Joint and Several: Tryst with Liability in Project Finance

Abstract

In the recent era major infrastructural developments projects (“Projects”) are done through a Special Purpose Vehicle (“SPV”) or a Joint Venture (“JV”) with the backend agreement between the shareholders of SPV or members of JV (jointly referred as “Sponsors”) which is commonly stated as Shareholders Agreement (“SHA”) or Joint Venture Agreement (“JVA”). These SHA or JVA, amongst others, defines the liability of its shareholders or members which may occur in the ordinary course of its business These Projects are developed through internal and external funding arrangement by way of equity contribution or debt funding by group of lenders, of which major portion comes from the debt financing. The quantum of such funding comes into crores of rupees, based on the strength of the Sponsor and their credit profile, amongst others. In order for these projects to succeed, it is important that parties must have certainty over the risks they are assuming. In all such project financing arrangement, the primary repayment liability always lies upon the SPV or JV, however, there is always a Parent Guarantee from the Sponsors so that lenders interest is secured. In case the SPV or JV defaults in its liability, the secondary liability of the Sponsors gets activated. In such a scenario, the question which arises is in what quantum are the Sponsors liable. The answer to such question is whether the sponsors are severally liable, or jointly liable or