A Q&A guide to finance in Germany. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge clauses, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Finance Country Q&A tool. This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
For the first time in ten years, there was a significant increase in the number of new deals in the first quarter of 2011. Through the second and into the third quarter of 2011, the leveraged buy-out market accelerated and banks stood ready to provide, and even underwrite, senior loans at leverage levels of up to five times earnings before interest, taxes, depreciation and amortisation (EBITDA).
The lending market was again hit by macro-economic factors, and the crisis in the eurozone in particular, in the third and fourth quarter. Liquidity was curtailed and banks reverted back to best efforts underwritings (where the arranger of a syndicated loan promises to do its best to ensure lenders provide commitments for the total amount of the loan, but does not guarantee this) and club deals.
Real estate is generally understood to comprise real property, including:
Fixtures (wesentliche Bestandteile), such as the buildings on the property.
Accessory assets (Zubehör) relating to the property.
All property-related rights (for example, mortgages, abstract land charges and easements) which are capable of registration in a land register (Grundbuch/Erbbaugrundbuch).
The following security interests are most commonly granted over real estate:
Mortgages (Hypotheken). A mortgage grants a security interest over real property (including fixtures and accessory assets relating to the property) in favour of a lender until the debt is fully repaid. In addition, the lender is entitled to insurance payments under insurance contracts entered into by the owner of, and relating to, the mortgaged property. A mortgage is an accessory security right (akzessorisches Sicherungsrecht), that is, its existence and validity depend on the existence and validity of the secured obligation. Mortgages can only be transferred to a third party when the secured obligation is assigned to that same third party.
Abstract land charges (Grundschulden). Abstract land charges are similar to mortgages in most respects except that they are non-accessory security rights. Therefore, their existence and validity does not depend on the existence and validity of the secured obligation. A land charge can be transferred to a third party without assigning the secured obligation to that third party. Lenders generally prefer abstract land charges to mortgages.
Both mortgages and abstract land charges can be issued in a certificated form (Briefhypothek/Briefgrundschuld). This makes them easier to transfer (for mortgages, the secured obligation must be transferred at the same time (see above, Mortgages)) and therefore preferable in securitised finance structures. However, the non-certificated form (Buchhypothek/Buchgrundschuld) is more secure and, therefore, more commonly used in syndicated finance transactions.
Mortgages and abstract land charges can be granted over both freehold (Eigentum) and hereditary building rights (Erbbaurechte) (similar to long leases in the UK).
It is not possible to grant a floating charge over immovable property. However, lenders can (and generally do) ask debtors to agree to grant further charges over any land and buildings acquired in the future (see Question 8, Future assets).
Mortgages and abstract land charges are created by written agreement. Notarisation (Beurkundung) of the overall agreement is only required where the borrower (mortgagor/chargor) agrees to allow immediate enforceability without a court order (Unterwerfung unter die sofortige Zwangsvollstreckung). Otherwise, only the mortgagor's/chargor's signature must be certified by a notary (Beglaubigung).
Where the mortgagor/chargor agrees to allow immediate enforceability (which is common practice), due to the substantial notarial fees, the mortgage or abstract land charge is often split into two parts:
The first part (generally securing between 10% and 20% of the aggregate mortgage/land charge amount) is immediately enforceable without a court order.
The second part, over which the lenders are granted a notarised power of attorney, allowing them to arrange for immediate enforcement action of the mortgage/land charge on the occurrence of an agreed trigger event (generally an event of default under the loan agreement).
Perfection of mortgages or abstract land charges requires registration of the security interest in the relevant land register (Grundbuch/Erbbaugrundbuch) and, where the mortgage or land charge is certificated, the issue of a transferable instrument by the land register.
Both security interests take priority according to the date of registration in the relevant land register.
Tangible movable property comprises all physical objects (other than immovable property), including inventory, machinery, aircraft, ships and rolling stock.
Security transfer (Sicherungsübereignung) is the most commonly used security interest over the following tangible movable property:
Inventory.
Raw materials.
Semi-finished products.
Machinery, rolling stock and aircraft (both present and future).
A security transfer is a non-accessory security right (see Question 2, Common forms of security).
