Waiver of marshalling of assets: Overview, definition, and example
What is a waiver of marshalling of assets?
A waiver of marshalling of assets is a legal provision where a party agrees to waive its right to require the creditor to first pursue certain assets before others in the event of a default or liquidation. "Marshalling of assets" refers to the process where a court, in the case of a debtor's bankruptcy or default, requires the creditor to first exhaust remedies against specific assets of the debtor before seeking satisfaction from other assets.
By waiving this right, the party gives the creditor the ability to seek satisfaction from any assets of the debtor without following a prescribed order of priority or first attempting to collect from specific assets. Essentially, the debtor or a party agreeing to the waiver relinquishes the ability to challenge how the creditor seeks repayment.
Why is a waiver of marshalling of assets important?
The waiver of marshalling of assets is important because it streamlines the debt collection process for creditors. It allows creditors to have more flexibility and control over which assets they pursue to satisfy the debt, without being constrained by specific requirements to follow a particular order.
For creditors, this provision can increase the chances of recovering owed funds more efficiently. For businesses, agreeing to a waiver of marshalling of assets in a contract can make it easier to negotiate favorable loan terms or secure financing, as it provides greater certainty for creditors. However, for the party waiving this right (typically the debtor), it means giving up certain protections that could limit a creditor's ability to collect from certain assets.
Understanding waiver of marshalling of assets through an example
Imagine Company A borrows money from Company B and signs a loan agreement that includes a waiver of marshalling of assets. If Company A defaults on the loan and faces liquidation, Company B can pursue the assets of Company A without having to follow a particular order, even if Company A has multiple types of assets available (e.g., real estate, equipment, and inventory).
If Company A had not agreed to the waiver, Company B would have to first attempt to recover the debt from certain assets (such as inventory) before moving on to more valuable assets like real estate. By waiving this right, Company A has made it easier for Company B to recover its debt in whatever manner is most convenient for them, potentially increasing the likelihood of full repayment.
Example of a waiver of marshalling of assets clause
Here’s how a waiver of marshalling of assets clause might appear in a loan agreement:
“The Borrower hereby waives the right to require the Lender to marshal the assets of the Borrower or any guarantors, and acknowledges that the Lender may pursue any asset of the Borrower or any guarantors in any order it deems appropriate in the event of default or liquidation.”
Conclusion
A waiver of marshalling of assets is an important concept in finance and lending agreements, as it grants creditors flexibility in recovering debts from a debtor’s assets. For creditors, it ensures a more streamlined collection process, while for debtors or other parties agreeing to the waiver, it can be a significant concession that makes it easier for the creditor to pursue repayment.
For business owners and managers, understanding this provision is crucial when entering into financing agreements, as it can impact how assets may be treated in the event of a default. Whether you are seeking financing or offering it, understanding the consequences of waiving the marshalling of assets is key to managing risk and ensuring favorable terms.
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.