Scenario 1 - The Hannay Company ("Hannay") was formed in 1923 by Royal Charter. For the past 70 years it has conducted a large portion of its banking with Acme Bank. However, the company is now in financial difficulties. A $10m loan was provided to Hannay 5 years ago. The purpose of the loan was to downstream the proceeds to the 80%-owned UK subsidiary - Hannay UK Ltd. This subsidiary was not only a guarantor of the facility from Acme Bank, but has signed an intercompany loan agreement between it and Hannay in respect of the downstream loan.
The Constitution of Hannay required all financial flows to subsidiaries to be in the form of equity instruments and not debt. The bank had noticed this archaic restriction, and had included in the loan agreement a condition precedent that the Constitution be amended by shareholder resolution to enable the loan to proceed as required by both parties. However, by oversight, the meeting to process the amendment was never convened.
You have been asked, as the legal guru in the Acme Bank team, what the likely consequences will be for the bank if the Hannay Group collapses. Can the $10m be recovered in the workout or insolvency of Hannay, or in the workout of the guarantor - Hannay UK Ltd. Alternatively, is there anything that can be done at this late stage to rescue the situation?
SCENARIO 2 - Bravo Bank has advanced a loan facility to Maggott PLC. The client had requested the loan for the refurbishment of their business premises, and their contractor who was commissioned to undertake those works had requested evidence of finance availability. The purpose clause in the loan agreement identified the refurbishment as the purpose of the loan.
The drawdown of the loan occurred on the Monday and were placed on deposit with another bank. On the Friday of the same week, the Maggott Group were placed into insolvent administration. The administrator's initial report is not encouraging. The estimated insolvency dividend to unsecured creditors is estimated at only 40 cents in the dollar.
The company had failed to disclose to the bank that material adverse events had occurred since the date of their last financial reporting.
What are your observations concerning the position of both Bravo Bank and the management team at Maggott?
SCENARIO 3 - "Letters of Comfort are not worth the paper they are written on." Do you agree?
SCENARIO 4 - A Special Purpose Vehicle (SPV) has been established as a 50/50 joint venture by Penguin Constructions PLC and Sealion Development Inc. The SPV's raison d'etre is to build a $500m power generation plant.
Eighty percent of the financing for the development has been provided by a syndicate of banks of which Charlie Bank is the mandated lead arranger and Agent. The financing is on a limited recourse basis. The sole recourse to the Sponsors is for a $10m contribution to any potential cost overruns. The contingency for cost overruns during the construction phase of the project is a standby loan of $40m and the aforementioned contingent deferred equity of $10m from the two Sponsors.
The construction has gone badly.
Leviathan Constructions were the EPC turnkey contractor.
1. They have delivered the plant 11 months after the contractual delivery date.
2. The contract was for $395m and included a 10% liability cap of contract value for delays and 10% for equipment performance problems.
3. The contract provided for liquidated damages of $163,000 payable for each day of delivery after the contractual delivery date.
4. Because the plant has commenced operations 11 months late, the SPV has defaulted on a take-or-pay supply contract to the fuel supplier. The SPV is obliged to either take certain quantities of gas, or pay a minimum amount of $1m per month.
5. Leviathan Constructions is wholly owned by one of the Sponsors - Penguin Constructions PLC.
6. In addition to the delays, there were variation orders to the EPC contract for which the contractor was not liable. These totalled $72m.
Comment on both the implications of the delay and the cost overrun from the perspectives of:
-the SPV;
-Leviathan - the contractor;
-the Sponsors;
-the fuel supplier;
-the lenders.
SCENARIO 5 - Delta Bank's unsecured loan to a Special Purpose Vehicle (SPV) is guaranteed by the 4 joint venture partners (Companies, A, B, C and D) who each hold a 25% interest in the SPV. The most creditworthy partner is A, the other partners - B, C and D companies have mixed credit characteristics.
The loan to the SPV was fully repaid.
Shortly after the repayment of the loan, the Government cancels the operational contract with the SPV, as a result of which the SPV immediately goes into insolvent liquidation. The liquidator is seeking to have the loan repayment reversed as a voidable preference, since the unsecured trade creditors are likely to be receiving only 50 cents in the dollar in the winding up of the SPV.
The guarantee of companies B and C cannot be found in the bank's filing system.
Discuss the potential issues for each of the guarantors, the liquidator and Delta Bank.
SCENARIO 6 - Material Adverse Change clauses in contracts are controversial, because they are inevitably vague and subjective, since they try to catch situations that are not precisely known except with hindsight. Please discuss the issues, including but not limited to:
-the dangers to lenders of their enforcement;
-the possible benefit if the clause is included contrasted to it being absent;
-what the courts might regard as either adverse or material;
-your personal opinion from the opposing viewpoints of a lender and a borrower.
SCENARIO 7 - The bank has financed an acquisition by Alpha PLC (the Bidder) of Bravo PLC (the Target). It is proposed that financial assistance will be provided in the form of guarantees from the three subsidiaries of the Target:
-Charlie Ltd
-Delta Germany GmbH
-Echo PLC
Comment on the issues that the bank should consider in connection with the taking of these guarantees and what (if any) changes to the transaction structure could be considered.
SCENARIO 8 - A traffic consultant named Mr. Charles Swindler has produced a report on the expected number of freight and passenger vehicles that will be using the new M42 motorway that was built by Brablock & Green PLC ("BG").
BG project financed the road through its wholly-owned special purpose vehicle ("SPV"), which obtained 80% of the required financial capital from the syndicate of banks headed by Echo Bank. The remaining 20% was shareholder loans and equity supplied to the SPV from BG.
The actual traffic experienced in the first year of the operating phase of the project is less than 30% of the estimate that had been predicted in the Swindler Report which had been commissioned by, and sent to, BG.
The syndicate lenders fear they may suffer significant losses. It seems that all of them had relied on the report which had been supplied by BG to the Agent, and then from the Agent to each of the participants, ahead of the participants processing their financing approvals.
Upon further investigation it is discovered that Mr. Swindler is a former employee of BG and has a criminal record as a result of involvement in a real estate fraud some 7 years previously.
Mr. Swindler says, his consent was not obtained for handing out the report, and anyway he inserted a full disclaimer somewhere in the document.
Discuss the positions as you see it for:
-the syndicate participants;
-The Agent - Echo Bank;
-The SPV;
-BG;
-the traffic consultant - Mr. Swindler
SCENARIO 9 - You are attending a job interview and the question is posed to you: "Explain the meaning, scope and importance of stare decisis."
Impress the interviewer with your response.