July 2005 1

Fixed Charges over Book Debts: The Spectrum Plus judgment

1 Introduction

The House of Lords recently gave their anticipated decision in the case of National Westminster Bank plc v Spectrum Plus Limited and others ([2005] UKHL 41). The House of Lords ruled that the charge over present and future book debts granted by Spectrum Plus to NatWest under a debenture took effect as a floating rather than a fixed charge. While the decision itself is not good news for lenders, in particular clearing banks, it does provide some much needed certainty in an area of law which has been the subject of conflicting lines of judicial authority.

2 Facts

Spectrum Plus (“Spectrum”) entered into a debenture with NatWest Bank plc (“NatWest”) in September 1997 to secure its £250,000 overdraft facility with NatWest. The debenture created a specific charge over certain assets including book debts and other debts, and also floating security over all other future and current assets.

The debenture prohibited Spectrum from dealing with its uncollected book debts in any way prior to collection, such as factoring or assigning them, but left Spectrum free to deal with the debtor and to collect the debts. Spectrum was required to pay the proceeds of collection of the book debts into Spectrum’s current account with NatWest, which had a £250,000 overdraft limit. Provided the limit was not exceeded, there was no restriction in the debenture on Spectrum drawing on the account for business purposes. The account was never in credit but never over the limit. No instructions were given by NatWest regarding how the account could be used, nor did it seek to exercise any control over the withdrawal process, until 7 weeks before Spectrum went into voluntary insolvency (October 2001) when it blocked any withdrawal. The question was whether this charge was capable of being a fixed charge. The High Court ruled that the fixed charge over book debts only took effect as a floating charge but the Court of Appeal overruled and held that it took effect as a fixed charge.

Banking Update.

Contents Fixed Charges over Book Debts: The Spectrum Plus judgment 1 The Practical Impact of the Pensions Act 2004 on Finance Transactions 7 The Consequences of Wrongful Acceleration 14 A more creditor friendly Chapter 11 20 A case for reconfirming guarantees 26 Proposed changes to the Swedish Companies Act open the door for new financing opportunities for Swedish companies 29

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3 Advantages of a fixed over a floating charge

Lenders are keen to take fixed charges over as many assets as possible of a borrower. This is because the proceeds of fixed charges are paid to fixed charge holders first in priority to preferential creditors and expenses, whereas floating charges rank behind expenses and preferential creditors, and may lose priority to later fixed charges. Although since September 2003 HM Revenue & Customs are no longer preferential creditors, meaning that the pool of creditors having priority over floating chargeholders is less, the expenses of an insolvency can still be considerable. In addition, unlike fixed charges, a certain percentage of the floating charge proceeds are applied to an unsecured creditor’s fund (up to a cap of £600,000), and floating charges are more vulnerable to avoidance by virtue of the application of Section 245 of the Insolvency Act 1986.

4 Prior Judicial Authority

The decision in Agnew v Commissioners of Inland Revenue [2001] 2AC 710, otherwise reported as Brumark, clarified the law in relation to charges over book debts where the chargeholder was not a clearing bank and proceeds were paid into a bank account with a third party bank. This case concerned a debenture whereby the bank took a charge that was expressed to be fixed as it attached to the uncollected debts but floating as it applied to the proceeds of collection. The Privy Council held that in order for the charge to be fixed, the chargeholder must have control over both the uncollected debts and the proceeds when paid into an account. The right to control will be insufficient if not exercised in practice, and effective control requires the operation of blocked accounts.

However, what Brumark did not specifically address was what level of control was required in the case of a Siebe Gorman type debenture in which the chargeholder was a clearing bank and proceeds of the book debts were paid into an account held by the chargeholder bank rather than a third party bank.

In Siebe Gorman and Co Ltd v Barclays Bank [1979] 2 Lloyd’s Reports 142, it was held that for the purposes of a fixed charge it was sufficient that there was a requirement in the debenture that the chargor (i) is prevented from dealing in any way with debts prior to collection and (ii) pays all proceeds of the book debts into a specified bank account with the chargeholder bank. No control over drawings made by the chargor from the account or restrictions on the use of the account was necessary in order for the court to characterise the charge as fixed rather than floating. The fact that the account was with the chargeholder, and therefore de facto within (at least potential) control of the chargeholder was of itself enough.

Allegra Miles

Banking Update. 3

5 Decision

The House of Lords came down firmly on the side of Brumark. The requirement that the proceeds be paid into a specified account with the chargeholder bank was by no means sufficient if the bank did not exercise control over the account. Siebe Gorman was overruled.

In assessing whether a charge over book debts takes effect as a fixed charge, the court will focus on the restrictions both in the debenture and other finance documents on the rights of the chargor to withdraw the proceeds of the book debts from the account. The fact that Spectrum could until a notice of immediate repayment, withdraw on the account whenever it wished within the overdraft limit and that NatWest had no control over the operation of the account meant that it had the distinctive characteristic of a floating charge. The House of Lords made clear that it does not matter whether the account is in debit or credit, as long as in practice it can be drawn on.

A debenture which provided for book debt proceeds to be paid into a blocked account and which was operated as a blocked account would take effect as a fixed charge. Although not defining a blocked account, it is clear from the various judgments that it is an account from which the chargor is prohibited from dealing without the chargeholder’s positive consent and over which the chargor has no control. It is not enough to provide in the debenture for an account to be blocked, if it is not in fact operated as a blocked account.

6 Analysis and Impact

6.1 Requirement for control

• If the borrower has the ability to use the proceeds collected into the designated account, by making payments from it without any specific bank consent, the charge will be floating.

• It is clear from this decision that the taking of fixed charges over book debts where the proceeds of those book debts are used and turned over in the ordinary business of the company is unlikely to be feasible in practice. The key to a fixed charge is control. In order for a lender to take a fixed charge over book debts, it must have control over both the uncollected book debts and the proceeds of such debts and exercise such control. Such control is unlikely to be consistent with allowing the chargor to use the proceeds of collection as part of the agreed funding of the business.

•

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6.2 Level of control

• Effective control over the proceeds of book debts for the purposes of a fixed charge can be achieved by the operation of a blocked account. As mentioned above it is not enough for the debenture to provide that the account is blocked, if it is in fact not operated as a blocked account. Although not giving any specific guidance as to the required characteristics of a blocked account, it is clear that the essential characteristic is that it is an account over which the borrower has no control, and the borrower cannot have any access to any funds in the account, without the chargeholder’s prior consent.

