PERSONAL AND CONFIDENTIAL
Mr. A Date: ……………
RE: LOCAL COMPANY AVAILING FOREIGN LOAN
With reference to the above, we understand that a local manufacturing company wants to borrow foreign currency loan (USD) from an International Bank in Europe at an interest rate of LIBOR + 3% p.a. with a repayment period of 7 years. The loan amount will be to acquire existing/ new projects, for repayment of loans, etc.
Our legal opinion will only confine to the legal aspects of such transaction between the foreign lending institution and the local borrower.
The two governmental institutions in which we are concerned with in relation to foreign currency loan will be the Board of Investment and Bangladesh Bank.
The Board of Investment (BOI) is established for the purpose of promoting investment within the country and is somewhat a regulatory body which deals with the affairs of the private industries formulating policies from time to time and giving them assistance and guidance. The Company in question being a local manufacturing concern must be registered with BOI to avail such assistance. Approval from BOI is required of the terms and conditions of foreign private loan agreements. However BOI has set certain prescribed criteria, if met, their approval will not be necessary and mere registration of the foreign loan agreement will suffice. Approval is not required if:
a) the effective rate of interest does not exceed LIBOR+4% (effective rate of interest is the sum of the stated annual rate of interest and the annualised fees such as commitment fee, syndication fee, front end fee, project appraisal fee, etc.)
b) repayment period should not be less than 7 years.
A & Associates Continuation Sheet
Registration of the foreign loan agreement merely requires that a copy of the foreign loan agreement duly executed be provided to BOI for automatic registration along with prescribed forms.
If the above criteria are met, approval from Bangladesh Bank is also exempted. There will be no requirement of approval of the Bangladesh Bank/BOI for the transfer and the repatriation of the loan amount as well as the transfer of all other payments to be made by the borrower under the loan agreement. A general sanction for such remittance is also given in the Foreign Private Investment (Promotion and Protection) Act, 1980.
All governmental consents and approvals are to be obtained by the borrower prior to disbursement of loan.
Prior to entering into the loan agreement the legal documentation involved will be looking at the corporate authority under the Memorandum and Articles of Association of the borrower to see the extent of its objects, whether it covers the acts and businesses in which the Company proposes to be involved in. The authorised capital of the borrower must also be adequate to absorb any new project proposed to be undertaken/acquired by the borrower. A thorough investigation has to be conducted with regard to the current status of the assets of the Company, both movable and immovable (whether they are already encumbered as security for existing loans/liabilities) and the availability of other securities besides those of the Company to cover the whole liabilities of the borrower under the loan. In certain circumstances if the Company is entering into new projects, the lender has to be sure that the borrower has to have the technical know how to embark into the new project or has made arrangements for acquiring such technical know how.
The legal issues involved in the loan agreement :
|1.||Representationsand Warranties:||Borrower shall represent and warrant that :
a) it has authority to conduct its business, enter in the loan agreement and perform the obligations thereto.
b) the audited financial statements (Balance sheet, profit and loss account, management reports etc.) are a true and accurate state of affairs, in conformity with acceptable accounting principles and no material adverse change has occurred since the date of the reports
c) tax returns and all tax assessments, fees and other governmental charges of the borrower or its properties have been paid up to date.
d) there exist no litigation or threat of litigation which might adversely affect the financial position of the company
|A & ASSOCIATES Continuation Sheet|
|e) has good title to its properties and has the right to all concessions, trade names, trade marks, patents and licence agreements necessary for the conduct of its business.f) no default in any other agreements
g) the execution of the loan agreement and securities documents has been duly authorised
h) the entering and compliance to the terms of the loan agreement does not conflict any prior agreement(s), the Articles of Association of the Company or any judgement, decree or statutory provision of law.
|2.||Call Notice andDisbursement Procedure:||Call notice must be received by bank within stipulated period in loan agreement, certified signatures of person(s) authorised to issue call notice on the loan must be receive prior to the issue. On receipt of funds, Bank must receive confirmation of receipt and bank statement showing date and amount of sum received.|
|3.||Conditions precedentof disbursement:||a) if authorised and/or paid up capital has to be increased, the same has to be doneb) all governmental consents, approvals, licences, registration have to be completed and documented
c) proof of title of any immovable properties should be produced
d) all securities documentation has to be completed, executed and filed with the respective authorities depending on the form of securities the Bank requires, e.g. equitable/legal mortgage, hypothecation, floating charges etc.). Original documents will be kept with a duly authorised agent of Bank in Bangladesh.
