CJEU to rule on treatment of cross-border shareholder loans in the event of insolvency

The case concerns the treatment of shareholder loans under German insolvency law and the question of whether the relevant German provisions apply to a loan granted by an EU shareholder – in this case from Austria – where the loan agreement contains a provision stating that the agreement is subject to Austrian law.

The case that has been referred to the CJEU concerns an Austrian engineering company that was a shareholder in a German limited liability company (GmbH) based in Schwerin. The Austrian company granted several loans to the German GmbH in 2015, one of which was secured by assignment. In 2015 and 2016, the German company repaid parts of the loan and the resulting interest to the Austrian company until insolvency proceedings were opened against the German company on 1 October 2016.

The Austrian shareholder filed its outstanding claims as creditor in the insolvency proceedings. Afterwards, the insolvency administrator informed it that its claims were subordinated under German law and therefore could not be registered in the schedule of claims.

The Austrian company then sued the insolvency administrator. It sought to have its claims recognised as insolvency claims and also to ensure that the secured loan was paid separately. The insolvency administrator counterclaimed and demanded repayment from the Austrian company of interest and principal payments already made by way of a claw-back. The Regional Court of Schwerin, which was dealing with the case, and the Higher Regional Court of Rostock dismissed the Austrian company's claim and upheld the insolvency administrator's claim. The Austrian company appealed against the judgment.

The dispute centers around the question of whether the claw-back and the ranking of the claims must be assessed according to German or Austrian law under the terms of the European Insolvency Regulation.

‘German insolvency law gives shareholder loans a lower ranking in insolvency than is the case in other legal systems,’ said Dr Attila Bangha-Szabo, insolvency law expert at Pinsent Masons. ’Well-advised shareholders were therefore able to choose the law of a country in the loan agreement that did not provide for a comparable disadvantage for their loan. The CJEU will now decide whether such a choice of law is permissible. The BGH tends to not allow the choice of law.’

In principle, the law of the state in which the proceedings were opened applies in the event of insolvency proceedings. However, article 16 of the recast European Insolvency Regulation stipulates that foreign law may also apply in certain situations.

The BGH would now like to know from the CJEU whether article 16 of the European Insolvency Regulation applies to shareholder loans and whether shareholder loans are to be assessed in the same way as other contractual obligations under the loan agreement.

It also asks whether the principle of freedom of choice of law also applies to shareholder loans and whether national insolvency provisions on the subordination of shareholder loans are internationally mandatory rules within the meaning of article 9(1) of the Rome I Regulation.

‘The rulings of the BGH and the CJEU will also have an impact on non-EU cases, for example in legal relations between Germany and the UK. In such cases, the German Insolvency Code applies, which, however, provides for the same regulation as the EU Insolvency Regulation,’ Dr Bangha-Szabo said.