Banks often issue “standard form” documents to customers with the conflicting direction to “please be sure to read this and ensure it is accurate and reflects your circumstances” followed by “just keep in mind that these documents are in standard form and not negotiable.”
So, when will Banks amend their documents and is it worth pouring over the fine print?
While Bank documents are often in standard form at the business banking level, Banks are still obliged to ensure that they are correct and do not impose unnecessary restraints on your business. After all, isn’t it in everyone’s best interest for your business to succeed?
If the documents are not correct or will impact your business’ ability to trade, there are ways to ease some of these restrictions and Banks will often consider amending the terms if good reason can be shown … no matter how “standard form”.
Here are some things to look for:
- Purpose – an inaccurate statement of the loan’s purpose can have flow-on effects that may trigger a default as soon as you have drawn down the loan.
- Negative pledge clauses – these are clauses that restrict your business from granting security over its assets to other entities. While this can seem reasonable, consideration should be had to trade creditors and other lenders that may need security over particular assets in order to transact with or provide further funding to your business. Careful consideration should be given to these clauses and carve outs negotiated if required.
- Restrictions on dealing with assets – security documents often contain clauses that restrict the business from selling (disposing of) its property. This can have significant implications for your business. For example, should your business be required to hold onto equipment that is no longer viable and is costing your business money?
- Cross defaults and cross collateralisation – often one simple line or clause in a document can set in motion a wave of unintended consequences. Be aware of clauses that state a default by one entity in the group (or even by a director personally) may trigger a default under the loan document. The full ambit of these clauses may be difficult to ascertain as they often refer to “Obligors”, “Related Parties” or “Related Entities”. This requires referring to definitions (or worse definitions within definitions) and in some cases to the Corporations Act in order to determine the impact of these clauses.
Cross collateralisation is a different concept however similar in many respects. Where security is granted by one entity in the group, depending on the language used it may in fact secure all debts owed by that entity to the lender. These securities are referred to as “all monies” securities. While efforts may be made to quarantine security to only the debt it is intended to secure, a cross default clause together with “all monies” security may override all efforts to quarantine debt and security granted.
I am curious to hear from others what their experiences have been in negotiating their loan and security documents with Banks. Have they been open to negotiation and kept the best interest of your business in mind?
If you have any questions, contact Deepesh Daya by email at [email protected] or telephone +61 (2) 9016 0141 or +61 (3) 9098 0437
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.