Guide To Acquiring Distressed Debt

Acquiring Distressed Debt
A guide to European regimes

Acquiring Distressed Debt
A guide to European regimes
April 2013
1
Introduction
A key challenge facing the banking sector in recent years has been the need to deal
with troubled loans on balance sheets. One of the solutions available to optimise
returns is to transfer loans to purchasers, either individually or on a portfolio
basis. Loan sales of this nature give a bank a relatively quick and easy method of
converting its distressed loan book into cash, whilst giving potential purchasers
the ability to acquire loans to build their own strategic portfolio, or on a loan to
own basis with a view to ultimately acquiring the underlying business or asset.
The Loan Market Association has published a users guide which includes a
suggested procedure for debt transfer, and a set of precedents for suggested use
in debt transfer transactions. However, as the LMA guide points out, users need
to pay heed to local law considerations before entering into debt trades.
In this guide we provide an overview of the relevant local law considerations in
14 key European jurisdictions, prepared by specialist fnance lawyers from our
network who have extensive experience of advising clients on debt transfers.
At the end of this note, we set out a brief overview of the suggested LMA
procedure for debt transfers.
General observations on cross-border transactions
As with any fnance transaction, it is critical that local law advice is taken
at the earliest opportunity as the laws governing loan assignments and
participations differ from country to country. This inevitably increases
the complexity of loan acquisitions where the borrower has group
companies and/or assets in multiple jurisdictions. However, set out below
are some observations which may assist a potential loan acquirer in such
circumstances:
It is increasingly common for LMA style, English law governed,
documentation to be used for higher value, cross border lending. This
simplifes the process for taking assignments or participations of loans.
Care should still be taken when reviewing such documentaiton however
because, for example, the borrowers may have negotiated changes from
standard LMA wording on a case-by-case basis or in the case of security
over assets outside the UK, it may be necessary to re-take or re-register
security, irrespective of wording contained in the facility agreement
which apparently circumvents this need.
In most jurisdictions, rights against a borrower can be assigned, but
lender obligations cannot; the effect of this is that, other than in the
case of matured loans, in order to transfer outstanding obligations,
a new agreement (ie a novation) will need to be agreed under which
the borrower agrees to release the original lender from its existing
obligations and replace those with obligations from the new lender. The
problem is that in many jurisdictions, a novation requires new guarantees
and security to be taken, with attendant cost and delay. It may, however,
be possible to mitigate this problem if the original lender assigns its rights
under the loan agreement, and the new lender assumes the outstanding
obligations of the original lender. This may still require the consent of the
borrower, but may remove the need to re-take guarantees or security.
Legal advice should be taken in any particular case.
Note and Disclaimer
This note does not consider regulatory issues that may arise on a transfer of debt (eg in
relation to transfers of consumer loans) or set off issues (which can be complex, particularly
where a borrower becomes subject to a formal insolvency procedure). If you require guidance
on either of these issues, please contact any of the lawyers whose contact details are
included in this guide.
Published [ ] 2013. The information contained in this document is intended as a guide
and whilst the information is believed to be correct, it is not a substitute for legal advice.
Eversheds LLP can take no responsibility for action taken based on the information
contained in this guide.
Contents
England and Wales 4
Republic of Ireland 8
Czech Republic 12
France 16
Germany 20
Hungary 24
Lithuania 28
Poland 30
Romania 34
Spain 36
Switzerland 40
Slovak Republic 44
Sweden 48
The Netherlands 52
Loan Market Association (LMA) 56
3
England and Wales
There are a variety of methods open to lenders and counterparties which are
available to transfer credit risk between parties for example, credit default swaps
and credit insurance. However, they are beyond the scope of the note below which
considers only assignments, novations and participations of loans.
Note that under the English legal system it is possible to separate legal title, and
equitable (or commercial) title. This concept does not exist in certain other
jurisdictions, and users of this guide should therefore note that this will give rise
to different legal considerations and transaction structures in those jurisdictions.
Main methods for effecting a loan transfer
Assignment
An assignment will effect a transfer of the loan to the buyer.
English law distinguishes between legal and equitable titles to property including
loans. It is therefore possible to effect a transfer of the legal and equitable
title together, or only the equitable title in the loan. If legal and equitable title
is transferred, this means that the buyer will become the lender of record. If
equitable title only is transferred, the original lender will remain lender of record,
but will hold the beneft of the loan on trust for the buyer.
The main procedural difference between a legal and equitable assignment is that
in order to a effect a legal assignment, notice of the assignment must be given to
the borrower.
Note that under English law, liabilities of the lender to the borrower eg to fulfl a
drawdown request cannot be transferred to a third party by assignment; if the
parties wish to achieve this, they will need to enter into a novation.
Novation
Under a novation arrangement, the borrower, lender and the third party agree
to terminate the existing lending arrangements and replace them with new
arrangements on the same terms, but substituting the new lender for the original
lender. This will require the agreement of the existing borrower.
Note that under current LMA style syndicated loan documentation, the facility
documentation contains a pre-agreed mechanism to effect novations.
Participation
Rather than effecting a transfer or novation of rights and obligations, a
participation (also called a sub-participation) is a contract between the lender
and the participant under which the lender sub-contracts part or all of its risk
to the participant. For payment of a fee, the lender will agree to pay to the
participant sums equal to sums received from the borrower by way of payment
of liabilities under the loan agreement, and the participant will reimburse the
lender where the borrower fails to meet those liabilities.
Participation agreements can be used to achieve a similar commercial outcome
to a transfer or novation, and may be advantageous where a transfer is barred
under the original loan agreement, or where the lender wishes to keep matters
confdential from the borrower.
From the participants perspective, the primary disadvantage in entering into a
participation arrangement rather than an assignment is that the participant is
exposed to the credit risk not only of the borrower defaulting on the loan, but
also the credit risk of the lender.
Participation agreements are either funded, where the participant agrees to
reimburse the lender for sums for which it is liable to the borrower eg under
future drawdown requests; or unfunded, where the participant is obliged to
fund the lender only where the borrower has failed to make a payment due to
the lender.
Contractual Limitations
A loan can only be assigned provided that the loan agreement does not contain
a bar or restriction on assignments. The following contractual restrictions and
issues are encountered:
Absolute bar on assignment this is uncommon, but would prevent a lender
from assigning its rights to a buyer. It is possible (but, again, uncommon)
that a loan agreement could contain a restriction preventing a lender
entering into a participation agreement.
Restriction on identity of transferee it is common for a loan agreement
to provide that assignments can only be made to a specifed category
of permitted assignees eg a bank or other fnancial institution. Such a
restriction would have the effect of preventing an assignment to persons
falling outside the defnition of permitted assignees.
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Consent not to be unreasonably withheld a loan agreement may provide
that a loan can be assigned to a third party only with the consent of the
borrower, such consent not to be unreasonably withheld. If this is the case,
and the loan agreement does not contain further provisions clarifying the
basis on which consent can or cannot be withheld, this may give rise to some
uncertainty as to whether any proposed assignment is permitted. Other duties
commonly found in loan agreements are a duty to inform and consult with
the borrower; these provisions, broadly speaking, oblige a lender to give
disclosure of any proposed assignment in advance, but fall short of the need
for consent.
Restriction on disclosure of confdential information a third party is only
likely to be willing to purchase a loan if the lender is permitted, in advance
of an assignment, to disclose certain confdential information relating to
the borrower eg reports or fnancial information received under the
loan agreement. Generally under English law a lender will owe a duty of
confdentiality to the borrower; therefore a loan agreement needs to
contain an exception to this duty of confdentiality to permit a lender
to disclose relevant information to proposed assignees.
Guarantees and Security
Any guarantees, or security (ie mortgages or debentures), can be assigned to the
buyer of the underlying loan, but will only continue to secure the underlying loan
to the extent that it was contemplated under the original guarantee and security
documentation that the rights created would extend to assignees. A buyer should
therefore check that express provisions are contained in the guarantee or security
documentation in this regard (for example, a provision which provides that the
benefciary of the security is the original lender or its permitted assignees).
