Brief reflections on pool financing

by Giovanni Maria Uda

Abstract: Pool financing is a complex phenomenon from a legal point of view, widespread in practice but to which, civil law doctrine has dedicated limited attention. The work briefly examines the structure of this phenomenon, determining the various phases in which it is articulated in the categories that govern negotiation, with the intention of favoring a basically uniform reconstruction on which the applicative models drawn from the general law of contracts can be based, with relative constancy.

Summary: 1. The tripartite nature of pool financing contracts. – 2. The interbank agreement. – 3. The legal relationship between the pool leader and the pool banks. – 4. The financing agreement.

1. The contractual tripartition of pool financing

The pool financing contract, despite the limited attention[1] it got from the legal system, appears to have for some time now, played a significant role in the financial market[2], that lead to its identification within that market, as a contractual scheme with sufficiently constant characteristics.

However, it is still an atypical contract, which in practice may present variants[3] that not only affect the terms and conditions of financing, but also the classification of the individual cases. The homogeneity of the basic characteristics – which will be discussed below – allows us to proceed to an analysis of this specific contractual figure and to its classification as a contractual “type”.

It is generally customary to distinguish two moments of the overall economic transaction: the moment of the agreement concluded by a plurality of banks[4] in order to organize themselves in view of granting a unitary financing, under the management of a lead bank; and the moment of the financing contract in the strict sense, concluded between the financing banks on one hand and the beneficiary on the other hand.

In our opinion, it seems more appropriate to also distinguish from a descriptive point of view, three negotiation phases, all of which have their own specific qualification. We can then speak more specifically, of a single economic operation of pool financing consisting of three distinct transactions, interconnected in the terms that will be discussed.

The first transaction, in logical and chronological order, is created by the agreement between two or more banks, which is usually defined as a “banking agreement”[5], through which they set up a unitary strategy for the supply of an entire credit in favor of a financed party, with fractions of the credit as well as the relevant risk.

The second transaction consists of a mandate agreement that the banks participating in the pool conclude with the “leading bank”, with the attribution of management powers, which significantly vary in accordance with the contractual provision, but are generally aimed at organizing the pool and drawing up the loan agreement. This agreement is usually concluded at the same time as the interbank agreement, taking the form of a clause in the agreement[6].

The third transaction is the financing agreement in the strict sense of the term, which may be governed in a number of very different ways, but which retains the basic scheme whereby, in return for a single loan, the loan is disbursed in instalments. That is to say that, in accordance with the provisions of the Interbank Agreement, each bank is obliged to disburse only a fraction of the loan and to only bear the relevant risk.

2. The Interbank Agreement

Moving on to an examination of the individual stages of the pool financing operation, it has been said that the basis of the pool financing operation is first of all an agreement between two or more banks for the fractional disbursement of a credit that would be too costly or too risky for only one of them.

It is obviously a multilateral contract. It is well known that this definition has been, and to some extent still is, the subject of a wide-ranging debate, which previously concerned the admissibility of such a figure[7]. The economy of the current work and the extend and complexity of the subject do not allow us to enter into the specific merits of topic, which will be repeated for the pool financing contract in the strict sense[8]. It is sufficient here to accept the admissibility of the legal category of multilateral contract, and therefore to assume that the interbank agreement is to be qualified as such. Such a qualification can be explained, with specific reference to the interbank agreement in question, not only by the presence of several parties expressing a common will in regulating their interests, but also by the idea that it is a contract aimed at achieving a common result capable of satisfying the interests of the individual participants[9].

In fact, as mentioned above, the interbank agreement is aimed at establishing an organizational system between the banks, outlining a common operating line and a common[10] contractual and financial strategy. All this is instrumental to the conclusion of the financing contract with a third party, according to the criterion of fractioning that are mentioned above.

In this sense, it can be said that the interbank agreement stands as a multilateral contract with common purpose[11], where the purpose is given by the pursuit of a specific end: the conclusion of the financing agreement. And the term “pursuit” rather than “achievement” is used because the achievement of that end – i.e. the conclusion of the financing agreement – depends on an event outside the sphere of control and organization of the participating banks: the contractual will of the third party.

Thus, the intended purpose is the realization of the contractual opportunity, that is the realization by the banks in the pool (and generally through the lead bank) of a serious and rational situation of joint pre-contractual negotiation with a potential beneficiary of the loan. Once this aim has been achieved, which is the result conventionally established, the contractual interest of each participating bank[12] is fulfilled, even if the hoped-for or recommended result is not achieved due to the failure to conclude the financing contract.

