Learn to draft a loan agreement like a pro

DeekshaSinghLoan agreements, like most commercial agreements, have a standard structure that must be moulded and adapted to suit specific transactions. In corporate lending, that is, where a bank is lending to a company, the amounts involved tend to be substantial and both the bank and the borrower will typically have legal representation. The bank’s lawyers usually draft the first version of the loan documents and the borrower’s lawyers review and negotiate the terms of the agreement on behalf of the borrower.

Remember, a loan agreement goes through many rounds of discussions and negotiation. A drafting lawyer must be prepared to rework the draft several times.

Term sheet

Before the lawyers begin drafting, the bank and the borrower enter into a term sheet that lays down the key commercial points that they have agreed upon in relation to the loan. Referred to as a financing term sheet, it is the basis for the legally binding documents that the lawyers have to draft. Generally, it covers only the more important aspects of a deal, without going into every detail covered in a binding contract. Typically, the authority or committee within a bank that reviews and approves loan proposals also considers financing term sheets.

Facility agreement

Often, a corporate loan is also called a ‘facility’ provided by the bank to the borrowing company and so, a corporate loan agreement is also known as a facility agreement.

A facility agreement between the bank and the borrower sets out the terms laid out in the term sheet in the form of a binding legal agreement. It contains the details of the loan, the manner in which the loan will operate, and the terms and conditions that have to be fulfilled by the parties to the agreement.

Each facility agreement is different and is drafted bearing in mind the nature of the facility. While there are several ways of drafting facility agreements, all of them can be divided into the following key sections—introductory, interpretation, operational, terms and conditions, and boilerplate clauses.

The introductory section

APCCLP_CompanyLaw-BannerAt the beginning of a facility agreement, the introductory section contains all the vital information that sets up the contract. This is typically the part where the drafter tells the reader what is being communicated, and what will be contained within the body of the contract.

The title, the exordium, the recitals, and the table of contents, which are items that are found at the beginning of most commercial agreements, are placed at the beginning of a facility agreement also.

The interpretation section

Every facility agreement also needs a separate section defining the special terms used in the agreement, or terms that are used in a particular way in the agreement. Typically, in facility agreements in India, definitions are provided at the beginning.

This section should be accurately drafted as it will significantly impact the way in which key clauses in the agreement operate. Many definitions are common to all facility agreements, but they can have minor variations depending on the specific transaction. It is, therefore, important for the drafter to tailor the definitions to suit the term sheet.

Most facility agreements will define terms like “Borrower”, “Obligor”, “Material Adverse Effect”, and “Event of Default”. A drafter must examine the terms of the particular loan transaction and determine how they should be defined.

In addition to a definitions section, a facility agreement can also contain a section that sets out specific rules for interpreting the agreement. These rules apply through the document.

The operational section

DraftingCreditFacilityAgreementsThis is the section of the facility agreement that deals with the operational details of the loan, that is, the amount of the loan, the term and purpose of the loan, how the loan will be drawn by the borrower, the repayment schedule, the details of payment of interest, conditions relating to prepayment of the loan, and so on. Obviously, these details are transaction-specific and the drafter will need to rely on the commercial understanding contained in the term sheet to draft the clauses in this section.

Terms and conditions

The terms and conditions section of a facility agreement is transaction-specific and contains the terms and conditions based on which the lender agrees to give a loan to the borrower. These terms and conditions differ among agreements and include both generic conditions that any lender would ask of a borrower—such as the borrower’s capacity to take the loan—as well as conditions that specifically relate to the facts and circumstances of that particular facility. An example of a specific condition is one where the borrower has to obtain the necessary environmental approvals, if the loan is for setting up a power plant.

Broadly, the provisions in this section can be categorised as representations and warranties, undertakings, events of default, and consequences of events of default. This section also includes provisions protecting the bank from changes in circumstances that could affect the loan.

Representations and warranties

The representations and warranties in a facility agreement typically focus on issues such as:

– Whether the borrower is a legally incorporated entity, carrying on business legally, and is duly authorised to take the loan and enter into the agreement;

– Whether the loan agreement and other finance documents for the transaction will be valid, admissible as evidence, duly stamped or registered, and binding on the borrower;

– Whether the borrower has committed any default in relation to the loan or has committed any default that could impact the loan;

– Whether all the information, including financial statements, that the borrower provided to the lender, are true, accurate, and in the form that the lender requires;

– Whether the rights of the lender under the loan agreement or the security documents are in any way subordinated to any other creditor of the borrower;

– Whether the borrower has any legal proceedings pending against it that could affect the borrower’s business or its ability to repay the lender; and

– Whether the assets offered to the lender as security are legally owned by the borrower, and whether they are free of any existing encumbrances.


