Belgian founders routinely lend money to their own companies. The rekening-courant actionnaire — the shareholder current account — is one of the most fiscally efficient and structurally flexible tools available in a Belgian BV or NV. Interest paid to the shareholder-lender is tax-deductible for the company at or below the Royal Decree benchmark rate (5.97% for 2024). The loan is informal, quickly established, and requires no notarial deed. It has become the default mechanism by which Belgian owner-managers inject and extract liquidity from their businesses. A subordination requirement says: while the bank loan is outstanding, you cannot repay yourself. The bank is first. You wait.
Most founders read this clause on page eighteen of a credit agreement and move on. It feels abstract — a formality, a standard insertion, something that probably does not apply to them in practice. The reality is that subordination requirements surface at exactly the worst moment: a divorce settlement, an estate distribution, a personal liquidity crisis, a tax assessment that demands immediate payment. The moment a founder urgently needs that shareholder loan back, they discover — for the first time, often — that it is contractually frozen. The bank has not confiscated the money. But it has made it legally inaccessible for as long as the credit facility is outstanding.
This article explains how subordination requirements work in Belgian SME credit agreements, why banks require them, how vendor loans and acquisition earn-outs create a three-party complication, and what you can negotiate before signing. Shareholder loans exist at the intersection of two distinct covenant regimes — they are simultaneously caught by the affiliate transaction restriction as a related-party financing and by the subordination requirement as a competing debt claim. Understanding the interaction between these covenants before you sign protects you against constraints that compound in ways neither clause makes obvious on its face.
What Is a Subordination Requirement?
A subordination requirement is a contractual covenant in a credit agreement obliging specified creditors — most commonly the borrowing company's shareholders — to defer their claims on the business until the bank's facility is fully repaid. 'Subordination' does not mean cancellation of the debt; it means a legally enforced queue. The subordinated creditor — the founder, the family holding company, the selling shareholder — retains the right to be repaid eventually, but that right is pushed behind the bank's claim in both priority and timing. For the duration of the credit facility, the subordinated creditor agrees not to demand or receive repayment of principal, and often not to receive interest either, without the bank's prior written consent.
In Belgian practice, subordination is formalised in a subordinatieakte / acte de subordination, a separate agreement signed by three parties: the bank (as senior creditor), the borrowing company, and the subordinated creditor themselves. This tri-partite structure is legally significant. The subordinated creditor — typically the founder personally — must sign the deed. This is not a matter of the borrower giving an undertaking on behalf of others; the founder is directly party to a contractual obligation, binding in their personal capacity, not to enforce their shareholder loan claim while the bank debt remains outstanding. Many founders are surprised by this. They expected to be managing the company's obligations to the bank; they did not expect to be signing an agreement restricting their own personal rights as a creditor.
The covenant distinguishes between two forms of standstill. A full standstill prohibits all payments on the subordinated debt — neither principal nor interest may be paid — for the entire period the bank facility is in place. This is the most aggressive form and the one that most constrains the borrower-shareholder. A partial standstill permits scheduled interest payments to continue (subject to no covenant breach being outstanding) while deferring all principal repayment. Partial standstill is meaningfully more borrower-friendly — the founder continues to receive interest income from the company at the Royal Decree benchmark rate without tax-deductibility complications — and it is the starting position any informed founder should aim for in negotiation. Belgian banks will often begin with full standstill in the first draft; partial standstill is typically achievable with a direct request backed by a coherent explanation of why scheduled interest payments do not increase the bank's risk.
It is important to understand what Belgian subordination covenants are not. They do not convert shareholder loans into equity. They do not change the legal character of the founder's claim against the company. And — critically — they do not replicate what Belgian insolvency law would do on its own. Under Belgian faillissement procedure, shareholder loans are not automatically ranked behind bank debt; they rank pari passu with other unsecured creditors unless contractually subordinated or unless a court treats them as an abuse of company resources under the circumstances of the insolvency. The subordination deed creates a specific, enforceable contractual obligation that goes significantly further than general insolvency ranking and operates entirely independently of whether the company ever becomes insolvent. These are different legal effects, and conflating them gives founders a dangerously incomplete picture of their obligations.
