Hi my name is Richard Dusome and I'm a Financial Services lawyer at Gowling WLG. This video is part of our Arrangements with Third Party Creditors video series.
There will be instances where your due diligence uncovers a third party creditor of your borrower or debtor that does not actually hold a security interest, but is owed debt (other than trade debt) by your debtor subject to regular or irregular payments. This will typically occur when subsidiaries or other related parties make unsecured inter-company loans to your debtor, or shareholders make loans to your debtor.
In these situations you are not looking to have any security subordinated. Rather your goal is to prevent your debtor from paying that third party before the debtor pays you. The way to prevent the third party from receiving any payment from the debtor is by having the third party provide in your favour a postponement of its right to receive the funds. These types of inter-company loans or shareholder loans are traditionally intended to remain in place over the long term. So, it is not unreasonable for a lender to expect that repayment of these loans will be delayed or subject to certain financial performance ratios having been met.
Generally speaking, a postponement is simply an agreement whereby one creditor (known as the subordinate creditor or junior creditor) agrees not to be paid by a debtor until another creditor (known as the senior creditor) has been paid or the senior creditor otherwise consents to the making of a payment to the junior creditor. The Postponement will typically apply to all present and future debt owed by the debtor to the third party so that there is no need to monitor accounting records.
A Postponement Agreement is key because it gives you, as the senior creditor, a direct covenant from the junior creditor that you can enforce independently to prevent it from receiving payments. It gives you the power to restrict payments that the junior creditor can accept. Simply having the debtor's negative covenant in the loan agreement or credit agreement not to pay the junior creditor is not enough when the money is already out the door.
There are many typical terms in any Postponement, but here are three key terms.
- Permitted Payments.
The prohibition on payments contained in the Postponement may include some specifically negotiated "Permitted Payments". "Permitted Payments" are specific amounts the senior creditor has agreed may be made to, and accepted by, the junior creditor. Typically they are only made when the senior loan is not in default and a default would not be triggered by the making of that payment. The permission can also be linked to the achievement of a certain level of financial performance.
2. Clawback. The Postponement will typically also include the ability of the senior creditor to claw-back payments made to the junior creditor in contravention of the prohibition. The direct covenant means the junior creditor can be sued if it fails to remit.
3. No Time Limit. The Postponement will frequently be effective over the full term of the Senior Loan. It will usually state that it is effective until the Senior Loan is repaid in full and the senior creditor has no obligation to make further advances.
As is the case with subordinations, one size does not fit all Postponement situations and the correct document to be used depends upon the situation and the parties involved.
So if you want the power to control payments to junior creditors (and let's face it, who doesn't want power?), make a Postponement part of your security package.
Should you have any questions about the content of this video, please feel free to reach out to me directly, or any one of the Gowling WLG lending team. Thank you so much for watching this video.