FIN.12:5.1 - A cash remedy must also fit its borrowing permission

Take the adverse account in FIN.2: week-1 receipts are delayed, the borrowing base permits 20, and an agreed supplier deferral of 15 allows a draw of 20 to preserve cash reserve 10. Add a stipulated condition tested before each draw: total debt divided by the agreement’s qualified earnings measure must not exceed 3. Existing included debt is 70, with no additional service within that account’s horizon, and the qualifying earnings measure is 30. The draw of 20 gives 90/30 = 3. It is allowed under this test, but leaves no debt headroom under that unchanged measure.

If the qualifying earnings measure instead becomes 25 before the draw, this test permits total debt only 75 and hence an additional draw of 5. That limit is tighter than the borrowing base of 20. After the supplier deferral, week-1 cash before drawing is −10; drawing 5 leaves −5, or 15 below the selected reserve. The earlier liquidity remedy is no longer sufficient.

Actually settled new equity of 15 before week-1 payments, with the draw of 5 and the same supplier deferral, would restore cash to 10 under the supplied terms. An unaccepted equity proposal would not. Recompute later balances, interest and repayment in FIN.2 before relying on the whole route. Alternatively an obtainable covenant amendment could permit the larger draw, but its fee and every remaining condition would need to return to that account.

The example’s earnings definition and draw test are stipulated contract terms, not a claim about all loan agreements. If the rule is instead tested at quarter end or grants a particular cure, model those events explicitly; do not import this draw prohibition by analogy.