Where a novation occurs, it is likely that the buyer will need to take new guarantees
or security to the extent required. Note however that where security is held by
a trustee, there will be no need for new security to be taken, provided that the
security documents are for the beneft of lenders and their transferees. Note also
that under LMA style syndicated loan documentation, guarantees automatically
extend to loan transferees where there is a transfer by way of novation.
Under a participation agreement, the beneft of guarantees and security will not
transfer to the participant (as there is no transfer of the loan itself). However, the
participation agreement can include provisions obliging the lender to enforce any
guarantees and security so as to maximise recoveries made from the borrower,
and therefore maximise the value of the participation agreement for the beneft
of the participant.
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Tax
The transfer of a loan will potentially give rise to a proft or loss for the transferor
for the purposes of UK tax. Broadly speaking, such proft or loss will be
ascertained in accordance with transferors accounting treatment and taxed
or relieved as income (rather than capital). We would not generally expect UK
stamp taxes to be payable in relation to a loan transfer.
Registrations
As there is no publically maintained register for corporate loans in the UK,
a transfer of a loan will not require any registration.
Security held over a companys property (ie mortgages or charges) is registerable
at Companies House in the UK. However, where there is an assignment of
security, that does not trigger a requirement for any new registration. Care needs
to be taken, however, to ensure that any arrangements reached between a lender
and a transferee to which the borrower is party do not in substance amount
to a novation of the loan, which might give rise to a requirement to re-register
security rights.

Country contacts:
7
Paul de la Pea
+44 20 7919 0706
pauldelapena@eversheds.com
Nick Swiss
+44 20 7919 0742
nickswiss@eversheds.com
Republic of Ireland
Introduction
Irelands recent economic diffculties have resulted in a large increase in loan
transfer activity. Much of this activity has involved Irelands National Asset
Management Agency (NAMA). In addition, Irelands IMF/EU programme requires
signifcant deleveraging to be achieved by its pillar banks and other incumbent
(and some exiting) fnancial institutions have also been engaged in selling parts
of their loan books. Such activity has been particularly prevalent in the context of
distressed real estate loans where purchasers have acquired loans on an individual
or a portfolio basis and sometimes at a signifcant discount to the loan
amounts outstanding.
The level of warranty protection given in the context of such sales is generally
limited and the onus is usually on a prospective purchaser of the debt in question
to satisfy itself that the loan and security package is transferable and will work in
the manner it requires after its acquisition. It may be that the loan documentation
is amended following the transfer if the borrower is willing to do so. This will all
form part of the prospective purchasers due diligence process.
Ireland is a common law jurisdiction and the broad legal concepts applicable
to the transfer of Irish law loans will be familiar to prospective purchasers who
have knowledge of analogous concepts in England and Wales and other
similar jurisdictions.
Main Methods for Effecting a Loan Transfer
The main methods for effecting a loan transfer in Ireland are broadly the same
as in England and Wales, ie pursuant to an assignment (whether legal or
equitable), a declaration of trust of the transferors rights, a novation or by
a contractual sub-participation or risk participation.
The same type of issues arise in Ireland as in England and Wales in the context of
contractual restrictions on loan transfers and confdentiality issues.
The recent judgement in Patrick McKillen v Maybourne Finance and NAMA is a
reminder of the need to analyse contractual provisions in detail prior to effecting
any transfer. Although this was an English Court of Appeal decision it involved
the interpretation of Irish law loan agreements. Provisions in the documentation
required the lender to consult with the borrower prior to the transfer of the
loans in question and these were subject to dispute. The judgement confrmed
that NAMA had been free to transfer its loans in this particular case without
restriction.
In Ireland similar considerations arise in the context of the transferability of
guarantees and security documents as those in England and Wales. Since any
existing guarantees and security will expire upon a novation, a transferee will
require new guarantees and security for its own beneft. The new security
agreements will be required to be registered and could lose priority or result in
diffculties in the context of Irish insolvency legislation relating to preferences,
hardening periods and the like.
Tax
The taxation regime in Ireland can be advantageous for entities acquiring
distressed loans. Depending on the circumstances of each particular case, loan
portfolios can be acquired in an effcient manner by using structures which avail
of Irelands favourable corporate tax and capital gains tax regimes, including the
use of Irish special purpose vehicles or Irish qualifying investor funds.
Irish stamp duty can apply if the loan documentation is executed in Ireland,
relates to Irish debt or relates to matters or things done or to be done in Ireland.
A charge to stamp duty can generally be avoided by effecting any loan transfer
by way of a novation and not an assignment. Where a loan cannot be novated,
there is an exemption for transfers of loan capital which may apply subject to
satisfying certain conditions. The transfer of debt securities issued by an Irish
securitisation vehicle are specifcally exempt from Irish stamp duty.
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Other taxation issues which should be considered include the treatment of interest
payable on the loan subsequent to any transfer. In particular, care should be
taken to ensure that interest is paid and is receivable in the most effcient manner
even if interest rate gross-up provisions are contained in the underlying loan
documentation. Also, corporation tax and capital acquisitions tax need to be
considered as part of any arrangement which will involve a waiver or write-down
of the debt.
Registrations
Similar registration issues as those in England and Wales arise in the context of
an Irish debt/security transfer and the position needs to be analysed on each
occasion.
Note that security flings may be required depending on the nature of the assets
which are subject to the security. So, for example, the particulars of security over
registered land which is transferred can be registered at the Land Registry.
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Country contacts:
Steve Rodgers
+353 1 6644350
steverodgers@eversheds.ie
Darragh Blake
+353 1 6644213
darraghblake@eversheds.ie
11
Czech Republic
Assignment
Under Czech law, receivables, including the right to repayment of a loan can be
unilaterally assigned by the creditor.
An assignment will become effective between the parties to it upon execution.
Vis--vis the borrower the assignment will be effective upon delivery of a notice
of the assignment to it.
The lenders obligations (eg the commitment to permit further drawdown) cannot
be unilaterally transferred without the consent of the borrower. In practice, such
consent is often given in advance in the original loan agreement.
Novation
Under a novation arrangement, the borrower, the original lender and the third
party agree to replace the existing lender with a new lender while the other
conditions of the loan agreement remain unchanged.
The loan documentation may contain a pre-agreed mechanism to effect novations.
Participation
Similar to UK Law, under Czech law it is possible to conclude a sub-participation
contract between the lender and the participant or another synthetic transfer
of the risks and benefts from the loan agreement.
The following contractual restrictions and issues are commonly encountered:
Restriction on identity of transferee it is common for loan agreements
falling outside the defnition of permitted assignees. However, such
restriction is usually limited to situations where the borrower is not in
default. In a default situation, the restriction is relatively uncommon.
Restriction on disclosure of confdential information the assignment
could be effectively restricted by contractual restriction on disclosure of
confdential information. Therefore it is important to pay attention to the
confdentiality clause in the loan agreement so that it allows the disclosure
of information to a third party. Such disclosure may be conditional upon
conclusion of an NDA.
In addition lenders owe a general duty of confdentiality to their customers.
The Czech National Bank has addressed this issue stating that if the borrower
fails to comply with its obligations under the loan documentation and the lender
decides to sell the receivable to any third party, it will be allowed to disclose to
such third party information about the loan notwithstanding the banks duty of
confdentiality to its customers.
Most security instruments (eg mortgages, movable pledges, share charges)
automatically transfer to the buyer together with the assigned loan. However,
there is a risk that they will only continue to secure the underlying loan to the
extent that was contemplated under the original security documentation. It is
therefore advisable that a buyer checks the original security documentation for
any restriction and seeks confrmation from the borrower that it consents to the
assignment of the underlying loan and the extension of the security obligations
to the buyer. This may be diffcult to procure where the loan is distressed/non-
performing and the borrower is reluctant to cooperate.
