Loan securitisations are, broadly speaking, concerned with the transfer of a lender's rights, but not obligations. Under revolving facilities and partly drawn or undrawn facilities, the lender will have funding obligations. Depending on the loan terms, a lender may have other types of obligations too. A lender can assign the benefit of a loan agreement, but not the obligations. Obligations must be "transferred" by novation, meaning a new contract must be entered into by the new lender and the borrower.

On the facts of Goodridge, the original lender retained the ongoing funding obligations in respect of the margin loan, but the assignee lender (a securitisation vehicle under an equitable title securitisation programme) purported to hold the rights in respect of that loan.

Whilst this separation is not necessarily problematic in all cases, in the context of a margin loan, the court found that the nature of the rights and obligations were so interdependent as to be incapable of separate transfer. The court was concerned that if it allowed the assignment without the novation, it would result in a separation of, on the one hand, the agreement as to the criteria and use of powers on which the original lender would be bound to lend further amounts (which would be held by the securitisation entity), and on the other hand, the obligation to lend further amounts (which would be held by the original lender). Such powers and duties were incapable of assignment (without novation) as they were "inherent and necessary" to both the original lender's and the assignee lender's rights and its obligations under the whole agreement.

Going forward, the case raises the prospect of a re-assessment of the manner in which some securitisations are conducted. In particular, equitable title securitisations will require a clear assessment of the relationship between the rights and obligations of the lender to determine whether or not they may be separated, and the rights effectively assigned.

Features involving the commitment of further funding – such as redraws and undrawn advances – may in particular be impacted, depending on the terms of those arrangements. Additional diligence will be required in relation to the terms of these arrangements. An issue for securitisation participants will be the introduction of qualifications to legal opinions as to the effectiveness of the underlying assignment.

As with a securitisation, a lender seeking to effect a sell-down by transfer of rights will need to consider whether the nature of any lending obligations mean that a formal novation is required, and how that novation would be effected. A lender seeking to transfer its "rights and obligations" will be determined to ensure that a novation has been effective.

A basic principle of contract law is that a novation of obligations under a loan contract without the consent of the borrower will be ineffective – irrespective of whether the terms of the underlying loan agreement purport to permit such a dealing. Assignment provisions in many loan documents are drafted simply to state that a lender may transfer its obligations without borrower notice or consent, which may overreach what is legally possible.

The case also expressed doubts as to whether a borrower can prospectively authorise a lender to novate its loan without any further involvement or knowledge of the borrower, and examined the nature of such an authority. Whilst finding that a lender's documented right to transfer or novate obligations without borrower consent is not of itself a sufficient authority from the borrower, the decision need not be taken as authority that a well documented agency authorisation and novation substitution mechanism (such as found in a syndicated loan document) is ineffective to transfer of rights and obligations. The case did not examine such a situation. However consideration may need to be given to the procedures involved as concerning the borrower.

In syndicated arrangements, the borrower has typically appointed a party (the facility agent) to act as its agent for a specific purpose to enter into and effect contractual novations of existing lenders to third parties. In Goodridge, there was no such authorisation – the court held that the purported waiver of the borrower's consent right in the loan provisions was fundamentally different from the situation where the borrower had specifically authorised an agent to act in a specified manner on its behalf.

The judge in Goodridge did not specifically seek to reduce the role of agency law. However it would be prudent to ensure that the substitution provisions include all the following characteristics:

Many syndicated loan agreements will already contain provisions in these terms, but the agreements should be checked. It should also be possible to reflect the above mechanism in bilateral loan agreements, although this may not be commercially acceptable to strong borrowers.

The case has clear implications for the margin lending industry and equitable title securitisation transactions, but also for a range of other loan transactions where lenders wish to understand their sell-down rights. This will particularly be the case where a simple assignment provision is relied on as being authority to transfer a lender's rights and obligations under a facility. The nature and interdependency of a lender's rights and obligations will need to be considered in the context of an assignment of rights. If a novation is required (or desired) to effect the transfer sought, consideration will need to be given as to how to effect the novation.

Whilst the case should not impact upon the sell-down mechanism typically adopted in syndicated loan agreements, the underlying provisions and procedures on sell-down should be reviewed on a case by case basis.