Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The conditions under which the lender (or, in the case of a syndicated credit facility, the administrative agent on behalf of the lenders) can enforce its rights under the loan documents are usually defined in the loan agreement and referred to as ‘events of default’. Typical events of default include:
- the borrower’s failure to make required payments on a timely basis;
- the borrower’s breach of a covenant in the loan documents;
- material inaccuracy of a representation or warranty in the loan documents;
- commencement of an insolvency proceeding against the borrower or guarantors;
- a default on other debt of the borrower or guarantors;
- a final legal judgment issued against the borrower above a certain threshold;
- changes of control of the borrower; and
- issues with the validity of the lender’s security interest.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
Upon an event of default, the lender or administrative agent acting on the instructions of the requisite lenders is typically entitled to accelerate the maturity of the debt. With respect to its security interest in the collateral, the secured party may either seek judicial foreclosure of the collateral or exercise ‘self-help’ remedies under the Uniform Commercial Code, such as selling collateral in the secured party’s possession. If the borrower has filed for bankruptcy protection, the ‘automatic stay’ provisions of the US Bankruptcy Code generally require the secured party to obtain permission from the bankruptcy court before exercising any remedies against the borrower or the collateral.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
A creditor with a valid, perfected security interest has priority over unsecured creditors to the extent of the value of the collateral. If there are multiple secured creditors with a security interest in the same asset, the creditor with lien priority typically has priority.
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