{"id":666,"date":"2021-06-12T22:42:17","date_gmt":"2021-06-12T22:42:17","guid":{"rendered":"http:\/\/legalblog.ie\/?p=666"},"modified":"2021-06-13T08:14:51","modified_gmt":"2021-06-13T08:14:51","slug":"subordination","status":"publish","type":"post","link":"https:\/\/legalblog.ie\/subordination\/","title":{"rendered":"Subordination"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_63 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/legalblog.ie\/subordination\/#Priority\" title=\"Priority\">Priority<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/legalblog.ie\/subordination\/#Subordination_Agreement\" title=\"Subordination Agreement\">Subordination Agreement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/legalblog.ie\/subordination\/#De_Facto_Subordination\" title=\"De Facto Subordination\">De Facto Subordination<\/a><\/li><\/ul><\/nav><\/div>\n<h3><span class=\"ez-toc-section\" id=\"Priority\"><\/span>Priority<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Where a company has several major financiers, issues arise as to priority of entitlements to repayment.\u00a0 The general position on a winding-up is that creditors who are unsecured are treated pari passu.\u00a0 If there is a shortfall in assets, they are paid proportionate to the balance, if any remaining after payment of preferential creditors, secured creditors and the expenses of liquidation.\u00a0 This sum would commonly be zero, due to expenses of liquidation, secured creditors attaching worthwhile assets and the prevalence of preferential creditors, typically the Revenue Commissioners.<\/p>\n<p>Subordination and priority issues focus mainly on the obligation of parties rather than the underlying security.\u00a0 Security deals with priority in entitlement to the proceeds in the event of enforcement.\u00a0 Generally, it does not in itself restrict a lower-ranking security holder from being paid off in a priority to a prior security holder.\u00a0 Accordingly, if a secured creditor wishes to secure that it is paid first, other than in the context of payment, it must enter a priority or subordination agreement.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Subordination_Agreement\"><\/span>Subordination Agreement<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>If lenders enter an agreement in respect of their respective priority of securities, they will need to provide a mechanism to determine the decisions as to sale.\u00a0 There can be a serious conflict of interest where one party has priority so that it will be paid substantially or in full, but the subordinated security creditor would wish to postpone the sale to see if the market would arise.<\/p>\n<p>The general principle is that the senior lender is not obliged to wait to see if the market will arise but is obliged to get the best price reasonably obtainable in the current market. The creditors may agree on a mechanism for the valuation of assets and determination of the appropriate point of sale.<\/p>\n<p>Under a subordination agreement, the subordinated creditor may receive interest, but will not generally be entitled to the payments of capital while the senior debt is outstanding.\u00a0 Where there is a default on the senior debt, there may be a block on repayments of the junior debt or a standstill period.\u00a0 The mezzanine lender is generally restricted from taking action where there is a default.<\/p>\n<p>The junior lender may be restricted from taking enforcement action for a period.\u00a0 This may be lesser in terms of default on its own debt.\u00a0 Equally, there may be restrictions on taking action where there is a breach of covenants for less than certain periods.<\/p>\n<p>The junior lender will be restricted from amending the terms of the loan agreements.\u00a0 Senior lenders may be restricted from increasing their margin. The same security may be given for both.\u00a0 New lenders will typically have the prime position in terms of enforcement.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"De_Facto_Subordination\"><\/span>De Facto Subordination<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Structural subordination seeks to avoid loans to subsidiaries which may have the effect of undermining loans to the holding company.\u00a0 Covenants may be placed on subsidiaries.\u00a0 Alternatively, guarantees may be taken from subsidiaries to try to limit the risk that monies will be lent from the holding company down to a subsidiary and then be captured by a third-party lender or other creditors.<\/p>\n<p>Negative pledge covenant seeks to prevent the creation of later security with priority over the lender.\u00a0 It may be employed in unsecured lending.\u00a0 In secured lending, issues may arise in terms of later security, typically granted to finance a particular acquisition.\u00a0 The lender will seek to have the right to consent to the creation of such security.<\/p>\n<p>Difficult issues of priorities arise where assets are financed by a secured lender where there are earlier fixed and floating charges.<\/p>\n<!--themify_builder_content-->\n<div id=\"themify_builder_content-666\" data-postid=\"666\" class=\"themify_builder_content themify_builder_content-666 themify_builder tf_clear\">\n    <\/div>\n<!--\/themify_builder_content-->\n","protected":false},"excerpt":{"rendered":"<p>Priority Where a company has several major financiers, issues arise as to priority of entitlements to repayment.\u00a0 The general position on a winding-up is that creditors who are unsecured are treated pari passu.\u00a0 If there is a shortfall in assets, they are paid proportionate to the balance, if any remaining after payment of preferential creditors, [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[53],"tags":[],"_links":{"self":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/666"}],"collection":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/comments?post=666"}],"version-history":[{"count":4,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/666\/revisions"}],"predecessor-version":[{"id":673,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/666\/revisions\/673"}],"wp:attachment":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/media?parent=666"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/categories?post=666"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/tags?post=666"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}