Definition of Subordinated Debenture

A subordinate debenture is a debenture that has assets claim after every corporate debt is paid. The term subordinate is used here to rank the debentures according to the right to claim assets in case a borrower defaults. When a company is about to liquidate, the priority of the creditors is determined based on the type of liabilities.

First of all the specific items that are secured for the repayment of all secured liabilities are sold to pay off the secured or unsubordinated loans. After that the unsecured loans are paid, then the trade creditors and after that, the residual assets are used to pay off the subordinated debentures.