Where a novation occurs, depending on the form of the agreement and wording
of the security documentation, the buyer may need to take new guarantees or
security to the extent required.
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guarantees and security so as to maximise recoveries made from the borrower,
and therefore maximise the value of the participation agreement for the beneft
of the participant.
Registration and stamp duties
The transfer of a loan is not generally expected to give rise to stamp duties.
However, the records of security registered in various registries would need to be
updated, often incurring separate fees (notarial, court or administrative fees).
The following types of security are subject to registration requests:
Mortgages over real property
Pledges of the participation interest in s.r.o. type companies
Pledges over dematerialised shares in a.s. type companies (ie if the shares
are book-entered)
Floating pledges in respect of the assets which remain at the disposition of
the pledgor (egg aircraft, cars, machinery, rolling stocks, etc)
Selected IP rights (trademarks, patents and industrial designs).
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Country contacts:
Libor Vacek
+42 02 51 00 91 11
libor.vacek@eversheds.cz
Petr Neumann
+42 02 51 00 91 11
petr.neumann@eversheds.cz
France
Introduction
Only duly licensed or passported credit institutions are authorised to conduct
banking activities in France on a regular basis. This includes any form of credit
operations, as well as the purchase and sale of non-matured debts and/or
receivables. There is therefore a risk that a purchaser which acquires receivables,
and is not licensed or passported, might be in breach of these regulations if
its business following the sale constitutes banking activities. There are some
exemptions to that prohibition, in particular in the context of intragroup
1
or
off-shore transactions. Also note that an unauthorised person could under certain
conditions enter into a participation arrangement with an existing lender.
Civil law assignment
This is the standard method of assignment of receivables under French law.
The sale is valid between the seller and the purchaser but requires, as a condition
to enforceability as against the assigned debtor and third parties, that the
assignment be notifed (signif) to the assigned debtor by a court bailiff (or
alternatively that the assigned debtor accept the assignment in a deed executed
before a French public notary)
2
.
There are no restrictions on the type of receivables that can be assigned under a
civil law assignment.
In the context of loan transfers, it is generally the case that this option is only
available where the loan is fully drawn down and the original lender has no
outstanding obligations to the borrower.
Assignment by way of subrogation
The French law concept of Subrogation is a legal mechanism whereby a third
party (subrog) that pays a debtors existing creditor (subrogeant) is substituted
in place of that existing creditor in respect of its rights as against that debtor. The
existing creditors rights are transferred to the new creditor together with any
ancillary rights attached thereto, up to the amount paid to the existing creditor.
Subrogation can occur without the agreement or consent of the debtor.
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Subrogation occurs at the time of the payment and only occurs if it is expressly
agreed to apply by the subrog and the subrogeant. It further requires a formal
receipt called quittance subrogative to be remitted by the original creditor to the
subrogated creditor.
As with civil law assignment, there are no restrictions in respect of the type of
receivables that can be assigned by way of subrogation. However, as the original
creditors rights against the assigned debtor are transferred to the subrogated
creditor only up to the amount paid by the latter, this may cause diffculties
where the debt is purchased at a discount.
Subrogation is often used in the context of real estate refnancing, as all existing
security interests (eg mortgages (hypothques conventionnelles) or lenders liens
(privilges de prteur de deniers)) will be maintained and transferred with their
existing rank being preserved in favour of the new lender, without the need to
take and register (and can therefore incur the costs of) new security interests on
the refnanced assets.
(Note that French subrogation is different in its application and scope to English
law subrogation.)
Delegation
Occasionally, lenders in the French market will transfer their loans by means of a
combination of a receivable assignment (cession de crances) and a dlgation
which novates the original lenders obligations under the loan agreement, as
obligations of the lender to the borrower eg to fulfl a drawdown request cannot
be transferred to a third party by way of assignment. For dlgation to occur, the
agreement of the borrower will be required.
Participation
Rather than effecting a transfer of its rights and obligations, a lender can
participate (or sub-participate) part or all of its risk to a participant.
Participations are generally used where, for example, the borrowers consent to
the transfer of the loan cannot be obtained, or where syndication by way of a
direct transfer will be affected by banking monopoly (ie where the participant is
not duly licensed or passported to conduct banking activities in France), or due
to withholding tax considerations.
Please refer to the description contained in the Participation section of the guide
for England and Wales.
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Limitations
The contractual restrictions described in the Contractual Limitations section of this
guide for England and Wales are also commonly found in French law documents
with one important exception. The French Commercial Code provides that any
clause of an agreement prohibiting the assignment to any third party of the
receivables arising from such agreement is null and void if such agreement is
entered into between commercial parties
3
.
Assuming that the assignment is performed under one of the methods referred to
above, all related security and ancillary rights will be automatically and without
formality (de plein droit) transferred to the purchaser.
French law
4
provides however that in case of novation, the guarantees and security
granted to the original lender will not beneft any of its transferees or assignees,
unless expressly provided for in the original security documentation.
guarantees and security so as to maximise recoveries made from the borrower, and
therefore maximise the value of the participation agreement for the beneft of
the participant.
Tax
for the purposes of French tax. Broadly speaking, such proft or loss will be
ascertained in accordance with transferors accounting treatment and taxed
or relieved as income (rather than capital).
In the event the conditions resulting from the procedure prescribed under article
1690 of the French Civil Code (described above) are not met at the time the loan is
transferred, the borrower could run the risk of being regarded as the benefciary of
a waiver of fnancial claim which would be liable to corporate income tax.
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1. Article L.511-7-3 of the French Monetary and Financial Code authorises a
company to carry out credit facility arrangements (oprations de trsorerie)
with companies which, directly or indirectly, have capital links with it that
confer on one of the linked companies an effective control over the others.
2. Article 1690 of the French Civil Code.
3. Article L.442-6 II of the French Commercial Code.
4. Article 1278 of the French Civil Code.
19
Country contacts:
Sophie Perus
+33 15 573 4035
sophieperus@eversheds.com
Germany
Assignment
An assignment will effect a transfer of the loan to the buyer. Upon transfer, the
buyer assumes the lenders obligations under the loan agreement in relation to
both the original lender and the borrower.
Where consumer loans are concerned, notice of assignment to the borrower is
mandatory, in other cases such notice is recommended, because otherwise the
borrower could make payment to the original lender with debt releasing effect.
If an assignment takes place without giving notice of such assignment to the
borrower, even though the buyer becomes the new holder of the loan and the
security rights, the borrower can continue to make payments to the original
lender with debt releasing effect. In these circumstances, it is therefore advisable
for the buyer to agree specifc terms with the original lender to administer rights
and obligations under the loan agreement vis--vis the borrower, and to collect
payments on behalf of the buyer.
Novation
A novation as described in the UK section is possible, but unusual in Germany.
As it creates a new loan agreement, guarantees and securities would need to be
created afresh, which would require the involvement of the borrower.
Participation/Sales Contract
The original lender and the buyer can agree a sales contract of the loan.
Under German law, such sales contract has no direct effect on the ownership
of the purchased asset, ie the loan and its security rights and the original lender
continues to hold the loan and security rights as against the borrower in its own
name. The original lender and the buyer will need to agree specifc terms on the
administration of the rights and obligations under the loan for and on behalf of the
buyer vis--vis the borrower in the sales contract or a supplemental agreement.
Such arrangements are similar to a UK style participation, and also expose the
buyer to the credit risk of the original lender.
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A loan can only be assigned (with or without notice) if the loan agreement
does not contain a bar or restriction on assignment. Contractual restrictions of
an assignment as described in the England and Wales section of this guide are
possible, but uncommon, in Germany.
Contractual restrictions contained in a loan agreement do not affect the ability
of a lender to enter into a sales contract as described above.
