The Letter of Subordination of Debts is a critical document in Malaysian corporate finance, used when a company has multiple creditors with varying levels of priority in debt repayment. This document becomes particularly important in scenarios where new financing is being introduced, during corporate restructuring, or when managing related-party loans. It explicitly sets out the hierarchy of debt repayment, ensuring that senior creditors' rights are protected while subordinated creditors agree to postpone their repayment claims. The letter must comply with Malaysian corporate law requirements, particularly the Companies Act 2016 and related financial regulations. Companies typically need this document when seeking new financing, as senior lenders often require existing creditors to subordinate their debt as a condition of providing new funds. The document includes detailed information about all relevant debts, payment restrictions, and the specific terms of subordination.
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1. Parties: Identification of the Senior Creditor, Subordinated Creditor(s), and the Debtor company
2. Existing Debts: Clear identification and acknowledgment of the senior and subordinated debts
3. Subordination Declaration: Express statement of subordination and its scope
4. Payment Restrictions: Terms restricting payments on subordinated debt until senior debt is satisfied
5. Turnover Provisions: Obligation to turn over any prohibited payments to senior creditor
6. Duration: Period of effectiveness of the subordination arrangement
7. Governing Law: Confirmation of Malaysian law as governing law
1. Security Arrangements: Include when the subordinated debt is secured by any assets
2. Permitted Payments: Include when certain payments to subordinated creditors are allowed under specific conditions
3. Assignment Provisions: Include when rights under the subordination arrangement may be assigned
4. Insolvency Provisions: Include specific provisions for insolvency scenarios
5. Further Assurance: Include when additional documentation or actions may be required
6. Notice Requirements: Include when specific notification procedures are needed between parties
1. Schedule 1 - Senior Debt Details: Detailed description of all senior debt facilities, amounts, and key terms
2. Schedule 2 - Subordinated Debt Details: Detailed description of all subordinated debt facilities, amounts, and key terms
3. Schedule 3 - Form of Acknowledgment: Template for acknowledgment by future creditors if required
4. Appendix A - Payment Waterfall: Detailed order of priority for debt payments
5. Appendix B - Existing Security: List of any existing security arrangements affecting the subordinated debt
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