Legal Updates

A loan to a company by a shareholder or companies under its control is a deferred loan upon liquidation

September 3, 2020

A company owned a factory that was formerly used to produce poultry fat based biodiesel and later produced raw material for animal feed. When the company went into liquidation, it was contended, among other things, that a loan from a company owned by one of the shareholders is a loan from an external party and not from a shareholder and should therefore be repaid in the same manner as loans are repaid to external parties.
The Court held that a loan by a company held by a shareholder is a loan deferred in liquidation in the same manner as a shareholder loan. When the conditions for piercing the corporate veil are met, a shareholder's right to be repaid by the company may be suspended until after the company repaid its obligations to all creditors. Although debt deferral for the same tests as piercing the corporate veil (when the corporate veil is knowingly used to defraud creditors, or when the separate legal entity is used in a manner that is detrimental to the corporate purpose and while taking an unreasonable risk as to its ability to repay its debts), it is a more moderate measure, with limited results, suitable in circumstances where the balancing of interests justifies a partial intervention in the corporate principles for the purpose of protecting creditors and not necessarily attributing the company's full debts to its shareholders. In addition, in the event of liquidation in any case all debts to shareholders are deferred until full payment of the debts to external creditors. When there is an affiliation between the lending company and the borrower, by the two companies sharing joint shareholders/control holders at certain periods, the loan will be considered as a shareholder loan and a deferred debt, both in liquidation and in the event that the corporate veil may be lifted. Here a shareholder who holds 66% of the bankrupt company also holds 99% of the shares of the lending company and therefore the loan is considered as a shareholder loan and a deferred debt.