Covenants or undertakings are provisions in the loan agreement that relate to actions that the borrower company is required to carry out (known as affirmative covenants), or prohibited from carrying out without obtaining prior consent from the bank (known as negative covenants). These can also be financial covenants, which  set out parameters for the borrower to follow during the tenure of the loan. Typically, this section contains some specific financial definitions provided by the bank, based on which the bank intends to judge the financial performance of the borrower. The breach of these covenants can be an immediate event of default.

Events of default and consequences

InfrastructureLawThe section on events of default tends to be extensive, in order to protect the interests of the bank in the best way possible. Broadly, events of default focus on the following key points:

– Events relating to the loan agreement: Naturally, any non-payment of any amount due to the bank, any breach of, or any misrepresentation under the loan agreement will be considered an event of default by the lender. Similarly, any breach, or misrepresentation in relation to the security documents will also be included as an event of default.

– Events relating to the borrower: There will also be some other events, which affect the borrower’s ability to repay the loan that will be included as events of default. These include cross-default provisions that consider non-payment by the borrower in other loans as a default, any events in relation to the insolvency of the borrower, the cessation of business by the borrower, any illegal activity by the borrower, and so on.

Since loan agreements tend to be fairly one-sided documents, where the obligations remain primarily on the borrower, events of default are usually linked only to breaches by the borrower and not by the lender.

Deeksha Singh is part of the faculty on


Eight clauses that you will come across in business contracts

The skills required to draft and review contracts well are best acquired through practice. While many become experienced negotiators of contracts, many lawyers continue to struggle with them. To make things a little easier, here is a brief look at eight clauses that you will encounter commonly in the business world.

Parties to the contract

KareenaRaveenaEvery party to the contract is named in this clause. It is vital to the validity of the contract itself since any ambiguity in identifying the parties can render a contract null and void. If you are drafting the contract, make sure that you clearly state the names of all the parties and then, refer to them throughout the contract using the same nomenclature. Remember, consistency is key to good drafting.


The clause containing the definitions of the important terms and concepts referred to in the contract is important because the contractual relationship will flow from the meanings of these words. Remember to be as precise as you can because it will affect the operation of the entire contractual relationship.


Amitabh_KhamoshThis clause is included in contracts to maintain the confidentiality of vital information for businesses such as ‘trade secrets’ or other types of information that is explicitly marked as ‘confidential’.

Sometimes, when negotiating a contract, parties share confidential information with each other even before the contract comes into effect. To protect the interests of the parties in case the negotiations do not culminate in a contract, such a clause is often drafted as part of a stand-alone agreement called a ‘non-disclosure agreement’. It is a contract that survives even if the actual business contract does not come into effect.

Intellectual property rights

Very often, in the course of employment or business, individuals and enterprises create and use intellectual property. Intellectual property is a precious source of income and it is very important to clearly identify in a contract, its ownership, usage, and the rights of the parties in relation to the intellectual property. While the creator of some intellectual property usually has all rights in it, those rights belong to the employer or the person who has commissioned the work when it is created for an employer or if the work has been commissioned. Parties can also agree to share the ownership or profits from its exploitation.

Non-compete and non-poaching clauses

Apart from protecting trade secrets and intellectual property, businesses must also guard against the transfer of vital information to their rivals through employees who are offered greater incentives to do so. In a non-compete clause, an employee (usually) agrees to not to enter into, start, or join a profession or trade in competition with the employer. A non-poaching clause is relevant in agreements between businesses. In it, organisations mutually agree to not hire employees from each other. Both non-compete and non-poaching clauses can be limited to a certain period of time.

Indemnity, warranty, and guarantee


Indemnification is important for protecting an organisation from errors committed by those outside it. Warranties and guarantees are important to establish a reliable framework of trust between partners in a business for the successful execution of a business contract. These clauses can often lead to separate indemnity, warranty, guarantee, and in some cases, full-fledged insurance agreements that are distinct from the original business contract.