Why Banks Require Subordination of Shareholder Loans
Belgian banks lend on the basis of a company's projected cash flows and its balance sheet at the time of origination. A shareholder loan sitting in the liability column of the balance sheet is, from the bank's perspective, a competing claim on those cash flows. If the founder is entitled to demand repayment of a €300,000 shareholder loan at any moment, the bank's projection of the company's liquidity — and its ability to service bank debt — is compromised by a demand it cannot anticipate or control. Subordination removes that uncertainty. The bank knows that for the duration of the facility, the shareholder loan claim is frozen behind its own claim. The cash flow model it used to approve the credit is not disrupted by an unexpected founder withdrawal.
Belgian banks also consider the thin capitalisation context, even when the subordination covenant operates separately from tax rules. Belgian tax law (WIB Article 198/1 / CIR 198/1) limits interest deductibility on shareholder loans when total indebtedness to shareholders exceeds five times equity. A company that is thin-capitalised from a tax perspective is also, from a credit perspective, a company whose balance sheet is dominated by shareholder debt — a structure that raises legitimate concerns about what would happen if the founder decided to enforce that debt. Subordination is the bank's answer: even in a thin-cap scenario, the shareholder's claim is contractually deferred. The tax treatment of the interest is a separate matter governed by Belgian fiscal law; the credit covenant operates on top of it.
There is a direct connection to the additional debt restriction covenant, which typically prohibits the borrowing company from incurring new financial indebtedness above a specified threshold without the bank's consent. Future shareholder loans are caught by both restrictions simultaneously: they require prior consent under the additional debt covenant, and if permitted, they must immediately be the subject of a new subordination deed. This means that a founder who wants to inject new working capital via a shareholder loan mid-facility faces a two-step process — both covenants must be satisfied before the loan can be made and before the company can be confident it is not in breach. Understanding this interaction at the outset avoids situations where a well-intentioned capital injection by the founder triggers a covenant conversation the bank treats as a default notification.
Vendor Loans and Acquisition Earn-Outs: The Three-Party Problem
Belgium has a substantial market in family business successions. When a founder-owner retires, the buyer — often a management team, a family member of the next generation, or an external acquirer — rarely pays the full purchase price in cash at closing. The seller leaves part of the consideration outstanding as a vendor loan (verkoperskrediet / prêt vendeur). This arrangement is attractive to both parties: the seller receives a market rate of interest on the deferred amount, and the buyer avoids the need to raise the full purchase price through bank debt. The problem arises when the acquisition is partially bank-financed. The bank requires subordination of the vendor loan — the seller must sign the subordinatieakte alongside the buyer and the bank.
This negotiation must happen before the acquisition closes, not after. The sequence matters enormously. If the seller signs the share purchase agreement without understanding or accepting that their vendor loan will be legally frozen for the duration of the bank's facility, the acquisition can collapse at the financing stage — the bank will not draw down without the signed subordination deed, and a seller who belatedly refuses to subordinate leaves the buyer without the financing they had assumed was in place. Belgian notarial practice increasingly builds this risk into the pre-closing checklist: notaires advising on business transfers will flag the subordination requirement as a condition that must be resolved before the SPA is executed, not treated as a post-closing administrative matter.
Sellers sometimes refuse subordination, particularly when they are elderly, need the income from the vendor loan to fund their retirement, or have estate-planning concerns about leaving a large subordinated claim that their heirs cannot access. A seller who has operated a business for thirty years and financed their own retirement on the expectation of receiving monthly interest on a €500,000 vendor loan will not casually accept a full standstill. This is where the partial standstill negotiation becomes commercially decisive rather than merely convenient: a structure that permits scheduled interest payments to the vendor while deferring principal is often the compromise that keeps a Belgian family succession deal together. If the bank refuses partial standstill in a vendor loan context, the buyer's lawyer must escalate that as a material deal risk before the financing is finalised.
