294 6 Mezzanine
ments. For example, the whole capital amount can be repaid at the end of the term
of the loan (bullet repayment) or in two instalments after the senior tranche has al-
ready been repaid.^38 Mezzanine loans can be repaid after all senior debt has been
repaid.^39
The main rule is that the ranking of loans in insolvency is not influenced by
their repayment schedules. In the absence of a contract or a statute, the main rule
is that the debts will rank pari passu.
6.3.4 Statutory Subordination
There are statutory exceptions to the pari passu principle. Claims can be deferred
by statute below the claims of other creditors in many ways. For the ranking of
claims in insolvency in general, see Volume II.^40 Of particular interest in this con-
text can be the potential existence of mandatory provisions subordinating the
debtor’s loans from shareholders or its loans from banks that have legal or de facto
power to control the debtor company (see Volume II).^41
6.3.5 Contractual Subordination of Debts
Contractual subordination enforceable when the debtor becomes insolvent is one
of the most common equity techniques (see above) and subordinated loans are the
most common form of mezzanine instruments. Subordinated debt is also known as
“junior debt”.
Contractual subordination is a contractual exception to the pari passu principle.
Contracting out of the pari passu principle can be allowed on the basis that a credi-
tor would be permitted to waive a debt in full (or in part) and that this might be
agreed ex ante or ex post.^42
Subordinated loans are usually only granted if the lender believes that the bor-
rower can repay them out of cash flow. Subordinated loans are a form of middle-
(^38) Ibid, § 5 number 7 and § 38 number 2.
(^39) Ibid, § 39 number 1.
(^40) For German law, see § 39(1) InsO and Diem A, op cit, § 39 numbers 8–10. For English
law, see, for example, section 215(4) of the Insolvency Act 1986 and Soden v British &
Commonwealth Holdings plc (in administration) [1997] UKHL 41, [1997] 4 All ER
353, [1997] 3 WLR 840, [1998] AC 298. See also Fuller G, Corporate Borrowing. Third
Edition. Jordans, Bristol (2006) paragraph 8.2: “There are many ways in which one
creditor of an English company can rank junior to another in an insolvent winding up:
unsecured creditors rank junior to secured and preferential creditors; floating chargees
rank junior to fixed chargees and preferential creditors; preferential creditors rank junior
to fixed chargees; and one fixed chargee may rank junior to another.”
(^41) See Habersack M, Grundfragen der freiwilligen oder erzwungenen Subordination von
Gesellschafterkrediten, ZGR 2000 pp 384–419; Schall A, Kapitalaufbringung nach dem
MoMiG, ZGR 2009 pp 126–155; the MoMiG; and § 19 GmbHG.
(^42) For English law, see Re Maxwell Communications Corporation plc (No. 2) [1994] 1 All
ER 737; Finch V, Corporate Insolvency Law. Cam U P, Cambridge (2002) p 443.