Loan Note Instrument

A loan note instrument is a financial instrument which is issued by a borrower in favour of one or more lenders known as “noteholders” in order to evidence the debt that exists between them. While the issuer can be either an individual or a company, in the majority of cases it will be a company.

Under the terms of the loan note, the issuer will acknowledge the debt that it owes and specify the terms upon which the debt will be repaid to the noteholder(s). These terms are generally similar to what you would expect to see in a traditional loan agreement. For example, the terms will deal with matters such as interest rates, payment terms, default, etc.

Loan notes are commonly issued in the following circumstances:

(a) as consideration or part consideration for the purchase of shares or other assets from a third party. Payment in this manner allows the issuer to acquire the shares or asset(s) but to defer payment for them until a later date thereby facilitating its cash flow and general working capital requirements. Also, loan notes issued to a seller on the sale of his, her or its shares in a company may also help the seller in certain instances to defer any charge to capital gains tax that may arise on the sale. That said, specific tax advise needs to be taken in such instances;

(b) to individuals or private equity investors investing in start-up or risky companies. Investing in this manner gives the investor the ability to quickly procure the repayment of a loan in the event that the company runs into financial difficulty. By comparison, if the investment was made by means of a straight forward acquisition of shares in the company, the investor would most likely have to wait for the company to be wound up before being entitled to recover its funds. Shareholders also rank last in terms of the priority of payment on winding up where that repayment relates to a return of capital invested. As a lender, however, the investor would rank equally with all others creditors who are owed money (except for the Revenue Commissioners, employees and the secured creditors such as banks);

(c) where a lender wants to raise finance from a number of people on identical terms; or

(d) where a lender would prefer (for whatever reason) not to have the borrowers sign up to any loan documentation.

The loan note instrument sets out the total amount of the loan notes, gives them a specific name and specifies that they are unsecured obligations of the issuer. When a loan is made to the loan note issuer, the issuer/borrower will evidence that loan by issuing a loan note certificate to the lender acknowledging that the debt is owing. Attached to that loan note certificate will be a copy of the terms and conditions applicable to the loan.

The loan note issuer will give certain warranties (legal assurances) to the loan note holders relating to the validity of the loan note instrument, the capacity of the loan note issuer to issue the loan note, and so on.

The loan advanced under the loan note will be repaid in the manner set out in the loan note instrument. However, the loan notes will become immediately repayable by the issuer notwithstanding that a later date is specified in the loan note instrument if:-

(i) the issuer does not redeem any of the notes (i.e. repay an element of the loan) within 30 days of the date on which it is obliged to do so (often a sign of insolvency);

(ii) the issuer breaches its obligations under the instrument and fails to rectify that breach within 30 days of being notified of the breach by the noteholder;

(iii) the issuer makes an arrangement with its creditors in relation to the repayment of its debts (another sign of potential insolvency);

(iv) a receiver, examiner or other person is appointed over the issuer’s assets or a petition is filed in court to make such an appointment; or

(v) the issuer becomes insolvent.

The issuer is obliged to notify the noteholders if any of the above events occur.

The issuer will be obliged under the terms of the loan note instrument to maintain a register of the noteholders and the amount that remains to be repaid to each noteholder. It also sets out the people who shall be entitled to the notes in the event of the death of the noteholder or his or her bankruptcy. Noteholders are entitled to inspect the register during normal business hours.

Loan notes can also be convertible into shares in the issuer at the option of either the issuer or the noteholder. A convertible loan note instrument can be obtained from www.enodare.ie.

The loan note instrument also contains standard ‘boiler plate’ clauses and other clauses typically found in loan note instruments of this kind.

Detailed information in relation to each clause of this loan note instrument and on how to complete the loan note instrument are contained in the notes that accompany the agreement.

Clauses Included in this Loan Note Instrument:

• Definitions and Interpretation Clause
• Issue and the Amount of Notes Clause
• Representations and Warranties of the Issuer Clause
• Redemption and Repayment Clause
• Issuer’s Covenant Clause
• Default Clause
• Status Clause
• Register Clause
• Transfer Clause
• Amendments Clause
• Conditions Clause
• Repayment Clause
• Payment Clause
• Replacement of Loan Note Certificates Clause
• Notices Clause
• Governing Law and Jurisdiction Clause

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