26.3.1 This approach distinguishes between the Contractor and the Senior Lenders even on step-in. The Senior Lenders must agree to sign up and pay for any liability (e.g. any amounts owing to the Authority) at the time of step-in and take steps to rectify breaches. In implementing rectification of breaches under the Contract some time and flexibility should be given. Nevertheless, the Contractor will always remain liable under the Contract and, to the extent a new breach occurs during the period of step-in, then termination can still occur.
26.3.2 Following, or simultaneously with, the issue of a Termination Notice under the Contract, the Authority will issue a Termination Notice to the Agent. This will trigger the running of a period which, if the Senior Lenders decide not to step-in, will allow the Contract to terminate. Within 30 days of issuing the Termination Notice, the Authority must also notify the Agent of the liabilities to be discharged by the Senior Lenders on step-in. If the Senior Lenders wish to step-in, then the liability to be discharged must be paid to allow step-in to occur (see Clause 6(b) of the Funders' Direct Agreement for detailed provisions).
26.3.3 A similar procedure can apply if no Termination Notice is in fact issued, but the Senior Lenders have accelerated the maturity of their debt and demanded repayment. These provisions are set out in Clauses 3 (No Termination Without Notice), 5 (Representative) and 6(b) of the Funders' Direct Agreement.
26.3.4 During the step-in period, the Senior Lenders are incentivised to ensure that a remedial programme is implemented in relation to antecedent breaches and that no new breaches occur. If antecedent breaches are not remedied or new breaches occur, then a right to termination can arise again.
26.3.5 The Funders' Direct Agreement also provides that the effects of the step-in can come to an end if the Senior Lenders step-out or a novation occurs. If the Contract continues by way of a novation, this does not mean that the parties will not amend the Contract in certain respects. For example, the parties may agree that the performance and payment mechanism are not incentivising the parties correctly (see Section 19.7 (Calibration)) and so require it to be amended. This will depend in part on the extent to which the mechanism concerned is untested and/or capable of automatic recalibration (see Section 19.8 (Flexibility)).
26.3.6 If the Senior Lenders cannot rectify the default or save the Project, then termination will occur in accordance with Clauses 23.2.8 (Retendering Procedure) or 23.2.9 (No Retendering Procedure) of the Contract, depending on what steps have been taken by Senior Lenders to realise a value from the project. If any undischarged claims are owing from the Contractor, then they can be set off under Clause 22 (Set-off and VAT).
26.3.7 The advantage of the above approach is that the Senior Lenders are clearly aware when they make the decision whether or not to step-in what liabilities are being accepted.1 At the same time, the Authority retains the right to terminate if any breach occurs or the Senior Lenders are not making sufficient effort to rectify the antecedent breaches and so it is in substantially the same position after step-in as it was before.
26.3.8 On termination of the contract the Senior Lenders should agree to release any security over the Unrestricted Assets (other than charges over bank accounts and counterparty claims (including claims against the Authority under the Contract and the Sub-Contractors under the Sub-Contracts). This is because an Authority will want to ensure that the operational assets which the Authority needs to complete or operate the Project pass across from the Contractor to the Authority on a termination so as to ensure continuity of service, and the Senior Lenders' security arrangements should not overturn them. However, this should not be a concern for the Senior Lenders (whose main interest should be the Termination Sum or the cash sum paid in the market for the Project on a default). It is in the interests of the Senior Lenders that the Project remains operational and can be sold in the market for its maximum value. Their real security is in the cash flow (or termination sum) rather than in assets. The operational assets involved are not likely to be major items in most Projects. See further Clause 10 (Release of Assets) of the Funders' Direct Agreement and Section 23 (Early Termination). .
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1 Unlike in some other models, the Senior Lenders have no liability to the Authority during the step-in period (but the step-in period may end and the Contract may be terminated if new payment or other defaults arise during the step-in period, or if "post notified" debts are not paid. See Clause 6(b) of the Funders' Direct Agreement). Similarly, the Senior Lenders can step out at any time without having any liability to the Authority. This does not prejudice the Authority as it is protected in the knowledge that if the situation worsens (e.g. claims arise) as a result, then this will be reflected in compensation payable on Contractor Default.