what is assignment and postponement

What's in a name? Priority issues under postponement, subordination and intercreditor agreements

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Two priority issues arise between creditors of a common debtor:

• Payments - What are the priorities between the creditors to payments made to them by the debtor?
• Security Interests - What are the priorities between the creditors in relation to security interests granted to them by the debtor?

As to payments, creditors are free to agree as between themselves as to who is paid when [1] . As to security interests, the Personal Property Security Act [2] (the " Act ") has complex priorities rules that determine the priority between competing security interests to the same collateral. However, creditors can enter into agreements to confirm or change the priority that their security interests would have under the Act [3] . Those agreements can, and usually do, also deal with priority of payments [4] . The agreements go by a number of different names, such as subordination agreements, priority agreements or intercreditor agreements. While there are no firmly established rules as to what each type of agreement does, there are typical terms in each agreement that differ from the terms in other agreements. This article looks at the various kinds of agreements dealing with priority issues, the typical terms they have and the differences between them.

Postponement agreement

A postponement agreement deals only with the issue of payments to be made by a debtor to its creditor, and not with any security interests granted by it. Under a postponement agreement the postponing creditor agrees that it will postpone receipt of payments from the debtor on specified terms, such as until the senior creditor is paid in full. While a postponement does give one creditor priority to payments from the common debtor, it does not usually subordinate any security interest that a creditor might have [5] .

Subordination agreement

A subordination agreement (sometimes called a priority agreement or a priorities agreement) is given by one creditor in favour of another, and typically deals with subordination by the granting creditor of both security interests governed by the Act and of the right to payment. Under a subordination agreement, the subordinated secured creditor:

• subordinates to the senior secured creditor the security interests granted to it by the debtor; and
• agrees to postpone payments to it by the debtor until the senior secured creditor is paid in full [6] .

An agreement on those terms constitutes a full or deep subordination by one secured creditor to another [7] . A subordination agreement can limit the extent of subordination, for example to a limited dollar amount, for a certain period of time or while other conditions exist, and can contain some of the more complex provisions of an intercreditor agreement, as discussed below. But the typical subordination agreement is a one-way subordination by a subordinated creditor in favour of a senior creditor.

Intercreditor agreement

An intercreditor agreement usually provides for mutual subordination of security interests and division of payment between secured creditors. It can also deal with matters not strictly related to priority, such as enforcement of rights and remedies and access to collateral.

Rather than a simple subordination by a subordinated creditor in favour of a senior creditor, an intercreditor agreement is usually a more complex agreement between two or more secured creditors, setting out the details of the relationship between them in relation to their common debtor. An intercreditor agreement could include provisions dealing with:

• The relative priority of the security interests of each secured creditor to the other. This could take the form of subordination by each secured creditor of its security interest to certain classes of collateral. For example, one secured creditor might take priority over the debtor's operating assets, such as inventory, cash and receivables, and the other could take priority over the debtor's fixed assets, or over all other personal property.
• Payments by the debtor to each secured creditor. These provisions could include payment blockage notices (to be given by a senior secured creditor upon a default or other occurrence) and payment blockage periods (relating to payments to a junior creditor). Or the parties could agree to pari passu [8] sharing of payments between them, calculated on the amount of the indebtedness owing by the debtor to any one of them to the amount of the debtor's indebtedness to all parties to the agreement.
• The rights and remedies of each secured creditor on default. For example, a secured creditor could be required to give notice to the other secured creditor before enforcing its security. The parties could also agree to an enforcement standby (sometimes called a standstill), setting out when a junior creditor may and may not enforce its security interest.

What about no interest letters?

A no interest letter (sometimes called an estoppel letter) or similar agreement is not strictly an agreement affecting priority to payments or to collateral, although it does affect rights to collateral [9] . Under a no interest letter one secured creditor acknowledges to another that it does not have a security interest in specified collateral, or that its security interest is limited only to specified collateral. This differs from a subordination agreement in that the creditor giving the letter is disclaiming or narrowing any interest in the collateral, rather than maintaining a subordinated security interest in it. For the secured creditor receiving the no interest letter, however, the effect is the same as a subordination agreement. The benefitting secured creditor can rely on the no interest letter to assert its priority to the collateral over the secured creditor granting the letter.

