In short
A priority and subordination deed is entered into between two or more secured or unsecured creditors of the same borrower to fix the order in which they're paid, overriding what the PPSR registration order would otherwise produce. It's essential wherever a second lender is coming in behind an existing facility, a shareholder loan sits behind bank debt, or a group restructure changes the intended ranking of creditors.
Why registration order isn't always the outcome the parties want
Under the Personal Property Securities Act 2009 (Cth), priority between competing security interests in the same collateral generally follows the order of registration on the PPSR, not the order the loans were actually advanced or any commercial understanding between the parties. Where that default rule doesn't reflect what the lenders actually agreed — for instance, a second lender coming in later but expecting to be repaid ahead of a subordinated shareholder loan — a priority deed is the only reliable way to lock in the intended ranking.
Structuring the subordination
Subordination can be structured as payment subordination, where the subordinated creditor simply agrees not to receive payments until the senior debt is repaid, or as full security subordination, where the subordinated creditor's security interest itself ranks behind the senior interest regardless of registration timing. We choose the structure based on what the senior lender actually needs — payment subordination alone doesn't protect a senior lender's security position on an insolvency, only its cash flow position pre-insolvency.
Standstill and turnover provisions
A properly drafted deed includes a standstill period preventing the subordinated creditor from enforcing its security or demanding repayment while the senior debt remains outstanding, and a turnover clause requiring any payment mistakenly received by the subordinated creditor to be held on trust and paid across to the senior creditor. Without these mechanics, subordination is little more than a statement of intent that does nothing on the day a borrower actually defaults.
Effect on the borrower's dealings
The deed typically restricts the borrower from repaying the subordinated debt, granting further security, or amending the subordinated facility without the senior lender's consent. We draft these restrictions to bind the borrower directly, not just the two creditors, so a borrower can't sidestep the arrangement by simply repaying the junior lender early.
Getting the deed onto the PPSR record
Where the deed changes the practical priority between two registered security interests, we record the arrangement through amendment of the relevant financing statements where appropriate and ensure both secured parties' registrations reference the correct collateral classes, so a liquidator or a third party searching the register isn't misled about the true ranking on default.
What the fixed fee covers
- Priority and subordination deed reflecting the agreed ranking
- Structuring advice on payment versus security subordination
- Standstill and turnover provisions
- Restrictions on the borrower's ability to unwind the arrangement
- Review of existing PPSR registrations for consistency
Mistakes we see
- Assuming a side letter or verbal understanding on priority will hold up without a deed
- Payment subordination used where the senior lender actually needed security subordination
- No turnover clause, leaving a misdirected payment to the junior creditor unrecoverable in practice
- Deed doesn't bind the borrower, allowing early repayment of the junior debt to sidestep the arrangement
- PPSR registrations left inconsistent with the agreed priority, confusing later searchers
Who this is for
- Senior lenders admitting a second-ranking lender behind existing debt
- Shareholders providing loans intended to rank behind external finance
- Group companies restructuring intercompany debt priorities
- Private equity and venture investors structuring layered debt in a portfolio company
Frequently asked questions
- Do I need a subordination deed if the loans are registered in the right order already?
- Registration order can change unexpectedly — an existing registration can lapse, be discharged in error, or a new financing statement can be lodged ahead of an intended senior interest. A deed fixes the ranking contractually so it doesn't depend on the PPSR record staying exactly as expected.
- What's the difference between payment and security subordination?
- Payment subordination stops the junior creditor being paid ahead of the senior debt but doesn't change the ranking of security interests on enforcement. Security subordination changes the actual priority of the security interests themselves, which matters far more in an insolvency.
- Can a subordination deed be varied later?
- Yes, but any variation needs the consent of all parties bound by it, including the borrower if the deed restricts the borrower's conduct. We build a variation mechanism into the original deed to avoid ambiguity later.
- Does subordination affect the junior creditor's rights against the borrower directly?
- It restricts when and how those rights can be exercised — particularly around enforcement and receipt of payment — but doesn't extinguish the underlying debt or security, which remains valid subject to the standstill.
- Is a subordination deed needed for a related-party or director loan?
- Almost always, yes, if there's external finance in place. Bank and non-bank lenders routinely require director or shareholder loans to be formally subordinated before they'll advance funds, and an informal understanding won't satisfy that requirement.
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