As the world of finance continues to evolve, it is imperative for businesses to protect their interests by entering into intercreditor agreements. These agreements are contracts between lenders that outline their respective rights and responsibilities in the event of default by the borrower. One important provision in such agreements is the “standstill provision”.
A standstill provision in an intercreditor agreement prevents the junior lender from taking any enforcement action against the borrower or the collateral securing the loan without the prior consent of the senior lender. This provision is intended to give the senior lender the right to control any decision-making related to the borrower`s default, including the timing and method of any enforcement action.
The standstill provision is critical to maintaining the senior lender`s priority over the junior lender. Without this provision, the junior lender could take enforcement action against the borrower and the collateral, potentially damaging the senior lender`s interests. Furthermore, the junior lender could potentially recover all or part of its loan before the senior lender has a chance to do so, which could further erode the senior lender`s position.
However, the standstill provision is not an absolute right for the senior lender. It typically comes with certain conditions and limitations. For instance, the senior lender may not unreasonably withhold its consent to a proposed enforcement action by the junior lender. Additionally, the standstill provision may expire after a certain period of time or in specific circumstances, such as the senior lender`s failure to take action to enforce its rights under the loan documents.
Another factor to consider is the potential impact of the standstill provision on the borrower. If the junior lender is prevented from taking any enforcement action, the borrower may be stuck in default for an extended period, which could have negative consequences for its business and operations. Therefore, it is essential to balance the interests of the senior and junior lenders with the borrower`s interests when negotiating the standstill provision.
In conclusion, the standstill provision is a crucial component of any intercreditor agreement, protecting the senior lender`s priority while affording the junior lender some degree of flexibility. However, it is critical to ensure that the standstill provision is drafted with care and consideration to avoid any unintended consequences. Therefore, businesses must always consult experienced legal counsel when negotiating these types of agreements.