Table of Contents
If you are in the final stages of negotiating a bank loan, the bank will present your company with a draft loan agreement. This document will contain many different terms and conditions, some of which will be representations. Representations refer to the assertions you make that the bank relies on when agreeing to lend your company a sum of money. These representations in loan agreements typically cover your company’s financial and operational conditions. If these representations turn out false, you could face legal action. This article will explain the important legal implications of representations and provide common representations the bank may ask you to make.
What Are Representations in Loan Agreements?
If your company wants a bank loan, the bank needs to be confident that your company can repay the loan. Consequently, the bank will want you to provide them with certain assurances about your business’ current and future operation. The bank can include these assurances you provide as ‘representations’ in the loan agreement.
The law provides a basic degree of protection if you make a misrepresentation to a lender under a loan agreement. For example, the law allows banks to:
- demand its money back; and
- sue you for damages.
However, banks will usually go one step further by incorporating additional terms into the loan agreement to protect themselves from misrepresentations. For this reason, you must remain truthful throughout the loan negotiation period and seek legal advice immediately if you find yourself in a dispute.
What is the Purpose of a Representation in Loan Agreements?
From the lender’s perspective, representations in loan agreements are important since they:
- give lenders the information they need to reach a lending decision;
- provide legal avenues for retrieving money if the information is untrue; and
- allow the bank to terminate the loan and demand all outstanding amounts paid immediately.
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
Common Representations
Representations in loan agreements can fall into two categories: legal and commercial.
Legal Representations
Legal representations are statements about your company’s ability to enter a loan agreement. Consequently, you may need to verify that:
- you incorporated your company in line with the law;
- your company’s directors have the capacity to enter the loan agreement; and
- by entering into the loan agreement, you are not breaching your company’s constitution or company law.
Commercial Representations
Commercial representations will cover the financial and operational status of your company. The table below explains some common commercial representations.
| Representation | Explanation |
| Accounting Principles | A bank will want assurance that you have provided accurate accounts consistent with recognised accounting principles. Likewise, the bank will ask you to represent that there have not been any detrimental changes to your company’s financial condition from the day you provided the accounts. |
| Priority Ranking | A bank may ask your company to represent that they are equal with other unsecured lenders. If your company becomes insolvent, the bank will receive a return (if any) at the same time as your company’s other unsecured creditors. |
| Litigation | A bank will want assurance that your company is not a party to any legal proceedings when entering into the loan agreement. |
| Winding-up Proceedings | A bank will want you to make a representation that you are not part of any proceedings under insolvency law. |
| Environmental, Social and Governance Representations (ESG) | A bank may ask your company to represent that it is not breaching any environmental policies or engaging in any conduct that could be contrary to the aims of ESG initiatives. |
Repetition of Representations in Loan Agreements
Loan agreements are ongoing contracts. Consequently, each party owes continuing obligations that do not just end after the bank gives your business a loan. However, since you make representations at specific times, your company’s state of affairs will likely change in the future.
To minimise the legal implications of this change, most lenders make it a condition of the loan that you will have to re-represent that the initial representations are still the same.
Key Takeaways
Banks lend money on the basis that your business can repay the loan. Consequently, the bank will want assurance that your company is financially capable of repaying the loan. Therefore, you must make certain representations about your company’s financial and operational conditions when entering the loan agreement. The bank can terminate the relationship and demand early repayment if these representations turn out to be false. You can also face additional legal consequences like damages for breach of contract.
If you need further guidance, our experienced corporate lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A representation is a contractual term in the loan agreement where the borrower certifies that specified information about their company is factually accurate.
If your company represents a false state of affairs, your company will likely breach the loan agreement. This could allow the lender to accelerate the loan and demand early repayment. You can also face additional legal consequences like damages for breach of contract.
We appreciate your feedback – your submission has been successfully received.
