Default Procedure
Operational procedures to handle borrower's default
Trilobyte's initial plan is to facilitate loans based on Permissioned Vaults. Therefore, the focus of this section will be on default procedures for these types of loans.
Note:
After the initial release of the Protocol, a default framework for Permissionless Vaults will be defined and implemented. A likely scenario might be outsourcing this activity to one or more specialised 3rd party providers.
What happens in case of default of permissioned vaults?
Cases of Borrower default in a permissioned vault will rely on the specifics of the legal contract written between the Investor(s) and Borrower off-chain that outline what occurs in a default situation. As such, each default procedure will be unique to the loan contract between the Borrower and Investor. This also means that the smart contract for each Borrower Vault will have to contain the correct parameters and instructions to handle default as set out in the contract.
By default, permissioned vaults will have a built in default procedure that handles the following two scenarios:
Scenario 1 - Workout
This scenario happens when the projected cash flows do not perform as well as expected and are insufficient to support the agreed payment schedule, but they nevertheless continue to flow into the Vault.
This scenario is handled by allowing investor(s) and the borrower to define how much of the incoming cashflow should go to investors as repayments and how much should go the borrower during the vault creation. The assumption here is that, as long as the cash flows are coming into the Vault, the loan will be eventually repaid and the parties are free to set the terms depending on the nature and behaviour of the cash flows.
Example:
Investors and borrowers could agree that when the Workout scenario happens 80% of the incoming cash flows should go to repayments and 20% should go to the borrower. Alternatively, they could also agree that 100% of the cash flows should go to repayments.
Scenario 2- Default
This scenario happens when the cash flows that serve as the source of repayment are halted completely or seriously delayed or impaired. The Borrower here cannot repay any amount by the agreed-upon time period. Whenever the expected cash flows is not arriving to a vault according to the agreed payment schedule the following will happen:
The vault will automatically trigger its grace period function which performs the following steps
It extends the expected repayment period. The exact extension will depend on a parameter defined and agreed upon between borrower and investor(s) during the vault creation. During the grace period, the borrower can repay the owed amount, in addition to a grace period fee.
A notification is sent to borrower and investors related to that vault.
If the Borrower is still unable to repay the debt once the grace period has expired, the Vault will automatically switch to “default status”. If this occurs, the following steps will happen:
A notification is sent to borrower and investors related to that vault
Any payment coming into the vault will be allocated to investors until the debt up until that period is fully paid.
Investors and Borrower will need to renegotiate the terms of repayment, including any changes to the principal amount, maturity date, interest rate, repayment period and cash flows that will serve as the basis of repayment.
These new terms will need to be incorporated as an update to the defaulted vault.
Note:
Updates to permissioned vaults will require the creation of a transaction with the signature of all the related parties. The Trilobyte team will be responsible for coordinating the signatures among all the parties.
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