Purpose clauses in facility agreements and Quistclose trusts
Purpose clauses in facility agreements and Quistclose trusts

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Purpose clauses in facility agreements and Quistclose trusts
  • What is a purpose clause?
  • What is a Quistclose trust?
  • Why are Quistclose trusts relevant to purpose clauses?
  • Drafting a purpose clause in a facility agreement
  • Loans for unlawful purposes
  • Lender's obligation to monitor

This Practice Note considers what a purpose clause in a facility agreement actually is. It examines how the actual wording of the clause can impact on whether a Quistclose trust arises when the money is actually lent, which can result in problems should the borrower later suffer from financial difficulties.

Where appropriate, this Practice Note highlights relevant provisions in:

  1. Lexis®PSL Precedent: Facility agreement (term loan): single company borrower—bilateral—with or without security or a guarantee

  2. the Loan Market Association (LMA) investment grade multicurrency term facility agreement (the LMA investment grade facility agreement), and

  3. the LMA senior multicurrency term and revolving facilities agreement for leveraged acquisition finance transactions (LMA leveraged facility agreement)

Both LMA documents are available to LMA members on the LMA website.

What is a purpose clause?

Most facility agreements contain a clause specifying the purpose(s) for which the loan proceeds must be used.

From a lender's perspective, it is preferable to specify the purpose(s) for which a loan must be used because doing so helps to give the lender comfort that:

  1. the borrower will be able to repay the loan when required (the purpose will be linked to the lender's credit analysis and approvals), and

  2. the loan will not be used for an imprudent or illegal purpose

For sample purpose clauses, see:

  1. clause 2.2 in Lexis®PSL Precedent: Facility agreement