Cross-Border Shareholder Loans: European Court of Justice Clarifies Equitable Subordination in German Insolvency Proceedings

Shareholder loans are a common financing tool for businesses, but their treatment in insolvency proceedings, particularly across borders, can be complex. A recent judgment by the European Court of Justice (ECJ) in re C-43/25 SML Maschinengesellschaft mbH provides legal certainty regarding the ranking of such loans in insolvency for business owners, investors, and legal professionals navigating cross-border insolvency scenarios involving German companies. The German text of the judgment can be found here.

The core of the ECJ’s decision revolves around the principle of “equitable subordination” for shareholder loans. In essence, equitable subordination means that a loan to a direct or indirect subsidiary or affiliate ranks junior to all other unsubordinated liabilities of the insolvent borrower of such shareholder loan. Repayments on shareholder loans made within one year prior to the filing for insolvency and any security granted in respect of such shareholder loans are subject to insolvency claw back. This shall prevent shareholders from withdrawing funding from a struggling company at the expense of other creditors.

In an international context, shareholder loans are often subject to the applicability of a foreign law, i.e. a law differing from the insolvency law applicable to the borrower of the shareholder loan. Based on such foreign law applicable to the shareholder loan, shareholder loans may not be subordinated in an insolvency of the borrower. Article 13 of Council Regulation (EC) 1346/2000 on insolvency proceedings (now Article 16 Regulation (EU) 2015/848) provides that transactions are not voidable under national insolvency law if (i) the laws of another Member State apply to such transaction, and (ii) such transaction is not voidable in any respect in that Member State. 

The ECJ now ruled that Article 13 of Council Regulation (EC) 1346/2000 on insolvency proceedings (now Article 16 Regulation (EU) 2015/848) must be interpreted to prevent a shareholder who has received repayments on a loan – repayments that disadvantage the overall body of creditors – from using this provision to block a recovery claim by the insolvency administrator. This applies when the administrator’s claim aims to uphold the ranking of claims as defined by the insolvency law of the state where the proceedings were opened.

The Key Takeaway: This decision fundamentally means that German equitable subordination rules cannot be circumvented in international contexts simply by choosing a foreign law to govern the shareholder loan agreement. Even if an agreement specifies the law of another jurisdiction, the ranking prescribed by German insolvency law and hence the subordination applicable to shareholder loans prevail if insolvency proceedings are opened in Germany.

For companies and their shareholders, the practical consequences are significant:

• Clawback Rights: The insolvency administrator, subject to certain exceptions, has the right to challenge (or “claw back”) repayments made on shareholder loans within one year prior to the insolvency filing. These funds must be returned to the insolvency estate to benefit the general body of creditors. Security interests granted within ten years prior to the filing are voidable, too, and cannot be enforced.
• Subordinated Claims: Any outstanding claims a shareholder may have regarding its loan will, subject to certain exceptions, be treated as subordinate debt. They will only be satisfied after all other unsecured creditors of the company have been fully paid.

This ruling reinforces the protective nature of German insolvency law for unsubordinated creditors and ensures that shareholders cannot make use of the choice of governing law to avoid subordination. It underscores the importance for all parties involved in shareholder loan agreements to understand the potential implications of equitable subordination, particularly in a cross-border context.

If you have any questions on the issue please reach out to the authors of this blogpost at any time.