UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
5.7 Rules Governing the Priority of Competing Security Interests and/or Claims Under English law, multiple security interests are allowed and parties can contractually agree on the order and priority of subordination. Besides contrac - tual subordination, deal structures often involve struc - tural subordination, where a parent company’s credi - tors are subordinated to its subsidiaries’ creditors. This occurs because assets and cash flows of a sub - sidiary are typically applied to satisfy their creditors first, leaving parent company creditors with structur - ally subordinated claims, with claims only on residual value after subsidiaries’ creditors are paid. Case law supports both contractual and turnover subordination agreements, as neither violate the pari passu rule or anti-deprivation principle. The priority of competing security interests under Eng - lish law is complex. Generally, security interests rank by creation order, with exceptions: • legal security interests (acquired for value without notice of prior equitable interests) take priority over equitable interests; • notice to the debtor/contractual counterparty determines priority in successive purported assign - ments of the same debt or other chose in action; • required registration at asset registries (eg, the Land Registry), usually determines priority among competing interests by registration order, but Com - panies House registration does not directly affect priority; and • subsequent fixed charges have priority over earlier floating charges unless the subsequent fixed charge-holder knows the earlier floating charge includes a negative pledge. 5.8 Priming Liens and/or Claims Methods to Structure Around Priming Liens Facilities agreements typically restrict incurring debt or granting guarantees or security that rank ahead of the lender’s debt. This will also typically extend to incremental facility provisions, which only permit the incurrence of pari passu debt. Any amendments to these restrictions in the facilities agreement or prior - ity provisions in the intercreditor agreement will also be all-lender consent items. Junior creditors and
super senior revolving lenders are usually stayed from enforcing remedies until senior creditors are repaid. Subordination Creditors of shareholder loans to the borrowing group are generally expected to become party to the inter - creditor agreement as subordinated creditors. Group company creditors providing intercompany loans are also party to the intercreditor agreement, subordinat - ing their claims to senior creditors. Parties may negoti - ate minimum debt thresholds for these accessions. Anti-Layering Private credit lenders typically require an anti-layering provision to prevent additional debt layers that could subordinate existing creditors’ claims. These anti-lay - ering provisions restrict borrowers from incurring new debt that ranks senior to existing obligations, main - taining the hierarchy of claims and protecting senior lenders’ interests. “No Short Circuit Clause” Private credit lenders typically require a “no short cir - cuit clause” to prevent junior creditors from bypassing the priority structure to receive payments or enforce claims ahead of senior creditors. This ensures jun - ior creditors cannot undermine the agreed order of payment priority, such as by accessing collateral or receiving payments before senior creditors are fully satisfied. 5.9 Cash Pooling and Hedging/Cash Management Obligations Cash pooling and other transactions in the ordinary course of banking operations are not usually restricted under the debt or security covenants in private credit transactions (similar to the treatment of these arrange - ments in broadly syndicated loans). Any permitted secured hedging (where such hedge counterparties have acceded to the intercreditor agreement) will usually share the security and guar - antee package. There may also be an agreed amount of hedging that will rank super senior. 5.10 Appointment of Collateral Agent Security is typically granted by security providers to a security trustee (or security agent) who holds the
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