There is unease in financial circles about subordinations. While it is clear that secured creditors can vary the ranking of their debt on a debtor’s insolvency,1 the ability of unsecured creditors to do likewise has produced vexed legal issues. The judgments of the House of Lords in National Westminster Bank v. Halesowen Presswork & Assemblies 2 and British Eagle International Airlines v. Air France 3 have been interpreted as prohibiting the “contracting-out” of insolvency legislation. These cases sounded the death knell for contractual subordinations the efficacy of which depends on their survival into the insolvency of the common debtor. Draftsmen responded by developing artificial techniques that avoided the impact of the case law but failed to achieve the simple ranking of unsecured debt. Despite recent Australian,4 New Zealand5 and English5A cases that appear to reopen the door for contractual subordination, their utility in the insolvency of the common debtor remains uncertain. Legislative reform that validates contractual subordination, incorporating the advantages and ameliorating the disadvantages inherent in the varying techniques, is required.

The subordination of debt is a simple concept. A debt becomes subordinated when one creditor or group of creditors (the junior/subordinated creditor: “Y”) agrees not to be repaid until another creditor or group of creditors (the senior creditor: “Z”) is or are paid in full.6 The effect is the ranking of certain unsecured debt (the junior/subordinated debt: “Y debt”) behind other unsecured debt (the senior debt: “Z debt”); no others are affected.7 Subordinations can be defined as general or