296 6 Mezzanine
tire position as between the two sets of creditors, but conferring no priority as
against third parties. This contract should generally be effective prior to a liquida-
tion of the borrower.^49
The intercreditor agreement will typically be signed by the borrower, the senior
lenders, the mezzanine lenders, the agent of the senior lenders, the agent of the
mezzanine lenders, and the security agent. It can also be signed by equity inves-
tors such as the shareholders of the borrower.^50
Insolvency. In the insolvency of the borrower, the main rule is that the bor-
rower’s insolvency administrator will apply the pari passu principle. It is neverthe-
less possible to contract out of pari passu.
Under German law, the insolvency administrator will be bound by a multilateral agreement
between senior lenders, junior lenders and the debtor. The insolvency administrator will not
be bound by a bilateral agreement between senior lenders and junior lenders as the debtor is
not a party.^51 The insolvency administrator will nevertheless be bound by an agreement be-
tween the debtor and a creditor according to which the claims of the creditor will rank be-
hind all other debts.^52
Where the liquidation of a company is governed by English law, the main rule is that a
subordination agreement does not bind the liquidator to pay out in a non-pari passu way.^53
It is a fundamental principle of English insolvency law that the assets of an insolvent com-
pany which have not been the subject of any valid security and which are not required to
pay off claims preferred by statute should be available for the discharge of the claims of un-
secured creditors on an equitable, that is, pari passu, basis. This rule of public policy was
confirmed by the House of Lords in British Eagle v Air France.^54 However, contracting out
of pari passu on subordination was permitted in the Maxwell Communications case, be-
cause there were no good public policy reasons for the pari passu rule to be mandatory.^55
Prior to Maxwell, two methods were in use for effecting subordination without infringing
the principle of pari passu treatment: trust subordination and contingent debt subordina-
tion.^56
Terms of intercreditor arrangements. Intercreditor arrangements between senior
lenders and mezzanine lenders will often cover the following issues:^57
(^49) Diem A, op cit, § 39 numbers 11–13; Dyer R, Mezzanine Finance: Subordination and
Priorities – an Overview, JIBL 5(4) (1990) pp 155–158.
(^50) Diem A, op cit, § 40 numbers 1–2.
(^51) Diem A, op cit, § 40 number 13.
(^52) §§ 39(2) and 80(1) InsO (Rangrücktrittsvereinbarung). Diem A, op cit, § 40 number 17.
(^53) Section 107 of the Insolvency Act 1986 and rule 4.181 of the Insolvency Rules 1986.
(^54) Lord Cross in British Eagle v Air France [1975] 1 WLR 780.
(^55) Re Maxwell Communications Corporation plc (No. 2) [1994] 1 All ER 737. See Finch
V, Corporate Insolvency Law. Cam U P, Cambridge (2002) pp 443–444; Fuller G, Cor-
porate Borrowing. Third Edition. Jordans, Bristol (2006) paragraphs 8.6–8.11.
(^56) See Fuller G, op cit, paragraphs 8.11–8.17.
(^57) Bohrer A, Corporate Governance and Capital Market Transactions in Switzerland.
Schulthess, Zürich Basel Genf (2005) pp 203–204.