The distinguishing feature of an under-participation agreement is that the initial lender remains the borrower`s “means of payment” and there is no direct contractual relationship between the sub-participant and the borrower. No agreement from the borrower is required, so this process can be confidential. Copyright (Article 1.535 of the Spanish Civil Code): a debt becomes “contentious” (also known as the disputed credit) from the moment a debtor files his formal defence on a creditor`s request for payment. When a disputed loan is granted to a third party, the debtor has the right to delete the debt (within nine days of the date the purchaser requests payment) by repaying the price paid by the purchaser for the acquisition of the disputed loan (as well as court costs and interest on the price from the day of payment). The loss of the guarantee on the basis that the transfer does not involve the transfer of security rights, so that the participant cannot benefit from the guarantee, especially when it comes to Spanish security rights which, in most cases, require registration or public acts. Any restriction or prohibition of transfer in the underlying loan is violated, so that the borrower may attempt to challenge the validity of the partial participation (vid. Bank of America v TP Ferro, published in the press). Financial players in the troubled market in Spain often use the LMA`s under-participation agreement. However, “partial participation” is not a concept traditionally recognized by Spanish law. As a result, borrowers object to the application of the law and argue that such an agreement should be redefined as a transfer of debt. Such a new characterization would be detrimental to questionable obligations. The new lender has a direct relationship with the borrower and other parties to the syndicated loan agreement. The loan agreement should include the form of the transfer certificate used for innovation and contain a provision that the borrower does not object to the original lender selling its shares in the loan agreement to a new lender.
Novation is generally used for revolving credit facilities for which the original lender has outstanding obligations, such as the loan bond. A type of loan or sale of assets through an interest in which the borrower is neither consulted nor, in most cases, informed of the transaction. In practice, most loan contracts… The application of English law to LMA sub-participation agreements since the financial crisis, particularly in the troubled debt market, has increased considerably in Spain. This means that a leading bank, which uses an under-participation agreement while starting with the application, may have difficulty enforcing the rules. If the borrower discovers the partial participation and objects to the payment on the basis that the debt is contested (a credito litigioso) or on the basis that the effective creditor has lost the advantage of the corresponding guarantee, he may ask the court to terminate the execution of the guarantee on the basis that the partial participation must be rectified as a transfer and that this assignment does not include the corresponding guarantee.