When a lender extends credit, they need assurance that the borrower’s financial and legal standing is solid. That’s where representations in loan agreements come into play. These crucial statements bridge trust between borrowers and financiers, ensuring transparency and reducing risk. For business owners, CFOs, and corporate borrowers, understanding these representations is key to navigating your next loan negotiation.
This guide explains what representations are, why they’re included, and how they can impact both parties in a loan agreement.
What Are Representations in Loan Agreements?
Representations (sometimes referred to as warranties) are statements made by the borrower about their current legal and financial situation. These are included in facility agreements—contracts that set the terms of a loan. Key representations assure lenders about the borrower’s status at the time of signing, and some may be periodically repeated throughout the life of the loan.
Why do lenders require representations? There are three main reasons:
To gather relevant, factual information about borrowers.
To provide a mechanism (often referred to as a “draw-stop”) to prevent borrowing if a representation is untrue.
To enable the lender to call a default or demand immediate repayment if a representation is proven false.
Representations also provide lenders with legal remedies, such as the ability to seek damages or rescind a loan agreement in cases of misrepresentation.
Why Representations Matter to Borrowers and Lenders
For lenders, representations mitigate risks, ensuring that their decision to extend credit is based on accurate, credible information. For borrowers, representations can clarify expectations and establish trust—key to a smoother borrowing process. However, an untrue representation can potentially lead to severe consequences, including default or termination of the loan.
Understanding the types of representations included in loan agreements allows borrowers to negotiate fair terms that protect their interests while meeting the lender’s requirements.
Key Representations in Loan Agreements
Representations can vary widely depending on the borrower, the lender, and the purpose of the loan. However, they typically fall into two main categories:
1. Legal Representations
Legal representations affirm the borrower’s compliance with legal and contractual obligations. Common examples include:
(a) Status
The borrower must confirm that they are:
Properly incorporated in their home jurisdiction.
Capable of owning assets and conducting business as described in the agreement.
This ensures the lender is working with a verified, legally established entity.
(b) Binding Obligations
Borrowers must guarantee that the obligations set forth in the loan agreement are legally binding and enforceable. This can be subject to limitations, like insolvency laws, that may affect enforceability.
(c) Non-Conflict
Entering into the loan should not create conflicts with:
Laws or regulations.
Internal company documents or constitutions.
Existing contracts or agreements.
Failure to represent this accurately could lead to disputes and even lawsuits from third parties claiming interference.
(d) Power and Authority
Borrowers must confirm they have the authority to enter the agreement and fulfill obligations. If this representation is false, the lender may call a default and potentially demand repayment.
(e) Admissibility and Enforcement
If the loan agreement’s governing law differs from the borrower’s incorporation jurisdiction, borrowers must confirm that the agreement is admissible and enforceable in their home jurisdiction.
2. Commercial Representations
Commercial representations address financial and operational implications of the loan. These give lenders a deeper understanding of a borrower’s financial condition and ability to service the loan.
(a) Deduction of Tax
Borrowers often guarantee that they are not required to deduct taxes (e.g., withholding tax) from payments owed to lenders. This ensures interest payments remain intact and lenders are not unexpectedly penalised.
(b) No Filing or Stamp Duties
The borrower must confirm that no additional taxes or stamp duties apply to their jurisdiction that could jeopardise repayment terms.
(c) No Event of Default
Borrowers must verify that there are no ongoing events of default—or situations that may escalate into one—under either this or other agreements. Lenders typically insist that this representation is repeated throughout the loan’s term.
(d) No Misleading Information
This key representation ensures:
All information provided was true and accurate at the time it was shared.
Financial projections are reasonable and based on sound data.
No misleading or incomplete details have been shared.
(e) Accounting Principles
Borrowers must affirm that financial statements provided during due diligence:
Were prepared in accordance with relevant accounting standards.
Provide a “true and fair view” of the company’s financial health.
Borrowers must also, as an ongoing obligation, disclose any material adverse changes since those statements were issued.
(f) Ranking
Borrowers often represent that the lender’s claims will rank pari passu, or equally, with their other unsecured creditors. This clarifies the lender’s position relative to other creditors in the event of the borrower's insolvency.
(g) Litigation
Any ongoing or potential lawsuits must be disclosed to lenders, as legal disputes may be costly and impact repayment. Borrowers often seek to limit this representation with provisions for materiality thresholds (e.g., only disclosing lawsuits above a certain monetary value).
(h) Winding-Up Proceedings
The borrower must confirm there are no insolvency proceedings or bankruptcy threats that could jeopardize their ability to honor the agreement.
(i) Encumbrances
Borrowers must disclose if any of their assets are encumbered, such as being secured against another loan. Overlapping obligations can weaken the lender’s position.
(j) Environmental Compliance
If the borrower’s business involves potential environmental risks, this representation ensures they comply with relevant laws and regulations to avoid fines or lawsuits and limit any potential corresponding exposure for the lender.
The Borrower’s Perspective
While representations are mostly designed to protect lenders, borrowers should carefully review and negotiate these clauses to ensure fairness:
(a) Negotiate Materiality Clauses
Where possible, add qualifiers to obligations, so representations only apply to material issues or inaccuracies.
(b) Avoid Overreach
Push back on representations that seem overly broad or unnecessary for your company’s circumstances. Focus instead on those relevant to your loan purpose and operations.
(c) Repetition of Representations
Some representations are repeated periodically throughout the loan term, often before each loan drawdown. Confirm which representations require repetition and under what conditions.
(d) Always Verify Accuracy
Providing false information, even unintentionally, can have severe consequences. Double-check financials, projections, and data shared during the loan process.
(e) Seek Legal Advice
Loan agreements are complex legal documents. To protect your interests, always consult legal counsel before signing.
When Representations Are Untrue
Misrepresentations can attract significant legal and financial consequences:
Defaults: If a misrepresentation leads to default, lenders can halt loan advances or demand immediate repayment.
Recission: Lenders may be able to rescind the loan agreement, returning both parties to their pre-contract position.
Damages: Lenders may seek compensation for losses due to negligent or fraudulent misrepresentation.
Legal remedies are often embedded in the loan agreement, reducing reliance on general misrepresentation laws. However, if misrepresentation isn’t covered in the agreement, common law or statutory remedies like those provided for under the Misrepresentation Act 1967 (applicable under English law) may apply.
The Importance of Well-Structured Agreements
Representations are integral to the integrity of loan agreements, creating a foundation of trust and reliability between borrowers and lenders. For business owners, CFOs, and corporate borrowers, understanding and negotiating these clauses is essential to ensure financial stability and legal compliance.
Whether exploring options for your next loan or needing clarity on the specifics, working with an experienced legal advisor can position you for success. Review your agreements carefully, and ensure they align with your current circumstances and future business goals. Have questions about your loan agreement? For more insights and personalised advice, reach out to Jamie Tredgold and David Wloszczowski.
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This material is provided for general information only. It should not be relied upon for the provision of or as a substitute for legal or other professional advice.
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