Research On Cross-default Clause In Chinese Bond Contract

Cross-default means that the debtor’s default in other contracts or transactions is regarded as a breach of this debt at the same time.In this case,the creditor has the right to ask the debtor to implement relief measures for this debt,including additional credit enhancement measures and early maturity,etc.The cross-default clause has been used in international loan agreement for many years,and has appeared in Chinese bond market in recent years.The emergence of cross-default clause allows bondholders to claim their rights by means of bondholder meeting before the contract expires,so as to avoid falling into a more disadvantaged position than other creditors.The warning and protection function of the clause is welcomed by bond market investors.However,the utility of the cross-default clause in bond contracts is still very limited.In practice,holders often claim the right of restless defense or expected default to prevent their losses from expanding and obtain the benefits of paying the bonds in advance.As to which of the two systems of restless right of protest and expected default can be the legal basis of the cross-default clause,there has long been a dispute in academic circles.In view of the differences in nature,function and remedy between the right of protest and the expected breach,it is more appropriate to take the expected breach as the legal basis for the cross-breach clause.Due to the limitation of the validity level of the Model Text,the use of crossdefault clause has no compulsory effect.The issuer basically chooses whether to adopt it or not when drafting bond contracts,which to a large extent restricts the application of cross-default clause.In addition,bond contracts are mostly prepared in advance of the standard terms,how to explore the terms through the interpretation of the true meaning of the terms is also worth exploring.Therefore,it is necessary to provide incentives for issuers to use cross-default clauses from the perspective of credit enhancement,and to clarify the minimum standards for the use of the clauses and other standards that should be referred to when the clauses are partially adopted.The interpretation of cross-default clauses should balance the standardized interpretation of bond contracts with the consent of the parties,take into account market expectations,and require issuers to assume implicit obligations of good faith.The nature of the debt,the nature of the default,the starting amount and the subject scope of the triggering cross-default need to be further clarified.Different criteria can be used to define the nature of debt according to the credit of different issuers;The default behavior that does not hinder the realization of the purpose of the contract,such as defective performance,should not be included in the trigger situation,but the expected default of other debts should be included.The fixed starting amount can be further refined according to the level of the issuer’s net assets.The dynamic starting amount should specify what kind of financial statements are referred to and whether there are audit requirements.The precondition of including affiliated enterprises and affiliated enterprises among trigger subjects is to strictly define their concepts and give consideration to the necessity and feasibility.Effective information disclosure system is the premise for cross-default clause to play an effective role.At present,the provisions on information disclosure in the Model Text are not perfect,and in practice,issuers delay disclosing information.The holder’s meeting has limited binding force on the issuer,the protection of the interests of retail bond holders is not in place,and the validity of the resolution of the holder’s meeting is not clear in Chinese laws.It is necessary to unify the system of information disclosure rules in the bond market,promote the unified law enforcement in the bond market,raise the illegal cost of information disclosure,and ensure the realization of the function of cross default clause.Clarify the effectiveness of holder meetings for all holders and issuers,while protecting the interests of minority holders.The cross-default clause has higher requirements on the debt management ability of the issuer,and its function of accelerating maturity will aggravate the liquidity pressure of the issuer and lead to the debt repayment crisis.Restricted by the disposition procedure,disposition measure and other factors,the holder’s interests may be more difficult to realize.The establishment of the terms should abandon the concept of absolute investor protection and replace it with the concept of balancing the interests of both parties.At the same time,the application basis of each component of the terms should be clarified and the application conditions of the terms should be strictly regulated.