Legal Updates

When a shareholders loan is granted without setting its terms it should checked whether it is an investment and not a loan

October 13, 2020

An investor purchased shares in the company in exchange for a shareholder loan to the company. He later demanded repayment of the loan.
The Court held that the shareholders loan is in fact an investment in the company that for tax purposes has been defined as a shareholders loan and therefore the investor does not have the right to demand its repayment. The share purchase agreement stipulated that the provision of the loan was a condition for receiving the shares but did not stipulate the terms of the loan, including the date of repayment, installments, interest, etc. In such a case, it must be examined whether the term "shareholders loan" used in the agreement does in fact teach of the real nature of the transaction or whether it is an investment in the company and not a shareholders loan. Among other things, it must be checked whether the shareholdres loan transaction was made within the ordinary course of business, what is the nature of the loan agreement, what was the financial status of the company when the loan was extended, what is the nature of the relationship between the shareholder and the company, for what purpose was the loan used – is it to purchase assets or for ongoing expenses, is there any collateral for the loan, etc. In this case, although the parties chose to register the consideration for the shares as a "shareholders loan", it is clear from the wording of the agreement that this is not an ordinary commercial owner loan, but a share purchase and therefore the shareholder is not entitled to demand the loan repayment.