Law firm for subordinated loans

Subordinated loans: Legal classification and options for action

Subordinated loans are a flexible, but also riskier form of financing. Companies often use them to raise capital, while investors invest in the prospect of higher returns. However, anyone opting for a subordinated loan should keep a close eye on the legal consequences. CDR Legal will provide you with expert advice and offer you a free initial consultation to examine your individual situation and possible liability risks.

One of the special features of a subordinated loan is that the lender is only serviced after all senior creditors in the event of the company’s insolvency. If the financed company becomes insolvent, there is a risk of significant losses or even the total loss of your invested capital. This makes it all the more important to recognize potential errors in the drafting of contracts in good time and to avoid legal pitfalls. With CDR Legal, you receive sound support from lawyers with many years of experience in banking and capital market law.

Understanding the basics: What is a subordinated loan?

In the case of a subordinated loan, the lender and borrower conclude a contract which stipulates that the lender will withdraw from other creditors if the company gets into financial difficulties. While traditional loans have a fixed order of priority for the settlement of debts, a subordinated lender waives a preferred order of payment. In the case of a qualified subordinated loan, which provides for an even stricter exception, the lender sometimes even accepts that it may not be able to assert any claims at all in the event of insolvency.

In economically stable times, both sides may benefit from this model: the borrower receives fresh capital to finance his project or company, while the lender can achieve attractive interest rates. However, as soon as the financial situation becomes tense, the risk of default rises sharply. Anyone interested in a subordinated loan should therefore carefully consider whether the relationship between risk and potential return is acceptable.

Liability issues and special legal features

The core risk of a subordinated loan is that in the event of the borrower’s insolvency, most of the claims of other creditors must be serviced with priority. Only when these creditor payments have been settled and funds are still available does the lender of a subordinated loan receive his money – if there is anything left at all. This situation can be further exacerbated by various contractual clauses, for example if there is express consent to a complete suspension of receivables in the event of imminent insolvency.

It is important that investors are fully informed before taking out a subordinated loan. Anyone who falls for misleading advertising promises or unclear contractual provisions, for example, can later assert claims for damages, e.g. due to incorrect advice or prospectus liability. The main issue here is the duty of care incumbent on advisors and providers: If the high risk of a qualified subordinated loan is concealed or downplayed, this may constitute a breach of disclosure and information obligations. Further details on how they work and the associated risks can be found in this informative article on qualified subordinated loans.

Contractual duty of care and prospectus liability

If key information is incorrect or not available when brokering or advising on subordinated loans, this can trigger prospectus liability, for example. An issue prospectus must contain all relevant information for the investor in order to enable an informed investment decision. If the obligatory information on the risks is missing or if figures and forecasts are embellished, the advisor or issuer may be liable for damages.

When it comes to qualified subordinated loans in particular, the risk of incorrect information increases in practice. This is because in many cases investors are guided by supposed promises of returns without fully understanding the legal implications of the subordination agreement. If the borrower then experiences financial difficulties over time, investors are often faced with high losses. A thorough review of all contractual documents and prospectuses is therefore the key to avoiding disputes later on. You can find out more about our expertise in banking and capital markets law on the CDR Legal website.

Typical disputes and gross negligence

In addition to prospectus liability, further disputes are conceivable with subordinated loans. The accusation is often that advisors or brokers have acted with gross negligence by not clearly explaining the excessive risk of a qualified subordinated loan. Investors who rely on seemingly secure prospects for returns are correspondingly disappointed when the reality is different. If you have received incorrect advice or incomplete risk information, you can take legal action in many cases.

Careful documentation is important in such situations. Collect all contracts, brochures and consultation protocols in order to be able to prove what information was provided to you before you took out the loan in the event of a dispute. A law firm with specialized expertise in the area of subordinated loans and banking law can efficiently accompany this process and professionally examine your claims. This will help you avoid costly mistakes and give your case the necessary legal substance.

Practical recommendations for investors

Anyone considering a subordinated loan should take a few basic steps in advance to protect themselves legally:

• Research: Find out in detail about the company or project you want to finance. Check the economic stability of the borrower.
• Contract review: Have all documents checked by a specialized lawyer. Pay particular attention to subordination agreements, interest rate regulations and term.
• Risk analysis: Ask yourself whether you can cope with a possible total loss. Qualified subordinated loans entail an above-average risk.
• Duty to inform: Actively ask what obligations an advisor or intermediary has to inform you of all material risks.
• Documentation: Keep all correspondence, brochures and attachments in case discrepancies arise later.

If you have already incurred losses or the borrower is at risk of insolvency, it is advisable to seek expert advice. Contacting a specialized lawyer at an early stage can prevent important deadlines from being missed or opportunities to assert claims from being missed.

How CDR Legal can help you

Get in touch now and take advantage of the free initial consultation to clarify your questions about subordinated loans. We offer empathy, expertise and transparency and only take on cases with a realistic chance of success. You also receive full cost transparency before any service is rendered, while our lawyers work with legal precision based on many years of experience. After a free initial assessment of your individual situation, we will submit a request for cover to your legal expenses insurance company. You can then make an informed decision on how you want to proceed – with CDR Legal you are represented personally and competently.