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Simple English definitions for legal terms
subordination
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A quick definition of subordination:
Subordination is when one person or company's rights or claims are ranked lower than others. This is important when dealing with debts and creditors. Sometimes, a creditor may agree to put their claim on hold to help another creditor get paid first. This is called a contractual subordination agreement. It's like taking turns in line. Subordination is used to make sure everyone gets a fair share of what they are owed, especially in situations like bankruptcy. It's not about punishing anyone, but making sure things are fair for everyone involved.
A more thorough explanation:
Subordination is a legal process where one person or creditor's rights or claims are ranked below those of others. This is important when dealing with the distribution of debts between creditors.
For example, let's say a company owes money to two creditors. One creditor has a higher priority claim than the other. This means that if the company goes bankrupt, the higher priority creditor will get paid first. The lower priority creditor will only get paid if there is any money left over after the higher priority creditor has been paid.
A contractual subordination agreement is a legal agreement where one creditor agrees to give up their priority claim in favor of another creditor. This is enforceable in bankruptcy court.
Subordination is used to prevent unfairness in bankruptcy situations. For example, if a shareholder of a company is also a creditor, they may try to get paid before other creditors. This is not fair to the other creditors. Equitable subordination protects unaffiliated creditors against this type of behavior.
Subordination is not a punishment for wrongdoing. It is a way for the bankruptcy court to make sure that all creditors are treated fairly.