Equitable Subordination

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In the law of corporations, describes decision by a court to subordinate a controlling shareholder’s claims upon debt owed her by her own firm, to those of other  “outside” (i.e., bona fide third party) creditors in bankruptcy. Equitable subordination protects unaffiliated creditors by giving them rights to corporate assets superior to those of creditors who happen to also be significant shareholders of the firm. For this doctrine to apply, the creditor to be subordinated must be an equity holder and an insider at the company, typically an officer, and must have in some manner behaved unfairly or wrongly toward the corporation and its outside creditors.