We receive several enquiries a week regarding disputes relating to loan agreements between individuals, individuals with companies and companies lending to companies. In virtually all enquiries, the dispute centres on repayment of all or part of the loan. This article sets out nine tips when raising finance by way of a loan. It is just a heads up that getting a loan agreement right is not that simple. If you follow these nine tips you can avoid bitter disputes regarding repayment. The focus is primarily on a private company raising debt finance secured on its shares but some of the tips concern loans generally.
1. A loan Agreement is a contract – The first thing to remember is that a loan agreement is essentially a contract. Like any contract it must set out the responsibilities and benefits of each of the parties carefully and clearly. It must also be very careful not to find itself in conflict with the substantive law. Any clause or clauses that are contrary to the substantive law will have the consequence of being unenforceable.
2. Loan agreements and consumers – When lending to an individual pay particular attention to the Consumer Credit Act 1979 and 2006. The Consumer Credit Act 2006, inter alia, removes the financial limits of the 1979 Act and extends protection to sole traders and partnerships of up to 3 people. If the party you are lending to is an “individual” under the Consumer Credit Act then you need to comply.
3. Powers in the articles authorising loan agreements – With companies the first thing when performing any order of business is to check what powers you have under your articles. A company can borrow money unless restricted by its articles – the Companies Act 2006 (the “Act”), (pre 1 October 2009, objects were part of memorandum which became articles). Directors must have authority to borrow money. if there are restrictions the appropriate minutes should be recorded and resolutions and/or authorisations should be passed. If you ignore these formalities you could find that the loan is unenforceable.
4. Loan agreements and Debt Finance – There are various types of debt finance, secured loans against a company’s assets are just one of them. Other common examples are debentures, commercial paper, bonds, euro medium-term note programme. Secured debt is the core focus of this article.
5. Cost, Risk, Benefits of loan Agreements – Surprisingly, we see several types of complex loan contracts which purport to comprise very sophisticated charges (including over property) for substantial sums (substantial refers to sums above £50,000). These contracts are usually hopelessly misconceived. On a cost, risk and benefits analysis it is recommended to get proper advice as the cost of an unenforceable contract far exceeds the price for professional advice.
6. Secured Debt Loan Agreements – Secured debt means that the lender is able to recover the loan from the assets of the debtor if the debtor fails to pay. In the case of a private company the Act sets out specific formalities that must be followed when issuing security for a loan. The Insolvency Act 1986 and the Law of Property Act 1925 (where property is the asset) may also be relevant.
7. Taking Security for a Loan Agreement – Check that the company has authority to grant security over its assets. As recommended in tip 3 above always check the company’s articles before taking business decisions, otherwise you could be acting outside the scope of the authority set out in the articles.
8. Assets – A company can grant security over any of its assets including property, shares, machinery and intellectual property rights.
9. Registration of a Loan Agreement – Registration of the security is very important. You need to refer to the Act for compliance with registration within prescribed time limits. There are adverse consequences for the lender that fails to register charges.
This practice area is very complex, the good news is that it is mostly procedural. Meticulous following of the formal procedures as well as knowledge and experience when drafting the agreements should guarantee a stress free loan transaction.
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