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Drafting a subordinated loan agreement means not only establishing the standard loan terms (amount, interest rate, term, repayment), but, more importantly, formulating the subordination clause in a legally watertight manner: regarding whom the loan is subordinated, whether this subordination is firm or soft, and what may and may not be paid during the term. It is precisely this clause that determines whether the bank agrees and whether the subordination holds up in the event of bankruptcy.
The short answer
- Parties and amount: who lends to whom, how much, and when it is provided.
- Subordination clause: in relation to which creditors, hard or soft.
- Interest: amount, commercially substantiated, and whether interest may be paid on losses.
- Repayment: schedule or condition (for example, only after the bank).
- Demandability and securities: when demand may be made, and what security (or no security) applies.
- Final provisions: applicable law, disputes, amendment only in writing.
Drafting a subordinated loan agreement: start with the basics
At its core, a subordinated loan is a monetary loan (Article 7:129e et seq. of the Dutch Civil Code) with an additional agreement: subordination pursuant to Article 3:277 paragraph 2 of the Dutch Civil Code. Therefore, start with the standard building blocks of a loan agreement and carefully build the subordination around them. Include the parties in full, including their Chamber of Commerce registration number and legal representation, and record the borrowed amount, the currency, and the date of disbursement.
The subordination clause
This is the heart of the agreement. Formulate explicitly:
- In relation to whom? All other creditors, or specifically the bank/financier. A general subordination is broader than a subordination that applies only to the bank.
- Hard or soft subordination. With hard subordination, no principal repayment or interest payment is permitted during the term as long as the higher-ranked creditor has not been satisfied. With soft subordination, the subordination only applies upon bankruptcy or dissolution.
- Scope. Both principal and interest, or only the principal.
A vague clause (“this loan is subordinated”) poses a risk. Without specifying to whom and to what extent, disputes may arise regarding its meaning, and the bank may refuse the payments or the bankruptcy trustee may challenge them.
Recording interest for business purposes and correctly
Fix the interest rate as a fixed or variable percentage, with payment schedules. Because the risk is higher, the interest rate is typically higher than that of a standard loan. Two points to consider:
- length conduct with affiliated parties. If a director-major shareholder lends to his own BV, the interest must be at arm's length. An interest rate that is too low or too high may be corrected by the Tax Authorities and may have tax consequences.
- Interest freeze. Banks often stipulate that no interest is paid as long as certain agreements (covenants) or ratios are not met. Specify whether unpaid interest is credited or lapses.
Repayment and enforceability
Determine how and when repayment will be made:
- Repayment schedule with fixed installments, or
- Lump sum repayment at the end of the term, or
- Conditional repayment: only after the bank credit has been fully repaid or certain ratios have been met.
Also regulate the enforceability: when may the creditor claim the amount (for example, in the event of default or suspension of payments), and which cases are specifically excluded as long as the subordination applies. In the case of strict subordination, claiming against the subordinated creditor will effectively only be possible after the bank.
Securities and other provisions
Subordinated loans are usually granted without security (pledge, mortgage) — otherwise, the subordination would be undermined. If you do require security, discuss this with the bank, as it will not tolerate concurrent security. Also include:
- Applicable law (Dutch law) and competent court.
- That changes are only possible in writing and with the consent of the bank.
- A co-signing clause or separate subordination deed for the bank, if required.
- Provisions regarding the transfer of the claim.
Example: A family member lends €75,000 to a private limited company (BV) which simultaneously applies for a bank loan. The bank requires strict subordination. The agreement states: interest 5%, no interest or principal payments as long as the bank loan is outstanding, principal repayment only thereafter, no security, and the bank co-signs the subordination.
Common mistakes
- Only state “subordinated” without indicating to whom or whether it is hard or soft.
- Interest not commercially substantiated with affiliated parties.
- Allowing repayment during the term while the bank demanded strict subordination.
- Failure to have the bank co-sign, as a result of which the subordination towards it is in question.
- Agreeing to changes verballythat cannot be proven later.
Honest recommendation
You can easily draft a simple subordinated loan between known parties, without a bank and with clear terms, yourself using a good template — you do not always need a lawyer for this. As soon as a bank requires subordination, affiliated parties are involved (arm's length interest), or the subordination needs to be firm, the wording becomes decisive for enforceability. In that case, have the agreement drafted or reviewed so that the subordination clause holds up in the event of bankruptcy and the bank agrees.
Want to read more? Use the subordinated loan agreement, learn more about what a subordinated loan agreement is , or read when to have a subordinated loan agreement drafted.
Frequently Asked Questions
Start with the standard loan terms (parties, amount, interest, term, repayment) and build an explicit subordination clause around them: with respect to whom the loan is subordinated, whether this is a hard or soft subordination, and what may be paid during the term. Establish collateral, enforceability, and final provisions.
Regarding which creditors the loan is subordinated to (all or specifically the bank), whether the subordination is hard or soft, and whether it covers both principal and interest. Vague wording lacking these elements creates uncertainty in the event of bankruptcy.
Usually, the interest rate is higher than on a standard loan due to the additional risk. For affiliated parties (for example, a director-major shareholder in their own BV), the interest rate must be at arm's length; otherwise, the Tax Authorities may make adjustments. Specify whether interest on losses may be paid or credited.
Usually not, because that would undermine the subordination and the bank does not tolerate competing collateral. Subordinated loans are generally granted without security. If you do require security, discuss this with the lender in advance.
Often, yes. Banks want assurance that the subordination applies to them and therefore require a separate subordination agreement to be co-signed or impose requirements on the text. Without their consent, the subordination may be open to dispute.
Via a fixed schedule, repayment in a lump sum at the end, or conditionally (only after the bank or after meeting certain ratios). In the case of hard subordination, no repayments may be made during the term as long as the higher-ranked creditor has not been satisfied.
Merely stating “subordinated” without indicating to whom and whether it is hard or soft, failing to commercially substantiate interest, making repayments while the bank demanded hard subordination, failing to have the bank co-sign, and agreeing to changes verbally. These errors make the subordination vulnerable in the event of bankruptcy.