To transfer an asset for security purposes, title in the asset is transferred to the lender, but the lender generally authorises the borrower (transferor) to possess (besitzen) and deal with the transferred assets in the ordinary course of business until an agreed trigger event occurs.
Although there is no legal requirement as to form, security transfers are usually created by written agreement. Generally, no further action is required to make the transfer fully enforceable against the borrower and third parties. However, as the borrower is still in possession of the secured asset, it can validly transfer title to the asset to a third party, provided that the third party does not know about the security transfer agreement.
The ability to identify the transferred assets is essential to ensure enforceability of the security transfer agreement. Identification is usually achieved by attaching to the security agreement either:
A site map, showing the physical location of the transferred assets.
A list, identifying the assets (for example, by reference to serial numbers) at the date of execution of the agreement.
Moving the tangible movable property can obstruct enforcement. Therefore, if only a site map has been attached to the security transfer agreement, lenders tend to require that:
No transfers are made, other than to locations that are equally encumbered.
Updated lists of transferred assets are supplied on a regular basis.
Financial instruments include, among others:
Securities.
Stocks and bonds.
Money market instruments.
Derivatives (both in certificated and dematerialised form).
The most common form of security granted over financial instruments is a pledge (Pfandrecht). It does not transfer ownership to the lender. Instead, a lender can enforce its security against the pledged property (Verwertungsrecht).
Although there is no general legal requirement as to form for pledges, they are usually created by written agreement. Perfection requires notification of the debtor (Schuldner) of the pledged asset. In addition, pledges over the following interests must be in a prescribed form (that is, notarised by a German law notary) to be enforceable:
Shares in a limited liability company (Gesellschaft mit beschränkter Haftung (GmbH)).
Partnership interests where the partnership is in the form of a limited partnership (Kommanditgesellschaft (KG)) with a GmbH as its general partner (GmbH & Co. KG) and both the shares in the general partner and the partnership interests are pledged.
A pledge is an accessory security right (see Question 2, Common forms of security). Therefore, its continuing existence, validity and enforceability depend on compliance with certain mandatory provisions of German law, including the following:
A pledge must not be transferred independently. It can only be transferred by an assignment of the relevant secured obligations.
A pledge can only be enforced if, and to the extent that, any secured obligations are outstanding and due.
A pledge can only arise for the benefit of a particular pledgee (including any subsequent assignee or transferee, such as a new or additional lender under the loan agreement) if, and to the extent that, the pledgee is also the creditor of the secured obligation. Therefore, a subsequent lender can only benefit from the pledge by acceding to the original security agreement. It is uncertain whether, following the accession, subsequent lenders would be subordinated to prior lenders. However, this does not affect the contractual rights and obligations (as set out in any intercreditor agreement) of subsequent lenders in relation to their participation and status when sharing the proceeds from the realisation of the pledged asset (see Question 16).
Particular rules apply to pledges over the following financial instruments:
Shares in a GmbH. There is no need for additional notification of the pledge to the issuer of the shares (that is, the company). However, shareholders registered on a specific shareholder list (Gesellschafterliste) (filed with the relevant commercial register of the GmbH), can exercise shareholder rights against the GmbH. Therefore, lenders or other secured parties should obtain powers of attorney from the pledgor (a shareholder) to allow them to step into the pledgor's shoes and exercise any shareholder rights after the share pledge has become enforceable (generally only after an event of default).
Shares in all companies and partnership interests. The relevant articles of association/shareholders' agreements may set out additional perfection requirements, such as the issuer's or other shareholders' consent.
Claims and receivables generally refer to debts or rights under contracts, such as trade receivables and payment claims.
A security assignment (Sicherungsabtretung) is the most commonly granted security interest over claims and receivables. Under a security assignment agreement, the assignor transfers legal title in its claim against a third party to the lender as security.
A security assignment generally covers present and future claims under existing and future contracts, provided that both:
There is a possibility that a future claim will arise.
The future claim is identifiable at the time of execution of the security assignment.
