Acquiring Distressed Debt. A guide to European regimes

Transcription

1 Acquiring Distressed Debt A guide to European regimes

2 Acquiring Distressed Debt A guide to European regimes April 2013

3 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 to own 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 finance 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.

4 General observations on cross-border transactions As with any finance transaction, it is critical that local law advice is taken at the earliest opportunity as the laws governing loan assignments and participations differ from country to country. This inevitably increases the complexity of loan acquisitions where the borrower has group companies and/or assets in multiple jurisdictions. However, set out below are some observations which may assist a potential loan acquirer in such circumstances: It is increasingly common for LMA style, English law governed, documentation to be used for higher value, cross border lending. This simplifies the process for taking assignments or participations of loans. Care should still be taken when reviewing such documentaiton however because, for example, the borrowers may have negotiated changes from standard LMA wording on a case-by-case basis or in the case of security over assets outside the UK, it may be necessary to re-take or re-register security, irrespective of wording contained in the facility agreement which apparently circumvents this need. In most jurisdictions, rights against a borrower can be assigned, but lender 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 which the borrower agrees to release the original lender from its existing obligations and replace those with obligations from the new lender. The problem is that in many jurisdictions, a novation requires new guarantees and security to be taken, with attendant cost and delay. It may, however, be possible to mitigate this problem if the original lender assigns its rights under the loan agreement, and the new lender assumes the outstanding obligations of the original lender. This may still require the consent of the borrower, 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 [ ] The information contained in this document is intended as a guide and 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.

5 3 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

6 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 benefit 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 fulfil 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.

7 5 Participation Rather than effecting a transfer or novation of rights and obligations, a participation (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 confidential from the borrower. ENGLAND AND WALES From the participant s 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 lender from 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 specified category of permitted assignees eg a bank or other financial institution. Such a restriction would have the effect of preventing an assignment to persons falling outside the definition of permitted assignees.

8 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 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 confidential 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 confidential information relating to the borrower eg reports or financial information received under the loan agreement. Generally under English law a lender will owe a duty of confidentiality to the borrower; therefore a loan agreement needs to contain an exception to this duty of confidentiality 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 beneficiary 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 benefit 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 benefit 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 benefit of the participant.

9 7 Country contacts: Paul de la Peña Nick Swiss ENGLAND AND WALES Tax The transfer of a loan will potentially give rise to a profit or loss for the transferor for the purposes of UK tax. Broadly speaking, such profit or loss will be ascertained in accordance with transferor s 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 company s 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 amount to a novation of the loan, which might give rise to a requirement to re-register security rights.

10 Republic of Ireland Introduction Ireland s recent economic difficulties have resulted in a large increase in loan transfer activity. Much of this activity has involved Ireland s National Asset Management Agency ( NAMA ). In addition, Ireland s IMF/EU programme requires significant deleveraging to be achieved by its pillar banks and other incumbent (and some exiting) financial 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 individual or a portfolio basis and sometimes at a significant 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 purchaser s 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 transferor s rights, a novation or by a contractual sub-participation or risk participation.

11 9 Contractual Limitations The same type of issues arise in Ireland as in England and Wales in the context of contractual restrictions on loan transfers and confidentiality 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 confirmed that NAMA had been free to transfer its loans in this particular case without restriction. IRELAND Guarantees and Security 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 benefit. The new security agreements will be required to be registered and could lose priority or result in difficulties 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 efficient manner by using structures which avail of Ireland s 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 specifically exempt from Irish stamp duty.

12 Other taxation issues which should be considered include the treatment of interest payable on the loan subsequent to any transfer. In particular, care should be taken to ensure that interest is paid and is receivable in the most efficient 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 each occasion. Note that security filings 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.

13 11 Country contacts: Steve Rodgers [email protected] Darragh Blake [email protected] IRELAND

14 Czech Republic Main methods for effecting a loan transfer 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-à-vis the borrower the assignment will be effective upon delivery of a notice of the assignment to it. The lender s 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 benefits from the loan agreement.

15 13 Contractual Limitations The following contractual restrictions and issues are commonly encountered: Restriction on identity of transferee it is common for loan agreements to provide that assignments can only be made to a specified category of permitted assignees eg a bank or other financial institution. Such a restriction would have the effect of preventing an assignment to persons falling outside the definition 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 confidential information the assignment could be effectively restricted by contractual restriction on disclosure of confidential information. Therefore it is important to pay attention to the confidentiality 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 confidentiality 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 to such third party information about the loan notwithstanding the bank s duty of confidentiality to its customers. CZECH REPUBLIC Guarantees and Security 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 confirmation 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 difficult to procure where the loan is distressed/nonperforming 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.

