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General structuring of financing

Choice of law

What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?

Pursuant to German conflict of law rules, parties are principally free to choose the law governing a loan agreement. Courts of a jurisdiction that also applies such principles generally hold that the choice of law is to be recognised. However, this only applies to the loan agreement itself. Depending on the specific type of collateral, the relevant collateral agreements may be subject to deviating choice of law principles (eg, liens in property are subject to the principle of lex rei sitae).

In practice, agreements about loans that are to be syndicated internationally are usually subject to English law. Apart from that, it is common to choose German law.

Restrictions on cross-border acquisitions and lending

Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?

There are generally no restrictions regarding acquisitions of domestic companies by foreign entities. However, certain exceptions exist. In particular, entities that are subject to financial markets supervision are usually also subject to certain change of control provisions. For example, change of control provisions regarding major stakes in banks and financial services companies are stipulated by section 2c of the German Banking Act (KWG). Similar provisions exist, inter alia, for stock exchanges, e-money institutions, insurance companies and investment fund companies. Moreover, additional merger control rules may apply under Regulation (EC) No. 139/2004 (EC Merger Regulation) and the German Act Against Restraints of Competition (GWB), and especially for acquisitions in arms companies, provisions under the German Foreign Trade Act also apply.

Also, Directive 2011/61/EU (Alternative Investment Fund Managers) was implemented into German law in July 2013 when the Investment Code (KAGB) entered into force. According to this, acquisitions of major stakes in non-listed companies by private equity funds are subject to report and disclosure obligations (eg, under sections 298 and 290 KAGB).

Types of debt

What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?

Acquisitions are usually financed by a mix of equity and debt, whereas the equity-to-debt ratio for medium-sized transactions of an average risk seems to be approximately 25:75 to 35:65 at present. In most cases, debt is usually provided by banks in the form of senior bank loans. However, depending on the deal, financing consisting of a mix of senior and junior loans, mezzanine loans and even high-yield bonds are also possible. Depending on the transaction volume, syndication is not unusual. The debt components usually comprise financing of the purchase price (including both tranches with bullet repayments and with instalments), refinancing of existing loans as well as working capital funds.

Certain funds

Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?

Generally, German law does not require ‘certain funds’. However, exceptions exist, inter alia, for listed companies and companies subject to merger control rules.

For example, if a bidder makes a voluntary or mandatory takeover offer for a listed company, the Securities Acquisition and Takeover Act (WpÜG) provides that prior to the announcement of the offer document, the bidder must ensure that the required funds are available at the time at which the claim for consideration will become due. If a purchaser intends to acquire a major stake in a regulated entity (eg, a bank or financial services institution), the German regulator requires similar proofs.

Apart from such statutory requirements, depending on the deal, sellers sometimes demand assurances regarding the reliability of the potential acquirer’s funding. In such cases, ‘certain funds’ may be a reasonable option.

Restrictions on use of proceeds

Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?

The usual acquisition financing documentation generally provides for strict rules regarding the purpose and use of the debt tranches. For example, tranches for financing the purchase price and refinancing of existing debts are usually directly transferred to certain bank accounts named by the seller and the existing banks. Working capital lines may usually only be drawn for certain operational needs. A violation of the provisions governing the application of funds usually constitutes a breach of contract.

Licensing requirements for financing

What are the licensing requirements for financial institutions to provide financing to a company organised in your jurisdiction?

Pursuant to section 32(1)(2) of the KWG, anyone wishing to lend money in Germany on a commercial basis or on a scale that requires a commercially organised business undertaking requires a written licence from the Federal Financial Services Supervisory Authority (BaFin). In this respect, one should note that only the ‘granting’ of a loan constitutes a licensable banking business. Therefore, once a loan has been issued, the acquiring of the relevant claim for repayment would generally not be a licensable activity.

