Drafting an Intercreditor Agreement: What You Need to Know
When multiple creditors are involved in financing an enterprise, drafting an intercreditor agreement becomes essential to avoid any potential disputes or conflicts over the priority of their respective claims. An intercreditor agreement is a legal document that outlines the rights and obligations of each creditor in relation to the other creditors and the borrower.
If you`re a lawyer tasked with drafting an intercreditor agreement, here are some key considerations to keep in mind:
1. Understand the Hierarchy of Claims
The first step in drafting an intercreditor agreement is to understand the hierarchy of claims. This refers to the order in which creditors will be paid in the event of a default or bankruptcy. Generally, secured creditors have priority over unsecured creditors and senior creditors have priority over junior creditors.
Your intercreditor agreement should specify the respective claims and priorities of each creditor, and how they will be treated in case of default.
2. Determine the Roles and Responsibilities of Each Creditor
In addition to outlining the hierarchy of claims, your intercreditor agreement should also specify the roles and responsibilities of each creditor. This includes the rights and obligations of each creditor with respect to the collateral, the borrower, and each other.
For example, if one creditor has a senior lien on the borrower`s assets, they may have the right to control the disposition of those assets in the event of default. The intercreditor agreement should also specify the duties of each creditor, such as providing notice of default or sharing information about the borrower`s financial condition.
3. Address Potential Conflicts
One of the biggest challenges in drafting an intercreditor agreement is anticipating potential conflicts between creditors. For example, junior creditors may feel aggrieved if senior creditors are given too much control over the borrower`s assets.
To avoid conflicts, your intercreditor agreement should specify a clear dispute resolution mechanism, such as mediation or arbitration. You should also include provisions for waivers, consents, and standstill agreements, which can help ensure that creditors are working together to protect their mutual interests.
4. Review Existing Financing Documents
Before drafting an intercreditor agreement, it`s important to review the borrower`s existing financing documents, such as loan agreements, security agreements, and guarantees. This will help you understand the borrower`s obligations and ensure that the intercreditor agreement is consistent with the existing terms.
You should also review the borrower`s organizational documents, such as articles of incorporation and bylaws, to ensure that the borrower has the authority to enter into the intercreditor agreement.
5. Seek Expert Advice
Finally, if you`re new to drafting intercreditor agreements, it`s a good idea to seek advice from experts in the field. This might include attorneys with experience in complex finance transactions, as well as accountants, appraisers, and other financial professionals.
By working with experts, you can ensure that your intercreditor agreement is comprehensive, legally sound, and meets the needs of all parties involved.
In conclusion, drafting an intercreditor agreement can be a complex process, but by understanding the hierarchy of claims, specifying the roles and responsibilities of each creditor, addressing potential conflicts, reviewing existing financing documents, and seeking expert advice, you can create an agreement that protects the interests of all parties involved.
