The German claw-back regime for shareholder loans also applies if the shareholder loan agreement is governed by the laws of another EU member state, giving full effect to the German equitable subordination regime
The decision of the European Court of Justice (“ECJ”) in SML Maschinengesellschaft mbH v. AK provides clarity for any shareholder or affiliated lender that provides financing to a company whose center of main interests (“COMI”) is in Germany:
- Cross-border shareholder loans are also subject to mandatory German equitable subordination rules: German insolvency law governs the ranking of creditor claims and thus the equitable subordination of loans granted by a shareholder or an affiliated lender.
- Choice of the laws of another EU member state in the underlying loan agreement does not provide a safe harbor: A governing law clause in a shareholder loan agreement stipulating that the shareholder loan agreement is governed by the laws of another EU member state does not prevent the application of the German claw-back regime with respect to repayments of equitably subordinated shareholder loans. Any repayments of shareholder loans within one year prior to the insolvency filing are subject to claw-back.
- The same likely applies to the choice of the laws of a non-EU state: While the ECJ's ruling is confined to EU cross-border scenarios, its reasoning carries strong persuasive weight for situations where the shareholder loan is governed by the laws of a non-EU member state. German domestic conflict-of-laws rules are likely to lead to the same result.
- Shareholders financially supporting German companies should plan accordingly: Any shareholder or affiliated entity considering providing debt to a company whose COMI is in Germany should factor in the risk of equitable subordination as well as the risk that repayments made within one year prior to the insolvency filing can be clawed back. This claw-back risk applies regardless of the governing law chosen for the shareholder loan.