e) the execution of all other agreements in relation to the loan agreement, as may be required under the loan agreement e.g. project funds and share retention agreement, security sharing agreement, technical know how agreement, etc.
f) Memorandum and Articles of Association in form and substance satisfactory to Bank.
g) appointment of auditors acceptable to Bank.
h) arrangement satisfactory to Bank with respect to installation and operation of an account, cost control and management information system.
i) Board resolution approving all the acts and deeds of the Borrower in relation to the loan.
|A & ASSOCIATES Continuation Sheet|
|j) if loan is for implementation of project, that satisfactory arrangement has been made for purchase, installation, commission of plant; or purchase of equipment; or for transfer of know how etc.k) appointment of Managing Director/CEO approved by Bank
l) achievement of the debt to equity ratio stipulated under the loan agreement.
m) if there is any exemption of taxes, evidence thereof.
n) appointment of agent in the country of the Bank to receive summons on behalf of borrower.
o) adequate insurance coverage (where Banker is financing for procure of plant/equipment, Banker shall be made payee of such insurance policies).
p) the completeness and conformity of legal documentation has to be verified and confirmed by lawyer of the Bank.
|5.||Securities:||For covering the total liabilities of Borrower, Bank may require :
a) equitable/legal mortgage of all immovable assets of borrower or Directors of the Company,
b) hypothecation of all plant and equipment,
c) first floating charge on all movable assets,
d) personal guarantees,
e) corporate guarantees,
f) execution of promissory notes.
– however provisions has to be made for allowing short term loans by borrower for working capital with security.
|6.||Covenants:||a) to keep all assets in good repair and condition.
b) to renew all rights, powers, privileges, licences, leases, insurance policies till full adjustment of all liabilities of borrower.
c) procure accounts to be audited in accordance to law by auditor approved by Bank.
d) to furnish:
A) quarterly –
i) trading and profit loss account including physical and
ii) financial progress and prospect of borrower’s operations
B) at the end of each financial year
i) copies of complete audited accounts
ii) management letter from auditor relating to the state of affair of the financial control procedures and accounting system and management information system
|A & ASSOCIATES Continuation Sheet|
|iii) report from auditors certifying that based on its audited account the borrower has complied with all financial covenants under the loan agreement .e.g. current ratio, debt/equity ratio, debt service coverage ratio etc.C) before the beginning of each Financial year
i) copies of projected balance sheet at the beginning and end of such financial year.
|ii) estimated trading and profit and loss account for the yeariii) statement of physical and financial programme with basic assumptions on which the same are based.
iv) statement showing the estimated source and application of funds for the year.
|7.||Restrictions:||a) Not to create any further mortgage/charge, pledge, lien or other encumbrances over the assets without written consent from Bank ( provision has to be made for creation of charge over receivable, stock, work-in-process and inventories to secure short term debt)b) Not to have subsidiary
c) Not to sell, lease, lend, transfer or otherwise dispose of or part with possession (except in the ordinary course of business) whole or any substantial part of its undertaking/assets
d) Not to make loan, guarantee or give credit (not being credit given in the ordinary course of business)
e) Not to enter into any contracts which are not on arms-lengths term
f) Not to amalgamate, merge or consolidate or reorganise
g) restriction on payment of dividends
h) Not to incur expenditure or commit for expenditures over a stipulated amount
i) Not to incur, assume or permit to exist any further indebtedness without written consent
j) Not to enter into any partnership, profit-sharing or royalty agreement, technical assistance agreement and similar arrangement
k) restriction on disbursement
l) change financial year
m) issue any shares other than as envisaged in the financial plan
n) Not to alter the Memorandum and Articles of Association in such manner as to adversely affect the interest of the Banker.
|9.||Governing law||Generally governed by the law of the Banker’s choice.|
|A & ASSOCIATES Continuation Sheet|
For the purpose of credit monitoring, the Bank may also require that it has a nominee Director in the Board and the quorum for Board meetings shall only be fully and properly constituted with the attendance of the Bank’s nominee Director or in case of resolutions by circulation if provided for in the Articles of Association of the borrower, the consent of the Bank’s nominee Director for such resolution is required for the same to be valid.
It may be mentioned here that inspite of the completeness and effectiveness of all legal documentation to safeguard the interest of the Bank, the Bank should ascertain the creditworthiness of the borrower and its track record to its full satisfaction before entering into any agreement because realisation of defaulted dues is a protracted process.
If you have any further queries please do not hesitate to revert back to us.
For: “The Lawyers & Jurists”
M.L.Hotel Tower Ltd,208,Shahid Syed Nazrul Islam Sarani,
Bijoy Nagar, Dhaka-1000.