16 Under a participation agreement, the benefit 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 benefit 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).

17 15 Country contacts: Libor Vacek Petr Neumann CZECH REPUBLIC

18 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 intragroup 1 or off-shore transactions. Also note that an unauthorised person could under certain conditions enter into a participation arrangement with an existing lender. Main methods for effecting a loan transfer 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 the assignment be notified (signifié) 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 (subrogé) that pays a debtor s existing creditor (subrogeant) is substituted in place of that existing creditor in respect of its rights as against that debtor. The existing creditor s 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.

19 17 Subrogation occurs at the time of the payment and only occurs if it is expressly agreed to apply by the subrogé and the subrogeant. It further requires a formal receipt called quittance subrogative to be remitted by the original creditor to the subrogated creditor. FRANCE 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 creditor s rights against the assigned debtor are transferred to the subrogated creditor only up to the amount paid by the latter, this may cause difficulties where the debt is purchased at a discount. Subrogation is often used in the context of real estate refinancing, as all existing security interests (eg mortgages (hypothèques conventionnelles) or lender s liens (privilèges de prêteur 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 refinanced assets. (Note that French subrogation is different in its application and scope to English law subrogation.) Delegation Occasionally, lenders in the French market will transfer their loans by means of a combination of a receivable assignment (cession de créances) and a délégation which novates the original lender s obligations under the loan agreement, as obligations of the lender to the borrower eg to fulfil a drawdown request cannot be transferred to a third party by way of assignment. For délégation to occur, the agreement of the borrower will be required. Participation Rather than effecting a transfer of its rights and obligations, a lender can participate (or sub-participate) part or all of its risk to a participant. Participations are generally used where, for example, the borrower s 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.

20 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 parties 3. Guarantees and Security 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 law 4 provides however that in case of novation, the guarantees and security granted to the original lender will not benefit any of its transferees or assignees, unless expressly provided for in the original security documentation. Under a participation agreement, the benefit 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 benefit of the participant. Tax The transfer of a loan will potentially give rise to a profit or loss for the transferor for the purposes of French tax. Broadly speaking, such profit or loss will be ascertained in accordance with transferor s 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 beneficiary of a waiver of financial claim which would be liable to corporate income tax.

21 19 Country contacts: Sophie Perus FRANCE 1. Article L of the French Monetary and Financial Code authorises a company to carry out credit facility arrangements (opérations de trésorerie) 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 II of the French Commercial Code. 4. Article 1278 of the French Civil Code.

22 Germany Main methods for effecting a loan transfer Assignment An assignment will effect a transfer of the loan to the buyer. Upon transfer, the buyer assumes the lender s 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 the borrower 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 specific terms with the original lender to administer rights and obligations under the loan agreement vis-à-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 ownership of 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 specific terms on the administration of the rights and obligations under the loan for and on behalf of the buyer vis-à-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.

23 21 Contractual Limitations 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. 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 secrecy A 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 confidential information by the bank s duty to confidentiality. 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 refinancing purposes. Guarantees and Security 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 original secured 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 certificated land charges.

24 Upon assignment without notice, the original lender will exercise the rights of accessory securities on behalf of the buyer, but can exercise the rights of non-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-à-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 refinancing register (Refinanzierungsregister), 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.

25 23 Country contact: Thomas Ziegler, LL.M GERMANY

26 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. Main methods for effecting a loan transfer 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 the buyer 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 notified 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 notified of the assignment by the assignor, the debtor may only make payments directly to the new assignee after notification; in the case of notification by the assignee, the debtor is entitled to demand certification of the assignment. If the debtor makes payments to the assignee without seeing such due certification, he does so at his own risk. The borrower is entitled to enforce objections and offset counterclaims arising vis-á-vis the assignee on legal grounds already existing at the time when the borrower is notified of the assignment. The original lender shall, as a surety, be liable for the borrower s 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 indefinite claim the original lender has otherwise excluded his liability.

