The German Insolvency Act (the Act) states that certain company "cash transactions" may be contested in insolvency proceedings only in limited circumstances. Earlier this year, the German Federal Court of Justice clarified that this "cash transaction privilege" does not apply to securities granted by a debtor company for shareholder loans.

The court held that the purpose of the relevant provisions in the Act is to treat certain shareholder loans as equity to ensure that the risks associated with the granting of a loan are not passed to external creditors. If a shareholder advances funds to a company already in financial distress, the funds are deemed to be share capital. Consequently, on insolvency, the claim to repayment becomes a subordinated claim.

The court also held that the cash transaction privilege is intended to enable a debtor in financial difficulty to continue to trade by excluding normal business transactions from being contested in insolvency proceedings. In this case, the court did not consider that securities granted for shareholder loans were normal business transactions.

As such, the court has limited the scope of the cash transaction privilege and the extent to which shareholders can demand loan repayments during insolvency proceedings.

Bundesgerichtshof, 14 February 2019, IX ZR 149/16