Earn-outs in Belgian acquisitions present a related but distinct complication. An earn-out — a portion of the purchase price contingent on the company's future performance — creates a deferred payment obligation to the seller. Banks will typically require that any earn-out payments be treated as subordinated debt during the facility period, subject to the same standstill conditions. If the earn-out falls due in year three of a seven-year facility and the company has achieved the performance threshold, the buyer may be contractually obligated to the seller but contractually prohibited from paying by the bank. Managing this sequencing requires that earn-out payment schedules and covenant conditions be drafted together, ideally with the bank's credit team reviewing the earn-out mechanism at origination. The mandatory prepayment covenant is also relevant here: proceeds from equity raises or asset disposals during the facility period may be required to repay bank debt first, before any subordinated earn-out can be settled.
In Belgian acquisition financing, the seller of the business must personally sign the subordination deed. Confirm this requirement with the bank before the sale and purchase agreement is executed — a seller who refuses subordination after signing the SPA can collapse the financing at closing.
Typical Subordination Terms in Belgian SME Lending
Belgian credit agreements vary considerably in how prescriptively they define the subordination obligations, but certain patterns are consistent across the market. The subordinatieakte will define the subordinated amount with precision — typically by reference to the outstanding balance at the date of the deed plus any interest accrued but unpaid. New advances from the founder to the company after the deed is signed will usually require a separate deed or an amendment. This matters for working capital situations: if the business needs additional founder capital mid-facility, the founder cannot simply transfer funds to the company's account and retroactively bring them within the existing subordination framework. The bank will insist on a fresh deed and, under the additional debt covenant, prior written consent.
The duration of the subordination is co-extensive with the bank facility. The subordinated creditor's obligations under the deed terminate when the bank credit agreement terminates — either at maturity, on early repayment, or on a mandatory prepayment event. It is worth ensuring the deed explicitly defines the release trigger. Some first-draft subordination deeds use language tied to 'full and final settlement of all amounts due under the credit agreement,' which in Belgian banking practice can include contingent obligations (guarantee fees, hedging close-out amounts, commitment fees) that survive nominal loan repayment. Ensure the release trigger is tied to the termination of the credit facility itself, not merely to the repayment of the principal balance.
A negotiable release valve that some Belgian banks will accept is a ratio-based release mechanism: the subordinated creditor may receive partial repayment of principal if, at the time of the proposed payment, (a) the company's leverage ratio (net debt / EBITDA) is below a specified threshold — typically 2.0x — and (b) no covenant breach has occurred or is reasonably anticipated in the preceding twelve months and the following twelve months. This structure gives the bank adequate protection (the principal is only accessible when the company's financial position is demonstrably strong) while acknowledging that a full standstill for the entire life of a seven- or ten-year facility is an extreme constraint on the founder's personal liquidity. Partial releases tied to ratio tests are not universal in Belgian practice, but they are available in negotiation and worth requesting explicitly in your term sheet phase.
What to Watch After Signing
The most common post-signing subordination issue is not a deliberate violation — it is an inadvertent payment. The typical scenario involves a founder who uses the company's banking platform to transfer funds from the company account to their personal account, characterising it as a routine shareholder advance or rekening-courant movement, without recognising that this constitutes a repayment of subordinated debt. The bank's covenant monitoring systems — increasingly automated in Belgian banks since the introduction of digital covenant dashboards at KBC and BNP Paribas Fortis — will flag unexplained decreases in the shareholder loan balance on the company's balance sheet at the next financial reporting date. When the bank asks for an explanation, the founder discovers that what felt like routine treasury management was a breach of the subordinatieakte. Set a clear internal protocol: any movement on the rekening-courant actionnaire account requires a specific sign-off against the credit agreement before it is executed.
Belgian estate planning creates a second category of post-signing risk that is underappreciated. If a founder dies while holding a large subordinated shareholder loan — €250,000 or €500,000 is not unusual in a family BV that has been operating for fifteen years — the estate cannot recover that loan until the bank is repaid. The subordination obligation is binding on the founder's estate and heirs in exactly the same way it was binding on the founder. Belgian notarissen and estate lawyers increasingly advise their clients to specifically address outstanding subordinated shareholder loans in the context of wills, trust structures, or matrimonial regime planning. The combination of an illiquid estate, a subordinated claim, and surviving family members with immediate liquidity needs is a scenario that requires advance planning, not reactive negotiation after the death.
