Postponement And Subordination Agreement Template for Canada

A Postponement And Subordination Agreement is a legally binding contract that establishes the priority order between different creditors of the same debtor company. When your business involves multiple debt facilities or lenders, this document ensures that certain debts take priority over others in repayment, particularly during enforcement actions or insolvency proceedings. Under Canadian law, these agreements must comply with federal legislation including the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act, as well as provincial Personal Property Security Acts.

When do you need this document?

You need a Postponement And Subordination Agreement whenever your company has multiple creditors and you want to establish clear payment priorities. This commonly occurs during corporate refinancing where new senior debt is introduced alongside existing facilities, in leveraged buyout transactions involving both senior bank debt and subordinated mezzanine financing, or when shareholder loans need to be subordinated to third-party lenders. The document is also essential in project financing arrangements where multiple tranches of debt have different risk profiles and priority levels. Without this agreement, creditors may have equal ranking under provincial Personal Property Security Acts, potentially creating conflicts during enforcement or insolvency proceedings.

Key legal considerations

The agreement must clearly define the subordination mechanism, specifying whether it applies to principal, interest, fees, and other obligations. You should carefully consider the standstill provisions that prevent subordinated creditors from enforcing their rights while senior debt remains outstanding. Payment blockage clauses are crucial, as they restrict the debtor from making payments to subordinated creditors during specified events of default. The document should address how proceeds from asset sales or refinancing will be distributed between creditor classes. Importantly, the agreement must specify what constitutes permitted payments to subordinated creditors and under what circumstances such payments can resume. Consider including provisions for creditor cooperation during workout scenarios and define the circumstances under which subordination can be released.

Legal requirements in Canada

Under the Bankruptcy and Insolvency Act, subordination agreements are generally enforceable in bankruptcy proceedings, but the agreement must be properly documented and cannot contravene the Act's preference provisions. Provincial Personal Property Security Acts require that security interests be properly perfected and registered to maintain priority. In Quebec, the Civil Code governs these arrangements with specific provisions for hypothecs and priority rankings. The agreement must comply with the Companies' Creditors Arrangement Act if the debtor company becomes subject to CCAA proceedings, where courts have broad discretion to approve or modify creditor arrangements. Federal Bank Act provisions may apply if chartered banks are involved as creditors. The document should include Canadian governing law clauses and specify jurisdiction for dispute resolution to ensure enforceability across provinces.