Most financing offers are subject to subordination agreements, for advances granted by shareholders. These agreements are often downplayed by shareholders.
Most financing offers are subject to subordination agreements for advances granted by shareholders.
A father and his two sons are co-shareholders of a company through their management companies. The company owes significant amounts to these three management companies as advances. The company, in the context of a request for a credit line opening, is forced to ask its shareholders (the management companies) to subordinate their advances in favor of the lender. To do this, the company signs an agreement. Three demand promissory notes are issued to each management company, which are endorsed in favor of the lender.
One of the two sons, following his expulsion from the company, demands, among other things, the repayment of his advances. His co-shareholders oppose it and the son takes the matter to court*. In the first instance, the judge concluded that following the agreement signed with the lender, the advances were "not repayable on demand loans, but rather invested capital" in the company, and that one shareholder cannot decide alone when to repay his part.
The Court of Appeal ruled: "If the three shareholders agreed not to demand repayment of their loan in order to allow [the company] to obtain a credit line from [the lender] for its ongoing operations, it would be likely to think that [the expelled son] cannot demand repayment of his claim on demand."
The implications of a subordination of debt granted by shareholders when granting a loan are often underestimated by these shareholders. Perhaps it would be appropriate to quote them the proverb of Confucius when signing the financing offer.
*C.A. Montréal 500-09-019430-099
