Effect of equitable, contractual and structural subordination


Published by a ÀÏ˾»úÎçÒ¹¸£Àû Restructuring & Insolvency expert
Practice notes

Effect of equitable, contractual and structural subordination


Published by a ÀÏ˾»úÎçÒ¹¸£Àû Restructuring & Insolvency expert

Practice notes
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Senior creditors will ensure that in addition to having better security rights over junior creditors, juniors are also subordinated to them, ie the priority of claims against the debtor is changed so that junior creditors creditor agree that their debt will not be paid until debts owed to the senior creditors have been paid.

Subordination is also used to ensure that repayments of any intra-group loans rank behind repayments of debt provided by external creditors.

Generally creditors closest to the main asset-owning companies (we will refer in this Practice Note to the main-asset owning companies as Opcos, but depending on structuring, this may also be a Propco, for example) exert most control over any restructuring/Insolvency, meaning their Final dividend is often higher.

The three main types of subordination are:

  1. •

    contractual subordination—Lending to the same debtor entity

  2. •

    structural subordination—seniors lending to Opcos, juniors lending to Holdcos

  3. •

    equitable subordination—shareholder loans re-characterised as equity; common in the US and parts of Europe, but not recognised in the UK

The common theme

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Jurisdiction(s):
United Kingdom
Related legal acts:
Key definition:
Opco definition
What does Opco mean?

Operating company which holds key assets and runs the day-to-day business.

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