Remedies for COVID-19: Anticipating, Identifying and Dealing with Contractual Defaults

March 31, 2020

Common “Tripping Points” For Companies Experiencing Financial Difficulty.

Commercial Contracts

COVID-19 and the resulting economic downturn is causing financial difficulties for many companies with the result that they are at risk of being in default under certain of their commercial contracts. Key commercial contracts typically include property and equipment leases, supply and sourcing agreements, licensing and IP agreements and franchise agreements. 

Assessing Key Contracts

Companies should review key contracts to assess whether they or their counterparties are at risk of default under any of these agreements with the goal of understanding the following:

  • What obligations is the Company required to perform?
  • What constitutes a default?
  • If a counterparty were to default, what are the implications? Could the innocent party continue operations? Would the innocent party subsequently be in default under other agreements?
  • Could Covid-19 (or its economic consequences) trigger a force majeure clause in a contract or bring about frustration?

Companies should also assess whether their financial distress impacts their insurance coverage (particularly with respect to business disruption insurance and civil authority insurance).

Renegotiations and Accommodations

Is it possible to renegotiate any of these contracts or request accommodations from the counterparty?  Maintaining relationships with key stakeholders (landlords, suppliers, customers, etc.) and keeping them informed of current circumstances, as appropriate – and considering when (and whether) to request accommodations from them will be key.

Credit Facilities


Borrowers should carefully consider their obligations under credit facilities, which typically include a fulsome set of covenants.  Those covenants potentially include timely reporting obligations, obligations to notify the lender of defaults and of any material adverse change, and obligations to maintain certain financial covenants. Borrowers should also consider their ability to satisfy any applicable conditions in order to draw under their lines of credit or other revolving credit facilities.

Assessing Options

If borrowers are concerned that they have not or may not be able to satisfy their obligations under their loan documents or otherwise access their lines of credit, they will want to consider how to proceed:

  • Where the lender is amenable, a waiver of amortization payments (i.e. a “payment holiday”) or of compliance with a leverage ratio or other earnings-based covenants may be the most appropriate method of addressing these concerns, particularly if the parties expect the compliance issues to be temporary or if speed of execution is key.
  • Again, where the lender is amenable, an amendment of the amortization schedule or of financial covenants may be appropriate if the borrower and lender are in agreement as to what changes are to be made to the agreement (which may be difficult in the current environment) and there is the necessary time to draft and negotiate the amendment.
  • There may be flexibility within the credit agreement for a shareholder to inject equity into the borrower; depending on whether this is done pursuant to an “equity cure” clause, there may be a restrictions with respect to how such equity is applied.
  • Depending on the structure of the financial covenants, there may be an ability to add back some of the expenses or losses associated with COVID-19 in the EBITDA calculation.
  • If other remedies aren’t available or aren’t sufficient, as applicable, a forbearance agreement (where the lender agrees not to act on specific defaults) may afford the borrower time to consider how best to proceed, including how it may refinance or restructure its credit facilities.

In the context of a syndicated credit facility, the borrower will need to review its loan documents to determine the necessary level of consent for any waiver, amendment or forbearance.  Typically, a waiver of a financial covenant would require the approval of lenders holding a majority of the commitments under the credit facility; however, any waiver or amendment that reduces or postpones the payment of scheduled principal amounts, reduces the rate of applicable interest or postpones the time for payment of interest would commonly require unanimous lender consent.

Engaging Lenders

Once a borrower has assessed its financial position, identified any compliance issues and considered what accommodations it is seeking from its lender, the borrower should engage its lender in discussions.  In the current environment, with its restricted access to the courts (as discussed below), there may be additional incentive for borrowers and lenders to come to an agreement with respect to a path forward.

Potential Judicial Relief

The COVID-19 pandemic looks like it will increase the need for debtors and creditors to seek relief from the Courts.  Applications for creditor protection under the Companies’ Creditors Arrangement Act, receivership applications, and bankruptcy filings are all expected to increase.  The impact of the outbreak is also impairing access to the Court. In Ontario for example, the Ontario Superior Court of Justice is only hearing urgent matters at this time, which are defined as matters where “immediate and significant financial repercussions may result if there is no judicial hearing.”

Other jurisdictions are implementing measures that impact companies in financial distress. While this directly impacts companies with cross-border operations, it also raises questions as to whether Canada will implement similar measures. For example, Germany has suspended certain requirements with respect to insolvency filings (effectively delaying some insolvency filings until September 30, 2020). China has implemented fiscal policies that give certain businesses extended grace periods, waived interest payments, etc.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at

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