Intercreditor And Subordination Agreement Template for Canada

An Intercreditor and Subordination Agreement is a complex legal document that establishes the hierarchy and interaction between multiple creditors in Canadian financing arrangements. When your business involves multiple layers of debt or security interests, this agreement ensures that all parties understand their rights, obligations, and priorities in various scenarios including defaults and insolvency proceedings.

When do you need this document?

You need an Intercreditor and Subordination Agreement when your financing structure involves multiple creditors with different security positions or debt rankings. This commonly occurs in leveraged buyouts where senior bank debt coexists with subordinated mezzanine financing, project finance transactions with multiple funding sources, or corporate restructurings involving new money alongside existing debt. The agreement becomes critical when hedge counterparties, bond trustees, or multiple facility agents are involved in the same transaction. Canadian businesses particularly benefit from these agreements when dealing with complex security packages that span multiple provinces, each with different Personal Property Security Act requirements.

Key legal considerations

The agreement must clearly define payment priorities and establish when subordinated creditors can receive payments from the borrower. Standstill provisions are crucial, preventing junior creditors from taking enforcement action during specified periods or circumstances. Security sharing arrangements determine how collateral proceeds are distributed among creditors, while intercreditor liens ensure senior creditors maintain their priority positions. The document should address permitted actions each creditor class can take, voting rights in restructuring scenarios, and information sharing protocols. Amendment procedures and waiver mechanisms require careful drafting to prevent future disputes. Guarantee subordination provisions ensure that guarantors cannot prefer one creditor class over another, maintaining the established hierarchy.

Legal requirements in Canada

Canadian Intercreditor and Subordination Agreements must comply with both federal and provincial legislation. The Personal Property Security Act in each province governs security interest creation, perfection, and priority rules, with registration requirements varying by jurisdiction. Under the Bankruptcy and Insolvency Act, subordination agreements are generally recognized and enforced, but specific drafting is required to ensure they survive bankruptcy proceedings. The Companies' Creditors Arrangement Act affects how these agreements operate during large corporate reorganizations. Quebec transactions require consideration of the Civil Code's hypothec system rather than common law security interests. Bank Act compliance is necessary when chartered banks are involved as creditors. Provincial Business Corporations Acts may impose additional requirements for guarantee subordination provisions, particularly regarding statutory priorities and director obligations.