Many businesses operate through multiple corporate entities (such as companies and trusts), each with specific roles and responsibilities in the operation of the overall business. This is referred to as the “corporate structure” or the “corporate group”.
In a financing context, different entities in the group will have different roles in the financing arrangement (i.e. as borrower, security provider, or both).
It is crucial to consider the corporate structure in a financing arrangement for several reasons:
Restrictions on business activities – finance documents usually restrict what a borrower or security provider are allowed to do (such as granting security over assets, paying dividends to shareholders, and buying or selling assets – this can also extend to the whole corporate group). If not carefully considered, these restrictions can unintentionally hinder the day to day business activities of the group, impacting profitability in the long term. It is important to strike a balance between protecting the lender’s interests, and aligning with the group’s ongoing business needs.
Avoid unintended defaults – inconsistencies between unrelated agreements across the group, can inadvertently trigger defaults under the finance documents (and vice versa). A default can entitle the lender/other party to demand repayment of the loan/terminate the agreement and enforce any security – causing significant disruption to business operations and potentially leading to significant financial loss for the borrower group.
Commercial benefit – a lender must ensure that security providers receive adequate commercial benefit from granting the lender any security (otherwise the security is at risk of being unenforceable). Understanding the corporate structure will allow a lender to identify whether a commercial benefit is received or not, and make changes to the security package if needed.
Prevent “leakage” in the security package – understanding the structure will help a lender identify any “gaps” in the proposed security package, to prevent the group from being able to transfer assets outside the scope of the lender’s security.