A loan agreement will typically include a number of statements made by the borrower. The lender relies on these statements in deciding whether or not to enter into the loan agreement with and whether to advance money to the borrower. These statements are referred to as representations and warranties.
It is rare for a loan agreement to include representations by the lender and, if it does, they will be limited to the bare minimum.
Examples of representations to be made by both parties include the following:
- it is duly incorporated in accordance with the laws of its place of incorporation, is validly existing under those laws and has the capacity to sue or be sued in its own name and to own its own property and conduct its business as it is being conducted;
- it has capacity to execute and deliver and comply with its obligations under the loan agreement;
- the loan agreement constitutes its valid and binding obligations which are enforceable against it in accordance with its terms;
- the execution and delivery of, and compliance with its obligations under the loan agreement, do not contravene any law or directive from a government body, its constitutional documents, any agreement or instrument to which it is a party or any of its obligations to any other person.
It is unlikely that the lender would give any representations in addition to this, if indeed it gives these.
Additional representations to be made by the borrower include the following
- all information given to the lender in relation to the loan agreement is correct, complete and not misleading and it has disclosed to the lender all information which it has or has access to which is relevant to the assessment by the lender of the nature and amount of the risks undertaken by the lender becoming its creditor;
- the statement of its financial affairs and all other books and records given to the lender are a true, fair and accurate statement of its financial position at the date on which they were prepared;
- except as notified to the lender in writing prior to the date of the loan agreement, no litigation, arbitration or administrative proceeding is current, pending or to its knowledge threatened which has or the adverse determination of which would be likely to have a material adverse effect; and
- no Event of Default or potential Event of Default is continuing.
The borrower may also be expected to make some more specific representations to the lender depending on the nature of the loan. For example, if the loan is to enable the borrower to purchase an asset, the borrower may represent that it has legal title to the asset and that the asset is not subject to any security interest (other than any which may have been granted in favour of the lender) and that the borrower has all necessary insurance in place should any harm come to the asset.
Representations and warranties are always made on the date that the loan agreement is entered into. The loan agreement may also state that representations and warranties are to be repeated on other dates during the term of the loan, for example on each drawdown date, on each interest payment date or on every date during the term. The latter is arduous on the borrower as the borrower has to ensure that the representations and warranties do indeed remain true. However it is important for the lender to know that the information it based its decision on remains accurate and that, for example, the borrower retains a good credit risk profile.
If representations and warranties are to be repeated, the loan agreement must make it clear that on the date they are repeated, they are repeated with reference to the facts and circumstances then existing. This means that if the borrower makes a representation about its financial statements then it makes such representation with reference to the most recent financial statements issued.
Repetition will only apply to any representations made by the borrower; not those made by the lender.
Due to the importance of the representations being correct, the lender may ask the borrower to provide it with some or all the following:
- A statement in each drawdown notice to the effect that all representations made under the loan agreement (and any other security documents and guarantees) are correct with reference to the facts and circumstances then existing;
- If it becomes aware of a misrepresentation, a certificate setting out details of the misrepresentation; and/or
- A certificate, at its request, stating that all representations made under the loan agreement (and any other security documents and guarantees) are correct with reference to the facts and circumstances then existing.
Misrepresentation is when a false statement of fact made by one party (here the borrower) to another party (here the lender) has the effect of inducing that party to enter into a contract (here the loan agreement). For example, under certain circumstances, false statements or promises made by a borrower regarding the profitability of its business may constitute misrepresentation.
For an action to be successful, some criteria must be met in order to prove a misrepresentation. These include:
- A false statement of past or existing fact has been made;
- The statement was directed at the suing party (here the lender); and
- The statement had acted to induce the suing party (here the lender) to contract.
A finding of misrepresentation allows for a remedy of rescission (intended to restore the parties to the position they were in prior to entering into the contract) and sometimes damages depending on the type of misrepresentation. In addition, if the representation is found to be a term of the contract then the normal remedies for breach of contract will apply (including specific performance, damages and/or termination, where applicable).
Event of Default
In addition to the above remedies, if the borrower makes a misrepresentation this will generally (and indeed you should make sure it does if you are the lender) constitute an event of default under the loan agreement. We will discuss events of default in more detail in Part 6 (Events of Default) of this series but, if an event of default occurs, it means that the loan is immediately due and payable on demand by the lender and any security is enforceable.
Representations and warranties are a very important clause and, due to the repercussions of misrepresentation, the borrower must ensure prior to entering into a loan agreement that any representations and warranties in the loan agreement are true and, if they are to be repeated, will remain true.
To find out more about loan agreements, or for any other finance law related matters, please contact us on 1300 544 755. One of our finance law specialists would be delighted to assist!
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