There are several ways to use provisions for cross-defaults in financing transactions. In demanding financing transactions, where financing is transferred from multiple lenders to a debtor, lenders compete for priority repayment by the debtor. No lender wants to be last online. In this case, the cross-default provision is used to trigger the borrower`s default in a financing agreement if the borrower defaults with another obligation. For example, the parties should determine whether the cd terms of a loan agreement are enforceable. Another question is whether entering into a contract with a CD clause violates the fiduciary duty of a company director. Assets America® offers commercial, aircraft and yacht real estate loans of $5 million and up to more than $25 million. If your business needs a business loan, we invite you to contact us for a free consultation at 206-622-3000. As briefly mentioned above, cross-default clauses are very favorable to the debtors of the agreements, as they are sufficient to minimize the risk of default in the agreement, but these clauses can certainly have a negative impact on borrowers. For example, a borrower who has received multiple loans may default on all of their loans due to the domino effect caused by cross-default clauses, and lose all of their financial advantage and power due to defaulting on a single loan.
To protect borrowers from such negative situations, the parties should negotiate and take certain measures. In T&H Diner, Inc., the court concluded that the cross-defect provisions can be applied because they concluded that the cross-default agreements were indivisible. According to In Re Kopel, the courts have refused to apply the cross-default provisions in situations where cross-default agreements are not bound. In Sanshoe, supra, the Court clarified that the cross-default provision was not enforceable if the agreements at issue constituted separate agreements which, in the factual circumstances of that case, should not be interpreted as a single contract. Similarly, if funding is directed to a specific part of the business that is related to other parts of the business, a failure in one part ends up affecting the entire business. In this case, lenders usually don`t want to wait for the entire business to break down. Therefore, cross-default provisions are used to ensure that the lender can be repaid if part of the business goes bankrupt. In general, the fiduciary duty of the board of directors includes the duty of care, the duty of good faith and the duty of loyalty. One of the arguments is that the application of cross-defect provisions violates due diligence. These provisions of a financing contract can be detrimental to a company as they significantly increase the company`s obligation in the event of non-payment. Instead of one defaulting loan at a time, the presence of cross-default provisions in multiple loan agreements means that several of the company`s loans are in default at the same time. Thus, it can be argued that the board of directors neglects its duty of care towards the company`s activities by letting the company incur more debt at the same time.
Typically, cross-default provisions allow borrowers to remedy or mitigate the default of an unrelated agreement before triggering the CD. Mitigation provisions give borrowers some leeway before they can endure the CD, such as: From the examples above, it is clear that cross-default provisions are necessary to reduce the risk for a lender not to be repaid by a borrower. Another way for the borrower to minimize the risk of default would be to set repayment terms as much as possible in the agreement, which could prevent the borrower from defaulting on their payment obligations. Finally, the provisions of the agreement relating to cross-default clauses should be clear and far from subject to subjectivity in order to avoid disputes arising from this issue. Of course, if CD prefers lenders, this may not be good news for a borrower. Obviously, a borrower loses when his loan defaults on another loan. Therefore, borrowers may be reluctant to include a cd provision in a loan agreement. To this end, certain issues need to be resolved within the framework of the financing agreement. When a borrower negotiates a loan with a lender, there are several ways to mitigate the effects of a cross-default and create financial leeway. For example, a borrower may limit cross-default to loans with a maturity of more than one year or more than a certain dollar amount.
In addition, a borrower may negotiate a cross-acceleration disposition that occurs first before a cross-default, which requires a creditor to first expedite the payment of principal and interest due before declaring a cross-default case. Finally, a borrower can limit contracts that fall within the scope of cross-default and exclude debts that are contested in good faith or paid within the authorized grace period. For example, the same borrower receives financing from Lender A to build an auto plant where the borrower works with a contractor under the construction services contract. Typically, Lender A wants to ensure that Lender A receives repayment directly in the event of a default on the construction services contract. Therefore, Lender A requires a cross-default provision in the loan agreement so that Lender A can collect repayment directly without waiting for the borrower to be unable to repay Lender A. However, a cross-default clause comes into effect if the borrower is in default on completely different lending transactions. The clause is explained in detail below – A late payment in a credit agreement can occur in several ways. This can happen in a case where the borrower does not pay the agreed value, as well as in cases where the borrower violates the positive or negative agreements of the agreement.
A positive restrictive covenant requires the borrower to carry out certain transactions, while a negative clause requires the borrower to avoid certain transactions. A cross-default clause that is related to the payment of the contract value is called a “cross-default of payment” and a cross-default that is related to the performance of other contractual obligations is called a “cross-default of the agreement”. The following examples of default cross-clauses are from Law Insider. In particular, a CD clause can increase a company`s obligations when triggered. Borrowers need the services of experts (i.e., lawyers) to solve sensitive issues like these. When lending to individuals or organizations, it is necessary to protect the rights of institutions that lend funds. For the same thing, the parties conclude an agreement that governs their relationship. In addition to the other conditions, the contract (credit agreement) thus concluded covers the situation of default and its consequences. Due to the willingness of financial institutions to involve new players in the game and speed up the flow of money, credit transactions and contracts dealing with these transactions are increasingly used every day. .