Intercreditor Agreements are contracts, often deeds, that control the rights and ranking of two or more funders (sometimes both debt and equity) in a financing arrangement. Typically, the contract governs the rights to receive payments from a common debtor (such as principal, interest, and fees prior to the enforcement of security) and the rights to enforce security over that debtor’s assets.
Both sorts of documents seek to establish a ranking among creditors. Nevertheless, an intercreditor agreement is generally a more complex arrangement than a deed of priority, which will typically only rank secured debt providers and manage the distribution of enforcement revenues. In this article, intercreditor agreement UK, we take a look at the process involved and the options available to you.
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What Is The Purpose Of An Intercreditor Agreement?
The basic purpose of the intercreditor agreement is to contractually regulate the interaction between the different types of creditors. The first issue relates to “subordination,” whereas the second issue relates to “priority.”
If the borrower has many lenders for the same loan and collateral, the lenders must show their claim to the loan and collateral. In most cases, lenders accept an agreement that each has a distinct claim on the borrower’s assets.
However, when senior and junior lenders enter into an arrangement, they enter into an intercreditor agreement. This agreement helps clarify their individual rights.
What Should An Intercreditor Agreement Include?
This form of agreement typically restricts the borrower’s capacity to make payments to junior lenders if the borrower defaults on the terms stipulated in the agreement with the junior lenders. These actions are known as “payment obstruction.” This provision even affects the payments junior lenders are entitled to in the ordinary course of their business relationship with the borrower, including interest and standard fees and expenditures. This form of contract also has provisions for buyout rights. This ability allows a lender to acquire claims and liens from other lenders. Instances such as declaring bankruptcy activate such a choice.
A standstill clause could also be included in the intercreditor agreement. This condition prohibits the junior lender from pursuing legal action against the debtor to recover its obligation. Generally, there is a deadline for taking action (demanding money, initiating legal proceedings, etc.). Additionally, the standstill period continues until the senior lender commences enforcement procedures. Occasionally, the period extends until the senior obligation is fully repaid.
The contract may also have payback limits. With the exception of agreed-upon interest and other payments, a junior lender could agree not to pursue repayment until the senior debt is repaid in full.
In other situations, the borrower will also sign the agreement. The borrower acknowledges the agreement’s terms, such as not making payments to the junior lender until the senior lender has been repaid in full.
What Are The Potential Problems With Intercreditor Agreements?
Prior to signing the agreement, the junior lender must additionally define “senior debt” and “junior debt.” Also, it is typical for a senior lender to change the terms of the arrangement without the junior lender’s consent. Consequently, the junior lender must also monitor this. Before approving the transaction, the junior lender must conduct a thorough evaluation in order to circumvent such problems. In addition, the junior lender must negotiate the contract fairly. If the efforts were unsuccessful, the junior lender may reject the arrangement and pursue alternative options.
The junior lender must attempt to include a condition allowing it to assume control of the project in the event of default. To maximise its potential, it will have two possibilities. First, refinance the borrower to assure the continuation of the project, and second, repay the senior lender in full. If the senior lender has extended a substantial loan, the second option may be unrealistic.
How we can help
We have a proven track record of helping clients deal with the process involved in creating intercreditor agreements. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of creating an intercreditor agreement. However, expert legal support is crucial in terms of ensuring your partnership is set up correctly.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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