Banking hot topics Q&A – May 2020

Since the outbreak of COVID-19, Blake Morgan’s Banking and Finance team has been assisting clients across a range of sectors, with issues on their banking facilities.

In case these are instances where other businesses may benefit, we have collated the commonly asked queries and below is our second hot topics Q&A.

Q) I am meeting my Financial Covenants at the moment, but because of COVID-19 my financial forecasts indicate that I will breach them at the next test. Am I in Default?

A) This turns on the distinction between actual and potential events of default, both of which are comprised in the commonly used term “Default” but which have quite different consequences. Unless you also have forward looking covenants that require testing against your cashflow forecast, then a formal “Event of Default” entitling your lender to demand repayment has probably not yet occurred. There may be a potential event of default which would trigger a range of rights on the part of your lender (for example to refuse to permit future drawings, or trigger a cash trap, or to restrict other activities).

The LMA definition of “Default” is:

“Default” means an Event of Default or any event or circumstance specified in Clause 25 (Events of Default) which would (with the expiry of a grace period, the giving of notice, the making of any determination under the Finance Documents or any combination of any of the foregoing) be an Event of Default.

What’s important here is the wording in brackets. The projected covenant breach is only a Default if the particular conditions specified apply to it. In fact, none of the conditions apply: there is no applicable grace period, notice requirement or right to make a determination that applies in such a way as to say that the projected non-compliance has the ability to become an Event of Default.

The picture is different if your “Default” definition includes a “lapse of time” condition, because then obviously, in time your projected breach would become an Event of Default. It is for this reason that borrowers usually seek to negotiate any such wording out to bring the definition into line with the slightly narrower LMA approach.

That said, you should be talking to your lender and ensuring that you can agree a suitable covenant waiver or other accommodation to make sure that there is a plan in place. Most lenders are sympathetic to the difficulties facing otherwise good businesses and are very willing to offer appropriate support.

Q) I have a document that needs signing and registering at the Land Registry – can the signature page just be printed and signed?

A) These rules are governed by HM Land Registry (HMLR) who have taken a small step towards accepting electronic signatures on deeds.

From 4 May, HMLR will temporarily accept deeds signed using the ‘Mercury signing approach’. This involves capturing a signature page with a scanner or camera and emailing the image to the legal advisor attaching the whole document as an electronic attachment, with authority and confirmation that the signature page is to be appended to that version of the document. Signatures must still be signed in pen and witnessed in person.

Q) Can a statutory declaration be administered remotely?

A) A solicitor does not need to see the declarant sign the document, nor witness it. The document just needs to be signed by the declarant before being administered. It has been customary for the declarant to be physically present when the solicitor attests the declaration because a prudent solicitor needs to satisfy themselves as to when and where the declaration was made.

If they wish to do so, the solicitor may be happy to use video conferencing or video calling software for a clear and uninterrupted picture of the declaration being signed by the declarant. If the documents are then immediately and securely forwarded to the solicitor to prevent any transitional alteration (including by email, providing two wet ink signatures are not required), this should suffice for the solicitor to complete the attestation. It is still not known if statutory declarations can be executed in counterpart.

Under section 19 of the SDA 1835, a fee becomes due and payable to the solicitor on administering the attestation as a discharge of public office (currently £5 for a statutory declaration and £2 per exhibit). With the government measures in effect, this is solved simply by paying the solicitor electronically or sending payment in the post.

Q) Can I draw an undrawn facility?

A) Depending on the terms of the facility, there may be restrictions if you are already in default (for example because of a breach of a financial covenant) or unable to make the repeating representations on the date of any drawdown/utilisation request and the drawdown/utilisation date. These provisions would need to be checked. There may also be additional covenants set at a different threshold that are tested when additional drawings under a facility are requested

A borrower would also need to consider the practical aspects of obtaining a signature of an authorised signatory, confirming how any drawdown or utilisation request can be signed and how this should be delivered.

Please also see our previous hot topics Q&A here, for further guidance.