• If the proceeds in the account are effectively segregated, and completely frozen and unusable until the end of the security period, then it is clear that this type of blocked account would satisfy the fixed charge requirement.

6.3 Exception to complete control

• However, there is still a considerable uncertainty as to whether a degree of control less than this absolute freezing of the account may suffice to support a fixed charge. Are there, for instance, any situations in which the borrower can withdraw money from the account, without compromising the fixed nature of the charge and the “blocked” nature of the account. The technical answer is that withdrawals should be permissible as long as the chargeholder bank’s consent is in practice obtained for each withdrawal. In practice, this is likely to depend on the nature of the relevant charged debts.

• In the case of a manufacturing or trading company, proceeds of the book debts will reflect for the most part the sale of trading stock. The company will generally use those proceeds for everyday trading purposes, such as paying suppliers for raw material and trade creditors. Even if the debenture provides that the bank can at any time not consent to the withdrawal from the blocked account, in practice it is unlikely to be practical to set up a mechanism for consent on a drawing by drawing basis as the trading position of the company will require continual drawings. Any purported consent mechanism is likely not to be operated in practice.

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• In other circumstances where the borrower is not a trading company and does not need the proceeds for working capital purposes, obtaining the consent of the bank may be genuinely feasible. So in the case of a property financing in which the borrower has cash building up from rent payment in the rent account and the lender gives written consent to the release of cash from such an account, for example if the account holds the required debt service payment, the release may in such a case not taint the fixed nature of the charge.

6.4 Automatic release

• It is not uncommon in secured financing transactions to provide for a consent to release cash in an account over a specific level. These structures usually provide that if the bank is satisfied that the amount in the blocked account is in excess of its specified security requirements and other criteria are fulfilled (e.g. no default is continuing), the bank will release the excess amount from the blocked account into an unblocked account from which the borrower is permitted to draw. The fact that only amounts in excess of the required security cover are released means that the bank is still preserving the proceeds required for its security, and therefore such withdrawals should not adversely affect the categorisation of the charge as fixed.

• However, as discussed above, if the amounts are to be used and required by the company for normal business and trading purposes, the operation of a parallel account structure may mean that the blocked account from which the transfers were made would only take effect as a floating charge. The House of Lords in Spectrum did cast doubt on whether parallel account structures would be effective to create a fixed charge.

6.5 Practical Impact

• In view of the commercial unacceptability to trading companies of not having access to the proceeds of book debts, it is likely that Spectrum has made taking fixed charges over book debts to secure loans made to trading or manufacturing companies very difficult for lenders.

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• Trading and manufacturing companies may be able to strengthen their cashflow by selling their invoices to a factoring company, which will provide cash in return. The Spectrum judgment does not apply where there has been a sale of book debts.

• Meanwhile, lenders providing funds to such companies may start requiring personal guarantees from directors and other forms of collateral to alleviate the fact that any charge they take over book debts will (unless the account is completely blocked) take effect as a floating rather than fixed charge.

• It may still be possible for lenders to take fixed charges over the proceeds of a single contract or several contracts, such as it typical in a property or project financing, by the operation of blocked accounts. Automatic release mechanisms from such accounts may satisfy the “control” requirement, but there is no certainty in this area and until and unless a court provides further guidance on this issue, lenders will risk the recharacterisation of fixed charges as floating.

Allegra Miles London

Banking Update. 7

The Practical Impact of the Pensions Act 2004 on Finance Transactions

1 Introduction

In April 2005, substantial and far-reaching changes to pensions law occurred by virtue of the coming into force of key provisions of the Pensions Act 2004 (the “Act”). This article gives some background to the Act and details the key provisions which may affect banking transactions. It then discusses the possible impact of the Act on financings, in particular as regards the potential liability of lenders and financial sponsors under the “moral hazard” provisions of the Act.

2 Background

There are two types of company pension schemes in the UK. These are defined benefit (otherwise known as final salary) and defined contribution schemes. The Act provides additional protection for members of defined benefit occupational (i.e. work based) pension schemes in a number of ways. Firstly, it imposes a new scheme specific funding requirement which is more onerous than the current one. Secondly, it creates a new Pension Protection Fund (“PPF”) to provide a minimum level of benefits for members, if their pension scheme’s sponsoring employer becomes insolvent and there are insufficient assets in the scheme to pay the benefits. The PPF is funded by a levy on defined benefit schemes.

The Government also created a new regulatory body, the “Pensions Regulator” (the “Regulator”), and gave it wide powers in order to protect the benefits of members of defined benefit schemes and to reduce the risk of claims for compensation from the PPF. The most important powers the Regulator has are those in the moral hazard provisions (detailed below)

Key Provisions

2.1 Moral Hazard Provisions

The Regulator has two separate powers to “make good” a defined benefit pension scheme deficit and to avoid the offloading of employers’ pension liabilities onto the PPF. These are financial support directions (“FSD”) and contribution notices (“CN”).

(a) Financial Support Directions

The Regulator has the power to issue an FSD requiring the person to whom it is issued to secure that financial arrangements are put in place to support an employer’s pension liabilities if the Regulator is of the opinion that the sponsoring employer is (i) a service company (basically, a

Allegra Miles

Rosalind Knowles

July 2005 8

company in a group whose turnover derives solely from amounts charged for the provisions of services of its employees) or (ii) is insufficiently resourced within the relevant time. Financial support can include either a holding company of the employer or all members of the group becoming jointly and severally liable for the whole or part of the employer’s pension liabilities. The purpose of these provisions is to ensure that well resourced companies within a group effectively guarantee the employer’s scheme liabilities, which it might otherwise not be able to meet.

The FSD can be issued to the employer or any persons connected or associated with the employer (see 2.2 below for meaning of connected or associated).

(b) Contribution Notices

The other tool which the Regulator has under the moral hazard provisions is the power to issue a CN, requiring the person to whom it is issued to pay an amount up to the entire deficit of the relevant pension scheme calculated on the buy-out basis (basically the amount it would cost to secure the pension benefits with annuity contracts purchased from insurance companies) to the scheme trustees or, if applicable, the PPF. Such an amount could be extremely substantial. However, there are a number of criteria that must be met before the Regulator can issue a CN which are:

(i) the Regulator is of the opinion that the person to whom it is issuing the CN was acting or continuing to act or party to an act, one of the main purposes of which was to reduce, avoid or prevent the recovery of the whole or part of the pension liabilities;

(ii) the act or failure to act must have occurred on or after 27 April 2004 and within 6 years of the notice;

(iii) the Regulator considers it is reasonable to make the person pay the amount in the notice; and

(iv) the person to whom it issues the CN is connected or associated with the employer (see below).

