Sharing of payments: Overview, definition, and example
What is sharing of payments?
Sharing of payments is a clause commonly found in credit agreements involving multiple lenders. It ensures that if one lender receives more than its fair share of a borrower’s payments—whether through repayment, enforcement, or setoff—that excess must be shared proportionally with the other lenders. The goal is to maintain fairness and equality among all lenders under the agreement.
Why is sharing of payments important?
Without this clause, a lender who acts first (such as by suing or setting off funds) could recover more than the others, creating an imbalance and undermining the syndicated structure. The sharing of payments clause ensures that all lenders benefit equally from borrower payments, regardless of who receives them first. It protects the syndicate from preferential recoveries and encourages coordination among lenders.
Understanding sharing of payments through an example
A borrower defaults on a syndicated loan. One of the lenders manages to recover $2 million through a setoff, while the others have received nothing. The credit agreement includes a sharing of payments clause requiring that lender to redistribute a portion of its recovery to the rest of the syndicate, based on each lender’s pro rata share. This keeps the lenders on equal footing and prevents strategic or unfair recoveries.
Example of a sharing of payments clause
Here’s how a sharing of payments clause may look like in a contract:
"If any Lender receives any payment or recovery (whether by setoff, realization upon collateral, or otherwise) in excess of its pro rata share of the obligations, such Lender shall promptly share such payment or recovery with the other Lenders so that each Lender receives its proportionate share in accordance with the terms of this agreement."
Conclusion
The sharing of payments clause maintains fairness in multi-lender arrangements by ensuring equal treatment in the distribution of borrower payments. It prevents opportunistic recoveries and reinforces the collaborative nature of syndicated lending. If you're involved in a financing with more than one lender, this clause is key to preserving trust and balance among all parties.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.