At the same time, the interbank agreement also has a preparatory function[13], since through it the participating banks – also by granting the relevant powers to the lead bank – arrive at the preparation of a contractual proposal[14], and possibly at the definition of pre-contractual negotiations with respect to the financing agreement in the strict sense of the term. In this sense, it may also be said that, at least in certain circumstances, the interbank agreement may be attributed to the phenomenon of the progressive formation of the contract[15].

3. Role of the lead bank and mandate relationship

The second step in the negotiation of a pool financing arrangement is the assignment of the lead bank by the other participants. This role is essential to successfully achieve the pool financing phenomenon.

Clearly, the very term “lead manager” does not express a precise legal connotation, not even from a descriptive point of view, and even less so is a specific legal category identifiable today.

This terminological and categorical uncertainty, in addition to the diversity of functions that the lead bank may assume in relation to the agreement reached with the other participating banks, leads to a certain diversity of views on the notion of lead bank.

What may however, appear to be generally assumed as a common datum, is that the leading bank already performs precise functions within the framework of the relationship constituted by the interbank agreement: taking care of the organizational system, preparing the contractual proposal, including the fractioning of the loan, and developing negotiations at the pre-contractual stage. However, there is nothing to exclude the possibility that the lead bank also has the power of representation when concluding the financing agreement[16] or that it is even entrusted with tasks relating to the performance of that agreement.

On the basis of these data, the lead bank is to be regarded as being linked to the other participating banks by a relationship of mandate, in its capacity as agent. A mandate relationship that may also be accompanied by a power of attorney on the part of the other banks with the attribution of representative powers.

The attribution of management powers, whatever they may be, takes place at the stage of the interbank agreement, often by means of a clause in the same agreement and within the same contractual document. This is, however, a so-called self-sufficient clause, i.e. a clause which contains in itself a complete contractual regulation, even if often by reference to other clauses of the contract in which it is placed, and which has a cause of its own.

Therefore, in any event, the mandate agreement between the participating banks and the lead bank is to be regarded as a structurally and causally autonomous contract, although functionally linked[17] to the interbank agreement and possibly to the financing agreement.

Given the common function that must be carried out by the leader, that is, in favor of the banks in the pool indiscriminately and with a view to the achievement of the common purpose, the mandate relationship must exist at the same time with all the banks. Thus, we are dealing with a hypothetical collective mandate, foreseen and regulated by art. 1726 of the Civil Code, on the basis of which the mandate “conferred by several persons with a single act and for a common interest affair”[18] is to be qualified as such.

The repercussions of the relationship between the leading bank and the participating banks within the figure of the collective mandate have important consequences in terms of application, given that the revocation of the mandate can only take place for just cause, beyond the collective revocation.

If we then consider that the lead bank is in most cases one of the banks intended to participate in the financing, such a mandate can also be qualified as a mandate in “rem propriam”[19], which can also be revoked “just because” by reference to the article 1723 paragraph 2, civil code.

Consequently, the lead bank, in addition to being burdened with the obligations of the mandated banker (Art. 1773 Civil Code), is certainly endowed with power and autonomy of action, which are significantly binding on the mandated banks.

Finally, with regard to the management relationship, it can be said that it is normally a general mandate (art. 1708 Civil Code)[20], given that the tasks of organizing the pool, preparing a contractual proposal, or even more so participation in pre-contractual negotiations, perhaps with the achievement of an agreement by means of punctual payments, do not lend themselves to the provision of specific and determined management operations.

The character of the general mandate appears more problematic – even if theoretically possible – when the management relationship extends to the dynamic phase of the financing contract[21], in which case the tasks of the agent are mostly limited to certain purely executive activities, which do not require choices of a discretionary nature[22].

4. The financing agreement

The pool financing agreement, understood in the strict sense of the term, i.e., as the final stage of the overall economic transaction, constitutes, at least from a strictly legal point of view, an eventual phase, since its conclusion cannot be taken for granted.

This contract, as mentioned above, regulates an overall financing in favor of the beneficiary, where, however, each financing bank assumes the obligation to finance only a fraction of such financing, with the corresponding risk.

In terms of its effects, the pool financing agreement gives rise to as many financing obligations, and corresponding obligations on the part of the borrower, as there are financing banks. Therefore, each bank is obliged to finance its own fraction of the total financing and becomes the creditor of the obligation always proportionate to that fraction.

Without prejudice to a different contractual provision, neither the financing obligation can be qualified as a joint and several liability, nor the beneficiary’s payment obligation can be qualified as a joint and several liability.

Consequently, the borrower may not demand the full amount from the individual financing bank, nor an amount in excess of the relevant fraction. Similarly, each financing bank may demand the fulfilment of its counter-performance in proportion to the financing fraction.

