Despite the numerous Government funding packages made available to struggling businesses, these are unlikely to halt the long-term economic losses caused as result of the COVID-19 related measures.
With the inevitable increase in non-performing loans, we expect to see a growth of the UK loan sales market in 2021, with lenders seeking to manage their risk exposure by divesting of poorly performing debt.
AG are leading advisors in both the performing and non-performing loan portfolio space. We have also defended some of the highest profile litigations that have sought to attack the underlying loan portfolio transfer documentation. We have therefore identified four top tips for prospective buyers and sellers looking to head out to the market.
1. Buyer/Seller: Identify and Manage Confidentiality Issues
Naturally, a loan sale will require commercially sensitive information to be disclosed to any potential buyer. However, in light of the common law duty of confidentiality owed by a lender to its customers, the seller may become exposed to potential liability issues should that duty be breached during the course of sales negotiations. Accordingly, restrictions should be reviewed from the outset and appropriate confidentiality agreements put in place with prospective buyers. Such agreements should also set out processes for addressing any future confidentiality issues that may arise down the line.
2. Buyer: Make a Plan Now
There may be potential stumbling blocks on the buyer's route to recovery of the loans. Loan sales tend to attract a raft of litigation from disgruntled debtors, which can delay the buyer's exit from the portfolio. It is therefore important for buyers to start thinking from the outset about these potential risks and have a plan in place of how to work out and, ultimately, exit the portfolio. Such a plan should include key milestones as well as measures to offset litigation risks, to ensure that it is worked out efficiently and without a significant costs overrun. Engaging trusted legal advisors, insolvency practitioners and loan servicers throughout the process will ensure that the most cost-efficient routes to recovery are identified and included within the plan.
3. Buyer/Seller: Keep Title Transfer Documents Simple
At AG, we have acted for multiple buyers in successfully defending disputes raised by debtors as to the validity of the debt and security assignment. In many of those cases, we have seen first-hand the issues that come with vague and convoluted drafting within title transfer documents. Debtors will attempt to sow seeds of doubt as to the validity of the transfer, by dissecting each and every definition. To minimise this risk, we would advise that both buyer and seller ensure that the drafting of the title transfer documents is as simple as it possibly can be. Moreover, they should be drafted on the basis that they are distinctly separate from the commercial agreement documents. This minimises the risk of a Court, when faced with uncertain drafting, authorising debtors to look behind the title transfer documents. Both buyer and seller will want to avoid their commercially sensitive documents being scrutinised by opposing Counsel.
4. Buyer/Seller: Keep Accurate and Detailed Records
A well-organised data room is crucial, for both buyer and seller. It protects the seller against any claims that it failed to disclose important information to the buyer, and the buyer is also then given the chance to review all relevant security documents that are in the seller's possession or control. It is particularly important, in the case of non-performing loan portfolios, that sellers disclose all of their relevant correspondence with the debtor, including demands, default letters and pre-litigation letters. This can ensure no nasty surprises arise in the course of litigation in recovery actions, down the line. It is also worth emphasising the importance of keeping track of where the original security documents are kept. In the absence of original documentation, it can, in some situations, become costly to prove their validity and rely on them for enforcement purposes.
Should you require specific advice, please do not hesitate to contact any of our team here.