Restriction on disclosure of condential information
and banking secrecy
A buyer will normally not be willing to acquire rights under a loan without
having reviewed the relevant documents, in particular the loan agreement itself.
Broadly speaking, the original lender is restricted on disclosure of confdential
information by the banks duty to confdentiality.
In practice the loan agreements therefore often contain provisions permitting
the original lender, in advance of an assignment or transfer, to disclose certain
relevant information relating to the borrower for refnancing purposes.
German law distinguishes between accessory securities (in particular mortgages
(Hypothek), pledges and guarantees) and non-accessory securities (in particular
land charges (Grundschuld), security assignments, security transfer and
reservation of title).
Upon assignment of a loan, the accessory securities granted for the loan will
generally be transferred automatically by operation of law and will continue to
secure the underlying loan to the extent that it was stipulated under the original
secured obligation, ie the security documentation. Non-accessory securities do
not automatically transfer to the buyer. In order to transfer those securities, an
additional assignment is required.
Charges over real estate, such as mortgages (Hypothek) or land charges
(Grundschuld), have to be registered in the land register. The transfer of such
charge needs to be registered as well. For such purpose, notary and land register
fees need to be incurred. Particular rules apply to the transfer of certifcated
land charges.
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Upon assignment without notice, the original lender will exercise the rights of
accessory securities on behalf of the buyer, but can exercise the rights of
non-accessory securities in its own name.
As regards Sales Contracts as described above, the original lender remains holder
of the security rights on a trust basis for the buyer. Under the sales contract or
a supplemental agreement the original lender and the buyer need to agree on
administration and enforcement of the security rights as against the borrower.
In order to reduce its credit risk vis--vis the original lender under an assignment
without notice as well as under a sales contract, the buyer is entitled to register its
land charges in the refnancing register (Refnanzierungsregister), which will grant
a right of separation (Aussonderungsrecht) for the buyer in case of insolvency
proceedings against the original lender.
Tax
Broadly speaking, the purchase and assignment of a loan itself will not give rise
to tax charges, even if the loan is secured by mortgage.
The effect on the corporate tax position of the buyer varies depending on the
particular transfer method.
Registrations
As there is no publically maintained register for loans in Germany, a loan transfer
does not require any registration.

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23
Country contact:
Thomas Ziegler, LL.M.
+49 89 545 65 260
thomas.ziegler@eversheds.de
Hungary
In Hungary, there is no entity similar to the Loan Market Association and
accordingly there is no standard procedure for secondary debt-trading as in
England and Wales.
Assignment
Assignment is a very common method of selling and acquiring distressed debt
in Hungary. An assignment will effect a transfer of the loan to the buyer and the
buyer will become the lender of record. There are no formalities prescribed by law
and notice to the borrower is not required for effecting the assignment. Notice
of the assignment to the borrower is however necessary for realizing the debt, as
until notifed of the assignment, the borrower may discharge the debt by making
payments to the original lender.
According to the Civil Code (Section 328), if the borrower is notifed of the
assignment by the assignor, the debtor may only make payments directly to the
new assignee after notifcation; in the case of notifcation by the assignee, the
debtor is entitled to demand certifcation of the assignment. If the debtor makes
payments to the assignee without seeing such due certifcation, he does so at his
own risk.
The borrower is entitled to enforce objections and offset counterclaims arising
vis--vis the assignee on legal grounds already existing at the time when the
borrower is notifed of the assignment.
The original lender shall, as a surety, be liable for the borrowers services to
the new lender, up to the value of the consideration received in return for
assignment, unless:
the original lender has assigned the claim to the new lender expressly as an
indefnite claim
the original lender has otherwise excluded his liability.
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Assumption of debt
The Hungarian Civil Code provides for the assumption of debt by a third party.
The assumption of debt is made by way of an agreement between the borrower
and the third party and requires the approval of the lender. If the lender approves
the assumption of debt, the third party shall be subrogated to all rights to which
the borrower was entitled vis--vis the lender; however, he shall not be entitled to
offset the previous borrowers existing claims against the lender.
Novation
Novation of lending arrangements on similar terms to those set out in the
England and Wales section of this guide plays an important role in Hungary,
although a novation mechanic is currently not proscribed by Hungarian law
5
.
Participation
Participation agreements on similar terms to those set out in the England and
Wales section of this guide are permitted under Hungarian law.
A loan can only be assigned provided that the loan agreement does not contain a
bar or restriction on assignments. Contractual restrictions and issues commonly
encountered are similar to those described in the England and Wales section of
this guide:
Restriction on disclosure of confdential information - Act CXII of 1996 on
Credit Institutions and Financial Enterprises applies, according to which
confdential information may only be disclosed to third parties, if:
(i) so requested by the borrower or his legitimate representative fxed in
an authentic instrument or in a private document with full probative
force that expressly indicates the information may be disclosed;
note, it is not necessary to make such a request if the borrower provides
a statement to that effect in its underlying agreement with the
fnancial institution
(ii) the Act grants an exemption from the obligation of banking
confdentiality
(iii) so facilitated by the lenders interests for selling its receivables due
from the customer or for enforcement of its outstanding claims.
25
In Hungarian law, there are so-called ancillary securities which transfer
automatically to the buyer upon transfer of the underlying loan. Ancillary
securities include, for example, fxed pledges, foating pledges, mortgages and
security deposits. There are also types of securities that are non-ancillary and
thereby do not transfer automatically with the transfer of the underlying loan,
these types of securities must be transferred separately or granted to buyer by
the borrower. Non-ancillary securities include for example: independent pledge
(when a pledge is created over an asset independent of any claims), option rights
that serve security purposes and assignment of rights and claims with the purpose
of providing collateral security.
The beneft of a guarantee will only transfer to the transferee if the original
guarantee contains provisions that the rights extend to assignees.
Suretyship and liens securing a loan cease to exist upon the assumption of debt
in the absence of statements of approval from the guarantor and the obligor
of the lien.
Tax
Similar tax considerations apply under Hungarian law as those detailed in the
England and Wales section of this guide.
Registrations
As there is no publically maintained register for corporate loans in Hungary,
a transfer of a loan will not require any registration.
If the loan is subject to registered security, the transferees interest should be
registered in the relevant register. Mortgages over real estate are to be registered
with the Land Registry. All non-possessory security rights in movables other than
security interest created over special types of movable assets, eg vehicles, ships,
aircraft, intellectual property, business quota must be registered in the Register
of Pledges run by the Chamber of Notaries. Security interests created over the
abovementioned special type of movable assets are to be registered in the
relevant registries.
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5. The draft version of the new Civil Code (which is expected to be adopted by
Parliament shortly) contain provisions on novation, which if enacted, will require
a trilateral agreement between the original lender, the borrower and the new
lender and serve as a method for transferring whole contractual positions instead
of just certain rights and obligations.
27
Country contact:
Agnes Szent-Ivany
+361 394 3121
szent-ivany@eversheds.hu
Lithuania
Generally, the priorities outlined in the section for England and Wales applies
except as described below.
Assignment
Under Lithuanian law, a lender may without the consent of the borrower, assign to
a third party all or part of a loan. The assignment of the loan may not render the
borrowers obligations more onerous.
The assignment of the loan should be made in the same form as the principal loan
agreement (eg in written form, approved by notary, etc.).
The loan may be enforced against third parties and the borrower from the
moment when the borrower is notifed.
Novation
Under a novation arrangement, the new lender replaces the original lender and
the borrower is released from its obligations to the original lender.
If the loan agreement includes a bar on assignment, an assignment would
only be possible with the borrowers consent. If there is no bar or restriction on
assignment, an assignment is permitted without the borrowers consent,
provided that the borrower is not placed in a less favorable position as a result.
As a general rule, upon the assignment of the loan, the loan is transferred to
the buyer with the privileges established for the security of fulfllment of the
obligation and other accessory rights. Some specifc rules (eg obligation to
notify the borrower, etc.) may be applied in case of different forms of
guarantees and securities.
