When an investment structure runs into difficulty, the question of how and when a trustee can act is one of the most important — and most misunderstood — parts of the arrangement. This piece sets out what an event of default is, and the role a specified majority of investors plays in triggering enforcement.
What an event of default is
An event of default is a defined trigger in the trust deed or loan note instrument — a missed interest or redemption payment, a breach of a financial covenant, the onset of insolvency, or another circumstance named in the documents. It does not automatically mean enforcement. It opens a door: it gives the security trustee the power to act, with the timing and manner depending on the documents and on the instructions received from investors.
An event of default does not automatically mean enforcement — it opens a door.
The role of a specified majority
As security trustee, the trustee holds the security on behalf of the investor body as a whole. No single investor can instruct enforcement alone. Most trust deeds require a specified majority — commonly 75% of outstanding principal — to direct the trustee before it proceeds. The mechanism protects investors from an obstructive minority while preventing a small group from forcing action against the wider interest. Once a valid direction is received in writing, with evidence of holdings, the trustee acts on it — provided it is lawful, consistent with the deed, and appropriately indemnified.
How it works in practice
Organising a direction rests with the investors. The register of holders is kept by the issuer or its administrator, not the trustee, so investors seeking to act should approach them first. The trustee will take legal advice before enforcing and will usually require an indemnity before incurring significant cost — standard practice that protects the trustee and the investor body alike.