2.2 Meaning of Associate and Connected Person

The moral hazard provisions pierce the corporate veil. Pension liabilities can no longer be isolated in one part of the group, with other group companies not liable for the deficit in the employer’s pension scheme. A person is connected with a company if he is a director or shadow director of the company or an associate of the company. A company is an associate of another company if it is controlled by the same person or his associate. Control can be determined by reference to control of the exercise or entitlement to exercise a third of the voting power at shareholders’ meetings or by whether the directors normally act in

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accordance with that person’s instructions. It is important to note that if two or more persons (including companies) acting together hold a third of the voting power they fall within the definition of “control”. This means that the “associate” net is extremely wide.

Therefore, (i) companies within the same group as the employer of a defined benefit scheme would be associated and (ii) shareholders with a large stake (more than 33 per cent) in a sponsoring employer, held either individually or when grouped with another shareholder or shareholders and held either directly or indirectly, would fall within the category of associate.

A non-UK incorporated company can fall within the definition of “associate”. For example, the Dutch holding company of a UK subsidiary with a defined benefit scheme could be an associate under the Act.

2.3 Clearance Procedures

The Act contains a formal clearance procedure which allows parties to a transaction to apply to the Regulator for a statement that the proposed transaction will not cause it to issue a CN or FSD to the named applicants. Clearance from the Regulator is binding in so far as the circumstances described to the Regulator do not vary from the transaction as it proceeds. Clearance is not compulsory and there is no direct sanction for failing to seek clearance in accordance with the guidance. The Regulator’s published guidance recommends seeking clearance generally where the scheme is in deficit on an FRS17 basis

There are certain types of events which provided (i) they fulfil certain criteria set out in the guidance issued by the Regulator and (ii) they have a material detrimental effect on the pension creditor should be cleared with the Regulator. These events are known as “Type A” events. The most relevant “Type A” events as regards finance transactions are (i) a change in priority, namely a change in the level of security given to creditors with the consequence the pension creditor might receive a reduced dividend in insolvency and (ii) a change in the control structure of an employer.

3 Practical Impact of the Act

It is still unclear as to how pro-active and expansive the Regulator will be in the use of its powers to issue FSDs and CNs and who it issues them to. However, the possible impact of the Act on leveraged and other secured finance transactions and the pension related liability that lenders and financial sponsors may incur is extensive. Set out below is a summary of the key areas of concern for lenders and financial sponsors.

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3.1 Clearance from the Regulator for certain finance transactions

An acquisition, whether leveraged or not, which involves a change in control of the direct or indirect parent company of a sponsoring employer and which is financially detrimental to the ability of the scheme to meet its liabilities may require clearance. Most leveraged finance transactions would probably be considered financially detrimental on the basis of the amount of secured debt taken on to acquire the target company. Even if the change of control was not financially detrimental, in most leveraged acquisition finance transactions full security is taken over the shares and assets of the target group. The taking of such security would, if over more than 25% of the total assets of the group or of the sponsoring employer, be an event for which clearance should be sought if the scheme is in deficit.

It should become clear at an early stage in a transaction whether clearance should be sought from the Regulator. If so, lenders may want to include the granting of a clearance statement as a condition precedent in the facility agreement.

Lenders and financial sponsors should be aware that the Regulator will, in considering whether to grant clearance, assess if the scheme’s position has been protected and its trustees are content for the proposal to succeed (for example because they have received additional contributions or security). The Regulator has made clear that it views its role in the clearance procedure as a referee between the employer and the trustees, and not a deal maker. The position that the trustees take in their negotiation with the company in such a situation will be far more robust than in the past and may involve the trustees requiring a charge over the company’s assets and/or covenants, additional contributions and reporting obligations. The outcome of the negotiations with the pension trustees may have a radical impact on the credit analysis of the lenders, in particular if it has to share its security package with the pension trustee or if the acquisition company or other target companies are required to give guarantees for the pension liabilities of the scheme. The lenders will now need to consider where in the capital structure pensions liabilities will rank.

3.2 Liability of lenders and financial sponsors under the moral hazard provisions (a) Financial Sponsors

As discussed above, a CN or FSD can be issued to an associate or connected company of the sponsoring employer. A financial sponsor that holds, whether by itself or together with a number of other financial sponsors or shareholders, more than 33 per cent. of the voting shares in a sponsoring employer (whether directly or indirectly) is at risk of being issued with a CN or FSD in respect of any scheme deficit or under

Banking Update. 11

funding. Financial sponsors may be less concerned about CNs than FSDs, at least on entry into a transaction. This is because it may be possible to structure a transaction to fall outside the scope of the CN criteria. However, it is not possible to structure around an FSD, and although clearance can be sought when entering into a transaction, it may be of limited comfort to financial sponsors at such a point, due to the fact that it is not binding if circumstances change or any relevant information is not disclosed at the time.

Whether the Regulator chooses to use its power to impose an FSD or CN on a financial sponsor remains to be seen, but financial sponsors should be aware of their potential liability under the Act.

(b) Lenders

A security trustee or lender who holds security over shares in a company “connected” or “associated” with the employer of a defined benefit scheme could fall within the definition of an “associate”. This would be a major concern for lenders, as it could lead to the imposition on a lender of an unquantifiable liability in relation to the pension scheme deficit of the relevant company.

However, in order to fall within the scope of the Act, the lenders or security trustee would need to be entitled to or control the exercise of at least a third of the voting rights in the employer of a defined benefit scheme or any company which controls (either directly or indirectly) the employer. In most leveraged and other secured transactions, the share security documentation will provide that the security trustee cannot exercise voting rights until the occurrence of an event of default which is continuing (“Enforcement Event”). Even if the security trustee or lenders chose not to exercise its voting rights when enforcing the security, or actually chose not to accelerate and enforce, it could be argued that the trustee would technically still have the entitlement to exercise these voting rights once an Enforcement Event had occurred. In such a case, the security trustee (if entitled to exercise the vote) or lender could be liable as an “associate” to the imposition of a CN or FSD.

This concern was raised with the Regulator by the Financial Markets Law Committee, and in a letter in response, the Regulator clarified that where control has vested in the holder of share security but has not been exercised it would not be reasonable to issue an FSD and the security holder would not be party to an act upon which to base the issue of a CN. However, once the lender has exercised the voting rights or control it would fall within the “associate” net. Although this letter provides comfort, it has no statutory authority and has not yet been incorporated into the formal guidance of the Regulator. It is also given in the abstract without reference to a particular set of facts. Caution should therefore be exercised by lenders if relying on this letter.

