Subordination Agreement Insolvency

The Supreme Court overturned the Court of Appeal`s decision and found that the qualified subordination clause is a constitutive feature of the specific type of contract and is therefore not subject to a judicial review of the content in accordance with Article 879, paragraph 3, of the Civil Code. The Supreme Court based its decision on the following assessment: the fundamental condition of interbank borrowing agreements, including mezzanine and priority borrowings, is that mezzanine debt be subordinated to the right to the payment of priority debt. As a general rule, the borrower is prevented from paying mezzanine debt and mezzanine creditors are prohibited from taking corrective action against the borrower. The interbank agreement may also contain a provision by which the mezzanine creditor must, under the inter-credit agreement, transfer to the agent, in accordance with the interbank agreement, all the sums it receives, for the purpose of submitting the application in the event of payment water. Since it is generally the responsibility of the agent to receive payments from the borrower and distribute them to the parties in accordance with the inter-credit agreement, the applicability of such subordination provisions in the Swiss insolvency procedure (i.e. their automatic consideration by liquidators) is limited. Finally, the Bankruptcy Court was not persuaded by The Junior Lender`s argument that it should be allowed to investigate whether senior Lender Argon had defrauded the secured credit facility and the accompanying subordination agreement by promising a $75 million line of credit that senior Lender never wanted to provide. According to the Tribunal, Delaware law (which regulated this issue) does not permit the application of a negotiated agreement between sophisticated commercial operators when a party claims to have committed fraud. Although, in certain circumstances, a subordination agreement may be revoked as an appeal under Delaware law, the Junior Lender did not wish, in this case, to recant. Therefore, the subordination agreement would be applied by Argon in the bankruptcy proceedings, until a court decides otherwise in the context of a bankruptcy proceeding. In such a procedure, the court wrote, the Junior Lender may have the right to discover by the senior Lender “according to ordinary civil rules.” In a recent decision (1), the Supreme Court upheld the admissibility and validity of qualified subordination agreements contained in terms and conditions and transactions with consumers. In addition, the Supreme Court found that qualified subordination agreements – particularly those involving loan contracts – created a certain type of contract.

A subordination agreement recognizes that the requirement or interest of one party is greater than that of another party if the borrower`s assets must be liquidated to repay the debt. The fact that guarantees no longer exist is generally considered an undesirable consequence. As a result, there have been some unsuccessful calls for a change in the law, and some legal experts have argued in favour of limiting the applicability of the participation approach of Article 1378 of the Civil Code, particularly in situations where innovation does not aggravate the position of third-party security providers. These attempts have been challenged by others who emphasize general contractual freedom. These deviants argue that a change in guaranteed liability that goes beyond the scope of a simple amendment (Article 1379 BGB) without the consent of the third-party security provider would not be compatible with the principle that, regardless of a deterioration in the guarantees granted, everyone (including a third-party security provider) may decide to enter into an agreement himself.

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