In 2015, some Argon shareholders (the „Junior Lender“) also granted credits to Argon (the „Junior Debt“). The subordination contract and certain subsequent subordinational agreements (collectively the „subordination agreement“ of The Junior Lender and the Senior Lender provided for a „custody restriction“: the fact that guarantees are no longer guaranteed by the application of the law is generally considered an undesirable consequence. As a result, there have been some unsuccessful calls for a change in the law, and some legal experts have argued in favour of limiting the applicability of the participation approach of Article 1378 of the Civil Code, particularly in situations where innovation does not aggravate the position of third-party security providers. These attempts have been challenged by others who emphasize general contractual freedom. These deviants argue that a change in guaranteed liability that goes beyond the scope of a simple amendment (Article 1379 BGB) without the consent of the third-party security provider would not be compatible with the principle that, regardless of a deterioration in the guarantees granted, everyone (including a third-party security provider) may decide to enter into an agreement himself. Subordination agreements can be used in a variety of circumstances, including complex corporate debt structures. This discussion also becomes relevant when the parties must enforce the subordination agreement in court. Where subordination in the debt plan is to be admitted or automatically rejected, any disagreement between the parties as to its validity or scope must be ironed out by an appeal to challenge the claims plan. Such disputes take place in Switzerland, where insolvency proceedings have been initiated. On the contrary, if the liquidator does not have to consider subordination, the principal creditor should sue the subordinated creditor in order to transfer dividends, i.e. a normal payment action outside the insolvency proceedings. Inter-17 agreements determine the order of priority between lenders of a syndicated loan, including provisions for payment service, priority of security interest and contractual subordination (payment water case or receipt application). In Re Argon Credit, LLC, 2019 WL 169315 (Bankr.
N.D. Ill. Jan. 10, 2019), the U.S. Bankruptcy Court for the Northern District of Illinois decided that, pursuant to Section 510 (a) of the Banking Code, a watch clause in a subordination agreement prevented a subordinate lender from knowing the rights of the primary lender. According to the Tribunal, the subordinate lender`s efforts to circumvent the clear terms of the subordination agreement by asserting that it had acted on behalf of the bankrupt state or that it had investigated the alleged fraud of the main lender were not available. The Supreme Court overturned the Court of Appeal`s decision and found that the qualified subordination clause is a constitutive feature of the specific type of contract and is therefore not subject to a judicial review of the content in accordance with Article 879, paragraph 3, of the Civil Code. The Supreme Court based its decision on the following assessment: after all, the bankruptcy court was not persuaded by the Junior Lender`s argument that it should be allowed to investigate whether the senior had incited Lender Argon to fraudulently enter the secured credit facility and the accompanying subordination agreement by promising a $75 million line of credit that senior Lender never wanted to provide. According to the Tribunal, Delaware law (which regulated this issue) does not permit the application of a negotiated agreement between sophisticated commercial operators when a party claims to have committed fraud.