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Assigning Distressed Debt, Declarations of Trust and the Vanderpitte Procedure: Barbados Trust Company Limited v Bank of Zambia [2007] 1 Lloyd’s Rep 495 (CA)
Blair Leahy, Barrister, 3-4 South Square, Gray’s Inn, London, UKThose trading in debt on the secondary market will be familiar with covenants against or restrictive of assignment. In general terms, these covenants serve the dual function of protecting the syndicate banks against assignments to third parties who might not be able to provide their share of funds and of protecting borrowers from having ‘foisted’ on them as a lender non-established or non-authorised or otherwise ‘undesirable’ institutions. The Court of Appeal decision in Barbados Trust Company Limited v Bank of Zambia, set within the distressed debt arena, serves as a cautionary note to all would be assignors/assignees that for there to be an effective assignment, great care must be taken to ensure that restrictive covenants are complied with or, if compliance is impossible, that waivers are obtained from the borrower. More crucially, however, the decision suggests that a covenant restrictive of assignment may, in certain circumstances, be circumvented by the use of a declaration of trust and the adoption of e procedure sanctioned in Vanderpitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 (PC) by which the beneficiary of a trust may sue the obligor directly (joining the trustee as defendant) when the trustee refuses to sue (‘the Vanderpitte Procedure’).
Material facts
The Facility
By an Oil Import Facility dated 19 July 1985 (‘the Facility’), various banks and financial institutions agreed to make available to the Bank of Zambia (‘BoZ’) a facility for the issue of letters of credit in the maximum principal amount of US$100,000 million.
Advances were made to BoZ under the Facility on 16 January 1986 (‘the Debt’) with maturity dates in June and July of that year.
Assignment under the Facility
Under article 12.01(A) of the Facility, for an assignment to be valid (1) the assignee had to be a ‘bank or other financial institution’ and (2) ‘prior written consent’ of BoZ had to be obtained (albeit such consent could not be unreasonably withheld and was to be deemed to have been given if no reply was received from BoZ within 15 days of receipt of a request for consent).
The trades and requests for consent
Between February 1992 and December 1999, Masstock (International) Ltd (‘Masstock’) was acknowledged by BoZ to be the creditor of record in respect of the Debt. In November 1999, Bank of America NA (‘BoA’) bought the Debt from Masstock and sold the Debt on to GMO Emerging Country Debt LP (‘GMO’). Although BoA was a bank, it was conceded at first instance that GMO was neither a bank nor a financial institution.
The assignment of the Debt to BoA from Masstock (‘the Assignment’) and the on-sale to GMO were the subject of two Forms of Confirmation both dated 22 November 1999. Both the Assignment and the on-sale were subject to and incorporated the ‘Standard Terms for Assignment of Loan Assets … of the Emerging Markets Traders Association’ (‘the EMTA Terms’).
On 2 December, Masstock requested BoZ’s consent to the Assignment and on 10 December, BoA requested BoZ’s consent to the on-sale to GMO. No response was received from BoZ to either request.
On 10 December 1999, BoA prepared a ‘Closing Certificate’ for the Assignment. The Closing Certificate was, like the Final Confirmation, expressed to be subject to the EMTA Terms. The settlement and effective dates were both stated to be 10 December 1999 (‘the Effective Date’). The Certificate also stated that ‘The prior written consent of Bank of Zambia is required to transfer the Assigned Credits’. On returning the Certificate, Masstock added in manuscript ‘As per article 12.01(A).
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