Where a novation occurs, it is likely that the buyer will need to take new
guarantees or security to the extent required.

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Registrations
As there is no publically maintained register for corporate loans in the Republic
of Lithuania, a transfer of a loan will not require any registration.
Security held over a companys property (ie real estate mortgages, other
property pledges (with exceptions), etc.) as well as amendments/assignment of
the security is registerable at Mortgages Register of the Republic of Lithuania.

29
Country contacts:
Rimtis Puisys
+370 5 239 2373
rimtis.puisys@eversheds.lt
Milda Auktakalnyte
.
+370 5 239 2351
milda.aukstakalnyte@eversheds.lt
Poland
Assignment
Under Polish law, a lender may transfer its receivable to another entity without
the borrowers consent, unless (i) a specifc provision of law, or (ii) a provision of
the contract giving rise to the receivable which is to be assigned. The buyer will
acquire all rights related to the transferred receivable (please also see section 5.4
(Guarantees and Security) below).
The borrower has to be notifed of the assignment in order to perfect the transfer.
Until the borrower is notifed of the transfer, any payment by the borrower to the
old lender will be an effective discharge.
Novation
In Poland, novation is a transaction between the original borrower and lender
which extinguish the borrowers liability, and is not used for the purpose of
transferring receivables.
While it is possible under Polish law for contracting parties to agree to transfer
their rights and obligations to a third party, in practice the use of such agreements
is rare for distressed debts.
Participation/Securitization Funds
Securitisation Funds are special purpose vehicles set up under recent Polish
legislation. Whilst, under Polish law, lenders cannot generally enter into
participation agreements, they can enter into such agreements with Securitisation
Funds. Such agreements are similar to those described in the UK section.
Note that under Polish Bankruptcy Law, receivables of the bankrupt, which are
the subject of a sub-participation agreement, are exempted from the bankruptcy
estate. The sub-participant, being a party to the sub-participation agreement,
steps in the rights of the bankrupt with respect to the receivables. The trustee
or the receiver of the bankruptcy estate is therefore obliged to transfer to the
Securitisation Fund all proceeds from the securitized receivables.
Note that Securitisation Funds enjoy other benefts in relation to loan purchases,
in particular in relation to the tax treatment of the transferred loans, and that a
lender otherwise subject to confdentiality restrictions will be exempted from them
when entering into a transfer or sub-participation agreement with a Securitisation
Fund, if revealing the confdential information is necessary in order to conclude
the assignment.
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The same type of issues arise in Poland as in England and Wales in the context of
contractual restrictions on loan transfers and confdentiality issues:
Absolute bar on assignment this is relatively uncommon, but would
prevent a lender from assigning its rights to a buyer.
Restriction on identity of transferee it is common for a loan agreement
falling outside the defnition of permitted assignees.
Consent not to be unreasonably withheld a loan agreement may provide
that a loan can be assigned to a third party only with the consent of the
borrower, such consent not to be unreasonably withheld. If this is the case,
and the loan agreement does not contain further provisions clarifying the
basis on which consent can or cannot be withheld, this may give rise to
some uncertainty as to whether any proposed assignment is permitted.
Other duties commonly found in loan agreements are a duty to inform
and consult with the borrower; these provisions, broadly speaking, oblige
a lender to give disclosure of any proposed assignment in advance, but fall
short of the need for consent.
Restriction on disclosure of confdential information a third party is only
likely to be willing to purchase a loan if the lender is permitted, in advance
of an assignment, to disclose certain confdential information relating to
the borrower eg reports or fnancial information received under the loan
agreement. Under Polish law, a lender owes a duty of confdentiality to a
borrower. Therefore either a loan agreement needs to contain an exception
to this duty of confdentiality to permit a lender to disclose relevant
information to proposed assignees, or the lender must seek express consent
from the borrower.
However, where loans are transferred to, or are the subject of
sub-participation agreements with, Securitisation Funds, the duty
of confdentiality is automatically disapplied.
31
A mortgage over real property may only be transferred under Polish law together
with the receivable which it secures. The receivable is effectively transferred
upon the entry of the buyer of the receivable as the mortgagee in the Land and
Mortgage Register. In other words, the assignee effectively acquires the receivable
secured with the mortgage after it is registered. Registration could take as long
as 6 months to be completed. In the interim period, transfer agreements often
provide for the transfer of any proceeds from the receivables to the buyer, as the
transferor remains the lender in respect of the receivable until the buyer is entered
in the Land and Mortgage Register as the mortgagee.
If the mortgage secures several receivables, should only one of the receivables be
transferred, the mortgage will fx on a proportionate amount of the receivable.
Other security under Polish law takes the form of pledges registered and civil
(unregistered). These are commonly taken over non-real estate assets. Whilst
(unlike with mortgages) the transfer of a receivable takes effect upon the execution
of the transfer agreement, the transfer of a registered pledge is only effective as of
the date of entry of the new pledgee in the pledge register. With civil pledges,
the pledge is transferred as at the date of transfer of the receivable.
Tax
There is some doubt in Poland as to the question of whether the assignment of
receivables should be treated as a provision of services which would be subject
to VAT in Poland. Recent decisions of the ECJ and Polish Supreme Court suggest
that an assignment of receivables for a value lower than the nominal value of the
transferred loan should not be subject to VAT, but the practice of the Polish Tax
Authorities and Regional Administrative Courts is less clear. Assuming however
that the recent ECJ and Polish Supreme Court decisions are followed by the
Administrative Courts in Poland, whilst no Polish VAT will be payable, a civil
transaction tax of 1% of the market value of the receivables would be payable
on any transfer.
Note that Polish law provides for advantageous tax treatment of sale of receivables
to Securitisation Funds.
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Registrations
As there is no publically maintained register for corporate loans in Poland,
a transfer of a loan does not require any registration.
If the loan is secured with a mortgage the buyer must be registered as the new
mortgagee in the Land and Mortgage Register. Registration in the Pledge Register
is required in order to transfer registered pledges securing the loans.
33
Country contacts:
Dr Krzysztof Haladyj
+48 22 5050 731
krzysztof.haladyj@eversheds.pl
Romania
Assignment
Romanian law does not distinguish between legal and equitable title, but
distinguishes between assignment of contract and assignment of receivables.
Assignment of receivables
Unlike the assignment of contract, the assignment of receivables transfers only
the rights and not the obligations under a contract. This is the preferred transfer
method for fully-drawn loans. An assignment of receivables does not require the
consent of the borrower, but should be notifed to it to be enforceable.
Both in the case of an assignment of contract and of an assignment of receivables,
any guarantees and security interests will be transferred with the same ranking by
virtue of law to the assignee.
Assignment of contract
The rights and obligations of the lender can be transferred by agreement between
the lender and the buyer. The entire contract can be transferred by agreement
between the assignee and the assignor, with the assignee taking the place of
the assignor.
The assignment of contract is possible only with the borrowers consent. The
borrower may consent in advance (eg in the original loan agreement), but in
this case the assignment needs to be formally notifed to the borrower in order
to be effective.
Novation
arrangements on the same terms, but substituting the new lender for the
original lender.
Security interests and guarantees will not be transferred to the new lender unless
expressly agreed by all parties (and where security or guarantees come from third
parties, the consent of such parties is needed). However, if all parties agree, the
ranking of the existing security subsists.
Participation
Participation is not proscribed under Romanian law, but can be structured
contractually along similar lines to those set out in the guide for England
and Wales.
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Limitations
Commercial lending can only be made by regulated entities. As such, the
obligations of the lender under a loan which has not been fully drawn can be
transferred only to another regulated entity.
Other contractual or legal limitations may apply (such as restriction on disclosure
of confdential information, data protection issues etc.). Such issues would need
to be dealt with on a case by case basis, but note that under Romanian law a
clause seeking to prevent assignment of receivables is void.
