Kirschner Court Adopts Fact Specific Analysis to Conclude That Loans Are Not Securities

The United States Court of Appeals for the Second Circuit recently affirmed the 2020 Kirschner v. JP Morgan Chase Bank, N.A. ruling that a secured $1.775 billion syndicated term loan to Millennium Laboratories LLC (Millennium) was not a security. The decision is great news for the loan market, but a slightly different set of facts could easily lead to a different decision. Read our key takeaways here.

Loan Trading 101: How to Ensure You Get It Right with Transfer Restrictions

If you know anything about syndicated loan trading, you probably know the basics of transfer restrictions.

New term lenders typically need the consents of the administrative agent and the borrower in order to be admitted to the syndicate. New revolving lenders usually need those consents, plus the consents of any banks that issue letters of credit or swingline loans. In many syndicated loan deals, that’s the entire universe of transfer restrictions.

But that isn’t always the case. Transfer restrictions vary from deal to deal. They may stay the same over the life of the loan or change over time. Debt exchanges, rights offerings, and other restructuring events can introduce new sources of transfer restrictions outside of the credit agreement.

Overlooked or misunderstood transfer restrictions can result in settlement delays, unexpected costs, and potentially litigation. That’s why it’s critical to do your diligence before you trade. In order to perform this task efficiently, you need to know where to look for transfer restrictions.

Where to Find Transfer Restrictions

The Credit Agreement

Most syndicated loan transfer restrictions can be found in the credit agreement, but there are several places within the agreement where transfer restrictions are most likely to be found. The most important of these is the successors and assigns provision. Consent requirements, minimum transfer amounts, and any notice requirements are usually set forth at or near the beginning of the section. In many credit agreements, those provisions will be the only restrictions on transfer. But there are many exceptions. For example, the successors and assigns provision often imposes limitations on assignments to the borrower, the sponsor (if there is one), and their respective affiliates. The credit agreement may prohibit assignments to such entities altogether, or it may require the parties to follow a special process or use a separate form of assignment and assumption to complete the transfer. Some credit agreements grant a right of first refusal to certain lenders. These provisions can be particularly troublesome because the LSTA standard terms do not address what happens to a trade if a third party exercises its right of first refusal. If the loans are convertible into equity, the successors and assigns section may set out additional requirements based on applicable securities laws. Pre-trade due diligence should always include a thorough review of the successors and assigns section.

The credit agreement’s definitions section may also contain transfer restrictions. Most notably, credit agreements often limit transfers to potential assignees that meet the definition of an “Eligible Assignee.” The definition may simply state that an “Eligible Assignee” is an assignee that satisfies the requirements set forth in the successors and assigns section. But in some cases, the “Eligible Assignee” definition will impose additional restrictions of its own. For example, the definition may require that the assignee be a commercial bank or a financial institution with assets in excess of a certain threshold. Eligible Assignee definitions also sometimes set forth the consent requirements for new lenders or describe the level of discretion the borrower or the administrative administrative agent may have in deciding whether to admit new lenders. Similarly, the definition of “Disqualified Lender” may exclude certain named entities or types of entities from becoming lenders. As Eligible Assignee and Disqualified Lender definitions often set forth restrictions that apply to certain entities and their “Affiliates”, the definition of “Affiliate” (or the lack of such a definition) may complicate things further. To the extent the definitions section contains transfer restrictions, it’s important to harmonize those restrictions with the ones set forth in the successors and assigns section and to resolve any ambiguities before trading.

Transfer restrictions may also appear elsewhere within the credit agreement. For instance, some credit agreements require borrowers to comply with a Dutch auction process when repurchasing loans. These requirements may be set forth in the definitions or in the successors and assigns sections, but they may also appear in other parts of the credit agreement or in the exhibits. In rare cases, ancillary credit documents like security agreements or intercreditor agreements may impose additional transfer restrictions beyond what is set out in the credit agreement.

Other Agreements

Restructuring support agreements (“RSAs”) are an increasingly common source of transfer restrictions outside of the credit agreement. RSAs are agreements under which a subset of lenders agrees to support a proposed plan of restructuring, often in conjunction with the borrower, sponsor, and other groups of creditors. To prevent dilution of the debt controlled by RSA parties, lenders who sign on to RSAs are usually prohibited from transferring loans unless the assignee is or becomes a party to the RSA. One common exception is that a “qualified marketmaker” (i.e., a broker-dealer or similar entity that is acting as a marketmaker) that is not a party to the RSA may buy and sell loans that are subject to the RSA, provided that the qualified marketmaker transfers the loans to an assignee that is or becomes an RSA party. In either case, one or both of the parties to a trade of RSA paper is usually required to notify the borrower, the sponsor, the other RSA parties, or some combination thereof within a fixed period of time before or after the transfer. Although the LSTA published model RSA transfer provisions several years ago, the market has not adopted them, and transfer restrictions and notice requirements vary from one RSA to another.

