Events of default

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Events of default
  • The purpose of events of default
  • Common events of default
  • Failure to pay
  • Breach of financial covenants and breach of other obligations
  • Misrepresentation
  • Cross-default
  • Insolvency, insolvency proceedings and creditors process
  • Ceasing to exist
  • Ownership of obligors
  • More...

Events of default

This Practice Note considers:

  1. the purpose of events of default included in facility agreements

  2. common events of default relating to borrowers and guarantors

  3. continuing events of default

  4. the differences between an event of default, default and potential event of default, and

  5. considerations relating to acceleration

Where appropriate, this Practice Note highlights relevant provisions in Precedent: Facility agreement (term loan): single company borrower—bilateral—with or without security or a guarantee and the Loan Market Association (LMA) investment grade multicurrency term facility agreement (the LMA facility agreement) (available to LMA members on the LMA website).

The LMA's user guides (available in the 'Documents & Guidelines' section of its website) and the Association of Corporate Treasurers (ACT)Borrower’s Guide to the LMA’s Investment Grade Agreements contain useful guidance on the events of default in LMA investment grade documentation. Registration with ACT is necessary to access their guide.

The purpose of events of default

Lenders generally prefer not to rely on general contract law for a remedy if the borrower breaches the loan agreement. Serious breaches such as not meeting payment obligations or breaching financial covenants may indicate that the borrower is in financial difficulty and urgent action may be needed if the lender is to protect its investment.

Most facility agreements therefore include a mechanism under which a lender can, if it chooses, take certain actions if the borrower breaches the

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