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The founders of MKB Juristen

Our organization consists of several small teams working within various legal fields. Each legal field has its own senior in-house counsel and/or lawyers.

Denian Wielhouwer

Corporate lawyer in corporate law & business expert

Denian Wielhouwer

Annelore Hendriks

Corporate lawyer, corporate law, administrative law

Annelore Hendriks

Ilja van Driel

Corporate law attorney, employment law

Ilja van Driel

Jaime Boogaers

Corporate law, ICT & privacy law, energy law attorney

Jaime Boogaers
Custom choices

Which choices determine the content?

The following choices determine how strict the subordination is and how the agreement works out in your situation.

Choice or question Why this matters legally
Compared to whom is one being disadvantaged? Subordination can be general (towards all creditors) or specific (only towards the bank). Banks often require subordination specifically in their own favor.
Is it allowed to make interim repayments and pay interest? You can block interest and principal payments as long as priority creditors have not been satisfied, or agree on an intermediate arrangement. This directly affects the borrower's liquidity.
Is the loan interest-bearing and how much is it? For loans between related parties (for example, a director-major shareholder and a private limited company), the interest rate must be at arm's length to avoid tax adjustments.
Is security required? Security increases your chance of repayment, but can conflict with subordination; discuss this with the lender.
What happens in the event of bankruptcy or suspension of payments? Stipulate that the lender will only submit or collect their claim after the priority creditors have been satisfied, possibly with a supporting statement to the bank.
Clauses and provisions

What components belong in a subordinated loan agreement?

The components below form the core of a subordinated loan agreement. Together, they determine the level of security the lender holds and whether the subordination against other creditors will hold up.

Provision Relevant to Legal point of attention
Parties and capacity Always Full details of lender and borrower, indicating whether acting as a business, shareholder, or in a private capacity.
Principal and payout Always The borrowed amount, the time and the manner of provision.
Subordination clause Always The core: establishing that the claim is subordinated to other creditors and to which creditors (for example, the financing bank).
Interest Always Interest rate, calculation method, and payment dates; for affiliated parties, look for an arm's length interest rate.
Repayment and term Always Repayment schedule, end date, and the condition that repayment is only permitted if it does not prejudice the position of priority creditors.
Enforceability and default Always When the loan is immediately callable, provided that call-out does not interfere with the subordination.
Guarantees If desired Any securities, provided that the security may not effectively undo the subordination.
Applicable law and disputes Always Choice of Dutch law and designation of the competent court.
Use in practice

How do you use this document correctly?

With the following steps, you ensure that the subordinated loan agreement does what it is supposed to do.

Situation What should you do? Point of attention
For signature Coordinate the wording of the subordination clause with the bank or other financier Banks often set their own requirements for the wording; otherwise, a deviating clause will not be accepted.
Upon signing Have both parties sign a dated copy and keep it Without a signed document, subordination is difficult to prove later.
During the term Pay interest and principal only if this does not disadvantage the priority creditors Payments in violation of the subordination may be recovered or breach the agreement with the bank.
In case of change or repayment Document every change in writing and inform the financier if necessary Verbal agreements or silent repayments undermine the agreed ranking.
Common mistakes

Common mistakes

We encounter these errors most frequently in practice with subordinated loans.

Wrong Consequence Better approach
No or a vague subordination clause The loan does not count as subordinated; the bank refuses or you do not lose your priority position as intended Include an explicit clause specifying against which creditors subordination applies.
Non-arm's length interest for a director-major shareholder or affiliated parties Tax correction or reclassification by the Tax and Customs Administration Apply a market-rate interest rate and substantiate it.
Interim repayment despite subordination In conflict with the agreement with the bank; payment can be reversed Block repayments and interest as long as priority creditors have not been paid.
Do not record anything regarding bankruptcy Uncertainty regarding rank and possible challenge by the trustee Explicitly regulate what happens in the event of bankruptcy and suspension of payments.
Only verbal agreements The subordination and conditions cannot be proven Document everything in writing and have it signed.
Risk profile

What is your situation and what do you pay attention to?

Depending on your role and goal, what you need to pay particular attention to varies.

Risk profile Example Focus in the document
Loan from director-major shareholder to own private limited company The director-major shareholder lends money to the company, often at the request of the bank Arm's length interest, a watertight subordination clause, and tax substantiation.
Financing with bank credit The bank requires subordination as a condition for (additional) credit Ensure the clause aligns exactly with the bank's requirements and record this before granting the credit.
Loan between collaborating enterprises Two entrepreneurs finance each other or a joint project Clear agreements regarding rank, relief, and what happens if the collaboration ends.
Investment in a start-up You provide subordinated capital to a start-up Be aware of the high risk; carefully weigh interest rate, term, and any collateral.
Additional documents

When is this document not enough?

Sometimes a subordinated loan agreement covers only part of what you need. In these situations, additional documentation or advice is advisable.

