What is the impact of subordination on the final allocation of proceeds from liquidation?

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What is the impact of subordination on the final allocation of proceeds from liquidation?

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What is the impact of subordination on the final allocation of proceeds from liquidation?

Explanation & AnswerSolution by a verified expert

Explanation

During the final allocation of funds to general creditors, the pro-rata distribution of funds is made to all the creditors. After the pro-rata distribution, subordinated parties are expected to turn over the funds they were allocated to senior claimants until they are paid in full. After the senior claimant is paid in full, subordinated creditors receive their claims if any amount is left. This is the role played by subordination in the final allocation of funds.

Verified Answer

During the final allocation of funds to general creditors, subordinated parties' funds are transferred to the senior claimants. Until the senior claimants to which a party is subordinated to, is paid in full, the subordinated party does not receive their claims.

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