Experience of international financing transactions has shown us that legal constraints on a lender accelerating debt (demanding its immediate repayment) and enforcing allied security can vary across jurisdictions.

English law is generally permissive, in line with the freedom of contract that is a fundamental feature of the common law. Any event specified in a loan facility agreement governed by English law as an “event of default”, however technical or de minimis it may be considered to be in the context of the borrower group’s business and the loan extended to it, could be grounds for the lender(s) to accelerate the debt and enforce any security granted over English assets. 

By contrast, certain continental jurisdictions can be more restrictive.  For example, while subject to nuance, our experience is that Spanish courts may be reluctant to accept enforcement in most situations other than non-payment of the debt or amounts otherwise required to preserve the secured asset – and, even then, only after a minimum grace period has expired. Similarly in France, we understand the right to enforce security arises from non-payment of the debt – the occurrence of any other contractually agreed “events of default” may give the lender(s) the right to accelerate the debt, but the ability to enforce only arises if the debt is not then paid. While not entirely different in practice from the approach under English law (where the debt is generally accelerated prior to an enforcement of security), additional pre-enforcement steps and grace periods may need to be taken into account.  The above being said, determining whether these remedies are indeed available under English law agreements is not always straightforward. 

What is an event of default? 

The term “event of default” should not be considered synonymous with “breach of contract”. Not all breaches of contract constitute events of default, or at least not automatically; and not all events of default (otherwise) constitute breaches of contract. General contractual remedies for breach are considered insufficiently predictable, available, consistent and full for lenders to rely solely on them. By clearly specifying events of default and their consequences, a lender can be more confident of the contractual (and, where there is security, associated proprietary) remedies that will be available to it.  

Typical events of default include (subject to event-specific grace periods and other qualifications):

• failure to pay, when due, interest, any amount of principal or other amounts payable under the finance documents;
• non-compliance with a financial covenant or more general undertaking; 
• misrepresentation;
• default under the borrower group’s other financing arrangements; and
• insolvency or the initiation of insolvency-related proceedings or process. 

What does the contract say?

A facility agreement will often specify that an event of default has to be “continuing” for the lender to accelerate the debt. The Loan Market Association’s recommended forms of facility agreement provide optionality for an event of default to be “continuing” until it is (i) waived, or (ii) remedied or waived. 

Clearly, where the creditors have agreed to waive an event of default, it should cease to be grounds for acceleration. Over time, borrowers have posited that certain events of default are capable of remedy and, once remedied, should equally cease to be grounds for acceleration. Consequently, option (ii) is often adopted today, giving borrowers an opportunity to remedy an event of default even in the absence of a consensual waiver.  

This feeds through to the enforcement of security. Under associated (but separate) security documents, it is now most common for a “declared default” to be the trigger to enforcement. This therefore requires the lender(s) to have first accelerated the underlying debt (perhaps with a further requirement that the declared default itself be “continuing”, to make even more certain that an event considered relatively immaterial in itself cannot later have unavoidably draconian consequences). 

For example, consider a scenario where a borrower misses the deadline to deliver its annual accounts (taking account of any grace period) and this constitutes an event of default, allowing the lender to accelerate the debt. However, if the borrower seeks to remedy the situation by delivering its accounts a day or so late, the event of default may no longer be considered “continuing” – this will depend on which of option (i) or (ii) above has been followed and, otherwise, whether time sensitive obligations are actually remediable. This has not been tested in English courts in this specific context. However, legal considerations as to whether time is “of the essence” in relation to a contractual obligation are likely to align with practical considerations as to whether there has been an honest and innocuous mistake or something more serious has occurred. 

When is an event of default remedied? 

The uncertainty around deemed waivers by way of conduct, coupled with standard “no waiver” clauses in facility agreements, typically lead borrowers to seek a waiver in writing. In the absence of an express waiver, whether an event of default has been sufficiently remedied so as to cease to be “continuing” can be less clear cut.  

The 2022 case of Re Lehman Brothers International (Europe) LBIE¹ established that whether an event of default is continuing under an ISDA Master Agreement depends on whether the “factual events or states of affairs” constituting the event of default are continuing.²

However, this may not always be the case for all events of default. A creditor may have provided funds on the basis of a representation, which transpires to be materially untrue at the time it was made and financial covenants are tested at specified dates. In these cases, absent their remedy during any contractually agreed grace period (including by way of “equity cure” of financial covenants), it is debatable whether the “point in time” event of default can subsequently be remedied.

In light of this uncertainty, a number of contractual remedy and cure mechanisms have developed or been bolstered. Equity cures for financial covenants (requiring the injection of further equity or subordinated shareholder debt) are now common but features such as “over-cures” and “pre-cures” are still negotiated points. Borrowers may also seek allowance for “deemed” cures, whereby a historic financial covenant breach is cured by subsequent compliance on a later test date. In a borrower-friendly environment, the scope of cure rights will likely continue to be tested and expanded.

Consequences 

Lenders need a facility document and the related wider finance documents to provide them with a well-founded basis for acceleration and enforcement at the appropriate time – they otherwise risk liability for dealing with contracts and, potentially, security property, in a manner in which they were not entitled. This is why lenders are reluctant to enforce on the basis of a material adverse change (MAC) event of default, which can be difficult to establish when compared to, for example, breaches of clearly defined financial covenants.  

While borrowers may seek written waivers for all events of default to avoid ambiguity, it may be in all parties’ interests to ensure that – as far as reasonably possible against the background of the law and practice outlined above – their facility agreements clearly define what constitute “continuing” events of default, including the parameters and, ideally, the specifics for remedying them.
 

1 [2012] UKSC 6. 

2 See also our related publication at the time of this judgment, which focused on the ISDA Master Agreement and other contractual master arrangements.