Security assignments are usually created by written agreement, although there is no legal requirement for this. Generally, no further action is required to perfect the assignment, except for specific claims (for example, tax and insurance claims) where notification of the relevant debtor (the relevant inland revenue service (Finanzamt) or insurance company) is required. Subject to these specific circumstances, security assignments can be disclosed or undisclosed. In practice, debtors are usually only notified after a default/an event of default has occurred under the loan agreement. (Until notification, debtors can discharge their debt by paying the assignor.)
Global assignments (Globalzessionen) of trade receivables cannot cover claims subject to extended retention of title (verlängerter Eigentumsvorbehalt), which are typical for German trading arrangements. If these claims are not excluded from the global assignment agreement, it is void.
The most common form of security over cash deposits is a combination of a pledge over the relevant bank account (see Question 4, Formalities) with a concurrent security assignment of the assignor's payment claim against the account holding bank (see Question 5, Formalities).
In addition to the formalities in Question 4, the general business conditions of German banks typically provide for, among other things, pledges over all of the accounts maintained with that account bank (bank pledges). Therefore, unless the account bank has waived or subordinated its pledges, any other pledge over the bank account ranks below the bank pledge.
The most common types of intellectual property over which security is granted are:
Patents.
Trade marks.
Copyright.
Designs.
The most commonly used security interests granted over intellectual property (with the exception of copyright that cannot be encumbered), are security assignments and pledges. (For their creation and perfection, see Question 4, Formalities and Question 5, Formalities.)
The following additional formalities must be complied with:
Security assignments. Registration is not required to perfect security assignments of intellectual property rights. However, security assignments of trade marks and patents can be registered at the German Patent Office (Bundespatentamt).
Pledges. Pledges of patents cannot be registered. Registration is not required to perfect pledges over trade marks. However, they can be registered at the German Patent Office.
Where registration is possible, it is often only made following an event of default under the loan agreement (to avoid unnecessary administrative burden and costs).
Security interests (both accessory and non-accessory) can be granted over both future and, generally, fungible assets. The relevant security document must comply with the principles of clarity and certainty (Bestimmheitsgrundsatz).
See above, Future assets.
There are no other types of assets over which security cannot be granted or is difficult to grant.
Due to its accessory nature, accessory security is released automatically on repayment and discharge in full of the secured obligations. Non-accessory security requires an agreement between the secured parties and the security grantor(s) that all security will be released on repayment and discharge in full of the secured obligations.
It is common practice in Germany to both take security directly over the debtor's assets and security over the shares in an SPV. However, when taking security over an SPV, some structuring may be required to avoid adverse tax consequences (for example, restricted deductability of interest expenses as a result of interest barrier rules) or, depending on the security package, a greater likelihood of the lender's equitable subordination (see Question 14, Others).
Sale and leaseback, factoring, hire purchase, retention of title (Eigentumsvorbehalt), and extended retention of title (verlängerter Eigentumsvorbehalt) are common. They generally give a creditor a better position on the debtor's insolvency because the creditor has the right to either:
Separate the relevant asset from the rest of the debtor's insolvency estate (Aussonderung).
Claim preferential satisfaction (abgesonderte Befriedigung) of their debts from the insolvency administrator.
See Question 25.
There is no risk of these structures being recharacterised as security interests.
See above, Sale and leaseback.
See above, Sale and leaseback.
See above, Sale and leaseback.
There are no other quasi-security structures available.
A negative pledge (Negativerklärung) is a contractual provision under which the borrower agrees not to create a further voluntary security interest. There is no risk of it being recharacterised as security. It does not give preferences to a secured creditor on insolvency (see Question 11, Sale and leaseback); its aim is to retain the value of the insolvency estate for all of the debtor's creditors.
Corporate guarantees are a common form of third party security in Germany. They can take the form of an:
Accessory (secondary) surety (Bürgschaft), whose validity is dependent on the validity of the underlying debt.
Abstract (primary) guarantee, whose validity is not dependent on the validity of the underlying debt.
Both of these forms of corporate guarantee are not subject to any particular requirements as to form. They are typically issued in written form, either as a unilateral declaration by the guarantor addressed to the beneficiary, or in the form of a contract. Both can be issued in the form of a bank guarantee which is common practice.
Financial assistance rules only apply to stock corporations (Aktiengesellschaften) (a form of company limited by shares, which are capable of being listed), and not to GmbHs.
