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In accordance with the Reserve Bank of India`s (RBI) Prudential Framework for Resolution of Stressed Assets, the Association of Indian Banks (IBA) has entered into an agreement between creditors (ICA) that provides details on lender meetings, voting issues, payments to dissenting lenders and additional financing. The junior lender should consider meeting the contractual terms for the project in the event of a delay in payment from the borrower. In the event of such a situation, the junior lender should be aware that there are usually only two options: either to inject funds into the project, to remedy financial defaults under the senior lender, or to pay the priority lender. This last point is often almost impossible in cases where the priority lender has provided very large financing. In many inter-credit agreements, it is often common for the chief lender to dictate the terms of the pledge. However, in cases where a junior lender is not trading hard, the senior lender may disadvantage a junior lender. In some cases, a junior lender may face artificial delays on the part of the primary lender to seek authorization to enter into an agreement or right. Such an approach can thwart the process and force the junior lender to capitulate. But in the event of a senior/junior lender case, the lenders enter into an inter-creditor agreement. Such an agreement helps them define their respective rights. A senior lender generally wants a junior lender to bear the burden of debts incurred by the borrower. In this case, a junior lender can protect itself by requesting waivers for short-term and limited loans. It should also negotiate an adoption for the exercise of fundamental capital rights, such as holding a shareholder vote in the event of a deadlock.B.

In such a scenario, the government authority may act as a junior lender, the financial (s) as a priority lender and the company (Y) as a borrower. Since the company provides credit to the two financiers with the same property, the senior creditor will in any event want to enter into an intercreditor agreement with the government authority in order to protect its interests. As a general rule, such an agreement limits the payment a borrower can make to junior lenders if the borrower is behind on the terms of the agreement with junior lenders. Such provisions are called “payment freezes.” This provision even limits payments to which junior lenders are entitled in the normal course of working with the borrower, such as interest or customary fees and expenses. An intercreditor agreement (or inter-creditor agreement) is a contract between two other creditors. Such an agreement comes into effect when the borrower has two (or more) lenders. Lenders sign a contract between them specifying all the necessary points. The contract contains details such as dispute settlement, different deposit positions, creditors` responsibilities, each creditor`s debts, impact on other creditors, etc. If you do not enter into such an agreement, each lender will act in its own way.

Such a process could prove unprofitable and, at the same time, become a legal confusion. Typically, there are two creditors in an inter-creditor agreement – one senior and the other a secondary or junior lender.

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