Difference between a Subordination Agreement and an Inter-Creditor Agreement
An inter-credit agreement, also known as ICA, is slightly different from a subordination agreement. Both agreements allow two lenders to “divide” a business’s collateral so both of these can be made secure in the first lien, on the respective business collateral.
An inter-credit agreement and a subordination agreement are structured in two different ways. When lenders use an ICA, they both file a UCC-1 financing statement. The UCC (Uniform Commercial Code) orders that the lien which is filed first by the respective lender is a superior one to the second lien. An ICA is an agreement between two different lenders which basically says that irrespective of the UCCs filed at the local and state agencies, the two lending companies agree to divide the collateral of a business in a way that is specified by the agreement.
The first lending company has the first lien rights upon the assets which it has agreed to retain, and the second lien rights upon the ones it has “provided” to the second lending company. The latter has the first lien rights upon the assets which the first lender has “given up”. The second lending company tends to have the second lien rights upon the rest of the collateral.