It happens that the debtor cannot fulfill its obligations to the creditor or lessor. This phenomenon was called default. This can be the beginning of the end both for legal entities and individuals, and for the whole state. But there is also such a thing as cross-default, which is defined as the early presentation of all debts to the debtor at the same time, in addition to current.
Details on default
Default - this is the default by the debtor of specific obligations specified in the contract. Obligations can be credit, rental, under a contract of sale, etc. Default does not mean that the company is automatically liquidated or, if it concerns an individual, its bankruptcy in case of failure to fulfill these obligations. Nevertheless, this may be the beginning of such processes if the violation is significant.
Default is divided into the following types:
- Technical: the violating party must correct the situation within a few days.
- Contractual: the right of the injured party to demand the performance of obligations by the violating party.
- Coming.
- Potential: there is no violation yet, but there is every reason to fear non-fulfillment of obligations (payment must be received in a couple of months, and the organization has begun bankruptcy proceedings).
Cross default
Not everyone knows what it is. Cross-default is a type of default. This phenomenon means the debtor's failure to fulfill his obligations to the creditor or other person, as a result of which the terms of the contract and other documents are violated. As a result, the debtor is required not only current debt, but also other existing debts, and at the same time.
This type of default can occur in the relations of private companies and almost never in the relations of states, since their legal capacity is limited in such phenomena. Often there is a cross-default in a loan agreement, as well as in any contractual relationship. Therefore, such a nuance should be taken into account in any document signed by a legal entity. The circumstances of the occurrence of cross-default can be spelled out in different ways:
- violation by the debtor of contractual obligations with the creditor;
- violation by the debtor of the terms of the contract with a third party;
- violation of conditions not only by the debtor, but also by his representatives, who are able to influence the activities of the debtor.
Benefits
Cross-default on obligations provides an opportunity for a creditor to apply a method of protection in the event that obligations under a specific contract are violated. But this can only happen when there is a likelihood of a worsening of the position of the debtor, and there are prerequisites for him not to fulfill the contractual terms of other contracts and other lenders. Therefore, the main and, perhaps, the only advantage of cross-default is the ability of lenders to get some flexibility in working with debtors.
The dangers
But, in spite of everything, the position of cross-default is rather insidious, and its consequences are unpredictable. If obligations under one agreement are not fulfilled, therefore, they are not fulfilled under the others, although obligations under them may have never been violated, and the deadlines have not yet arrived. The effect of "dominoes" is obtained when, one after another, the obligations are considered violated, and the responsibility set forth in the documents begins to arise. In order to somehow protect themselves from such a phenomenon, debtors try by all means to limit the conditions of cross-default.
As a rule, cross-default does not occur automatically. Some contracts specify a time period during which the lender announces a cross-default. If this did not happen, then it turns out that the creditor himself renounced his right. Cross-default gives the creditor the right to demand the fulfillment of obligations both under the main contract and on security, which are concluded for the execution of the first. That is why the parties should carefully approach the drafting of all contracts and related documents.