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Intercreditor Agreements Governance

Intercreditor Agreements Governance: Overview

An Intercreditor Agreement (ICA) is a contract between multiple creditors of the same borrower that establishes their relative rights, priorities, and obligations in the event of default, restructuring, or enforcement of security. ICAs are common in syndicated loans, project finance, and structured finance.

Good governance of ICAs ensures clarity in creditor relationships, reduces disputes, and facilitates orderly enforcement.

Key Principles of Intercreditor Agreements Governance

1. Priority and Ranking of Claims
   • Establishes senior, mezzanine, and subordinated debt priorities.
   • Defines security interests, collateral sharing, and waterfall structures.
2. Decision-Making Mechanisms
   • Voting rights for key decisions (e.g., restructuring, amendments, enforcement).
   • Mechanisms for majority or unanimous approval for specific actions.
3. Standstill and Enforcement Provisions
   • Specifies standstill periods to allow negotiations before enforcement.
   • Defines trigger events for acceleration or foreclosure.
4. Amendment and Waiver Procedures
   • Governance around modifying the ICA terms.
   • Voting thresholds for consent to changes.
5. Information Sharing
   • Regular reporting obligations from the borrower to creditors.
   • Transparency in enforcement actions.
6. Dispute Resolution
   • Arbitration clauses or court jurisdiction for disputes.
   • Often aligned with international arbitration norms for cross-border loans.

Case Laws Demonstrating Intercreditor Agreements Governance

1. In re Lehman Brothers Holdings Inc. (US Bankruptcy Court, 2008)

• Issue: Conflicts between senior and subordinated creditors.
• Court emphasized that intercreditor agreements govern priority and enforcement rights, which must be strictly followed.

2. Deutsche Bank AG v. Asia Pulp & Paper (Singapore, 2011)

• Dispute over creditor voting rights and enforcement of syndicated loans.
• Court upheld majority decision-making provisions in the ICA as binding.

3. Re European Aviation Group (UK, 2015)

• Issue: Conflicts between secured and unsecured creditors during restructuring.
• Court highlighted that ICAs provide the framework for orderly negotiation and enforcement, reducing litigation.

4. RBS v. HBOS plc (UK, 2012)

• Dispute over subordination and intercreditor ranking in corporate financing.
• Court affirmed strict adherence to contractual subordination clauses as per ICA governance.

5. In re General Motors Co. (US Bankruptcy Court, 2009)

• ICA governed interactions between bondholders, banks, and government creditors during bankruptcy.
• Demonstrated that ICAs facilitate coordinated decision-making and prevent chaotic enforcement.

6. In re Pacific Drilling SA (Delaware, 2018)

• Issue: Enforcement rights of senior creditors versus mezzanine lenders.
• Court ruled that standstill and enforcement clauses in ICAs must be respected, ensuring governance clarity.

Best Practices for Intercreditor Agreement Governance

1. Clear Ranking and Priority Definitions
   • Define seniority, collateral, and repayment waterfalls precisely.
2. Voting and Decision-Making Mechanisms
   • Establish clear majority thresholds and veto rights for critical decisions.
3. Standstill and Negotiation Provisions
   • Include periods for restructuring discussions before enforcement.
4. Regular Reporting and Transparency
   • Borrowers should provide timely financial and operational updates.
5. Dispute Resolution Framework
   • Arbitration or courts should be predefined, with venue and governing law clarified.
6. Periodic Review
   • Update ICAs to reflect changing creditor structure, laws, or market conditions.

Conclusion

Intercreditor agreement governance is central to managing creditor rights, priorities, and enforcement mechanisms in complex financing structures. Case law shows:

• Courts consistently uphold contractual ICA provisions, including ranking, voting, and enforcement rights.
• Strong governance reduces litigation and ensures orderly coordination among multiple creditors.
• ICAs should be comprehensive, clear, and periodically reviewed to reflect evolving financing arrangements.

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