Assignment Of Loan Agreement

In the Turcan case, Bristowe VC held that in circumstances where there was an agreement to assign a policy of insurance which incorporated a non-assignment clause, the assignor could effectively be regarded as trustee of the policy for the assignee.Accordingly, the insured in this particular case was duly regarded as the trustee of the policy proceeds for a third party.

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In this event, the assignor's obligation to account, would effectively afford the assignee a priority claim in the insolvency, in respect of the outstanding amount in question (G Mc Cormack "Debts and Non-Assignment Clauses" (2000) JBL 422).

A further legal mechanism which may work in the assignor's favour in the event of a failed assignment, is that put forward in Don King Productions Inc v Warren (2000) Ch 291, which would permit the original lender ("assignor"), to effectively declare a trust over the proceeds of the debt for the benefit of the new lender ("assignee").

Any assignment not made in accordance with the terms of this Section shall be void".

BP subsequently assigned, to the National Bank of Abu Dhabi (NBAD), 95% of the value of the debt/receivable which was owed by SAMIR as consideration for the supply of oil under the terms of their agreement (the value of the discounted payment being $68 million).

Whilst the case itself related to the assignment of a receivable, the court, per Carr LJ, put forward the following principles which would be equally applicable to assignments of loan participations: Although BP's position was that on a proper interpretation of the assignment letter they were not in breach of warranty as regards their entitlement to assign, the court ruled to the contrary and ordered the company to reimburse NBAD the full $68 million, plus interest.

Paradoxically, the non-assignment provision which ultimately proved to be detrimental for BP, was in fact a key stipulation of one of its own standard terms of contract.

It has been suggested however, that this decision should be narrowly regarded, by way of exception, as being restricted and applicable to its own particular facts, and that, as a general proposition it should, in such circumstances, be ordinarily incumbent on the borrower to effect payment only to the assignor as trustee, and not to the assignee as beneficiary .

The upshot of the foregoing is that due care should be exercised by all parties to a loan arrangement, be they borrowers, lenders or assignees, to be vigilant in ensuring that, in the context of appreciating and understanding the nature and extent of their general contractual rights and obligations, there is also clarity as to the legal implications and potentially far-reaching consequences of assignments.

This approach was subsequently favoured by the majority of the court, per Walter LJ and Rix LJ, in Barbados Trust Co Ltd (formerly known as C I Trustees (Asia Pacific) Limited v Bank of Zambia and Bank of Americana (2007) EWCA Civ 14 ( although Hooper LJ dissented on the basis that this was diametrically opposed to the prohibition against assignment).

In the Barbados, the court saw no problem in permitting an assignee of rights under a syndicated loan, which embodied a non-assignment clause, to claim as beneficiary of a declared trust, directly from the borrower.

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