Situation Supplementary document Why
You are a co-financier as a shareholder and also wish to arrange for control Shareholders' Agreement In addition to the loan, you record the relationships, voting rights, and exit agreements between shareholders herein.
The loan is part of a broader collaboration between companies Cooperation Agreement In this document, you regulate the content, division of tasks, and objectives of the collaboration within which the financing takes place.
The borrower does not pay and you must collect the debt Debt collection In the event of non-payment, debt collection or legal action helps to collect your claim, within the limits of the subordination.
Explanation of this document

Drafting a subordinated loan agreement, why?

Not every entrepreneur knows exactly what subordinated loan agreements are, when they are needed, and which risks they must cover. Therefore, we explain below what this document entails, what to look out for, and why customized legal solutions are important.

What is a subordinated loan agreement?
A subordinated loan agreement is a loan agreement in which the lender explicitly subordinates the debtor to other creditors. This means that in the event of the debtor's bankruptcy or suspension of payments, the lender will only receive repayment after all non-subordinated creditors have been fully satisfied. Consequently, the subordinated loan occupies a position between debt—ordinary debt—and equity. Banks and other financiers generally regard a subordinated loan that meets the correct conditions as quasi-equity, which strengthens the debtor's solvency position and increases their access to additional bank financing. A sound subordinated loan agreement is therefore not only an internal financing instrument but also a document that the bank assesses before granting its own credit. Our lawyers will draft a legally watertight subordinated loan agreement for you that aligns with your financing structure, your bank covenants, and tax principles—whether it concerns a business acquisition, a shareholder loan, a restructuring, or growth financing.
When do you need a subordinated loan agreement?
a subordinated loan agreement is relevant in a number of recurring situations. In a business acquisition , the buyer leaves part of the purchase price with the seller as a subordinated loan, ensuring that the selling shareholder is only repaid in the event of disappointing results after the bank has been satisfied. In the case of shareholder loans, a shareholder or holding company provides a loan to the operating company, which is accepted by the bank as quasi-equity. During restructuring , existing debt is converted into a subordinated loan to strengthen the balance sheet and restore a bank covenant. In growth financing, an investor or private equity firm provides mezzanine financing in the form of a subordinated loan with a higher interest rate as compensation for the increased risk. Furthermore, for start-ups , a subordinated loan from family, friends, or a government agency such as Qredits is used to increase solvency, enabling access to bank credit.
What is the difference between generic and specific disadvantage?
A subordinated loan agreement can formulate the subordination in two ways. With generic subordination , the loan is subordinated to all other creditors of the debtor, both current and future. This is the most far-reaching form and is typically required by banks that wish to classify the subordinated loan as quasi-equity. With specific subordination, the loan is subordinated only to certain, specifically named creditors — usually the financing bank. The remaining creditors then share on an equal footing with the subordinated lender. Which form the bank accepts as quasi-equity depends on the specific bank covenants and the credit policy of the bank in question. Our lawyers align the subordination wording with your bank's requirements before you sign the agreement.
What must be included in a subordinated loan agreement?
A sound subordinated loan agreement contains at least the following elements. The subordination clause itself: an unambiguous wording stating that the lender subordinates its claims to all or specifically defined creditors, with an explicit payment restriction as long as the subordinated loan is outstanding. The principal amount, interest, and repayment schedule: for loans between related parties, the interest must be fixed at arm's length to avoid tax adjustments by the Tax Authorities. The term and early repayment options: may the debtor make interim repayments and, if so, only with the bank's permission? A payment restriction: the lender may not receive interest or principal repayment as long as this brings the debtor's solvency position below an agreed threshold or as long as a bank covenant prohibits it. A callability restriction: the subordinated loan may not be immediately callable upon a single default; immediate callability would nullify the creditor's subordinated position. And a ranking arrangement in the event of the concurrence of multiple subordinated loans. Our lawyers ensure that all these elements are formulated correctly and consistently.
What are the tax considerations regarding a subordinated loan between related parties?
Strict tax rules apply to a subordinated loan between a shareholder and their company, or between affiliated companies. The Tax and Customs Administration assesses whether the agreed interest rate is at arm's length — the so-called arm's length principle of Article 8b of the Corporate Income Tax Act. A subordinated loan carries a higher risk than an ordinary loan and therefore justifies a higher interest rate. If you set the interest rate too low, the Tax and Customs Administration will adjust the interest deduction for the debtor and the interest income for the creditor based on what an independent third party would have agreed. If you set the interest rate too high, the Tax and Customs Administration may classify the excess as a distribution or informal capital contribution. In addition, there is the question of whether the subordinated loan is treated as equity or debt for tax purposes — the so-called classification question. In the case of a bottomless pit loan or a participating loan, the interest may not be deductible. Our lawyers tailor the interest rate structure to the tax principles of your situation.
What is the Pauliana test and why is it relevant for a subordinated loan?
The Pauliana action — the actio pauliana of Article 3:45 of the Dutch Civil Code and Article 42 of the Dutch Bankruptcy Act — enables a bankruptcy trustee to annul legal acts that prejudice creditors. In the case of a subordinated loan between related parties — shareholder and company, or sister companies — there is a real risk that a bankruptcy trustee will annul the loan if the agreement was entered into or amended shortly before the bankruptcy and the creditors have been prejudiced as a result. This risk is particularly present if the subordinated loan was converted from an enforceable claim, if the grace period was extended just before the bankruptcy, or if the interest rate was set artificially low. A sound subordinated loan agreement contains an arm's length declaration and is documented with a file demonstrating that the terms are commercial and not motivated by the desire to prejudice the bank or other creditors. Our lawyers assess your agreement for Pauliana risk before you sign.
How does the subordinated loan relate to the bank covenants?
Virtually every bank financing arrangement contains covenants —contractual obligations of the borrower regarding its financial position, such as a minimum solvency ratio or a maximum net debt position. A subordinated loan counts as quasi-equity for the calculation of these ratios only if the bank has explicitly accepted the subordination. This typically requires a subordination declaration signed by all parties—the lender, the debtor, and the bank—in which the lender confirms in writing that it subordinates its payment claims to the bank and will not receive interest or principal repayment as long as this violates the bank covenants. A subordinated loan agreement that is not aligned with existing bank covenants can lead to a covenant breach—and consequently to the immediate callability of the bank credit. Our lawyers review your bank covenants and align the subordinated loan agreement accordingly.
What are the risks of a subordinated loan in the event of the debtor's bankruptcy?
The lender of a subordinated loan bears a significant insolvency risk. In the event of the debtor's bankruptcy, the lender only receives payment after all unsecured and preferred creditors have been fully satisfied. In practice, this means that a subordinated lender virtually never recovers anything in the event of an SME's bankruptcy. This risk is compensated through a higher interest rate — the so-called risk premium. In addition to the recovery risk, the question also arises as to whether the lender can be held liable themselves. If a shareholder grants a subordinated loan to their company while knowing, or ought to have known, that the company could no longer pay its debts, they run the risk that the bankruptcy trustee will hold them liable on the grounds of directors' liability or tort. The Beklamel criterion is relevant here: a director who enters into obligations on behalf of the company while knowing that the company cannot meet them acts unlawfully. Our lawyers analyze this risk for you before you grant a subordinated loan to your own company.
How much does it cost to draft a subordinated loan agreement at MKBjuristen?
The costs for drafting or reviewing a subordinated loan agreement depend on the complexity of your financing structure, the number of parties involved, the required alignment with bank covenants, and tax considerations. After a brief intake, we will provide you with a transparent quotation. We take a pragmatic approach: a good subordinated loan agreement is not a generic template but a document tailored to your specific financing structure and your bank's requirements. Contact us for a no-obligation estimate.
How does it work at MKBjuristen?
After a brief intake, our lawyers map out your financing structure, bank covenants, involved parties, and tax principles. Based on this, we draft a subordinated loan agreement tailored to your situation — featuring the correct subordination wording, a commercially sound interest rate structure, a watertight payment restriction, and an arm's length declaration that passes the Pauliana test. Have you received an existing subordinated loan agreement from an investor, a bank, or your accountant? We will then assess it for legal and tax risks and advise you on the necessary adjustments. Are you in a restructuring process where existing debt is being converted into a subordinated loan? We will guide you through the entire process — from negotiations with the bank to the signing of the final agreement.
Are you unsure whether your document is legally correct? We would be happy to assess the sensible course of action: drafting, reviewing, or amending.
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Explanation regarding the use of the document