Termination of the contract

Every contract must indicate a manner of ending. Some contractual relationships may not specify a termination date, such as employment contracts where employment ends on superannuation. Other contracts, such as those for the performance of a service or the use of a product, must clearly specify the duration of the contract and how to terminate it so that parties can either renegotiate terms afresh or renew the contract if required.


Jurisdiction plays a crucial role in any contract. It acquires importance when the contractual relationship deteriorates and requires judicial intervention. A contract can state the law it is to be governed by, that is, the law applicable to the subject matter of the contract. It can also state which court(s) will exercise jurisdiction in case parties choose to take judicial recourse such as the courts of a particular city, or which mechanism will be used to redress disputes, such as arbitration tribunal.

(Suhasini Rao is part of the faculty on


Learn to structure and communicate a good due diligence report

Drafting_for_Business_Deepa_Mookerjee.jpgIn my last post here, I listed out some points that are important for a due diligence exercise. Completing the investigation (or the due diligence) however is just half the job. The latter half – often more confusing – is to organise all the information you have collected in a structured manner and communicate it effectively to your client.

Before starting to draft, determine the type of due diligence report your client wants. Typically, though there is no formal classification, there are two types of due diligence reports.

A comprehensive due diligence report

You will come across this type more frequently. Many pages long, often going into hundreds of pages, it will contain all the information that you have found from your investigations about the company. It is usually divided into many chapters, each containing information about a specific part of the company.

Generally the chapters include:

Corporate information: This chapter contains details about all corporate matters related to the target company, including its date of incorporation, number of directors, provisions in the articles of association, corporate compliances, and key decisions of the board and the shareholders.

– Litigation: This chapter lays out the details of all the litigation pending against, and filed by, the target company and their impact on the transaction, if such litigation is decided against the target company.

– Material agreements: Here, all the material agreements that a company has with its suppliers, consumers, and retailers, are reviewed to understand the important terms of such agreements, and determine whether there are any particular clauses that will hinder the transaction.

– Human resources: Here, a broad overview is provided of the employee structure, the key employees, their terms of employment, and conditions of their contracts.

– Financial information or indebtedness: In this chapter, all information about loans or financial indebtedness of the company is reviewed, and key issues such as requirement of consents from lenders, and restrictions on transfer of shares or assets, are highlighted.

– Compliances: In this chapter, there is a detailed investigation into the registration and licenses required under law to carry on the business of the company. Information regarding all statutory compliances is found in this chapter.

– Property: Information about all property (movable and immovable), whether owned or leased by the company, and their terms and conditions, is reviewed and outlined in this chapter.

– Intellectual property law issues: This is important if the target company has registered trademarks, copyrights, or patents. All documents in relation to their registration, ownership, or assignment are analysed, to examine any restrictions present on such intellectual property rights.

– Environmental law issues: If the target company is a manufacturing, construction, or engineering company, acquirers ensure that the company is in compliance with all environmental statutes in India and does not violate any pollution standards that have been prescribed.

– Insurance law issues: This chapter outlines the insurance policies taken by the target company, to provide the acquirer with a general idea of the protection available to the target company.

Since such a report runs into many pages, a client often asks for a separate document listing key issues to accompany this report. The list of key issues is a three-or-four-page document (maybe more depending on the transaction) which only lists out the problem areas of the company and provides concrete suggestions on how to solve these problems. Remember that the client will always want a solution to the problems. It is not enough to only identify the problems in the company. As a lawyer it is your duty to provide a solution. Therefore, while drafting, take some time out to think clearly about the manner in which a particular problem can be solved, and then specify that.

An “exceptions only” due diligence reportAPCCLP_CompanyLaw-Banner

Here, a lawyer is only supposed to list out the problem areas or issues with the company. The due diligence report will have language to the effect that “everything is in order with the company except the following…”. This is a report where the client assumes that all the items are in order except those listed in the report. The only problems with the company or its operations are those identified in the report. In other words, while drafting, you will only list out the problems with the company that you have investigated. You will not spend your time stating facts about the company that are in order.

In a comprehensive due diligence report, you will provide the client with all the facts (whether they are in order or not). You will obviously identify problem areas specifically but provide a complete picture as well. In an “exceptions only” report, the client will assume everything is in order except those issues that you have mentioned. Reports like this are becoming common and clients often ask for such reports as they are more concise and much easier to plough through.