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The security trustee should be protected by the indemnities that it obtains from the lenders, but this does not obviously provide comfort to the lenders. This letter will provide a certain level of comfort, particularly to those lenders that hold security over shares in a company (or its holding or intermediate holding company) with a defined benefit scheme, where such security was entered into before the Act came into force. However, lenders taking share security over a company which has a defined benefit scheme in the group, should now carefully consider the drafting of the voting provisions in share charges.

One possible solution is for voting control to be surrendered altogether. In view of the letter of comfort, this is a somewhat unattractive option, in particular as it means that lenders will have no control over the voting process, which in an enforcement scenario may be unacceptable. Another is for the security trustee to be entitled only to exercise voting rights on the occurrence of an Enforcement Event and after the trustee has notified the chargor that it is so entitled.

If lenders require certainty at the outset of a transaction, it may be worth seeking clearance that such provisions in the share security documentation will mean that they can avoid the imposition of an FSD or CN, in particular if clearance is already being sought in relation to the transaction. Although it is unlikely that the Regulator would give specific clearance for any activities that lenders may undertake in an enforcement scenario, it may give specific guidance on whether a “waiver” of voting rights or failure to take them up would keep the lender out of the connected/associated net.

3.3 Impact on loan agreements

Whilst lenders will want to ensure that they are not liable as an “associate” to make a contribution under a CN or provide a guarantee pursuant to an FSD by careful drafting of the share security documentation, they should also be concerned by the implications of an FSD or CN being issued in relation to any borrower or related group company of that borrower. The issuance of an FSD or CN would in most cases have an adverse financial impact on the company or companies to whom it was issued.

In leveraged finance transactions, the senior and mezzanine facility documentation will usually contain general pension undertakings and representations providing that the company ensures that all pension schemes are maintained in all material respects in accordance with applicable laws and their governing provisions and that they are fully funded in accordance with the provisions of the relevant scheme. Most investment grade transactions do not usually include such provisions. It is unlikely that the current drafting of pensions related provisions in facility agreements will provide the additional comfort and protection that lenders will require from borrowers to deal with issues arising under the

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Act. If any borrower or a group company has a defined benefit scheme, lenders should consider the inclusion of additional drafting in the representations and warranties, covenants and event of default sections of the loan agreement to provide assurance that the borrower and any group company have satisfied their obligations under the Act and, if they have not, the extent of any potential liability under the Act.

Allegra Miles & Rosalind Knowles London

July 2005 14

The Consequences of Wrongful Acceleration

1 Facts

In the previous edition of Banking Update, we discussed the Court of Appeal decision in Concord Trust v Law Debenture Trust Corp. Plc ([2005] IW.L.R. 1591) noting that, until the appeal reached the House of Lords, the case should be treated with caution. In April, the House of Lords handed down their ruling. The decision and its impact is discussed in more detail below. For a recap of the facts and the earlier decisions please refer to the December 2004 edition of Banking Update.

2 Decision

2.1 Obligation on trustee to call an event of default

The House of Lords opined on two issues. The first was whether the trustee was under an obligation to the bondholders to give the notice of acceleration. The Court of Appeal had concluded that the issue as to whether event of default had occurred had to be settled as between the trustee and the issuer, Electrim (“E”), before the trustee’s mandatory obligation to give the acceleration notice could arise. The House of Lords disagreed, rejecting the proposition that the obligation on the trustee to accelerate did not arise unless the issuer had accepted or was unable to challenge the existence of the triggering event of default. If the conditions set out in the trust deed for instructing the trustee to accelerate had been satisfied the mandatory obligation on the trustee arose. As the bondholders had satisfied the requisite formalities, the trustee, subject to its contractual entitlement to be indemnified, was obliged to give the notice of acceleration. This is a commercially helpful ruling, as it would be an unacceptable administrative burden on trustees and agents, and the bondholders and banks for whom they act, if the cost and delay in obtaining such directions were required before any acceleration could occur.

2.2 Possible causes of action for damages against trustee for wrongful acceleration

The second issue was what liability the trustee could reasonably request to be indemnified against. The House of Lords considered that the critical issue was whether the trustee was at risk to E for damages for loss caused by the giving of an invalid notice and analysed possible causes of action against the trustee.

Before considering the various actions, the House of Lords effectively assumed, for the purposes of the argument, that (i) the

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Benedict James

Banking Update. 15

notice of acceleration would become public knowledge and the reaction to it would cause serious financial or commercial loss to E and (ii) E would succeed in legal proceedings in establishing against the trustee the invalidity of the notice.

2.2.1 Breach of contract or not?

In assessing the contractual claim, the House of Lords noted that there was no express undertaking by the trustee not to give an invalid notice of acceleration, so a cause of action for breach of contract could only arise if a term could be implied to that effect. A term could only be implied if it was necessary to give business efficacy to the contract. The House of Lords agreed with the reasoning of the Court of Appeal that it was open to E to challenge both the existence of the alleged event of default and the validity of the notice of acceleration. Crucially, they also agreed that if the challenge succeeded, neither the alleged event nor the invalid notice would be of any contractual significance and it would simply be ineffective. E could in effect just ignore the proposed acceleration. On this basis it was held that the implied term was not required to give business efficacy to the trust deed, nor could one be implied on the basis of the other tests.

2.2.2 Was the trustee negligent?

The House of Lords then considered other possible tortious causes of action. They concluded that, even if it was arguable (which was unlikely) that the trustee had a tortious duty of care to E, the trustee’s action in this particular case could not be categorised as negligent. In dismissing the negligence claim, Lord Scott’s judgment placed great reliance on the fact that the trustee had been applied to the courts seeking directions at every opportunity.

The House of Lords also summarily dismissed the tort of conspiracy (by the trustee) with the bondholder to cause E injury by unlawful means and interference by unlawful means with E’s business.

On this basis it was concluded that, as there was no possible cause of action in tort or in contract, the amount that the trustee’s indemnity should cover should be limited to legal costs. On this head of argument, therefore, the House of Lords judgment agreed with that of the Court of Appeal.

