In its decision published on March 13, 2013 (dated February 21, 2013 – IX ZR 32/12), the German Federal Court of Justice (BGH or Bundesgerichtshof) made it clear that it will uphold its prevailing case law regarding two questions at hand even though the relevant legal provisions relating to equitable subordination have been moved from the corporate law regime to the insolvency law regime with the 2008 Act to Modernize the Law on Private Limited Companies and Combat Abuses (MoMiG or Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Mißbräuchen).

The BGH Decision

In particular, the BGH ruled that indirect shareholder loans, i.e., loans granted by the ultimate parent company to one of its indirect affiliates (verbundenes Unternehmen) shall be treated equal to the direct shareholder loans, i.e., loans granted to the affiliate by its immediate parent company.

The court also ruled that where the ultimate parent company has transferred and assigned its repayment claims vis-à-vis the indirect affiliate to a third party; and the affiliate has made payment to the assignee in respect of the assigned repayment claim within the one-year period preceding the date of application for the opening of insolvency proceedings (or even after such application), both the assignee and the ultimate parent company shall be jointly and severally liable to the insolvent affiliate’s estate under applicable German insolvency laws (insolvenzrechtliche Anfechtung).

Practical Consequences of the Decision

While the facts of the case underlying the decision point toward collusion between the ultimate parent company and the assignee, the decision is not limited to fraudulent cases. It applies across the board to all indirect shareholder loans, as well as all cases of assignments and transfers of (indirect) shareholder loans within the one-year period preceding the date of application for the opening of insolvency proceedings. Moreover, it appears that the BGH intends to apply the decision even in cases in which the ultimate parent company only holds a 10 percent and thus minority equity interest in the affiliate.