Occasionally, loans are required to be traded in tandem with equity or other types of interests. These types of arrangements are most common in the post-restructuring context. If the loans are stapled to common stock, the parties to a trade will need to comply with any restrictions on transfer imposed by the issuer’s articles of incorporation, bylaws, and shareholders’ agreement (if any). If warrants are stapled, the parties will also need to consider restrictions imposed by the warrant agreement. Bonds or litigation trust interests may also be stapled to loans and their governing documents may impose further restrictions.

Why Transfer Restrictions Are So Important

Failing to identify the applicable transfer restrictions before entering into a trade can have serious consequences. Settlement delays are the most likely result. And while settlement delays are common in the loan market, the risks they create should not be overlooked. The longer a trade remains unsettled, the longer each party to a trade is exposed to the other party’s credit risk. For the seller, settlement delays also mean additional exposure to the credit risk imposed by the borrower. Price fluctuations can change the parties’ economic incentives, making disputes and litigation more likely. When a trade is entered, the parties’ economic incentives are aligned in that they have chosen to enter into the transaction at the agreed upon price. If the market price changes significantly before the trade settles, the party that stands to realize a loss will have a greater incentive to find a way out of the transaction.

In some circumstances, missing a transfer restriction can give third parties the right to unwind a transfer. Most credit agreements do not include provisions that make a transfer done in violation of the credit agreement void or voidable. While a lender or credit party that is damaged by such a transfer may have a claim for breach of contract, the transfer itself would stand.

However, RSAs and certain other agreements among lenders routinely include language that makes a transfer void if it does not comply with all applicable transfer restrictions. The right to unwind such a transfer is often bestowed upon every party to the agreement, thereby creating a large pool of potential challengers to the effectiveness of a transfer. A transfer that is retroactively voided could create significant liability for the original seller and buyer because the unraveling could negate the buyer’s and/or its downstream purchasers’ rights to participate in a rights offering, vote on a plan of reorganization, or receive distributions. As the transfer restrictions contained in RSAs vary from agreement to agreement and often contain multiple notice requirements, the parties to a trade should take special care to understand and observe the applicable restrictions and procedures.


  • Perform your due diligence before you trade. The secondary loan market functions on the principle that a “trade is a trade.” In other words, if two parties agree to the material terms of a loan trade, then they have made a legally binding commitment to one another to settle the trade on the agreed terms, regardless of whether there is a signed agreement and regardless of what happens after the trade is entered. Discovering after the fact that the loans cannot easily be transferred is unlikely to excuse either party’s obligation to settle the trade under an LSTA trade confirmation. Traders need to know upfront which restrictions apply so they can make informed decisions about whether to enter into a trade and which terms should apply if they do trade.
  • Consider the drafting implications. If your pre-trade diligence identifies transfer restrictions that are not adequately addressed by the LSTA standard terms, those restrictions should be taken into account upfront when the parties agree to trade terms. Knowing which terms to include requires a mastery of the LSTA standard terms, as well as the credit documents and other applicable sources of transfer restrictions. Getting those terms into the agreement often requires close coordination among traders, closers, and legal counsel.
  • Periodically refresh your diligence. Credit agreement amendments, events of default, bankruptcy filings, updates to internal policies, and even the simple passage of time can affect which restrictions apply. Lenders and prospective loan purchasers should stay on top of developments that may affect a particular loan’s transferability. If you haven’t traded a credit recently, consider performing a fresh round of diligence before trading again.

CARES Act Update: Small Business Administration Releases Paycheck Protection Program Regulations


On April 2, 2020, six days after the CARES Act was enacted, the Small Business Administration (“SBA”) released an interim final rule (the “Interim Final Rule”) implementing the Paycheck Protection Program (“PPP”). For an overview of the PPP sections of the CARES Act, see our previous alert, which is available here.

Read our discussion of the key provisions of the Interim Final Rule, along with a brief discussion of the revised Borrower Application Form and related guidance from the Treasury Department and the SBA, here. Significantly, the Interim Final Rule states that the SBA also intends to promptly issue additional guidance regarding the applicability of its affiliation rules to PPP loans.[1]

The Coronavirus Aid, Relief and Economic Security (CARES) Act Becomes Law – With Major Enhancements


By voice vote on March 27, the House of Representatives passed the Coronavirus Aid, Relief and Economic Security Act (the “Act”), a version of which the Senate passed on a 96-0 vote two days earlier. President Trump promptly signed the Act into law. The Act includes significant amendments to the Senate bill resulting from legislative negotiations that took place since we last analyzed it here. The final version of the Act increases funding for loans to small and large businesses, increases oversight on the Department of the Treasury’s loans and grants to businesses, and adds funding for struggling state, tribal and local governments, individuals and healthcare providers. We summarize key changes here.

