6 January 2022

We Need To Talk – Financial Difficulties and Facility Agreements

Unfortunately, businesses often face financial difficulties and the pandemic in particular, has caused problems for many. This is a stressful and worrying time for any business, even if they have no bank debt, but what are your options if you do have debt finance in place and are at risk of defaulting under the facility agreement?

Has there been a default?

Firstly, it’s important to determine whether an event of default under the facility agreement has actually taken place or whether there is a potential risk of default. If a default has actually occurred, there will often (but not always) be a grace period in which the borrower can attempt to resolve the issue.

You will need to dig out the facility agreement and carefully read through it or ask your lawyers to do that for you. It is very important to know what the position is and not assume there is a grace period. Grace periods can also be very specific.

What happens in the event of a default?

The lender’s options if an event of default has arisen will be set out in the facility agreement. Typically, this may include demanding repayment or enforcing any security in place, making a demand under a guarantee, cancelling any commitments so that no further drawdowns of the loan can be made, an increase in margins under the loan and being given access to the borrower’s records and management.

In addition, the borrower may be obliged to pay default-related expenses to the lender and is likely to be prevented from paying any dividends or making payment to any subordinated creditor.

A combination of these will usually be instigated, which can often exacerbate the borrower’s difficulties. But, it may be possible to avoid this situation.

Can these measures be averted?

The lender may be willing to enter into discussions with the borrower about possible options and next steps. Having to take drastic action, such as enforcing security, is not usually a lender’s preferred course of action and it may be possible to agree a waiver or amendment of terms which are less draconian for the borrower and could help to save the business from further financial difficulties or even insolvency.

Another option is to agree a standstill agreement under which the lender will agree not to declare an event of default for a certain period of time to allow the borrower a chance to rectify the problem.

A lender is more likely to be able to agree to some sort of compromise or help you to work through the difficult period, if they have notice of the issue. It’s therefore extremely important to raise any potential issues with your lender as soon as possible. Transparency is key and the earlier you raise the issues (or likely issues) with the lender the better (after consulting your lawyers of course...).

Victoria is Head of Banking & Finance at Forsters.


This note provides a general summary of the legal position in England and Wales as at 5 January 2022. It does not constitute legal advice.

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