When Oversight Becomes Control: How GCs Can Protect Board Sovereignty in Forbearance Negotiations

If your company carries meaningful secured debt, the odds that a forbearance agreement lands on your desk are higher than they’ve been in years. Business bankruptcy filings climbed through 2025 to their highest levels in more than a decade, borrowing costs remain elevated, and lenders are moving troubled loans into workout faster and with less patience.

For most companies in trouble, the workout doesn’t start in court. It starts when the lender’s workout group sends over a draft forbearance agreement with a short fuse and an assurance that everything in it is standard. It isn’t. It’s the document that decides who actually runs the company for the next six months. The CFO is consumed with liquidity and the CEO wants the lender calmed down. Reading the fine print falls to you.

The real question

The real question isn’t how many weeks of relief you get. It’s whether the board and management come out the other side with enough independent authority to steer the company. Most drafts run through a familiar menu: acknowledgments of the debt, broad releases, enhanced reporting, milestones, and more collateral. Each item looks routine on its own. Read together, they can gut corporate governance. And don’t count on the courts to fix it later. Courts give lenders wide latitude to police distressed borrowers and enforce strict terms. In Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, the Seventh Circuit held that a lender may enforce its hard contractual rights even when the pressure squeezes a struggling borrower, and in In re Clark Pipe & Supply Co., the Fifth Circuit blessed a lender that ratcheted advances down to bare survival levels. Proving lender domination requires extreme conduct. Your protection is the document, not the docket.

Two things belong on the table before you trade redlines. First, the objective: what has to happen during this window, whether a refinancing, a sale, or a capital raise, and how will you know it’s working? Buying time without a plan just makes the outcome more expensive. Second, the price of the boilerplate: the releases in every lender draft extinguish, forever, claims for overcharges, aggressive fees, or questionable lender conduct that nobody has had time to investigate. A release is consideration. Make the board quantify what it’s trading. With those settled, the negotiation comes down to five pressure points.

The five focus areas

1. Advisor engagement: When the lender forces you to hire a chief restructuring officer (CRO) or turnaround consultant, remember: they work for the board, not the lender. Keep that boundary ironclad, because independence is exactly what gives the advisor credibility with every stakeholder, including the lender. Insist on a choice among two or three acceptable firms rather than the lender’s single pick, and put the terms in the engagement letter: the board retains the advisor, sets the scope, and can terminate. The lender receives copies of the advisor’s reports but gets no private reporting line. Strike any covenant requiring management to implement the advisor’s recommendations and replace it with an obligation to consider them in good faith. Advisors advise. Management and the board decide.

2. Ordinary-course authority: The biggest hazard in the document is how quietly the lender’s credit committee absorbs operating authority. Weekly cash-flow forecasts and a standing management call are fair. Approval rights over hiring, minor spending, and inventory purchasing are not, because they aggregate into a functional loss of control. Convert approval rights into notice rights wherever you can. Where the lender insists on approvals, negotiate dollar thresholds tied to the agreed budget, test variances in the aggregate over a rolling period rather than line by line, and add deemed-approval language: if the lender doesn’t object within three to five business days, management may proceed. Then run the test: if the lender exercised every approval right in the draft, could management still run the company?

3. Objective credit formulas: For asset-based borrowers, actual availability is everything, and many drafts quietly hand the lender discretion to disqualify collateral, impose new reserves, or cut advance rates overnight. Freeze eligibility criteria as they exist on the signing date, and permit changes only on objective triggers already in the loan agreement, such as aging, concentration, or cross-aging tests. Require written notice several business days before any new reserve takes effect, stating the amount and the reason, and cap the total reserves the lender can layer on during the forbearance period. Tie any advance-rate change to a current appraisal or field exam, not to the lender’s judgment, and require that all remaining discretion be exercised in demonstrable good faith. The stakes justify the fight: a company can execute its turnaround perfectly, hitting every milestone, and still get choked out by a sudden contraction of its borrowing base.

4. Collateral exit mechanics: The lender will demand liens on unencumbered assets, real estate mortgages, deposit account control agreements, and sometimes personal guarantees from the owners. Before agreeing, ask whether the new collateral is proportional to the window you’re actually getting. Then negotiate the way back in the same document. Build a release schedule: when the company hits a defined paydown or milestone, specific collateral comes back automatically, without further lender consent. Sequence third-party, owner, and affiliate collateral for release first, because clawing those assets back after a default is monumentally difficult. Distress-era pledges left in place indefinitely will hobble the company’s capitalization options long after the crisis passes. A clause saying the lender agrees to consider a release is not a release mechanism.

5. Defensible milestones: Under pressure to sign, management will be tempted to agree to best-case projections. Resist that. Optimistic targets guarantee the next default. Build milestones from the downside case, not the base case, with cushions of ten to twenty percent on liquidity and EBITDA targets. Measure performance over rolling multi-week periods rather than single test dates, so one slow collections week doesn’t trip a default. Add cure periods and a one-time right to reset. And distinguish process milestones the company controls, like retaining a banker or delivering offering materials, from outcome milestones that depend on third parties, like a signed letter of intent. Commit to the first. Resist hard deadlines on the second.

The bottom line

You’ll negotiate this agreement in a furnace, and it’s easy to fixate on how many weeks of relief you’re getting while missing the fine print that decides who is actually in charge. The provisions that matter most are usually the ones that get the least attention. The test: does this document build a viable runway while protecting the board’s ability to govern? A well-negotiated forbearance agreement buys real time and the independence to use it. An overreached one just automates a slower, more expensive liquidation.