THE VERY nature of largescale syndicated loans and restructuring procedures for credit facilities granted by banking institutions in Cyprus and abroad, as well as other complicated commercial transactions or sales of businesses in which more than one economic entity, creditor, banking institution or security holder are involved, necessitate the safeguarding of the interests of every participant.
The difficult task of protecting the interests and securities of all the secured creditors collectively and each one of them separately may be performed by a security agent, who is appointed by all the creditors and security holders on express terms of appointment, within which he is contractually bound to act, complying at the same time with the orders and instructions given by the creditors or a specified majority of them according to the inter-creditors’ agreement to which the security agent becomes a party.
The security agent acts as a mutually accepted trustee, holding for the benefit of the secured creditors securities, estates in land, mortgages, floating charges, titles to shares, bonds and immovable property or other securities which were granted by the debtor to each creditor and in the event that one of the pre-agreed events of default takes place, he undertakes to liquidate the aforesaid securities and distribute the proceeds to the secured creditors. In this way, the co-operation between more than one secured creditor is facilitated and the agreements for the construction of big development projects and the grant of large-scale credit facilities are achieved.
A necessary requirement for the avoidance of friction among the secured creditors is the restriction of the security agent’s discretion, so he does not act in a way incompatible or contrary to the aims and terms of the creditors’ co-operation agreement. Consequently, a term is usually inserted in the security agents’ terms of appointment clarifying his role in the liquidation of the debtor’s assets and the distribution of the proceeds to the creditors will be solely mechanical and administrative. To date, the institution of the security agent in Cyprus is not regulated by special legislation and there are no specific regulations or guidelines determining his duties or obligations.
His duties are specified exhaustively in his terms of appointment and they include the management and possession or registration in his name for the benefit of the secured creditors of the debtor’s encumbered assets, the receipt and notification of the parties as to the exchange of documents, receipts and information between the parties and the distribution of sums received according to the terms of the inter-creditors’ agreement. Nevertheless, given the nature and the operation of the institution, the security agent undertakes a duty of care towards the secured creditors to act in good faith, avoid conflicts of interest with any creditor, abstain from receiving any profit from the debtor without informing the creditors, and exercise due diligence in the exercise of his powers.
Furthermore, taking into consideration that through this process a trust is established for the benefit of all the creditors, it seems that trust laws also apply. Without ignoring the need for the use of the said institution only in the instances where the interests of all the secured creditors are involved, the appointment of the security agent seems to gain ground over other solutions in instances of syndicated loans and restructurings, allowing for a feeling of security to the secured creditors by virtue of the possession of the creditors’ securities by a mutually accepted person or entity on the basis of pre-agreed terms of appointment.
George Coucounis is a lawyer specialising in the Immovable Property Law, based in Larnaca, Tel: 24 818288, [email protected]