Given that the company is surviving the financial consequences of the COVID 19 pandemic, the subordination of unsecured debt is one of the measures that businesses and lenders are beginning to consider to stimulate their business and avoid the inevitable financial difficulties of the company. However, such subordination carries risks, particularly when a debtor company is placed in a corporate rescue procedure (i.e. cannot vote on a business rescue plan) and remains open to the responsibility of the directors. Therefore, there is no quick fix and customers should consult us on how best to proceed under the current circumstances. The final version of the law amends the reclassification test. The proposal is now broader than in the bill, because reclassification could even be avoided in cases of debts that are not owed between companies defined within the same South African “group” as for income tax. To avoid reclassification, an accountant registered under the 2005 Audit Profession Act must certify that the debtor`s payment of an amount owed by the debtor, due to the market value of the company`s assets, was less than the amount of the company`s debts or is intended to be deferred. Subordination contracts are the most common in the field of mortgages. When an individual borrows a second mortgage, that second mortgage has a lower priority than the first mortgage, but those priorities may be disrupted by refinancing the original loan.
The financial impact of COVID-19 will depend on the duration and depth of the decline in production. The main cost of COVID-19 will undoubtedly be unemployment caused by the inevitable financial emergency of companies (a conservative forecast currently estimates that millions of people are unemployed). To survive, businesses and lenders must weather the storm, be agile and show solidarity, and consider business restructuring techniques to combat the effects of this pandemic. These techniques may include debt subordination. Mortgagor pays him for the most part and gets a new credit when a first mortgage is refinanced, so that the new last loan now comes in second. The second existing loan becomes the first loan. The lender of the first mortgage will now require the second mortgage lender to sign a subordination agreement to reposition it as a priority for debt repayment. Each creditor`s priority interests are changed by mutual agreement in relation to what they would otherwise have become. First, let us return to the basics: subordinated debt is a type of debt that receives a lower priority level than its right to a company`s wealth if the company is unable to pay its debts and becomes insolvent. When a company is late with its debts, debts have a priority order that determines when or if they receive the payment. It is generally accepted that subordination is done through a written subordination agreement in which a creditor formally subordinates his claim to either a particular creditor or to all the creditors of a corporation.
While the subordination of credits has the advantage of helping a company in its difficult financial situation, directors must be aware that they will not absolve it from directors` liability under the Corporations Act. if. B for example, subordination means that the company is no longer in financial difficulty because the subordinated debt is no longer due and due, the debts remain due and are part of the company`s debts.