Intercompany Subordination Agreement Template for Canada

An Intercompany Subordination Agreement is a critical legal document that establishes the order of priority for debt payments within Canadian corporate groups. When your company operates through multiple subsidiaries or related entities with internal lending arrangements, this agreement ensures that certain debts are paid before others, particularly when external lenders require subordination of intercompany debt as a condition of financing.

When do you need this document?

You'll need an Intercompany Subordination Agreement when your corporate group seeks external financing and lenders require intercompany debts to be subordinated to their loans. This commonly occurs during acquisition financing, where the target company has existing intercompany loans that must be subordinated to new senior debt. It's also essential during corporate restructurings when you need to reorganize payment priorities between group companies, or when implementing group treasury policies that establish a clear debt hierarchy. The agreement becomes particularly important if your company faces financial distress, as it clarifies which creditors have priority in payment scenarios.

Key legal considerations

The subordination clause forms the heart of this agreement, clearly defining which debts rank senior and which are subordinated. Payment blockage provisions are crucial, as they restrict the subordinated creditor from receiving payments while senior debt remains outstanding. You must carefully draft enforcement restrictions that prevent subordinated creditors from taking collection actions that could interfere with senior creditors' rights. The agreement should include detailed definitions of what constitutes senior debt and subordinated debt, including future advances and accrued interest. Consider including standstill provisions that prevent subordinated creditors from demanding payment or exercising remedies during specified periods. Turnover provisions requiring subordinated creditors to transfer any payments received in violation of the agreement to senior creditors are also essential.

Legal requirements in Canada

Under Canadian law, your Intercompany Subordination Agreement must comply with the Bankruptcy and Insolvency Act (BIA), which governs how subordination agreements are treated during insolvency proceedings. The Companies' Creditors Arrangement Act (CCAA) affects how these agreements function during corporate restructurings under court supervision. You must ensure compliance with the Canada Business Corporations Act (CBCA) regarding corporate relationships and duties between related companies. Provincial Personal Property Security Act (PPSA) requirements vary by jurisdiction but may affect how security interests in subordinated debt are created and enforced. The agreement should address how subordination rights survive corporate reorganizations and comply with provincial corporate law requirements. Consider including provisions for court approval if the subordination is part of a formal restructuring process under the CCAA or BIA.