Under German law, repayments of shareholder loans are subject to statutory avoidance provisions if the loans were made within a one-year period prior to or after the filing of an application for insolvency proceedings. Following a recent decision of the German Federal Court of Justice (BGH), the legal possibilities of avoiding the risk of avoidance under insolvency law are restricted.

Since the introduction of the Act to Modernise the Law Governing Private Limited Companies and to Combat Abuses (MoMiG), German law on shareholder loans has been changed fundamentally. Under the old law, a shareholder loan was considered to substitute equity if the loan was granted in the course of a financial crisis of the company or was not terminated when the company entered into such a crisis. If the respective loan was qualified as an equity-replacing loan, certain provisions to protect the creditors of the company applied. In particular, in case of insolvency proceedings the shareholder loan was subordinated (i.e. the shareholders would only be paid once all the unsubordinated insolvency creditors had been satisfied in full) and repayments were subject to avoidance rights of the insolvency administrator (i.e. the repayment could be challenged by the insolvency administrator).

Under the new law, any loan granted by a shareholder is now subordinated in case of insolvency proceedings over the assets of the respective company, regardless of whether the loan was granted in times of a financial crisis or not. In addition, the insolvency administrator’s avoidance right under section 135 of the German Insolvency Code now applies to all repayments that were made within a one-year period prior to or after the filing for commencement of insolvency proceedings. Prior to insolvency, however, under the new law the company is allowed to repay shareholder loans, even in cases when the company is in financial distress.

In its decision dated 21 February 2013, the BGH outlined its position on several questions regarding the scope of the insolvency administrator’s avoidance rights under the new law. First, the court ruled that the avoidance provisions also applied if the loan was granted by an indirect shareholder who was in a position to exert control over the direct shareholders of the company.

Secondly and more importantly, the BGH commented on the effects of an assignment of a shareholder loan. In practice in the past, it was not uncommon that shareholders tried to avoid the insolvency administrator’s avoidance rights by assigning their claims to a third party. The BGH now aimed to put an end to this practice. Based on an earlier BGH decision from 2011, the court now held that the assignment of a shareholder loan to a third party would not result in the loan ceasing to be subject to the subordination rules. Consequently, the insolvency administrator would be entitled to challenge repayments of the shareholder loan after the assignment, even in cases where the assignee was no longer a shareholder. However, the BGH clarified that this would be limited to those cases in which the assignment of the loan took place within the one-year period before commencement of insolvency proceedings.

Finally, the BGH clarified that in cases of an assignment to a third party not only the assignee is subject to the avoidance provisions, but also the shareholder who assigned the loan in the first place, provided that the shareholder was responsible for the subsequent payment to the assignee.

In summary, the BGH consistently restricts any attempts to circumvent the statutory avoidance provisions. Therefore, attention should be paid to the one-year time period in which repayments for shareholder loans trigger the avoidance rights of the insolvency administrator.

German Federal Court of Justice, decision dated 21 February 2013 (IX ZR 32/12)

Dr Lars Weber