Subordination agreements can be used in different circumstances, including complex corporate debt structures. In addition, these agreements are common in other real estate practices. Three types of agreements are briefly explained below. A right of pledge is a right that allows a party to own property of another party holding a debt until the debt is absorbed. Debt that has benefited from a lower right to an asset is called subordinated debt and debt that has benefited from a higher right to assets is called priority debtSenior DebtSenior Debt is the money owed by a company that has the first right to the company`s cash flows. This is safer than any other debt, such as subordinated debt.B. In the enforceable subordening agreement, a subordinate party undertakes to subordinate its interest to the interest of the guarantee of another subsequent instrument. Such an agreement can be difficult to implement afterwards, as it is only a promise to reach an agreement in the future. An agreement of omission does not constitute a waiver. The borrowing entity should continue to recognise subordinated claims as liabilities and to include the subordinated loan separately in the annual accounts. Consequently, the sequence does not constitute a restructuring measure, since the financial situation of the undertaking remains unchanged. However, subordinate agreements increase the chances of a firm in difficulty recovering financially by leaving more time for restructuring.
Subordinated loans under Article 725 II OR have often been used for many years as a de facto capital guarantee right, although this is not the intention of the law. It is important to note that the Federal Supreme Court has decided that subordinate claims must be taken into account in the calculation of damage when deciding on a director`s claim for liability. In addition, all creditors are superior to shareholders in the preference for claims in the event of liquidation of a company`s assets. However, loans follow a chronological order in the absence of a subordination clause. It implies that the first recorded act of trust is considered higher than any subsequent recorded act of trust. The signed agreement must be confirmed by a notary and registered in the official county registers in order to be enforceable. The Mortgagor essentially repays it and gets a new loan when a first mortgage is refinanced, which now puts the most recent new loan in second place. The second existing loan increases to become the first loan.
The lender of the first mortgage refinancing now requires the second lender to sign a subordination agreement in order to reposition it as a priority when repaying the debt. The priority interests of each creditor are modified by mutual agreement by what they would otherwise have become. Legal doctrine and case law have established that any subordinated agreement must include a deferral agreement, at least as far as the principal amount of the loan is concerned, as well as a prohibition on the borrower repaying or repaying subordinated debts. If it were possible to satisfy the subordinated creditor prior to insolvency, this would jeopardize the objective of Article 725 II OR to improve the financial situation of the borrower and the situation of other uns subordinated and unsecured creditors. In addition, the subsequent declaration must be irrevocable, unconditional and permanent (although termination is possible under the conditions set out below) in order to meet the requirements of Article 725 II OR. . . .