Chapter outline: Loan Covenants Red Flag/Warning signal Loan recovery Techniques
Loan Covenant
Written agreement or promise usually under seal between borrower and bank for the amount of the loan. Include terms & conditions of the loan, warranties, duties of each parties and certain control and restrictions on the borrower. Prepared by legal firm which are usually panel of the bank. Need to be stamped duty.
Loan Covenant
A loan covenant is a condition in a commercial loan or bond
Types of Covenants
FINANCIAL
COVENANTS NONFINANCIAL
Types of Covenants
Financial covenants
Refer to maintenance of specific ration
Types of Covenants
Non-financial covenants
Affirmative covenant
Clause that requires the borrower to perform certain action Ex: submission of periodical financial statement, maintain a minimum gearing ratio
Clause that restricts the borrower from doing certain things Ex: prohibition of mergers and acquisitions without bank approval. Clause that give the borrower information on certain things. Ex: action and penalties of default payment.
Negative covenant
Information covenant
3.
4. 5. 6. 7. 8. 9.
10.
loan agreement.
Therefore, the loan agreement must be prepared diligently.
2. Ascertain the owner of the collateral. 3. Signature of the borrower & guarantor in loan document. 4. Complete & accurate collateral information. 5. Title search for loan secured by real property.
10. Disburse the loan once the perfection of the loan has
been done.
Perfection of Securities
Land National code 1965 Section
Share
Debentures
Guarantees
Motor Vehicles
Balance sheet
Income statement Bank account statement
An outright seizure of a borrowers property will be sold at a public auction. The proceeds are used to settle debt and other legal claims relating to the judgment.
The court may appoint a receiver to take control of the borrowers EQUITY RECEIVERSHIP assets and try to get as much cash as possible out of the business to repay the bank The bank would require a court order to instruct the third party withhold funds owed to debtor to forward the fund direct to the bank. When the market value of security charged is higher than the amount of debt owed the bank would apply for court order to sell the charged asset to the public. If borrower unable to pay the debt, court order on bankruptcy will be applied. Voluntary bankruptcy is when debtor voluntary files a position to relief from debt. While involuntary bankruptcy when the debtor forced into bankruptcy by his creditor.
GARNISHMENT
PUBLIC SALE
BANKRUPTCY