Category: Transfer of financial assets in transactions

Could a trust be created over the rights of the Lender based on the following clause?

“Subject to this Clause [•], a Lender (the Existing Lender) may:

(a) assign any of its rights; or

(b) transfer by novation any of its rights and obligations,

to another bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets (the New Lender).”

Would your answer be any different if the clause said this instead?

“Subject to this Clause [•], a Lender (the Existing Lender) shall not assign, deal with, or otherwise dispose of or transfer its rights/obligations under the loan agreement.”

• The issue of trusts and no-assignment clauses formed much of the discussion in the case of Barbados Trust Co v Bank of Zambia [2007] EWCA Civ 148; [2007] 1 Lloyd’s Rep 495. The case involved an oil import facility agreement the terms of which are as follows:
• 

• An assignment was made by the lender of record (Masstock) without the consent of the Bank of Zambia to another bank (Bank of America) who sold the debt of Bank of Zambia to a vulture fund (Barbados).
• The anti-assignment clause prohibited assignment other than to ‘banks or other financial institutions’.
• Barbados was not a bank or a financial institution. Instead of using the language of assignment provided by the anti-assignment clause, the Bank of America declared itself trustee of the debt for Barbados. The consent of Bank of Zambia to this declaration of trust was not obtained.
• Initially the first assignor (Masstock) sought the consent of Bank of Zambia, which did not respond to the request although the time permitted by the anti-assignment clause for Bank of Zambia to respond to the request had not expired. Ultimately Bank of Zambia did not repay the loan and the ultimate assignee (Barbados) brought proceedings to recover the money.
• Barbados then operated the Vandepitt procedure, suing the Bank of Zambia and joining Bank of America (as trustee) as a defendant in the usual course. The question for the English Court of Appeal was whether the declaration of trust succeeded in evading the anti-assignment clause.
• Waller and Rix LJJ of the English Court of Appeal both held the view was that since a declaration of trust does not bring the beneficiary, Barbados, into direct contractual relations with the underlying debtor, Bank of Zambia, but only creates an encumbrance on the trustee’s, Bank of America, own rights, an anti-assignment clause would not prohibit the declaration unless expressly worded.
• They construed the anti-assignment clause as not to impose a prohibition on a declaration of trust. In this way, Bank of America could have sued to recover the debt owing by Bank of Zambia, with a view to paying the proceeds over to its beneficiary, Barbados. If that was permissible, and if the beneficiary Barbados could have compelled Bank of America to bring that claim against Bank of Zambia, then why should both steps not be compressed into a single Vandepitt proceeding?
• Hooper LJ disagreed on this point. He considered that the claimant’s stratagem cut directly across the anti-assignment clause: the Bank of Zambia found itself facing a vulture fund across the court notwithstanding that it had stipulated that the debt could only be assigned to a bank or other financial institution.
• That restriction would have achieved very little if it could be evaded by a declaration of trust. Hooper LJ did not think that special drafting should be required to prevent the claimant’s stratagem. On this view, the anti-assignment clause did not prohibit the declaration of trust but it did prevent the claimant from then operating the Vandepitt procedure (joining the trustee as a co-defendant where trustee declines to sue)

• We now come to one of the more interesting and challenging aspects of the topic of transfer of property in financing transactions.
• Declarations of trust are commonly used as the mechanism of transferring assets in financing transactions.
• It is a declaration by an originator of property that it holds that property on trust. In a financing transaction the property will usually be held on trust for a special purpose vehicle (SPV) as beneficiary.
• The legal effect of a declaration of trust is that the SPV becomes the equitable owner of the property.
• As a general rule a declaration of trust will be used to transfer property when there is a prohibition on either assignment or novation in the underlying agreement.
• There are good reasons for this mechanism of transfer should not be the default mechanism as we will discuss in detail below but the cases referred to below provide authority for the proposition that absent a prohibition on the declaration of trust notwithstanding that there may be a prohibition on assignment, a declaration of trust is a means by which property can be transferred.