The terms of agreements dealing with priorities and the issues they address are limited only by the requirements of the parties and the imaginations of creditors and their counsel. While this article has dealt with each type of agreement as separate and distinct, some or all of the elements in each type of agreement may be combined in a single agreement. That is sometimes done in an intercreditor agreement, or it may be in an agreement called a "Postponement, Subordination and Standstill Agreement", or a similar name that describes the effect of the provisions in the agreement.

As to "what's in a name", it turns out quite a lot. Although there are no fixed rules as to what terms any given agreement dealing with priorities contains, the name of the agreement can give a pretty good indication of the nature of the agreement and the provisions in it. Just don't forget to read the fine print.

[1] Such as in a postponement agreement, as discussed below.

[2] In this article a reference to the PPSA means the Personal Property Security Act in each of British Columbia, Alberta and Ontario.

[3] See s.40(1) of the British Columbia PPSA, s.40 of the Alberta PPSA and s.38 of the Ontario PPSA.

[4] The agreements can also deal with other issues, such as enforcement of rights under security on default, but this article focuses on the issue of priority of payments and security interests.

[5] The postponing creditor may not hold any security interest which requires subordination, or it may have agreed to postponement of payment but not to subordination of its security interest.

[6] There could be some other agreement on payments to the subordinated creditor, such as allowing certain defined "Permitted Payments" to it as long as the debtor is not in default to the senior creditor.

[7] For example, a shareholder that has made loans to and taken security from a company will usually fully subordinate its security interests and right to payment to an institutional lender to the company.

[8] Pari passu means "at the same rate" or (in general) "equally". Other terminology sometimes used to describe the equitable division of payments or proceeds among secured creditors is "proportionately" or " pro rata ". The meaning of these terms can vary depending on whether they are defined in the agreement and how they are used in context.

[9] No interest/estoppel letters are most common in Ontario, where the "check the box" system used for financing statements can make it difficult to determine the scope of a security interest and the collateral charged by it. For example, checking the box "equipment" would include all equipment, not just equipment supplied or financed by the secured party, even though the security interest may only extend to equipment that is supplied or financed.

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What Is a Subordination Agreement?

How a subordination agreement works, examples of subordination, the bottom line.

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• Debt Management

Subordination Agreement: Definition, Purposes, Examples

A subordination agreement is a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor. The priority of debts can become extremely important when a debtor defaults on their payments or declares bankruptcy. The higher a debt's priority, the more likely it is to be repaid, at least in part.

Key Takeaways

• A subordination agreement prioritizes debts, ranking one behind another for purposes of collecting repayment from a debtor in the event of foreclosure or bankruptcy.
• A second-in-line creditor collects only when and if the priority creditor has been fully paid.
• Subordinated, or junior, debts are riskier than senior debts, so lenders typically require a higher interest rate or other compensation for taking on this added risk.
• Subordination agreements are often employed when multiple mortgages exist against one property.

Individuals and businesses turn to lending institutions when they need to borrow funds, and they may take on multiple debts for a variety of purposes. If they declare bankruptcy, there may not be enough money to repay all of their creditors. When that happens, a trustee appointed by the court will attempt to repay as much of the debt as possible, starting with the debts that have the highest priority. Those are often referred to as senior debt .

Lower on the priority list are obligations classified as junior debt or subordinated debt .

Lenders of senior debts have a legal right to be repaid in full before lenders of subordinated debts receive anything. As a result, the lenders with lower-priority debts might receive only partial repayment or none at all.

When a lender accepts a subordination agreement, it acknowledges in advance that another party’s claim or interest will take precedence over its own in the event that the borrower's assets must be liquidated to repay the debts.

Why would any lender agree to that? One reason is that they may receive a higher interest rate from the borrower in return for taking on the greater risk. They may also receive fees.

A subordination agreement must be signed and acknowledged by a notary and recorded in the official records of the county to be enforceable.

Subordination can come into play when either a business or individual declares bankruptcy.

In the case of a business, suppose a public company has $670,000 in senior debt, $460,000 in subordinated debt, and total assets with a value of $900,000. The business files for Chapter 7 bankruptcy and its assets are liquidated at market value—$900,000.

The senior debt holders will be paid in full, and the remaining $230,000 will be distributed among the subordinated debt holders, for cents on the dollar. Those may include investors who own any bonds the company had issued earlier. An exception would be secured bonds , which entitle the lender to claim whatever collateral was used to back them.

Stockholders in the company would most likely receive nothing in the liquidation process because stockholders are last in line—subordinate to all other types of creditors.