Congress Has Passed Phase III of the Federal Coronavirus Relief Legislation: Here’s What You Need to Know about the Legislation’s COVID-19-related Small Business Administration Loan Resources


The Coronavirus Aid, Relief, and Economic Security (CARES) Act – the third phase of Congress’s response to COVID-19, which was enacted on March 27, 2020 – includes a Paycheck Protection Program. The proposed program would, among other things, expand the scope of the Small Business Administration’s available 7(a) loans during a “covered period” beginning on February 15, 2020 and ending on June 30, 2020. (The Small Business Administration (SBA) provides 7(a) loan guarantees for certain loans made by participating lending institutions to qualifying small businesses.) Certain key elements of the Paycheck Protection Program are described here, followed by a discussion of various other SBA loan resources. The final version of the bill reflects substantial changes from the version introduced into the Senate on March 19, 2020.

CARES Act Inches Closer, but Terms for Economic Relief Still Uncertain


When we last wrote, we advised that the CARES Act’s provisions granting extraordinary power to the Secretary of the Treasury to determine those businesses’ eligible for financial relief without legislative oversight was likely to be a significant point of contention during legislative negotiations over approval of the Senate Bill. Our prediction proved correct, with passage of the Bill being delayed for several days through procedural measures. Recent reports have indicated that Secretary Mnuchin has agreed to strict legislative oversight over his authority to designate eligible businesses entitled to receive funding, which has increased in the aggregate from $150 billion to $500 billion in aid for corporations and municipalities. The agreement purportedly also includes hundreds of billions of dollars in funding for hospitals – a significant increase from the Bill’s initial allocation. Read our key takeaways here.

What You Need to Know About Proposed and Existing COVID-19-related Small Business Administration Loan Resources


The Coronavirus Aid, Relief, and Economic Security (CARES) Act – which was introduced into the Senate on March 19, 2020, as the third phase of Congress’s response to COVID-19 – includes a Small Business Interruption Loan program. The proposed program would, among other things, expand the scope of the Small Business Administration’s available 7(a) loan guarantees during a “covered period” beginning on March 1, 2020 and ending on December 31, 2020. (The Small Business Administration (SBA) provides 7(a) loan guarantees for certain loans made by participating lending institutions to qualifying small businesses.) Read our key takeaways here.

What You Need to Know About the Proposed Senate Coronavirus Aid, Relief and Economic Security (CARES) Act


The goal of the trillion-dollar Coronavirus Aid, Relief and Economic Security Act (CARES Act) introduced yesterday in the Senate is the quick distribution of cash to individuals, small businesses and critical economic sectors such as the airline industry, providing financial assistance to students, expediting coronavirus testing and easing shortages of medical supplies and personnel. While the bill as drafted has met with resistance from Democratic leaders, we expect a version of this bill to be enacted soon. The CARES Act is 247 pages long and seeks to address many critical problems. We summarize below some key provisions here.

The Rule in Gibbs: Safeguarding Creditors’ Rights or Aiding and Abetting “Hold Out” in Foreign Insolvencies?

There is an English common law rule that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. This rule is derived from a Court of Appeal case: Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.

The rule has been heavily criticised. Many do not consider it to be relevant in modern day cross-border insolvency proceedings following the continuing trend towards recognition of foreign insolvency proceedings (and their effects). As explained further below, some commentators see the rule as assisting creditors to “hold out” from participating in collective insolvency measures which are designed to benefit the creditor class as a whole.

The English court recently had the opportunity to review whether Gibbs still applied in Bakhshiyeva v Sberbank of Russia [2018] EWHC 59 (Ch). The court considered an application by a foreign representative to the English court on behalf of a debtor, International Bank of Azerbaijan, for a permanent stay on a creditors’ enforcement of claims in England under an English law governed contract contrary to the terms of the foreign insolvency proceeding. Under local law, the English creditors were purportedly bound. The Azerbaijani proceedings were not “terminal” liquidation proceedings and therefore, any stay would need to apply beyond the duration of the proceedings to properly bind the English creditors and to permanently give effect to the insolvency proceedings.

The foreign proceedings were conducted in Azerbaijan and had been recognised in England under the Cross-Border Insolvency Regulations 2006 (the “CBIR“) (implementing UNCITRAL Model Law). The CBIR are a procedural mechanism whereby foreign insolvency proceedings (conducted outside the EU) can be recognised and foreign representatives can seek “assistance” from courts in other jurisdictions to effect the insolvency proceedings (subject to any restrictions on the exercise of such power under local law).

