HAS YOUR BORROWER CONVERTED?
The Indiana Business Corporation Law allows for a domestic business entity to change from one type of entity to another without the need for a formal transfer of assets. For example, a corporation may simply file articles converting its form from that of a corporation to a limited liability company. Similar changes may be made from an LLC status to another type of business entity.
When this occurs, authorization procedures for future loan transactions will have to comply with the rules for the type of entity resulting from the conversion. Thus, while an action of the Board of Directors may have been sufficient to authorize a loan originally, renewals or future loans to the entity after it is converted to LLC status should be authorized by members or managers as appropriate under the Articles of Organization. Or stated another way, when a business entity converts from one type to another, the proper authorization body will likely change as well.
The same statute also allows an organization to change its state of creation by a similar procedure. If a borrower undertakes this type of change, it will not only affect the rules relative to corporate authority, but it may also change the steps needed to be taken to perfect the security interest under Article 9. Generally speaking, financing statements are to be filed in the state under whose law an entity has been created.
When a borrower goes through either type of change, a legal review should be conducted of the existing documentation before any further renewals or new loans are made. The review should be made of the conversion documents to be sure they are compliant and also to determine what type of documentation is appropriate in the future for the new entity.