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United Kingdom

Two recent cases have considered the scope of two types of provision commonly found in loan agreements, bond and other debt instruments.

In Hendry v Chartsearch [July 23 1998], the contract contained a prohibition against assignment without the consent of the debtor, with assignment not to be unreasonably withheld. The creditor assigned the benefit of a cause of action under the contract without seeking the consent of the debtor. A majority of the Court of Appeal concluded that, even if it would have been unreasonable for the debtor to refuse consent to the assignment, the failure of the creditor to ask for consent made the assignment ineffective as against the debtor. A qualified prohibition against the transfer of a debt will, therefore, bind the transferee unless either the prior consent of the debtor is given, or a court has declared that the refusal of consent is unreasonable.

The First Division of the Scottish Court of Session has allowed an appeal in respect of a break cost clause contained in a fixed-rate debenture loan stock instrument. Under the instrument, the issuer was entitled to repurchase the loan stock "subject to [the holder] being fully reimbursed for all costs, charges and expenses incurred by it in connection with the stock". The holder purchased an interest-rate swap under which it received a floating-rate payment to hedge its funding of the purchase of the loan stock. Reversing the decision of the Outer House, it was decided in Bank of Scotland v Dunedin Property Investment Company [May 1 1998], that on its proper construction the break cost clause in the instrument allowed the holder to recover the costs it incurred to break its swap transaction on early redemption of the instrument. This was described as a "commercially sensible interpretation" once it was determined that the issuer was aware that the holder was to enter into some form of hedging arrangement, and that the early termination of that arrangement would give rise to some cost.

Mark Evans

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