Deed of postponement between creditors

A Deed of Postponement is an agreement between two lenders to agree to change or regulate the distribution of profits of enforcement of security granted by the debtor in their favour. Normally the Deed will provide that those proceeds which are used first to pay off the debt owed to the senior creditor and then

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A Deed of Postponement is an agreement between two lenders to agree to change or regulate the distribution of profits of enforcement of security granted by the debtor in their favour.

Normally the Deed will provide that those proceeds which are used first to pay off the debt owed to the senior creditor and then to pay off the debt owed to the junior creditor. Both the debts are secured and include amounts due under the loan agreements.  In effect the Senior Creditor has security over all the assets subject to security created by the junior security documents.

In relation to the enforcement a similar action the Senior Creditor may take enforcement action without the Junior Creditor’s consent but in normal event he must consult with the Junior Creditor but on the other hand the Junior Creditor may not take any such action without the prior written consent of the Senior Creditor.

The Senior Creditor’s lawyers normally draft the Deed of Postponement which will be negotiated between the Senior Creditor and the Junior Creditors’ lawyers but the debtor will not be involved in negotiating such document.

So long as the Debtor is solvent and able to meet payments on all his debts, the provisions of Deed of Postponement are unlikely to be tested. If however, the debtor becomes insolvent then the provisions of the Deed of Postponement will be relevant to the order in which the creditor’s party to that deed.  Both the secured creditors are free to vary the Deed of Postponement of their respective debt and security between themselves without the consent of the Debtor in the absence of a provision to the contrary.

A Deed of Postponement can provide, among other things, that on enforcement of security, any enforcement proceeds will first be used to pay off the debt owed to the Senior Secured Creditor either up to a specified amount (if any) or up to the total amount due to the Senior Secured Creditor.  Any such arrangement is not an exchange of security interest and so does not affect the priority of any intermediate security interest in favour of a third party.

In most cases parties to the Deed of Postponement shall be the Senior Creditor, Junior Creditor and the common debtor.  This is because there are practical benefits to ensuring that all parties know and agree to the terms of the security ranking.

The standard Deed of Postponement contains covenants preventing the Company from undermining the ranking provisions. This is of great importance to the Senior Creditor because “in practical terms” the corporation of the debtor is usually vital to ensuring the success of the inter-creditor arrangements.  Becoming a party to the deed also carries a benefit for the debtor, who will want to avoid being caught between the creditors in any dispute.  If the debtor is a party to the Deed of Postponement, its obligation to its creditor (e.g. if the debt document contain conflicting requirements in relation to the application of insurance proceeds) are clearly set out and agreed between the creditors.

The term deed of postponement is also often used synonymously with Occupier’s waiver  where a non owning occupant of a residential property is required to sign a deed agreeing to postpone any rights he or she may have or acquire in a property behind those of a mortgage lender. This is necessary so that, in the event there is a default on the mortgage, the non-owning occupier cannot obstruct the lender in applying for a repossession order.

If you need further advice, please do call or email me.

James Swede

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