PART A

Gareth Evans Ltd is the borrower in a syndicated loan of $300 million. Mani Bank is the mandated lead arranger and bookrunner of the syndicated loan and it is the facility agent and also a lender. There are two other lenders: Primal Bank and Happy Monday Bank. The lenders have lent $100 million each.

Things are not going well for Gareth Evans Ltd. It makes a bad investment in a large golf club and conference centre. As a result Gareth Evans Ltd defaults under the syndicated loan and the lenders decide to accelerate the debt. The financial statements of Gareth Evans Ltd make it clear that if all its assets were sold it would return only 50 cents in the dollar to the lenders. A liquidator is appointed to the company. The following facts emerge:

The director of corporate finance at Mani Bank, Liam Gabalot, who was in charge of the syndication, knew that Gareth Evans Ltd had decided before the loan was entered into to invest in the golf club and conference centre after drawdown. He also knew that this was a risky proposition but this fact was not made known to the other lenders before they entered into the loan (or indeed to his own board of directors at Mani Bank).

The information memorandum stated 'Mani Bank has relied upon Gareth Evans Ltd for the accuracy of the information contained in this memorandum, and has made no independent enquiries as to the completeness or otherwise of the information herein'. The information memorandum did not mention the decision to invest in the golf club and conference centre. Happy Monday Bank is a very small bank and this is its first syndicated loan. It relied heavily on Mani Bank before it entered into the syndicated loan and accepted what it was told by Mani Bank about the financial position of Gareth Evans Ltd. Mani Bank told Happy Monday Bank nothing more than what was in the information memorandum about the financial position of Gareth Evans Ltd. Happy Monday Bank had a top legal firm advising it on the legal documentation for the loan. Primal Bank had been involved in several syndications prior to this one.

Mani Bank earned $2 million in arranging fees and made $5 million in interest prior to the default.

Advise Happy Monday Bank and Primal Bank whether they can sue Mani Bank in relation to Liam's failure to reveal the decision by Gareth Evans Ltd to invest in the golf club and conference centre prior to entering into the loan. Also advise whether or not they can claim the amounts Mani Bank earned in arranging fees and of the interest of $5 million it earnt. If you need any further information (for example, about the terms of the loan agreement or otherwise) then indicate what information is needed and why.