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3 Analysis

3.1 Comfort for trustees and facility agents when accelerating

The decision of the House of Lords that accelerating a bond issue on the basis of an unjustified or incorrect assertion of an event of default does not give rise to either a contractual or tortious cause of action against the trustee for economic loss caused by wrongful acceleration appears to be a commercially sensible result as regards trustees themselves. Most commentators on the case have also argued that the judgment leaves no room for a suit against the bondholders or banks themselves (as opposed to the agent or trustee). If this is correct (and see paragraph 3.4 below for a counter-argument), this gives rise to substantial disadvantages for issuers or borrowers who, because of wrongful acceleration, could find themselves with no legal recourse for loss or damages suffered as a result of such an acceleration.

3.2 Application to syndicated loans

Lord Scott expressly drew a parallel between the position of bond trustees and that of agents in syndicated loans. Similarly, most commentators have applied the argument that the judgment closed off the possibility of suit against the bondholders to syndicate banks themselves.

In most syndicated loan agreements (and in the LMA Agreement) the acceleration wording provides that “on and at time after the occurrence of an event of default” the agent may, and shall, if so directed by the majority lenders declare that all amounts outstanding become immediately due and payable. There is no express undertaking by the agent that it will not accelerate nor unjustifiably assert an event of default, nor by the majority lenders not to give instructions to do so, unless an event of default has actually occurred. In the absence of an express term, such an undertaking or term will not, it seems from the reasoning in this case, be implied by the courts. The agent would not be liable for contractual damages, even if manifest economic loss occurred to the borrower as a result.

3.3 Distinction between acceleration of a loan and cancellation of commitments

The House of Lords decision appears to be limited to the acceleration of a facility (i.e. demand for early repayment of advances made) and not to the cancellation of a commitment to lend, nor the withholding of funding. In respect of cancellation of a commitment, Lord Scott noted that if the agent terminates its commitment to make further advances on the basis of an event of default which turns out not to have actually occurred, that it is liable in damages for any losses that flow from such a cancellation.

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Although not directly addressed by the House of Lords, it follows that withholding funds (even if the contract is not in fact cancelled) because of an unjustified event of default will constitute a breach of contract. Most loan agreements provide that the lenders only have an obligation to fund if no event of default has occurred or is continuing. If an event of default has not actually occurred and the lenders withhold funding, it is likely that there is a breach of contract and the lenders would be liable for consequences that flowed as a result of the breach.

The distinction the House of Lords made (albeit indirectly) between a wrongful acceleration which does not give rise to a breach of contract and cancelling a commitment on the basis of an event of default which has not actually occurred which does give rise to a breach of contract seems, whilst logically consistent, to give rise to an artificial result. On the basis of such a distinction, it appears that a borrower should be able to sue for damages which arise as a result of a syndicate failing to roll over a revolving loan at the end of each rollover period, but not for accelerating a term loan at the end of a an interest period, even though the commercial result is exactly the same.

3.4 Distinction between lenders or majority lenders and the agent?

3.4.1 General

As mentioned above, the House of Lords focussed solely on the liability of the trustee of the bonds. It did not deal with whether there would be a cause of action for breach of contract or in tort against the bondholders. Restricted to these terms, the judgment is in fact commercially helpful, in that trustees and agents can now do what they are contractually obliged to do without being concerned that in doing so they may incur very substantial liability.

However, the ratio of the judgment does not strictly apply to claims against or in relation to bondholders or the banks. In the case of bonds, in most cases it would be difficult to sue the holders as a result of (in most cases) their unidentifiable nature and the distant relationship between the bondholders and the issuer. This is quite possibly why this issue was not discussed in the House of Lords judgment. In a situation where the bondholders were an identifiable and limited class, it does not seem impossible for a judge in the future to distinguish a claim against the

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bondholders from the situation considered by Lord Scott.

3.4.2 Contractual Claim

As regards the contractual claim, it could, for instance, be held that, whilst there is no implicit contractual term to the effect that the trustee will not serve an acceleration notice when duly instructed but where no default has actually occurred, there in contrast is an implicit term that the bondholders themselves will not so instruct the trustee unless a default event has actually occurred. This argument has, perhaps, added strength in the case of a syndicated loan, where the relationship between the banks and the borrower is rather closer (and therefore arguably more apt for the finding of implicit terms requiring behaviour in a commercially appropriate manner). In a situation where a borrower has suffered loss which (taking into account duties of mitigation and issues of contributory negligence) is properly attributable to a wrongful acceleration notice from a group of identifiable banks, we believe that there may be a strong incentive on a court in a future case to follow an argument along these lines so as to achieve a just and commercial result.

3.4.3 Negligence Claim

As regards the negligence claim, it is possible that a judge could find that the banks owed a duty of care to the borrower and that they breached this duty of care by wrongfully accelerating. It would be more likely to impose a duty of care on the banks as the relationship between a bank and a borrower is more proximate than that between groups of bondholders and an issuer. In this particular case, the reason that the negligence claim was dismissed was that the trustee had been in and out of court seeking directions at every opportunity. However, if a syndicate of lenders decided to accelerate on the basis of a possible (but not certain) event of default (such as is often the case in relation to a material adverse change), it is unlikely that they would seek directions from a court as to the correctness of their decision that a relevant event had occurred. The borrower in such a situation could argue that the

Banking Update. 19

lenders breached their duty of care if they failed to exercise due care and attention.

4 Summary

In summary, therefore, this case seems to be reliable (and very helpful) authority that fiduciaries such as trustees and agents will not be liable in tort or in contract if they follow instructions given to accelerate. In the case of bond issues, it would take a certain amount of strain to distinguish the case of bondholders for bond trustees in Lord Scott’s judgment, but it would be possible. In the case of a syndicated loan, distinguishing the case of a syndicate of banks from that of the agent would, it seems, be rather less difficult. Accordingly (and despite a number of commentaries to this effect), it should not be assumed that bank syndicates will be immune from suit it they wrongfully seek to accelerate a facility without the contractual right to do so.

Benedict James & Allegra Miles London

July 2005 20

A more creditor friendly Chapter 11

With the enactment of the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (the “Act”) on 20 April 2005, chapter 11 appears to have become a slightly less attractive place for debtors and a slightly more congenial place for creditors. The amendments the Act makes to existing bankruptcy law create the possibility of significant limitations on business debtors and new challenges for management of distressed companies to consider both before and after a chapter 11 filing. Most of the amendments will apply to cases filed after 17 October 2005. We expect that some companies will choose to file chapter 11 cases prior to this date to avoid application of the Act to their cases. Although it remains to be seen exactly how legal and business practices will evolve as a result of these amendments, it is clear that the Act has altered the restructuring landscape.

