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Shareholder Loans in Corporate Insolvency – A New Approach to an Old Problem

Published online by Cambridge University Press:  06 March 2019

Dirk A. Verse

Extract

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The treatment of shareholder loans in corporate insolvency is a controversial issue in many jurisdictions. On both sides of the Atlantic, lawmakers and courts have struggled to answer the question if and under what circumstances shareholder loans should be treated differently from loans granted by outsiders. In particular, the difficulties turn on three issues: (i) whether shareholder loans should rank pari passu with the claims of outside creditors or whether they should be subordinated; (ii) whether the repayment of shareholder loans should be subject to specific restrictions, particularly in the vicinity of insolvency; and (iii) whether specific restrictions should apply to secured shareholder loans.

Type
Research Article
Information
German Law Journal , Volume 9 , Issue 9: Special issue - Reform of Germany's Private Limited Company (GmbH) , 01 September 2008 , pp. 1109 - 1124
Copyright
Copyright © 2008 by German Law Journal GbR 

References

1 See, e.g., James H.M. Sprayregen, Jonathan P. Friedland, Jo Ann J. Brighton, & Bianca, Salvatore F., Recharacterization of Debt to Equity: An Overview, Update and Practical Guide to an Evolving Doctrine, Annual Survey of Bankruptcy Law (2004); David Skeel, Jr. and Georg Krause-Vilmar, Recharacterization and the Nonhindrance of Creditors, 7 European Business Organization Law Review (EBOR) 259 (2006).Google Scholar

2 See Taylor v. Standard Gas & Electric, 306 U.S. 307 (1939) (on equitable subordination).Google Scholar

3 Reichsgericht (RG— Court of the German Empire), 67 Juristische Wochenschrift (JW) 862 (1938); Reichsgericht, 68 Juristische Wochenschrift (JW) 355 (1939). The precedent in the jurisprudence of the BGH is Entscheidungen des Bundesgerichtshofs in Zivilsachen (BGHZ) 31, 258.Google Scholar

4 BGHZ, 90, 370.Google Scholar

5 Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG — Act to Modernize the Law Governing Private Limited Companies and to Combat Abuses).Google Scholar

6 E.g., stock corporations (AG), limited partnerships which do not have an individual as their general partner (GmbH & Co. KG) and foreign companies operating mainly in Germany. On the latter, see infra Part E.Google Scholar

7 The final version is published in BTDrucks 16/9737.Google Scholar

8 For a comparative overview, see Martin Gelter, The subordination of shareholder loans in bankruptcy, 26 International Review of Law and Economics 478, 479–482 (2006); Martin Gelter and Jürg Roth, Subordination of Shareholder Loans from a Legal and Economic Perspective, 5 Journal for Institutional Comparisons 40, 40–45 (2007); Ulrich Huber and Mathias Habersack, Special Rules for Shareholder Loans: Which Consequences Would Arise for Shareholders if the System of Legal Capital Should be Abolished?, in Legal Capital in Europe, 308, 308–321 (Marcus Lutter ed., 2006).Google Scholar

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11 Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG — Private Limited Company Act) § 32a (1); Insolvenzordnung (InsO – Insolvency Code) § 39 (1) n. 5. Until 1998, GmbHG § 32a (1) even provided that the claim be disallowed.Google Scholar

12 For details, see Habersack, Mathias, §§ 32a, b, in GmbH Grosskommentar, margin numbers 43–51 (Peter Ulmer ed., 2006).Google Scholar

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15 According to the analysis in In re Autostyle Plastics, 269 F.3d 726, 750 (6th Cir. 2001), courts should consider eleven factors when deciding on recharacterization. The first three of these factors focus on whether or not the loan was properly documented. See Skeel and Krause-Vilmar, supra note 1, at 277, 279 (noting that “[i]f the loan is properly documented, courts are loath to interfere”).Google Scholar

16 InsO § 39 (1) n. 5, as amended.Google Scholar

17 See Huber and Habersack, supra note 8, at 315–316 (discussing the Spanish position). The new law borrows heavily from the ideas of these two authors, as is apparent from a proposal submitted by them in early 2006; see Ulrich Huber and Mathias Habersack, GmbH-Reform: Zwölf Thesen zu einer möglichen Reform des Rechts der kapitalersetzenden Gesellschafterdarlehen, 61 Betriebs-Berater (BB) 1 (2006).Google Scholar

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21 InsO § 39 (4), as amended. Note that the 10 % threshold will henceforth not only apply to the GmbH, but also to a stock corporation (AG). Up to now, the relevant threshold in an AG was 25 % of the registered capital.Google Scholar

22 InsO § 39 (5), as amended.Google Scholar

23 BTDrucks 16/6140.Google Scholar

24 Note, however, that the new approach triggers considerable practical consequences in other areas, particularly as regards the repayment restrictions on shareholder loans; see infra Part C.Google Scholar

25 BGHZ 90, 381, (388-389).Google Scholar

26 For details see infra Part C.Google Scholar

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31 Skeel and Krause-Vilmar, supra note 1, at 271; Cahn, supra note 10, at 294.Google Scholar

32 Empirical data from 1994–1998 suggests that, on average, unsecured creditors receive quotas of less than 5 % in the insolvency proceedings; see Bauer, Joachim, Ungleichbehandlung der Gläubiger im geltenden Insolvenzrecht, Deutsche Zeitschrift für Wirtschafts- und Insolvenzrecht (DZWIR) 188, 189 n. 21 (2007).Google Scholar