If lending is provided on a cross-border basis (ie, without any physical presence of the lender in Germany), it has to be differentiated as follows: BaFin would deem such cross-border business still to be transacted ‘in Germany’ if the lender targets the German market (eg, by actively soliciting potential borrowers for its lending services in Germany). In contrast, the lending services would not be deemed to be rendered ‘in Germany’, and therefore a banking licence would not be required, if borrowers in Germany approach the foreign lender on their own initiative (ie, without prior solicitation) in order to be provided with the desired lending (the ‘freedom to passively provide licensed services’). This should usually be the case where, for example, a German borrower approaches foreign lenders in order to invite them to participate in a lending agreement.

A further option to provide business-scale banking or financial services in Germany without the need to apply for a licence exists for enterprises that have their legal seat in a member state of the European Economic Area (EEA). Pursuant to section 53b of the KWG, a deposit-taking credit institution or securities trading firm domiciled in another EEA country may conduct banking business, except for investment fund business, or provide financial services in Germany, either through a branch or by providing cross-border services, without a licence from BaFin if it is licensed by the competent authorities of its home state. The business it conducts is covered by such a licence and the enterprise is supervised by the competent authorities in accordance with the nine EU directives on passporting.

Withholding tax on debt repayments

Are principal or interest payments or other fees related to indebtedness subject to withholding tax? Is the borrower responsible for withholding tax? Must the borrower indemnify the lenders for such taxes?

Under German tax law, payment of a principal amount is not subject to withholding tax. This also generally applies to interest, payable by a borrower to a lender under a facility agreement, unless that borrower is a domestic credit institution or a financial service provider. Nonetheless, facility agreements usually contain provisions obliging the borrower to increase payments to compensate for any amount of tax withheld (tax gross-up) or to indemnify the lender against any tax, costs and expenses incurred as a result of interest payments under the facility agreement (tax indemnity).

Restrictions on interest

Are there usury laws or other rules limiting the amount of interest that can be charged?

Generally, and subject to the general civil law principle of contra bonos mores, parties to a German loan agreement may freely agree on any interest rates. Interest rates that exceed 200 per cent of the respective real interest rates that are customary in the particular market at the time are usually regarded as contra bonos mores. Limiting provisions exist for the charging of compound interest also.

Indemnities

What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?

Usually, a borrower is required to indemnify lenders against any cost, expenses, loss or liability incurred as a result of its breach of the provisions of the finance documents. In particular, defaults, failure to pay or if any obligation of a borrower under or in connection with any finance document or any obligation guaranteed by it is, or becomes, unenforceable, invalid or illegal. Besides that, documentation often contains clauses regarding tax and currency indemnity. Moreover, lenders usually ask to be indemnified against third parties’ claims except in cases that are their own fault. Regarding the latter, lenders usually try to limit their liability only to intentional and gross negligent default, whereas borrowers usually try to have any form of default on the side of the bank covered (ie, including slight negligence).

Assigning debt interests among lenders

Can interests in debt be freely assigned among lenders?

Under German statutory law, claims arising from loan agreements may generally be freely assigned by the creditor. Depending on the identity of the creditor and the circumstances of the individual case, general banking secrecy or data protection provisions may have to be complied with. However, breach of these provisions would not hinder valid assignment as such but may lead to claims for damages on the side of the debtor only.

As such, general rules are subject to the parties’ agreements they can contractually agree to prevent any or certain types of assignment. According to our experience, borrowers usually try to exclude assignments to certain types of assignees (eg, hedge funds, opportunity funds, etc) or even to limit assignment to regulated authorities such as credit institutions only. In contrast, lenders usually try to adhere to the statutory provisions (ie, no limitation).

Requirements to act as agent or trustee

Do rules in your jurisdiction govern whether an entity can act as an administrative agent, trustee or collateral agent?

Generally, no. Exceptions may arise if the agency comprises standard banking or financial services or the trust assets comprise financial instruments within the meaning of the KWG. In such cases, one should carefully analyse whether or not the activities of a trustee or agent could qualify as a licensable service.

Debt buy-backs

May a borrower or financial sponsor conduct a debt buy-back?

A debt buy-back (ie, a purchase of a share in a syndicated loan by the borrower or their financial sponsor or their shareholder) is generally possible. Restrictions may, however, arise from the relevant financing agreements, which usually contain provisions in this regard.

