Deed Of Subordination Of Directors Loan Template for Canada

When your company has received loans from both directors and institutional lenders, you need a clear legal framework to establish creditor priorities. A Deed of Subordination of Directors Loan provides this essential structure, ensuring that your company's financing arrangements comply with Canadian federal and provincial law while protecting the interests of all parties involved.

When do you need this document?

You'll require this deed when your company seeks new institutional financing while existing director loans remain outstanding. Banks and other senior lenders typically demand subordination agreements before extending credit, as they need assurance about their priority position in case of default or insolvency. This document is also essential during corporate refinancing, when restructuring existing debt arrangements, or when directors provide additional funding to companies that already have senior debt facilities. Public companies may need subordination deeds to satisfy securities law disclosure requirements about material debt arrangements, while private companies use them to maintain clear creditor hierarchies and facilitate future financing rounds.

Key legal considerations

The deed must clearly define all parties, including the company as borrower, directors as subordinated creditors, and senior lenders with priority claims. Critical provisions include the scope of subordination, which typically covers all amounts owed to directors including principal, interest, and any related costs. You need to specify permitted payment conditions, such as allowing director loan repayments only when the company is solvent and no default exists under senior facilities. The document should address enforcement restrictions, preventing directors from taking collection actions that could interfere with senior creditors' rights. Include provisions for dealing with unauthorized payments, requiring directors to hold such funds in trust for senior lenders. Consider including standstill periods during which directors cannot demand repayment, and ensure the deed addresses what happens if additional subordinated debt is created.

Legal requirements in Canada

Under the Canada Business Corporations Act, directors must ensure subordination agreements don't conflict with their fiduciary duties to the corporation and shareholders. The deed must comply with provincial property law requirements for execution, which may include witnessing and notarization depending on your jurisdiction. If your company is publicly traded, provincial securities acts may require disclosure of material subordination arrangements. The Interest Act governs interest rate provisions in the underlying loans, while the Bankruptcy and Insolvency Act affects how subordination operates during insolvency proceedings. Tax implications under the Income Tax Act must be considered, particularly regarding the timing of interest deductions and deemed benefits. Ensure the deed includes proper governing law clauses specifying which provincial law applies, and consider whether registration requirements exist in your jurisdiction for certain types of subordination agreements affecting real estate or other secured assets.