When Shylock is broke : Loan syndication and defaulting lender problem – (February 2012, Issue 1)

February 22, 2012, by Junayed Chowdhury

Loan Syndication has seen rapid growth in Bangladesh banking sector over the years. Recently, we have seen introduction of some innovative structured finance products by some of the players in the market[1].


As promising as it may sound, the recent stock market debacle has put things into a new perspective. Termed as “One of the World’s Worst Performing Stock Markets” by TIME Magazine[2], the Dhaka Stock Exchange (DSE) has seen small investors coming to the streets to protest the logic-defying fall of stock prices in recent times.


As one of the three pillars of Bangladesh financial sector[3], the capital market, over the years, is seen by the banking and other financial institutions as a quick pay zone. With the new stricter restrictions of Bangladesh Bank, the chief banking regulator, on banks investing in the stock market, we have seen a rapid and punishing decline in the stock prices in recent times. Consequently, inflation went up and we are witnessing spiraling food prices. The combination of all these, coupled with growing unemployment abroad largely due to slow global economic growth has forced the devaluation of Taka, the national currency. This has resulted in a current account deficit in the banks.


Banks’ loan syndication portfolio should be reevaluated in view of the recent liquidity crisis. Therefore, the loan syndication documentations that are currently being used should be revisited to deal with a very important question – what if the participating bank fails to fund a commitment under a syndicated facility.


The recent global financial crisis and collapse of banking institutions have prompted the review of the loan documentation concerning syndicated financing facilities. Loan Market Association (LMA), the Europe’s association for syndicated loan market, has recently revised its market standard documentation specifically dealing with lender defaulting situations. LMA defines a ‘Defaulting Lender’ as one which (a) fails to fund or gives notice that it will do so, or (b) rescinds or repudiates a syndicated facility agreement, or (c) has faced an insolvency or bankruptcy event.


Generally, if a participant fails to fund a commitment under a syndicated facility, the lead bank may initiate legal proceedings against the defaulting participant for recovery of the participant’s share[4]. However, complications arise when amendments and waivers are involved under a facility agreement which may require the defaulting lender’s consent with which a borrower may be uncomfortable to deal with. The reason is obvious – a defaulting lender would be unwilling to consent to a waiver or amendment to its detriment at a time when it is in default of the facility agreement.


In Bangladesh’s context, the prevailing syndicated loan documentation in the market does not specifically deal with this important issue of lender/participant default in syndicated loan arrangement. A crucial factor is pertinent from a borrower’s perspective when there is a defaulting lender situation – how to cancel the undrawn commitment of the defaulting lender/participant and arrange for that undrawn commitment to be assumed by a new or existing lender of the borrower’s choice.


The LMA proposed a ‘yank the bank’ clause in its revised standard documentation provision whereby the borrower is permitted to replace a defaulting lender/participant in certain situations. Related to this issue is the situation when a defaulting lender/participant does not consent to an amendment/waiver for the borrower’s benefit in which majority lenders consent. The solution could be by incorporating a ‘snooze and lose’ provision whereby the defaulting lender/participant’s commitment shall be taken out of the total commitment of the loan facility if the defaulting lender/participant fails to respond within a specified period. Thus, under this scenario, the defaulting lender/participant will not be treated as part of the syndicate.


Now, the question arises is what happens if the defaulting lender/participant challenges the applicability of these provisions on some grounds, for example, challenging its status as a defaulting lender/participant. In other words, how would this dispute be settled by the parties?

In Bangladesh, legal proceedings for recovery of loans of banks and financial institutions are governed by Money Loan Court Act 2003 (“MLCA”). Section 5(1) of the MLCA stipulates that all cases for recovery of money of the financial institutions will have to be instituted and decided in the Money Loan Court. Also, section 18(2) of the MLCA states that no borrower shall file any suit in the Money Loan Court against any financial institution relating to loan taken from such financial institution seeking any relief and the borrower is barred to raise set-off or counterclaim in its defense when filing the same in the Money Loan Court. It has been held by the High Court that a suit filed by the borrower against a financial institution for declaration that the borrower is not liable for the loan money is not a subject matter to be decided by the Money Loan Court and only the Civil Court has the jurisdiction to hear and decide upon such a suit[5]

Therefore, if the lender/participant disputes its status as a defaulter or challenges any of the aforesaid proposed provisions of the syndicated facility agreement, such disputes cannot be agitated and resolved under the MLCA. This puts the borrower in a precarious position as until such disputes are resolved, the borrower may not be able to take the advantage of the proposed provisions as mentioned above.


One way to deal with this problem is to put a “split dispute resolution clause” in the syndicated facility agreement whereby the borrower will be given a choice to either litigate or arbitrate the matters that are outside the power of adjudication of the Money Loan Court under the MLCA. In recent times, the validity of “hybrid clause” as dispute resolution mechanism has been upheld by the English Courts[6].A sample hybrid clause giving the borrower the option to arbitrate or litigate and the bank to litigate only could be, inter alia, as follows:


“[a] Subject to the option in favour of the Borrower stipulated in Clause (b) below, the courts of Bangladesh shall have jurisdiction to settle any dispute, controversy or claim arising out of or relating to this Agreement.


[b] Notwithstanding Clause (a) above, at the option of the Borrower, the Finance Party or Lender [as may be defined] agrees for the benefit of the Borrower that any dispute (including claims for set-off and counterclaims), controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be referred to and finally resolved by arbitration in accordance with the Arbitration Act 2001 as in force and effect on the date of this Agreement.”


Given the uncertainty looming over the banking sector in Bangladesh, it would be prudent for the borrower to negotiate and incorporate provisions dealing with the defaulting lender circumstances in syndicated loan financing arrangement. Also, because these proposed provisions have a definite impact on the proper functioning of the loan syndication arrangement, it is equally important for the borrower to decide which dispute resolution mechanism it would pursue if and when the particular lender/participant disputes its status as a defaulting lender under the facility agreement.


Written by Junayed Chowdhury, Managing Partner  


† Disclaimer: The opinions and comments expressed in this Blawg are not to be regarded or construed as legal advice by and from Vertex Chambers or any of its members. It is highly advisable that any person should seek independent legal advice before relying on any of the contents of this Blawg.

[1] In 2009, Citibank NA successfully arranged the country's first ever syndicated agricultural term financing facility of BDT1,500 million (or US$21.7 million); See


[2] See http://www.time.com/time/world/article/0,8599,210584,00.html

[3] The other two are Money Market and Microfinance.

[4] 635 F 2d 1247 (7th Circuit)

[5] Oriental Bank v. Sitara Siddiq 59 DLR 573

[6] NB Three Shipping Ltd v. Harebell Shipping Ltd [2005] 1 AER 200