Tax
The transfer of a loan will may give rise to proft tax and VAT issues, in particular
where the face value is different from the transfer value. As these issues depend
on a number of factors (such as nationality and business object of the parties,
type and purpose of transfer etc.), tax advice should be sought on a case by
case basis.
Registrations
Assignments of receivables need to be registered with the Romanian Electronic
Archive for Secured Transactions in order to be opposable to third parties.
Where security is transferred as result of the transfer of the loan, it is advisable
that the change of the creditor be registered with the same register where
security had been registered (eg Romanian Electronic Archive for Secured
Transactions, The Cadastre and Real Estate Offce Registry etc). This may entail
additional formalities and potentially the need for notarized documents with
associated costs.
35
Country contacts:
Cristian Lina
+40 21 31 12 56 1
cristianlina@eversheds.ro
Spain
Assignment
Under Spanish law, the sale and transfer of loans and credits is generally governed
by articles 1526 to 1536 of the Spanish Civil Code. The general rule is that the loan
can be transferred by an assignment which may be executed by means of a public
deed of assignment granted before a Spanish Notary.
Unlike in other jurisdictions (eg England & Wales), Spanish law does not
distinguish between legal and equitable titles. The transfer of a loan will
accordingly generally imply the transfer of the full ownership of the loan.
As a general rule, a loan may be freely transferred without the need to obtain
the consent of the borrower unless the loan documentation provides otherwise.
However, special care needs to be taken in relation to a loan which has not
been fully drawn down. If the whole loan is to be assigned (which includes the
obligation of the lender to make further payments of available funds to the debtor
under the loan) then the consent of the borrower will be required. Such consent
should not be necessary, on the other hand, if the assignment relates to only that
part of the loan which has been fully drawn down by the borrower.
As a general rule, it is not necessary to provide notice of the assignment to the
borrower for it to be deemed valid and effective. However, a borrower who pays
the original lender before having been notifed about the transfer would be
released from its obligations in relation to the payment of such amount. Once the
borrower is notifed, the transfer will be fully effective and payment made to the
original lender will not release the borrower vis--vis the new lender. Note that the
documentation may establish an obligation to notify the borrower.
Participation
Rather than effecting a true sale, a sub-participation arrangement is a contract
between the lender and the participant under which the lender sub-contracts part
or all of its risk to the participant. Note that the ancillary rights and securities are
not assigned to the participant.
The participation agreement creates only a personal obligation between the lender
and the participant and the participant is not entitled to execute direct rights
against the borrower.
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Although it is unusual to absolutely prohibit the assignment of a loan agreement,
participation agreements can be used to achieve a similar commercial outcome
to an assignment where a transfer is barred under the original loan agreement
or where the lender wishes to keep the arrangement confdential from
the borrower.
From the participants perspective, the primary disadvantage in entering into a
participation arrangement rather than an assignment is that the participant is
exposed to the credit risk not only of the borrower defaulting on the loan, but
also the credit risk of the lender.
A loan can only be assigned provided that the loan agreement does not contain a
bar or restriction on assignment. The following contractual restrictions and issues
are commonly encountered:
Absolute bar on assignment this is relatively uncommon, but would
prevent a lender from assigning its rights to a buyer.
to provide that assignments can only be made to a specifed category of
permitted assignees (eg to a bank or other fnancial institution).
Restrictions on the minimum amount to be transferred or on particular dates
it is fairly common that syndicated loans establish certain conditions for
the transfer of a debt such as the minimum amount to be transferred or that
the transfer can only occur on particular dates (eg at the end of an interest
period so that break cost are eliminated or minimised).
Article 1528 of the Spanish Civil Code provides that the sale or transfer of a
credit facility involves all ancillary rights, such as those relating to deposits,
mortgages, pledges or security interests. The general rule, therefore, is that the
transfer of a loan would necessarily entail the assignment of any related security
which has been granted to strengthen the contractual position of the lender.
In addition, it is necessary to analyse the form of the execution of the security.
Article 1280 of the Spanish Civil Code also sets out that acts and contracts upon
which in rem rights are created, transferred, modifed or extinguished must be
formalised in a public document (1280.1) and that the assignment of actions
or rights which have been formalised in a public document must also in turn be
formalised in a public document. Article 1878 of the Spanish Civil Code states
that the mortgage credit facility may be transferred or assigned to a third party
in whole or in part in accordance with the formalities stipulated by law.
Therefore, the assignment of a loan guaranteed by a mortgage or pledge (an in
rem right) and previously formalised in a further public document would also
have to be formalised in a public document. Special care also needs to be taken to
complete the transfer of certain securities. In particular, a transfer of mortgages,
chattel mortgages and special pledges needs to be recorded in public registries
and a transfer of a pledge over shares or of a pledge over receivables may require
notice to be given to the corresponding borrowers.
guarantees and security so as to maximise recoveries made from the borrower and,
therefore, maximise the value of the participation agreement for the beneft of
the participant.
Tax
for the purposes of Spanish tax. Broadly speaking, such proft or loss will be
ascertained in accordance with transferors accounting treatment and taxed or
relieved as income (rather than capital).
If the purchaser is a tax resident of a European Union State, interest payments will
be exempt from taxation in Spain. If the purchaser is a tax resident of a foreign
State not being member of the European Union, interest payments will be subject
to taxation at a fxed tax rate (currently 21%) other than where a Double Taxation
Treaty applies by establishing a lower tax rate.
We would not generally expect Spanish stamp duty or VAT taxes to be payable in
relation to a loan transfer unless the transfer implies the transfer of a loan secured
with a guarantee that may be registered (such as a mortgage security) in which
case the tax rate is generally 1% of the total amount secured.
Registrations
As there is no publically maintained register for corporate loans in Spain, a
transfer of a loan will not require any registration. However, special care needs
to be taken when the loan is secured by a registered security (ie mortgage or
chattel mortgage). It is advisable for any buyer, where there is an assignment of a
registered security, to register its acquisition by following any statutory formalities
whenever the original loan or its security is registered.
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39
Country contacts:
Juan e Daz
+34 91 42 94 33 3
jdiaz@evershedsnicea.com
Javier Ibez
+34 91 42 94 33 3
jibanez@evershedsnicea.com
Switzerland
Assignment
Claims including those deriving from loans and their related security may be
assigned in writing under Swiss law, unless the assignment is prohibited by law,
by the nature of the debt or by a contract between the borrower and the
original lender.
Swiss law does not distinguish between legal and equitable titles to property.
The assignment of debts does not require the borrowers consent unless the
underlying contract provides otherwise. However, unless and until the borrower
is notifed of the assignment, the borrower may validly discharge its duties by
payment to the original lender rather than the buyer.
On the other hand, the accession of a third party to the debt relationship in lieu of
and with the release of the previous borrower, is effected by means of a contract
between the third party and the lender.
Novation
arrangements on the same terms (or possibly with amendments), but substituting
the new lender for the original lender. This will require the agreement of the
existing borrower. Effects of such a novation on related security constituted are to
be assessed on a case by case basis.
Participation
In accordance with the principle of contractual freedom under Swiss law, parties
may enter into a participation or sub-participation as described in the England
and Wales section of this guide. A choice of law clause in favour of English law
will further be upheld by Swiss courts.
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Under Swiss law, the same contractual restrictions and issues are commonly
encountered as outlined under the England and Wales section of this guide:
Restriction on disclosure of confdential information - a third party is only
likely to be willing to purchase a loan if the lender is permitted in advance
of an assignment to disclose certain confdential information relating to the
borrower or guarantor, eg reports or fnancial information received under
the loan agreement. The Swiss Data Protection Act of 19 June 1992 needs to
be complied with. Each person who processes data is subject to a general
duty of diligence. Further, the disclosure of data abroad is subject to specifc
requirements. If the data controller is a bank, banking confdentiality rules
set out in particular at article 47 of the Swiss Banking Act of 8 November
1934 specifcally apply. In principle, client data that is not fully anonymised
cannot be disclosed to any third party, unless the client has waived its
banking confdentiality. The provisions of a loan agreement need to contain
an express waiver to permit a lender to disclose relevant information to
proposed assignees.
