A subordination agreement is a legal funding agreement which is instrumental in establishing the lower priority of one debt over the other and the higher priority loan is known as the senior debt. Whenever a company goes into liquidation, repayment of debts and liabilities takes place in order of priority and to avoid any dispute in priority of the loans it becomes imperative to enact a subordination agreement.
A subordinate loan is loan on low priority and repaid after all the senior loans and liabilities have been repaid in full. Therefore in many case the subordinate lender may end up getting very little or no repayment. In other words there is higher degree of risk associated with these type of funding arrangements and thus command higher rate of interests. The agreement would generally consist of clause pertaining to the loan amount, the interest rates and repayment period, clauses wherein the lender agrees to loan subordination and rights of all the parties involved.
[Also Read: Subordinated Loan Agreement]
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