Transactions under which a stock corporation grants security or issues a guarantee for the acquisition of its own stock are void.
A stock corporation cannot repay share capital to its shareholders. Distribution (in cash or in kind) of any assets other than distributable profits (Bilanzgewinn), including granting upstream or cross-stream collateral and/or corporate guarantees, is generally regarded as repayment of share capital.
However, distributions are not regarded as prohibited repayments of share capital if either:
A domination or profit transfer agreement exists (Bestehen eines Beherrschungs- oder Gewinnabführungsvertrages).
The distribution is covered by a relevant (repayment) claim (vollwertiger Gegenleistungs- oder Rückgewähranspruch).
A GmbH that grants or makes a payment(s) under an upstream or cross-stream security or guarantee is subject to certain preservation of capital rules. Breach of these rules does not invalidate a security interest but can result in the GmbH directors' personal and criminal liability. Therefore, lenders typically undertake not to take enforcement action if it would result in the GmbH's equity (Eigenkapital) falling (further) below the amount of its stated capital (Stammkapital). These rules also apply to a GmbH & Co. KG.
A GmbH cannot make loans to its directors from funds that are required to preserve its stated capital (see above, Corporate benefit). A loan made in violation of this rule must be repaid immediately. These rules also apply to loans made by a GmbH & Co. KG to the directors of its general partner GmbH.
A stock corporation can only make loans to its directors based on a resolution by the supervisory board that contains provisions on interest and repayment. These rules are not aimed at preserving the company's capital, unlike in the case of a GmbH, but at avoiding misuse.
Usury is generally defined as exploiting a person's misfortune, inexperience, lack of ability to judge, or considerably weak will to obtain property gains that are clearly disproportionate to the services rendered.
Usurious loans are void, and usury in the context of loans can result in criminal liability.
The German courts have established rules relating to shareholders causing the insolvency of a GmbH (existenzvernichtender Eingriff). Under these rules (which also apply to a GmbH & Co. KG), the courts can invalidate or limit the enforceability of lenders' claims under the loan agreement, if both:
The execution of, or the GmbH's performance of, its obligations under the loan agreement could be viewed as an insolvency-causing interference by the GmbH's shareholders.
The third party creditors (that is, the lenders) and the shareholders have acted in collusion to the detriment of the GmbH or other third party creditors (including commercial creditors) of the GmbH.
Further, any shareholder loans or claims resulting from legal acts that are economically equivalent to shareholder loans are subordinated to other creditors' claims on the borrower's insolvency, subject to specific exemptions concerning:
The financial restructuring of a distressed company (Sanierung).
Minor, non-managing shareholders (nicht geschäftsführende Gesellschafter).
An insolvency administrator can challenge payments made under these shareholder loans during one year before the application for the commencement of insolvency. Under the principles of equitable subordination, German courts can decide that, as a result of control and other rights granted to lenders under the loan agreement and/or security documents, the credit facilities made available to the borrower under them will be treated like equitably subordinated loans.
The Act Amending the German Financial Market Stabilisation Act (Gesetz zur weiteren Stabilisierung des Finanzmarktes (Finanzmarktstabilisierungsergänzungsgesetz)) provides that a shareholder loan (or a legal act economically equivalent to a shareholder loan) which has been granted by the Financial Market Stabilisation Fund (Sonderfonds Finanzmarktstabilisierung) (SoFFin) must not be:
Taken into account when assessing a company's over-indebtedness under section 19 of the German Insolvency Code (Insolvenzordnung).
Treated as subordinated.
SoFFin-undertaken stabilisation measures cannot be challenged on the insolvency of a company that has received aid from SoFFin (see Question 26).
Generally, a lender is unlikely to be liable for the clean-up of contaminated land before enforcement of its security interest. However, where a lender obtains ownership of contaminated land on enforcement, it will, as the current owner, be potentially liable for the borrower's past acts or omissions even if it has not caused, or is not causing or permitting, the contamination.
Subordination of debt is possible in Germany. Subordination can be achieved both contractually (for example, by a subordination or intercreditor agreement) or structurally (that is, as a result of a particular group structure).
