But does the decision in the Argo Fund mean that hedge funds will constitute permissible transferees without any limitation? A first instance court will be bound by the Court of Appeal decision in the Argo Fund to apply the same lenient approach when considering whether a hedge fund is a “financial institution”. The following factors could nevertheless be used to distinguish Argo Fund:
Does the hedge fund carry out business concerning commercial finance?
In most cases (if not all) (i) a fund will be duly incorporated and (ii) the business carried out by the fund will be lawful in its place of incorporation, thereby satisfying the first two limbs of the definition set out in Argo Fund. The critical limb is whether a fund actually “carries out business” and, if so, whether that business concerns “commercial finance”. This is essentially a question of fact. For example, a limited liability asset-holding shell company arguably does not satisfy the definition. Equally, if an entity does not trade then arguably it does not carry on any business, whether in commercial finance or otherwise. Furthermore, such an entity would have no real substance, contrary to its description as an “institution”. Accordingly, borrowers should establish whether a proposed transferee does or will provide capital to financial markets through making or trading in loans, securities or other financial assets or whether it is incorporated specifically and solely for the purpose of the transfer of this particular loan and has no other business.
Has the loan been fully drawn and is the borrower in default?
It may be possible to distinguish Argo Fund if the loan is not fully drawn with the borrower in default. In that case, the Court viewed the borrower’s challenge to the transfer as a “device” to avoid honouring its debt and gave little weight to the borrower’s concerns about having a hedge fund as a counterparty. The borrower’s commercial relationship with an established bank with a presence in the shipping industry may carry more weight with a Court when the borrower is not in default.
Is the loan a term or revolving facility?
Given that Argo Fund sets a very low bar for transferees to qualify as financial institutions, there may be a risk that a lender transfers its commitment to a transferee who is incapable of fulfilling the primary lending obligation. In Argo Fund, Lord Justice Rix expressly refused to consider transfers associated with obligations to lend monies in the future (under a revolving facility, for example). A counterparty that owes obligations to the borrower is fundamentally different to one that is only the beneficiary of obligations and questions as to the commercial relationship and the nature of the transferee are clearly more relevant. Therefore, in these cases, a narrower definition of “financial institution” may be appropriate.
Contractual wording and other potential restrictions/conditions?
A borrower may argue that failure to satisfy a contractual condition invalidates any transfer, irrespective of the qualities of the transferee. For instance, it is not uncommon for facility loan agreements to require that the lender notifies the borrower of its intention to transfer or consults with the borrower or obtains its consent in advance of a transfer. There may be scope for a borrower to argue that failure to satisfy a condition means that the transfer will have no legal effect. This will depend on the precise wording and the nature of the condition – although most conditions on transfer would be ineffective if a breach only led to a remedy in damages, breach of a purely administrative requirement may not invalidate the transfer. Of course, this argument is only available where a condition to transfer has not been satisfied. Where borrower consent is necessary before a transfer, the contract may only allow refusal on reasonable grounds and, even if the contractual discretion is expressed to be absolute, courts will generally forbid refusal where it would be irrational or take into account irrelevant considerations.