The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:
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:
Lexis®PSL Precedent: Facility agreement (term loan): single company borrower—bilateral—with or without security or a guarantee
the Loan Market Association (LMA) investment grade multicurrency term facility agreement (the LMA investment grade facility agreement), and
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.
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:
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
the loan will not be used for an imprudent or illegal purpose
For sample purpose clauses, see:
clause 2.2 in Lexis®PSL Precedent: Facility agreement
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