A form of equitable subordination, arising under German insolvency law, is also possible (see Question 14, Others).
See above, Contractual subordination.
See above, Contractual subordination.
Germany is not a significant trading market for secured debt, except for German covered bonds (Pfandbriefe) issued by German mortgage banks (Pfandbriefbanken). These bonds are generally traded on the regulated market of the German stock exchanges or in over-the-counter (OTC) trading.
Security interests over German assets (that is, assets located in Germany and receivables regulated by German law) are usually held by a security agent/trustee on behalf of the relevant creditor/holder of public debt and as a creditor in its own right under a parallel debt (see Question 19). Therefore, if the debt is traded, the associated security can be transferred without having to be recreated.
German law recognises the agency concept, and it is frequently used in syndicated loans. (For more details of how a security agent operates in the context of a German law trust (Treuhand), see Question 19.)
German law does not recognise the concept of holding (German law governed) security through an English law trust. However, non-accessory security can be held, administered and realised by a security agent or security trustee on behalf of the secured parties (including future syndicate members) under a German law trust, which only operates contractually.
Accessory security can only be granted to the holder of the secured obligations (that is, it must be granted to each secured creditor, see Question 2). However, a security agent can be empowered to administer and realise the security (see Question 18). In addition, the security agent is generally granted an independent right to demand payment of the secured obligations in the form of a parallel debt to both:
Minimise the primarily financial and administrative burden of having to grant new accessory security (with different in rem ranking) to incoming lenders or syndicate members.
Facilitate syndication.
A parallel debt is an undertaking by each obligor under the loan agreement, through an abstract acknowledgement of debt (abstraktes Schuldanerkenntnis), to pay to the security agent (as a creditor in its own right and not the lenders' representative) the equivalent of what it owed the lenders. The amount paid to the security agent is then deducted from the amount owed to the lenders. While the parallel debt concept has not yet been tested in a German court, there is consensus among the practising legal profession that it would be upheld.
German law does not generally provide for global charging documents. However, in relation to security assignments, it is possible (and common) to enter into one global assignment agreement covering all security assignments instead of entering into different agreements for each of the assigned claims/receivables (see Question 5, Formalities). It is not unusual to combine pledges of GmbH shares and partnership interests into one document (this document then requires notarisation (see Question 4, Formalities)).
Although there is no requirement for loan agreements that do not involve a consumer to take any particular form, they are usually made in writing. More complex loan agreements often include provisions that require a written form, such as a parallel debt obligation (see Question 19).
The relevant security document will generally provide for the lender's right to enforce its security interest on an event of default (as defined in the loan agreement), provided it is continuing and has not been remedied within the agreed grace period (or, where applicable, waived). Typical events of default include, among other things:
Non-payment or late payment.
Breach of financial and other covenants.
Misrepresentation.
Cross-default.
The borrower's insolvency and insolvency proceedings.
The lender must generally give five days' (or if the borrower is an individual, one month's) notice to the borrower of its intention to enforce the security interest unless either:
The borrower has ceased to make payments generally (that is, to all creditors).
An application for the commencement of insolvency or similar proceedings has been filed by the borrower or against it.
In relation to pledges, the statutory prerequisites for enforcement (Pfandreife) must be met before enforcement can begin. In particular, the secured obligation must be due and payable. However, since contractual events of default provide the lender with the right to accelerate the outstanding loan and demand repayment of the outstanding principal amount and interest, the statutory prerequisites will generally also be satisfied (or will, at least, be easy to satisfy) where an event of default has occurred and is continuing.
These are typically enforced by public auction (Zwangsversteigerung) or forced administration (Zwangsverwaltung). The mortgagor/chargor and secured party can only validly agree to another form of enforcement (for example, a private sale) after the mortgage/land charge has become enforceable. An abstract land charge can only be enforced six months after cancellation of the land charge. The termination period is non-negotiable where the land charge secures monetary claims.
These are typically enforced by private sale (if the security transfer agreement contains the appropriate provision) or public auction.
Enforcement varies depending on the type of asset, as follows:
Receivables. These are typically enforced by the lender collecting the receivables.
Rights or benefits arising under contract. These are typically enforced by the lender exercising the contractual right directly against the other contracting party or parties.
