Syndicated loans in Poland
Protection of lenders’ rights in the face of security agent’s non-cooperation
In the case of syndicated loans involving Polish security providers there are two legal concepts that are commonly used to secure the lenders' rights under the finance documents:
The Polish law concept of the mortgage administrator and/or pledge administrator (administrator hipoteki/administrator zastawu). Under this concept, mortgages and/or pledges governed by Polish law secure the claims of all syndicate lenders and not just an abstract parallel debt claim of the security agent. Nonetheless, only the security agent, in its capacity of a mortgage and/or pledge administrator, is subject to registration in the relevant security registers as the holder of the mortgage and/or pledge and remains solely entitled to enforce the relevant security (Security Administrator Concept);
the concept of a parallel debt, which is unknown under Polish law and therefore taken from and governed by foreign law. Pursuant to this second concept, the security agent is entitled to a parallel debt claim against all the obligors and such parallel debt claim reflects total claims of the syndicate lenders. In such a case, all security interests, including Polish mortgages and pledges, are established in favour of the security agent and secure only the abstract parallel debt claim of the security agent (Parallel Debt Concept).
In light of the market practice concepts outlined above, the question arises of how the rights of syndicate lenders can be preserved within these concepts when the security agent refuses to cooperate with the syndicate lenders by refusing to forward the recoveries to the lenders or by refusing to enforce the security interest. Given that this might occur, in particular, in the event of insolvency or similar proceedings over the security agent's estate, the focus of the present article is on the insolvency scenario. For the purposes of this article, we have assumed the applicability of Polish insolvency law as currently in force.
Option 1: Exemption of proceeds from the security agent’s insolvency estate
As far as the Security Administrator Concept is concerned, Polish insolvency law provides for an explicit provision, pursuant to which the proceeds obtained from the enforcement of the mortgage and/or pledge held by the insolvency debtor as a mortgage administrator and/or pledge administrator do not form a part of insolvency estate to the extent that such proceeds are due to other secured creditors (e.g. syndicate lenders). Thus, whenever the security agent or the insolvency administrator appointed over the security agent’s insolvency estate enforces the mortgage and/or pledge, each of the secured syndicate lenders may demand that the relevant funds obtained from the sale of the encumbered asset be exempted from the security agent’s insolvency estate and paid directly to such syndicate lender in proportion to its share determined in the relevant finance documents.
The above regulation does not apply to the Parallel Debt Concept. Given and due to the fact that the concept of trust is unknown under Polish law, there is a substantial risk that the insolvency administrator of the security agent may refuse to exempt the proceeds obtained from the enforcement of the security interest securing the parallel debt claim from the security agent’s insolvency estate. In consequence, the proceeds obtained as a result of such enforcement would be used to satisfy all creditors on a pro rata basis.
Option 2: Replacement of the existing security agent
Another insolvency scenario that should be addressed is when the insolvency administrator of the security agent refuses to enforce the security interest. This can be the case, in particular, where the insolvency administrator considers that no event of default on the part of the borrower occurred or is simply postponing the enforcement while considering withdrawal from the security trust agreement.
An appropriate solution to protect the syndicate lenders' rights is to confer upon them the right to replace the security agent in the relevant security trust agreement. This is the case under most of the finance documentation based on the LMA standard, pursuant to which the security agent is obliged to resign upon the majority lenders' instruction.
Ideally, the relevant provisions of the security trust agreement should ensure that the replacement of the security agent is possible without any cooperation of the latter. Unfortunately, this is not feasible in the Parallel Debt Concept, since the transfer of the parallel debt claim requires a formal assignment agreement to be executed by both the new and the existing security agent. Better protection of the syndicate lenders' rights is granted under the Security Administrator Concept. This is due to the fact that the replacement of the mortgage administrator and/or pledge administrator can be effected simply by way of an agreement between the syndicate lenders without the participation of the security agent (subject, however, to the relevant provisions of the security trust agreement).
Option 3: Demand for division of security interest
A further question is whether the syndicate lenders are entitled to terminate the security trust agreement and demand division of security interests established in favour of the security agent.
The provisions of Polish mortgage law specify two cases where the secured creditors may demand division of a mortgage (i.e. security over real estate collateral) held by the security agent in its capacity as a mortgage administrator pursuant to the Security Administrator Concept. The first one is when the agreement on the appointment of a mortgage administrator expires and no new administrator is appointed. The second one occurs upon disagreement among the secured creditors as to the replacement of the mortgage administrator. In these two cases, the general rules regarding cancellation of co-ownership apply accordingly. However, since the provisions of Polish mortgage law do not specify conditions under which an agreement on the appointment of a mortgage administrator can be terminated by the secured creditors, it is highly recommended detailed provisions on that scenario are included in the relevant security trust agreement.
The present option involving a demand for the division of the security interest held by the security agent cannot be applied by the syndicate lenders in the following cases:
the Parallel Debt Concept; as a rule, the security interest securing the parallel debt claim of the security agent cannot be divided among the secured lenders; an exception would be if the lenders purchase part of the parallel debt claim from the security agent;
any security interest other than a mortgage (e.g. pledges over movables or security assignment of receivables).
In the aforementioned cases, the lenders' rights can be preserved only by way of replacement of the existing security agent.
The Security Administrator Concept governed by Polish law offers better protection of the secured lenders' rights against the risk of the security agent’s lack of cooperation than the other concept, the Parallel Debt Concept. This is due to the fact that under the latter concept the lenders have at most the right to demand from the security agent its resignation and transfer of the parallel debt claim to another entity designated by the lenders. Under the Security Administrator Concept, on the other hand, the lenders are entitled to dismiss the security agent or even, in the case of mortgages, to divide the security among themselves without any cooperation of the security agent (subject, however, to the relevant provisions of the security trust agreement). On top of that, the proceeds received from the enforcement of security interests held by the security agent as a mortgage administrator and/or pledge administrator are exempted from the insolvency estate of the security agent by virtue of Polish insolvency law.