Intercreditor Agreement
What is Intercreditor Agreement?
An Intercreditor Agreement is a legal contract between two or more lenders (creditors) of the same borrower, which defines the rights, responsibilities, and priorities of each lender in case the borrower defaults on their loan obligations.
It helps avoid conflicts between creditors by clearly stating who gets paid first and how recoveries will be shared in a default or insolvency situation.
Why Is an Intercreditor Agreement Important?
When a borrower takes loans from multiple lenders (e.g., banks, NBFCs, or bondholders), it creates a multi-creditor situation. Without an agreement, lenders might fight over collateral or repayment proceeds if the borrower fails to repay.
The Intercreditor Agreement ensures:
- Clarity on repayment priority
- Orderly resolution in case of default
- Reduced legal disputes
- Smooth coordination among lenders
Key Provisions in an Intercreditor Agreement
| Clause | Explanation |
|---|---|
| Ranking of Debt | Defines which lender gets priority (e.g., senior vs. junior debt) |
| Collateral Rights | Clarifies how collateral is shared or who has the first charge |
| Standstill Period | Restricts junior lenders from enforcing their rights for a certain time |
| Voting Rights | Outlines how decisions will be made (majority voting, unanimous consent, etc.) |
| Enforcement Rights | Defines which lender can enforce collateral and under what conditions |
| Sharing of Recoveries | Specifies how money recovered from the borrower will be distributed |
Who Uses Intercreditor Agreements?
- Banks and Financial Institutions
- Bondholders
- Private Lenders
- NBFCs
- Consortium Lenders (in large syndicated loans)
Example (India)
In India, under the RBI’s Prudential Framework for Resolution of Stressed Assets (2019), lenders are required to sign an Intercreditor Agreement when working together on the resolution of a defaulting borrower.
This is particularly relevant for companies in financial distress or insolvency, ensuring all creditors work together under agreed terms.
Simple Scenario
Let’s say a company takes loans from:
- Bank A (₹50 crore, secured with factory property)
- Bank B (₹30 crore, secured with machinery)
If the company defaults:
The intercreditor agreement would specify which bank gets to recover its dues first, how the collateral is handled, and whether proceeds are shared or kept separate.
Intercreditor Agreement vs. Loan Agreement
| Aspect | Loan Agreement | Intercreditor Agreement |
|---|---|---|
| Between | Borrower and one lender | Among multiple lenders |
| Purpose | Outlines loan terms | Coordinates rights among lenders |
| Focus | Repayment, interest, default clauses | Priority, collateral rights, recovery sharing |