Event of default

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Event of default is a term used in commercial loan documentation. It refers to the occurrence of an event which allows the lender to demand repayment of the loan in advance of its normal due date (also known as accelerating the loan). In a revolving credit facility, the occurrence of an event of default normally also allows the lender to cancel any obligations to make further loan advances.

There are two types of event of default:

• actual default, ie the failure to pay principal or interest when it falls due for payment; and
• prospective default, when payment is not yet due, but it is clear that it will not be capable of being paid when it does fall due. For example, a payment is due in three months' time but the borrower has been put into liquidation.