Key points

The ‘qualified subordination’ tool is a useful device for a German company that may be balance-sheet insolvent.


German insolvency law requires the directors of a company to file for insolvency when the company is over-indebted pursuant to sec. 19 German Insolvency Code (‘InsO’). The failure to comply with this obligation is a criminal offence, and can also trigger directors’ liabilities under German corporate law.

‘Qualified Subordination’

An entity is over-indebted pursuant to sec. 19 InsO when its available assets no longer suffice to cover its existing liabilities, unless it is reasonable to take the view that its survival is probable in all the circumstances. Details as to over-indebtedness are required to be set out in a specific ‘over-indebtedness balance sheet’ (‘Überschuldungsbilanz’).

A company may remedy this by entering into an agreement which subordinates the repayment of a tranche of debt on deeply subordinated terms. This arrangement is known as a ‘qualified subordination’ of debt (‘qualifizierter Rangrücktritt’) (a Qualified Subordination). The agreement should specify that the subordinated debt will only be repaid after all other creditors of the company have been satisfied; and then only if the net income from winding up the company or other net assets remain available. A Qualified Subordination is often deployed in cases where intra-group debt exists.

Obligations which have been subordinated in this manner will still be listed as liabilities in the commercial balance sheet, but not in the over-indebtedness balance sheet. This may prove a solution to management’s obligation to file for insolvency in cases where the company is commercially viable but technically insolvent.

Tax implications

It is crucial that the Qualified Subordination is not regarded as a waiver of the debt by the tax authorities. If so characterised, the company would unfortunately be required to declare the value of the subordinated debt as taxable income.


A Qualified Subordination is widely regarded as a cost-efficient; tax-efficient and effective financial restructuring tool.

However, the documentation should be tailored on a case-by-case basis to ensure that the relevant debt need no longer be included in the over-indebtedness balance sheet. Careful drafting is also required in order to avoid negative tax treatment.

Ruprecht von Weichs