Exit consents

Is it permissible in a buy-back to solicit a majority of lenders to agree to amend covenants in the outstanding debt agreements?

Legally, it has to be differentiated between transfers of repayment claims and transfers of stakes in a syndicate or consortium. If a transfer includes the latter, it may have an implication on lenders’ decisions. Depending on the size of the transfer, borrowers, or their financial sponsors, may even acquire a blocking minority, which enables them to block early terminations.

Guarantees and collateral

Related company guarantees

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

German law generally imposes no limitations on foreign companies providing guarantees for the benefit of their German affiliates or parents (however, laws of the relevant foreign jurisdictions usually do). In contrast, guarantees provided by German companies for the benefit of their domestic or foreign parent or domestic or foreign affiliates are generally subject to capital maintenance rules or provisions on financial assistance under German corporate law.

For example, a German limited liability company (GmbH) may provide a guarantee securing the debt of its parent to a third party only, if such a guarantee will not lead to a shortfall in its share capital. Similar provisions exist for other legal entities such as stock corporations as well as for partnerships whose general partner is a legal entity (eg, GmbH und Co KG).

Usually, finance documents comprise a ‘limitation language’ in order to prevent that entering into such finance documents by a German subsidiary (and the providing of guarantees under it) may be qualified as a breach of the aforementioned rules.

Assistance by the target

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

In addition to the restrictions under the aforementioned capital maintenance rules, the provision of the German stock corporation act on the providing of financial assistance may apply if the target is a German stock corporation. If the providing of collateral conflicts with such provisions, the relevant agreements may be void. However, there are several recognised ways to circumvent such issues. For example, if a control and profit and loss transfer agreement between the stock corporation and its parent is in force, acts of assistance provided by the stock corporation may be excepted from the aforementioned rules.

Types of security

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

German civil law provides for several types of collateral instruments. This includes:

  • mortgages and land charges on real property;
  • pledges on shares;
  • goods and rights (eg, bank accounts);
  • assignment of goods or rights for security purposes;
  • guarantees;
  • sureties; and
  • letters of comfort.

As German law does not provide for the possibility of an all-asset grant (like a debenture) security needs to be granted asset by asset in the form of the aforementioned collateral instruments.

Although German law does not generally provide for the concept of floating charges, in certain respects it does offer the possibility to agree on security arrangements pursuant to which collateral may float. For example, the parties may agree on an assignment for security purposes of storage inventories. Pursuant to such an agreement, ownership in all goods, machines, parts of machinery, etc, located in or brought into a certain storage room (eg, specified by corresponding marks in a floor plan) would be assigned. In such cases the extent of the collateral changes, from time to time, depending on the goods, machines, parts of machinery, etc, which are located in the storage room.

Generally, German law does not allow for the possibility of a blanket lien on all assets of a company. However, it is possible to grant blanket assignments of certain assets. Such assignments would have to comply with the principle of certainty, which means that it has to be determined, or at least it has to be determinable at all times, which assets are exactly subject to such assignments. Security transactions that violate this principle may be void. For example, a global assignment agreement that refers to the assignment of all existing and all future claims of the target would usually be in line with principle of certainty. Such future claims are not determined but are determinable.

Requirements for perfecting a security interest

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

This generally depends on the specific type of security and has to be analysed carefully in each case. There are no specific bodies of law governing the perfection of collateral, but there are provisions in general laws dealing with the perfection of security rights. For example, notarisation and registration requirements exist in the Civil Law Code with regard to mortgages and land charges. A pledge or transfer of shares in a limited liability company requires notarisation, according to the provisions of the Limited Liability Companies Act, whereas a pledge or transfer of shares in a limited partnership or of movable property does not. A pledge of movable property generally requires possession of the respective asset, whereas a transfer of ownership for security purposes does not. If an intellectual property right is pledged, registration at the German Patent and Trademark Office may be advisable. Assignment of receivables generally requires no notification but notification to the debtor may be advisable in order to avoid that such receivables cease to exist due to payments made by the debtor to the former creditor (assignor).

Renewing a security interest

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Under German law there are generally no requirements for renewal procedures.