This article outlines selected amendments and their practical implications.

1 Discretion of Judges Limited

There is clear congressional intent to limit the discretion and flexibility of bankruptcy judges, including a number of provisions that limit the debtor’s time period for significant action.

1.1 Exclusivity. A debtor’s exclusive period to file a chapter 11 plan of reorganization (which, under current law, may be extended for a significant amount of time upon a showing of cause) will be limited under the Act to a period of 18 months from the date the debtor files a chapter 11 petition (or the date of the order for relief in an involuntary case). The limitation of a debtor’s exclusive period may significantly impact the ability of large and complex debtors to achieve a consensual chapter 11 plan within the prescribed time frame. A failure to put forth a chapter 11 plan within the exclusive period will shift negotiating leverage from the debtor to creditors or may result in the debtor proposing a chapter 11 plan without the support of its creditors. In addition, a debtor may choose to delay filing for chapter 11 to pursue additional pre-petition negotiations with creditors to avoid the risks associated with a limited exclusivity period.

1.2 Real Property Leases. The time frame within which a debtor can assume or reject non-residential real property leases also has been compressed. This time limitation will provide landlords with considerable leverage in lease negotiations and make matters especially difficult for retailers with numerous locations around the country. Failure to carry out complete and timely planning and

Marty Flics

Brian Greer

Banking Update. 21

evaluation of leases could result in the inadvertent loss of valuable above-market leases or the retention of costly below-market leases.

1.3 Conversion/Dismissal of a Case. Under the Act, courts must convert a case to a liquidation or dismiss a case if the applicant establishes “cause,” unless the court finds unusual circumstances establishing that a conversion/dismissal is not in the best interests of creditors and the estate. This differs from the current law which provides the court with the discretion to convert/dismiss the case if the applicant proves “cause.”

2 Influence of Corporate Scandals

The influence of the Sarbanes-Oxley Act’s attempts to address governance, disclosure and accounting abuses in corporate America also has left its impression on the amendments to the Bankruptcy Code as Congress has tried to address perceived abuses in the bankruptcy system resulting from corporate malfeasance.

2.1 Appointment of Trustee. The US Trustee is required under the Act to move for the appointment of a trustee if there are “reasonable grounds to suspect” that current members of the debtor’s board of directors or other governing body, the debtor’s chief executive or chief financial officer, or members of the board or other governing body who selected the debtor’s chief executive or chief financial officer, participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or the debtor’s public financial reporting. This amendment may encourage the US Trustee to take a more active role at the outset of a case to see whether it has reasonable grounds to suspect that corporate crimes have taken place.

2.2 Retention Payments/Severance. In a move sure to raise eyebrows in boardrooms across America, Congress has placed severe restrictions on the payment of retention bonuses and severance pay to key personnel of the debtor, including that the executive must have a “bona fide” job offer from another employer and a limitation on the total value of such payments. It remains to be seen how judges will interpret the new provisions when actual bankruptcy cases come before them, but in any event these amendments may make it harder for distressed companies to recruit and retain top-quality executives and directors.

2.3 Fraudulent Transfer to Insiders. In an apparent effort to foreclose the possibility that corporate executives will rush to lock in compensation packages before a bankruptcy filing to avoid court scrutiny as described immediately above, payments to insiders within two years prior to bankruptcy (effective immediately and retroactively) can be clawed back to the estate as fraudulent

July 2005 22

transfers regardless of the debtor’s financial condition if the payment was made out of the ordinary course of business of the debtor and for less than reasonably equivalent value. Although creditors always have been able to assert rights under fraudulent transfer laws, this amendment may make it easier to recover payments made to management.

3 Priority and Cash Issues

A number of provisions impact cash flow issues and will force a debtor to consider these before filing for bankruptcy.

3.1 Utilities. Under the Act, a debtor can no longer rely on historical payment activity or the availability of an administrative expense priority as proof of assurance of payment to a utility after a bankruptcy filing. Instead, a debtor must provide a cash deposit or other assurance of payment such as a letter of credit or surety bond. This requirement will require careful pre-bankruptcy planning to assure that the debtor has available cash or access to financing vehicles on a post-filing basis to make the necessary payments to utilities. In addition, it is possible that the issue of how significant a deposit or other form of security must be will be heavily litigated in the first large chapter 11 cases filed after the effective date of the Act. Debtors with many locations will find this amendment particularly challenging because of the large number of utilities that provide them with service.

3.2 Administrative Claims for Trade Vendors. Under the Act, trade creditors will be able to reclaim goods sold on credit to a debtor for a 45 day period before the commencement of the bankruptcy case so long as a written demand is made to the debtor within 45 days of receipt of the goods. This is a substantially longer period than otherwise provided in the Uniform Commercial Code and may result in large reclamation claims. In addition, the Act provides that a trade creditor is entitled to administrative expense priority status for the “value of the goods” that were received by a debtor in the ordinary course of business within 20 days before bankruptcy regardless of whether the trade creditor makes a written reclamation demand. These amendments raise a number of issues. The first is whether debtors will use these provisions to argue that post-filing “critical vendor” payment motions should be granted because the trade creditors (who at least shipped goods within the 20 day period) will now have administrative expense claims rather than unsecured claims. Secondly, trade creditors may press vigorously at the outset of a case for the debtor to demonstrate that it will have the ability to pay their administrative expense claims, a requirement to confirm any chapter 11 plan, and threaten motions to convert or dismiss the case under the expanded conversion/dismissal sections. In any

Banking Update. 23

event, it is clear that these sections, like those limiting exclusivity extensions and shortening time limits for assuming real property leases, will impact leverage in chapter 11 cases.

3.3 Taxes. Under the Act, tax claims must now be treated at least as well as any class of unsecured claims. As a result, a debtor proposing to pay its trade claims in full for example, will need to do the same for tax claims. Most secured and unsecured taxes also will be treated the same (before one could threaten to cram down secured tax claims) and interest rates on all tax claims will now be determined by applicable non-bankruptcy law (which will likely lead to higher rates than used previously). These changes will force management and advisors to the debtor to carefully consider the uses of cash in preparing for and effectuating a restructuring in ways different from past practice.

4 Other Amendments

There are many other amendments to the Bankruptcy Code which will affect plan formulation, pre- and post-petition negotiations and the behaviour of interested parties.

