BGH on insolvency avoidance for third-party loans: When banks are suddenly treated like shareholders

In its ruling of April 18, 2024 (case no. IX ZR 129/22), the Federal Court of Justice (BGH) once again clarified that external lenders such as banks can be treated as shareholders under insolvency law under certain circumstances – especially if they are granted a position similar to that of a member through contractual provisions such as profit participation and investment reservation. This is a clear warning signal for banks and institutional lenders: even the combination of such clauses can lead to the same status as a shareholder – with potentially serious consequences in the event of insolvency.

In the following, we present the correlations and classify the practical implications of the decision.

Shareholder loans in insolvency

If a limited liability company (e.g. GmbH, AG or GmbH & Co. KG) becomes insolvent, a shareholder must return repayments on loans granted in the year prior to the insolvency application to the estate (avoidance pursuant to sections 135 (1) no. 2, 143 InsO). Open loan claims are subordinated and regularly lead to a loss of receivables, even if they are secured against the company's assets. The same applies to claims from economically comparable legal acts. These regulations serve the equal treatment of creditors and are based on the assumption that shareholders may not reduce their risk tied up in the company to the detriment of the company's creditors by providing the company with debt capital (in addition to or instead of equity capital). According to the established case law of the BGH, these principles can also be applied in personal terms to economically equivalent third parties.

The case of the BGH (Ref. IX ZR 129/22): Not a shareholder – but economically close

In the case decided, a bank had granted the debtor, which later became insolvent, several loans to finance commercial real estate. Although the bank did not formally hold a stake in the debtor company, the loan agreements contained a participation in sales proceeds (profit participation), an investment reservation (influence on business decisions) and other provisions that restricted the debtor's freedom of decision. The rental income was collected by a real estate management company proposed to the debtor by the bank and forwarded to the bank by the latter on the instructions of the debtor to meet the debt service. After insolvency proceedings were opened, the debtor's insolvency administrator demanded repayment of the amounts received from the bank.

The BGH examined (among other things) the contestability pursuant to section 135 (1) no. 2 InsO – even though the bank was not a shareholder of the debtor. It referred to its landmark decision of June 25, 2020 on dual-benefit trusts (IX ZR 243/18, BGHZ 226, 125), according to which legal acts by third parties outside the company are also covered if they correspond economically to a shareholder loan.

In the specific case, the BGH left open whether the bank was to be qualified as a third party with the same status as a shareholder. This was because the participation elements had already ceased to exist before the start of the avoidance period. The repayments were therefore outside the relevant annual period pursuant to section 135 (1) no. 2 InsO – a challenge was therefore excluded in this respect.

However, the implicit statement of the ruling is clear: if the participation elements had still been active, the company would have been treated as a shareholder.

The standards from the landmark ruling of 25.06.2020 (IX ZR 243/18, BGHZ 226, 125) and their practical relevance

In its ruling from 2020, the BGH specifically outlined the criteria for equating a third-party lender with a shareholder. The decisive factor is whether the activity of the company constitutes the third party's own entrepreneurial activity. This is to be examined by way of an overall assessment based on the following criteria:

• Profit sharing: A participation in the economic success of the company beyond mere interest claims;
• Shareholder-equivalent rights: Contractually granted participation or veto rights that go beyond the typical rights of creditors go beyond typical creditor rights;
• Influence on the management: Legally secured possibility to control or monitor the or control of the management.

These criteria are based on section 39 (5) InsO, which provides for a so-called small-participant privilege for shareholder loans. The possibility of exerting influence on the management is particularly important here; it can compensate for a lack of profit participation, just as loans from a minor shareholder (max. 10 %) who manages the business are nevertheless subordinated.

(Critical) assessment from the perspective of credit practice

From the perspective of the financing banks, the decision of the BGH should be seen as a warning signal. This is because it shows that the Federal Court of Justice is prepared to at least consider the same status as a shareholder, even outside the well-known cases of atypical pledging and trusteeship of the shares in the debtor, even if there is a reservation of investment and a share in profits.

The investment reservation in particular is widespread in lending practice – for example in the form of reservations of consent for major investments, distributions or structural measures. Such clauses serve to manage risk and are economically necessary from the lender's perspective.

Direct participation in sales proceeds is rare in the case of new loans, but is not entirely uncommon, particularly in the subordinated part of structured financing. However, it is also not uncommon for financiers to contractually agree a qualified subordination for their receivables through corresponding subordination clauses. 

Participation in sales proceeds is more common in restructuring cases. If the aim is merely to recover the original loan amount including (also risk-adequate) interest, the BGH also believes that the lender's interest should be paramount and that the lender is not engaged in its own entrepreneurial activity with its customer. However, if this level is exceeded, this may constitute a harmful profit participation. However, even a profit participation does not necessarily have to lead to subordination, as the so-called restructuring privilege of section 39 (4) sentence 2 InsO would probably also have to be taken into account in the overall assessment required by the BGH. However, there is no apparent case law on this and this area of questions can also be described as unexplored territory. 

Conclusion and practical advice

The current BGH case law makes it clear that the insolvency law equivalence of third-party lenders with shareholders is not a theoretical risk, but a real danger if the contract is unclear or too far-reaching. The following is therefore recommended for lenders:

• Avoid participation clauses that suggest entrepreneurial influence or profit-sharing;
• Check existing contracts for shareholder-like elements – especially in the case of mezzanine financing, silent partnerships or hybrid structures;
• Clearly document the role as a lender – also in the context of the design of covenants, reporting and communication with the borrower;
• Carefully evaluate variable remuneration models – especially in the case of performance-related interest or participation in realization proceeds.

Specialized advice is therefore required when structuring new and reviewing existing financing.