Restricted payments clause: Copy, customize, and use instantly
Introduction
A restricted payments clause limits a party’s ability to make certain financial distributions, such as dividends, stock repurchases, or payments to affiliates, to ensure financial stability and compliance with debt covenants. This clause is commonly used in loan agreements, bond indentures, and shareholder agreements to protect creditors and investors from excessive cash outflows.
Below are templates for restricted payments clauses tailored to different scenarios. Copy, customize, and insert them into your agreement.
Standard restricted payments clause
This clause prohibits payments beyond agreed financial thresholds.
The Borrower shall not, directly or indirectly, declare or make any Restricted Payment, including dividends, stock repurchases, or other distributions, unless: (i) no Default or Event of Default has occurred and is continuing, and (ii) the Borrower’s total leverage ratio remains below [threshold] after such payment.
Restricted payments clause with permitted exceptions
This version allows specific payments even when restrictions apply.
The Borrower shall not make any Restricted Payment unless otherwise permitted under this Agreement. Notwithstanding the foregoing, the Borrower may make the following payments: (i) dividends payable solely in common stock, (ii) payments required under existing employee benefit plans, and (iii) payments approved in writing by the Lender.
Restricted payments clause with financial condition test
This clause allows payments only if certain financial metrics are met.
The Borrower may make Restricted Payments only if, immediately before and after such payment: (i) the Borrower maintains a minimum cash balance of [amount], (ii) its debt service coverage ratio remains above [ratio], and (iii) no breach of this Agreement has occurred.
Restricted payments clause with debt repayment priority
This version requires outstanding debt to be repaid before restricted payments are allowed.
The Borrower shall not make any Restricted Payments unless all scheduled principal and interest payments due under this Agreement have been made in full. Any payments made in violation of this clause shall be deemed void.
Restricted payments clause with rolling compliance period
This clause requires compliance over a set period before restricted payments can be made.
The Borrower shall not make any Restricted Payments unless it has remained in compliance with all financial covenants under this Agreement for at least [number] consecutive months prior to the payment date.
Restricted payments clause with cumulative earnings threshold
This version allows restricted payments only if cumulative earnings exceed a specified amount.
The Borrower may declare or make Restricted Payments only if its cumulative retained earnings exceed [amount] and such payment does not reduce retained earnings below this threshold.
Restricted payments clause with carve-out for tax distributions
This clause permits payments related to tax obligations despite restrictions.
Notwithstanding the restrictions in this Agreement, the Borrower may make payments to its shareholders or members to cover tax liabilities directly attributable to the Borrower’s income, provided that such payments do not exceed the amount necessary to satisfy such tax obligations.
Restricted payments clause with maximum payout percentage
This version caps restricted payments at a percentage of net income.
The Borrower shall not make any Restricted Payment exceeding [percentage]% of its net income for the most recent fiscal year, provided that no Event of Default has occurred and is continuing.
Restricted payments clause with prepayment requirement
This clause requires early repayment of outstanding debt before restricted payments are made.
No Restricted Payment shall be made unless the Borrower has prepaid all outstanding principal amounts due under this Agreement by at least [percentage]% of the remaining balance.
Restricted payments clause with subordination to lender approval
This version requires lender approval for any restricted payments.
The Borrower shall not make any Restricted Payment without the prior written consent of the Lender, which may be granted or withheld at the Lender’s sole discretion.
Restricted payments clause with limitation on payments to affiliates
This clause restricts payments to affiliates, ensuring no diversion of funds.
The Borrower shall not make any Restricted Payment to any affiliate, shareholder, officer, or director, except for (i) payments for reasonable compensation in the ordinary course of business and (ii) distributions permitted under this Agreement.
Restricted payments clause with exception for contractual obligations
This version allows payments required under pre-existing contractual obligations.
Notwithstanding the restrictions contained in this Agreement, the Borrower may make Restricted Payments that are required under any contract or obligation in effect as of the Effective Date, provided that such payments do not cause a Default or Event of Default.
Restricted payments clause with penalty for non-compliance
This clause imposes financial penalties if a restricted payment is made in violation of the agreement.
Any Restricted Payment made in violation of this Agreement shall result in an immediate penalty equal to [percentage]% of the payment amount, payable to the Lender, in addition to any other remedies available under this Agreement.
Restricted payments clause with step-down limits over time
This version gradually reduces restrictions on payments over time.
The Borrower may not make Restricted Payments exceeding [amount] in any fiscal year; however, this limit shall increase by [percentage]% annually provided that no Event of Default has occurred.
Restricted payments clause with escrow requirement
This clause requires certain restricted payments to be placed in escrow before disbursement.
Any Restricted Payment exceeding [amount] shall be placed in escrow for a period of [number] days prior to disbursement, during which the Lender may review and approve or reject such payment.
Restricted payments clause with ranking priority for debt obligations
This version ensures that debt obligations take precedence over restricted payments.