Obviously the manner in which you will draft will depend upon the type of report that your client asking for. However, there are some basic drafting points to keep in mind for any report. See the image below.

DraftingaDueDiligenceReport_DosAndDon'tsKeep these points in mind while drafting your report. While some of these seem very simple and obvious, browsing through it before starting to draft will always help refresh your memory and hold you in good stead in your career as a commercial lawyer.

(Deepa Mookerjee is part of the faculty on


Six tips for an effective due diligence process

Drafting_for_Business_Deepa_Mookerjee.jpgEven though Ray Limited has agreed in principle to acquire 30% shares in Whirl Limited and has signed a memorandum of understanding to this effect; it does not have enough information about that company. For instance, it does not know whether and to extent the company is in debt, how its business is doing, and who its main customers are. Obviously, just as you will not buy a car or a home theatre without a thorough investigation of its benefits, Ray Limited will never purchase shares in Whirl Limited without having complete knowledge about that company. Ray Limited will only invest in Whirl Limited once it carries out a thorough investigation of Whirl Limited. Such an investigation, called a ‘due diligence’ process, helps an investor carry out a cost-benefit analysis of whether the investment is beneficial. During this process, an investor investigates the financial, commercial, and litigation-related details and contractual and other information about the target company.

Such investigations can be of different types. They include:

Commercial due diligence: This consists of a review of the industry, market, and business model of the target company;

– Reputational due diligence: This includes a review of the credit worthiness and reputation of the target company;

Financial due diligence: This includes a review of the tax, financial position, policies, and internal controls of a target company; and

Legal due diligence: This is usually very broad in nature, and consists of a review of all relevant documentation and material contracts. This due diligence process, which is the focus of this post, aims to understand the business and identify potential legal issues that can impede the transaction or affect the transaction value.

Requisition list

As a lawyer carrying out a legal due diligence, the first step is to send to the target company, a questionnaire or list of the documents you require. This list is typically called a requisition list or a due diligence checklist. It helps the other side of the transaction organise documents in the manner you want and ensure that all the documents you require are provided to you. In the absence of such a list, confusion is likely to arise about the nature of documentation required.

APCCLP_CompanyLaw-BannerThis information is provided by the target company in a data room, set up for the purpose of the diligence. Such a data room is either a physical data room or an online data room, which is becoming more prevalent these days. Depending upon the nature of the deal and the extent of confidentiality required for the documents, the target company can grant limited access to the advisors of the acquirers or permit them to examine the records, contracts, and information about the company in person (in a physical data room) or download or edit them (in an online data room).

You will always have to comply with the directions of the target company in relation to handling sensitive information. For instance, you may be asked to not make copies of any documents. You will have to strictly comply with that direction.

While carrying out this investigation, bear in the mind the following:

1. Remember, what you are doing can make or break a deal.

You are the one who has access to all the company’s records and therefore, you have a responsibility to provide a complete and true picture of the company you are investigating. Your client will depend on your report to make a final decision. Never cut corners while investigating. Ensure that all the information is made available to you. If you face a problem accessing any information about the target company (which you feel is vital), let your client know that your investigation will be incomplete unless the information is provided to you.

2. Never assume any fact.

Always ask for documents or written evidence to confirm any statement made by the company. For instance, if a company says it has paid off a loan of Rupees 10 crore in the last two months, ask for written evidence (such as a letter or undertaking from the bank) stating that the loan has in fact ben repaid. If you don’t get what you have asked for in the beginning – ask again.

3. Never forget the nature of the transaction.

The type of documents you will ask for depends on the type of transaction. For instance, if you are only going to buy a specific part of the business, ask only for the documents relevant to that part. If you are acquiring the whole company – you need documents pertaining to the whole company.

4. Always be polite and courteous to those who are providing you the documents.

A Business Men Climbing a Pile of Papers
It can often seem like this but make sure you retain your cool during a due diligence process.

Remember, the documents will often be provided to you by employees or company secretaries who have little or no background to the deal and may not know the reason why the document may be important to your investigation. Patience is key to a successful due diligence investigation.

5. Where you can, make copies of documents.

Always keep copies of all documents you have looked at (if you are permitted to photocopy documents). If not, make detailed notes of every document. This will be helpful while preparing the report as you can look at your notes to refresh your memory. Remember, once the target company has provided some information, it is unlikely to provide it again. So, your notes will form the basis of the report and your conclusions regarding the deal.

