The Fiduciary Obligation Delusion in Syndicated Loan Agreements

Last year, Eastern Bank Limited arranged a loan syndication worth BDT 1,200 crore for Banglalink Digital Communications Limited. Such Facilities are becoming increasingly popular in the country since it plays a huge role in reducing the exposure level of a lender through distributing the risk amongst various lenders. In Bangladesh, syndicated loan facilities are governed according to the Law of Contract as well as the directions issued by Bangladesh Bank from time to time. Moreover, its recovery is presumably to be governed by the Artha Rin Adalat Ain, 2003. However, an important question which deserves to be explored is to what extent equity comes into play in governing the roles of the banks engaged in such facility, specifically, the arranging bank and the agent bank. 

In a syndicated loan facility, the arranging bank and the agent bank perform contrasting duties since the role of one begins only when another's comes to an end. However, when it comes to fiduciary duties, the position in English Law (which is a persuasive authority for Bangladesh) is quite the same. The arranging bank in a syndicated loan facility is the bank which puts together the loan upon receiving the mandate from the borrower.

Zakrzewski & Fuller in McKnight and Zakrzewski on The Law of Loan Agreements and Syndicated Lending (OUP, 2019) describes the duties of the arranging bank to be threefold, namely, (a) helping the borrower in putting together the information memorandum which compiles the necessary information for the lenders to assess whether to lend or not, (b) using its reasonable (or best) endeavours to obtain the agreement of different lenders to participate in the loan, and lastly, (c) to prepare the facility document.

In contrast, they describe the Agent bank as the "facility agent … coordinator of the facility once it has been formalised by the signing of the documentation. Its role begins upon execution of the facility agreement and will continue, unless it resigns and is replaced by another agent, until the conclusion of the transaction". The agent bank is appointed by the lenders to act as their agent and the appointment is not revocable by individual lenders in respect of themselves (Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch)).

Fiduciary obligation of arranging bank

L. Gullifer & J. Payne in Corporate Finance Principles and Policy (2nd ed, 2015) outline that whether an arranging bank owes a fiduciary duty has two aspects to it. First, whether it owes a fiduciary duty to anyone and the second is to whom and when? According to them, it is impossible to owe a fiduciary duty to two parties negotiating with each other and it is very difficult "to pinpoint a time when the duties of the arranger shift from the borrower to the lender". Hence, referring to other scholarly authorities, they opine that the best solution is that the arranging bank does not owe a fiduciary duty. The only authority suggesting that the arranging bank may owe a fiduciary duty is the case of UBAF Ltd v European American Banking Corp [1984] QB 713.

However, both Zakrzewski & Fuller and L. Gullifer & J. Payne suggest that in the concerned case, the duty might have been owed as the security trustee, rather than the arranger. In this regard L. Gullifer & J. Payne highlights two more key aspects to arranging bank owing a fiduciary duty which are: (i) such duties are likely to be expressly excluded in the mandate letter (Barclays Bank Plc v Svizera Holdings BV [2014] EWHC 1020 (Comm) [15]) and (ii) the borrower is usually in the position of a customer of the bank, and no fiduciary duties are owed by a bank to its customer (JP Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm) [573].

Fiduciary obligation of agent bank

In the case of agent bank in syndicated loan facilities, although the probability of owing fiduciary duty may be more than the arranging bank, it is well within the capacity of the parties to exclude any such duty through their contracts. Again, the starting position would be UBAF Ltd v European American Banking Corp [1984] QB 713 as the authority, however, Zakrzewski & Fuller have expressed their doubts as to whether such duty would be owed by virtue of being an agent rather than a security trustee.

From the case of Henry v Hammond [1913] 2 KB 515, it is also evident that not every agent will be held to be in a fiduciary position. Moreover, Zakrzewski & Fuller  argue that as per Torre Asset Funding v Armitage [2013] EWHC 2670 (Ch) "it is possible (specially in a commercial context) for the nature and scope of the duties of a fiduciary to be restrictively defined and modified or even excluded by contract" with the exception of situations which involves dishonesty or lack of good faith on the part of the fiduciary as provided in Armitage v Nurse [1998] Ch 241. Further relying on the case of Torre Asset Funding, Zakrzewski & Fuller opined that it is common practice that the syndicated loan facility will expressly preclude any fiduciary obligation on part of the agent bank towards lenders or anyone else and contain such provision that would overcome any fiduciary duties which might otherwise arise or might be implied from the role which the agent bank plays.

Therefore, it is quite evident that the parties to a syndicated loan facility can successfully avoid any liability which may arise out of fiduciary obligations owed as an arranging bank and agent bank through meticulously drafted documentation. However, even if the documentation does not sufficiently protect the parties against such liability, the chances of courts implying such a duty are quite narrow.

The Writer is an Advocate and an Associate at Tanjib Alam and Associates.