A ruling by the São Paulo Court highlights the need to formalize financial agreements to avoid disputes and ensure proper categorization of investments and loans
It is common for companies to require additional capital injections from their partners during regular business operations to meet obligations or support new projects.
These funds may be received as capital, becoming part of the company's assets and affecting the balance of partners' economic and political rights, or as debt, creating an obligation for the company to repay the loan under agreed terms. The choice between the two brings different legal, tax, and corporate implications, making it crucial to formalize the arrangement properly to avoid future disputes over the correct categorization.
The 1st Reserved Business Law Chamber of the São Paulo Court of Justice (TJ-SP) recently addressed this issue in its ruling on Civil Appeal No. 1019502-09.2017.8.26.0002 on August 8, upholding a lower court decision that recognized the existence of a verbal loan between a former partner and the company.
In this case, the former partner filed a lawsuit against the company, claiming he had made several financial contributions that were never repaid. The company argued that these transfers were investments, not loans, and requested the dismissal of the case.
The court ruled that the funds provided by the former partner were indeed loans and not investments in the company's capital. The decision was based on documentary evidence, such as emails and testimonies, which showed that the amounts had not been recorded as a capital increase but as a loan to the company. The lower court's decision was upheld, ordering the company to repay the loan, adjusted for inflation and with 1% interest per month from the date of the lawsuit.
The company also claimed that the former partner had acted as an angel investor in another joint venture and argued that this same status should apply here. However, the court found that the legal nature of the relationship in this case was different and that the partner had, in fact, made the contributions as a personal loan to keep the business running, especially given the lack of capital from the other partner.
This decision highlights the importance of formally documenting any financial agreements between partners and the company, especially when significant sums are involved. The absence of a clear contract can lead to misunderstandings and even litigation over the true nature of the contributions, raising uncertainties about whether interest applies, penalty amounts for late payment, and due dates. In the case of a loan, it can generally be demanded immediately, as it can be requested within 30 days according to Article 592, Section II, of the Civil Code.
Furthermore, it is essential that all financial transactions be properly recorded and documented in corporate resolutions to authorize the transactions and prevent future disputes about how the funds were used. Formalizing agreements not only protects the parties involved but also ensures that any discussion about the origin or purpose of the funds can be resolved efficiently and objectively.
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