Updated November 2016
This How-To Brief outlines steps to structure a simple debt financing from both the lender's and the borrower's point of view.
1Discuss the proposed loan with the lender
- The first item to consider is how well you know the lender and its practices. This may be a lender that you have had numerous dealings with and in respect of which an established practice of responsibility and scope of due diligence has been put in place.
- Ask the lender if it wishes to have a commitment letter reviewed before being sent to the borrower (usually issued by the lender before counsel is engaged).
- If you are working with a lender for the first time, it is very important to establish, up front, what its priorities are and how extensive an enquiry into the business of the borrower is expected.
- Canvass security options with the lender, such as a general security agreement, a personal guarantee of the principal or collateral security for the guarantee such as a mortgage or pledge of shares or other assets.
- Discuss whether the security from the borrower is to be a first security.
- Discuss the time frames and obligations of the borrower.
- Discuss the nature of the borrower's business with the lender.
2Obtain a commitment letter from the lender
- Discuss with the lender if there is to be a loan agreement and whether there are to be any financial covenants.
- Discuss with the lender if it wishes you to conduct preliminary searches against the borrower.
- The lender's solicitor should ascertain who is acting for the borrower.
- The borrower's solicitor may have some questions regarding the commitment letter.
3Ask the borrower's solicitor to provide copies of articles, by-laws and any unanimous shareholder agreement and related information
- One of the early steps the lender's solicitor should take is to write to the borrower's solicitor setting out a list of all of the information that, at this stage, the lender's solicitor will require to commence preparation of the documentation:
- a corporate chart specifying ownership of the borrower and its related parties (particularly those involved in the transaction)
- the borrower's full proper name (including all French variants) together with a list of all predecessor names (whether by amalgamation or otherwise) including dates of use and a list of business names (whether by amalgamation or otherwise) including dates of use and a list of all business names or trade styles used in the conduct of the business including dates of use in respect of the borrower and any guarantor
- a list of directors and officers (including positions held)
- names of the parties who will sign the documents including the positions held
- particulars of trademarks, patents, copyrights, industrial designs and other intellectual property including copies of registrations
- Obtain copies of the following:
- In connection with an individual guarantor, in addition to any of the items catalogued above that may be relevant to his or her status as a guarantor, you will also require identification of the individual's full legal name and date of birth.
- where a corporation, up-to-date constating documents (i.e., articles of incorporation, articles of amalgamation, articles of continuance, etc.) including all amendments
- where a corporation, shareholder agreements, options and warrants
- where a corporation, the by-laws or (at the very least) excerpts from the by-laws dealing with the execution of instruments and the borrowing by-law (if any)
- a detailed list of machinery, equipment, non-inventory motor vehicles and other fixed assets, grouped by location and, in the case of motor vehicles, copies of the vehicle registrations and identification of all equipment that is a fixture
4Conduct preliminary searches and due diligence
- The lender and its solicitor must agree on the scope of due diligence and which of them is to undertake that due diligence.
- Status capacity and other matters:
- It is important to search corporate status of the borrower at the outset.
- It is also critical to confirm that the borrower is not bankrupt and has the corporate capacity and authority to carry on business in the jurisdictions where it purports to do so.
- Rectifying deficiencies in respect of corporate capacity and authority can take some time, so the earlier the problems are identified the better.
- The following are typical searches in the Province of Ontario for this information:
- Certificate of Status
- Ministry of Government Services, Profile Report
- Personal Property Security Act and Repair and Storage Liens Act
- Bank Act
- Executions Act
- Bulk Sales Act
- Bankruptcy and Insolvency Act
(See links to the above-listed resources and statutes in the Resources section of this How-To Brief)
5Prepare the draft loan agreement
- Often, the commitment letter will identify the borrower but include only a generalized reference to other parties who will be important to the transaction, for example,
- guarantees and security to be provided by subsidiaries and shareholders of the borrower
- postponements of claim to be delivered by all related parties
- priorities agreement to be obtained from existing lender(s) or landlord
- Clearly, these items will need to be expanded upon. Often the lender may have this information already and a quick telephone call will be sufficient to provide additional information needed.
6Prepare the draft security documents
- The lender's solicitor will prepare drafts of the documents which, in this case, will be a loan agreement, general security agreement and form of guarantee.
- Discuss with the lender various aspects of the loan agreement, such as conditions precedent and the advance of the loan and events of default.
- Discuss the terms of the general security agreement and permitted encumbrances as disclosed in the searches.
- Discuss with the client which encumbrances are to be discharged.
- Discuss the form of guarantee.
7Forward the draft loan documents to borrower's solicitor for comments
- Forward the drafts to the borrower's solicitor for comments. For example, the borrower's solicitor may wish to negotiate events of default, grace periods, or limit of liability on the guarantee.
8Register the financing statement under the Personal Property Security Act
- The lender's solicitor should obtain instructions for the length of registration and what collateral is to be checked in the financing statement.
- The borrower's solicitor may wish to comment on the form and description of collateral.
9Report to the lender
- The lender's solicitor should report on the registration of the financing statement and the need to renew and put a tickler in a system so that the solicitor can remind the lender ahead of the renewal date of the need to renew (but should disclaim responsibility for so doing).
- Sample loan agreement
- Certificate of Status: The Ministry of Government Services has contracts with three service providers that can issue Certificates of Status or any other standard corporation/business name search product:
- Bank Act, S.C. 1991, c. 46
- Execution Act, R.S.O. 1990, c. E.24
- Bulk Sales Act, R.S.O. 1990, c. B.14
- Personal Property Security Act, R.S.O. 1990, c. P.10
- Repair and Storage Liens Act, R.S.O. 1990, c. R.25
- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3