What is a "financial institution" in the context of transferring debt?

The English Court of Appeal has considered what constitutes a "financial institution" to determine whether a transferee of a debt could enforce repayment.

In this case1, the borrower was loaned US$40 million by a syndicate of nine banks.  Following drawdown, there was a dramatic drop in the price of steel (which was the borrower's business) and the borrower failed to make the payments due under the loan agreement. 

A Cayman Islands company (the transferee) purchased a significant portion of the borrower's debt and brought proceedings against the borrower for breach of the loan agreement in failing to repay the amounts due.  The borrower argued that there had not been a valid transfer of the debt to the transferee, as the loan agreement only allowed for transfers to banks and "other financial institutions".

In the lower court, there was some debate as to what constituted a "financial institution".  The judge ultimately found that the transferee did constitute a financial institution, and that the debt had been transferred validly.

The Court of Appeal agreed that the transferee constituted a financial institution, although it did not agree with all the criteria that the lower court used to reach its decision.  In this instance, the Court of Appeal imposed a relatively low threshold for constituting a "financial institution", determining that it was not a necessary characteristic of a transferee under this loan agreement that its business should include bank-like activities (like lending) or that it should exhibit any particular standard of suitability for being transferred the debt.  It only had to be a legally recognised entity, carry on business in accordance with the laws of the place where it was incorporated and its business had to be in commercial finance. 

The interpretation of "financial institution" may be relatively case-specific in this instance because the Court did comment on the fact that the reality was, that the borrower had defaulted, and the original lenders should have little interest in the commercial or financial status of the party that they transferred the debt to.  To allow the borrower to avoid honouring its debt simply due to the dubious or suspect commercial nature of the transferee would be unjust.

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