The joint liability of the banks is to be excluded[23], first because the contractual obligation of each individual bank is limited to its own fraction based on a synallagmatic relationship, so that they cannot all be considered to be bound by the “same performance” (Art. 1292 Civil Code). Secondly, if one of the results that characterizes the economic program of the pool financing agreement is the splitting of the risk, it is the contractual title itself (in accordance with Article 1294 of the Civil Code) that excludes – even if only implicitly – joint liability, which in itself is incompatible with the splitting of the risk.

Active solidarity, on the other hand, is also to be excluded for an even more straightforward reason: that in the absence of a norm that establishes a “presumption” of active solidarity in the presence of certain circumstances[24], it must necessarily find its basis in the contractual title[25]. Which, at least in the generality of cases, does not happen.

It remains to be understood, in a more specific manner, how the contract in question is structured, and how it can be qualified, given the importance that this can assume under the application profile.

As has been said, the contract of financing in pool involves the creation of a plurality of distinct obligatory relations of a conventional nature. This could lead to the idea that it actually consists of a number of contractual relationships which are perfectly autonomous from one another.

However, such a conclusion presupposes that the coexistence of such relationships is merely occasional. This, seen from the point of view of the overall economic operation, cannot be sustained. On the contrary, it points to a causal unity. As a matter of fact, it cannot be said that the disbursement of the entire financing or only a part of it constitutes an irrelevant variant. It is not irrelevant for the financed subject, but neither it is for the financing banks, since a partial financing could plausibly determine the unsustainability of the investment, the insolvency of the beneficiary and a consequent significant increase in the risk of the lenders themselves.

Therefore, it must be assumed that the agreement in question, taking into account the unitary cause of financing[26] and the interest of each lending bank in the smooth functioning of the agreement as a whole, must also be qualified as a multilateral agreement, as has already been said with regard to the interbank agreement.

However, in contrast to the latter, the interest contracted for by the individual banks in the pool does not lead back to (and is not realized in) a common purpose, but conforms to the individual fractioned financing relationship, according to a Pool scheme.

Therefore, we are witnessing a phenomenon of an economic nature, contractually provided for and regulated, which is resolved in a plurality of “exchanges” of economic utilities[27] which are autonomous when referred to the expectations (and claims) of the individual contracting parties, but which – this plurality of exchanges – is also referable to a single, and shared by all, negotiation program.

It can therefore be said, in extreme synthesis, that the pool financing contract is to be qualified as a multilateral contract without common purpose[28], and more specifically as a multilateral exchange contract[29].

Author

Giovanni Maria Uda is full professor of private law at University of Sassari

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[1] Excluding the works of economic nature in the scope of legal research, in addition to the specific contribution of GHIONNI CRIVELLI VISCONTI P., Finanziamenti in pool e posizione delle banche, Turin, 2016, and in particular the notes of D’ATTORRE G., D’AJELLO C.P., I finanziamenti in pool nelle procedure concorsuali, in Fallimento, 2019, p. 729 ff.; BIANCHI L.A., I prestiti in pool, in various authors, L’integrazione fra imprese nell’attività internazionale, Turin, 1995, p. 233 ff.; CLARIZIA R., Finanziamento in pool, in Dig. comm., VI, Turin, 1991, p. 169 ff.; SCORZA G., Finanziamenti e fideiussioni in pool, in Banche e banchieri, 1978, p. 161 ff., 237 ff.

[2] GADANECZ B., Il mercato dei prestiti sindacati: struttura, sviluppo e implicazioni, in Rass. trim. BRI, Dec. 2004, p. 81 ff.; ID., Sviluppi sul mercato dei prestiti sindacati, ibid., Mar. 2006, p. 29 ff.

[3] An initial review of the most common clauses can already be found in CLARIZIA R., Finanziamento in pool, loc. cit., on the various modalities of the structuring of Pool financing contract, more recently GHIONNI CREVELLI VISCONTI P., op. loc. cit., p. 81 ff.

[4] More specifically, the pool can be constituted of two or more banks.

[5] In the broader figure of the interbank agreement regarding the different phenomenon, see UBERTAZZI T.M., Accordi di moratoria, convenzioni interbancarie e bancarie nei risanamenti di imprese: profili civilistici e qualificatori, in Contr. impr., 2015, p. 358 ff.

[6] From this probably derives the idea of a negotiation unity sa well as the quakifying point of view, in the basis of which the mandate is “incorporated” (so to speak), in the interbank agreement, so that the two phases of the pool financing are generally perceived, however, see below Par. 3.

