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Covenant to pay: Difference between revisions
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So, in brief: | So, in brief: | ||
===What the covenant to pay is all about=== | ===What the covenant to pay is all about=== | ||
The note is a [[unilateral contract|unilateral]], [[bearer instrument]]. Holders | The note is a [[unilateral contract|unilateral]], [[bearer instrument]]. Holders appoint a trustee to represent their interests as creditors — somewhat interesting — but also to hold security interests for them and the other Secured Parties. | ||
As the security trustee does not hold the Notes themselves, otherwise it would have no rights under it. This covenant gives the trustee legal standing to sue/act for noteholders. | |||
Also, the | Also, the Issuer makes its payments to noteholders via a [[paying agent]] (normally, a bank). There is an odd interregnum between the Issuer paying its agent, and the Paying Agent paying the Noteholders, which it does through [[Clearing system|clearing systems]]. | ||
There are [[Stupid banker cases|fun recent cases]] about this — in the context of a loan agency arrangement, about what happens if an agent pays money away ''before'' the debtor pays it — especially when it then turns out that the debtor ''can’t'' pay it. | |||
The Issuer’s covenant is discharged by paying the principal it owes to its agent. At that point it has done everything it can do. | |||
But if the agent then fails before paying noteholders — it can happen — the Issuer should not be discharged from its obligation to the noteholders. One cannot escape liability to a principal by giving money to your own agent. | |||
The trustee holds the covenant on trust for | At this point, the noteholders have a claim for default against the Issuer, and the Issuer has a claim against its (insolvent) paying agent. | ||
The security trustee holds the covenant on trust for noteholders, other secured parties (and itself to the extent of its own fees) to defend against trustee running off with the money: under the trust noteholders can trace their claims in the trustee’s hands if the trustee does a bolter. | |||
===Why have separate covenants to the Trustee, if they are direct covenants under the Notes?=== | |||
====Privity ==== | |||
As described above. it establishes a direct contractual relationship between the Issuer/chargor and Trustee for the main indebtedness, which there would otherwise not be (albeit that the Trustee holds this obligation on trust for the Secured Parties) | |||
====Limitation period==== | |||
There are some more ninjery reasons relating to the statutory limitation of claims. | |||
A [[covenant]] under the debt instrument itself is only a [[simple contract]] to which the usual six-year period in the [[Limitation Act 1980]] applies. A covenant under a security arrangement is a [[specialty]], to which a longer 12 years limitation period applies under pursuant to s 20 of the [[Limitation Act 1980]]. | |||
You can also buy a few more days with security covenant. Per the Limitation Act, again, no action can be brought of 12 years ''from the date on which the right to receive the money accrued''. | |||
There will generally be a due date — the scheduled maturity date, for example — and this is undoubtedly the point from which the Noteholder’s [[simple contract]][ 6-year limitation period runs, but the ninja wizardry is to buy the ''secured'' “specialty” covenant a few more precious days (you know, should 12 ''years’'' worth of days not be quite enough) by making the security covenant bite “when demanded ''on or after the due date''” — the italicised reference to the due date being there so as not to convert a term loan into a demand loan. (I know what you are thinking, and you’re right: lawyers sometimes need a slap). | |||
{{Sa}} | {{Sa}} | ||
*[[Signal versus noise]] | *[[Signal versus noise]] | ||
*[[Stupid banker cases]] | *[[Stupid banker cases]] | ||
*[[Specialty]] | |||
*[[Limitation Act 1980]] | |||