If your business is negotiating a loan agreement with a bank, you will see repeated references to \u201cevents of default\u201d in the draft loan agreement. As you probably know, not repaying a loan is the most obvious kind of default. However, most loans have several other events of default. If the event of default occurs, the bank can end the loan. Hence, this article will explain the common events of default you are likely to find in a loan agreement and some of the commercial and legal implications surrounding the events of default.\u00a0<\/p>\n\n\n\n
Under English law, if the other party breaches a term of the contract, your options for remedying the breach depend on how important the term is in the contract. If a breach is minor, both parties can continue their obligations under the contract. However, if the breach is substantial, this can end the contract.\u00a0<\/p>\n\n\n\n
Banks often expressly indicate what event gives rise to a severe breach in loan agreements. So, if the circumstance arises, the bank can take quick action to end the loan and recover its money. These severe breaches are \u201cevents of default\u201d. When an event of default arises, the bank can<\/p>\n\n\n\n
You should note that most events of default either:<\/p>\n \n
In the latter case, this threshold is commonly defined as any event with a “materially adverse effect” on the company’s business or its ability to repay the loan.<\/p>\n
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When you think of an event of default, a late payment is one of the most common examples. Banks operate by maximising the amount of money they lend and borrow. So if your company misses a payment, it jeopardises the bank\u2019s ability to balance its loan books adequately. <\/p>\n\n\n\n
Additionally, a late payment indicates that your company may suffer from cash flow problems. At best, delinquent payments suggest mismanagement and poor attention to detail. At worst, it suggests declining cash generation and early signs of a failing business. Therefore, late payments invariably constitute events of default.\u00a0<\/p>\n\n\n\n
Your business\u2019 loan agreement may provide for certain circumstances where you will not be in default despite a missed payment. For example, because of a clerical error, third-party mistake or computer issue. Nevertheless, you may have to make the payment within a certain period (e.g., three business days).<\/p>\n<\/div>\n\n\n\n
Beyond late payments, there are other events of default you should consider.\u00a0\u00a0<\/p>\n\n\n\n
Banks lend to businesses they think are fundamentally sound and will repay the loan. To determine if a business is fundamentally sound, the bank will assess the business’ financial and operational performance and forecast based on information the business supplies.<\/p>\n\n\n\n
If the bank decides to lend to the business, it will do so on the basis that the information it used to make that decision is factually correct. However, if it later turns out that the information was not factually correct, the bank will want to recover its money. <\/p>\n\n\n\n
Therefore, any misrepresentation<\/a> \u2014 which is where a statement made by a company to the lender later turns out to be untrue \u2014 will almost always constitute an event of default.<\/p>\n\n\n\n The definition of a misrepresentation in loan agreements is often quite broad. For instance, if your accounts state your company is worth \u00a3100,000 when it is worth \u00a31,000, that is a misrepresentation. But so is a line in your assets valuing your computer monitor at \u00a3190 when it is \u00a3170. Therefore, the extent to which a misrepresentation constitutes a default may be specified in the terms.<\/p>\n<\/div>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n