Formation of authorized capital at the expense of loan funds in the USA

We have already raised the question in the article , whether it is possible to form the authorized capital with debt obligations . According to Part 1 of Art. 190 of the CCU, property as a special object is considered to be a separate thing, a set of things, as well as property rights and obligations. In accordance with the second part of Article 13 of the Law on Companies, the company cannot provide a loan for the payment of a participant's contribution or a guarantee for loans, credits provided by a third party for the payment of his contribution . Thus, property rights arising from the loan relationship of the company with its founder on the basis of a security - a promissory note cannot be a contribution to the authorized capital of a business company. At the same time, the legislation does not prohibit the formation of the company's authorized capital by depositing funds received by the participant in the form of returnable financial assistance not from such a company, but from another person .

But this concerns Ukraine. And how is this issue regulated in the USA?

These points are very carefully analyzed in the article " The status of the creditor as a "managing person" , authors: Joseph V. Bartlett and Philip S. Lapatin. The article considers the problem of the creditor's responsibility for the actions of the borrower, especially in cases of falsification of financial statements and bankruptcy. The authors give an example a situation where the bank granted a loan to the company for the expansion of state capital. It was assumed that during the five-year period of the loan, company A will issue public shares and use part of the proceeds from the sale to pay off the debt of bank B. Subsequently, after successful trading of shares, it will turn out that the profit of company A was significantly overstated and incorrectly formed by accountants, which forced company A to apply for bankruptcy. After which the price of the newly created shares is reduced several times and the buyers of the shares file a direct lawsuit against company A, its directors and accountants, however, despite the probability of a positive decision, there are reasons to believe , that neither management nor accountants will be able to respond with monetary losses. For this reason, Investors joins Bank B as a defendant, citing §15 of the Securities Act, which essentially provides that any person who controls a party liable under §11 may also be liable in the same measures, as well as the controlled party .

According to the authors, the creditor's control over the borrower's actions may arise if there is an economic benefit for the creditor and the need to take measures to protect third parties.

Analyzing the court decisions, it can be concluded that the creditor may be liable for failure to fulfill his duties of monitoring the borrower , which is important in the context of product liability cases.

Judge Mosk noted that creditor-borrower relations do not always imply the obligation to control the behavior of another person that harms third parties. An exception may be situations in which the creditor became an active participant in the profit from the project he financed. In addition, he noted that a person would not be considered a "controlling person" if he :

• is not an executive director;
• does not act as an executive director or director;
• does not beneficially own, or has no voting rights in respect of, securities representing more than 10% of such voting corporation;
• is not the father, mother, child, brother, sister or common-law spouse of any person referred to in the above clauses;
• is not a creditor of such corporation whose consent is now required or may be required in circumstances within its control before changes in the management of the corporation or other corporate transactions take place.

If it is considered that the creditor has a duty to control the borrower, then all creditors can be considered to be "controlling" the projects they finance." It is important to find a clear line between protective restrictions and full creditor supervision, on which the duties of control should be imposed .

Justice Douglas, on the other hand, relied on some of the CAB's expert testimony which indicated that the creditor-debtor relationship could involve control.

But, for example, in another case, In re Clearfield Bituminous Coal Corp., the Securities and Exchange Commission specifically found that the power to veto the creation of a lien on extraordinary debt does not create control.

Consider the case of In re Walston & Co., involving a brokerage firm. The Securities and Exchange Commission (SEC) brought an action for violation of §15 of the Securities Exchange Act, alleging that certain loans to the company were actually capital investments by a "creditor" not named in the registration application, which was therefore false and introduced in error The "creditor" created a trust to lend money to the company. Each of the partners borrowed their contribution to the capital of the limited partner, which received this money from the trustees. The terms of these loans were given to the "lender":

• the right to purchase shares of the borrowers' company, canceling the balance of the loan at any time;
• the right to a share of the borrowers in profits and losses;
• the right to interest on loans issued to a trust partner/intermediary.

It was found that the "lender" was in control, as, through his various loans, he contributed more than 92% of the stated capital of the firm and large sums of additional working capital, and received 90% of all profits, being liable for losses in a similar proportion. Moreover, he would acquire legal ownership of any part of the firm that he did not own, using various options, and could expel any or all partners from the partnership at his discretion.

In the light of this analysis, it can be concluded that Bank B in the initially presented situation should not be held responsible for the misrepresentation of information by Company A. In addition to insisting on equity participation as financial support, Bank B offered a very attractive offer by giving itself a stake in the company's business, but only to the extent that a portion of the proceeds from the public offering will be used to reduce outstanding debt, and each of the restrictions and special conditions was related to ensuring the repayment of the debt and not to participation in profits as a co-entrepreneur.

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Useful templates:

Decision on founding a company (one member)

Protocol on the establishment of a limited liability company

The statute of the limited liability company (second version), (Ukrainian), Ukraine

Statute / Resolution / Minutes / Structure for a newly formed company, Ukraine

Agreement on the provision of repayable financial assistance, universal parties (Ukr), Ukraine

Loan agreement between individuals (English), universal !!

Loan agreement/Loan agreement (loan from a non-resident)

Loan agreement (financial assistance) (Ukrainian, English, Ukrainian-English), universal

Loan agreement (between non-residents), (English-Ukrainian), (English), universal

Loan agreement with a non-resident (Ukrainian-English), Ukraine