The Borrower may not make any Restricted Payments unless all senior and subordinated debt obligations have been paid in full, or such payments are expressly permitted under the terms of the applicable debt agreements.
Restricted payments clause with clawback provision
This clause allows the lender to recover improperly made restricted payments.
If any Restricted Payment is made in violation of this Agreement, the Lender shall have the right to demand repayment of such amount within [number] days, and failure to repay shall constitute an Event of Default.
Restricted payments clause with required compliance certificate
This version requires the borrower to certify compliance before making restricted payments.
Before making any Restricted Payment, the Borrower shall provide the Lender with a compliance certificate, signed by its Chief Financial Officer, confirming that the Borrower remains in full compliance with all financial covenants and restrictions under this Agreement.
Restricted payments clause with forced reduction in case of financial distress
This clause automatically reduces allowable restricted payments in times of financial difficulty.
If the Borrower’s net income declines by more than [percentage]% in any fiscal quarter, all Restricted Payments shall be reduced proportionally until financial conditions improve.
Restricted payments clause with dividend reinvestment exception
This version allows restricted payments if they are reinvested in the business.
Notwithstanding any restrictions in this Agreement, the Borrower may make Restricted Payments if the funds are reinvested into the Borrower’s business within [number] days of payment.
Restricted payments clause with board approval requirement
This clause requires the Borrower’s board of directors to approve restricted payments before they are made.
No Restricted Payment shall be made unless first approved by the Borrower’s Board of Directors through a formal resolution and documented in meeting minutes.
Restricted payments clause with maximum allowable cumulative payments
This version sets an aggregate cap on all restricted payments during the loan term.
The total cumulative Restricted Payments made under this Agreement shall not exceed [amount] during the term of the loan, unless otherwise approved by the Lender in writing.
Restricted payments clause with automatic suspension upon default
This clause suspends all restricted payments if the Borrower defaults on any obligation.
In the event of a Default or Event of Default under this Agreement, all Restricted Payments shall be automatically suspended until the Default is cured to the Lender’s satisfaction.
Restricted payments clause with ranking priority for operational expenses
This version ensures that operating expenses are covered before restricted payments are allowed.
No Restricted Payment shall be made unless the Borrower has satisfied all operational expenses, including payroll, rent, utilities, and tax obligations, for the current fiscal quarter.
Restricted payments clause with approval rights for majority creditors
This clause requires approval from a majority of the Borrower’s creditors before payments are made.
The Borrower may not make any Restricted Payments unless approved by at least [percentage]% of its senior creditors, as determined by outstanding principal amounts.
Restricted payments clause with condition requiring debt-to-equity ratio compliance
This version ensures restricted payments do not impact the Borrower’s leverage ratio.
The Borrower shall not make any Restricted Payments unless, immediately before and after such payment, its debt-to-equity ratio remains below [ratio].
Restricted payments clause with legal and regulatory compliance requirement
This clause ensures that restricted payments comply with all applicable laws.
No Restricted Payment shall be made in violation of any applicable laws, regulations, or contractual obligations, including restrictions imposed by governmental authorities or regulatory agencies.
Restricted payments clause with proportional reduction for declining revenues
This clause reduces allowable payments if the Borrower’s revenue declines.
If the Borrower’s gross revenue decreases by more than [percentage]% compared to the previous fiscal quarter, the maximum allowable Restricted Payments for the subsequent quarter shall be reduced proportionally by the same percentage.
Restricted payments clause with staggered approval process
This version requires payments above a threshold to go through multiple approval levels.
Any Restricted Payment exceeding [amount] must first be approved by the Borrower’s Chief Financial Officer, followed by written approval from the Lender. Payments below this threshold require only internal approval.
Restricted payments clause with return of funds if financial conditions worsen
This clause requires a party to return restricted payments if financial conditions deteriorate within a set period.
If, within [number] days after making a Restricted Payment, the Borrower experiences a financial decline exceeding [percentage]% in net income or fails to meet any financial covenant, the Borrower must return the full amount of the payment to its operating account.
Restricted payments clause with annual aggregate limit
This version sets a yearly cap on all restricted payments.
The Borrower shall not make Restricted Payments exceeding a cumulative total of [amount] per fiscal year, unless otherwise approved by the Lender.
Restricted payments clause with strict priority for secured creditors
This clause ensures all secured debts are satisfied before any restricted payments.
No Restricted Payment shall be made unless all obligations to secured creditors have been paid in full, or the payment is expressly permitted under the terms of the secured credit agreement.
Restricted payments clause with rolling lookback period
This version restricts payments based on financial performance over the past few quarters.
The Borrower may make Restricted Payments only if, over the prior [number] fiscal quarters, it has maintained a minimum EBITDA of [amount] and a total leverage ratio below [ratio].
Restricted payments clause with lockbox control
This clause requires payments to be held in a separate account before disbursement.
Any Restricted Payment exceeding [amount] must be deposited into a lockbox account for [number] days before disbursement to allow for compliance review by the Lender.
