Subordinates Notes are debt instruments issued to a company by its lenders with a relatively high rate interest owing to the fact that they are low in priority to an already existing debt wherein this already existing lien is known as senior debt. The issuers of the subordinated notes agree to the subordination clause at the time of agreement between the two parties and the senior debt has to be transparently disclosed before availing the subordinated loan.
In case of default or bankruptcy or liquidation of a company the funds accruing out of liquidation process are first utilized to settle the senior debt and then the subordinate loan repayment takes place. A typical example of this type of loan is a promoter investing in his company in form of debt and undertakes to subordinate this loan to already existing liens in the company. Then in case of liquidation the promoter is paid in last before the stockholders after all debt and existing liabilities of the company are settled
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