Subordination
Subordination

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Subordination
  • Why is subordination used?
  • Two types of subordination
  • Contractual subordination
  • Structural subordination
  • Subordination and insolvency of the debtor

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.

This Practice Note explains:

  1. why subordination is used in certain finance transactions

  2. the two main types of subordination:

    1. contractual subordination, and

    2. structural subordination, and

  3. how subordination is affected by insolvency

For a precedent subordination deed, see Precedent: Subordination deed-single company borrower-single unsecured senior lender-single unsecured junior lender. For a precedent intercreditor deed, see Precedent: Intercreditor deed—single company borrower—single secured senior lender—single secured junior lender—single unsecured subordinated lender. These precedents contain drafting notes.

For an explanation of the key terms included in an intercreditor agreement, including subordination provisions, see Practice Note: Intercreditor agreement—key provisions. Note in particular the section, Intercreditor agreement—key provisions—Ranking and subordination provisions which explains the various provisions that effect subordination in a subordination or intercreditor agreement. This Practice Note also explains the difference between a deed of priority, a subordination agreement and an intercreditor agreement.

Why is subordination used?

In commercial finance transactions, subordination is used:

  1. to ensure that repayments of any intra-group loans rank behind repayments of debt provided by external creditors, and

  2. to govern the relationship between a range