How do I fix a covenant breach on my acquisition loan after closing?

A covenant is a promise in the loan agreement, such as keeping to a financial test, delivering statements or avoiding certain actions. A breach calls for quick action, but it does not always lead to enforcement. This page describes the general legal setting and uses the federal Canada Small Business Financing Program guidelines as an example. Your own agreement controls, and the lender’s rights come from its wording.

Find out exactly what was breached

The CSBFP guidelines say a default occurs when a borrower fails to comply with a material condition of the loan agreement, and that a minor failure, such as late filing of yearly statements, is not material and so does not amount to default. Those guidelines apply to CSBF loans only. Other agreements define default their own way, so read the default clause, any cure period and any notice requirement, and ask a lawyer whether your agreement treats the breach as a default.

Raise it and ask for a written fix

For CSBF loans, the guidelines say to work with the borrower to remedy a default that can be remedied. They add that if it is not remedied and the lender and borrower cannot agree to amend the loan agreement, the lender may send a demand for repayment that sets a period to comply. Ask the lender what remedy it will accept, such as resetting a covenant, waiving the breach for a stated period or adding reporting. Get any waiver or amendment in writing, signed by the lender.

What the law adds if it is not fixed

Under the Bankruptcy and Insolvency Act, a secured creditor that intends to enforce security on all or substantially all of the inventory, accounts receivable or other property of an insolvent person that was acquired for, or is used in relation to, a business carried on by the insolvent person must send a notice of that intention. Unless the insolvent person consents to earlier enforcement, it cannot enforce until ten days after sending it, subject to the exceptions in s.244. Ontario’s Personal Property Security Act lets a person entitled to notice of a disposition redeem the collateral at any time before the secured party disposes of it, contracts to dispose of it or is deemed to have elected to accept it, unless that person has otherwise agreed in writing after default (s.66). Read anything you sign after a default with that in mind. If the loan has a personal guarantee, get advice before you sign.