4.1 Financial Contracts. Changes affecting financial contracts (e.g., swaps, securities contracts, repurchase agreements, commodity contracts and forward contracts) will affect many current transactions. The Act greatly expands the scope of protections available to a non-debtor party to certain types of financial contracts in the event of the bankruptcy of the contract counterparty. Primarily, the Act broadens the range of circumstances under which non-debtor parties to financial contracts may exercise their contractual rights to liquidate, terminate, accelerate or offset amounts owing thereunder, irrespective of the operation of the automatic stay or the general non-enforceability of so-called “bankruptcy default” clauses. The amendments accomplish this goal by adding to the types of financial contracts which are eligible for these special protections and broadening the scope of persons eligible to rely on such protections.

4.2 Pre-packs. The Act promotes prepackaged bankruptcy plans by enabling the debtor-in-possession to continue soliciting votes on the plan after the filing of the bankruptcy petition. The new law will prevent dissenting creditors from disrupting the solicitation of a prepackaged plan by filing an involuntary case against the debtor.

4.3 Preferences. The preference statute has been modified to broaden the exception to preference recoveries. This makes it easier for a creditor to successfully invoke the “ordinary course” defence by eliminating the requirement that the creditor show that the challenged payment was both in the ordinary course of business of both parties and was according to ordinary business terms. Now, a

July 2005 24

creditor only has to prove that the challenged payment meets industry standards, regardless of whether the payment was in the ordinary course of business of the debtor. This broadening of the “ordinary course” defence is a boon to certain creditors and may encourage litigation by inducing creditors who might otherwise have settled to risk defending against those claims. It also may serve to reduce the “scatter shot” approach many debtors employ when commencing this type of litigation, suing every entity that received a payment during the 90 day period without first undertaking any factual analysis.

4.4 Investment Bankers and Disinterestedness. Under the current law, a financial adviser is not disinterested if it is an underwriter of any of the debtor’s outstanding securities or any securities issued within three years before bankruptcy, regardless of whether such securities were still outstanding and, thus, could not be retained by the debtor-in-possession. The Act deletes the provisions that automatically rendered investment bankers for a security of the debtor (without regard to the timing of the issuance of the securities) and their attorneys not disinterested. The repeal of both of these automatic disqualification provisions will increase potential competition among investment banks for financial advisory positions in chapter 11 cases.

4.5 New Chapter 15 – Recognition of Foreign Bankruptcy Proceedings. One of the most all-encompassing changes affecting business bankruptcies results from the adoption of new chapter 15, captioned “Ancillary and Other Cross-Border Cases,” in place of section 304 of the Bankruptcy Code, which has been repealed. Chapter 15 incorporates the Model Law on Cross-Border Insolvency drafted and recommended for adoption by the United Nations Commission on International Trade and Law to promote cooperation between the United States and foreign countries with respect to transnational insolvency cases. It is intended to provide greater legal certainty for trade and investment as well as to provide for the fair and efficient administration of cross-border insolvencies, which protects the interests of creditors and other interested parties, including the debtor. Adoption of new chapter 15 should ensure greater consistency in United States bankruptcy courts through its simplified definition and codification of many aspects of existing US case law. This in turn may encourage troubled foreign companies to explore more closely and readily their options to file chapter 15 cases in the future.

Martin Flics & Brian Greer New York

Banking Update. 25

Further information For further information on this, please contact any of the following members of our US Restructuring & Insolvency team:

Martin Flics at martin.flics@linklaters.com or (1) 212 424-9022

Mark Palmer at mark.palmer@linklaters.com or (1) 212 424-9034

Brandon Ziegler at brandon.ziegler@linklaters.com or (1) 212 424-9078

Jonathan Gill at jonathan.gill@linklaters.com or (1) 212 424-9133

Brian Greer at brian.greer@linklaters.com or (1) 212 424-9128

July 2005 26

A case for reconfirming guarantees

1 Background

The Court of Appeal recently considered whether a guarantee of two loan agreements which were materially amended (by tripling the level of debt and changing the purpose of the loan) was still valid and covered amounts due under the amended agreements (Triodos Bank NV v Ashley Charles Dobbs [2005] EWCA Civ 630). The Court of Appeal concluded that the amendments were not “expressly” contemplated in and within the “general purview” of the original agreement and the guarantee no longer covered the new agreement. This article briefly sets out the facts of the case, the decision and issues that it raises in respect of relying on existing guarantees when amending a loan agreement.

2 Facts

Mr Dobbs (“D”) had given a guarantee of amounts due to Triodos Bank NV (“T”) under two loan agreements amounting to £900,000 made with a company of which D was a director. The loan agreement provided that T could, without reference to D, agree to amendments to the loan agreement. The two agreements contained provisions which allowed the interest rate to be varied and repayments to be rescheduled. T then made further loans to the company under two loan agreements, which were expressed to “replace” the earlier agreements and these were in turn “replaced” by another agreement which increased the facility amount to £2.6 million. The agreement provided that the bank should continue to have the benefit of the guarantee. The company went into receivership and T called on the guarantee.

3 Decision

The Court of Appeal held that an agreement which replaced the original loan agreement could not be called an amendment or variation to the loan agreement, and sums due under the new agreement could not be sums due under or “pursuant” to the original agreement for the purposes of the guarantee. In this case, the company’s liability under the final agreement was not something which D had guaranteed since that agreement was on terms so different that it was considered not just an amendment or variation, but rather a novation of the original loan agreements.

The court made clear that the assent of the guarantor, whether previous to or subsequent to a variation, only rendered him liable for the contract

Kirsty Thomson

Banking Update. 27

as varied where it remained a contract within the “general purview” of the original guarantee and if a new contract was to be secured there had to be a new guarantee. The court placed emphasis on the fact that the loan agreement had terms in relation to variation of interest rates and rescheduling repayments (which if they were operated would amount to amendments or variations of the agreement), but not in relation to an increase in the amount or purpose of the loan. The substantial increase in debt and change in purpose was not specifically envisaged at the time of entry into the loan agreement. Lord Justice Longmore noted that you need clear words in the guarantee which show that the guarantor did agree to be bound to a more onerous obligation in the future without reference to it.

4 Analysis

The typical guarantee given by a guarantor under a loan facility will include, as one of the usual saving provisions a clause stating that the obligations of each guarantor are not affected by any amendment or replacement of the loan agreement. The relevant LMA clause provides in the Waiver of Defences clause that the obligations of each Guarantor are not affected by “any act, omission, matter or thing which but for this clause would reduce, release or prejudice any of its obligations…including…any amendment (however fundamental) or replacement of a Finance Document or any other document as security”. Such a clause is included to address the fact that a material variation or amendment in the contract between the creditor and the principal debtor will discharge the guarantor, unless the variation is one to which he assented or which is provided for in the guarantee. However, the Court of Appeal made clear in Triodos that even if assent is given, if the amendment or variation is not “within the purview” of the original agreement, then the existing guarantee will no longer cover the amended loan agreement.