The English High Court found that the rule in Gibbs did apply to prevent the court granting a permanent (or indefinite) stay on the enforcement of creditors’ English law governed contractual claims. Any stay granted by the court would be more than simply procedural and would go to the substance of creditors’ claims – the court would, in effect, be ordering the discharge of the creditor’s claim and was prohibited from doing this, following the rule in Gibbs.

The message for creditors with English law claims which are purportedly extinguished under a foreign (non-EU) insolvency process is therefore, to adopt a “hold out” position. Following the expiry of the foreign proceedings (and any related stay on creditor action), objecting creditors may then take steps to enforce English law governed contractual claims provided however, that they have not participated in the foreign insolvency proceedings (they may otherwise be deemed to have accepted the jurisdiction of the foreign proceeding).

We note many holders of English law governed bonds issued by the Greek government adopted a “hold-out” strategy knowing that the English courts would not recognise any provision of Greek law extinguishing or amending the sovereign debt.

The “territorial” nature of the rule in Gibbs is, arguably, “out of step” with trends in modern insolvency law. In the US, for example, in proceedings under Chapter 15 of the Bankruptcy Code (the US statute adopting UNCITRAL Model Law) (“Chapter 15“), US courts have enforced foreign court judgements made in foreign proceedings, including judgements which alter or vary US law governed debts or claims. Chapter 15 does however, include important public policy protections for creditors designed to forestall recognition of clearly abusive procedures.

The US has a longstanding policy of recognising restructurings of US law governed financings of foreign companies. The Supreme Court’s 1883 decision in the famous Gebhard case (Canada Southern Railway Co v Gebhard [1883] 109 US 527) set the precedent for US recognition of foreign restructuring processes in which Chief Justice Waite endorsed the recognition of the implementation of a Canadian scheme of arrangement with the words “under these circumstances the true spirit of international comity requires that schemes of this character, legalised at home, should be recognised in other countries“.

The “public policy” exception to recognition under Chapter 15 only applies in “exceptional circumstances” and includes, for example, circumstances where a creditor was denied due process and notice of the foreign insolvency proceedings of the debtor; and the denial of privacy rights. The fact that a creditor may make a more limited recovery, and the fact that the substantive law of the insolvency proceeding was not the same as US law, were not held to be “manifestly contrary” to public policy.

We note the Gibbs rule has been disapplied in the context of EU insolvency proceedings, on the basis that English courts recognise the jurisdiction of courts in respect of insolvency proceedings in Member States under the European Insolvency Regulation (“EIR“); and similar “public policy” exceptions apply. It is difficult to justify the radically different approach English courts take to non-EU insolvency proceedings particularly given the UK’s recent decision to leave the EU.

Our view is that as part of any withdrawal treaty of the UK from the EU, the parties should look to negotiate a process for mutual recognition of insolvency proceedings based on the EIR “recognition” approach. Looking outside of its relationship with the EU, it would also seem sensible for the UK to look to adopt an approach similar to US Chapter 15, for the UK courts to recognise foreign insolvency proceedings with safeguards for creditors to avoid the application of such rules only if limited public policy reasons exist to void the application of the foreign insolvency proceedings. The English court will want to avoid “re-litigating” issues dealt with under foreign insolvency proceedings, and should not examine actual recoveries made by creditors. However, a carve out on “public policy” grounds could protect English creditors if it captured circumstances where the process was evidently “discriminatory” to foreign (English) creditors.

We acknowledge there are strong arguments to retain the Gibbs rule. By entering an English law contract, creditors may feel strongly that they wish to retain the impartiality, commerciality and due process English courts are well known for.

As we near BREXIT, in this issue as in so many others, the UK has a decision to make: adopt English “exceptionalism” or take a more ‘universalist’ view implied by the recognition of foreign insolvency proceedings exemplified by the current arrangements under the EIR? The choice is looming.

Recast EU Insolvency Regulation Comes into Force


On 26 June 2017, the Recast EU Insolvency Regulation (Council Regulation (EC) No. 2015/848) came into force. It will apply to all relevant insolvency proceedings (although existing and ongoing proceedings will continue to be bound by the EU Insolvency Regulation (Council Regulation (EC) No. 1346/2000) (the “EIR”)). The Recast EU Insolvency Regulation will have direct effect in all EU member states (except Denmark).”

The Recast EU Insolvency Regulation is an update of the EIR following ten years of insolvency practice and experience since the EIR’s implementation. Largely, it represents a codification of well-established insolvency practice developed across the EU under the EIR however, it also introduces new innovative steps which, it is hoped, mark a step forward in light of learnings under the EIR to address perceived issues or “gaps” in existing legislation. READ MORE