Events of default

If a lender finances a business purchase, the loan agreement and any security agreement set out the events that count as default. Ontario’s Personal Property Security Act defines default as the failure to pay or otherwise perform the secured obligation when due, or the occurrence of any event on which, under the terms of the security agreement, the security becomes enforceable. The loan covenant entry covers covenants, whose breach is one such event.

What follows a default

Under section 59(1) of the Ontario Act, when the debtor is in default under a security agreement, the secured party has the rights and remedies in the security agreement and those provided in Part V of the Act. BDC explains that a breached covenant can technically put a loan in default, and that for a more serious breach, or where the company does not take corrective action, the lender can decide to call in the loan. Alberta’s Personal Property Security Act defines default in similar terms, covering any event or set of circumstances on which the security interest becomes enforceable under the security agreement. Each province has its own Act, so check which one applies.

What to ask

• Which events does the agreement list, and does the sale or a change of ownership itself count as one?
• Is there a notice or a period to fix a problem before default is declared?
• Does default under one agreement trigger default under the others?
• Which remedies does the agreement give the lender once default occurs?