Debt subordination in corporate liquidation

Thesis

This work examines the validity and effectiveness of certain subordination techniques of unsecured debt in corporate liquidation under English law. In practice, the validity and effectiveness of debt subordination is only relevant when either the debtor or the subordinated creditor is, or is threatening to become, insolvent. The focus in the work is on contractual and turnover subordination.

It is proposed that the general picture of debt subordination becomes clearer when we examine it from the point of view of, first, the debtor’s liquidation, second the junior creditor’s liquidation and third when they are both in liquidation. The material questions dealt with go to the very fundamentals of insolvency law, ie the role of pari passu distribution, ascertainment of which assets constitute the insolvency estate and whether it is possible to deviate from these rules contractually.

In order to answer the question whether debt subordination is effective in corporate liquidation under English law, the thesis addresses the following sub-themes: (i) whether subordination may fail being a preference, transaction at an undervalue or otherwise voidable; (ii) whether subordination may be defeated as a result of the insolvency set-off provision; and (iii) the effectiveness of the trust arrangement used in connection with turnover subordinations. These issues are evaluated through so-called complete, springing and subsequent subordinations.

The thesis proposes that the often-difficult questions concerning debt subordination in corporate liquidation can be resolved through a systematic, concise evaluation of the basic principles of the insolvency law in each liquidation respectively and that careful contractual drafting can considerably reduce the risks often associated with debt subordinations.

Authors: Lehtimaki, MJ

• DOI: 10.5287/ora-7rddekmby
• Type of award: M.St.
• Level of award: Masters
• Awarding institution: University of Oxford
• Language: English
• Keywords: Financial law; Contract; Divestiture; Pari passu; Debt subordination; Turnover trust; Liquidation; insolvency set-off
• Subjects: Finance; Contract; Subordination agreements (Finance); Bankruptcy; Debt