Restricted payments clause with escrow holdback for disputed obligations
This version requires disputed amounts to be held in escrow before restricted payments can be made.
If any dispute arises regarding the Borrower’s outstanding obligations under this Agreement, all Restricted Payments shall be held in escrow until such dispute is resolved.
Restricted payments clause with automatic suspension upon breach of financial covenant
This clause halts all restricted payments if the Borrower fails to meet financial covenants.
If the Borrower breaches any financial covenant under this Agreement, all Restricted Payments shall be immediately suspended until the breach is cured and the Borrower provides a compliance certificate confirming adherence to all financial requirements.
Restricted payments clause with mandatory prepayment of excess cash flow
This version requires surplus cash to be used for debt reduction before restricted payments.
If the Borrower generates cash flow exceeding [amount] in any fiscal quarter, such excess shall be applied toward prepayment of outstanding debt before any Restricted Payments may be made.
Restricted payments clause with anti-diversion safeguard
This clause prevents using alternative mechanisms to bypass payment restrictions.
The Borrower shall not use alternative financing arrangements, intercompany loans, or indirect transfers to circumvent the restrictions on payments set forth in this Agreement.
Restricted payments clause with prohibition on payments to departing executives
This version blocks large payouts to executives who resign or are terminated.
The Borrower shall not make any severance, bonus, or retirement-related Restricted Payments exceeding [amount] to any executive or key employee upon their resignation, termination, or retirement.
Restricted payments clause with board-supervised waiver option
This clause allows restricted payments only if the board votes to approve a waiver.
No Restricted Payment shall be made unless the Borrower’s Board of Directors, by a vote of no less than [percentage]% of its members, determines that such payment is necessary and will not materially affect the Borrower’s financial position.
Restricted payments clause with separate treatment for equity buybacks
This version sets different rules for dividends and stock repurchases.
The Borrower may make dividend payments up to [amount] per fiscal year, but stock repurchases shall be prohibited unless expressly approved by the Lender.
Restricted payments clause with requirement for third-party verification
This clause requires independent financial verification before making payments.
Before making any Restricted Payment, the Borrower must obtain verification from an independent auditor confirming that the Borrower remains in compliance with all financial covenants under this Agreement.
Restricted payments clause with minimum liquidity reserve requirement
This version ensures that a minimum cash reserve is maintained before payments.
No Restricted Payment shall be made unless the Borrower maintains a minimum liquidity reserve of [amount] in cash or cash equivalents after making the payment.
Restricted payments clause with penalty interest for unauthorized distributions
This clause imposes higher interest rates if restricted payments are made improperly.
If the Borrower makes a Restricted Payment in violation of this Agreement, all outstanding debt shall accrue penalty interest at a rate of [percentage]% per annum until such payment is reversed or an alternative remedy is agreed upon.
Restricted payments clause with additional restrictions during debt restructuring
This version limits payments when the Borrower is negotiating a debt restructuring.
If the Borrower is engaged in debt restructuring negotiations with any creditor, all Restricted Payments shall be suspended until a final agreement is reached.
Restricted payments clause with creditor approval for lump-sum payouts
This clause requires creditor approval for large, one-time payments.
Any Restricted Payment exceeding [amount] in a single transaction shall require prior written approval from [Lender/Creditor].
Restricted payments clause with clawback for misrepresentation
This version allows creditors to recover payments if the Borrower misrepresents its financial condition.
If the Borrower makes a Restricted Payment based on inaccurate or misleading financial statements, the Lender shall have the right to demand immediate repayment of such amount.
Restricted payments clause with exception for government-mandated payments
This clause allows payments that are required by law or regulatory order.
Notwithstanding any other provision of this Agreement, the Borrower may make payments required by law, court order, or regulatory directive, provided that it notifies the Lender in writing within [number] days of such obligation.
Restricted payments clause with liquidity monitoring requirement
This version requires the Borrower to provide regular liquidity reports.
The Borrower shall submit a liquidity report every [number] days to confirm compliance with restricted payment limitations. Failure to provide such a report shall result in immediate suspension of all Restricted Payments.
Restricted payments clause with mandatory reserve for tax liabilities
This clause ensures tax obligations are covered before payments are made.
No Restricted Payment shall be made unless the Borrower sets aside an adequate reserve for all anticipated tax liabilities due within the next [number] fiscal quarters.
Restricted payments clause with specific exclusions for intercompany transactions
This version allows certain intercompany payments while restricting others.
The Borrower may make intercompany transfers for operational expenses and payroll but shall not distribute any dividends, stock repurchases, or non-operational cash payments to affiliates without Lender approval.
Restricted payments clause with automatic review trigger
This clause mandates financial review if a large restricted payment is planned.
Any proposed Restricted Payment exceeding [amount] shall trigger an automatic review of the Borrower’s financial condition, to be conducted by the Lender within [number] days before the payment is authorized.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.