Tuesday, March 27, 2012

German Provisions on Subordination of
Shareholder Loans Apply to Foreign Companies

The Federal Court of Justice ruled that the provisions of section 39 (1) no. 5 in conjunction with (4) and (5) German Insolvency Act, according to which all loans provided by a shareholder to a corporation (Kapitalgesellschaft) are subordinated, must also be applied to any corporation formed in an EU member state, if the “centre of the debtor’s main interests” [Articles 3 (1), 4 (1) Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings] is in Germany.

Whether the provisions on the subordination of shareholder loans are governed by insolvency or corporate law has long been a controversial issue.  The answer is of particular importance because in the latter case the laws of the member state in which the corporation has been incorporated (foundation theory) would apply – and not necessarily German corporate law.

Pursuant to the court’s recent judgment, German law on the subordination of shareholder loans is applicable in any case in which insolvency proceedings over the assets of a corporation are instituted in Germany.

In sum, in terms of insolvency aspects, practicing “formation tourism” may not be worth the effort.

2 comments:

  1. Thanks for this great write-up about German Provisions on Subordination of Shareholder Loans Apply to Foreign Companies. These provisions are helpful in many businessmen in different foreign countries.

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