A credit facility agreement, a.k.a. loan agreement, is an agreement between a lender and a borrower in which the lender agrees to make a loan or credit facility available to the borrower based on agreed terms. A common example is a bank loan. Individuals and companies enter into loan agreements. For the purpose of this write up, we will discuss loan agreements entered into by companies. Please note that we will consider the relevant terms in a simple loan agreement in the context of Ghanaian law (as opposed to the terms of a syndicate or complex facility agreement).
A clear understanding of the terms of a loan agreement is needed and necessary to ensure that the company’s best interests are served and protected. Some relevant terms in a simple loan agreement are discussed below as follows:
1. The loan amount
The loan amount must be carefully checked to ascertain whether the company needs to obtain a shareholders’ resolution.
Under the companies Act, 1963 (Act 179), an amount of borrowing by a company which together with any other borrowing exceeds the stated capital of the company must be with the approval of the shareholders by an ordinary resolution.
2. The purpose of the loan
The purpose should also be checked to ascertain whether or not it is for the furtherance of the object of the company and whether approval of the shareholders will be needed to give effect to the loan. This is because any power of the directors which is exercised not for the furtherance of the object of the company is void unless approved or ratified by the shareholders of the company.
3. Utilization/ drawdown procedures
These terms specify the conditions for making the loan available to the borrower. The lender will require that sufficient notice in the form of a request and certain confirmations are given before funds can be made available. These conditions must be clearly stated and specified and not cumbersome to the borrower. These conditions may be specified in the loan agreement or in the “conditions precedent” schedule to the loan agreement.
Interest is payable at the end of each interest period. There is no law which prescribes the rate of interest to be used. Parties are free to choose a particular interest rate. Interest periods may be fixed periods or as specified by the agreement. There are sometimes default interest clauses which increase the interest rate payable on amounts which are not paid when due. This default rate should be an accurate reflection of the cost to the lender in the event of default.
Prepayments are provisions which allow the borrower to make early repayments of the loan amount. A borrower should ensure that it has some flexibility to make prepayments without incurring extra fees if possible. In some situations breakage cost will be payable where prepayments are made before the end of interest periods. This is allowed so far as the amount reflects the lenders actual loss.
6. Representations and Warranties
These terms concentrate on whether the borrower is legally capable of entering into the loan agreement and the nature of the borrower’s business. They give some form of assurance to the lender. For example, the borrower may warrant on its legal status, that it is a company duly incorporated and validly existing under the laws of Ghana, etc. Representations and Warranties are similar in all loan agreements. Where there is a breach or false representation, the lender will usually use this breach of the representations and warranties as a mechanism for calling an event of default and/or demanding repayment of the loan.
7. Undertakings/ Covenants
These terms are formal pledges or promises by the borrower to do or not to do something. They are usually split into positive, negative and financial undertakings:
Positive undertakings – The positive undertakings/covenants will include for example a duty to supply financial information to the lender, provisions on insurance policies, provisions on security, etc. They are positive because they do not impose any restriction on the borrower.
Negative undertakings – These terms list various activities that the borrower may not engage in without the lender’s consent. These terms must be checked carefully to ensure that the borrower has enough flexibility to carry on its business. A key negative undertaking is one preventing dividend and other payments to shareholders.
Financial undertakings – These terms govern the financial position of the borrower. They set out certain financial parameters within which the borrower must operate. Dates when these undertakings are tested should be checked closely as well as the separate financial definitions which will be applicable. The financial covenants are a key element of any facility agreement and probably the most likely to trigger an event of default if breached. Examples are provisions on the financial ratios; debt service ratios, etc.
8. The security
The security, a.k.a. collateral for repayment of the loan agreement is very important to the lender. The lender is interested in the kind and value of security provided by the borrower to secure the facility and would want to ensure that other persons do not obtain prior security rights. The lender is also interested in the effectiveness of the security document and will require an undertaking by the borrower to ensure that the security documents are effective at all times. A security or collateral may be a fixed or floating charge, mortgage, lien, pledge, assignment by way of security, etc.
9. Events of Default
An event of default occurs where there is a breach of the facility agreement itself. The lender may allow the borrower time to remedy a breach and may in any case apply only to material breaches or breaches of the main agreement provisions. The lender should only have the right to demand repayment of the loan if an event of default has occurred and is continuing. If the event of default has been remedied or waived, then the lender’s right to accelerate should stop.
