An intercreditor agreement is a contract between two or more lenders to the same borrower that sets out who gets paid first, whose security ranks ahead, and who controls enforcement if the business defaults. For Ontario business owners financing an acquisition with more than one lender, it is often the document that decides whether the deal closes on time and whether the capital stack holds together under pressure.
An intercreditor agreement fixes the relative rights of lenders and other creditors to a shared borrower: the ranking of their security interests, the order of payment, and the rules each lender must follow when enforcing secured financing. It sits beside the loan documents, and it governs the lenders' relationship with each other. The borrower's own repayment obligations come from its loan agreements.
At Beganyi Law, we see these agreements most often in acquisitions combining bank debt with vendor take-back or mezzanine financing. Getting the priorities aligned early protects the purchase price, the closing timeline and the buyer's relationship with every lender. If you are structuring a deal with more than one lender, you can contact Beganyi Law or call +1 647-977-7749 to arrange a confidential consultation.
Key Takeaways
- Lenders sharing a borrower agree in advance on payment order, security ranking and enforcement control.
- Standstill, turnover and cure terms decide who acts, and who collects, after a default.
- Creditor priorities are negotiated separately from the borrower's own loan terms and should be settled before closing.
How Are Lender Priorities Established?
Lender priorities come from two sources: the statutory ranking rules under Ontario's Personal Property Security Act (PPSA) and the private agreement the lenders negotiate to confirm or change that ranking. The negotiated agreement addresses two separate questions. The first is whose security ranks first against the collateral. The second is whose debt gets paid first.
Lien Subordination vs. Payment Subordination
Lien subordination deals with security. The junior lender agrees that its security interest in some or all of the collateral ranks behind the senior lender's security interest, whatever the registration order would otherwise produce. When collateral is sold, the senior lender is satisfied from the proceeds first.
Payment subordination deals with the right to receive payment. The junior lender agrees not to accept payments from the borrower, or to accept only defined "permitted payments", until the senior debt is repaid or while a default continues. Payment subordination applies even to an unsecured creditor.
The distinction has practical consequences:
Feature | Lien subordination | Payment subordination |
|---|---|---|
What is ranked | Security interests in collateral | Right to receive payments |
Applies to unsecured creditors | No | Yes |
Main effect | Order of recovery from collateral proceeds | Restricts payments before and after default |
Common in | First-lien/second-lien deals | Shareholder loans, VTB notes, mezzanine debt |
A simple postponement deals only with payments and leaves the creditor's security ranking untouched. A full or "deep" subordination combines both. Most acquisition intercreditor agreements contain both forms, plus enforcement terms.
How Ontario PPSA Rules Interact With Negotiated Priorities
Under the PPSA, priority between competing security interests in the same personal property follows statutory rules, largely based on the order of registration or perfection. An unperfected security interest is subordinate to a perfected one in the same collateral. Section 38 of the Ontario PPSA allows secured parties to subordinate their interests by agreement, so lenders can contract around the default ranking.
Ontario's "check the box" registration system creates its own problems. A financing statement that checks "equipment" covers all equipment, even if the creditor financed only one machine. Lenders frequently ask for no-interest (estoppel) letters, or carve-outs in the intercreditor agreement, so the PPSA search results match the intended deal.
In our transaction work, we review PPSA searches against the borrower and target before drafting priority terms. Prior registrations from equipment lessors, old lenders or shareholders surface regularly during due diligence, and each must be discharged, subordinated or carved out.
First-Lien, Second-Lien, Pari Passu, and Split-Collateral Arrangements
Intercreditor structures follow several recognizable patterns:
- First lien intercreditor agreement: governs lenders sharing the same first-ranking security, often through a collateral agent.
- Second lien intercreditor agreement: governs the relationship between the senior and junior lenders when the junior lender holds second-ranking security over the same collateral.
- Pari passu sharing: secured lenders rank equally and share recoveries pro rata, based on each lender's share of the total debt.
- Split collateral: one lender ranks first on working-capital assets (receivables, inventory and cash) while another ranks first on fixed assets such as real property and equipment.
Split-collateral deals require detailed access provisions. A working-capital lender realizing on inventory may need to occupy the fixed-asset lender's premises, and the agreement should address compensation for that occupation and repair of any damage.
What Happens When the Borrower Defaults?
After a borrower default, the intercreditor agreement determines which lender can enforce, when the junior lenders may act, and how collateral proceeds are distributed. These terms rarely matter on a healthy business. They become decisive the moment an event of default occurs.
Who Controls Enforcement and Collateral Sales?
The senior lender usually controls enforcement actions against shared collateral. That control covers decisions about appointing a receiver, running a sale process, setting the timing of a disposition and releasing security so a buyer takes the assets free and clear.
Junior lenders accept this because two lenders pursuing competing remedies against the same assets destroy value. Junior lenders do negotiate protections, including:
- notice before the senior lender begins enforcement;
- a commercially reasonable sale requirement;
- the right to file claims and vote in insolvency proceedings;
- release of junior security only when senior security is released in the same sale.
