the lender (or vice

versa) (such consent not to be unreasonably withheld).

Restriction on identify of transferee - the loan documentation often includes

a restriction that assignments can only be made to a group of assignees as

dened in such loan agreement.

Restriction on disclosure of condential information: Under Dutch law

there is no statutory of a duty of condentiality, but this obligation may be

base on the general duty of good faith. This means that a party has to treat

certain information given by the other party as condential, meaning it

may not disclose or use such information. since this is generally thought to

apply to a lender/borrower relationships, it is important to check whether

the loan agreement provides that a lender may disclose certain condential

information to proposed assignees, since if it does not the consent of theborrower to release of the information will be required.


Any guarantees for security (ie mortgages, rights of pledge or debentures), can

be assigned to the buyer but will only continue to secure the underlying loan to

the extent that this was contemplated under the original guarantee and security

documentation that such rights would extend to assignees. A buyer should

therefore check that express provisions are contained in the guarantee or security

documentation in this regard (for example, a provision which provides that thebeneciary of the security is the original lender or its permitted assignees).


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Where a novation occurs, it is likely that the buyer will need to take new

guarantees or security to the extent required, because the contractual legalrelationship between the lender and borrower will cease to exist and a new

lender and a new contractual legal relationship is created.

For a contract takeover or takeover of debt involving property, a pledge or a

mortgage on the property of one of the parties to takeover of debt, serving as

security for the debt that is taken over, remains in force. However a pledge or a

mortgage on the property of third parties and rights from a suretyship cease to

exist when the debt or contract is taken over, unless the pledgor, mortgagor or

surety already agreed that in such event the security remains in force.

It should be noted however that where security is held by a trustee, there will be

no need for new security to be taken, provided that the security documents are

for the benet of lenders and their transferees and further Dutch law requirements

are met.

Registrations

Under Dutch law there is no requirement to register the loan documentation,

except as regards non-disclosed assignments.

Furthermore, security held over a companys property (ie mortgages) must be

registered at the Dutch Land Registry Ofce. In the event of novation, security

may have to be re-registered.

Tax

Dutch tax law analysis of loan transfers is beyond the scope of this note.


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Country contacts:

Matthijs Bolkenstein+31 20 5600 [email protected]


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Loan Market Association (LMA)

Secondary debt trading procedure (par and distressed)

Introduction

The LMA has established a standard procedure and

guide to acquiring distressed debt

Documents