22.6.4 What are the limits on the shareholder’s discretion to decide on the financing of the company in terms of financing the company using loan capital issued by the shareholder himself?

Given that there are no special rules for shareholder loans in the Netherlands, these loans will have to be assessed in light of the general civil system of standards previously outlined. I believe that there are no convincing arguments to simply subordinate the claims of shareholders, as is done in Germany.1 Unconditional subordination of shareholder loans is not in line with flexible company law that is trying to distance itself from ex ante regulation formulated in absolute terms due to the objections described in Chapter 3. The special risks that are intrinsic to funding using shareholder loans do not justify expanding the current statutory framework. For example, advocates of subordination rules point to the possibility of shareholders calling in their loans the moment the company runs into difficulties. However, as indicated in par. 21.4.2.2, the wrongful act and the fraudulent transfer in bankruptcy law offer sufficient protection in this regard.

Others have submitted that shareholder loans should be subordinated, because otherwise there might be an incentive for rational shareholders to finance inefficient rescue operations, and in this way keep doomed enterprises afloat. However, because a subordination rule only has a limited effect on the evaluation of risks of the shareholder of the company in financial distress, such a rule does not prevent all rescue operations with a negative value (seen objectively); sometimes, this rule does stand in the way of rescue operations with a positive value (seen objectively). Moreover, for creditors, the wrongful act in itself offers considerable protection from the risk that an enterprise that is certain to fail is continued. The shareholder who enables a company to enter into new obligations by furnishing financing, even though he knows or should realize that the company does not have any reasonable chance of survival, acts wrongfully vis-à-vis these ‘new’ creditors if he fails to ensure that their claims are paid. In addition, under those circumstances, any security established in favour of the shareholder is exposed to the risk of being nullified by invoking the fraudulent transfer. Rather than an unconditional subordination of all shareholder loans that were furnished in a crisis or a general prohibition of shareholder security, inefficient rescue operations should be prevented by the threat of the wrongful act and the fraudulent transfer (in bankruptcy law). These two doctrines are supported by open standards that enable the judge to assess in retrospect whether a rescue operation had a fair chance of success.

In my opinion, a more difficult issue is involved in the situation in which the financing of the company is adequate, but virtually the entire company risk will be borne by the unsecured creditors upon incorporation or at the start of the activities in the event that the company goes bankrupt. With this financing method, the creditors are not exposed to any unreasonable bankruptcy risk, but the prejudice of the creditors lies in the fact that the shareholder limited his own exposure to the detriment of the creditors. I believe that it in a bankruptcy case, if there is an obvious imbalance between equity and loan capital, a judge will rule that part of the shareholder’s contribution should have been contributed as risk-bearing capital, and that for this reason, the shareholder acted wrongfully by making this part available to the company as a loan.