Subordination Agreement (Debt) - Enhanced Drafting Workflow

You are tasked with drafting a comprehensive Subordination Agreement (Debt), a critical transactional document that establishes the priority of creditor claims against a debtor's assets. This agreement creates a legally binding arrangement where one creditor (Junior Creditor) agrees to subordinate its debt claim to another creditor (Senior Creditor), fundamentally altering the payment waterfall in default or bankruptcy scenarios.

Document Preparation and Information Gathering

Begin by conducting a thorough review of all uploaded documents to identify the parties involved, existing debt instruments, loan amounts, maturity dates, security interests, and any prior subordination arrangements. Extract specific details about the Senior Debt and Junior Debt, including principal amounts, interest rates, payment terms, collateral descriptions, and any existing default provisions. Pay particular attention to intercreditor relationships, guarantees, and any cross-default provisions that may impact the subordination structure.

Verify the complete legal names and jurisdictions of organization for all parties: the Senior Creditor (the creditor whose debt will have priority), the Junior Creditor (the creditor agreeing to subordinate its claim), and the Debtor (the borrower obligated under both debt instruments). Confirm each party's authority to enter into this agreement and identify the appropriate signatories with their titles.

Structural Framework and Core Provisions

Draft the agreement with a clear recitals section that establishes the factual and legal context, including: the existence and material terms of the Senior Debt, the existence and material terms of the Junior Debt, the business purpose necessitating the subordination arrangement, and the consideration supporting this agreement. The recitals should create a comprehensive record of the parties' intentions and the commercial context.

The subordination provisions must precisely define the scope and mechanics of subordination. Specify that all payments, distributions, and recoveries on the Junior Debt are subordinated to the prior payment in full of the Senior Debt. Detail the payment waterfall, making clear that until the Senior Debt is paid in full (including principal, interest, fees, and enforcement costs), the Junior Creditor shall not receive any payments except as expressly permitted. Include standstill provisions prohibiting the Junior Creditor from taking enforcement actions, accelerating the Junior Debt, or exercising remedies without Senior Creditor consent during any default period.

Address turnover obligations requiring the Junior Creditor to immediately remit to the Senior Creditor any payments received in violation of the subordination provisions. Specify whether such payments are received in trust for the Senior Creditor's benefit. Define "payment in full" with precision, clarifying whether it includes contingent obligations, indemnities, or post-petition interest in bankruptcy scenarios.

Representations, Warranties, and Covenants

Include comprehensive representations and warranties from each party addressing: the valid existence and enforceability of their respective debt instruments, the absence of defaults under such instruments, the accuracy of stated debt amounts and terms, the authority to enter this agreement, and the absence of conflicts with other agreements. The Junior Creditor should represent that it has not previously subordinated its debt to any other creditor and that no other subordination agreements exist.

Establish ongoing covenants binding the Junior Creditor, including: prohibitions on amending the Junior Debt in any manner that would adversely affect the Senior Creditor's rights, restrictions on granting additional security interests or liens, requirements to provide notice of any defaults or amendments, and obligations to cooperate in bankruptcy or insolvency proceedings. Specify that the Junior Creditor must vote its claims in bankruptcy consistently with the Senior Creditor's interests or abstain from voting.

Define events of default under the subordination agreement itself, which may include: breach of subordination provisions, unauthorized amendments to the Junior Debt, filing of enforcement actions in violation of standstill provisions, or bankruptcy filing by the Junior Creditor. Specify the Senior Creditor's remedies upon such defaults, including the right to specific performance and injunctive relief.

Bankruptcy and Insolvency Provisions

Address the agreement's effectiveness in bankruptcy with specific provisions acknowledging that the subordination is effective before, during, and after any bankruptcy case. Include language designed to satisfy the requirements for equitable subordination under Section 510(a) of the Bankruptcy Code. Specify that the Junior Creditor waives any right to challenge the subordination in bankruptcy and agrees to file appropriate subordination proofs of claim.

Clarify the treatment of the Junior Debt in various insolvency scenarios, including: the Junior Creditor's rights (or lack thereof) to adequate protection payments, its standing to object to use of cash collateral or financing motions, and its entitlement to participate in any plan of reorganization. Address whether the subordination is a complete subordination (Junior Creditor receives nothing until Senior Debt paid in full) or a partial subordination with specific carve-outs.

Governing Law and Miscellaneous Provisions

Specify the governing law jurisdiction, selecting the state whose law governs the Senior Debt or where the Debtor is organized, ensuring consistency with related transaction documents. Include a submission to jurisdiction clause and venue selection provision, preferably designating the same courts that have jurisdiction over the Senior Debt.

Incorporate standard miscellaneous provisions appropriately tailored to this agreement type: a severability clause preserving the agreement if any provision is invalidated, an amendment provision requiring written consent of all parties (with particular attention to whether the Debtor's consent is required), a comprehensive notice provision with addresses for all parties, a waiver of jury trial clause, and an integration clause confirming this agreement supersedes prior subordination understandings.

Address the survival of the subordination provisions, specifying that the agreement continues until the Senior Debt is paid in full regardless of any discharge or release of the Debtor. Include provisions addressing successors and assigns, typically providing that the agreement binds successors but prohibiting assignment by the Junior Creditor without Senior Creditor consent.

Execution and Finalization

Prepare signature blocks for all parties with appropriate attestation lines. For corporate parties, include spaces for corporate seals if required by the governing law jurisdiction. Consider whether notarization is advisable for recording purposes if the subordination relates to real property security interests.

Before finalizing the document, verify that all cross-references are accurate, defined terms are used consistently, and the subordination mechanics align with the parties' commercial understanding. Ensure the agreement coordinates with any intercreditor agreements, security agreements, or loan documents that may contain related subordination provisions. Review for any jurisdiction-specific requirements regarding subordination agreements, particularly if the agreement will be recorded or filed publicly.

Once all information has been gathered and verified, create a polished, professionally formatted Subordination Agreement (Debt) that clearly establishes the priority of creditor claims and protects the Senior Creditor's position while providing appropriate acknowledgment of the Junior Creditor's subordinated rights.