An intercreditor agreement is a legal document that outlines the relationship between two or more creditors with a shared interest in a debtor`s assets. In such an agreement, both parties agree on the rights and obligations of each party, and also work out an agreed payment plan.
The following are key provisions that should be included in an intercreditor agreement:
1. Priority of claims: In the event of a debtor default, it is important for the intercreditor agreement to specify the priority of claims among the creditors. This provision will determine the order in which each creditor can collect from the debtor`s assets.
2. Payment waterfall: The payment waterfall outlines the distribution of proceeds from the debtor`s asset sale or other sources of repayment. It should be clearly defined in the agreement to avoid any confusion or disputes between the parties.
3. Voting rights: The agreement should specify the voting rights of each creditor in the decision making process of the debtor`s business operations, such as the sale of assets or restructuring of debt.
4. Subordination: This provision lays out the hierarchy of the creditors` claims, and the agreement should specify the extent to which each creditor is subordinate to the other in terms of repayment priority.
5. Negative covenants: An intercreditor agreement may contain negative covenants, which are restrictions placed on the debtor`s activities that may affect the creditors` rights. Such restrictions may include limits on debt incurrence, asset sales or acquisitions, and other financial transactions.
6. Events of default: An intercreditor agreement should specify the events that would trigger default, such as missed payments or violation of covenants. This will help in managing risks and potential disputes that may arise when dealing with a debtor.
In conclusion, intercreditor agreements are essential documents that every creditor should have in place in order to ensure that their rights and interests are protected. It is important to consult with an experienced attorney who can advise and help draft a comprehensive intercreditor agreement. By including the key provisions mentioned above, creditors can manage risks and minimize potential disputes that may arise in the course of debt repayment.