I. How Trades Are Structured — The Foundation

1. Assignment vs Participation:

• Assignment: Buyer becomes lender of record. Requires borrower consent unless loan is in default, and administrative agent consent. Governed by assignment agreement.
• Funded / Unfunded Participation: Seller remains lender of record. Buyer funds seller. Purely contractual, no borrower consent. Used when quick exit needed or assignment is restricted.

2. Par vs Distressed Documentation:
The industry uses standardized docs:

• US: LSTA - Loan Syndications and Trading Association
• UK/EU/Asia: LMA - Loan Market Association
• India: RBI-prescribed formats under Master Direction on Transfer of Loan Exposures, 2021

LSTA publishes a "Shift Date" when a loan moves from par to distressed. LMA distressed confirmation acts as both trade confirmation AND purchase agreement. LSTA requires a separate Purchase and Sale Agreement for distressed trades. Distressed docs have far more representations - insolvency, litigation, set-off, existing defaults.

II. Legal Framework by Jurisdiction

A. United States
The most developed market.

• Bankruptcy Code - Chapter 11: Automatic stay under Sec.362 gives breathing room. Distressed trades mostly occur pre-petition or under Section 363 sales. DIP Financing - distressed buyers provide super-priority financing to protect their position.
• Securities Laws: SEC and FINRA have no specific distressed framework, but general anti-fraud, insider trading under Rule 10b-5 and disclosure applies. If you receive MNPI (material non-public information) as a creditor committee member, you become restricted from trading.
• Avoidance Powers: Fraudulent conveyance under Sec.548 and preferential transfers under Sec.547 allow clawback if debt was transferred to hinder creditors.

B. United Kingdom / Europe

• Insolvency Act 1986, Corporate Insolvency and Governance Act 2020
• LMA Terms: Governed by English law. Doctrine of champerty and maintenance largely abolished, but assignment of bare right to litigate still problematic.
• Pari Passu Clause: Central to sovereign debt litigation.

C. India - The Most Restrictive to Liberal Journey

SARFAESI Act, 2002: Empowered secured creditors to take possession and sell assets without court intervention and created licensing framework for Asset Reconstruction Companies (ARCs) to acquire financial assets.

Insolvency and Bankruptcy Code (IBC), 2016: Centralized, time-bound resolution framework. Provides clean slate to buyer under Sec.31, which supercharges distressed M&A. Creditor rights strengthened and outcome certainty increased.

RBI Master Direction on Transfer of Loan Exposures, 2021: Replaced 2014 guidelines. This is the bible for trading in India today.

• Only loan exposures classified as standard, SMA, NPA can be transferred.
• Minimum Holding Period (MHP) and Minimum Retention Requirement (MRR) for securitization.
• NPA can only be sold to ARCs, or to other Banks / NBFCs / AIFs under specific conditions. Price discovery via Swiss Challenge.
• Borrower consent not required.

SEBI Framework for Distressed Bonds, 2022: Allowed mutual funds and other bondholders to trade defaulted bonds on stock exchanges to create secondary liquidity, as mutual funds have lesser legal remedies.

III. Core Legal Risks and Doctrines

1. Insider Trading & Big Boy Letters: Traders use "big boy" disclaimers acknowledging they may have MNPI and waiving claims. Still risky under US law.
2. Equitable Subordination & Recharacterization: Court can subordinate your claim if you exercised inequitable conduct as controlling creditor.
3. Fraudulent Conveyance: Buyer can be liable if debtor transferred assets to avoid payment.
4. Pari Passu Interpretation: Whether it means equal ranking or equal payment.

IV. Landmark Case Laws

1. Global Sovereign - NML Capital Ltd v Republic of Argentina, US SDNY 2012, 2nd Cir 2012, Supreme Court 2014
The defining distressed sovereign case. Argentina defaulted on $100bn in 2001, offered swaps at 25-30 cents in 2005/2010. Holdouts Elliott's NML Capital and Aurelius refused.
Legal Holding: Judge Griesa held Argentina violated pari passu clause by paying restructured bondholders while refusing to pay holdouts. Ordered Argentina must pay $1.33 bn to holdouts pro-rata before paying restructured bonds. Supreme Court affirmed discovery of worldwide assets.
Principle: Trading distressed sovereign debt at pennies and suing for full face value is legal under New York law. Ends with Argentina settling in Feb 2016 for $6.5 bn.

2. Enron Corp. v. Springfield Associates, LLC (In re Enron), 2nd Cir 2007
Doctrine of equitable disallowance. Bank sold its claim against Enron to distressed trader. Court held trader's claim inherits disabilities of seller - if seller received voidable preference, buyer can have claim disallowed. Due diligence on seller's exposure is critical.

3. In re Washington Mutual, Inc. (Bankr. D. Del. 2011)
Confirms LSTA standard. Court enforced trading terms, held that distressed claims trading enhances liquidity and provides exit strategy for creditors. ABI Commission later refused to recommend additional regulation.

4. India - ICICI Bank Ltd v Official Liquidator of APS Star Ind Ltd, (2010) 10 SCC 1 & Kotak Mahindra Bank v OL of APS Star Ind Ltd, Gujarat HC 2009
This is India's foundational legality of loan assignment case.
Facts: ICICI sold NPA portfolio relating to APS Star (in liquidation) to Kotak Mahindra. Kotak sought substitution as lender before Company Court. Borrower objected that banks cannot trade debt as it is not banking activity under Banking Regulation Act, 1949, and violates stamp laws.
Gujarat HC held trading of debt portfolios was "illegal" and not permitted banking activity.
Supreme Court in ICICI Bank (2010) 10 SCC 1 reversed: Held assignment of debt by banks is permissible as part of banking business under BR Act, and RBI guidelines allow it. However, assignment must be properly stamped and registered. This judgment unlocked India's NPA trading market and directly led to RBI's 2021 Master Directions.

5. Phoenix ARC Pvt Ltd v Ketan Bhagwandas Kapadia, Supreme Court 2022 & Regulation
Court upheld SARFAESI rights of ARCs as secured creditors, including right to take possession without borrower concurrence after 60-day notice under Sec.13(2).

6. Caspian, UK (2013) - Assenagon v Irish Bank Resolution Corp
UK court upheld exit consents used to coerce bondholders in distressed exchange - illustrates creditor oppression risks in distressed trades.

V. Practical Compliance Checklist for Trading Desk

1. Document: Is it par or distressed? Use correct LSTA/LMA confirmation.
2. Consent: Check credit agreement for assignment restrictions - Yanks vs LMA differences.
3. MNPI: Are you on a private side? Implement wall.
4. India-specific: Is seller within MHP? Is buyer eligible - ARC vs Bank? Valuation by 2 external agencies, Swiss challenge mandatory for ARCs. Stamp duty - 0.1-0.5% in Maharashtra can kill economics.
5. Insolvency: If IBC triggered, all SARFAESI actions stop under moratorium Sec.14. Only RP can decide.