It appears from this case that unless the types of amendments which are subsequently made are “expressly” contemplated and within the purview of the original loan agreement, the inclusion of the typical general savings language may not be sufficient to ensure that material amendments, such as an increase of the facility amount, fall within the scope of the existing guarantee. The court will carefully analyse the specific provisions, if any, of the loan agreement and or the guarantee relating to the relevant amendments to assess what was in the original contemplation of the parties at the time of entering into the agreement.

In view of the narrow approach taken by the court to the construction of the intention of the parties from the wording in the relevant loan agreement and guarantee, lenders may consider amending the saving provisions of a guarantee to explicitly include, for example, any increase in any indebtedness under the loan agreement, any change in purpose

July 2005 28

for existing or increased indebtedness, or any change in margin. Lenders may also consider adding such wording to the statement in the construction clause of the loan agreement that the references to any agreements are to those agreements as amended from time to time.

The inclusion of additional wording in both the savings language and the construction clause should reduce the doubt that these types of material amendments were in the contemplation of the parties at the time of entering into the agreement. However, even if such wording is included, lenders are still advised to seek confirmation from a guarantor that their guarantee extends to cover the amended or varied loan agreement, or take a new guarantee altogether when the changes relate to a material increase in the amount of indebtedness, the maturity of the loan or other key commercial terms of the loan. Reconfirmation of a guarantee or a new guarantee provides certainty for lenders that the guarantee covers the amended loan agreement in a way that reliance on carefully worded savings provisions cannot.

Kirsty Thomson London

Banking Update. 29

Proposed changes to the Swedish Companies Act open the door for new financing opportunities for Swedish companies

1 A governmental bill proposing a new revised Companies Act

Extensive changes to the Swedish Companies Act (the “Act”) have been proposed. If enacted, the new Companies Act will provide for greater flexibility for Swedish limited liability companies in relation to certain types of financing. The new Act is due to come into force on 1 January 2006 unless the proposals are not ratified by parliament which is very unlikely.

This article will deal with three types of financings which will be affected by the proposed changes. These are vendor financings, exchangeables and other equity linked financial instruments and mandatory convertible bonds.

2 Vendor finance

Vendor finance can be described as any form of financial assistance to the purchaser by the seller of assets. If there is a gap between the purchase price asked by the seller in a leveraged buy out and the total amount of available bank debt and equity, vendor finance is often used. Vendor finance can also include not just a vendor loan note or loan agreement, but also deferral of the purchase price, whether linked to the achievement of certain performance targets (earn-outs) or not (at least if there is some predetermined minimum earn-out amount).

In Sweden, vendor finance, in particular in relation to LBO transactions, has been restricted because of the wide scope of the financial assistance prohibition. The prohibition provides that a company may not grant a loan or provide security if the purpose of such loan or security is to assist a person who intends to acquire shares in the company or another company within the same group as the company. There is no exemption from this prohibition and there is no specific procedure “clearance” procedure such as, for example, the “whitewash” available in the UK. The prohibition is only applicable to share transfers and not to sale of other assets. There is no exemption for intra-group transfers, which means that a company cannot grant credit to finance the purchase price when selling to another company within the same group of companies. It is a criminal offence to violate the financial assistance prohibition.

The current prohibition against financial assistance in the Companies Act prohibits not only financial assistance in relation to the acquisition of shares in the company providing the assistance or its holding company, but also in relation to the acquisition of shares in subsidiaries of the assisting company.

Fredrik Rydin

Anders Malm

July 2005 30

The impact of this provision, namely that a company is not allowed to provide any kind of financial support to a buyer of shares in its subsidiary (irrespective of the form it takes, whether in the form of a stand alone vendor note or a deferral of payment of the purchase price) has been criticised in Sweden for many years. However, because of the strict interpretation of the wording in the financial assistance prohibition, the use of the vendor financing in Sweden has, up until the present time, been minimal.

The amendments to the Act limit the prohibition to financial assistance given by a company in relation to the acquisition of its own shares or shares in a company structurally above the company in the same group. Once the new amended Companies Act enters into the force, the use of vendor finance, including vendor notes, deferred purchase price mechanisms or earn outs in LBOs and acquisitions should expand.

3 Exchangeables and other equity linked instrument

The current Swedish Companies Act prohibits Swedish companies from borrowing (including the issue of debt instruments) where the principal amount payable to the creditor is determined by reference to the company’s future financial standing. Swedish issuers are therefore prevented from issuing so called exchangeable bonds or bonds where the redemption amount is linked, for example, to the share price performance of the issuer.

As with the current prohibition against vendor finance, this provision has been criticised by legal scholars in Sweden. It is regarded as outdated since it prevents Swedish companies from using certain types of financial instruments available in the market.

The amended Act will abolish the above prohibition. This change will allow Swedish companies to issue exchangeable bonds and also extinguish remaining doubts regarding the legality under Swedish company law of credit-linked notes and other debt instruments which have physical settlement on redemption. It will also allow issuers to issue bonds where the redemption amount is calculated by reference to the issuer’s share price performance, whether as a feature of convertible bonds or as a wholly synthetic instrument.

4 Mandatory convertible bonds

A mandatory convertible bond is a convertible bond where the holder cannot choose between cash payment and conversion. For a typical mandatory convertible, conversion into equity is the only available settlement method on final maturity.

Currently, Swedish companies are prevented from using mandatory convertible bonds because of the requirement of the Act that a holder of a convertible bond issued by a Swedish company must always have the option to choose between conversion into equity and cash repayment at par.

Banking Update. 31

The amended Act will expressly allow issuers to issue convertible bonds where the holder has the option or the obligation to convert the debt into shares of the issuer. This will enable issuers to issue mandatory convertible bonds in addition to standard convertible bonds.

It is possible for Swedish issuers to issue debt instruments where the desired terms and conditions are conditional upon the entry into force of the new legislation. For instance, an issuer could issue standard convertible bonds which, following the introduction of the new legislation, become mandatory convertible bonds pursuant to pre-set terms and conditions.

Fredrik Rydin & Anders Malm Stockholm

32

This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters, or contact the editors.

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