Stakeholder consent for guarantees

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

Generally, no explicit legal provisions exist stating that approval of a works council or other similar consent is necessary before granting a guarantee or security. However, if an economic committee within the meaning of section 106 of the Works Constitution Act exists, it might be appropriate to keep that economic committee informed of any relevant borrowing and granting of security because the company is obliged to inform the committee about economic affairs, in particular the company’s economic and financial situation.

Granting collateral through an agent

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

This generally depends on whether the respective security is accessory or non-accessory to the secured claims. In the case of non-accessory securities such as security assignments or land charges, the holder of the secured claims and the holder of the granted security do not necessarily have to be identical, so that security may be granted directly to an agent or trustee. In the case of accessory securities such as pledges or mortgages, the identity of the holder of the secured claim and the holder of the granted security is mandatory. However, the concept of ‘parallel debt’ allows for a parallel claim structure where the agent will be entitled to his or her own abstract claim in order to be able to hold accessory collateral.

Creditor protection before collateral release

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

German statutory law does not explicitly deal with creditor’s protection before the release of collateral. However, a creditor is only obliged to release collateral as far as the secured claim has been discharged. In addition, there are several provisions leading to further protection of the creditor. For example, a holder of a land charge is protected as long as it is registered within the Land Register and the land charge itself cannot be deleted without the holder’s consent. Moreover, secured parties entitled to rights in rem benefit from a certain level of protection pursuant to the German civil law’s provisions on ‘acquisitions in good faith’. Also, contractual agreements within the financial documentation generally contain provisions regarding the requirements that have to be fulfilled before collateral can be released.

Fraudulent transfer

Describe the fraudulent transfer laws in your jurisdiction.

Depending on the circumstances of the individual case, German law provides for several provisions dealing with fraudulent transfers. For example, if a debtor has transferred assets, despite creditors of that debtor being entitled to these assets owing to an enforceable judgment, these creditors may, under certain conditions, challenge that transfer in accordance with the provisions of the Creditors’ Avoidance of Transfers Act. If insolvency proceedings have been initiated, the provisions on recessions in the Insolvency Act (InsO) may apply. Also, fraudulent transfers may form criminal offences.

Debt commitment letters and acquisition agreements

Types of documentation

What documentation is typically used in your jurisdiction for acquisition financing? Are short form or long form debt commitment letters used and when is full documentation required?

The documentation used largely depends on the type of deal, particularly the target, the enterprise volume and the volume of debt as well as whether or not the lenders intend to syndicate parts of their portions internationally. With respect to the full loan documentation contractual standards exist, which more or less mirror the standard documentation published by the Loan Market Association (LMA). However, several law firms have developed house styles which follow the concept of the LMA documentation but use deviating language. Some banks even use their own templates, which are sometimes significantly tighter than the LMA standards. The latter is, however, usually only the case if such bank does not intend to syndicate internationally.

Commitment letters are usually not a matter of size but of language. As German statutory and case law provides for an existing legal framework, a reasonable commitment can be achieved by using relatively straightforward documentation. A commitment letter usually contains a conditional commitment of a bank to a borrower to provide for the financing of the intended acquisition and to sign the full documentation (underwriting). Such commitment is always subject to the fulfilment of various conditions. Usually, a term sheet is attached to the commitment letter, which contains the material economic and legal parameters of the financing.

Level of commitment

What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?

This largely depends on the deal and the parties’ negotiating power. Usually, sellers expect that the banks’ commitment is subject to reasonable conditions precedent only, for example, a precise but not too wide material adverse change (MAC) clause, satisfactory due diligence results and execution of final documentation. However, fully underwritten commitments occur rather seldom.

Conditions precedent for funding

What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?

The conditions precedent contained in commitment letters strongly depends on the characteristics of each transaction and are, therefore, subject to specific adjustments. Usually, commitment letters comprise standard conditions such as to ‘know your customer’ compliance, corporate authorisations, no MACs, valid granting of security interests, execution of final documentation within a certain period of time, regulatory requirements and approvals, as well as satisfactory due diligence results.

Flex provisions

Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?

