Subordination agreements (Rangrücktritt) with German subsidiaries to be revised
The management of a German corporation that has more liabilities than assets is obligated to apply for insolvency, even if the overindebtedness is caused by shareholder loan. This may only be avoided if the shareholder explicitly subordinates its receivables. The prerequisites of such Subordination Agreement (Rangrücktrittserklärung) were eased substantially by the legislator. Any parent company having entered into such agreement should revisit the documentation.
Until the Act to Modernise the Limited Liability Company Act (GmbHG) and Combat Abuses (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG)) came into force on 01.11.2008, the Supreme Court required a so called “qualified” subordination, whereby the shareholder loans need to be subordinated in a way that repayment would only be allowed as if it was registered capital. Any repayment therefore could only be legal if it was made from free liquidity from future profits.
This implied that any upstream payment during a time the overindebtedness existed was illegal and need to be returned to the company in any event. This means that upstream payments from a subsidiary to its parent company in that period, such as for example in cash pooling systems, were illegal.
Now the new law only requires the subordination of the shareholder’s loan in the event of insolvency. Any repayment of shareholder loans – irrespective of whether it was made from free liquidity or not – may be reclaimed by the insolvency administrator if the repayment was made within one year before the insolvency application. Any payment before this one year period needs not to be returned to the subsidiary.
In order to make full benefit of this reduced requirement, any parent company should revisit the subordination agreement with its subsidiary in Germany. It should be reworded, in order to avoid claims of the insolvency administrators resulting from repayments that were made outside that one year period.