27 25 Assumption of debt The Hungarian Civil Code provides for the assumption of debt by a third party. The assumption of debt is made by way of an agreement between the borrower and the third party and requires the approval of the lender. If the lender approves the assumption of debt, the third party shall be subrogated to all rights to which the borrower was entitled vis-à-vis the lender; however, he shall not be entitled to offset the previous borrower s existing claims against the lender. HUNGARY Novation Novation of lending arrangements on similar terms to those set out in the England and Wales section of this guide plays an important role in Hungary, although a novation mechanic is currently not proscribed by Hungarian law 5. Participation Participation agreements on similar terms to those set out in the England and Wales section of this guide are permitted under Hungarian law. Contractual Limitations A loan can only be assigned provided that the loan agreement does not contain a bar or restriction on assignments. Contractual restrictions and issues commonly encountered are similar to those described in the England and Wales section of this guide: Restriction on disclosure of confidential information - Act CXII of 1996 on Credit Institutions and Financial Enterprises applies, according to which confidential information may only be disclosed to third parties, if: (i) so requested by the borrower or his legitimate representative fixed in an authentic instrument or in a private document with full probative force that expressly indicates the information may be disclosed; note, it is not necessary to make such a request if the borrower provides a statement to that effect in its underlying agreement with the financial institution (ii) the Act grants an exemption from the obligation of banking confidentiality (iii) so facilitated by the lender s interests for selling its receivables due from the customer or for enforcement of its outstanding claims.

28 Guarantees and Security 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, fixed pledges, floating 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 benefit 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 transferee s 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 than security 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.

29 27 Country contact: Agnes Szent-Ivany HUNGARY 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.

30 Lithuania Generally, the priorities outlined in the section for England and Wales applies except as described below. Main methods for effecting a loan transfer 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 borrower s 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 notified. Novation Under a novation arrangement, the new lender replaces the original lender and the borrower is released from its obligations to the original lender. Contractual Limitations If the loan agreement includes a bar on assignment, an assignment would only be possible with the borrower s consent. If there is no bar or restriction on assignment, an assignment is permitted without the borrower s consent, provided that the borrower is not placed in a less favorable position as a result. Guarantees and Security As a general rule, upon the assignment of the loan, the loan is transferred to the buyer with the privileges established for the security of fulfillment of the obligation and other accessory rights. Some specific 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.

31 29 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 company s 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. LITHUANIA Country contacts: Rimtis Puisys [email protected] Milda Aukštakalnytė [email protected]

32 Poland Main methods for effecting a loan transfer Assignment Under Polish law, a lender may transfer its receivable to another entity without the borrower s consent, unless (i) a specific 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 notified of the assignment in order to perfect the transfer. Until the borrower is notified 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 borrower s liability, and is not used for the purpose of transferring receivables. While it is possible under Polish law for contracting parties to agree to transfer their 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 benefits in relation to loan purchases, in particular in relation to the tax treatment of the transferred loans, and that a lender otherwise subject to confidentiality restrictions will be exempted from them when entering into a transfer or sub-participation agreement with a Securitisation Fund, if revealing the confidential information is necessary in order to conclude the assignment.

33 31 Contractual Limitations The same type of issues arise in Poland as in England and Wales in the context of contractual restrictions on loan transfers and confidentiality issues: POLAND 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 to provide that assignments can only be made to a specified category of permitted assignees eg a bank or other financial institution. Such a restriction would have the effect of preventing an assignment to persons falling outside the definition 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 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 confidential 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 confidential information relating to the borrower eg reports or financial information received under the loan agreement. Under Polish law, a lender owes a duty of confidentiality to a borrower. Therefore either a loan agreement needs to contain an exception to this duty of confidentiality 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 confidentiality is automatically disapplied.

34 Guarantees and Security 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 fix 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.

35 33 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. POLAND Country contacts: Dr Marek Czarny [email protected]

36 Romania Main methods for effecting a loan transfer Assignment Romanian law does not distinguish between legal and equitable title, but distinguishes 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 transfer method for fully-drawn loans. An assignment of receivables does not require the consent of the borrower, but should be notified 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 by virtue of law to the assignee. Assignment of contract The rights and obligations of the lender can be transferred by agreement between the lender and the buyer. The entire contract can be transferred by agreement between the assignee and the assignor, with the assignee taking the place of the assignor. The assignment of contract is possible only with the borrower s consent. The borrower may consent in advance (eg in the original loan agreement), but in this case the assignment needs to be formally notified to the borrower in order to be effective. 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. Security interests and guarantees will not be transferred to the new lender unless expressly agreed by all parties (and where security or guarantees come from third parties, the consent of such parties is needed). However, if all parties agree, the ranking of the existing security subsists. Participation Participation is not proscribed under Romanian law, but can be structured contractually along similar lines to those set out in the guide for England and Wales.

