Arrangements with third-party creditors: Introduction

Hi my name is Richard Dusome and I'm a Financial Services lawyer at Gowling WLG and you are watching video one of our Arrangements with Third Party Creditors video series.

Over the next couple of videos, we're going to walk you through how to identify third party creditors of your prospective borrower. We will also highlight some of the arrangements and the documents you need to put in place to effectively deal with these third parties.

It goes without saying that you all provide great client service to your borrower clients.

You are responsive, efficient, you know their business and what they need in terms of financial services and credit accommodation.

But despite all of your best efforts, chances are you will not be your borrower's "one and only" when it comes to their borrowing needs.

There will be internal credit, industry and geographical limits that stand in the way, leading your borrower to seek other third party sources for part of their debt financing needs.

So part of your job will be to skillfully structure the credit facilities you are offering to your client around the existing framework of third party creditors that it deals with. Early identification and considered solutions are key to having a happy borrower.

As this is a very broad topic, we have developed a series of videos that address some of the third party arrangements you will run into and things you may need to consider in navigating your way through them.

For discussion purposes, we need a perspective. So we are going to presume that your institution is the Senior Lender providing new operating or general financing to a prospective Borrower in Ontario with the intention of having general first priority security over the Borrower's assets.

We will also assume the Lender has done the traditional corporate and lien searches to identify Third Parties. And finally we will assume that the Lender has completed its own internal due diligence of the prospective Borrower's operations and financial statements.

Guiding Principle:

The one thing you need to remember as a guiding principle in this exercise is that you cannot bind a Third Party through a simple covenant in your Loan Agreement with the Borrower.

A negative covenant prohibiting payments to Third Parties in the Loan Agreement is nice. But if the Borrower breaches that covenant, all you have is an Event of Default. In most cases, you cannot claw that payment back from the Third Party who received the funds without a direct covenant from the Third Party in favour of the Lender not to accept the payment.

The Solution:

The Solution is that a Lender needs to obtain a signed agreement or other document in its favour directly from the Third Party before making loans and advances to the Borrower. This will preserve the Lender's rights and to permit direct enforcement of those rights as against the Third Party.

We invite you to review all of the videos in this series for examples of the spectrum of issues you may need to consider in structuring your financing.