[7] Among the various contributions, see ASCARELLI T., Il contratto plurilaterale, in Studi in tema di contratti, Milan, 1952, p. 97 ff.; FERRI G., Contratto plurilaterale, in Noviss. Dig. it., IV, Turin, 1959, p. 678 ff.; MESSINEO F., Contratto plurilaterale, in Enc. dir., X, Milan, 1962, p. 140 ff.; BELVEDERE A., Contratto plurilaterale, in Dig. civ., IV, Turin, 1989, p. 270 ff.; INZITARI B., Riflessioni sul contratto plurilaterale, in Riv. trim. dir. proc. civ., 1973, p. 476 ff.; BARBA B., Appunti per uno studio sui contratti plurilaterali di scambio, in Riv. dir. civ., 2010, I, p. 531 ff.

[8] Below, Paragraph 4.

[9] From this point of view, it can be said that the satisfaction of the interest of the individual (in this case, of each bank in the pool) takes place by means of the achievement of the common purpose; the result is the contribution of the performance of the individual (for this approach see BELVEDERE A., Contratto plurilaterale, cit., p. 274).

This, moreover, can also be verified if the pool is made up of only two banks, so that the interbank agreement, at least from the structural point of view, can be qualified as a (not necessarily) bilateral contract with common purpose (on the common purpose see below in the text).

[10] That is to establish the activities to which participating banks are required to adhere.

[11] For this case, refer to the authors cited in Note 7.

[12] Thus the interest of the individual contractor is salso realized on the basis of its own performance (see note 9).

[13] Relating to the preperatory contracts, see BOZZI G., I contratti preparatori, in Contratti di vendita, edited by VALENTINO D., I, Trattato dei contratti directed by RESCIGNO P. and GABRIELLI E., Turin 2007, p. 155 ff.

[14] In addition to the internal organization, there is also the executive purposes.

[15] See on this subject, RICCIUTO V., La formazione progressiva del contratto, in I contratti in generale, edited by GABRIELLI E., Turin, 1999, p. 151 ff.

[16] See GHIONNI CRIVELLI VISCONTI P., Finanziamenti in pool e posizione delle banche, cited above, p. 70.

[17] The functional connection should exclude that it can be properly defined as a self-sufficient clause (on this subject SICCHIERO G., Clausola contrattuale, in Dig. civ., Update **, II, 2003, p. 245 ff.; ID., La clausola contrattuale, Padua, 2003, p. 210 ff.).

[18] V. per tutti LUMINOSO A., Mandato, commissione, spedizione, in Tratt. dir. civ. comm. Cicu-Messineo, directed by L. MENGONI, Milan, 1984, p. 162 ff. With specific regard to pool financing, the existence of a mandate contract is expressly noted by D’ATTORRE G., D’AJELLO C.P., I finanziamenti in pool nelle procedure concorsuali, cit., p. 733.

[19] D’ATTORRE G., D’AJELLO C.P., ibidem.

[20] D’ATTORRE G., D’AJELLO C.P., op. loc. cit., p. 733.

[21] For a case in which the (collective irrevocable) mandate to the lead bank provided for the exercise of powers of credit collection and other powers in the executive phase, see Court of Cassation, 26 February 2019, no. 5670.

[22]   Such as, the granting of consent for the cancellation of mortgages, or otherwise acts of will directed to affect the collateral regime.

[23] In this sense see D’ATTORRE G., D’AJELLO C.P., op. loc. cit., p. 733.

[24] As it is for passive solidarity, according to the provisions of art. 1294 Civil Code.

[25] Or possibly in a specific provision of law (e.g. art. 1854 Civil Code).

[26] Thus GHIONNI CRIVELLI VISCONTI P., Finanziamenti in pool e posizione delle banche, cit., p. 76, according to whom in pool financing “there is not a series of credit concessions equal to the number of intermediaries, but only one”.

[27] On the different notion of exchange in the economic sense and in the legal sense BARBA V., Appunti per uno studio sui contratti plurilaterali di scambio, cit., p. 543 f.

[28] Cf. VALENZA F., Attività negoziale e rapporto giuridico plurilaterale senza comunione di scopo, Turin, 2005.

[29] BARBA V., op. loc. cit., p. 542 ff. It can be added that, since in the pool financing contract the “exchanges” are legally understood (BARBA V., op. loc. cit, p. 544), notwithstanding the fact that they are reported within a unitary contractual program, operate according to a plurality of bilateral-synallagmatic Pools, the figure of the contract characterized by pluribilaterality can also be recalled (thus ALLARA M., La vendita, Turin, 1958, p. 75 f.; doubts on the qualifying value of such an expression are manifested by BELVEDERE A., Contratto plurilaterale, cit., p. 272.