37 35 Limitations Commercial lending can only be made by regulated entities. As such, the obligations of the lender under a loan which has not been fully drawn can be transferred only to another regulated entity. Other contractual or legal limitations may apply (such as restriction on disclosure of confidential information, data protection issues etc.). Such issues would need to be dealt with on a case by case basis, but note that under Romanian law a clause seeking to prevent assignment of receivables is void. ROMANIA Tax The transfer of a loan will may give rise to profit tax and VAT issues, in particular where the face value is different from the transfer value. As these issues depend on 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 by case basis. Registrations Assignments of receivables need to be registered with the Romanian Electronic Archive 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 advisable that the change of the creditor be registered with the same register where security had been registered (eg Romanian Electronic Archive for Secured Transactions, The Cadastre and Real Estate Office Registry etc). This may entail additional formalities and potentially the need for notarized documents with associated costs. Country contacts: Cristian Lina [email protected]

38 Spain Main methods for effecting a loan transfer 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 not distinguish 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 that part 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 notified about the transfer would be released from its obligations in relation to the payment of such amount. Once the borrower is notified, the transfer will be fully effective and payment made to the original lender will not release the borrower vis-à-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.

39 37 Although it is unusual to absolutely prohibit the assignment of a loan agreement, participation agreements can be used to achieve a similar commercial outcome to an assignment where a transfer is barred under the original loan agreement or where the lender wishes to keep the arrangement confidential from the borrower. SPAIN From the participant s 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 Limitations A 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. Restriction on identity of transferee it is common for loan agreements to provide that assignments can only be made to a specified category of permitted assignees (eg to a bank or other financial 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). Guarantees and Security 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, modified 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 be formalised 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.

40 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 also have 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. Under a participation agreement, the benefit 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 benefit of the participant. Tax The transfer of a loan will potentially give rise to a profit or loss for the transferor for the purposes of Spanish tax. Broadly speaking, such profit or loss will be ascertained in accordance with transferor s 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 fixed 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.

41 39 Country contacts: Juan e Díaz [email protected] SPAIN Javier Ibáñez [email protected]

42 Switzerland Main methods for effecting a loan transfer 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 borrower s consent unless the underlying contract provides otherwise. However, unless and until the borrower is notified 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 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 (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.

43 41 Contractual Limitations 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 confidential 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 confidential information relating to the borrower or guarantor, eg reports or financial 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 specific requirements. If the data controller is a bank, banking confidentiality rules set out in particular at article 47 of the Swiss Banking Act of 8 November 1934 specifically apply. In principle, client data that is not fully anonymised cannot be disclosed to any third party, unless the client has waived its banking confidentiality. The provisions of a loan agreement need to contain an express waiver to permit a lender to disclose relevant information to proposed assignees. Guarantees and Security 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 certificates cédules hypothécaires 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 certificates. Personal guarantees are usually not transferred to the assignee. In any event, there are some important differences between different types of guarantees and the parties should pay attention to the wording they use (in particular as English translations may be fluctuating in this respect). SWITZERLAND Where a novation or sub-participation occurs, the legal situation is similar as that outlined in the England and Wales section of this guide.

44 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 certificates are registered with the competent land registry.

45 43 Country contacts: Fabien Aepli SWITZERLAND

46 Slovak Republic Main methods for effecting a loan transfer 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-à-vis the borrower the assignment will be effective upon delivery of the notice of the assignment. The lender s 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 benefits from the loan agreement along similar lines to those set out in the England and Wales section of this guide.

47 45 Contractual Limitations 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. Restriction on identity of transferee it is common for loan agreements to provide that assignments can only be made to a specified category of permitted assignees, eg a bank or other financial institution. Such a restriction would have the effect of preventing an assignment to persons falling outside the definition 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. Confidentiality issues - the assignment may include a contractual restriction on the disclosure of confidential 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 borrower s consent if the borrower is, following delivery of a written demand from the bank, in default of payment of the loan for more than 90 days. Guarantees and Security 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 the buyer checks the original security documentation for any restriction and seek confirmation 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 difficult to procure where the loan is distressed/ non-performing and the borrower is reluctant to cooperate. SLOVAK REPUBLIC 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.

