So, you are one of several creditors of a borrower and each creditor has a security interest in all assets of the business. Or perhaps you and another creditor have competing liens on inventory of a borrower. In these and other similar cases, you want appropriate assurances of an orderly liquidation of such collateral with a pro rata distribution of proceeds from the sale proceeds pool. Is there any option available to avoid the race to the courthouse and all those costs, fees and expenses of bankruptcy, receivership or other legal action?
Yes, indeed! It’s a collateral agent. An independent, third party with experience in handling asset dispositions can be an excellent option for cooperating creditors. It’s all about avoiding the battles over the business assets and instead having a trusted party handle not just (i) marshalling assets and (ii) marketing and selling such, but also (iii) accounting for all sale proceeds and attendant costs, and (iv) distributing to each creditor its applicable amount of net dollars.
Creditors are finding the time and relative expense to address a collateral agent arrangement via an intercreditor agreement are well worth the investment when compared to the fees and expenses of protracted litigation among competing lienholders.
As that old saying goes, “It takes two to tango,” and some deals may not present an opportunity for creditors to reach an arrangement for a collateral agent. Yet the option should be considered whenever possible. An intercreditor agreement where creditor parties (i) acknowledge their respective borrower obligations and collateral lien positions, and (ii) agree to engage the services of a collateral agent in the event collateral disposition is necessary, is a worthwhile effort to pursue in the interest of minimizing the risks of duplicative remedial actions and maximizing asset liquidation proceeds.
It costs very little to try (and tango) when all else fails.