What Does a Standstill Provision Prevent?
A standstill provision bars the junior lender from enforcing its security for a defined period after a default, giving the senior lender time to work out or realize on the collateral. Standstill periods in Canadian deals range from about 90 to 365 days, depending on the type of debt and the parties' bargaining strength.
During the standstill, the junior lender cannot seize collateral, appoint a receiver or start a sale. Well-negotiated standstill provisions still let it take protective steps, such as accelerating its debt, making demand, and filing proofs of claim. The standstill ends when the period expires, the senior debt is repaid, or the senior lender stops pursuing enforcement.
How Payment Waterfalls and Turnover Obligations Work
A payment waterfall sets the order in which collateral proceeds are applied. A common sequence is:
- Enforcement costs and agent expenses.
- Senior debt, including interest and fees.
- Junior debt.
- Any surplus to the borrower or as a court directs.
A turnover obligation backs up the waterfall. If the junior lender receives a payment or proceeds it was not entitled to, it holds them in trust for the senior lender and must hand them over. This protects the priority scheme against misdirected payments, setoffs and recoveries from a junior lender's independent enforcement.
Junior Lender Cure Rights and Senior Debt Buyout Options
Cure rights let a junior lender pay overdue amounts on the senior debt, or otherwise remedy a senior default, to stop enforcement. They are usually limited in number and timing.
A buyout option goes further. It allows the junior lender to purchase the senior debt at par (principal, accrued interest and fees) after a default or enforcement notice. This gives the junior lender control of the enforcement process, which is valuable when it believes the business is worth more than a quick senior-led sale would recover. These creditor rights are among the most heavily negotiated terms in mezzanine financing.
Which Terms Need Negotiation Before Closing?
The terms that cause the most trouble are those limiting what the borrower can pay the junior lender, and what the senior lender can change without consent. Mechanical provisions on notice, agency and collateral access also require attention, since they control how the agreement operates in practice.
Debt Caps, Permitted Payments, and Payment Blockages
A senior debt cap limits how much senior debt ranks ahead of the junior lender. Without a cap, the senior lender could increase its loan and dilute the junior lender's recovery position. Caps often include a cushion (for example, a percentage above the closing amount) plus interest, fees and protective advances.
Permitted payments define what the borrower may pay the junior lender while senior debt is outstanding. Most agreements prohibit junior principal payments, while scheduled interest is commonly negotiated.
Payment blockages stop permitted payments after a senior default, usually triggered by a blockage notice from the senior lender. Key points to settle include:
- which defaults trigger a blockage;
- how long each blockage lasts;
- how many blockages may be issued in a year;
- whether missed junior payments can be caught up once the blockage ends.
Consent Rights for Amendments, Refinancing, and Assignments
Junior lenders want consent rights over senior amendments that increase the rate, shorten maturity, or add restrictive covenants. Senior lenders want freedom to manage their own loan documents.
Refinancing provisions should state whether a replacement senior lender inherits the senior position automatically. Without this, a borrower refinancing its bank facility may have to renegotiate the intercreditor agreement from scratch.
Assignment rules are often uneven. Junior lenders are usually restricted from assigning their debt unless the assignee agrees to be bound, while senior lenders face no similar restriction. A junior lender should decide whether to accept that imbalance in exchange for other rights.
Notice Requirements, Information Sharing, and Dispute Resolution
Notice clauses should specify who receives default notices, how they are delivered, and when they take effect. Missed notices can start or block standstill periods, so precision has real consequences.
Information sharing obligations cover financial reporting, compliance certificates and default information. Senior and junior lenders frequently agree to share copies of notices sent to the borrower.
Dispute resolution provisions set governing law (usually Ontario for Ontario borrowers), the forum, and sometimes expedited mechanisms for disputes over payment waterfalls or enforcement.
Agent Authority, Voting Rights, and Access to Collateral
In syndicated or multi-lender deals, an administrative agent manages the loan while a collateral agent holds security for all secured parties. The agreement should define each agent's authority, its standard of care, and the indemnities it receives.
Voting rights determine which lender group instructs the collateral agent on enforcement, releases and waivers. Typical structures give control to the senior class or to a majority by debt amount.
Access provisions govern use of collateral during enforcement. In split-collateral deals, the working-capital lender may need a limited period to use the fixed-asset lender's real property and equipment to collect receivables and sell inventory.
How Does This Affect an Ontario Business Acquisition?
In an acquisition, the intercreditor agreement determines whether the buyer's financing sources can coexist and close on the same day. Each lender's position also shapes deal terms beyond financing, including payment schedules to the seller and the buyer's flexibility after closing. We address these issues as part of our mergers and acquisitions practice.
A Bank Loan and Vendor Take-Back Financing Example
Consider a buyer acquiring an Ontario manufacturing business for $6 million. The buyer funds $1.5 million in equity, borrows $3.5 million from a bank, and the seller accepts a $1 million vendor take-back (VTB) note payable over four years.
