It is common practice for loan agreements to
provide for a fee/ premium where a loan is repaid earlier than its contractual
due date. The said fee is designed to compensate the lender/s for the loss of
anticipated income from the transaction and is usually expressed as a percentage
of the principal amount prepaid. While the loan agreement sets out the
circumstances in which the prepayment fee will be payable, usually it is in
cases of voluntary prepayment by the borrower and does not include situations
where the prepayment is compulsory/ mandatory, e.g. acceleration of the loan
due to occurrence of an event of default etc.
While this should normally be easily decipherable
from the loan agreement itself, a recent decision of the English High Court
(QBD/ Commercial Court) in the matter of Aston Hill Financial Inc v African Minerals Finance Ltd,
[2012] EWHC 2173 (Comm.) demonstrates that a potential area of difficulty
may arise where the loan agreement is not clear on this matter.
Brief Facts
A facility agreement was executed on February 4,
2011 for a loan of upto US$ 500,000,000 for the development of Phase I of
Tonkolili iron ore project in Sierra Leone. On February 11, 2011, the lenders
disbursed US$ 417,700,000 to the borrower, African Minerals. On January 31,
2012, it was announced that Standard Bank Group had agreed to refinance the
original loan. A syndicated facility led by Standard Bank was signed on
February 3, 2012.
The borrower noted that pursuant to Clause 8.3 of
the loan agreement, it was obliged to prepay the loans with any finance
proceeds promptly after receipt of such funds and asked for detail as to (among
other things) the amount required to prepay the Facility in full on a daily basis
from February 7, 2012 to February 9, 2012 inclusive. The facility agent
replied by a letter of the same date, stating that the outstanding loan amount
of $417,000,000 and details of the accrued interest but making clear that 'any
other amounts that may be due under the Finance Documents are not included in
this notice'.
On the same day, the lenders' solicitors responded to the borrower,
notifying it that if the prepayment was made before February 10, 2012 (the
first anniversary of the Closing Date), the borrower was required to pay the
prepayment fee referenced in Clause 8.8(d). The letter went on to state that
Clauses 8.3 and 8.5 of the Facility were not mutually exclusive and that, as
the borrower was aware, prepayment fees were included to compensate the lenders
for early repayment of the loan. The letter (i) noted that in this case, the
lenders negotiated and agreed the prepayment fee with the defendant in order to
ensure that they would be properly compensated for their costs of funds and
risks incurred by virtue of entering into the Facility; (ii) stated that the
defendant was seeking to obtain more favourable terms by refinancing the loans;
and (iii) stated that the failure of the defendant to pay the prepayment fee in
the event the Facility was prepaid on or before the first anniversary of the
Closing Date would constitute a breach of a contract.
On February 8, 2012 the borrower prepaid the full amount outstanding
under the Facility of US$417,700,000. Such prepayment included a prepayment of
US$291,100,000 to the claimants in respect of the full principal amounts
outstanding in respect of their loans to the defendant under the Facility
.
Relevant provisions
It is pertinent at this time to cast a quick glance at the relevant
provisions of the Aston Hill loan agreement:
(a) Clause 8.3(a) (Disposal Proceeds and Finance Proceeds) stated that
"The Borrower shall prepay, and the Parent shall ensure that the Borrower
prepays, the Loans in an amount equal to the amount of Disposal Proceeds or
Finance Proceeds promptly upon receipt of any Disposal Proceeds or Finance
Proceeds by any member of the Group."
(b) Clause 8.5 (Voluntary Prepayment of the Loan) stated that "The
Borrower, if it gives the Facility Agent not less than five Business Days' (or
such shorter period as the Majority Lenders may agree) prior notice, may prepay
the whole or any part of the Loan (but, if in part, being an amount that
reduces the Loan by a minimum amount of $100,000,000)."
(c) Clause 8.8(c) stated that "On prepayment of all or any part of
the Loans pursuant to Clauses 8.5 (Voluntary prepayment of the Loan), the
Borrower shall pay to the Facility Agent (for the account of each Lender) a
prepayment fee on the date of such prepayment, in the following
amount: (i) 6 per cent. of the amount prepaid or repaid if the
prepayment is made on or before the first anniversary of the Closing Date;
and (ii) thereafter, no prepayment fee will be payable."
Court's decision
The court found that the principles of construction are well established
and was not in dispute. The lenders/ claimants and the borrower/ defendant
sought to rely upon the passage in Rainy Sky SA v. Kookmin Bank
[2011] 1 WLR 2900; [2011] UKSC 50 at [21] to [30]. Thus, it was common ground
that it is necessary when construing a commercial contract to strive to
attribute to it a meaning which accords with business common sense and to have
an eye on the commercial consequences of a particular construction; and that:
"If there are two possible constructions, the court is entitled to prefer
the construction which is consistent with business common sense and to reject
the other".
The court however found it difficult to come to a decision as the
wording was unclear and ambiguous. The two prepayment clauses are difficult to
reconcile. While the decision to refinance the original loan was a voluntary
decision on the part of the borrower, especially since the Standard Bank
facility was more competitively priced. The prepayment could not have happened
in the absence of refinancing arrangements contracted to by the borrower. It is
therefore attractive to categorize the prepayment as voluntary, with the result
that the lender would be entitled to the prepayment fee. On the other hand,
Clause 8.3 envisages that if the borrower issues new equity or incurs new debt,
prepayment becomes mandatory to the extent of the proceeds received by the
borrower.
The court ultimately accepted the latter interpretation and held that
the prepayment made was mandatory under Clause 8.3 and hence, no prepayment fee
was due. The case highlights the need for clarity around prepayment provisions
in loan agreements. From a lender's perspective, this decision is an
unattractive precedent as it is more than probable that a borrower interested
in prepaying an existing loan would seek to do so from a capital infusion or a
new loan (both, in this case, being grounds for mandatory prepayment and hence,
not liable to a prepayment fee).
Source: ICL
Thanks with Regards
Prakash Verma
Cont. Id: Prkverma@gmail.com
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