Subordinated Loans (or Capital Loans)
The terms of subordinated loans are based on an agreement between the parties, subject to certain minimum requirements set forth in the Companies Act. In order for a loan to be considered as a subordinated loan within the meaning of the Companies Act, the following provisions must be included in the terms of the loan:
in case of liquidation or bankruptcy of the company, interest and principal of the loan are subordinate to all other debts; and
principal is repaid and interest paid only to the extent the aggregate amount of the company’s unrestricted equity and all subordinated loans at the time of payment exceeds the losses according to the balance sheet to be adopted for the latest financial period or, if applicable, more recent financial statements.
A further prerequisite is that the company, or its subsidiary, has not issued security for payment of the loan’s principal or interest.
The subordinated loans shall be included in the balance sheet as a separate item, and for the purposes of the Accounting Act they shall, as a rule, be considered as liabilities. Repayment of principal, payment of interest or issuing of security for a subordinated loan in violation of the mandatory terms of the loan, is regarded as unlawful distribution of assets, and the payee is liable to return the funds including interest, if the payee was or should have been aware that the payment violated the mandatory requirements set forth for subordinated loans in the Companies Act. Furthermore, unlawful distribution of assets is punishable as company law offence, which carries a risk of fine or maximum twelve months of imprisonment.