4.3 Particular Clauses in Loan Facility Agreements 109should pay attention to what will happen to the security in the event of novation.
In civil law jurisdictions, the security typically will be released unless the security
is novated as well. This requires the consent of the provider of security. In com-
mon law jurisdictions, a trust construction can be used to mitigate this problem.
Generally, the legal problems relating to novation reduce the tradability of the
loan.
Assignment means that the new lender (A) deals directly with the original
lender (B) and becomes the holder of claims under the original loan agreement.
With novation and assignment, the A thus becomes the direct lender who may
sue C in the event that C does not fulfil its payment obligations. In contrast, par-
ticipation means that there is no contractual relationship whatsoever between the
new lender (A) and the borrower (C). A is dependent on the original lender (B) to
pass on payments of capital and interest made by C. As a rule, A may not be able
to sue C directly.
Events of default: general default. Events of default are primarily designed to
permit the lender to accelerate outstanding debt and/or to enforce security prior to
scheduled maturities. They also allow the lender to cancel commitments or sus-
pend further drawdowns.^101
The events of default in a loan agreement would usually cover non-payment,
breach of covenant in the finance documents, misrepresentation, cross default to
other financial indebtedness, invalidity of relevant documents, insolvency and/or
insolvency proceedings, litigation, rescission of the finance documents, and any
material adverse change. In an acquisition loan facility (see section 20.5), rescis-
sion of the acquisition agreement would also be listed as an event of default.^102
Payment default, default interest, and cross-default clauses. The borrower
should thus pay particular attention to the regulation of default. The borrower
should try to qualify its obligations to reduce the risk of default. The borrower
should also try to add materiality qualifications and appropriate cure periods.^103
For example, late payment can trigger a payment default under the contract.
The borrower can try to mitigate this risk by, for example, adding a grace period
of several days and a minimum amount.
The purpose of the default interest clause is to provide an incentive to comply
with the terms of the agreement and to compensate the lender for increased risk af-
ter default. The borrower may propose, for example, that the default interest is
triggered only after the expiry of a grace period (for unreasonable clauses, see
Volume II).^104
The cross-default clause is designed to ensure that the beneficiary of the clause
will have the ability to move against the borrower or its assets at the same time as
any of the borrower’s other lenders: the lender will be able to protect or enforce its
rights against the borrower if ever another lender to the borrower under another
(^101) Gayle C, Acquisition Finance – Syndication Best Practice, Int Comp Comm L R 13(8)
(2002) p 305.
(^102) Ibid.
(^103) Ibid.
(^104) See Buchheit LC, op cit, p 36.