Treatment of shareholders’ loans in the run-up to insolvency

Germany: Before insolvency proceedings begin, the fiduciary duty-based ban on recovery of a loan by a shareholder does not apply.

Introduction of the MoMiG (Act to Modernize the Law Governing Limited Liability Companies and to Combat Abuses) has resultsed in modernization of the equity compensation law and thus also in changes as to treatment of loans from shareholders. Whereas prior to the coming into force of the MoMiG loans from shareholders in times of crisis were treated as equity capital and thus subject to regulations on equity-replacing loans, after the coming into effect of the MoMiG they no longer underlie any special requirements and are subject to general regulations in respect of shareholders` loans.

This means that, above all, loans from shareholders are not subject to the ban on recovery of loans in the run-up to insolvency based on breach of fiduciary duty to the company.

Such a ban might be conceivable at most if the fiduciary protection mechanism required a counter demand.

In this case it is worth considering that the fiduciary protection mechanism might on the one hand refer to creditors of the company, and on the other hand arise from a fiduciary duty towards other shareholders. At the same time, application of fiduciary duty as a creditor-protective measure would contradict the established practice of the Federal Court of Germany whereby the third-party protective effect applies only when an agreement on postponement of priority is in place in relation to the loan. For such contractual relations can provide protection to third parties only if the company and the shareholders involve the interests of third parties in existing contractual relations by entering into an agreement postponing priority. Hence, the ban on recovery of a loan based on a fiduciary duty towards creditors is ruled out.

Furthermore, the ban on recovery might be derived from a fiduciary duty towards other shareholders. However, such a stipulation would allow an unjustified advantage to a sole shareholder in comparison with individual shareholders of companies formed by more than one shareholder.

Although the ban on recovery of a loan from a shareholder cannot be substantiated by fiduciary duty towards other shareholders, it should be taken into consideration that due to application of general insolvency regulations to shareholders` loans the latter can be disputed by the insolvency administrator if the loan is paid off within one year preceding the commencement of insolvency.


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