When an individual declares bankruptcy, their obligations will also be paid off in a specified order. For example, alimony and child support are among the items at the top of the list. The person's senior debts would be paid off ahead of any junior or subordinated debts.

Individuals most often encounter the concept of subordination, and subordination agreements, with mortgages. Suppose a person has both an original mortgage and a home equity line of credit (HELOC) on the same property. Both lenders will have liens on the home, but the mortgage will have the first lien (and first claim on the collateral) because it came first. The HELOC lender will have a second lien, putting it in a subordinate position. In the event of a foreclosure, the mortgage lender would be paid back first.

Now, suppose the homeowner decides to take out a new mortgage to refinance the old one. When the old mortgage is paid off, the HELOC would normally move up into the first lien position because it is now the older debt. However, the lender of the new mortgage may not agree to those terms and instead insist that the HELOC lender accept a subordination agreement. The HELOC lender may do so in return for a fee, as is most likely outlined in the terms of its contract with the homeowner. It also has the option to refuse, in which case the deal may fall through.

What Is Chapter 7 Bankruptcy?

In a Chapter 7 bankruptcy , the debtor's assets (except for some that are considered exempt) will be sold off, and the proceeds will be used to pay their creditors to the extent possible. Both businesses and individuals can file for Chapter 7 bankruptcy. It is sometimes referred to as a liquidation bankruptcy.

What Is a Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is typically used by businesses. Rather than have their assets liquidated and go out of business, as in a Chapter 7 bankruptcy, Chapter 11 allows them to reorganize under a court-appointed trustee's supervision and continue to operate. At the same time, they must agree to a plan to repay their creditors, typically over a period of several years.

What Is a Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy for individuals is similar to Chapter 11 for companies. Rather than liquidating most of an individual's assets, like Chapter 7, a Chapter 13 bankruptcy allows them to keep more assets if they agree to, and adhere to, a court-approved plan to repay their creditors.

Subordination agreements are used to legally establish the order in which debts are to be repaid in the event of a foreclosure or bankruptcy. In return for the agreement, the lender with the subordinated debt will be compensated in some manner for the additional risk. Consumers will often encounter a subordinated debt agreement if they have more than one mortgage on their home and decide to refinance it.

Cornell Law School Legal Information Institute. " Subordination Agreement ."

U.S. Securities and Exchange Commission. " Bankruptcy: What Happens When Public Companies Go Bankrupt ."

Cornell Law School Legal Information Institute. " Priority Debt ."

U.S. Courts. " Chapter 7 - Bankruptcy Basics ."

U.S. Courts. " Chapter 11 - Bankruptcy Basics ."

U.S. Courts. " Chapter 13 - Bankruptcy Basics ."

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Assignment & Postponement of Claim - Limited

This Assignment and Postponement of Claim (Limited) assigns a lender's claims in favor of a new lender. This assignment sets out the specific terms including the limitations of liability.

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• Description
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• Parties: Sets forth the names of the original lender, new lender and borrower;
• Assignment: Sets out that all future debts owed by borrower will be assigned to the new lender;
• Postponement: Lender agrees to postpone claims against borrower to new lender;
• Signatures: This assignment must be signed by all parties.
• General Information
• Assignment and Postponement of Claim (Limited)

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What is Supply Chain Postponement Strategy?

Supply chain postponement strategy is a approach to managing the flow of goods and materials through a supply chain in which final product customization and assembly are delayed until as late as possible in the production process. This allows organizations to respond more quickly to changing customer demands and reduce inventory levels by only producing and stocking the components and raw materials needed to meet current demand.

There are two main types of postponement strategies: location-based postponement and process-based postponement.

Location-based postponement involves postponing final product customization and assembly until the product is close to the end customer. This can help organizations reduce transportation costs and improve delivery times by locating production closer to the end customer.

Process-based postponement involves postponing final product customization and assembly until the product is in the final stages of production. This can help organizations reduce inventory levels by only producing and stocking the components and raw materials needed to meet current demand.

Advantages and Disadvantages

There are a number of potential advantages to using supply chain postponement strategy, including:

• It allows organizations to respond more quickly to changing customer demands by delaying final product customization and assembly until as late as possible in the production process.
• It helps organizations reduce inventory levels by only producing and stocking the components and raw materials needed to meet current demand.
• It can help organizations reduce transportation costs and improve delivery times by locating production closer to the end customer.
• It can help organizations reduce the risk of obsolescence by delaying final product customization until closer to the time of sale.

