Legal Opinions in Australian Finance Transactions 101: Part 2

If you’re reading this update, you likely would have learned all about the purpose and structure of legal opinions given in financing transactions in part one. In our second installment, we examine the standard legal opinions that are typically included in Australian law legal opinions.

Here, we’ll take a deep-dive into the issues to consider on some of the standard opinions which legal practitioners tend to refer to when providing guidance to their clients in banking and financial institutions.

Standard opinions* and issues to consider

Below is a table which sets out the standard opinions that are typically included in an Australian law legal opinion in a wholly domestic loan transaction (that is, a loan transaction involving obligors that are Australian companies that are entering Australian law-governed finance documents).

These represent the most common opinions given by the issuing firm to its lender client, and are not exhaustive. Several additional opinions can be given depending on the transaction or the nature of the obligors. For example, additional opinions on trust law issues are commonly given where the obligor is entering the finance documents in the capacity of a trustee.

*The following applies to Australian companies entering Australian law documents.

Status and incorporation

This opinion relates to the legal identity and existence of each obligor. The law firm will typically rely on an ASIC company search in giving this opinion to confirm the obligor is a registered company.

Corporate power

This opinion confirms that an obligor has the requisite corporate power to enter into and carry out the transaction. If the law firm has examined the obligor’s constitution, it will need to check that there is no restriction or prohibition in the constitution preventing the obligor from undertaking the transaction.

Alternative, the law firm may choose not to review the constitution and instead rely on the statutory assumption that the obligor’s constitution has been complied with (see section 129(1) of the Corporations Act (Cth) 2001 (CA 2001)).

However, it is important to note that a person cannot rely on this statutory assumption if it knew or suspected that the assumption was incorrect (see section 128(4) of the CA 2001). Accordingly, if the bank has obtained the obligor’s constitution, even in the context of a previous transaction, it may require that its lawyers review the constitution for the purpose of giving this opinion.

Due execution

This opinion addresses whether the finance documents have been validly executed by an obligor. In giving this opinion the law firm will need to consider the law relating to the execution of contracts by Australian companies including, if relevant, the temporary emergency measures relating to signing and witnessing documents enacted in response to 2019 novel coronavirus disease (COVID-19).

Legal validity

This opinion confirms that an obligor’s obligations under the finance documents are binding and enforceable against it. An opinion on enforceability means that the obligations are of the type that a court applying Australian law will enforce. However, it does not imply that a court will enforce those obligations in all circumstances. Accordingly, in giving this opinion a qualification will need to be included in the opinion that addresses the limitations on enforceability.

No-violation of laws

This opinion confirms that the entry into the finance documents by an obligor will not breach any laws. If the law firm is reviewing the obligor’s constitution as part of the legal opinion, it may also be asked to also confirm that entry into the finance documents will not breach the obligor’s constitution.

Authorisations, consents, registrations and filings

This opinion confirms that an obligor does not require any official authorisations, consents, registrations or filings to ensure the finance documents are binding and enforceable.

In giving this opinion, the law firm will need to consider any authorisations, consents, registrations or filings which, if not obtained, will affect the legal validity or enforceability of the finance documents and carve these out (such as ensuring stampable documents are lodged with the relevant revenue authority for stamping).

Stamp duties

An opinion on whether stamp duty is payable on the finance documents. Stamp duty can arise in a financing transaction that involves dutiable transactions in respect of dutiable property. Failure to pay stamp duty may incur penalties and interest and may render a document unenforceable. In the context of a standard loan finance transaction, the most common head of duty arises from a declaration of a trust (for example, the creation of a security trust in a syndicated loan transaction).

Valid security interest

If the loan transaction is secured, opinions will be included that address legal issues relating to the validity of the security interests created by each obligor under the finance documents. The opinions given will depend on the nature of the collateral that is subject to the security interest.

Need more information?

Practical Law Banking and Finance has just published a number of new legal opinions resources this month, including several standard form legal opinions for use in domestic and cross-border financing transactions. To speak with a Thomson Reuters specialist on the breadth of what Practical Law has to offer, be sure to contact us.

Alex Chernishev is the head of Banking and Finance at Practical Law Australia. He has more than 12 years’ banking and finance experience at leading international and domestic firms in Australia and the United Kingdom, including Clayton Utz and Freshfields Bruckhaus Deringer. Alex has extensive experience in a wide range of banking and finance transactions including corporate finance, project finance, debt capital markets, securitisation and derivatives.

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