What Is a Subordination Agreement South Africa

The effect of a subordinated loan was described in Ex Parte: De Villiers and Another NNO: In Re Carbon Developments (Pty) Ltd (In Liquidation) from 24 to 29 by Goldstone JA as follows: “The essence of a subordination agreement is generally that the enforceability of a claim by agreement with the creditor to whom it is due is subordinated to the creditor`s solvency and the prior payment of its debts to other creditors. Becomes. Subordinated arrangements may have the characteristics of hybrid debt instruments – debt securities with equity characteristics – and may therefore fall victim to anti-tax avoidance provisions (Income Tax Act, No. 58 of 1962), which aim to nullify the effects of hybrid debt instruments. There are three types of HHI, and one of the three applies where the taxpayer`s obligation to pay an amount has been deferred under a subordination agreement and the deferral is based on the market value of the taxpayer`s assets that exceed its liabilities. With this agreement, you can recognize that a particular creditor`s claim is superior to other claims and demands and make the lender whose details are specified in the contract the primary lender. You can download a template for a subordination agreement from the following link. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating body for a network of independent member firms. KPMG International does not provide audit or other client services. These services are provided exclusively by member companies in their respective geographical areas. KPMG International and its member firms are legally distinct and distinct entities. They are not and nothing herein should be construed as placing such companies in the relationship of parent companies, subsidiaries, agents, partners or venturers.

No member firm has the power (real, obvious, implied or otherwise) to bind kpmg International or any member firm in any way. The information contained in this document is of a general nature and is not intended to relate to the situation of any particular natural or legal person. While we strive to provide accurate and timely information, there can be no assurance that such information will be accurate at the time of receipt or that it will continue to be accurate in the future. No one should respond to such information without appropriate professional advice after a thorough examination of the situation in question. For more information, please contact KPMG`s Federal Tax Legislative and Regulatory Services Group at:+1 202 533 4366, 1801 K Street NW, Washington, DC 20006. If a subordination agreement has been entered into solely for the pursuit of business problems, section 8F of the Income Tax Act does not apply (i.e., the rules on debt recharacterization do not apply). This is only the case if the company receives certification from a person registered as an auditor within the meaning of the Audit Professions Act. This certificate must demonstrate that the subordination agreement was entered into due to continuation problems. The 2016 Explanatory Memorandum states: “It is envisaged that the auditor`s certificate of subordination of related party debts will be demonstrated in a separate letter for the purposes of this exclusion. Under the anti-tax avoidance provisions, interest costs on hybrid debt are not deductible and constitute a cash dividend that results in a dividend tax of 20%. Of the three types of hybrid debt, one is triggered when a subordination agreement is entered into to defer tax debts.

The mortgage borrower essentially repays it and gets a new loan when a first mortgage is refinanced, so the most recent new loan is now in second place. The second existing loan becomes the first loan. The lender of the first mortgage refinancing will now require the second mortgage lender to sign a subordination agreement to put it back on the front burner with respect to debt repayment. The best interests of each creditor are changed amicably from what they would otherwise have become. Individuals and businesses turn to credit institutions when they need to raise funds. The lender will be compensated if it receives interest payments on the amount borrowed, unless the borrower is in default of payment. The lender could require a subordination agreement to protect its interests if the borrower places additional privileges on the property, such as if .B they were to take out a second mortgage. One mechanism that taxpayers can use to manage cash flows could be to (re)negotiate deferred payments and enter into subordination agreements on outstanding loan agreements. These agreements can help taxpayers reduce their liquidity burden and generally include an obligation for a distressed debtor`s creditor not to require payment until a particular future event (or similar type) occurs. From a SARS perspective, however, the problem is that these arrangements may have characteristics of hybrid instruments – that is, debt instruments with equity characteristics. This can trigger the anti-avoidance provisions of the Income Tax Act, which aim to eliminate the effects of any hybrid debt instrument.

The signed agreement must be confirmed by a notary and registered in the official county registers in order to be enforceable. In some cases, including an audit certificate confirming that the deferral is due to technical insolvency, the anti-dispute provisions may not apply. However, it is strongly recommended, especially in light of government interventions to support distressed businesses, to use tax advisory services before assuming that a subordination agreement would withstand the scrutiny of SARS. As a result, companies may enter into subordination agreements that allow them to subordinate loans with related parties in favor of third-party loans. Such subordination agreements may also be entered into on the advice of auditors in order to avoid the issuance of a modified audit opinion or the emphasis placed on the matter due to the fact that the Company is not an ongoing business. Subordination essentially occurs when a related creditor agrees not to assert a claim for the payment of its loans until the company`s assets (valued fairly) exceed its liabilities. Subordination agreements fall within the scope of Section 8F of the Income Tax Act, which deals with hybrid debt instruments. The objective of this section is to requalify loans that have equity or dividend characteristics. Within two years of liquidation and the person who draws on or benefited from the sale, it cannot prove that, immediately after the sale, the assets of the insolvent debtor have exceeded its liabilities. In this context, “value” has its ordinary meaning, which is any kind of consideration and not just money.

Whether or not a value was received for a disposition must be determined taking into account all the circumstances in which the transaction was made. An injunction is any transfer or waiver of ownership rights and includes a sale, lease, mortgage, pledge, delivery, payment, release, compromise, gift or contract for it, but does not imply an injunction pursuant to a court order. What constitutes an injunction is not exhaustive and includes every conceivable means of disposition of property. In addition, the wording indicates that not only the actual physical payment of the money or the delivery or transfer of goods, but also the conclusion of a contract that involves such payment, delivery or transfer for any reason constitutes a provision. The assets are movable or immovable and include contingent shares in immovable property. Movable property is any type of property and any right or interest that is not real estate. A subordination agreement is an agreement by which a party transfers or waives its rights in claims it has against debtors. Given that a right or interest falls within the scope of movable property and an injunction is defined as a transfer or waiver of ownership rights, it follows logically that a subordination agreement could fall within the meaning of a provision under section 26 of the Act. Particular attention must be paid when a Group company subordinates its loan account claims vis-à-vis another Group company to the benefit of the debtor`s external creditors. This is a fairly common practice in modern commerce. Such subordinations are often required by the bankers of the debtor company or as a means of restoring the technical solvency of a company with a weak balance sheet. A holding company which subordinates its claims on the loan account to its subsidiary may be regarded as a `value` in the sense that it has continued to carry on business for its ultimate profit ….