COMMON TYPES OF REPRESENTATION - LEGAL
Specific Representation	What Borrower needs to state
Status	Must be duly incorporated under the law of its jurisdiction & has power to own its assets and carry out its business.
Binding Obligation	The obligations undertaken in the agreement are legal, valid, binding and enforceable. Borrower will want to qualify this by any general principles of law which limit borrower’s obligations & which are referred to in the legal opinion addressed to the bank. E.g. insolvency procedures, equitable principles or public policy Banks will want to resist the qualification applying to other representations
Non- Conflict	Entering into agreement will not conflict with any laws, regulations, their constitution or any other agreement/instrument they are party to. 3^rd party can sue bank in tort for ‘procuring a breach of contractual relations’ if this isn’t included. Banks should make sure it isn’t just limited to ‘material breaches’ as this will not protect them from tortuous claim.
Power & Authority	Must have the power and authority to enter agreement and perform its obligations.
Validity and admissibility in evidence	Facility agreement is admissible in evidence in its jurisdiction of incorporation. Important if borrower is incorporated in different jurisdiction from governing law. May need government/regulatory authorisations (if extensive put in sch.) If parties need to sign doc. before authorisations are obtained, make it a condition precedent to utilise loan/get undertaking to obtain authorisation within specific time-frame
Governing law and enforcement	Law governing the facility agreement, & any judgment obtained in relation to it, will be recognised and enforced in the borrower’s jurisdiction of incorporation.

COMMON TYPES OF REPRESENTATION - COMMERCIAL
Specific Representation	What Borrower needs to state
Deduction of Tax	It is not required to deduct tax from payments made to banks which = ‘Qualifying Lenders’. Ensures there is no withholding of tax imposed on interest payments meaning banks would get less then expected, or borrower having to increase interest payment under gross-up provisions. Not repeated
Non filing of Stamp Duties	Under UK law, stamp duty does not usually apply to loan agreements, but required to protect against charges to the UK Stamp Duty Regime, or against possible foreign duties which bank is unaware. Not usually repeated unless new borrowers accede the agreement
No event of default	There is no event of default continuing or which might reasonably be expected to occur as a result of the agreement. There is no event of default under any other of its agreements which would have a ‘material adverse effect’ (this is usually a defined term) on the agreement. Borrower will only negotiate over narrowing definition of ‘ material adverse effect’ For bank, important that it refers to ‘event of default’ and not the LMA definition of ‘default’ or ‘potential event of default’. They will insist it is repeated
No misleading info	Info provided in info memo is true and accurate Financial projections prepared by the company’s directors are based on recent information and contain reasonable assumptions. All other information provided to the banks was true, complete and accurate at the time it was given Borrower will want to limit this just to written representations (banks usually accept unless key oral representations are made) that representation is qualified to say info was ‘true and accurate in all material respects (bank usually accept this) Not usually repeated
Accounting principles	The original financial statements it provided to the bank were prepared in accordance with the relevant GAAP, consistently applied policies, and give a ‘true and fair view’ (or equivalent). Give an undertaking to deliver future accounts on the same basis, but with a proviso to deal with any change in policies or practice. There has been no material adverse change in the business/financial condition of he borrower since a particular set of financial statements If repeated, ‘material adverse change’ is negotiated. Does it mean change from original or latest financial statements? If borrower does well compared to original statements, will be less severe test. But if it does bad, cumulative failings would eventually become a material adverse change. Opposite is true for comparison to latest financial statements.
Ranking	Any claims by bank under agreement will rank ‘pari pasu’ (equally) with any other unsecured creditor other than through reference through insolvency regulation.
Litigation	Banks needs to know about any litigation (existing or threatened) in order to asses risk. Usually drafted to exclude frivolous and vexatious claims
Winding up Proceedings	Bank don’t want insolvency proceedings in any form have been started or are be threatened. Borrower want de minimis provisions and wording to exclude debts which it disputes in good faith. Often repeated.
Encumbrances	Bank will want to know exact details of any existing charges over borrower’s assets. There should be no encumbrances other than those disclosed before execution.
Environmental	Full environmental audit to make sure that borrower is in compliance with environmental laws. Focus on ‘operators carrying out polluting activities. In USA (more comprehensive legislation than in UK) lender can be liable for clear up costs Usually subject to materiality and not generally repeated due to ‘environmental undertaking’ in facility
Catch all	Nothing that the borrower has omitted to tell bank that if it had they would not lend Borrowers will resist as it is impossible for them to know if they have complied.

GENERAL UNDERTAKINGS
	Type	Meaning
Positive	Insurance	Bank usually requires borrower to keep all its major assets insured. Avoids the borrower losing assets which it cannot replace, with a subsequent loss of income. For very small borrowers, or acquisition finance, bank will make borrower get ‘Keyman’ insurance over life of individuals key to ongoing success of the business. If the insured should die, a lump sum will be paid to the borrower Helps fund a replacement.
	Consents, licences and laws	Requires borrower to ensure that it maintains all necessary consents, authorisations and licences to perform its obligations under the loan document. Must comply with all laws if failure to do so might have a ‘material adverse effect’ (usually a defined term). Compliance with environmental laws often covered in separate undertaking
	Access to info and assistance	Very occasionally, undertaking is included which requires borrower to give the bank access to its books and records. The bank may also require the right to inspect the borrower’s assets. Borrower will want reasonable notice & availability restricted to within office hours.
Negative	Negative pledge	Borrower may want exceptions ‘carved out’ to ensure it can carry on business: Security necessary under equipment leasing/hire purchase Liens arising under common law, statute and in ordinary course of business – banks may restrict this to amounts overdue for max of 30 days. Cash collateralisation necessary for business arrangements Security which pre-dates facility Securities acquired through purchase of assets (may come with proviso that this security will be extinguished within a specific time frame Sett off arrangements between group companies/cash management arrangements with clearing banks Retention of title clauses – only allowed if clause is not register as a charge Project finance – will not impinge on borrower’s existing assets De minimis – allows aggregate amount of debt which borrower can create security Inter group securities. New security replacing existing security (e.g. in refinancing existing debt) Security given in relation to selling debts (‘factoring’) If contains provision that when borrower give security to 3^rd party, bank gets it as well, may not be enforceable as new security would probs fail due to lack of registration.
	Pari Passu ranking	Banks right to repayment is not subordinated to unsecured creditors
	Disposals and acquisitions	Banks can restrict or prohibit disposal of assets as this may affect cash flow. May be drafted to allow disposal of obsolete assets, or need to get consent from bank before disposing. Dealt with using financial covenants like minimum net worth (see WS2)
	Lending	Not to lend other than in the ordinary course of business (e.g. trade credit)...

#10291 - Representations Warranties And Covenants - Finance and Capital Markets

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