6. Be efficient.

Almost all due diligence investigations are carried out within a limited time period. Parties are eager to close the deal and there is immense pressure on lawyers to carry out a diligence efficiently and effectively. While actions such as sending a requisition list will help save time, never hurry up the investigation and ignore documents just to complete the process on time. If necessary, ask your client for more time after providing a detailed explanation about why you need more time.

After this process is complete, as a lawyer you will be asked to prepare a due diligence report setting out details about the investigation and your conclusion about the legal issues in the deal. I will discuss the important points to keep in mind while drafting the due diligence report in my next blog.

(Deepa Mookerjee is part of the faculty on


Drafting a Memorandum of Understanding

Drafting_for_Business_Deepa_Mookerjee.jpgLet’s say you are the CEO of ABC Limited, a multinational company. You have had oral discussions with the CEO of Apples Pte, a non-resident company that, in a highly lucrative deal, wants to invest in your company. While you do not want binding documents to be signed at this stage, you would like some kind of documentary proof that this deal is being negotiated. What would you do?

Ideally, both parties would sign a Memorandum of Understanding (“MoU”). In all commercial transactions, initial discussions between parties are usually followed by the execution of a document that lays out the preliminary intention of the parties to enter into a deal. This document is termed a MoU, a term sheet, or a letter of intent — terms are often used interchangeably in commercial transactions.

At first glance, a MoU looks like a simple document. Drafting the MoU however, is one of the most important steps in the transaction. This is because it serves as the basis for more detailed legal documents. It thus lays the groundwork for a transaction and ensures that the parties agree on all major issues, thereby reducing the possibility of a misunderstanding.

Signing_an_MoUWhile drafting a MoU, always ensure that you specify the correct name and description of the parties. If this is not done, it is a clear loophole that may allow either party to wriggle out of the deal, as the MoU does not place any obligations on them. Similarly, include a clear description of the deal. Never use vague or unclear language as it creates confusion.

Let’s understand some other key points to keep in mind while drafting a MoU.

Binding or non-binding?

A MoU can be drafted to be either legally binding on the parties to the MoU or serve as a document that is not binding and only captures the intent of the parties. A legally binding MoU is useful when parties have already agreed on major aspects of the deal and do not want this understanding to change under any circumstances. It also ensures that the parties do not back out of a deal without facing any consequences.

Assume that Apples Pte. has agreed on the amount of consideration, the nature of indemnification, and all the representations and warranties to be provided under the deal. All of these are key points that make or break a deal, and so you may want to enter into a binding MoU to ensure that Apples Pte. is tied to the deal. On the other hand, if the negotiations are still at a very preliminary stage, you could consider a non-binding MoU. It gives you the comfort of some documentary proof of the discussions, without restraining you from backing out of the deal at a later stage.

Often parties opt for a non-binding MoU as they wait to complete a due diligence exercise. This is a detailed investigation of a company and its results typically affect the terms of the deal materially. Parties therefore, do not want to enter into any binding documentation before the investigations are complete.

Exclusive or non-exclusive MoU

Non-ExclusiveMoU_MemorandumofUnderstanding.jpgA MoU can be exclusive or non-exclusive. For an exclusive MoU, parties are restrained from entering into similar MoUs with any other entity during the term of that MoU. On the other hand, the document can be drafted on a non-exclusive basis, in which case, the parties are free to enter into discussions with other entities dealing with the same subject.

If you are apprehensive that your competitors may also approach Apples Pte, start negotiations with them, and thus harm your deal, you can enter into a MoU on an exclusive basis. This would mean that during the term of the MoU, Apples Pte is barred from negotiating with any other party.


During negotiations of this nature, to understand the nature of each other’s businesses and the general condition of the company, parties exchange a lot of information, much of which is proprietary in nature. Obviously, no party will invest without having complete information about the investee company. In order to ensure that this information is not leaked to your competitors or the public in general, one very important clause that must be included in every MoU is a comprehensive confidentiality clause. Always insist on a clause that states that all information exchanged between the parties is to be treated as confidential and must never be disclosed to the public.

These are just few of the important clauses that you will see in every MoU. Remember always, that there is no set format for a MoU. It could be a one-page document or it could run into several pages. Ultimately, at the end of the day, the nature, contents, and form of the MoU will depend upon the nature of the deal and what your clients want.

(Deepa Mookerjee is part of the faculty on