A subordination clause is a provision in a contract that ensures one party's claim or interest is ranked below the claims or interests of another party in terms of priority, particularly in financial or property dealings. This clause is commonly used in mortgages and loans to protect the interests of senior lenders by ensuring their debts are paid before subordinate ones in the event of default or liquidation.
Agreement to Terms of Subordination; Payments from Monies Received Only. (a) Each Trustee hereby acknowledges and agrees to the terms of subordination and distribution set forth in this Agreement in respect of each Class of Certificates and agrees to enforce such provisions and cause all payments in respect of the Equipment Notes held by the Subordination Agent to be applied in accordance with the terms of this Agreement. In addition, each Trustee hereby agrees to cause the Equipment Notes purchased by the related Trust to be registered in the name of the Subordination Agent or its nominee, as agent and trustee for such Trustee, to be held in trust by the Subordination Agent solely for the purpose of facilitating the enforcement of the subordination and other provisions of this Agreement.
Indemnification. The Subordination Agent shall not be required to take any action or refrain from taking any action under Section 5.1 (other than the first sentence thereof) or Article IV hereof unless the Subordination Agent shall have been indemnified (to the extent and in the manner reasonably satisfactory to the Subordination Agent) against any liability, cost or expense (including counsel fees and expenses) which may be incurred in connection therewith. The Subordination Agent shall not be under any obligation to take any action under this Agreement and nothing contained in this Agreement shall require the Subordination Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. The Subordination Agent shall not be required to take any action under Section 5.1 (other than the first sentence thereof) or Article IV hereof, nor shall any other provision of this Agreement be deemed to impose a duty on the Subordination Agent to take any action, if the Subordination Agent shall have been advised by counsel that such action is contrary to the terms hereof or is otherwise contrary to law.
THE SUBORDINATION AGENT. Authorization; Acceptance of Trusts and Duties. Each the Trustees hereby designates and appoints the Subordination Agent as the Subordination Agent under this Agreement. WTNA hereby accepts the duties hereby created and applicable to it as the Subordination Agent and agrees to perform the same but only upon the terms of this Agreement and agrees to receive and disburse all monies received by it in accordance with the terms hereof. The Subordination Agent shall not be answerable or accountable under any circumstances, except (a) for its own willful misconduct or gross negligence (or ordinary negligence in the handling of funds), (b) as provided in Sections 2.2 or 5.3 hereof and (c) for liabilities that may result from the material inaccuracy of any representation or warranty of the Subordination Agent made in its individual capacity in any Operative Agreement. The Subordination Agent shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Subordination Agent, unless it is proved that the Subordination Agent was negligent in ascertaining the pertinent facts.
SUCCESSOR SUBORDINATION AGENT Replacement of Subordination Agent; Appointment of Successor. The Subordination Agent may resign at any time by so notifying each other party hereto. The Controlling Party may remove the Subordination Agent for cause by so notifying the Subordination Agent and may appoint a successor Subordination Agent. The Controlling Party shall remove the Subordination Agent if: (1) the Subordination Agent fails to comply with Section 6.9 hereof; (2) the Subordination Agent is adjudged bankrupt or insolvent; (3) a receiver or other public officer takes charge of the Subordination Agent or its property; or (4) the Subordination Agent otherwise becomes incapable of acting. If the Subordination Agent resigns or is removed or if a vacancy exists in the office of Subordination Agent for any reason (the Subordination Agent in such event being referred to herein as the retiring Subordination Agent), the Controlling Party shall promptly appoint a successor Subordination Agent. A successor Subordination Agent shall deliver (x) a written acceptance of its appointment as Subordination Agent hereunder to the retiring Subordination Agent and (y) a written assumption of its obligations hereunder to each party hereto, upon which the resignation or removal of the retiring Subordination Agent shall become effective, and the successor Subordination Agent shall have all the rights, powers and duties of the Subordination Agent under this Agreement. The successor Subordination Agent shall mail a notice of its succession to each other party hereto. The retiring Subordination Agent shall promptly transfer its rights to all of the property held by it as Subordination Agent to the successor Subordination Agent. If a successor Subordination Agent does not take office within 60 days after the retiring Subordination Agent resigns or is removed, the retiring Subordination Agent or one or more of the Trustees may petition any court of competent jurisdiction for the appointment of a successor Subordination Agent.
Subordination Agent Protected. If, in the reasonable opinion of the institution acting as the Subordination Agent hereunder, any document required to be executed pursuant to the terms of Section 9.1 affects any right, duty, immunity or indemnity with respect to it under this Agreement, the Subordination Agent may in its discretion decline to execute such document.
Subordination. If any Trustee or the Subordination Agent receives any payment in respect of any obligations owing hereunder, which is subsequently invalidated, declared preferential, set aside and/or required to be repaid to a trustee, receiver or other party, then, to the extent of such payment, such obligations intended to be satisfied shall be revived and continue in full force and effect as if such payment had not been received.
Bank and Creditor entered into that certain Subordination and Intercreditor Agreement dated as of November 1, 2021 (as amended or otherwise modified from time to time, the “Subordination Agreement”). Capitalized terms used but not defined herein shall have the meanings given to them in the Subordination Agreement.