Banks often ask for market flex clauses, allowing them to modify the agreed terms of the loan unilaterally if syndication turns out to be more difficult than expected. Such flex clauses often refer to interest margins. However, flex rights regarding other conditions of the financing are possible, too. Borrowers usually try to avoid flex rights on the side of banks or try to limit the applicability of such rights as far as possible. Also, they sometimes try to ensure that flexibility works in both directions (ie, that banks have an obligation to lower margins if syndication proves to be easier than expected).

Securities demands

Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.

Securities demands play no key role in acquisition financing in Germany.

Key terms for lenders

What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?

The German buyout and acquisition market is highly professional and mainly driven by commonly used contractual standards. Lenders tend to expect the acquisition agreement more or less to mirror these standards. Therefore, key elements of these contractual standards are relevant to them. This includes, inter alia, standard payment mechanics, standard closing and transfer procedures, representations and warranties, etc.

Public filing of commitment papers

Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?

Commitment letters and acquisition agreements are not usually publicly filed in Germany.

Enforcement of claims and insolvency

Restrictions on lenders’ enforcement

What restrictions are there on the ability of lenders to enforce against collateral?

Generally, the ability of lenders to enforce against collateral is not restricted. Exceptions exist pursuant to the general principles of German civil and insolvency law, which depend on the circumstances of the individual case.

Debtor-in-possession financing

Does your jurisdiction allow for debtor-in-possession (DIP) financing?

German insolvency law provides for a legal concept that is, as we understand, similar to the concept of ‘debtor-in-possession’ under US law. Under certain requirements, by the order of the competent court and subject to supervision, a debtor may continue to manage and dispose of the assets involved in insolvency proceedings, provided this has been requested by the debtor and no disadvantages for the creditors are to be expected. Also, German insolvency law provides for the possibility of shield proceedings for which a debtor, who is insolvent or over indebted, may apply under certain requirements (inter alia, on the basis of a detailed rescue concept). If these proceedings are granted, the debtor may continue management on an in-possession basis in order to follow the rescue concept by being protected against any creditor enforcements.

Stays and adequate protection against creditors

During an insolvency proceeding is there a general stay enforceable against creditors? Is there a concept of adequate protection for existing lien holders who become subject to superior claims?

In respect of creditors, it has to be distinguished between the legal situation during preliminary insolvency proceedings (ie, the time period from the respective application until the actual opening of the insolvency proceedings (normally extending to two to three months)) and the finally opened insolvency proceedings.

During preliminary insolvency proceedings, the insolvency courts usually order the prohibition of, or a provisional restriction on, measures of compulsory execution against an unsecured creditor unless immovable property is concerned (section 21(2)(1)(3) of the InsO).

Nevertheless, after insolvency proceedings have been opened, any attachment granted to an enforcing creditor becomes invalid if it has been created during the last month preceding (or after) the insolvency application (section 88 of the InsO). After the opening of the insolvency proceedings, unsecured creditors cannot enforce their claim and may file their claims with the insolvency schedule only.

Contrary to this, secured creditors (ie, lien holders) may enforce their security irrespective of the insolvency. However, there are various restrictions, such as a preliminary stay that can be ordered by the insolvency court, for the time period of the preliminary insolvency proceedings (section 21(2)(1)(5) of the InsO). After the insolvency proceedings have been opened, the insolvency administrator is entitled to realise certain security rights (claims or certain movables that the insolvent has transferred for security purposes) on behalf of the secured creditor. If so, the insolvency administrator is entitled to withhold certain fees (in practice, a minimum of 9 per cent) in order that the amount of enforcement proceeds paid to the secured creditor will be reduced accordingly.

However, in respect of immovables and their respective mortgages, the insolvency administrator can only temporarily defer realisation by the mortgagees (section 30c of the Foreclosure Proceedings Act). The insolvency administrator may provide for a private sale of the encumbered real estate, whereas the mortgage will only be deleted upon payment of the secured amount (reduced by a handling fee mutually agreed between the administrator and the mortgagee at some point). The insolvency administrator may also initiate a forced sale which, however, will not affect a prior ranking mortgage that has been granted to a secured creditor prior to the insolvency (subject to potential contestation rights pursuant to question 33).

