If your company has defaulted on a loan agreement, you may not know what this means for your company. Depending on your loan agreement, the bank could terminate the agreement, as well as demand immediate payment of the outstanding principal amount. Either way, an event of default can have widespread ramifications for your business. Hence, this article will explain the consequences of an event of default and how your company may rectify the situation.<\/p>\n\n\n\n
An event of default refers to circumstances in a loan agreement<\/a> that, if they arise, release the bank from any obligation it owes your company. These circumstances include:<\/p>\n\n\n\n An event of default almost always entitles the bank to accelerate the loan, which means it can demand immediate repayment of the outstanding amount. <\/p>\n\n\n\n An event of default<\/a> typically grants a lender the option to take several different rights. These include:<\/p>\n\n\n\n Say your company has a credit facility with its bank for \u00a31m in exchange for granting the bank security over all your property. At present, you have only borrowed \u00a3500,000. However, your company fails to make its monthly repayments. Consequently, the bank is no longer obligated to provide the remaining \u00a3500,000 under the facility.<\/p>\n \n Furthermore, the bank can also demand you immediately pay the \u00a3500,000 back. If your company cannot pay, the bank can take control of your company\u2019s property and sell it to recover its amount.<\/p>\n <\/p>\n<\/div>\n\n\n\n It is important to note that just because your company is in default does not mean that the bank will take immediate action. Instead, an event of default gives the bank the right to choose<\/em> to take specific actions. Whether or not it will take any action depends on the circumstances surrounding the event of default. <\/p>\n\n\n\n For instance, most loans contain a provision called a \u201cchange of control\u201d clause<\/a>, which states that if your company\u2019s owners change, it may constitute an event of default. However, a change of control provision can create unforeseen consequences.\u00a0<\/p>\n\n\n\n Consider the instance where you decide to incorporate a new parent company that will own the shares in both your existing and the new one. Transferring the shares to a parent company is technically in default because the company\u2019s owner has legally changed.<\/p>\n However, from a practical standpoint, transferring the shares to a parent company is not the same as selling your company to a third party. Of course, your bank may not know that you just created a parent company. So you give them a call, and after they inspect certain documents, waive the event of default. Problem solved.<\/p>\n<\/div>\n\n\n\n In many cases, companies cannot afford to repay the entire outstanding amount earlier than anticipated. If this is the case, the bank would have to enforce its security over the company\u2019s assets, which takes considerable time and resources. Therefore, most banks are prepared to work with a company that has defaulted, provided the bank is confident that the business is fundamentally sound. <\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nWhat Actions Can the Bank Take?<\/h2>\n\n\n\n
Technical Defaults <\/h3>\n\n\n\n
Commercial Considerations <\/h3>\n\n\n\n