48 Under a participation agreement, the benefit 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 benefit 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 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 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 disposition of 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.

49 47 Country contacts: Marek Bomba SLOVAK REPUBLIC

50 Sweden Main methods for effecting a loan transfer 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 defined 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. löpande skuldebrev). The negotiable promissory note 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 specific 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 notified (Sw. denuntierad) of the assignment. Assignment of negotiable promissory notes Negotiable promissory notes are payable to the bearer (bearer promissory note) or to a specific person or order (order promissory note). The bearer promissory note is valid in the bearer s hand. An assignment of a bearer promissory 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.

51 49 Substitution of Creditors Under a substitution arrangement the borrower, the lender and a third party may 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. SWEDEN 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 sums received 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. Contractual Limitations 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 of the loan agreement. If there is no bar or restriction on assignment, an assignment would be allowed without the borrower s consent as long as the borrower does not end up in a less favorable position because of the assignment. Guarantees and Security 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 it would be possible to agree that a security or guarantee may be assigned to the buyer of an underlying loan. A buyer should confirm 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 benefit of guarantees and security will not transfer to the participant.

52 Tax The transfer of a loan will potentially give rise to a profit 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 company s property is registered at the Swedish Companies Registration Office (Sw. Bolagsverket) and the National Land Survey (Sw. Lantmäteriet), and a purchaser of a loan secured by a registered charge will need to register its interest.

53 51 Country contacts: Tord Svensson SWEDEN

54 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. Main methods for effecting a loan transfer 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 assignment a 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.

55 53 Novation Under a novation arrangement, the borrower, lender and the third party agree to terminate 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. THE NETHERLANDS Contractual limitations The 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 defined in such loan agreement. Restriction on disclosure of confidential information: Under Dutch law there is no statutory of a duty of confidentiality, 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 confidential, 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 confidential information to proposed assignees, since if it does not the consent of the borrower to release of the information will be required. Guarantees and Security 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 the beneficiary of the security is the original lender or its permitted assignees).

56 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 legal relationship 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 benefit 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 company s property (ie mortgages) must be registered at the Dutch Land Registry Office. 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.

57 55 Country contacts: Matthijs Bolkenstein THE NETHERLANDS

58 Loan Market Association ( LMA ) Secondary debt trading procedure (par and distressed) Introduction The LMA has established a standard procedure and format for the trading of debt (both distressed and par) that is widely utilised by the debt trading arms of banks and investment houses. The standardisation of the procedure and documents allows the procedure to be undertaken quickly and easily. It is most frequently used for the trading of large syndicated facility participations. Summary of procedure Prior to any trade the proposed buyer will normally have had undertaken full due diligence into the debt to be purchased. The procedure described below assumes this exercise has been completed to the satisfaction of the parties. Stages of the debt trade are as follows: trade date the buyer and seller orally agree the trade (which is normally confirmed by ) on LMA standard terms with key components agreed (eg price, treatment of interest, and which party will complete the trade confirmation) the seller sends a request to the facility agent to seek consent of the borrower to the trade (if required) the form of trade confirmation is completed and sent to the counterparty (the terms having been agreed on the trade date). This standard form document contains all relevant terms of the debt trade and incorporate the LMA standard terms and conditions of trade trade confirmation and other transaction documentation are exchanged between the parties and signed once borrower consent to the trade is received payment by the buyer to the seller of the consideration for the debt trade. The stages set out above to signing of the documents are expected to occur within 7 days of the trade date for a par trade and 15 days for a distressed trade. Payment of the consideration is expected to occur as soon as possible after this and in any event within 3 or 5 days of signing respectively before delayed settlement compensation applies (if, as is usual, it is included in the trade terms).

59 57 Any notices that are required to be given (such as to the borrower) or registration of the buyer as a secured party are completed as soon as possible after the payment of the consideration. Conclusion Whilst the documentation for the trade is LMA standard and designed to be flexible it may not be appropriate for all circumstances. In particular the suitability of this form of debt transfer should be considered carefully where: one or both parties to the trade are not recognised financial institutions and/or where the debt is subject to the laws of a jurisdiction other than England and Wales. LOAN MARKET ASSOCIATION

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