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INTER-CREDITOR AGREEMENTS UNIFY CREDITORS

By: PHOEBE CLERIDOU Sep. 30, 2025

Inter-creditor agreements (ICAs) are crucial in organising cross-border finance transactions involving various lenders or creditor classes funding a single borrower. The ICA delineates a definitive framework for priority, enforcement, and inter-jurisdictional cooperation, acknowledging the diverse rights, risk preferences, and legal frameworks of each creditor.

The senior creditors will seek to oversee the execution of security and any reorganisation of the borrower group. Senior creditors typically possess a more advantageous negotiation stance compared to junior creditors, making it unsurprising that the conditions of the intercreditor agreement are generally more friendly to the former than the latter.

Rather than depending solely on statutory or jurisdiction-specific insolvency regulations, which may vary or conflict, the ICA unifies creditors under a single framework.

In principle, junior creditors are safeguarded as the sale proceeds must be allocated according to a predetermined payment hierarchy outlined in the intercreditor agreement; nevertheless, in reality, the proceeds may be inadequate to fulfil all creditor claims.

Legal, jurisdictional, and statutory barriers, along with practical challenges such as coordination and strategy, render these agreements exceedingly complicated. Although ICAs establish a contractual basis for creditor rights, their cross-border enforcement is not consistently uncomplicated. Numerous intercreditor agreements address similar issues; nevertheless, the rights granted to each lender varies markedly and are frequently subject to extensive negotiation.

A fundamental principle of intercreditor arrangements is that the senior creditor generally possesses the authority to oversee the management and disposal of shared collateral, while the junior creditor must waive specific statutory rights that would normally permit them to contest the enforcement and foreclosure proceedings. A "standstill period" is generally established, granting the senior creditor the only authority to enforce and implement remedies against the debtor for a specified duration. 

The relative newness of intercreditor agreements and the paucity of rulings interpreting them creates uncertainty. Up until now, judges show tolerance allowing financially educated parties to negotiate around the Bankruptcy Code.

The financial crisis and recession of 2008 and 2009 have led to various bankruptcies that have had Courts examine intercreditor agreements. The trend is for Bankruptcy Courts to review and enforce intercreditor agreements, even if they are between two “non-debtor” parties. The importance of intercreditor agreements is evident. As company capital structures become more complex, whether in the context of acquisition financing, working capital financing, or other transactions, the multiple sources of debt financing require an agreement between debt holders to define their relative rights with respect to the common debtor and, in the case of secured debt, the common collateral.

Side agreements may yield advantages that enhance the pace, predictability, and efficiency of the bankruptcy process. Mandating a second-lien creditor to maintain silence can be advantageous when that creditor is insolvent and poses a risk of obstructing a value-maximizing selling procedure. Simultaneously, side agreements may pose challenges when they threaten to generate externalities—specifically, impacts on the debtor's other stakeholders who are not involved in the deal.

Inter-creditor agreements serve as the fundamental framework that unifies cross-border financial institutions. They avert disorder by guaranteeing that creditors with conflicting interests operate in a synchronised, foreseeable, and enforced fashion across various legal frameworks.

The primary issues are that insolvency legislation is territorial and often misaligned with contractual autonomy. Agreements made by creditors in London or New York may not be entirely honoured in Paris, São Paulo, or Shanghai. This results in intricate structuring, significant dependence on local counsel, and occasionally the necessity for parallel ICAs or jurisdiction-specific exemptions.

Creditors cannot entirely evade the territorial characteristics of insolvency law; nevertheless, by employing stringent controlling law, arbitration, parallel debt, local-law security, and effective coordination mechanisms, they enhance the enforceability and predictability of International Credit Agreements (ICAs) across jurisdictions.