German Shareholder Loan Laws Under Scrutiny Before the ECJ

German insolvency law allows clawback of shareholder loan repayments – but what happens when the loan is governed by foreign law? A case now pending before the European Court of Justice (ECJ) could reshape how cross-border shareholder loans are treated in insolvency proceedings, especially since only a few other EU jurisdictions have similarly far-reaching clawback or subordination rules for shareholder loans as Germany.

 

Article 16 EIR: Can foreign law shield against clawback?

The clawback of transactions that satisfy or secure claims under loans granted by shareholders or, in certain circumstances, affiliated companies is a cornerstone of German insolvency clawback law. Insolvency office holders frequently attempt to recover funds from shareholders, leading to disputes. In a cross-border context, the key question is which clawback law applies: the law of the state in which the insolvency proceedings were opened or the law of the country governing the loan agreement.

Article 16 of the European Insolvency Regulation (EU) 2015/848 (EIR, previously Article 13 of the Regulation (EU) No 1346/2000) purports to answer this question. It allows a defendant to challenge a clawback claim if the contested act is governed by the law of another state and that law does not permit the act to be challenged. The Federal Court of Justice (Bundesgerichtshof; BGH) has referred several questions on this to the ECJ for a preliminary ruling to clarify the matter (order dated 16 January 2025 – IX ZR 229/23).

 

The ECJ Case: Austrian loan to a German sister company

The case concerns an Austrian company that has provided a loan, which is governed by Austrian law, to its German sister company. The parent company (also incorporated under Austrian law) holds a 33% stake in German Company and a 78% stake in Austrian Company. Insolvency proceedings were opened in respect of the assets of the German sister company. Four months prior to the insolvency petition being filed, the loan was partially repaid. More than one year after the opening of insolvency proceedings, the insolvency office holder contested the loan repayments under German insolvency clawback rules. The Austrian Company refuses to repay the payments, arguing that Austrian law applies, under which the repayments are no longer subject to clawback.

It was not disputed that, under sec. 135(1) of the German Insolvency Code (Insolvenzordnung; InsO), the repayments of loans would be subject to clawback if they were made within one year prior to the filing for insolvency proceedings.

In contrast, Austrian law doesn’t have a comparable (special) provision for the clawback of repayments on shareholder loans. It has, in fact, the limitation that the clawback claim must be filed within one year of the opening of the insolvency proceedings. Once this period has expired, the insolvency office holder is barred from filing a claim for clawback.

Accordingly, while the partial repayment of the loan would be subject to clawback under German law, it is not contestable under Austrian law. Therefore, determining which law is applicable makes the difference between granting and dismissing the claim.

 

Legal debate: Conflicting views in case law and academia

According to Article 7(2)(m) EIR, the law of the state in which insolvency proceedings are opened governs the rules of clawback law. However, Article 16 EIR provides for an exception: The principle doesn’t apply if a defendant against a clawback claim can prove that (a) the contested act is subject to the law of another EU member state, and (b) under that law of the other member state the act in the relevant case can’t be challenged by any means.

At first glance, the answer seems clear. The pre-requisites of Article 16 EIR are met: the loan agreement is governed by Austrian law, and under Austrian insolvency clawback law, the partial repayment of the loan is not challengeable (anymore).

The Higher Regional Court of Dresden (Judgment dated 14 November 2018 – 13 U 730/16) and some legal scholars support this interpretation of Article 16 EIR. They argue that, under conflict laws, a shareholder loan remains a contract governed by the law chosen by the parties in accordance with Article 3(1) of Regulation (EC) No 593/2008 (Rome I) or the lender's habitual residence pursuant to Article 4(2) Rome I. Article 16 EIR therefore serves to protect the trust of the shareholder that the contract will be governed by the law chosen or the law of their habitual residence.

However, legal scholars and courts don’t share this view and have made attempts to limit the application of Article 16 EIR. They argue that in any case of shareholder loans the requirement of Article 16(a) EIR is not met, because shareholder loans are always governed by the law of the state in which insolvency proceedings are opened or the office of the insolvent company is registered (i.e. Germany). The reasoning behind this is that, unlike other lenders, shareholders have a special responsibility to bear the consequences of their financing of the company. Therefore, they shouldn’t be allowed to weaken or circumvent the legal consequences of the mandatory provisions of German insolvency law on shareholder loans by choosing an alternative legal structure. In contrast to the view outlined above, they argue, that any shareholder of a German company, who finances that company with loans may not claim a legitimate expectation that only the law chosen or that of their habitual residence will apply. The Higher Regional Courts of Rostock (Judgment dated 6 December 2023 – 6 U 7/21) ) and Naumburg (Judgment dated 6 October 2010 – 5 U 73/10) have explicitly ruled in favour of this opinion in the past.

