Re: Legal Opinion regarding revised interest rate; A/C Confidence Salt Limited.
We refer to your letter no. COMPANY 1/LKP/DBH/2007/213 dated February 26, 2007 on the above subject.
From perusal of your letter and the provided documents, it appears that Company 1 (“Company 1”) extended a term loan facility of BDT 50.00 million (“the Facility”) to Company 2 (COMPANY 2) via loan agreement dated September 23, 2003 (“the Agreement”). The fund was disbursed on April 22, 2004 and as per the agreement, the 1st installment repayment started on April 30, 2005. Initially the rate of interest was 13% p.a. and from May 01, 2005 it was changed to 15% which was agreed by COMPANY 2.
In June, 2006 COMPANY 1proposed to revise the interest rate for the Facility from 15% to 17% p.a. to be effective from May 1, 2006.
COMPANY 2 by letter dated May 25, 2006 has requested COMPANY 1to keep the rate of interest at 15% but COMPANY 1by letter dated July 24, 2006 informed CLS that COMPANY 1is holding its position regarding the revised interest rate.
In reply to that, COMPANY 2 informed COMPANY 1by a letter dated August 23, 2006 that there is no provision in the loan agreement empowering COMPANY 1to enhance the interest rate arbitrarily. Meanwhile COMPANY 2 approached other banks to take over the Facility from COMPANY 1due to this interest rate dispute and COMPANY 2 has managed State Bank of India to take over the Facility.
Now, COMPANY 2 requires an NOC from COMPANY 1to allow State Bank of India to take over the Facility. COMPANY 1has decided that it will provide the NOC if COMPANY 2 pay interest at 17% p.a. from May 1, 2006 to the present date.
In these circumstances, you have sought our legal opinion on the position of COMPANY 1in this respect and whether COMPANY 1can ask payment at the revised interest rate of 17% p.a.
We have perused the Loan Agreement date 23 September, 2003, and have found that there is no provision in the agreement empowering COMPANY 1 to enhance the interest rate on its own. The Agreement does not contain any clause directing how the Agreement may be amended. As such, any amendment to the Agreement such as the change in the interest rate will have to be mutually agreed upon by both the parties. Previously, COMPANY 2 agreed to an upward change by COMPANY 1in the interest rate from 13% p.a. to 15% p.a. But at present, COMPANY 2 has not agreed to the upward change of interest rate from 15% p.a. to 17% p.a. as such COMPANY 1is not legally entitled to ask for payment at the revised interest rate of 17% p.a. Although COMPANY 1has ‘apparently’ revised the interest rate of the Facility from 15% to 17% p.a. effective from May 1, 2006 vide their letter date May 16, 2006, such change is not legally enforceable.
At the time of the State Bank of India to taking over the Facility from COMPANY 1, the State Bank of India on behalf of COMPANY 2 will pay to COMPANY 1, prior to maturity, all accrued interest and premium according to the repayment schedule and all of the principal amount of the loan outstanding at the time of payment. Such payment is in effect a prepayment of the loan. Section 3.07 of the General Conditions Applicable to Loan Agreement dated 23.09.2003 (which is made part of the Loan Agreement by Section 1.01 of the Loan Agreement) incorporates the terms and conditions for prepayment. This Section states that, COMPANY 2 shall have the right, upon a payment of all accrued interest and of the premium, if any, specified in the repayment schedule, and upon not less than 60 (sixty) days’ notice in writing to COMPANY 1, to repay to COMPANY 1, as of a date acceptable to COMPANY 1, prior to maturity, all of the principal amount of the Loan at the time outstanding.
may not assign or otherwise transfer all or any part of its rights or obligations under the Loan Agreement without the prior written consent of COMPANY 1. As such, the State Bank of India can not take over the Facility from COMPANY 1, without the prior written consent of COMPANY 1. Whether or not COMPANY 1will give written consent i.e. NOC, is a commercial decision. But we are of the opinion that COMPANY 1should not withhold its consent unreasonably.
If you have any further query, please do not hesitate to contact the undersigned.
For: “The Lawyers & Jurists”