Loan agreement: company; secured by guarantee

An agreement between a lender, who may be an individual or a corporate body, and a borrower, who is a company. Guarantee (probably by directors of company). Strong provisions to protect the lender. Options for alternative repayment provisions and lender actions if borrower defaults. Many other options.

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About this secured loan agreement

This secured loan agreement is for use when borrower is a company or other corporate body, or a trust. It is drawn so that lender is also a corporate body, but the lender may as easily be an individual or a trust. It is drawn primarily to protect the lender, but if you are the borrower, you have the opportunity to edit any point you would prefer not to include.

The lender has the security of the personal guarantee of one or more directors and/or their spouses and/or some other third party. The guarantee is worded to cover every obligation of the borrower. In many cases, a guarantor is much more effective than other types of security (like houses, shares or jewellery) because non-repayment risks a relationship and the reputation of the guarantor as well as of the borrower. Another advantage is that, in most situations, the lender only needs to satisfy himself that the guarantor has sufficient assets overall, and therefore doesn’t have to perform detailed valuations of individual items.

The agreement may be for a loan by a family member to her nephew’s business; by a business angel who has also taken shares; or simply an arm’s length “investment”.

There is no limit in law on the interest that the lender charges. We have provided for a greater rate of interest if the borrower falls behind with repayments. (That is done very carefully so as to avoid it being treated as a “penalty” - not allowed in Indian law.)

The agreement could be whatever you want to put in it, but we have provided a sound and comprehensive proposal containing many options. It is supported by extensive drafting notes so that you will know whether you can safely delete some provision. It is most unlikely that you will want to add new provisions, but if you do, it is easy. Our layout and use of plain English makes it very easy to edit by deletion.

Because the borrower is a company, we have included a small raft of warranties. These take effect as promises by the borrower as to aspects of its financial state. We have also provided that the signatory accepts personal liability for his proper authorisation. To some extent that person is bound in the same way as the company. All the better if he is a guarantor.

The law in this secured loan agreement

There is little statutory regulation relating to an agreement of this nature, so you can make, more or less, the deal you choose.

Drawn outside the consumer credit legislation, this agreement is not suitable for companies in the business of lending or providing credit to consumers.

Sections 124 to 145 of the Companies Act, 1956 deal with registration of charges by companies. Companies’ legislation required companies to maintain a register of charges. It is the legal obligation of the company to register every charge/debt. Its particulars shall be filed with the Registrar of the Companies (ROC) within 30 days of creation of charge. A charge means an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt.

In case of non filing and non registration of particulars of charge with the ROC, the security becomes void but non registration does not affect any contract or obligation of the company as to repayment of the money secured by the charge.

Alternatives to this secured loan agreement

Net Lawman offers three documents in this set. Each is available in two versions: one for a company borrower and the other set for a human individual or partnership borrower. All can be for any purpose.

The documents are:

Contents of this secured loan agreement

The contents of this agreement include:

  • Important interpretation provisions
  • Purpose of loan
  • Amount of loan and how advanced
  • Repayment provisions
  • Interest amount and arrangements
  • Provision for early repayment
  • Promise by borrower to make no change to capital structure.
  • What happens if things go wrong - notices, consequences and so on
  • An option on possible assignment of the rights and obligations set up under the agreement.
  • Borrower’s warranties
  • Guarantor’s obligations
  • A round up of legal matters which many draftsmen use to create another ten paragraphs. Here they are in one place and in plain English
  • Around 1200 words of helpful drafting notes

This document was written by a solicitor for Net Lawman. It complies with current Indian law.

IN-LDGloa15 - Loan agreement: company; secured by guarantee

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