 

Decision of the BGH: Four questions the ECJ must answer

The BGH referred the interpretation of Article 16 EIR to the ECJ for a preliminary ruling under Article 267(1) and (3) Treaty on the Functioning of the European Union, suspending the proceedings pending a decision.

• The BGH’s first question seeks clarification on whether Article 16 EIR applies if, under German law, the clawback of payments made on the shareholder loan only serve to secure the subordination under sec. 39 (1) no. 5 InsO.
• The second question asks whether Article 16 EIR applies to clawback provisions, with the purpose of treating shareholder loans quasi-equity.
• Thirdly, the BGH asks, whether Article 16 EIR can be interpreted to mean that the law applicable to a shareholder loan is determined by the borrower company’s registered seat.
• Finally, the BGH asks whether Article 9(1) Rome I, the concept of an overriding mandatory provision, is also applicable under Article 16 EIR and whether sec. 135 InsO is such an overriding mandatory provision. An overriding mandatory provision is a provision that a Member State considers essential for protecting its fundamental public interests, such as its political, social, or economic structure. These provisions apply to any situation within their scope, regardless of the law that would otherwise govern the contract.

 

Potential impact on shareholders and corporate groups

For shareholders (and also group companies) facing clawback claims under sec. 135 InsO, a final ECJ ruling will bring legal certainty regarding the applicable law on clawback risks of shareholder loans. However, if the ECJ sides with the BGH's interpretation, shareholders who have granted shareholder loans subject to foreign law may no longer be able to rely on the law explicitly chosen (at least in relation to the application of shareholder loan specific claw back rules), and the respective protection of Article 16 EIR.

The phrasing of the questions indicates that the BGH is of the opinion that Article 16 EIR does not apply to sec. 135 InsO. The first two questions seek to remove sec. 135 InsO entirely from the scope of Article 16 EIR. The third question argues for the application of German law within the scope of Article 16 EIR. The fourth and final question tries to establish the applicability of sec. 135 InsO as an overriding mandatory provision even if Article 16 EIR is applicable.

However, it is uncertain if the ECJ will adopt the BGH’s reasoning. The ECJ has already explicitly ruled that, for conflict-of-law purposes, shareholder loans are treated as contracts governed by the applicable contract law. There are two potential legal grounds that might be argued to exclude sec. 135 InsO from the application of Article 16 EIR. The first is a teleological reduction of the scope of application, a concept which theoretically exists in EU law. However, such interpretation would be squarely against the clear wording of Article 16 EIR. The second legal ground could be to invoke that sec. 135 InsO is to be considered an overriding mandatory provision under Article 9(1) Rome I. However, the threshold for mandatory provisions to apply is high, and the ECJ has historically taken a restrained approach to their use.

The upcoming ECJ decision, while not limited to German clawback rules, plays a pivotal role in shaping how shareholder loans in cross border situations may be protected against clawback risks and therefore how shareholder financings shall be structured. The position of the BGH, indicated by the phrasing of its questions, increases the risk of clawback claims against shareholders who have chosen, as is typical in practice for cross-border financing agreements, as the applicable law to the shareholder financing, a foreign law which does not have shareholder loan specific clawback rules.

 

Practical guidance until the ECJ ruling

The ECJ is not expected to make a decision before 2026. Until then all such shareholder loan financings, particularly more where there is restructuring potential, will have to account for increased clawback risks for repayments under such shareholder loans. However, shareholders may still wish to choose as the applicable law to the financing agreements a foreign law which does not have equivalent shareholder loan specific claw back rules, allowing for protection if the ECJ rejects the opinion of the BGH.

Shareholders facing claims under sec. 135 InsO having chosen a foreign law which does not have comparable shareholder loan clawback rules should raise the objection under Article 16 EIR and, if the insolvency office holder files an action against them, should request that the court suspend the proceedings (in a German court proceeding pursuant to sec. 148(1) of the Code of Civil Procedure) until the ECJ issues its clarifying decision. Insolvency office holders may want to consider agreements suspending the statute of limitations to await the outcome of the ECJ decision.