Clawbacks

In the course of an insolvency, describe preference periods or other reasons for which a court or other authority could claw back previous payments to lenders? What are the rules for such clawbacks and what period is covered?

German insolvency law provides for several clawback rules pursuant to which transactions entered into within certain periods of time prior to insolvency may be challenged (only) by an insolvency administrator. Depending on whether these transactions were entered into at arm’s length or not and depending on the time lag between such transactions and the application for insolvency proceedings (application), the requirements differ.

For example, a transaction at arm’s length between the debtor and a third party may be contested if it was made during the three months prior to application, provided that such third party was, on the date of the transaction, aware of the debtor’s insolvency or the application.

A transaction with a third party that was not entered into at arm’s length may be contested in any case if it was entered into during the last month prior to or after the application. If it was entered into within the second or third month prior to application, it may also be contested provided that the debtor was illiquid at that time or that the creditor was aware of the disadvantage arising from that transaction towards other insolvency creditors.

Longer clawback periods exist in specific cases. For example, a transaction the debtor entered into with a third party in order to disadvantage other creditors is contestable within 10 years, provided that the third party was aware of such intention of the debtor at the date of the transaction. A transaction between the debtor and a third party that was free of charge to that third party may be contested within four years, unless that transaction consisted of a common gift of minor value. Amortisations of shareholder loans may be contested within one year. The same applies to amortisations of loans granted by a third party to the debtor, for which a shareholder has provided collateral. Posting of collateral for a loan granted by a shareholder to the debtor may be contested within 10 years.

Further clawback provisions exist, inter alia, regarding repayment of contributions made by silent partners as well as transactions with persons with which the debtor has a close relationship.

Ranking of creditors and voting on reorganisation

In an insolvency, are creditors ranked? What votes are required to approve a plan of reorganisation?

Creditors are usually ranked as follows:

  • creditors with a right to separation (eg, because of legal and beneficial ownership);
  • creditors with a right to separate satisfaction (eg, secured lenders);
  • preferential creditors (consisting of, inter alia, creditors entitled to claims arising from continued urgent business transactions, court costs as well as fees and costs of the administrator);
  • unsecured creditors;
  • subordinated creditors (eg, due to a subordination agreement confirming that the subordinated creditor will only receive payment once all other (unsecured) creditors have been satisfied); and
  • shareholders (with their claim to the repayment of capital or a liquidation surplus).

Under certain circumstances determined by law, the insolvency administrator and the debtor are entitled to submit to the court an insolvency plan. Also, the creditors’ assembly may commission the administrator with drawing up an insolvency plan and the administrator has to submit that plan to the court within a reasonable period of time. Therefore, a resolution of the creditors’ assembly, adopted in groups by a majority of present creditors who are entitled to vote, is necessary. This majority will be calculated based on the majority of claims and the majority of creditors.

Intercreditor agreements on liens

Will courts recognise contractual agreements between creditors providing for lien subordination or otherwise addressing lien priorities?

Generally, yes. A creditor may freely agree with other creditors on rankings, provided that no rights of higher-ranked creditors are infringed. In practice, transactions often provide for the function of a security agent or trustee being in charge of realising the overall claims against the debtor and to distribute the proceeds to the various creditors in accordance with their ranks.

Discounted securities in insolvencies

How is the claim of an original issue discount (OID) or discount debt instrument treated in an insolvency proceeding in your jurisdiction?

German insolvency law does not explicitly deal with the treatment of claims arising from an original issue discount. Therefore, the aforementioned general principles of German insolvency law apply.

Liability of secured creditors after enforcement

Discuss potential liabilities for a secured creditor that enforces against collateral.

German law does not generally provide for liabilities comparable to those known under the United States Federal Comprehensive Environmental Response, Compensation and Liability Act.

However, the owner of a property is generally liable for contaminations. As such, liability also applies to new owners of the relevant property (however, this is limited to the value of the property), which may significantly reduce future enforcement proceeds, and therefore, the charged property’s value as collateral.