A deed of priority (also called an intercreditor deed) is the contract that governs which lender gets paid first — and under what conditions — when the same borrower has granted security to more than one creditor. Without one, both lenders claim against the same pool of assets under conflicting security documents, and enforcement becomes a legal dispute rather than a structured process.
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Why a debenture alone is not enough
A debenture grants a lender a package of fixed and floating charges over the borrower's assets. Executed correctly and registered at Companies House within 21 days under the Companies Act 2006, it gives that lender a powerful security position. The problem arises the moment a second lender takes the picture.
Most debentures are drafted to protect one lender. They contain restrictions on further borrowing and prohibit the creation of additional security ranking ahead of or equally with the existing charge — what practitioners call a "negative pledge." When a business needs a second facility, those restrictions either have to be waived or the two lenders have to agree, in writing, exactly how their competing interests interact. That written agreement is the intercreditor deed.
A debenture does not tell the second lender what happens if the borrower defaults. It does not tell the first lender when the second lender can appoint a receiver. Without an intercreditor deed, both lenders may act simultaneously — or lock each other out through injunctions — at the precise moment speed matters most.
Fixed versus floating charge priority: the mechanics
English law treats fixed and floating charges differently, and that difference drives the architecture of most intercreditor arrangements.
A fixed charge attaches to a specific identified asset — typically land, plant, or intellectual property. The chargor cannot deal with that asset without the chargeholder's consent. A floating charge, by contrast, crystallises only on a defined trigger event (usually insolvency or a default notice) and until then allows the borrower to deal with the assets in the ordinary course of business. Most debentures combine both types.
Priority between charges is not simply a matter of who registered first. The Companies Act 2006 registration regime gives notice to the world but does not automatically determine priority as between parties who have agreed otherwise. Section 176A of the Insolvency Act 1986, inserted by section 252 of the Enterprise Act 2002, carved out a prescribed part of floating charge realisations for unsecured creditors. The prescribed part is calculated as 50% of the first £10,000 of net floating charge realisations plus 20% of anything above that figure, capped at a maximum of £800,000 — a limit that was raised from the original £600,000 by the Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020 (SI 2020/211), which came into force on 6 April 2020. Senior and junior lenders need to account for this when modelling expected recoveries.
The intercreditor deed resolves ambiguity by specifying: which charges rank as "senior" (first in priority), which rank as "junior" (second in priority, typically called "mezzanine" in leveraged structures), and which categories of asset are allocated to which lender's fixed charge security.
The section 176A standstill and enforcement waterfall
The Insolvency Act 1986, as amended by the Enterprise Act 2002, introduced the prescribed part mechanism under section 176A. When a floating charge holder appoints an administrator, the prescribed part must be set aside before the floating charge holder can access floating charge realisations.
For intercreditor purposes, the more operationally significant provision is the standstill mechanism. Senior lenders typically negotiate an "enforcement standstill" period during which the junior lender cannot take enforcement action against the borrower or the security, even after a junior default event has occurred. Standstills of 90 to 180 days are common in UK leveraged finance. During the standstill, the senior lender retains exclusive control over enforcement timing and strategy.
The enforcement waterfall then operates in a fixed sequence. Senior principal and interest are repaid first, then senior fees and costs, then any hedging termination amounts owed to hedge counterparties who have been given a priority position under the deed, then junior debt in the agreed ranking, and finally any residual amounts to the borrower or subordinated creditors. The precise waterfall is negotiated, and it is common for prepayment premiums, PIK interest, and make-whole provisions to sit at different points in the queue.
Subordination versus postponement: not the same thing
Practitioners use "subordination" and "postponement" interchangeably, but the distinction matters in insolvency.
Subordination typically means the junior lender agrees not to receive payment until the senior debt has been fully discharged. In a formal insolvency, a contractual subordination deed that constitutes a trust — the junior lender receiving proceeds on trust for the senior — can survive the insolvency of the borrower under English law, provided it is structured correctly. The House of Lords confirmed the enforceability of such arrangements in the context of contractual priority in British Eagle International Air Lines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758, though that case also illustrates the limits: arrangements that cut across the statutory pari passu principle in section 107 of the Insolvency Act 1986 may be challenged.
Postponement, by contrast, means the junior lender agrees not to demand repayment or take enforcement action while an agreed condition persists — such as while any senior debt remains outstanding. Postponement is a personal covenant rather than a proprietary arrangement. If the junior lender breaches it, the senior lender has a damages claim but the underlying security may still be enforceable by the junior lender as against third parties.
