The recent Australian judgment in Goodridge v Macquarie Bank Limited is causing some concern to banks on both sides of the Tasman in relation to their ability to effectively securitise and sell down loans.
This Brief Counsel looks at two of the points raised in the case and how they may affect lenders looking to transfer loans.
The case, Goodridge v Macquarie Bank Limited  FCA 67, involved a margin loan facility made available to Mr Goodridge by Macquarie and subsequently transferred to Leveraged Equities. When the value of the securities fell, Leveraged Equities made a margin call on Mr Goodridge and subsequently proceeded to sell down his portfolio. The Court found that Leveraged Equities had not given proper notice to Mr Goodridge and that they had not acted in accordance with the margin loan contract.
The Court also looked at whether the transfer of the facility from Macquarie Bank to Leveraged Equities was effective. The facility had been transferred to a securitisation vehicle as part of a sell down of Macquarie’s margin loan business. It was held that the transfer was ineffective because Mr Goodridge had not been involved in the transfer process and that the loan agreement was incapable of assignment.
Consent to transfer
The loan agreement included a clause which provided Macquarie could assign, transfer, novate and otherwise deal with its rights, remedies, powers, duties and obligations under the agreement without the consent of Mr Goodridge. The Court found that this clause was merely an agreement to agree and was not sufficient authority to permit the novation of the agreement. Mr Goodridge could not consent to become party to a new contract at a time when he had no knowledge of who the counter party would be.
This decision does not prevent the novation of all facility agreements. A distinction was drawn between the consent to a novation and an authorisation. If the clause had been drafted (as is common in syndicated facilities) to authorise the lender or a facility agent and the lender/agent had consented to the transfer on behalf of the borrower pursuant to this authorisation this would have been sufficient.
Another factor that influenced the Court was the amendment of the agreement at the time of novation. A clause was included in the novation that limited the liability of the trustee of the securitisation vehicle. The Court was concerned that if this was added without Mr Goodridge’s consent there was nothing preventing other changes being made. Lenders should be cautious of any transfer to a trust or similar entity which has limited liability.
The Court also found that in this case the identity of the lender was important. Mr Goodridge had a very good relationship with Macquarie and had been able to agree compromises with them in the past. In contrast, he had no relationship with Leveraged Equities who took a much harder line on enforcing their rights and making demands on him.
The drafting of the novation clause was very similar to clauses commonly used in New Zealand. It is more common for transfers to take place by way of assignment rather than novation but if a novation is contemplated lenders should consider drafting the relevant clause in a loan agreement as an authorisation rather than consent.
Ability to assign
The second issue of interest was the ability of Macquarie to assign the whole of the margin lending agreement. It is well established that obligations cannot be assigned but in this case the Court found that Macquarie’s rights and obligations were so interdependent that it would have been “unworkable” for them to be separated. The right to determine the value of the security provided and make margin calls was “inherent and necessary” to Macquarie’s obligations under the loan agreement and could not be separated from the obligation to make further advances. The nature of the rights assigned meant that both Macquarie and Leveraged Equities would need to exercise them but the loan agreement was not drafted in a way that contemplated or permitted this.
In a number of respects this decision is specific to the facts of this case and the close relationship between the rights and obligations. In many loan transactions the link is not so tight and it would not be “unworkable” for different entities to hold the rights and obligations. In particular, we think this conclusion would not apply to assignments where there is no further obligation for advances to be made or to assignments where any further obligations can be performed without reference to the assignee and the rights or discretions which have been assigned.
It is likely that most mortgage securitisations will not involve assignments where unconditional obligations are retained by the assignee even where the facilities are of a revolving nature – generally these contain some discretion for the lender to refuse to make advances or to reduce the facility limit to zero. Where there is an obligation to lend, for example under revolving credit facilities, this obligation is usually not as closely linked to the value of the security or the other rights a lender has under the facility agreement as in this particular case.
Some securitisations and loan participations may be caught by this though and banks and other originators of securitisations should carefully consider the nature of loans being securitised and the relationship between the rights and obligations.
A novation of the loan would have overcome this issue but would have required the consent of the borrower under each loan (clearly not possible when there are 18,500 borrowers as in this sale).
While the case may have significant implications for transfers of loans, it will be important to review each transaction on its merits. The facts of this case may distinguish it from certain other transfers of loans or other contracts. We note also that the Court’s decision was based on Leveraged Equities' failure to comply with the loan agreement in making the margin call so the above matters were not determinative in this case.
This decision is likely to be appealed so there will be further uncertainty as to its application until the outcome of that appeal is known.