Intercreditor arrangements

Two types of subordination

Subordination is a way of changing the priority of claims against a debtor so that one creditor or group of creditors (the junior creditor(s)) agree that their debt will not be paid until debts owed to another creditor or group of creditors (the senior creditor(s)) have been paid. The main ways of achieving subordination in commercial transactions are by:

1. •

   contractual agreement between the parties ('contractual subordination'), and/or

2. •

   the structure of the transaction ('structural subordination')

Contractual subordination involves a set of creditors agreeing on the application of available monies between themselves to satisfy the debtor's debt, either within or outside the context of security being provided.

Contractual subordination can take the form of:

1. •

   simple contractual subordination—where the junior creditor agrees that it will not be repaid until the debtor has repaid all of the senior debt or that it will not be repaid if certain events occur

2. •

   turnover subordination—where the junior creditor agrees with the senior creditor that