Harmonizing Intercreditor Priority Conflicts over Cross Border Inventory Liens
Harmonizing cross-border inventory liens demands local registration at transit hubs, direct warehouse control, and explicit turnover provisions in intercreditor deeds.
Turnover Provisions
Meaning
Intercreditor agreements include specific clauses that require a junior lender to pass any payments received from a defaulting borrower to the senior lender. The insertion of turnover provisions ensures that the senior lender receives all cash flows until their debt is fully paid, regardless of who collected the money first. This contractual mechanism reinforces the payment priority agreed upon by the lenders.
Payment Redirection
If a junior creditor receives a distribution of assets or a loan payment in violation of the intercreditor agreement, they must hold that cash in trust for the senior creditor and deliver it immediately. This rule prevents the junior creditor from keeping funds that belong to the senior creditor. This redirection of funds helps maintain the agreed-upon payment hierarchy during a workout or liquidation.
Insolvency Protection
Maintaining the payment structure during bankruptcy proceedings is the primary purpose of these clauses. They prevent the junior lender from exploiting local insolvency rules to receive payments ahead of the senior lender. This protection is essential for senior lenders who rely on the first-priority status of their claims to justify the lower interest rates they charge.
Legal Remedies
Enforcing these clauses involves filing lawsuits in commercial court if a junior lender fails to transfer the collected funds. The senior lender has the right to demand an accounting of all payments received by the junior lender. This legal action can be taken directly against the junior lender rather than the borrower, avoiding the need to disrupt the borrower’s restructuring efforts and ensuring that the senior creditor’s recovery is not delayed by uncooperative behaviors.