Pledges and sureties (cautionnements) are automatically transferred to the
assignee in case of assignment of the secured debts. By contrast, the security
created by way of assignment in favour of the secured creditor (mortgage
certifcates cdules hypothcaires and securities such as assigned insurance
policies) do not automatically pass on to the assignee in case of the assignment
of the secured claims and necessitate an express assignment. Further, the
assignee needs to take the effective control of the original insurance policies
and mortgage certifcates. Personal guarantees are usually not transferred to
the assignee. In any event, there are some important differences between
different types of guarantees and the parties should pay attention to the wording
they use (in particular as English translations may be fuctuating in this respect).
Where a novation or sub-participation occurs, the legal situation is similar as
that outlined in the England and Wales section of this guide.
Tax
We would not generally expect Swiss stamp taxes to be payable in relation to a
loan transfer and related security. Other tax issues (in particular withholding tax)
are to be examined on a case by case basis.
Registrations
There is no publically maintained register for corporate loans in Switzerland,
therefore the loan transfer will not require any registration.
Switzerland does not hold a registry for movable security, except for aircrafts and
boats. Mortgages and mortgage certifcates are registered with the competent
land registry.
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43
Country contacts:
Fabien Aepli
+41 22 818 45 00
fabien.aepli@eversheds.ch
Slovak Republic
Assignment
Under Slovak law receivables, including the right to repayment of a loan, can be
unilaterally assigned by the lender.
An assignment will become effective between the parties to it upon execution
of the agreement. Vis--vis the borrower the assignment will be effective upon
delivery of the notice of the assignment.
The lenders obligations (eg the commitment to provide further drawdown)
cannot be unilaterally transferred without the consent of the borrower. In practice,
such consent is often given in advance in the original loan agreement.
Novation
Under a novation arrangement, the borrower, the original lender and the new
lender agree to replace the existing lender with a new lender while the other
conditions of the loan agreement remain unchanged. This requires the agreement
of the existing borrower.
The loan documentation may contain a pre-agreed mechanism to effect novations.
Participation
Under Slovak law, it is possible to conclude a sub-participation contract
between the lender and the participant or another synthetic transfer of the risks
and benefts from the loan agreement along similar lines to those set out in the
England and Wales section of this guide.
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The following contractual restrictions and issues are encountered:
Absolute bar on assignment this is uncommon, but would prevent an
existing lender from assigning its rights to a new lender.
to provide that assignments can only be made to a specifed category of
permitted assignees, eg a bank or other fnancial institution. Such a
falling outside the defnition of permitted assignees. However, such
restriction is usually limited to situations where the borrower is not in
default. In a default situation the restriction is relatively uncommon.
Confdentiality issues - the assignment may include a contractual restriction
on the disclosure of confdential information. Such disclosure may be
conditional upon conclusion of an NDA with the interested bidder. Even
if the contract does not contain an express restriction, banks are generally
unable to disclose the details of loans to third parties without the explicit
consent of the borrower. However, banks are allowed to transfer receivables
to a third party without the borrowers consent if the borrower is, following
delivery of a written demand from the bank, in default of payment of the
loan for more than 90 days.
Most of the security instruments (eg mortgages, movable pledges, share
charges), automatically transfer together with the assigned loan. Subsequently
there is an obligation for the old lender to provide notice of the transfer of the
loan to the borrower. However, there is a risk that security instruments will only
continue to secure the underlying loan to the extent that it was contemplated
under the original security documentation. It is therefore advisable that the
buyer checks the original security documentation for any restriction and
seek confrmation from the relevant security provider that it consents to the
assignment of the underlying loan and the extension of the security obligations
owed to the buyer. This may be diffcult to procure where the loan is distressed/
non-performing and the borrower is reluctant to cooperate.
Where a novation occurs, there is the risk (depending on the form of the
novation agreement and wording of the security documentation) that the buyer
will need to take new guarantees or security to the extent required.
guarantees and security so as to maximise recoveries made from the borrower, and
therefore maximise the value of the participation agreement for the beneft of
the participant.
Registration and stamp duties
The transfer of a loan is not generally expected to give rise to stamp duties.
However, the records of security registered in various registries would need to
be updated. Such update is often subject to separate fees (notarial, court or
administrative fees).
The following types of security are subject to registration requests:
Mortgages over real property
Pledges of the participation interest in s.r.o. type companies
Pledge over dematerialised shares in a.s. type companies (ie if the shares
are book-entered)
Movable pledges in respect of the assets which will remain at the disposition
of the pledgor (eg aircraft, cars, machinery, rolling stocks, etc)
Pledges over receivables, security papers, enterprise or part thereof
Selected IP rights (trademarks, patents and industrial designs), etc.

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47
Country contacts:
Marek Bomba
+42 02 51 00 91 11
marek.bomba@eversheds.cz
Sweden
In Sweden a loan by a bank or a credit institution is legally categorized as
a promissory note (Sw. skuldebrev) and governed by the provisions in the
Promissory Notes Act (Sw. Lag (1936:81) om skuldebrev). A promissory note is
defned as a unilateral written commitment to pay a monetary amount which has
been intentionally prepared to serve as evidence. Promissory notes are divided into
two main categories, non-negotiable promissory notes (Sw. enkla skuldebrev) and
negotiable promissory notes (Sw. lpande skuldebrev). The negotiable promissory
note is intended to easily be transferred between creditors. Banks and credit
institutions routinely use so called order promissory notes (Sw. orderskuldebrev),
ie a kind of negotiable promissory note, in their lending operations.
The transfer of a loan is based on an agreement between the lender and the buyer.
Assignment
Assignment of non-negotiable promissory notes
Non-negotiable promissory notes are payable to a specifc person. Non-negotiable
promissory notes thus identify a particular person, natural or legal, as payee. An
assignment of a non-negotiable promissory note will, in general, be effectively
upheld by creditors of the lender if the relevant borrower has been duly notifed
(Sw. denuntierad) of the assignment.
Assignment of negotiable promissory notes
Negotiable promissory notes are payable to the bearer (bearer promissory note)
or to a specifc person or order (order promissory note).
The bearer promissory note is valid in the bearers hand. An assignment of a bearer
promissory note will, in general, be effectively upheld by creditors of the lender,
if the transferee has it in his or her possession.
A lender who assigns an order promissory note shall endorse it to the buyer. This
may be done on the note or in a separate document. An assignment of an order
promissory note will, in general, be effectively upheld, if the transferee has it in his
or her possession duly endorsed to him or her.
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Substitution of Creditors
Under a substitution arrangement the borrower, the lender and a third party
may agree to terminate the existing lending arrangements and replace them
with new arrangements, substituting the original lender with a new lender.
This requires consent from the borrower. Within the Swedish legal system such
substitution has been used quite sparingly as a method for transferring loans.
Participation
A participation is a contract between the lender and a participant under which
the lender sub-contracts part or all of its risk to the participant. For payment
of a fee the lender would agree to pay to the participant sums equal to sums
received from the borrower under the loan agreement, and the participant
would reimburse the lender where the borrower fails to meet those liabilities.
Participation agreements are rarely seen in Sweden.
There are certain limitations on the right to assign loans under Swedish law:
Bar on assignment if the loan agreement includes a bar on assignment,
it would only be permitted if the parties later agree to vary the terms of
the loan agreement. If there is no bar or restriction on assignment, an
assignment would be allowed without the borrowers consent as long as
the borrower does not end up in a less favorable position because of
the assignment.