A standard document seems cheap, until it doesn't fit your situation properly. That is why we provide custom legal solutions tailored to your business.

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A legal document only has value if it suits your practice. That is why we look not only at the text, but also at how you use the document in your business.

Common mistakes with legal documents

A legal document often seems simple, but small errors can have major consequences later on. In practice, we see that entrepreneurs run the greatest risk when a document does not align well with their business, agreements, or way of working.

  • Using a standard document that does not suit the company
  • Forgot important agreements regarding payment, delivery, liability, or termination
  • Have a document generated without legal review
  • Continuing to use old documents while the company has changed
  • Not knowing how the document should be used correctly in practice

A legal document only prevents problems if it suits your situation. That is why we look not only at the text, but also at your company, agreements, and risks.

Why is a standard document often not enough?

Because a standard document does not take into account your industry, customers, risks, and specific agreements, important provisions may be missing or not align well with your practice.

Can I create a legal document myself using AI?

AI can assist in creating text, but does not independently assess whether the document is legally appropriate, complete, and usable for your business. Legal review therefore remains important.

When do I need to have my document checked?

Have your document checked if your business has changed, you have new customers or services, you have doubts about existing agreements, or the document has not been updated for a long time.

Will I also receive an explanation about the use of the document?

Yes. We explain how to use the document in practice, what to look out for, and which steps are important to prevent disputes afterwards.

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Annelore Hendriks

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SME Lawyers at the Chamber of Commerce Source: Chamber of Commerce 2019
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