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Articles

Court of Appeal Arnhem-Leeuwarden: a shareholder loan does not in itself have a subordinated character

Court of Appeal Arnhem-Leeuwarden: a shareholder loan does not in itself have a subordinated character

Court of Appeal Arnhem-Leeuwarden: a shareholder loan does not in itself have a subordinated character

08.10.2015 NL law

Court of Appeal Arnhem-Leeuwarden: a shareholder loan does not in itself have a subordinated character. If subordination has not been specifically agreed, other creditors may file a claim on the basis of tort law or on the principles of reasonableness and fairness in order to achieve a similar result, in other words as if the shareholder loan had been subordinated. 

In a judgment dated 10 March 2015, the Arnhem-Leeuwarden court ruled that if the parties to a shareholder loan intended to convert that loan into share capital, such intention will only have effect after the parties have realized that intention by actually converting the loan into share capital. Until completion of such conversion, the shareholder loan will continue to be an intercompany loan, which under Dutch law ranks pari passu with the unsubordinated and unsecured claims of other creditors.

Arnhem-Leeuwarden Court of Appeal 10 March 2015 (ECLI:NL:GHARL:2015:1695)

A parent company and its subsidiary entered into a loan agreement which did not provide for subordination of the loan. Both the parent company and the subsidiary went bankrupt. P&O Partner B.V. ("P&O"), being a creditor of the bankrupt subsidiary, could not invoke any rights on the basis of explicit or implied contractual subordination. According to P&O, the parent company and its subsidiary had intended to convert the loan into share capital, and as a result the loan would have been considered subordinated to the claims of other creditors of the subsidiary. However, (i) the loan had not actually been converted into share capital, (ii) P&O was not able to demonstrate that the parent company and its subsidiary constantly and unconditionally intended to convert the loan into share capital, and (iii) such intention was not documented in the loan agreement.

The Court of Appeal considered that the parties to the shareholder loan did not constantly intend to convert the loan into share capital and, even if they had constantly intended to convert the loan into share capital, this intention would have only taken effect after the actual conversion of the loan into share capital. Until such conversion takes place, the loan remains an intercompany loan, which under Dutch law ranks pari passu with the unsubordinated and unsecured claims of other creditors. Other than in certain jurisdictions, Dutch law does not provide for the automatic subordination of shareholder loans.

However, according to the judgment, P&O could have based its claim on tort law or on the limiting effect of reasonableness and fairness. In Dutch legal literature it is generally recognized that when a parent company grants a shareholder loan to its subsidiary, it should keep the interests of the current and future creditors of the subsidiary in mind. In certain circumstances, prejudicing these interests could result in liability of the parent company against its subsidiaries' creditors. For example, when a parent company facilitates continuation of the activities of its financially distressed subsidiary by granting or increasing a shareholder loan, such acts could be viewed as tortious vis-à-vis other creditors of the subsidiary, if a judge subsequently decides that there was never a real chance of survival. Alternatively, subordination of a shareholder loan can be construed on the basis of the mitigating effect of reasonableness and fairness. P&O might have benefitted from an argument that, given the circumstances, ranking its claim pari passu with the claims of the shareholder was unacceptable according to Dutch law principles of reasonableness and fairness.

In conclusion, the judgment confirms that, in principle, no special status is ascribed to intercompany loans under Dutch law. Unless agreed between the parent company and its subsidiary, a shareholder loan does not have a subordinated character but, under certain circumstances, such subordinated character can be construed on the basis of Dutch law principles of reasonableness and fairness. Another approach for a creditor who is prejudiced as a result of a shareholder loan may involve filing a tort claim against the shareholder.

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