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34 Cahn, , supra note 10, at 295–298, 299–300. For further arguments against subordination, see Mülbert, supra note 10, and Eidenmüller, supra note 10, at 57–60 arguing, inter alia, that the risk for creditors does not stem from the loan as such but rather from wrongful management decisions taken by the directors in the vicinity of insolvency. Therefore, Eidenmüller argues that liability should be strengthened in the latter respect rather than penalizing shareholder loans by way of subordination.Google Scholar

35 Habersack, , supra note 28, at 2147.Google Scholar

36 See, e.g., Cahn, , supra note 10, at 296–298; Mülbert, supra note 10, at 397; Eidenmüller, supra note 10, at 61–62.Google Scholar

37 InsO § 135 n. 2.Google Scholar

38 InsO § 143 (1).Google Scholar

39 AnfG §§ 6 n. 2, 11 (1).Google Scholar

40 GmbHG §§ 30, 31.Google Scholar

41 Example: The company has assets totalling 300 and liabilities (including the equity substituting loan) totaling 285, hence the net assets amount to 15. If the registered capital is 25, the repayment of the loan is barred in the amount of 10. See Habersack supra note 12, margin number 214.Google Scholar

42 Habersack, , supra note 12, margin numbers 214 and 221.Google Scholar

43 The limitation period is ten years; GmbHG § 31 (5).Google Scholar

44 InsO § 135 n. 2, as amended. If no insolvency proceedings are commenced, the one-year period is to be calculated not from the date of the insolvency filing, but from the date on which the creditor obtained an enforceable title for his claim; see AnfG § 6 n. 2, as amended.Google Scholar

45 See supra Part B.II.1. Note that while the exception for small shareholders can easily be explained on the ground that such shareholders will typically not have the same informational advantage as other corporate insiders, the merits of the second exception are dubious as far as repayments are concerned. It may be useful to give an incentive to investors who acquire shares in an attempt to rescue the company by exempting them from the subordination rule. It is difficult to see, however, why such an investor should also be exempt from the repayment restrictions, given that this enables him to abuse of his insider status by causing the repayment of his loan in the vicinity of insolvency.Google Scholar

46 GmbHG § 30 (1) s. 3 and AktG § 57 (1) s. 3, as amended.Google Scholar

47 Empirical data suggests that most companies are in financial distress long before the insolvency petition is filed; see Haas, supra note 30, at 621.Google Scholar

48 See Eidenmüller, supra note 10, at 64; Peter O. Mülbert, Neuordnung des Kapitalrechts, 60 Wertpapier-Mitteilungen (WM) 1977, 1978–1979 (2006).Google Scholar

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50 Supra Part C.I.Google Scholar

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52 See the contribution by Matthias Casper in this issue of the German Law Journal.Google Scholar

53 InsO § 135 n. 1. If no insolvency proceedings are commenced, the creditors themselves are entitled to avoid and claim back the security interest under AnfG § 6 n. 1.Google Scholar

54 InsO § 135 n. 1, as amended; cf. also AnfG § 6 n. 1, as amended.Google Scholar

55 Supra Part B.II.1.Google Scholar

56 For a critical analysis of the consequences of this approach in particular with regard to intra-group financing, see Michael Burg and Stefan Westerheide, Praktische Auswirkungen des MoMiG auf die Finanzierung von Konzernen, 63 Betriebs-Berater (BB) 62 (2008).Google Scholar

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60 On the rise of the UK limited company in Germany, see, e.g., Marco Becht, Colin Mayer & Wagner, Hannes F., Where do Firms Incorporate? Deregulation and the Cost of Entry, ECGI Law Working Paper N. 70/2006 (August 2007); Verse, Dirk A., Company Law Reform in Germany – The Proposed New Private Limited Company Law –, 4 Kyoto Journal of Law and Politics 1, 3 (2008).Google Scholar

61 This “incorporation theory” has been controversial for many years, but is now the prevailing view also in Germany, at least with regard to E.U. and U.S. companies. For details, see Andreas Heldrich, Anh. zu Art. 12 EGBGB, in Bürgerliches Gesetzbuch, margin numbers 6, 23 (Otto Palandt ed., 67th ed., 2008). Note that the German government is currently preparing a reform of international company law which shall codify the incorporation doctrine for companies from all jurisdictions.Google Scholar

62 See European Insolvency Regulation, art. 3 (1) § 1 and art. 4 (1), Council Regulation 1346/2000, 2000 O.J. (L160) 1 on insolvency proceedings.Google Scholar

63 BTDrucks 16/6140.Google Scholar

64 GmbHG §§ 32a, b will be repealed, and the new provisions will be found in InsO §§ 39, 135 and AnfG § 6 as amended.Google Scholar

65 European Insolvency Regulation, art. 4 (2) (i), (m), Council Regulation 1346/2000, 2000 O.J. (L160) 1.Google Scholar

66 For a detailed analysis of this issue, see Huber, Ulrich, Gesellschafterdarlehen in der Inlandsinsolvenz von Auslandsgesellschaften, in Europäische Auslandsgesellschaften in Deutschland 131, 165–185 (Marcus Lutter ed., 2005).Google Scholar

67 See Huber, , supra note 66, at 185–188; but see Eidenmüller, Horst, Ausländische Kapitalgesellschaften im deutschen Recht, § 9, margin number 44 (2004).Google Scholar