8. Default – when may the lender terminate the loan agreement and demand repayment of the loan and all other sums due?

8. Default – when may the lender terminate the loan agreement and demand repayment of the loan and all other sums due? 

A loan agreement usually sets out various events of default, the occurrence of which will entitle the lender to refuse to allow any further drawdown, to demand immediate repayment of all or part of the loan and other sums due from the borrower, and to enforce any security provided for that loan.

Events of default

The following are some common events of default:

1. Non-payment: failure to pay any amount due, be it principal, interest or other charges, would constitute an event of default. 
2. Breach of covenants: while a breach of the covenants under the loan agreement is often an event of default, the borrower is typically given a grace period to remedy the breach if it is capable of being remedied. The grace period would usually commence from the borrower’s awareness of its failure to comply or upon receiving notice from the lender of such failure to comply. 
3. Misrepresentation: this occurs when any representation made in the loan agreement or other security documents are incorrect or misleading in any material respect when made or deemed to be made.
4. Cross default: cross default means that a borrower’s default on another loan is to be treated as an event of default. Such other loan may be with the same or different lender and the scope may extend to cover loans by the borrower’s related companies (in the case of a corporate borrower).
5. Winding-up petition and insolvency: if the borrower or other security providers are wound up or insolvent, or there are circumstances indicating this might be the case, this would usually constitute an event of default.

Acceleration and cancellation of commitment(s)

A loan agreement may contain an acceleration clause providing that once an event of default has occurred, the lender may declare the loan immediately due and payable. In other words, this clause allows the lender to demand early repayment of the loan once an event of default occurs. 

A loan agreement would also include a clause permitting the lender to cancel the commitment(s) upon the occurrence of an event of default, and the borrower would not be permitted to make any further drawdown.