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von Holger Langer, LL.M.

Syndicated Loan Agreements II – The Role of the Agent Bank

The agent's bank role is to act as agent for the syndicate and not on behalf the borrower

  • in practice, the lead manager would usually also assume the role of the agent bank

A. Certification of compliance with conditions precedent by the borrower

  • requires the agent bank to examine the relevant documents relating to status and capacity of the borrower
  • agent bank in practice usually not able to form a view as to the sufficiency of these documents since they would involve matters of foreign law
  • consequently, agent bank is empowered to take action on the basis of legal opinions, which the borrower is required to furnish as a condition precedent to the drawdown of funds under the loan agreement

Potential liability

  • since drawdown of funds is normally made immediately after the certification of compliance with the conditions precedent, the agent bank is exposed to actions in negligence in the performance of its duty

B. Paying agent

  • the agent bank channels the payment streams
    • all funds which are to be disbursed by the syndicate banks to the borrower will in practice be transmitted by each syndicate bank into an account held by the agent bank and then transferred by the agent to an account designated by the borrower
    • equally, all payments of interest and principal made by the borrower to the syndicate will be effected through a single payment by the borrower to the agent bank, who will immediately transfer such payments to members of the syndicate in accordance with their respective entitlements


  • timing of the payments – “clawback” clause
    • payments made by the syndicate banks are transferred on the same day to the borrower
    • agent bank is exposed to the danger that while it has instructed the full transfer of all funds, it may not receive in its own accounts all funds due from the syndicate banks
    • clawback clause – enables the agent bank to demand repayment from the borrower of any funds which the agent bank itself has not received from members of the syndicate (corollary of the nature of the loans as several and separate loans)
  • insolvency of the agent
    • position of the borrower
      • situation: agent bank has received funds from the syndicate members, but does not transfer the funds to the borrower because of insolvency
      • transfer of funds by a principal to an agent does not by itself absolve the principal from any obligation to make payments ’ syndicate remains liable
    • position of the syndicate banks
      • situation: the borrower makes payment of interest and principal to the agent bank, but the latter fails  to transfer such funds to the members of the syndicate because of insolvency
      • where a creditor (syndicate banks) has required a debtor (borrower) to make payment to his agent (agent bank), and the debtor pays the agent the debtor has no further liability to the principal creditor (no double jeopardy of borrower due to the default or insolvency of the agent bank)
      • syndicate banks could probably recover such payments from the agent bank’s receiver or liquidator, since they were made to the agent bank for a particular purpose and would, thus, be impressed with a resulting or constructive trust on the basis of the ruling in Barclays Bank Ltd v Quistclose Investment Ltd

C. Monitoring Loan Covenants

  • in practice agent bank usually dispensed by express clauses from actively monitoring compliance by the borrower
  • express clauses would usually also remove the duty of the agent bank to keep the syndicate banks informed of all matters affecting the position of the borrower
  • in the absence of such clauses the common law would impose on the agent bank a duty of due diligence to monitor and to keep the syndicate members properly informed

D. Duty to act on occurrence of default

  • loan agreement usually contains stipulations under which
    1. the agent bank is required to call default on the basis of a majority decision of the syndicate          or
    2. the agent bank is empowered to call default on the occurrence of an event of default without waiting for a decision by the banks and is, thus, given a discretion


  • the agent bank becomes exposed to actions by the syndicate banks on the basis of a breach of an agent’s duty of due care, skill and diligence in the exercise of this discretion
  • the agent bank becomes exposed to actions in negligence by the borrower, on the ground that the discretion has been unreasonably or negligently exercised
  • However, the absence of such a clause does on the other hand mean that the agent bank is not enabled to act swiftly on the occurrence of an event of default
  • Is the agent bank only obliged to call default when it actually becomes aware of such an occurrence or is it under a constant duty to be vigilant
  • express clauses dealing with this problem – the agent bank is required to call default
    • if it has actual knowledge of the occurrence of an event of default
      • knowledge of directors or central management is attributed to the corporate entity (Tesco Supermarkets Ltd v Nattrass)
      • in practice problematic because of Chinese Walls, separating the several divisions of a bank from each other and, thus, ensuring confidentiality
      • sometimes special clauses included to the effect that the agent bank shall not be deemed to have knowledge (other than a failure to pay interest or principal) unless it has received written notice from a party to the agreement stating that an event of default has occurred and describing such an event
    • if it is given express notice by a member of the syndicate or the borrower of the occurrence of an event of default
  • possible conflict of duties
    • duty of confidentiality towards the borrower under another agreement / relationship not to disclose such information to the syndicate banks and not to use such information for a purpose other than that in respect of which it was received
    • on the other hand duty to the other members of the syndicate to inform them of the occurrence of an event of default of which it has actual knowledge
    • special clause: bank is not obliged to disclose information or make use of such information, if such disclosure or use would or might in the opinion of the agent bank constitute a breach of any law or duty of confidentiality

E. The agent bank as a fiduciary

  • agent bank is true agent (as understood under English law) and owes fiduciary duties
  • exact scope and ambit of the fiduciary obligations depend on the nature of the activities and the functions undertaken by the fiduciary
  • fiduciary obligations under English law:
    1. to act in the best interest of the person to whom a fiduciary duty is owed
      • in particular, not to allow a conflict between own interest and duty
      • not to make a secret profit
    2. to show the same level of skill, care and diligence as in respect of own affairs
    3. to keep the principal fully and completely informed
  • Conflict of interest and duty
    • conflict of agent bank’s own interest with its duties towards the syndicate banks
      1. where the agent bank becomes the lender in another context to the borrower
      2. where the agent bank subsequently develops a role of financial adviser to the borrower
      3. where the agent bank is an entity within a financial conglomerate that has been otherwise able to obtain business with the borrower due to the contract with the agent bank
    • full disclosure of material facts relating to those interests which may conflict with duties satisfies the requirements of equity with regard to the fiduciary’s duties (New Zealand Netherlands Society Oranje v Kuys)
    • special clause: notice of the agent bank allowing for the conduct of business with the borrower
      • problematic, because notice rather than full disclosure
      • authorisation to act without having regard to the best interests of the principal is a contradiction in terms
  • Conflict of duties
    • arises where the agent bank’s duty to one syndicate conflicts with its duties to another syndicate in which it is also acting as agent bank
    • the mere fact that the agent bank assumes the same role in another syndicate does not itself constitute such a conflict ’ there must be a real conflict rather than a potential conflict
    • can be overcome, as above, by information of the relevant facts