Cross default clause: when a default elsewhere counts here

Sample clause

Written for a $3,000,000 working capital facility from a fictional regional bank to Lachlan Valley Grain, a fictional grain trading business.

Cross Default. An Event of Default occurs if: (a) any Financial Indebtedness of the Borrower is not paid when due or within any originally applicable grace period; (b) any Financial Indebtedness of the Borrower is declared, or otherwise becomes, due and payable before its specified maturity because of an event of default, however described; or (c) any creditor of the Borrower becomes entitled to declare any Financial Indebtedness due and payable before its specified maturity because of an event of default, however described, provided that no Event of Default occurs under this clause unless the total Financial Indebtedness affected is more than $150,000, and no amount disputed in good faith by appropriate means counts towards that total.

Sample wording, not legal advice.

Variants

What to negotiate

• The threshold

  A threshold stops a small dispute with a supplier from putting a major facility at risk. It is usually a fixed amount or a percentage of net assets, set so that only a default significant to the borrower's finances counts. Borrowers should make sure the threshold applies to all limbs of the clause and that it is in the same currency as their other debts or adjusts for exchange rates.

• Grace periods

  The clause should only bite once the other debt's own grace period has expired, so a payment a day late under another loan, which that lender would excuse, does not trigger this one. The sample's wording on any originally applicable grace period does that. Borrowers can also ask for a period to remedy the cross default before the lender can accelerate.

• Disputed debts

  Borrowers should exclude amounts disputed in good faith, so that a contractual dispute with a supplier is not treated as a financial default. Lenders accept that if the dispute is genuine and being pursued properly. The definition of financial indebtedness also matters: it should cover borrowings and similar items, not every trade debt.

The risk of leaving it out

Without a cross default clause, a lender may have to watch a borrower default on other debts, with other creditors enforcing against assets, while its own loan remains technically in good standing. For borrowers, an overly broad clause creates a domino effect, where one default anywhere can trigger defaults across every facility at once.

Cross default and cross acceleration compared

Consider a borrower that misses a $200,000 payment on an equipment loan from another lender, and that lender sends a default notice but does not yet call the loan. Under a cross default clause like the sample's, the bank can act now, because the other creditor has become entitled to accelerate and the amount exceeds $150,000. Under a cross acceleration clause, the bank cannot act unless and until the other lender actually declares its loan due. If the borrower then agrees a payment plan with the equipment lender, the cross acceleration bank is never affected, while the cross default bank may already have used its leverage. Law checked on 21 October 2026. This page explains how the clause works and is not legal advice.

Market standard drafting

The Loan Market Association in Europe and the Asia Pacific Loan Market Association publish recommended form facility agreements that include a cross default clause with a threshold, and most syndicated and many bilateral loans start from them. The standard form covers non payment after grace periods, early acceleration, and creditors becoming entitled to accelerate, with a threshold applying to all three, which is the structure the sample follows.

What counts as financial indebtedness

The definition usually includes money borrowed, bonds and notes, finance leases, receivables sold with recourse, derivative exposures and guarantees of others' debts. Trade payables on normal terms are usually excluded. Borrowers should check the definition carefully, because a broad definition with a low threshold can capture ordinary business disputes.

Managing the domino effect

A borrower with several facilities should map which ones contain cross default and which contain cross acceleration, and the thresholds in each. When trouble begins, the borrower should talk to all lenders early, because one lender's enforcement can trigger the others. Standstill agreements, where lenders agree not to act while a plan is worked out, are a common response.

Documents that carry this clause

Loan agreement templateA Tasmanian foundry is borrowing $180,000 from a private investment company to buy a used induction furnace. The lender is not a bank, so everything a bank would take for granted has to be written down: what has to happen before the money moves, what is registered over what, and how long the borrower gets to fix a default.Notice of default template that gives a real chance to fix itA notice of default has to identify the loan, show exactly what is overdue, give the borrower a fixed date to put it right, and say what happens if they do not. This one page notice from a private lender after two missed instalments on an $18,000 business loan does that with an arrears table, a 30 day cure period and the acceleration clause quoted.Personal guarantee template with a cap and a notice of demandA director asked to guarantee a lease wants to know one number: the most this can cost me. This three page deed answers it in a callout, capping the guarantor at $60,000 including interest and enforcement costs, then sets out the two steps the landlord has to take before a demand can be made at all.

Questions people ask