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12 Jun 2020

Financing arrangements: covenant breaches/ financial distress


Market conditions and Covid-19

The Covid-19 pandemic and the response to it, including global lockdowns, has caused substantial disruption to business operations and trade which has resulted in significant cash flow and financial challenges for many businesses. As a result, in a number of cases, financing covenants have been breached which have triggered defaults under financing arrangements.

In response, governments around the world have enacted legislation to help mitigate the disruptive impact Covid-19 is having on business and trade. In general, such legislation has been designed to provide temporary relief from the inability to perform contractual obligations and to allow businesses in financial distress to continue to operate while, in certain circumstances, prohibiting creditors from commencing legal action or enforcing security.

In respect of Singapore for example, on 7 April 2020, the Covid-19 (Temporary Measures) Act 2020 (No. 14 of 2020) was implemented.

What constitutes a default?

Creditors and debtors must have a clear understanding:

  • of what constitutes a default;
  • if a default has occurred;
  • the contractual, legal and reporting consequences of a default occurring; and
  • what rights and obligations apply once a default has occurred.

In addition to understanding the contractual terms documented in the financing arrangements, creditors and debtors, through their respective legal advisors, must know how relevant common law and statutory rights and obligations interact with their contractual rights and obligations.

A default, in most instances, occurs pursuant to the terms agreed in the financing arrangements. To this extent, unless a creditor is accelerating the loan or reserving its rights, there is, in most instances, no requirement to "declare" the default for it to exist. There are certain limited exceptions to this including material adverse change (''MAC'') clauses where a creditor may be required to make a judgment decision – for example ''in the view of the majority lenders''– to establish that a MAC clause has been triggered.

From a practical perspective, it is important for the creditor to have an evidential record that it has informed the debtor that a default has occurred. A notice of default can also be a useful first step in opening a dialogue for the purpose of reaching a consensual arrangement to waive or cure a default.

Waiving rights

It is critical to know how to preserve your rights and the risks of taking or, as the case may be, not taking action to preserve your rights.

A common feature of financing arrangements is a contractual agreement, usually insisted on by creditors, that a default is ''continuing unless it has been waived''. A provision of this nature is useful but, as a matter of law, notwithstanding the inclusion of such a provision, it may be possible to waive a default by conduct or inaction if you fail to take action over a prolonged period of time.

Letters reserving rights are useful in this respect but not conclusive.

Acceleration and enforcement

If a default has occurred, a creditor will usually have the right to accelerate, enforce security and call on guarantees.

Careful review of contractual terms and an understanding of certain jurisdictional legal risk is essential prior to accelerating a financing arrangement, enforcing security interests or calling on a guarantee. For example, in Thailand, there are legislative protections in favor of guarantors that must be complied with prior to taking action against a guarantor.

Payment defaults are objective: when a payment has been missed, the payment default has, subject to any applicable grace period, occurred. It is difficult for a debtor to argue that a payment default has not occurred.

In contrast, a MAC default, typically requires a creditor to make a determination as to its occurrence. Such determinations, if incorrect, expose creditors to litigation and possibly reputational risk.

Information undertakings

Parties to a financing arrangement need to know what information each party is contractually obliged to provide / entitled to receive.

Information is key during any form of financial distress. Financing arrangements usually include information undertakings and give creditors the right to receive certain information about assets and the financial status of a business.

The scope of such rights is contractual. Consider if there is a positive obligation to provide such information or if the obligation is only effective if requested. Also consider if there are restrictions on what can be requested. Debtors should keep in mind that, once requested, failure to provide such information, can result in a default.

Insolvency and debt restructuring

If consensual restructuring cannot be agreed between creditors and debtor, insolvency or debt restructuring processes involving the courts may be commenced. In Singapore, for example, this can include schemes of arrangement, judicial management and/or liquidation.

Such processes add further complexity to a distressed debt scenario and, importantly, can impact the rights of a creditor to pursue contractual rights and remedies agreed in the financing arrangements. For example, in Singapore, a 30 day moratorium automatically applies on filing for a scheme. Such a moratorium restrains the right to take legal action or proceedings.

Legal and strategic advice is essential for both creditors and debtors to ensure action is taken to preserve legal rights and, where necessary, enforce such rights.


Information contained in this note should not be applied to any set of facts without seeking legal advice. Stephenson Harwood LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with our Alliance partner, Virtus Law LLP, where necessary.