Borrowed money
“Borrowed money” - also known as indebtedness - is a term of art used in financial contracts. It is a key part of the definition of Specified Indebtedness in the ISDA Master Agreement, which in turn is a key part of the definition of Cross Default.
Indebtedness ranks equally (pari passu, in the lingo) with all unsecured payment obligations in the insolvency of the company that owes it, and ahead of amounts owed to shareholders, preferential shareholders and holders of subordinated debt.
Borrowed Money is the main difference in scope between Cross Default and Default under Specified Transaction - the former includes it, the latter (unless you monkey around with your definition) does not.
Scope: does borrowed money extend to Stock loan and repo obligations?
Borrowed money is not generally defined. You know it when you see it. Quoth that sage old eminence gris Simon Firth, in his book Derivatives Law and Practice:
- “Borrowed money” is not defined but it means money which has been paid on the basis that it is to be repaid at a future date. It therefore excludes amounts that are due to ordinary trade creditors and financing arrangements (such as repos and the discounting of bills of exchange).
Mr Firth cites Transport & General Credit Corp. v Morgan [1939] CH 531 as authority for this point. It is important that repo and stock lending is excluded from the definition, because otherwise the Cross Default provisions of an ISDA may be triggered by a failure under a repo. Also this nugget, per Lord Devlin in Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209:
- The task of the court in such cases is clear. It must first look at the nature of the transaction which the parties have agreed. If in form it is not a loan, it is not to the point to say that its object was to raise money for one of them or that the parties could have produced the same result more conveniently by borrowing and lending money. But if the court comes to the conclusion that the form of the transaction is only a sham and that what the parties really agreed upon was a loan which they disguised, for example, as a discounting operation, then the court will call it by its real name and act accordingly.