The vast majority of companies have bank debt. It is frequently the case that once the loan and security documentation is executed it is filed away and, save for any regular reporting requirements, forgotten about.
There are however, certain business activities that should trigger a red alert for in house counsel and prompt a check of any loan documents.
Most facility agreements will have covenants (also called undertakings) where the borrower promises to do or refrain from doing something. The covenants are there to give the lender some control over the borrower to prevent the borrower’s financial condition and assets altering significantly from its position when the lender first made the loan.
Some of the most common restrictions in facility agreements relate to:
- Making an acquisition;
- Entering into a joint venture;
- Making distributions/paying dividends;
- Opening bank accounts, other than with the Lender;
- Making disposals of assets or land;
- Entering into material contracts;
- Incurring financial indebtedness;
- Granting security over its assets;
- Creating new subsidiaries;
- Issuing new shares or amending rights attached to existing shares;
- Lending money or granting guarantees.
In house lawyers are highly likely to be involved in these activities, so they are particularly well placed to check whether or not lender consent is needed before any action is taken.
If lender consent is needed then you need to factor in:
- The time it will take to obtain lender consent.
Your lender will need sufficient information to understand the implications on the business and its facility of any particular course of action.
- Potential costs
For example, if the facility agreement needs to be amended to reflect the terms of the lender consent, or the lender wants to increase the cost of borrowing in circumstances where it considers its risk has increased
If there is more than one lender to the business then this can result in further potential delays to the process.
If lender consent is not obtained when it is needed the business runs the risk of being in breach of its banking covenants, with the ultimate sanction being the lender demanding repayment of its loan and enforcing its security.
So checking the loan and security documents can be a straightforward way for you to bring real value to your business and should be top of the check list when any notable business activity takes place.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.