Under Swedish law guarantees and securities would generally continue to
secure the underlying loan at a transfer. There may however be limitations to
this included in the original guarantee or security documentation. In general it
would be possible to agree that a security or guarantee may be assigned to the
buyer of an underlying loan. A buyer should confrm that express provisions of
assignment are contained in the guarantee or security documentation.
Where a substitution of lenders occurs, a new loan arrangement is agreed and it
is very likely that the new lender will need to take new guarantees or security.
Under a participation agreement the beneft of guarantees and security will not
transfer to the participant.
Tax
The transfer of a loan will potentially give rise to a proft or a loss for the transferor
for the purposes of Swedish tax. No stamp duty is payable in relation to a loan
transfer in Sweden.
Registrations
As there is no publically maintained register for corporate loans in Sweden, a
transfer of a loan will not require any registration. Security held over a companys
property is registered at the Swedish Companies Registration Offce
(Sw. Bolagsverket) and the National Land Survey (Sw. Lantmteriet), and a
purchaser of a loan secured by a registered charge will need to register its interest.
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Country contacts:
Tord Svensson
+46 07 09 79 87 76
tord.svensson@eversheds.se
The Netherlands
Introduction
There are several options described in the Dutch Civil Code (Burgerlijk Wetboek,
DCC) to effect a transfer of loan, the most common of which are assignment
(cessie) and contract takeover (contractsovername). Transfer by novation is
also possible.
Assignment
An assignment will effect a transfer of claims arising under a loan to the buyer.
The requirements and characteristics for such assignment are as follows:
(i) a deed of assignment must be drafted in order to effect a transfer of legal
title. Such a deed may be drafted by the lender and buyer (a so called private
instrument (onderhandse akte)), or by a civil law notary (an authentic deed
(authentieke akte))
(ii) Dutch law distinguishes between a disclosed assignment (openbare cessie)
and undisclosed assignment (stille cessie). In case of a disclosed assignment
a notice of the assignment must be given to the borrower to effect a legal
transfer. In case of an undisclosed assignment, the deed of assignment must
be either executed by civil law notary (notaris) or registered with the Dutch
Tax Authorities (Belastingdienst). Furthermore, under the latter the borrower is
only obliged to pay to the buyer after notice of the assignment is given to him.
The lender and buyer should note that, according to Dutch law, a borrower who
has paid the original lender after the assignment may rely on the payment as a
discharge against the new lender, provided the borrower had reasonable grounds
to believe that the recipient of the payment was entitled to the such payment. This
might be the case if notice of an assignment has not been given to the borrower.
This is known as payment in discharge of an obligation (bevrijdende betaling).
After a notice is given to the borrower, such a discharge is no longer possible
for the borrower to rely upon in case of payment to another party than the
new lender.
Note that in each case, a borrower may not be put in a worse position than his
position to the original lender was as a result of the assignment.
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Novation
Under a novation arrangement, the borrower, lender and the third party agree to
terminate the existing loan agreement and replace it with a new agreement on
the same terms, between the new lender and the borrower.
Contract takeover
A party to an agreement may transfer its contractual legal relationship with
the counterparty to a third party by a deed, if the counterparty gives its
prior consent.
Contractual limitations
The following contractual limitations are commonly encountered:
Absolute bar on assignment - it is possible that the loan agreement may
include a clause stipulating that the rights and obligations cannot be
assigned. The loan documentation often stipulates that the borrower may
not assign to a third party without written consent of the lender (or vice
versa) (such consent not to be unreasonably withheld).
Restriction on identify of transferee - the loan documentation often includes
a restriction that assignments can only be made to a group of assignees as
defned in such loan agreement.
Restriction on disclosure of confdential information: Under Dutch law
there is no statutory of a duty of confdentiality, but this obligation may be
base on the general duty of good faith. This means that a party has to treat
certain information given by the other party as confdential, meaning it
may not disclose or use such information. since this is generally thought to
apply to a lender/borrower relationships, it is important to check whether
the loan agreement provides that a lender may disclose certain confdential
information to proposed assignees, since if it does not the consent of the
borrower to release of the information will be required.
Any guarantees for security (ie mortgages, rights of pledge or debentures), can
be assigned to the buyer but will only continue to secure the underlying loan to
the extent that this was contemplated under the original guarantee and security
documentation that such rights would extend to assignees. A buyer should
therefore check that express provisions are contained in the guarantee or security
documentation in this regard (for example, a provision which provides that the
benefciary of the security is the original lender or its permitted assignees).
Where a novation occurs, it is likely that the buyer will need to take new
guarantees or security to the extent required, because the contractual legal
relationship between the lender and borrower will cease to exist and a new
lender and a new contractual legal relationship is created.
For a contract takeover or takeover of debt involving property, a pledge or a
mortgage on the property of one of the parties to takeover of debt, serving as
security for the debt that is taken over, remains in force. However a pledge or a
mortgage on the property of third parties and rights from a suretyship cease to
exist when the debt or contract is taken over, unless the pledgor, mortgagor or
surety already agreed that in such event the security remains in force.
It should be noted however that where security is held by a trustee, there will be
no need for new security to be taken, provided that the security documents are
for the beneft of lenders and their transferees and further Dutch law requirements
are met.
Registrations
Under Dutch law there is no requirement to register the loan documentation,
except as regards non-disclosed assignments.
Furthermore, security held over a companys property (ie mortgages) must be
registered at the Dutch Land Registry Offce. In the event of novation, security
may have to be re-registered.
Tax
Dutch tax law analysis of loan transfers is beyond the scope of this note.
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Country contacts:
Matthijs Bolkenstein
+31 20 5600 636
matthijsbolkenstein@eversheds.nl
Loan Market Association (LMA)
Secondary debt trading procedure (par and distressed)
Introduction
The LMA has established a standard procedure and format for the trading of debt
(both distressed and par) that is widely utilised by the debt trading arms of banks
and investment houses. The standardisation of the procedure and documents
allows the procedure to be undertaken quickly and easily. It is most frequently
used for the trading of large syndicated facility participations.
Summary of procedure
Prior to any trade the proposed buyer will normally have had undertaken full due
diligence into the debt to be purchased. The procedure described below assumes
this exercise has been completed to the satisfaction of the parties.
Stages of the debt trade are as follows:
15.3.1 trade date the buyer and seller orally agree the trade (which is normally
confrmed by email) on LMA standard terms with key components agreed
(eg price, treatment of interest, and which party will complete the
trade confrmation)
15.3.2 the seller sends a request to the facility agent to seek consent of the
borrower to the trade (if required)
15.3.3 the form of trade confrmation is completed and sent to the counterparty
(the terms having been agreed on the trade date). This standard form
document contains all relevant terms of the debt trade and incorporate
the LMA standard terms and conditions of trade
15.3.4 trade confrmation and other transaction documentation are exchanged
between the parties and signed once borrower consent to the trade
is received
15.3.5 payment by the buyer to the seller of the consideration for the debt trade.
The stages set out above to signing of the documents are expected to occur within
7 days of the trade date for a par trade and 15 days for a distressed trade. Payment
of the consideration is expected to occur as soon as possible after this and in
any event within 3 or 5 days of signing respectively before delayed settlement
compensation applies (if, as is usual, it is included in the trade terms).
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Any notices that are required to be given (such as to the borrower) or registration
of the buyer as a secured party are completed as soon as possible after the
payment of the consideration.
Conclusion
Whilst the documentation for the trade is LMA standard and designed to
be fexible it may not be appropriate for all circumstances. In particular the
suitability of this form of debt transfer should be considered carefully where:
15.4.1 one or both parties to the trade are not recognised fnancial institutions
and/or
15.4.2 where the debt is subject to the laws of a jurisdiction other than
England and Wales.
Eversheds LLP 2013. Eversheds International 2013. All rights are reserved to their respective
owners. Eversheds International is an international legal practice, the members of which are
separate and distinct legal entities.
ECOC.125 10.13
For a full list of our international offces and contact details please visit
www.eversheds.com

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