2. SUBORDINATION TO SENIOR DEBT. 2.1 Agreement to Subordinate. (a) Issuer covenants and agrees, and Subordinated Creditor covenants and agrees, that: (i) in accordance with and subject to the provisions of this Subordination Agreement, the payment (whether in cash, kind or equity) of all the Subordinated Debt shall be subordinated and junior in right of payment to the prior payment in full of all of the Senior Debt; and (ii) except as expressly permitted pursuant to the terms of this Subordination Agreement, Subordinated Creditor shall not ask, demand, sue for, take, receive from Issuer, or retain by set-off or in any other manner, the whole or any part of the Subordinated Debt, or take any action to enforce Subordinated Creditor’s rights under the Subordinated Note Agreements, unless and until all of the Senior Debt shall have been fully paid and satisfied with interest. Any judgment in favor of Subordinated Creditor pursuant to any such action shall be subject to the provisions herein concerning Permitted Payments, as defined in Section 2.2 below. (b) Senior Creditor and Issuer each acknowledges and agrees that the terms and provisions of this Subordination Agreement do not violate any term or provision of the Senior Debt Agreements. (c) Subordinated Creditor and Issuer each acknowledges and agrees that the terms and provisions of this Subordination Agreement do not violate any term or provision of the Subordinated Note Agreements.
Subordinated Excess Payments. To the extent any payment or distribution to which Subordinated Creditor would otherwise have been entitled but for the provisions of this Subordination Agreement shall have been applied, pursuant to the provisions of this Subordination Agreement, to the payment of all amounts payable in respect of Senior Debt, then and in such case Subordinated Creditor shall be entitled to receive from Senior Creditor such payments or distributions received by Senior Creditor in excess of the amount sufficient to pay the Senior Debt in full and satisfied with interest, and Subordinated Creditor shall be subrogated to the rights and interests of Senior Creditor, as set forth in Section 2.7, 2.8 and 2.9.
Continuing Nature of Subordination. This Subordination Agreement shall be effective and may not be terminated or otherwise revoked by Subordinated Creditor until all Senior Debt shall have been fully paid and satisfied with interest and all financing arrangements between Senior Creditor and Issuer shall have been terminated. In the event that Subordinated Creditor shall have any right under applicable law to terminate or revoke this Subordination Agreement, which right cannot be waived, such termination or revocation shall not be effective until notice of such termination or revocation, signed by Subordinated Creditor are actually received by Senior Creditor by written notice given in accordance with this Subordination Agreement. In the absence of such non-waivable right to revoke or terminate, this Subordination Agreement is a continuing agreement of subordination, and Senior Creditor may continue, at any time and without notice to Subordinated Creditor to extend credit or other financial accommodations and loan monies to or for the benefit of Issuer on the faith hereof subject to the terms of Section 2.10 hereof. Any termination or revocation described hereinabove shall not affect this Subordination Agreement in relation to: (a) any of the Senior Debt that arose prior to receipt of the above-referenced notice of revocation or termination or (b) any of the Senior Debt created after receipt thereof, if such Senior Debt was incurred pursuant to Senior Creditor’s committed financing arrangements with Issuer and/or for the purpose of protecting any assets of Issuer securing the Senior Debt.
Subordination Not Affected by Additional Agreements. Senior Creditor, at any time and from time to time, may enter into such agreements with Issuer or any guarantors of the Senior Debt as Senior Creditor may deem proper altering the terms of all or any of the Senior Debt or affecting the security underlying any or all Senior Debt, and may exchange, sell, release, surrender or otherwise deal with any such security, without in any way thereby impairing or affecting this Subordination Agreement.
Any waiver, permit, consent or approval by any of Creditors of or under any provision, condition or covenant to this Subordination Agreement must be in writing and shall be effective only to the extent it is set forth in writing, signed by the applicable Creditor, and as to the specific facts or circumstances covered thereby. Any amendment of this Subordination Agreement must be in writing and signed by each of the parties to be bound thereby.
(a) This Subordination Agreement shall be binding upon the Issuer and each Creditor and their respective legal representatives, successors and assigns and shall inure to the benefit of each Creditor and its legal representatives, successors and assigns.
Subordination is a legal concept and a mechanism within contractual agreements that establishes the order of importance or priority of different debts, claims, or rights. In essence, it determines which party has priority in receiving payment or claims over others. Subordinated obligations are typically considered secondary to more senior obligations, meaning they will be paid after higher-ranking obligations are satisfied.
Subordination is often used in situations where multiple parties have competing claims or rights to certain assets or proceeds. It is particularly relevant in the following scenarios:
Writing a subordination agreement usually involves clear and precise language to avoid ambiguity. The key components typically included are:
Example of a subordination clause:
“The Borrower’s obligations under this agreement shall be subordinate in right of payment to the prior payment in full of all senior obligations. Notwithstanding any other provision of this agreement, unless and until the senior obligations are satisfied, no payments shall be made with respect to the subordinated obligations.”
Subordination clauses or agreements are commonly found in several types of contracts, including:
Understanding when and how to effectively use subordination can be crucial in managing financial risk and ensuring clarity in contractual obligations.
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Dive deeper into the world of clauses and learn more about these other clauses that are used in real contracts.
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