The term ‘financial institution’ is widely used in the finance sector. This blog focuses on its use in facility agreements where it is common to permit transfers of the lender’s position to ‘banks or other financial institutions’.
A typical transfer clause in a facility agreement may state that: ‘the lender may at any time transfer, assign or novate all or any part of the lender’s rights, benefits or obligations under this agreement to any one or more banks or other financial institutions’.
There is a degree of uncertainty as to when exactly a transferee will be classed as a ‘financial institution’ and in a legal document involving the lending of money, nobody likes uncertainty.
Court Guidance
The Court of Appeal partially addressed this issue in the Argo[1]case, where the judge stated that for the transferee to be a financial institution it was sufficient for the transferee to be an entity:
- which is a legally recognised form or being;
- which carries on its business in accordance with the laws of its place of creation; and
- whose business concerns commercial finance.
This is a very broad definition, but the entity involved in Argo was a hedge fund and so the case did not help to remove the uncertainly relating to companies set up purely for the purpose of purchasing and holding debt. In addition, the facility agreement Argo was concerned with was a syndicated agreement.
Further clarification
Fortunately, further clarification has recently been provided in the High Court[2]. This case considered whether a company that had not yet traded and which had only recently been incorporated, for the purpose of holding assets on trust for a third party, fell within the definition of ‘financial institution’.
Although not bound by the decision in Argo (because the Grant case involved a syndicated loan agreement) the High Court adopted the same view (and the same three point test from Argo), that the concept of ‘financial institution’ is widely drawn and will include, for example, ‘commercial trust corporations, primary and secondary lenders and those who act as trustees or fiduciaries either for buyers or borrowers on one side of a transaction or for the providers or users of financial products and services’.
