German insolvency law contains provisions that allow for the challenge of payments/securitisation of certain shareholder loans in insolvency proceedings. The reason for this is that under German insolvency law, a loan repayment claim of a shareholder against ‘his’ corporation is subordinated by law (sec. 39 para. 1 no. 5 German Insolvency Code).
Any repayment within a year prior to the filing for the commencement of insolvency proceedings over the estate of a corporation is considered as disadvantageous to other creditors, and thus subject to clawback. If the corporation had granted its shareholder collateral for a shareholder loan, that too is subject to challenge if furnished within a ten year period prior to the filing of the commencement of insolvency proceedings.
If a shareholder has securitised a third party loan or loan equivalent in order to financially aid its subsidiary, any repayment of that loan to the third party within a year prior to the filing for the opening of insolvency proceedings can trigger a clawback claim against the shareholder. That is because the said shareholder will be relieved of his obligation in relation to the security given to the third party.
Article 13 European Insolvency Regulation (Regulation No. 1346/2000) stipulates that, if a defendant can validly assert against the insolvency practitioner that (i) the act which is being challenged is governed by the law of a different jurisdiction than the one under which insolvency proceedings have been commenced and (ii) the payment cannot be challenged under that governing law, the clawback claim will fail.
A recent European court of Justice ruling (European Court of Justice Ruling C 310/14) (Nike) held that the challenge fails only if the defendant proves that under any aspect of the governing law (not only insolvency law) the legal act cannot be contested.
Under different European jurisdictions, provisions regarding time limitations, procedures and even substantive law vary greatly. The aforementioned German regulation regarding shareholder financing, is, for example, not mirrored in many jurisdictions. Thus, in clawback litigation in Germany against a (foreign) shareholder, the shareholder might be able to invoke Article 13 European Insolvency Regulation as a line of defence.
In cross-border insolvency litigation, it is important to be mindful of the perils of European insolvency law and its extraterritorial effect.
It is necessary to consider whether a defendant might be able to invoke the provisions of Article 13 European Insolvency Regulation. Equally, when warding off clawback challenges in cross-border litigation, one should always consider Article 13 as a possible defence.