Although the payment of tax under the loan agreement is the obligation of the lender, the lender will expect all payments of the loan agreement to be made without any set-off, deduction or withholding in respect of tax. If such deductions are required by law the lender will expect its payments to be grossed-up with applicable taxes added on. Tax indemnity provisions are included for the borrower to indemnify the lender for any taxes claimed or assessed in respect of the lender with respect to any obligation of the borrower under the facility agreement. This is a contractual matter and parties are free to agree on gross-ups.
11. Increased Costs
The lender will always reserve the right to require the borrower to pay any increased costs arising from any change in any law or regulation affecting the loan agreement. The borrower should ensure that this does not apply to an increase in taxation on the net income of the lender.
These terms specify the various charges that the lender will impose on the loan to cover the repayment risks. These terms should be checked carefully and negotiated by the borrower to avoid excessive costs. The fees may include:
Commitment fee – calculated on the undrawn balance during the loan drawdown availability period and paid by the borrower to show its commitment to the agreement.
Early redemption fee/ prepayment fee – which is set to compensate lenders for the loss on a term loan due to the early redemption.
Automatic cancelation fee- usually calculated at a flat rate calculated on the undrawn amount, etc.
13. The standard terms
The standard terms of a loan agreement set out the contract details of the parties and law which governs the agreement. These include provisions such as:
Language – Loan agreements may be in any language the parties agree to however, the parties may be required to submit a certified translated version of the agreement in the English Language when submitting such agreements to or before a public authority. It is advisable therefore, that agreements which relate to Ghana are drafted in the English Language.
Governing Law – Ghanaian law does not prohibit parties from choosing foreign law to govern their contractual relations. The Courts Act, 1993 (Act 459) empowers a court of law to give effect to the law chosen by the parties to a contract. Under certain circumstances however, the courts may decide that the dispute between the parties is more closely connected to Ghana and therefore the proper choice of law for the settlement of the dispute should be the laws of Ghana.
Choice of foreign court – Parties to a loan agreement are free to choose which forum to settle any dispute that arises in connection to the agreement however, foreign judgments will be enforced in Ghana if there exists a reciprocal arrangement with the foreign state as specified in the Foreign Judgments and Maintenance Orders (Reciprocal Enforcement Instrument), 1993 (LI 1575), (the “Reciprocal Enforcement Instrument”) and the said judgment has been registered at the High Court of Ghana. In the situation where a country or jurisdiction has no reciprocal arrangement with Ghana, or where a judgment is given by a court that is not specified under the Reciprocal Enforcement Instrument, the judgment will have to be re-litigated on its merits. Parties must therefore, choose courts the judgment of which can be enforced in Ghana to avoid re-litigation of the dispute in Ghana. Alternatively, the court of Ghana may be chosen as the forum for the settlement of disputes.
Arbitration – The choice of arbitration is permissible. Parties to a loan agreement are also free to choose the forum and the applicable law for the settlement of disputes by arbitration. Under the Alternative Dispute Resolution Act, 2010 (Act 789), a foreign arbitral award is enforced in Ghana if the award was made by a competent authority under the laws of the country in which the award was made; if a reciprocal arrangement exists between the Republic of Ghana and the country in which the award was made; or if the award was made under the United Nations Convention or under any other international convention on arbitration ratified by the Ghana Parliament.
Notices – This is a very important term. The agreement must specify how communications regarding the agreement must be made; the mode and periods. It must also provide contact details of both parties for ease of reference.
Execution – The execution or signing of the agreement is relevant to give effect to the agreement. It is relevant because companies act through an appointed officer or officers and it should be checked that the said appointed officer or officers have signed or executed the facility agreement. There must be at least one witness to the signature of the appointed signatory.
The following are important considerations for the enforcement of a loan agreement in Ghana:
corporate approvals/ consents must be obtained;
the agreement must be stamped in accordance with the Stamp Duty Act, 2005 (Act 689); and
payments to and by foreigners under the agreement must be made through authorised dealer banks in compliance with the Foreign Exchange Act 2006 (Act 723).
Finally, a legal due diligence may be conducted and legal opinion given to confirm that the agreement is in compliance with the laws of Ghana.
Author: Author: Thecla Wricketts
Associate at Bentsi-Enchill, Letsa & Ankomah