During the standstill period, a new agreement is negotiated, which usually changes the initial repayment plan of the loan. This is used as an alternative to bankruptcy or enforcement if the borrower cannot repay the loan. The status quo agreement allows the lender to save a certain value from the loan. In case of enforcement, the lender cannot receive anything. By cooperating with the borrower, the lender can improve its chances of recovering some of the outstanding debt. A subordination agreement is an agreement between two lenders – a Senior Lender and a Junior Lender. The junior lender readily agrees to subordinate his right to all or part of the assets of a company to a priority lender. This means that the priority lender has the first right to the assets if the company is in default or bankrupt with both loans. As noted elsewhere in this article, the benefits of a standstill agreement are beneficial to both parties when it makes economic sense to „buy time“ that the debtor company can recover. The parties may enter into forbearance agreements providing for a moratorium on payments to creditors. Before conducting out-of-court proceedings, the debtor should consider whether there is a realistic possibility of resolving its financial difficulties in terms of long-term profitability. If it is not possible to restore the long-term viability of the debtor, other remedies, such as liquidation of the debtor in formal insolvency proceedings, should be considered. The standstill period should be limited to the period reasonably necessary to draw up a viable restructuring plan or to determine that such a plan cannot be drawn up within an acceptable period.
The standstill period varies from case to case, whereas it would normally last no more than a few weeks. During the standstill period, it is essential that the creditors concerned receive adequate reliable information to assess the debtor`s financial situation, understand what caused the underlying financial problems and assess all proposed solutions. Since this is a contract, the form of a standstill agreement is inherently flexible. It must (and would not normally be) suspend the relationship as a whole. The parties are free to negotiate and design the contractual conditions in order to pursue certain commitments or services. In this way, a debtor can accept partial payments or a creditor can continue to provide services. Nevertheless, standstill agreements are based on a strong principle of equity and no creditor should be allowed to improve its position by obtaining a new guarantee or repayment of its loan without the agreement of other creditors. This will be a matter of negotiation on how the different creditors will ultimately be treated.
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