The bank will require the seller to sign a subordination or intercreditor agreement before advancing funds. Typical terms in this example:
- The seller's security ranks second behind the bank on all collateral.
- The seller may receive scheduled VTB payments only while no bank default exists.
- A default triggers a payment blockage and a standstill on the seller's enforcement.
- Any blocked payment received by the seller must be turned over to the bank.
For sellers, this changes the economics of the note considerably. We discuss the seller's side in more depth in our article on vendor take-back financing for Canadian business purchases. Sellers should negotiate the blockage triggers and catch-up rights before signing the purchase agreement, while they still have leverage.
Adding a Mezzanine Lender to an Acquisition
When equity and bank debt fall short, a buyer may add a mezzanine lender. Mezzanine debt sits between senior debt and equity, carrying a higher rate and sometimes warrants.
A three-party structure (bank, mezzanine lender, and VTB seller) requires the intercreditor terms to fit together. Usually the bank ranks first, the mezzanine lender second, and the seller third, though sellers occasionally negotiate parity with the mezzanine lender. The mezzanine lender will push hard for cure rights, a buyout option, and a short standstill, and those terms affect what the seller can obtain.
Buyers working with buy-side advisory counsel should present term sheets to every lender early, so priority conflicts surface before the purchase agreement is signed.
Why Creditor Priorities Do Not Replace Borrower Loan Terms
The intercreditor agreement governs the relationship among lenders. The borrower's obligations (interest rate, covenants, repayment schedule, events of default) come from each loan agreement.
Borrowers often overlook this point. A borrower may be a party to the intercreditor agreement for acknowledgment purposes, but signing it usually gives the borrower no right to enforce it. If the lenders amend priority terms between themselves, the borrower's debt stays the same while its practical flexibility can change.
For the borrower, the pressure points are interactions between the two sets of documents: a junior loan whose payment schedule the intercreditor agreement blocks, or a covenant default under one loan that triggers cross-defaults under another. Each loan agreement should be reviewed alongside the intercreditor terms.
Coordinating Legal, Tax, and Financing Work Before Closing
Acquisition financing interacts with structure. A share purchase and an asset purchase produce different collateral pools and security arrangements, as our guide to transaction structure, shares vs. assets explains. Holding company structures and post-closing amalgamations also affect which entity grants security and when.
On the seller's side, the timing of VTB payments affects capital gains reserves and tax planning on the sale, a topic covered in our article on tax planning for business sales in Ontario.
Because our practice combines corporate, tax, and M&A work, we coordinate these issues with clients and their accountants before documents are finalized. Principal lawyer Ladislav Beganyi completes more than 20 commercial transactions each year, and financing priorities are a recurring part of that work.
Align Lender Priorities Before Your Transaction Closes
An intercreditor agreement defines how senior and junior lenders share a borrower: whose security ranks first, which payments the junior lender may receive, and who controls enforcement after default. Its key mechanics (lien and payment subordination, standstill periods, turnover obligations, cure rights, and buyout options) all shape creditor rights long before any default occurs.
For buyers, the practical steps are:
- Run PPSA searches early and clear or subordinate existing registrations.
- Share lender term sheets so priority conflicts surface before the purchase agreement is signed.
- Read each loan agreement alongside the intercreditor terms to identify blocked payments and cross-defaults.
- Align financing structure with tax planning and the share or asset structure.
For sellers taking a VTB note, negotiate blockage triggers, standstill length and catch-up payment rights while you still control the deal. If you are buying or selling a business with multiple financing sources, we can help coordinate the documents before closing.
Frequently Asked Questions
How does an intercreditor agreement differ from a subordination agreement?
A subordination agreement is usually a one-way document in which a junior creditor subordinates its security and payment rights to a senior creditor. An intercreditor agreement is broader and mutual, covering priorities, payment terms, enforcement control, collateral access, and amendments among two or more lenders. Names vary, so the actual terms determine what the document does.
Does the borrower have to sign an intercreditor agreement?
The borrower is often asked to sign an acknowledgment confirming it will follow the payment restrictions. That acknowledgment usually gives the borrower no right to enforce the lenders' priority terms. The borrower should still review the agreement, because blockages and standstills affect how it operates after a default.
Is an intercreditor agreement needed for vendor take-back financing?
In most acquisitions with bank financing, yes, because the bank will require the seller to subordinate the VTB note and any security before advancing funds. The document may be called a subordination, postponement, or intercreditor agreement. Sellers should negotiate its terms alongside the purchase agreement.
How long does a standstill period last?
Standstill periods in Canadian intercreditor agreements commonly range from 90 to 365 days. The length depends on the type of debt and the lenders' relative bargaining strength, with mezzanine lenders pushing for the shorter end. The period usually ends early if the senior debt is repaid or the senior lender stops enforcing.
Does an intercreditor agreement override Canadian insolvency law?
No. The Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act can impose stays of proceedings and court-ordered charges that rank ahead of secured creditors, regardless of private agreements. Courts generally respect intercreditor terms between the lenders themselves, but statutory insolvency rules still govern the overall process.