Re: Legal Opinion regarding status of the loan liability of Company 1.
We refer to your letter dated February 12, 2007 on the above subject.
From perusal of your letter, it appears that Company 1 (“COMPANY 1”) is one of the existing clients of Company 2 (“COMPANY 2”). COMPANY 2 has been providing COMPANY 1 lease facility, the agreement of which was not provided for our perusal. We have been informed that the project and the land of the project of COMPANY 1 are mortgaged to COMPANY 2 as security.
Recently the board of directors of COMPANY 1 in their board meeting dated 25 June 2006 have resolved to sell and transfer all the shares of the existing shareholders of COMPANY 1 to Mr. x and Mr. y (“the Buyers”).
To settle the liabilities of COMPANY 1 with COMPANY 2, the Buyers have started negotiation with COMPANY 2. The buyers have agreed to pay COMPANY 2 Tk. 3,500,000.00 by March 2007 in two phases and decided to take the rest of the liabilities of around Tk. 4,800,000.00 in their name.
In these circumstances, you have sought our legal opinion as to the following:
(a) The documentations needed regarding the sale of the mortgaged project and COMPANY 2’s involvement into the legal documents.
(b) The legal process regarding the transfer of shares of COMPANY 1 and the transfer of liabilities of COMPANY 1 to the name of the Buyers.
(c) What terms and conditions COMPANY 2 could put into their consent letter.
Transfer of all the shares of COMPANY 1:
According to Section 27 A of the Bank Companies Act 1991, no resignation letter of the Directors of an Indebted company shall be effective and no Directors shall be entitled to transfer or sell his shares without the prior approval of the Board of Directors of its lenders. As such we are of the opinion that, before the existing Directors of COMPANY 1 could resign from the company and could transfer or sell their share to the Buyers, they need the prior approval of the Board of Directors of COMPANY 2 and any other lenders of COMPANY 1.
We have perused the Deed of Agreement dated 27 June 2006 for sale of the entire shares of COMPANY 1 (“the Agreement”), which was supposedly executed between the existing shareholder of COMPANY 1 and the Buyers. Please note that the Agreement is not a standard Share Sale Agreement, which contemplates and documents the whole implementation of the transactions leading to the transfer, from pre-closing conditions to be fulfilled prior to transfer and post closing conditions to be fulfilled after transfer. Moreover, the agreement also does not contain any schedule identifying the shares which are to be sold by the shareholders of COMPANY 1; and purchased and transferred to the Buyers. Although the name of 10 existing shareholders are mentioned at the beginning of the Agreement as 1st Party, only 7 Shareholders have actually signed the Agreement. So the Agreement was not properly executed and as such has no legal force. It is our opinion that COMPANY 2 should ask the existing shareholders to execute a proper Share Sale Agreement with the Buyers.
From perusal of the documents it is apparent that that the buyers are not buying the mortgaged project, they are buying all the shares of COMPANY 1, i.e. COMPANY 1 as a company. Upon acquisition of the COMPANY 1 shares, the Buyers would have acquired all the assets and liabilities in the name of COMPANY 1 and hence if the mortgaged property is in the name of COMPANY 1 there is no requirement of a separate agreement for the sale of the assets of COMPANY 1 to the Buyers.
Process of Sale and Transfer of Shares
Upon execution of a proper Share Sale Agreement, the following will occur on and after closing of the transaction:
1. The Seller will:
- have received full sale price of the COMPANY 1 shares,
- transfer the COMPANY 1 shares to the Buyers with the approval of the Board of Directors,
- deliver all original share certificates and corporate books, including the unissued share certificate book, the Register of members, etc. to the Buyers, and
- cause their directors to resign from the Board of Directors and to replace them with appointment of new directors selected by the Buyers.
The transfer of the shares shall have to be made in compliance with the relevant Articles in the Articles of Association relating to transfer of shares and Section 38 of the Companies Act, 1994.
Settlement of liabilities of COMPANY 1 with COMPANY 2:
To settle the liabilities of COMPANY 1 with COMPANY 2, the Buyers have agreed to pay COMPANY 2 Tk. 3,500,000.00 by March 2007 in two phases and have offered to take over the remaining the liabilities of around Tk. 4,800,000.00 in their name.
We have been informed that the Buyers want to assume the lease obligations of COMPANY 1. If that is the case, the lease agreement will have to be assigned to the Buyers by ovation, a tripartite agreement amongst, COMPANY 1, COMPANY 2 and the Buyers agreeing to the terms and conditions of the transfer. Thereafter a Lease Agreement will be entered into between COMPANY 2 and the Buyers. However, the Lessee in this case with be the Buyers in their individual and personal capacity and the mortgage will be a third party mortgage by COMPANY 1 a company. We are not sure if COMPANY 1 is entitled under its Memorandum of Association to grant third party mortgage. If not then, the assumption of the lease by the buyers may jeopardize the enforcement of the mortgage in case of default.
In view of the complications above, we advise that as the Buyers will be acquiring COMPANY 1 itself, they will be indirectly assuming the obligations of COMPANY 1 under the Lease Agreement with COMPANY 2 and there is no apparent need to transfer the liabilities.
The Buyers can still adjust the liabilities of COMPANY 1 in accordance to their plan, the payment by the Buyers can be shown as a capital investment by the Buyers in COMPANY 1 or as a shareholders’/directors’ loan to COMPANY 1. Since the COMPANY 1 will be theirs, internally they can adjust as to how they will financially treat their payments to COMPANY 2.
Whether the Buyers will assume the COMPANY 2 lease facility and liabilities directly or indirectly through COMPANY 1, it will be prudent to bind their agreement to partially adjust the liabilities of COMPANY 1 by a tripartite agreement. Fresh personal guarantees will be required to be collected from the Buyers once they have acquired COMPANY 1 or assume the liabilities of COMPANY 1, which is the earlier.
If you have any further query, please do not hesitate to contact the undersigned.
For: “The Lawyers & Jurists”