Can project lenders enforce security without terminating the concession?

Project lenders may in some circumstances enforce their security without terminating the underlying concession, particularly where the security package, concession and lender direct agreement provide for step-in, share enforcement, cure or substitution. There is no universal rule that bank enforcement automatically ends a public concession, or that a lender can retain the concession regardless of government consent. The actual result depends on what security is enforced, the project company's continuing licence, change-of-control restrictions and the concession authority's legally protected rights.

Identify the secured asset

A bank may hold a mortgage over land, charge over receivables, pledge of shares, security over accounts or assignment of contractual rights. Each can be enforced differently. A share pledge may change ownership or control of the project company while leaving the concession nominally with the same legal entity. A purported assignment of the concession itself may engage express consent requirements or statutory prohibitions. Lender counsel should map the collateral rather than speak of "enforcing the project" generally.

The concession agreement

Obtain the executed concession and its amendments, including termination, assignment, change of control, substitution and force majeure provisions. A government authority may have reserved approval powers over shareholder changes or replacement operators. The lender should not assume its private security deed binds an authority that did not consent to it. Identify the contractual mechanism by which enforcement can occur while the public service remains legally operated.

The lender direct agreement

A direct agreement with the concession authority can provide notice of default, lender cure periods, step-in and a process for substituting a qualified project company. Such agreements help avoid immediate termination upon a remediable sponsor default. However, the exact conditions and public-law limitations still apply. A right to propose a replacement is different from unconditional approval of any purchaser the bank selects.

Concession termination events

An authority may be entitled to terminate for persistent service failures, serious licence breaches or insolvency events, subject to the contract and law. Lender enforcement does not automatically suspend those rights unless a lawful standstill applies. The bank should act promptly when a notice is served and identify cure opportunities. A concession that is already validly terminated may present a very different collateral position from one merely at risk.

Share pledge enforcement

Enforcing pledged shares can allow a bank or purchaser to acquire control of the project SPV, subject to legal procedure. The concession may treat such a control change as requiring prior consent or as a default. A bank should not assume taking shares is less regulated than directly transferring the licence. Companies Act records and any shareholder or foreign-investment approvals also require attention.

Receivables enforcement

The lender may redirect payments due under a concession into controlled accounts where effective security and consent permit. This can preserve project-company operation while ensuring debt service. The authority's rights to set off or deduct performance penalties may remain. A payment direction does not by itself transfer operating obligations or cure licence breaches. The underlying revenue contract and assignment restrictions are central.

Step-in to project operations

Some arrangements permit lenders to appoint a nominee to manage the project temporarily while they rectify financial or operational default. The nominee must possess necessary capacity, personnel and permits. A bank cannot automatically become a licensed electric utility or transport operator merely by holding security. Step-in should be structured to preserve public safety and contractual performance.

Substitution of the concessionaire

A lender may seek an approved replacement project company. The concession can prescribe financial and technical qualifications and a process for authority approval. Lenders should identify eligible potential buyers early. A private asset sale executed without required consent may fail to transfer the concession. The authority should exercise its contractual and statutory functions lawfully and consistently with agreed direct-agreement protections.

Public procurement constraints

A public concession arose under a procurement or PPP process. Replacement may raise questions about whether changing the concessionaire alters the awarded bargain. The applicable PPP or procurement legislation may impose restrictions on assignment or material modification. An agreed lender step-in mechanism negotiated in the original concession can reduce uncertainty but cannot necessarily override mandatory public-law conditions.

Regulatory licences

Energy, environmental, transport and other approvals may remain with the project company or need amendment after control changes. The bank must check the legal identity of each licence holder and permit conditions. A new operator or contractor may also need its own qualification. Enforcement that leaves the project without a valid operating permission can destroy value and expose lenders to practical risk.

Other secured creditors

A project may have senior, mezzanine and working-capital lenders. Intercreditor provisions determine who may initiate enforcement, instruct the security agent and distribute proceeds. A junior lender cannot necessarily seize project shares unilaterally while a standstill binds it. Coordination is critical where another creditor holds control of bank accounts or title documents. The borrower should understand creditor priority before agreeing an enforcement settlement.

Insolvency risk

A distressed project company may enter insolvency or winding-up proceedings. The lender's security rights and concession continuity can be affected by statute, insolvency officeholders and court orders. An assignment not properly created or registered may prove vulnerable. A contractual right of step-in should be analysed against any legal stay or winding-up framework. The bank should not assume the concession sits outside all insolvency consequences.

Lender liability during operation

Banks seek enforcement remedies without becoming responsible for all operating liabilities. A temporary step-in or appointment of a nominee may nevertheless create obligations under its terms or applicable law. The direct agreement should state what post-step-in costs must be paid and which historic liabilities remain with the SPV. A lender cannot ignore employee safety or environmental obligations simply because its main interest is repayment.

Termination compensation as fallback

If concession continuation is impossible, the agreement may provide compensation on lawful termination, sometimes with a formula relevant to outstanding senior debt. Lenders should assess creditworthiness, payment timing and available government guarantees. Termination compensation is not identical to realised security proceeds and may be subject to disputes or deductions. A bank should not rely on a headline compensation figure without modelling actual recoverability.

An energy concession example

A power SPV defaults on loan payments but continues operating safely. Lenders enforce a share pledge and propose a qualified new investor. If the power agreement and licences permit a consented change of control, the concession might continue. The authority's prior approval and continuing tariff terms matter. The enforcement itself does not automatically transfer the regulated generating licence.

A toll-road example

An operator fails its service standards and receives a government termination notice shortly after lenders declare default. Lenders invoke the concession direct agreement's standstill and propose operational remediation. Whether termination can be deferred depends on actual notice and cure clauses and the nature of the public safety failure. A bank's financial cure may not resolve continuing dangerous road conditions.

Enforcement planning

Before issuing notices, obtain updated concession, security and licence records, financial accounts and technical due diligence. Prepare a legally effective step-in or sale structure, identify approvals and coordinate with the authority. The borrower and lenders should also assess whether consensual restructuring preserves more value than immediate enforcement. Every stage should be documented and consistent with public obligations.

Opinion and recommended course

Security enforcement without concession termination is possible when the legal and contractual architecture supports continuation, but it is not automatic. Examine share, account and receivable security; direct agreements; authority consent; licences; and intercreditor rules. Plan an enforceable remedy that preserves qualified operation rather than assuming a bank can freely transfer a public concession.

Principal authorities: Contract Act, 1872; Companies Act, 2017; relevant PPP, concession and sector licensing legislation; security and intercreditor documents; governing insolvency rules and concession direct agreement.