There are also some potential drawbacks to using supply chain postponement strategy, including:

• It may require significant changes to an organization’s production processes and logistics systems.
• It may require increased coordination and communication within the supply chain to ensure that the necessary components and raw materials are available when needed.
• It may not be appropriate for all types of products or industries.
• It may increase the complexity of the supply chain and increase the risk of disruptions or errors.

Cost Savings: Postponement Strategy

Supply chain postponement strategy can help organizations reduce costs in several ways.

First, by allowing organizations to respond more quickly to changing customer demands, supply chain postponement strategy can help organizations reduce the risk of obsolescence and excess inventory. By delaying final product customization and assembly until as late as possible in the production process, organizations can reduce the risk of producing products that do not meet current customer demand, which can lead to lower inventory levels and reduced storage and carrying costs.

Second, by reducing inventory levels, supply chain postponement strategy can help organizations reduce the costs associated with storing and managing inventory. By only producing and stocking the components and raw materials needed to meet current demand, organizations can reduce the amount of inventory they need to hold and the associated storage and handling costs.

Third, by locating production closer to the end customer, supply chain postponement strategy can help organizations reduce transportation costs and improve delivery times. By postponing final product customization and assembly until the product is close to the end customer, organizations can reduce the distance that products need to be shipped, which can lead to lower transportation costs and faster delivery times.

Supply Chain Quotes

• “Planning is everything.  The plan is nothing.” ~ Dwight D. Eisenhower
• “Globalization has taken a hit in that there is some sand in the gears because most of us have supply chains that are all over the world that we’ve had to lengthen.” ~ Jack Welch
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• “People can buy the kind of things they consider as normal and take for granted because of globalization and trade and use of supply chains and the reduction of the cost base of the manufacturing of some products.” ~ Christine Lagarde
• “We care about every worker in our worldwide supply chain… what we will not do – and never have done – is stand still or turn a blind eye to problems in our supply chain.  On this you have my word.” ~ Tim Cook
• “The Dell Theory of Conflict Prevention argues that no two countries that are both part of the same global supply chain will ever fight a war as long as they are each part of that supply chain.” ~ Thomas Friedman

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Course Assignments

• Guarantee and Postponement of Claim

Rationale for this assignment

This agreement is often made at the same time as a General Security Agreement(“GSA”). A mini-lecture introducing the use of a GSA together with a Guarantee is available in the GSA assignment module. Students who complete the two assignments will be able to explain how the two agreements work together in  debt financing.

Assignment Description

Regarding the above contract, I am NOT asking students to summarize the 6 pages of background reading or asking you to give a general description of a guarantee and its purpose. The 6 pages of readings in the text described in the course schedule may help you with this paper by giving you context. Your 1 page paper will demonstrate that you have critically reviewed the Guarantee and Postponement of Claim and are prepared for class discussions. Use the various tools you have tried so far this course. Come to class armed with your questions comments and concerns recorded in your paper. Describe at least three of the lender’s business priorities and describe the ways this agreement benefits the lender. I’m looking for evidence that you really thought about this short document; Wrap your mind around the details.

READING: Chapter 26, pp. 381 to 386 in the 13th edition or 14e pages 353 to 357.

Supporting Documents

• Contract Structure Form
• Items to Cover (Instructors Only)

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Postponement.

Other forms: postponements

When you delay something until a later time or date, that's a postponement . If a trial lawyer doesn't have all the information she needs, she may ask the judge for a postponement until the following week.

A postponement can also be called a deferral or a stay , and it means rescheduling something for later. You can request a postponement of your chemistry test, but there's no guarantee you'll get it. When a baseball game or tennis match gets rained out, the teams agree on a postponement, starting over at the earliest opportunity. Postponement has a Latin root, postponere , "put after, neglect, or postpone."

• noun act of putting off to a future time synonyms: deferment , deferral see more see less types: adjournment the act of postponing to another time or place type of: delay , holdup the act of delaying; inactivity resulting in something being put off until a later time
• noun time during which some action is awaited synonyms: delay , hold , time lag , wait see more see less types: extension a mutually agreed delay in the date set for the completion of a job or payment of a debt moratorium a legally authorized postponement before some obligation must be discharged retardation the extent to which something is delayed or held back type of: break , intermission , interruption , pause , suspension a time interval during which there is a temporary cessation of something

Vocabulary lists containing postponement

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