One document that is a standard part of any commercial loan transaction is a borrowing resolution from the borrowing entity. This is a document generally signed by the corporate secretary or other custodian of records for the borrowing entity which certifies that the entity took the proper steps under its corporate documents to: approve the borrowing from the lender, designate certain individuals to act on behalf of the entity, and to authenticate the corporate formation documents. Even though the proper preparation and execution of this document is just as important as the other documents contained in the loan document package, the borrowing resolution is often not treated with the same importance as a debt instrument or collateral document. However, failure to properly prepare and execute a borrowing resolution may result in an unenforceable obligation against the borrower.
The first step in properly preparing a borrowing resolution is to obtain copies of the borrower’s corporate formation documents, as well as any corporate resolutions contained in the borrower’s minutes relating to the loan in question. These documents must be carefully reviewed in order to determine the following items:
Once these questions have been answered through review of the documents, then the borrowing resolution can be prepared. The borrowing resolution needs to show that action was taken by the proper parties, usually either the board of directors of a corporation or the managers of a limited liability company. The resolutions need to show that the action was approved following the proper steps set out in the corporate formation documents. If the borrowing entity has already taken action to approve the loan through the approval of a corporate resolution reflected in the minutes of the organization, then the information in the resolution needs to match the borrowing resolution being prepared by the lender. In particular, the borrowing resolution prepared by the lender should accurately reflect the date of the meeting at which the borrowing resolution was approved, the amount of the loan approved, and the lender named in the resolution. The borrowing resolution needs to properly reflect the individuals authorized to act on behalf of the entity. Also, if not contained elsewhere in the loan documents, the borrowing resolution needs to certify that the corporate formation documents are current and that no changes to those documents have been made. Finally, the borrowing resolution will need to be certified by the individual designated in the corporate formation documents as the custodian of the records.
If the borrowing entity previously took action to approve the loan through the approval of a corporate resolution reflected in the minutes of the organization, then the resolution prepared by the lender must reflect the date the meeting actually occurred, but must be certified as of the date of the closing of the loan transaction. If the borrowing entity did not take formal action to approve the loan prior to the loan closing, then the individuals necessary to approve these actions on behalf of the entity should all be present at the loan transaction closing, and thus the meeting approving the borrowing can take place immediately prior to the closing of the loan transaction.
The preparation of borrowing resolutions can often be more complex than expected. However, it is critical to the maintenance of proper loan procedures to make sure that borrowing resolutions are prepared correctly and fully executed at the closing of the loan, just as with any other loan document.