Divorce settlements present an analogous risk. In a Belgian gemeenschap van goederen / communauté de biens matrimonial regime, the shareholder loan may form part of the matrimonial estate subject to partition. If the divorcing founder must assign part of the shareholder loan to the departing spouse, the assignment itself requires the bank's consent under the subordination deed — the bank controls who holds the subordinated claim, not merely whether it is repaid. Ensuring the subordinatieakte includes a clear provision on permitted assignments (or explicitly requires bank consent for any assignment) protects both the bank and the founder from disputes about the legal position of the claim during a marital dissolution. This is a provision worth flagging with the family law notaire before rather than during a divorce.
How to Negotiate the Subordination Requirement
The most important negotiation point is the form of the standstill. Start from partial standstill — interest permitted, principal deferred — and defend it on commercial grounds: the company's tax deduction for shareholder loan interest depends on the interest actually being paid, and blocking interest payments creates a tax inefficiency that reduces the company's net cash flow available for debt service, which is contrary to the bank's own interest in reliable repayment. This is not a creative argument; it is a straightforward cash flow observation that Belgian bank credit teams understand. Full standstill may be non-negotiable for highly leveraged transactions where EBITDA coverage is tight, but for a modestly leveraged SME the interest payment argument typically moves a bank from full to partial standstill without difficulty.
The ratio-based release mechanism described in the previous section is the second priority negotiation. Frame it as a mutual incentive alignment: a founder who can access their capital when the business is performing well has a stronger motivation to hit the financial covenants consistently than a founder who is locked out regardless of performance. A leverage test of 2.0x or below with a clean twelve-month trailing covenant history is a reasonable formulation. Some Belgian banks will include a minimum notice period (thirty days written notice before any release payment) and a cap on annual release amounts (typically 25–33% of the outstanding subordinated balance) to prevent a rush of releases that destabilises the company's balance sheet. Accept these parameters if the release mechanism itself is otherwise agreed.
The subordination deed's interaction with the affiliate transaction restriction deserves explicit negotiation attention. Some affiliate transaction covenants treat any payment on a subordinated shareholder loan — even scheduled interest — as an 'affiliate transaction' requiring prior bank approval on arm's-length terms. If your credit agreement contains both covenants, ensure they are drafted coherently: the partial standstill exception in the subordination deed should explicitly carve out permitted interest payments from the affiliate transaction restriction's consent requirement. This cross-covenant coherence is often missed in first-draft credit documentation and can be raised as a straightforward drafting clarification rather than a commercial negotiation — your lawyer should flag it as a consistency issue.
Finally, negotiate the scope of the subordinated debt definition. If the deed is drafted broadly to include 'all amounts owed by the company to the shareholder in any capacity,' it may inadvertently capture expense reimbursements, salary arrears, or director fee accruals that are not shareholder financing. Insist on a definition limited to financial indebtedness — principal and interest on the shareholder loan specifically — with explicit carve-outs for ordinary-course operational payments such as salary, director fees, and expense reimbursements at arm's-length market rates. This is a drafting precision point that most Belgian bank lawyers will accept without commercial objection, and it prevents a technically broad subordination deed from becoming an operational constraint on the company's ability to manage basic founder-related payments.
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Frequently asked questions
What is a Subordination requirement covenant?
A subordination covenant requires existing or future shareholder loans, vendor notes, or intercompany debt to be contractually subordinated to the bank facility. The subordinated creditors must agree to defer their claims until the bank is repaid.
What does a Subordination requirement covenant restrict?
Shareholders or vendors who have lent money to the business cannot demand repayment ahead of (or alongside) the bank. This protects the bank but may create tension with other stakeholders who expected their loans to be repaid.
Can you negotiate a Subordination requirement covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Subordination requirement covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.