Insurance policies. These are typically enforced by the lender collecting the insurance proceeds.
Enforcement varies depending on the type of asset, as follows:
Shares/partnership interests. These are typically enforced by public auction. Another form of enforcement can only validly be agreed after the pledge has become enforceable.
Bank accounts. These are typically enforced by the lender collecting the amount of credit in the account.
German law does not provide for specific statutory company rescue procedures outside of formal insolvency proceedings and the German government's rescue packages. Any reorganisation is purely contractual and must generally be approved by all concerned parties, including any secured lenders. The German Bond Act (SchVG) provides a mechanism that allows bondholders to alter the terms and conditions of German law governed bonds, including maturity, interest and principal amount, upon majority vote.
Secured creditors (except for creditors with a right to separation (see Question 11, Sale and leaseback)) must generally participate in the insolvency proceedings. Therefore, in respect of certain security interests, they are no longer in control of the enforcement of their security. In particular:
Security assignments and security transfers. Assignees and transferees are usually only entitled to preferential satisfaction of their debts and have no right to enforce their security interests outside the insolvency proceedings. However, the insolvency administrator can assign the right of enforcement to the creditor. Following the insolvency administrator's enforcement of the security interest, certain contributory charges are deducted from the enforcement proceeds and the remainder is distributed to the secured creditor.
Pledges. Pledgees generally remain entitled to enforce their security interest, provided that they have possession (Besitz) of the pledged asset.
Mortgages and abstract land charges. Creditors secured by real property generally remain entitled to initiate enforcement proceedings of their security interests. However, the insolvency administrator can petition the competent insolvency court to stay the enforcement proceedings where, for example, the property is necessary to continue or sell the insolvent debtor's business.
To the extent that a secured creditor suffers a shortfall as a result of the enforcement of its security interests (including as a result of any contributory charges payable by it to the insolvency administrator), it can claim the shortfall as an ordinary insolvency creditor in the insolvency proceedings.
The insolvency administrator can void certain transactions (including the granting of security) carried out to the detriment of the insolvency estate/creditors during specific periods before the petition for insolvency was filed. In particular, in cases of:
Congruent coverage (kongruente Deckung). This is a transaction granting, or making security available (including under a global assignment agreement) to a creditor, where either:
the transaction was entered into during the three months immediately preceding the filing for insolvency and both:
the debtor was unable to pay its debts when due at the time of the transaction; and
the creditor had knowledge of the debtor's inability to make payments when due at that time; or
the transaction was entered into after the petition for insolvency had been filed and either:
the creditor had knowledge of the debtor's inability to make payments when due; or
the creditor had knowledge of the fact that the petition for insolvency had been filed.
Incongruent coverage (inkongruente Deckung). This is a transaction granting, or making security available to a creditor, where the creditor was not entitled to it (in the circumstances or at the time) and:
the transaction was entered into during the month immediately preceding the filing for insolvency or after the filing for insolvency;
the transaction was entered into during the second or third month immediately before the filing for insolvency and the debtor was unable to make payments when due at that time; or
the transaction was entered into during the second or third month before the filing for insolvency and the creditor had knowledge that it was detrimental to other creditors at that time.
Directly detrimental transactions (unmittelbar benachteiligende Rechtshandlungen). This is a transaction that is directly detrimental to other creditors if the transaction was entered into during either:
the three months immediately preceding the filing for insolvency and both:
the debtor was unable to make payments when due at that time; and
the other party had knowledge of the debtor's inability to do so at that time; or
after the filing for insolvency and, at that time, either:
the other party had knowledge of the debtor's inability to make payments; or
the other party had knowledge of the filing for insolvency.
Intentionally harmful transactions (vorsätzliche Benachteiligung). This is a transaction entered into by the debtor:
during the ten years immediately preceding the filing for insolvency or after the filing for insolvency;
with the intent of prejudicing creditors; and
where, at that time, the other party to the transaction had knowledge of the debtor's intentions.
Any transaction by the debtor for which it immediately receives a consideration of equivalent value (cash transactions (Bargeschäft)) is only voidable if the prerequisites of an intentionally harmful transaction are satisfied.