Most institutional intercreditor deeds in the UK use both mechanisms: contractual subordination of payment rights, combined with postponement and standstill of enforcement rights.
What the deed actually covers
A well-drafted intercreditor deed in an English-law transaction addresses at minimum:
Ranking of security. Which charges rank first against which assets, including how proceeds of mixed assets (where both a fixed and floating charge might apply) are allocated between senior and junior lenders.
Turnover obligations. If the junior lender receives a payment — from the borrower, from a guarantor, or under enforcement — that it should not have received under the priority structure, the deed imposes a trust: the junior lender holds that payment on trust for the senior lender and must pay it across promptly. This is the mechanism that makes subordination work in practice.
Enforcement rights. Who controls enforcement, on what timeline, and under what conditions the junior lender may "purchase" the senior debt at par (an "equity cure" or "buyout" right). These rights give the junior lender a path to taking control of a restructuring without the senior lender's consent, usually after a specified period has elapsed without enforcement.
Voting in insolvency. The intercreditor deed commonly contains provisions requiring the junior lender to vote in an administration or company voluntary arrangement in accordance with the senior lender's instructions, or at least not to vote against proposals the senior lender supports. The courts have scrutinised voting arrangements of this kind — they are permissible as contractual arrangements, but they sit in tension with the legislative framework governing creditor voting under the Insolvency Act 1986 and the Corporate Insolvency and Governance Act 2020.
Guarantee sharing. Where the borrower has third-party guarantors — for example, parent companies or individual directors — the intercreditor deed specifies how guarantee proceeds are treated. A guarantee and indemnity granted to the senior lender typically cannot be called by the junior lender, and any amounts recovered under cross-guarantees are swept into the waterfall. Forms Legal's guarantee and indemnity template for England and Wales sets out the core obligations that then need to dovetail with the intercreditor structure.
Common failure points
Mismatched security packages. If the senior lender holds a debenture over company A and the junior lender holds a debenture over company B within the same group, but the intercreditor deed treats them as a single pool, the assumptions embedded in the waterfall may not match the legal reality of who actually holds what.
Inadequate crystallisation triggers. If the junior lender's floating charge crystallises before the senior lender's charge, the junior lender may accidentally acquire priority status over assets that were meant to be senior secured. Drafting the automatic crystallisation clauses with cross-references to the intercreditor deed is essential.
No administrator appointment rights. Under paragraph 14 of Schedule B1 to the Insolvency Act 1986, a qualifying floating charge holder has the right to appoint an administrator out of court. An intercreditor deed that is silent on how this right is allocated between senior and junior lenders creates a race — whichever lender moves first appoints the administrator of their choosing. Senior lenders routinely require the intercreditor deed to confirm that this right belongs exclusively to the senior lender for the duration of any standstill.
Post-completion amendments. If the senior lender later agrees to amend its facility agreement — extending tenor, increasing the facility amount, or releasing security — the intercreditor deed needs to contemplate whether the junior lender's consent is required. Without an explicit mechanism, amendments to the senior facility may inadvertently prejudice the junior lender's position or be argued to release the subordination obligations.
Practical steps before signing
Both lenders need independent English law advice. The intercreditor deed is not a standard-form document — the Loan Market Association publishes recommended forms as a starting point, but every deal requires bespoke negotiation of standstill periods, cure rights, and the waterfall sequence. Companies House registration is not required for the intercreditor deed itself, but both underlying debentures must be registered within 21 days. The deed should be executed as a deed under the Law of Property (Miscellaneous Provisions) Act 1989 to make the turnover trusts and enforcement obligations binding.
The borrower is usually also a party, to acknowledge the restrictions on its dealings with the junior lender and to confirm that payments made in breach of the intercreditor arrangements do not discharge its underlying obligations.
When you need one
Any transaction where a single borrower grants security to two or more lenders over the same assets requires an intercreditor deed before drawdown — leveraged buyouts with mezzanine notes, property finance with a development lender alongside a senior mortgage lender, restructurings introducing a super-senior tranche, or SME lending where a bank takes a debenture and a related-party lender takes a second charge.
A debenture gives one lender rights against the borrower. An intercreditor deed gives two lenders a workable framework for dealing with each other — and with insolvency practitioners — when those rights conflict. The two documents are not alternatives. In any multi-lender transaction, both are required.
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This article is general information, not legal advice — see our accuracy & editorial policy. Confirm the cited law is current before relying on it.