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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Are Voting Rights Provisions In Subordination Agreements Enforceable?

By James H. Millar
October 01, 2022

Subordination agreements among creditors have an obvious purpose — to consensually reorder payment priorities among two or more creditors. For example, Creditor A and Creditor B could enter into a subordination agreement providing that, if the borrower lacks the money to pay them both in full, Creditor A gets paid 100% of its debt before Creditor B receives anything. In return for agreeing to subordinate its debt, Creditor B will typically receive some form of consideration, such as a higher interest rate from the company that issued the debt.

In addition to payment subordination, subordination agreements often contain other bells and whistles that enhance the senior creditor's rights. One common provision is an agreement by the subordinated creditor that, if the issuer is a debtor in a bankruptcy case, the senior creditor can vote the claim of the junior creditor on any proposed Chapter 11 plan. If given effect, such a voting provision can give a senior creditor significant power, relative to both the subordinated creditor and other creditors, to support or oppose confirmation of a plan.

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