Performance without consideration (unentgeltliche Leistung). This is a transaction where no consideration was given, unless both:
the transaction closed more than four years before filing for insolvency; and
the transaction is not voidable because performance consisted of a gift of small value.
Loans in lieu of capital contributions (eigenkapitalersetzende Darlehen). All shareholder loans or claims resulting from legal acts that are economically equivalent to shareholder loans are subordinated to claims of other creditors on the insolvency of a company. Payments made in respect of those loans (including redemption payments) in the 12 months before the application for the commencement of insolvency can be challenged by the insolvency administrator (see Question 14, Others). Exceptions apply to:
the financial restructuring of a distressed company (Sanierung); and
minor non-managing shareholders (nicht geschäftsführende Gesellschafter).
Silent partnership (stille Gesellschaft). This is a transaction resulting in either:
the repayment of the capital contributions, in whole or in part, of a silent partner; or
the waiver, in whole or in part, of any share of losses, if the underlying agreement was entered into during the year preceding the filing for insolvency with respect to the assets of the owner of the commercial partnership or after the filing. However, the right to challenge any such transaction is excluded if the reasons for filing the insolvency petition arose after the silent partnership agreement was entered into. This hardening period also applies if the silent partnership was dissolved in connection with any such transaction.
German insolvency law does not generally provide for a priority ranking of creditors. Instead, the liquidation proceeds are distributed equally and without preference, except in the following cases (in order of priority):
Creditors who have a right to preferential satisfaction (abgesonderte Befriedigung), such as:
assignees under security assignment agreements;
transferees under security transfer agreements;
pledgees; and
holders of mortgages and abstract land charges.
These creditors are entitled to preferential and full satisfaction from the liquidation proceeds of the secured assets (see Question 22).
Creditors that have incurred claims during, and because of, the insolvency proceedings (Massegläubiger). These creditors have a right to preferential satisfaction from the liquidation proceeds.
Ordinary insolvency creditors (Insolvenzgläubiger) (unsecured creditors) are paid from any remaining liquidation proceeds.
Creditors that have a right to separation (see Question 11, Sale and leaseback), for example, holders of retention of title rights or assets under finance leases or hire purchase agreements, do not participate in the above distribution of the liquidation proceeds. The insolvency administrator (Insolvenzverwalter) separates their assets, on request, from the insolvency estate and gives them to the creditor.
Alternatively, the debtor and all its creditors can agree to an insolvency plan (Insolvenzplan) that provides for a different payout scheme. The plan requires the competent insolvency court's approval.
Priority is determined by order of creation of the security interest, unless otherwise agreed among the lenders. Therefore, a security interest granted first, ranks above a security interest granted second, and so on (Prioritätsprinzip).
Priority is determined by the order in which security interests were filed for registration at the relevant land register, subject to a contrary agreement among the lenders (Rangvereinbarung).
The party that was secured first becomes the owner of the asset. However, since the transferor is still in possession of the asset, it can be validly transferred to a third party, provided that the third party does not know about the security transfer.
If security interests have not been validly created and perfected, then no security interests are deemed to exist and lenders are treated as ordinary insolvency creditors (see Question 27).
There are no restrictions on the making of loans by foreign lenders or granting security or guarantees to foreign lenders. However, foreign lenders must observe applicable German banking regulatory laws.
There are no domestic exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement. An obligation, however, that is contrary to the exchange control regulations of a member state of the International Monetary Fund (IMF) is not enforceable in Germany.
German courts generally recognise and apply foreign choice of law clauses over claims against a person (in personam (schuldrechtliche Ansprüche)) (including loan documents and guarantees), subject only to:
Overriding mandatory provisions of German law (Eingriffsnormen).
The compatibility of the chosen law with German public policy (ordre public).
However, different rules apply in relation to in rem (sachenrechtlich) property. In that case, to determine whether a security interest was validly created and perfected, the German courts apply the law of the jurisdiction that regulates the secured asset, irrespective of any choice of law provision in the relevant security document to the contrary. Therefore, where the security over a particular asset is validly created and perfected under a foreign jurisdiction's law, it will generally be respected and given effect by German courts. However, where the security interest would be considered validly created and perfected under the foreign law governing the security document, but not under the law governing the secured asset, German courts would not recognise the security interest.
