A Few Useful Tips for Syndicate Agents

Anyone who perceives the syndicate agent appointment and related provisions in credit agreements as mere boilerplate, relatively unworthy of close attention, is likely doing themselves a disservice. The following is a brief overview of a few occasionally overlooked points.

Agent for Non-Signatories

The parties on whose behalf the agent is to act (collectively, the “creditors”) must formally appoint the agent as their agent. On occasion, not all secured creditors will actually sign the credit agreement (collectively, “non-signing creditors” (as distinguished from “signing creditors”)), such as cash management or hedging providers. Before any non-signing creditor is entitled to the benefits of the collateral security, such non-signing creditor should be required to deliver a simple agreement pursuant to which the agent is appointed as its agent and it agrees to the exculpatory and indemnity provisions of the credit agreement in favour of the agent. Alternatively, signing creditors might, on behalf of (and explicitly acting as agent for) any of their affiliates which are non-signing creditors, formally appoint the agent as agent for such affiliates as well as for themselves under the credit agreement.

Scope of Duties

Credit agreements typically include specific provisions to the effect that the agent has no independent duties except as may be specifically provided for in the loan documentation. The agent and the creditors should consider how to best describe the duties (and powers) of the agent in the credit agreement so that the agent can react appropriately to creditor direction. The agent will typically be authorized to take direction from a majority (or whatever the appropriate level of voting might be) of the signing creditors as to matters not expressly provided for in the loan documentation (including, for example, credit bidding). Prohibiting any creditor from taking any action to protect or enforce its rights arising out of the loan documentation without first obtaining the prior consent of the agent and a majority (or whatever the appropriate level of voting might be) of the signing creditors may offer an additional level of protection to the agent in the event of disagreement between creditors.

Reimbursement and Indemnification of Agent

It is conventional for the agent to be fully protected by the signing creditors against liability to the creditors, the borrower(s) and any guarantor(s) (collectively, the “loan parties”), and/or any third parties (except, in all cases, to the extent of gross negligence or wilful misconduct on the part of the agent). This indemnity will usually also cover all losses suffered and expenses incurred by the agent, including the non-payment of any fees owed to the agent. It is also conventional to provide for reimbursement and indemnification by the loan parties of the costs and expenses of the agent and of the creditors.

Related issues to consider from the agent’s perspective include:

  • specifying that the agent’s indemnities apply notwithstanding the comparative, contributory, or sole negligence of the agent;
  • specifying that the agent’s indemnity from the creditors applies to claims by creditors against the agent;
  • authorizing the agent to refrain from acting on the direction of the creditors if in the opinion of the agent its indemnities are insufficient or the ability of the agent to potentially make a claim thereunder has been impaired; and
  • ensuring that the obligations secured by any liens granted in favour of the agent (the “secured obligations”) include loan party obligations in respect of reimbursement and indemnification, and that such liens are granted to the agent in its own capacity as well as for the benefit of the creditors.

The agent will, however, usually have to accept any risk associated with collecting from the creditors their respective shares of any amounts owing to the agent pursuant to its indemnity from the creditors.

Contingent Obligations

The agent should also ensure that the secured obligations include contingent obligations. This way, unless a reserve (or letter of credit or similar protection) is provided for its benefit, the agent could potentially refuse to discharge its liens upon termination of the credit agreement if there remains a reasonable possibility that it may need to claim against the loan parties for reimbursement and/or indemnification. This may be particularly useful to the agent in a bankruptcy or insolvency scenario if the creditors propose to settle their claims against the loan parties notwithstanding the agent’s potential exposure to continuing contingent liability. It is similarly desirable, albeit uncommon, for the agent to be specifically authorized to withhold reserves from distribution proceeds after default in respect of future amounts anticipated to become payable to the agent pursuant to reimbursement and indemnification provisions of the loan documentation.

Provisions Surviving Termination

More generally, the agent should ensure that all reimbursement and indemnification obligations in its favour survive not only termination of the credit agreement but also the resignation or dismissal of the agent (accordingly extending to any post-transaction activities of a former agent in connection with an agency succession) or departure of a creditor from the syndicate.

The agent should also consider bargaining at the outset that any creditor sponsored entity emerging in a bankruptcy or insolvency scenario from a bid by the creditors shall assume (ideally on a secured basis) the reimbursement and indemnification obligations of the loan parties.

PPSA “Location of Debtor” Rules – Moving Towards

UniformityAs previously described (PDF) a series of significant amendments to the Personal Property Security Act (Ontario) (the Ontario PPSA) were introduced through the Ministry of Government Services Consumer Protection and Service Modernization Act, 2006 (the Ontario Act) in 2007. Certain provisions of the Ontario Act have yet to be proclaimed into force, including certain amendments that would alter the “location of debtor” rules under the Ontario PPSA.

Current Rules

The Ontario PPSA contains conflict of laws rules which point to the law of the jurisdiction where the debtor is located to determine the validity, perfection, the effect of perfection or non-perfection and the priority of security interests in:

(i)                  intangibles (including accounts),

(ii)                goods that are of a type normally used in more than one jurisdiction (if the goods are equipment or inventory leased or held for lease by a debtor to others– sometimes referred to as mobile goods), and

(iii)               non-possessory security interests in instruments, negotiable documents of title, money and chattel paper.

Under these rules, the location of the debtor is deemed to be located:

(iv)              at the debtor’s place of business if there is one;

(v)                at the debtor’s chief executive office if there is more than one place of business; and

(vi)              otherwise at the debtor’s principal residence.

Determining a debtor’s location for purposes of Ontario PPSA conflict of laws rules is rarely straightforward because the term “chief executive office” is not defined in the Ontario PPSA. Consider the following scenario. A Nova Scotia company has its registered or head office in Toronto, has offices in three other Canadian provinces, including executive offices in Calgary and Regina, and is controlled from the head office of its parent corporation in Missouri. Which of these offices is the “chief executive office”? That question is not easily answered and typically leads to lawyers registering in each jurisdiction where the “chief executive office” could potentially be located. This approach is inefficient and costly.

Amendments

The Ontario Act proposes to amend the conflict of law rules such that the location of a business debtor is no longer defined by reference to the debtor’s place of business or chief executive office. Instead, the location of the debtor will be determined by rules (shaded gray) regarding the debtor’s jurisdiction of incorporation, which are much easier to apply. This would also make the Ontario PPSA rules regarding the location of a debtor substantively similar to those under Article 9 of the Uniform Commercial Code.

As noted above, amendments to “location of debtor” rules in the Ontario PPSA are not yet in force. It seems the Ontario government is waiting for other Canadian jurisdictions to follow suit before proclaiming the “location of debtor” amendments into force; uniformity of rules being the objective. A step toward uniformity was taken on March 31, 2010 when Bill 6 received Royal Assent in the British Columbia Legislature becoming the Finance Statutes Amendment Act, 2010 (the BC Act) (see s.43). The BC Act includes amendments to the Personal Property Security Act (British Columbia) (the B.C. PPSA) that adopt the same “location of debtor” rules as the Ontario PPSA. However as with the “location of debtor” rules in the Ontario Act, the B.C. PPSA amendments will not come into force immediately.

We will continue to provide updates in this space as to the progress of PPSA amendments across the remaining Canadian provinces and territories.

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