Subordination Agreement
Drafts a subordination agreement establishing creditor claim priority, payment waterfall mechanics, and intercreditor rights for debt transactions.
Quick Start
Gather before drafting:
- Senior Debt instruments — principal, rate, maturity, collateral, default provisions
- Junior Debt instruments — same details plus any existing subordination or intercreditor arrangements
- Party information — legal names, jurisdictions, authorized signatories for Senior Creditor, Junior Creditor, and Debtor
- Security interests — collateral descriptions, lien positions, guarantees, cross-default provisions
- Commercial terms — complete vs. partial subordination, permitted junior payments (if any), standstill duration
Core Workflow
Draft the following sections in order.
1. Recitals
| Element | Content |
|---|
| Senior Debt | Material terms — principal, rate, maturity, instrument date |
| Junior Debt | Material terms — same |
| Business purpose | Why subordination is needed |
| Consideration | What supports the agreement |
2. Definitions
- "Senior Debt" — principal, accrued interest, fees, enforcement costs, post-petition interest
- "Junior Debt" — full scope of junior obligations
- "Payment in Full" — treatment of contingent obligations, indemnities, post-petition interest
- "Permitted Junior Payments" — carve-outs from subordination (if partial)
- "Default Period" — trigger for standstill and enforcement restrictions
3. Subordination Mechanics
Waterfall: Senior Debt (principal + interest + fees + enforcement costs) → only after Payment in Full → Junior Debt.
4. Representations & Warranties
All parties: valid existence, enforceability of debt instruments, no existing defaults, accuracy of stated amounts, authority to execute, no conflicts.
Junior Creditor additionally: no prior subordination to other creditors; no other subordination agreements exist.
5. Junior Creditor Covenants
- No amendments to Junior Debt adverse to Senior Creditor without consent
- No additional security interests or liens without consent
- Notice obligations on defaults or amendments
- Cooperation in bankruptcy/insolvency proceedings
- Bankruptcy voting: consistent with Senior Creditor interests or abstain
6. Events of Default & Remedies
Triggers: breach of subordination provisions, unauthorized Junior Debt amendments, enforcement actions violating standstill, Junior Creditor bankruptcy filing.
Remedies: specific performance, injunctive relief, turnover enforcement.
7. Bankruptcy & Insolvency
- Subordination effective before, during, and after any bankruptcy case
- Draft to satisfy 11 U.S.C. § 510(a) enforceability requirements
- Junior Creditor waives right to challenge subordination in bankruptcy
- Junior Creditor to file subordination proofs of claim
| Issue | Treatment |
|---|
| Adequate protection payments | Typically none until Senior paid in full |
| Cash collateral / DIP financing motions | Standing to object typically waived or limited |
| Plan participation | Subject to subordination waterfall |
| Post-petition interest | Clarify whether included in "Payment in Full" |
8. General Provisions
- Governing law — match Senior Debt governing law or Debtor's state of organization
- Jurisdiction/venue — match Senior Debt forum
- Amendments — written consent of all parties; specify whether Debtor consent required
- Survival — continues until Senior Debt paid in full regardless of Debtor discharge/release
- Assignment — binds successors; Junior Creditor may not assign without Senior Creditor consent
- Severability, integration, jury trial waiver, notice provisions
9. Signature Blocks
- Senior Creditor, Junior Creditor, Debtor
- Corporate attestation lines; seals if required by governing law
- Notarization if subordination relates to real property security interests
Pitfalls & Checks
- Complete vs. partial — confirm with user; if partial, define Permitted Junior Payments precisely (e.g., scheduled interest while no default exists)
- Cross-references — verify alignment with any existing intercreditor agreement, security agreement, or loan document subordination provisions
- Defined terms — audit all cross-references and defined terms for consistency before finalizing
- Recording — check jurisdiction-specific requirements if agreement will be recorded or filed publicly
- UCC — if collateral involved, confirm subordination of lien priority is addressed separately or within this agreement
- Multi-tier debt — if more than two tiers, expand waterfall accordingly
- No placeholders — flag missing information as targeted client questions rather than inserting brackets