There are no stamp, registration or documentary taxes payable on the execution and performance of the parties' obligations under any security document discussed in this chapter, or any loan agreement.
If the pledgor of GmbH shares and/or partnership interests owns legal title to land and buildings in Germany, enforcement of a pledge over GmbH shares and/or partnership interests may trigger real property transfer tax (Grunderwerbsteuer). In most German states this is charged at rates ranging from 3.5% to 5% of the tax value of land, if the lender would own at least 95% of the GmbH shares and/or partnership interests on enforcement.
Fees are charged for the registration of mortgages and abstract land charges in the relevant land register.
Notarial fees are payable in relation to:
Mortgages.
Abstract land charges.
Pledges over shares and partnership interests.
Notarial fees are generally non-negotiable in Germany. They are fixed by law and based on the secured asset's value. There is a EUR60 million statutory cap on the value of the secured assets. For example, notarial fees for a mortgage/abstract land charge over a property worth EUR150 million would be calculated on the basis of EUR60 million property value (as at 1 December 2011, US$1 was about EUR0.7).
While notarisation of pledges over GmbH shares in Switzerland (where fees are negotiable) used to be an alternative, there is continuing doubt as to the effectiveness and validity of notarisation of pledges over GmbH shares in Switzerland.
Further, notarisation of a mortgage or abstract land charge in Switzerland is not possible.
There are currently no significant proposals for reform.
However, the pending implementation of the Basel III framework is likely to lead to increased lending costs. This will further tighten capital requirements for banks, introduce a leverage ratio and several liquidity ratios, and include a framework for counter-cyclical capital buffers as well as certain measures to limit counterparty credit risk (much like implementation of the Capital Requirements Directive (CRD) 4 and potentially the US Dodd-Frank Act and Foreign Account Tax Compliance Act (FATCA) requirements).
T +49 69 254 94 240
F +49 69 254 94 440
E sandra.pfister@kayescholer.com
W www.kayescholer.com
Qualified. Germany, 1999
Areas of practice. Leveraged finance; project finance; energy and infrastructure; real estate finance; restructuring; general secured/unsecured, senior/mezzanine/second-tier lending; ECA-covered deals; Schuldschein loans; corporate bonds.
Recent transactions
Representing Rheinmetall Aktiengesellschaft in connection with its unsecured five year EUR500 million revolving credit facility as well as its EUR500 million 4% benchmark bond due 2017.
Representing American Securities on its acquisition of Unifrax and related LBO-financing.
Acting for SEB AG as mandated lead arranger and lead underwriter in connection with the syndicated EUR300 million acquisition refinancing and working capital financing for public CompuGroup Medical AG.
Representing a family office in connection with its acquisition and financing of a large shopping centre in Berlin Mitte.
Acting for Bank of America Merrill Lynch in connection with the state and KfW guaranteed refinancing for Heidelberger Druckmaschinen AG.
Representing various banks in connection with project finance matters, primarily in the energy and infrastructure sectors, including EIB as senior and LGTT (mezzanine) lender on the financing of the A5 A-model roads PPP, the IFLR 2010 “Project Finance Deal of the Year”, NIBC and KfW in connection with the project financing for the Potsdam Parliament building as well as SEB on its co-financing of the HKM coking plant expansion.
T +49 69 254 94 250
F +49 69 254 94 440
E ingrid.kalisch@kayescholer.com
W www.kayescholer.com
Qualified. Germany, 1990
Areas of practice. Leveraged finance; project finance; energy and infrastructure; real estate finance; restructuring; general secured/unsecured, senior/mezzanine/second-tier lending; ECA-covered deals; Schuldschein loans; corporate bonds; receivables finance; off-balance sheet financing.
Recent transactions
T +49 69 254 94 255
F +49 69 254 94 440
E reinhard.bunjes@kayescholer.com
W www.kayescholer.com
Qualified. Germany, 1999
Areas of practice. Syndicated lending; general secured/unsecured, senior/mezzanine/second-tier lending; real estate finance; restructuring; project finance; energy and infrastructure; ECA-covered deals.
Recent transactions
